The importance and ethics of companies are underappreciated, says Tyler Cowen, an economist and author of “Big Business”
By K.N.C.
IF THERE is one truth that millennials hold to be self-evident, it is that big business is bad. Soulless corporations pollute the planet, overpay their bosses and gouge consumers. Big tech turns us into screen addicts. Big Pharma makes life-saving drugs unaffordable. Big banks sell us dodgy mortgages. One cannot help wondering, listening to the chatter on social media, whether corporations ever do anything right?
Actually, they do, says Tyler Cowen, an economist at George Mason University in Virginia. In his latest book “Big Business: A Love Letter to an American Anti-Hero,” he argues that many of the gripes about business are ill-informed. And where there are real concerns, such as fraud or excessive concentrations of power, he believes that wise regulation can minimise the harm.
Mr Cowen has earned a reputation as a shrewd and iconoclastic thinker. In his blog Marginal Revolution he relishes debunking junk economics with data. The Economist’s Open Future initiative is publishing an excerpt from “Big Business” that presents the arc of his argument. We probe it further in a short interview that follows.
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From “Big Business: A Love Letter to an American Anti-Hero” by Tyler Cowen (St. Martin’s Press, 2019)
We live in an age when the reputation of business is under siege. Among Democrats, for instance, the word “socialism” now polls better than does “capitalism.” But Republicans, while they pay greater lip service to some business ideals, are not in practice much better. Many of them have quite readily followed President Donald Trump into his attacks on free trade, immigration, outsourcing, and the American media (which is labeled “the enemy of the people”)—all fundamentally anti-business stances.
Business, quite simply, has become underrated, and thus I am writing a contrarian book that ought not to be contrarian at all. All of the criticisms one might mount against the corporate form—some of which are valid—pale in contrast to two straightforward and indeed essential virtues. First, business makes most of the stuff we enjoy and consume. Second, business is what gives most of us jobs. The two words that follow most immediately from the world of business are “prosperity” and “opportunity.”
Without business we would not have:
* Ships, trains, and cars
* Electricity, lighting, and heating equipment
* Most of our food supply
* Most of our lifesaving pharmaceuticals
* Clothes for our children
* Our telephones and smartphones
* The books we love to read
* The ability to access, more or less immediately, so much of the world’s online information
And let’s not forget your paycheck. “Meeting payroll,” to invoke a now old-fashioned phrase, is nothing less than a heroic act. Someone or some group put in the hard work and thought up the innovations required to create a company from scratch—I know it’s easy enough to take this for granted if you aren’t the one who did it. On top of the paycheck, jobs are among our biggest sources of pride and a significant way to meet friends and establish social networks.
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We can all admit that we are a nation sorely in need of virtue, specifically in our political realm. The growing polarization of today’s politics has made our government at best hopelessly sclerotic and at worst prone to unpredictable lurches. This polarization has also spurred out-of-control political correctness and censorship, rampant racism and injustice, new waves of violent marches and shootings, and an array of indictments and corruption charges. Many features of contemporary America are wonderful, including the high level of trust in the corporate sector, but the weirdness in our government has been rising.
In contrast, the world of American business has never been more productive, more tolerant, and more cooperative. It is not just a source of GDP and prosperity; it is a ray of normalcy and predictability in its steady focus on producing what can be profitably sold to customers. Successful businesses grow dynamically, but they also try to create oases of stability and tolerance in which they can perfect their production methods. These oases help to attract and retain talent and make it possible for businesses to offer consumers a steady stream of “comfort products.” Business helps carve out spaces for love, friendship, creativity, and human caring by producing the resources that make our lives not just tolerable but comfortable.
American big business in particular has led the way toward making America more socially inclusive. McDonald’s, General Electric, Procter & Gamble, and many of the major tech companies, among others, were defining health and other legal benefits for same-sex partners before the Supreme Court legalized gay marriage. Apple, Pfizer, Microsoft, Deutsche Bank, PayPal, and Marriott, among others, spoke out or protested the North Carolina law that sought to specify which restrooms transgender people had to use; the outcry led to the eventual repeal of that law. This push for tolerance shouldn’t come as any surprise. Big business has lots of customers and relies on the value of brand names. It doesn’t want any group of those customers to feel put out or discriminated against or to have cause for complaint, not least because we live in an age of social media. Profit maximization alone—not to mention the consciences of some CEOs—puts big business these days on the side of inclusion and tolerance.
Larger firms, in particular, which you can think of as wildly successful businesses and thus embodiments of the logic of business, tend to be more tolerant of employee personal tastes than smaller firms. A local baker might be reluctant to make a wedding cake for a gay couple, but Sara Lee, which tries to build very broadly based national markets for its products, is happy to sell to all. The bigger companies need to protect their broader reputations and recruit large numbers of talented workers, including those from minority groups. They can’t survive and grow just by cultivating a few narrow networks of local white men.
I have a complaint about America today, and it is simple: we don’t love business enough.
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I’m here to speak up for business, to persuade you that it deserves more of your love and less hate. Perhaps, like you, I am not entirely comfortable with ceding so much of the daily human realm to apparently selfish, profit-maximizing, and even sometimes corrupt entities, but on closer examination this is a better bargain than it might seem at first. Indeed, at its best, business gives our lives more scope for the heroic and the noble, as we can use the outputs of business to satisfy our own creative desires and to better our lives.
I’ll argue that a lot of the most common criticisms of American business don’t stand up to scrutiny. For instance, it’s often claimed that American business is too focused on quarterly earnings statements, at the expense of a longer-run perspective. But in fact there is plenty of evidence that companies can think long-term when appropriate. Sometimes short-run problems are easier or more important to solve, or they are the bridge to longer-run success, and the evidence at hand indicates that American business does a pretty good job of looking to the future.
Then there’s the question of American CEO pay, which Edward Luce, a Financial Times columnist (and a friend of mine), described on Twitter as “unconscionable.” American CEOs are paid much more than they used to be, but these pay hikes have pretty much moved in tandem with the size and valuations of the firms they manage. Contrary to common claims, it is hard to establish that CEOs as a whole are ripping off their shareholders with manipulated pay packages, as a look at the numbers will show that high compensation is the price of attracting top talent. Running a large corporation involves taking on more roles than ever before, including media, government, and public relations, formulating a vision, understanding consumers and communicating to them, building cross-cultural global strategies, working with governments, and keeping the company out of trouble, in addition to having a lot of sector-specific expertise. That limits the number of eligible candidates who might succeed at the job and thus it boosts their pay, according to basic principles of supply and demand. Today’s CEOs are literally superachievers, and it should come as no surprise that they are compensated accordingly.
One of the most frequently cited whipping boys is the financial sector, which is portrayed as too large and out of control. The reality is that the financial sector has held to a fairly constant 2 percent share of American wealth, though of course that wealth has grown and so has finance with it. The ability of American finance to mobilize savings into riskier forms of equity and venture capital has brought Americans hundreds of billions of dollars in value each year, and those gains significantly outweigh the costs typically attributed to the financial sector. Nor is the financial sector draining the American economy of all its talent for other endeavors, as evidenced by the rise of American manufacturing output to ever higher levels.
Most of all, business is criticized for being fraudulent and ripping us off. While there is plenty of fraud in business, the commercial sector isn’t any more fraudulent than individuals in other capacities, and it may even be somewhat less fraudulent. Business can make us better people—for example, by teaching us how to cooperate better—and the best evidence indicates that, on net, businesses do not make us worse compared with our participation in other institutions. A lot of us were somewhat dishonest to begin with, and if you have doubts, just look at the individual lies and misrepresentations in online dating profiles.
So many of the problems with business are in fact problems with us, and they reflect the underlying and fairly universal imperfections of human nature. Yet we respond to this truth somewhat irrationally. While we suspect business of wrongdoing, at the same time we expect corporations to give us jobs and take care of us, to give us a network of friends, to solve our social problems, and to give us risk-free consumption experiences.
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Particularly now in the age of social media, which allows direct connections with consumers and offers them the chance to provide direct feedback when things go wrong, the most successful businesses have a kind of messianic view of their role in society—venerating the delivery of goods and services to the consumer, or perhaps promoting a particular vision of how society ought to be. Workers wish to believe their toil is saving the environment, fighting poverty, and strengthening America as a nation. A business that instills in its workers and managers a sincere belief in such goals has a better chance of building a durable competitive advantage than a business that does not. It will attract more consumer loyalty and better and more cooperative partners at the business-to-business level. Think of it this way: Who wants to marry someone who is always selfishly seeking to optimize happiness from the marriage?
Ayn Rand showed a deep insight into the character of successful business when she emphasized that it can be a vehicle for the achievement of heroic goals. The character of Hank Rearden in Rand’s novel Atlas Shrugged stressed the dignity, honor, and reason involved in good productive work, and he came to see it as the very foundation of America’s greatness.
It is often those business leaders who are religious or have strong ideologies of another kind who grasp most clearly the relevance of a business having a mission above and beyond profit. They understand that the business and religious or ideological sides of their lives are by no means totally separate. They understand they can do best by their shareholders—and the broader society—by tying together the business, religious, ethical, and ideological perspectives in one bundle. […]
In other words, business at its best is a fundamentally ethical enterprise.
The Economist:The concentration of power of business seems intense. Do we need to make capitalism more competitive, and if so, how?
Tyler Cowen: I see concentration of business in some sectors as a problem, but by no means all. For most goods and services, Americans have far more choice, choice of supplier and diversity of product than ever before. Consumers know this intuitively and it has turned out that recent claims about increased concentration in the American economy are largely wrong on a factual basis. In most sectors there is more actual competition, and the dominant players we do have, such as Amazon and Walmart, typically are lowering rather than raising prices when they enter markets. For the tech sector, there are dominant product suppliers such as Google and Facebook, but they are hardly following the old monopolist playbook of higher prices and restricted output.
There is too much concentration in the hospital sector, and in K-12 education: it’s a government semi-monopoly, and it’s hard to compete with the free government product unless you are selling to wealthy families. We also have some outrageously high prices for real estate and higher education, but those are due to supply constraints and excess regulation, rather than private monopoly. In all of these cases I would consider legal remedies to give consumers a better deal.
The Economist: What do you fear most about the effects of the anti-business sentiment?
Mr Cowen: For a start, I fear we will split up our big tech companies, or at the very least severely distract senior management with antitrust suits. An alternative route we might go down is to enact severe privacy legislation which raises costs to new market entrants, and cements in the power of the incumbents. Either of those two paths would be a mistake.
Most generally, I fear that the status of going into business will fall, as it already has in much of Europe. It would hurt America greatly to lose its genius and distinct preference for business activity. Culture really does matter, and America stands at risk of losing its pro-business, pro-entrepreneurship leanings.
The Economist: What do businesses need to do to improve their image, other than PR?
Mr Cowen: Business has to realise it always will be held to a higher standard, perhaps unjustly so, but still that is a reality. That means business ought to opt for less fraud, less lobbying for crony capitalism, more social conscience when it comes to pollution and climate change, and also bolder, less bureaucratic decision-making procedures. We are pretty far from that world.
As I stress in the book, a lot of business is pretty fraudulent. The thing is, human beings are fraudulent too; maybe more so outside of a business context. Ask a simple question: who lies more, the company Match.com, or the online daters filling out their profiles? The answer is both obvious and sad.
The Economist: What can individuals and groups do to hold businesses to account?
Mr Cowen: Search for the best price; it benefits the whole market. Speak up when you are unhappy, noting that the internet makes the monitoring of business quality easier than ever before. When it comes to health care, educate yourself. So much of the waste in the American economy is in that sector. And, if you really see persistent business failures in a particular area, consider starting a business yourself to fix them. Or recommend the business idea to someone else. All of the best businesses today were at some point in the past unrealised dreams.
The Economist: If we can't look to the political sphere for leadership to address global challenges, are we right to turn to business for that leadership? Ought they to rise to that mission, even if it strays from their central remit of making and selling their widgets?
Mr Cowen: Most of the biggest global challenges will require contributions from both government and business. Take climate change. Yes, governments need to regulate more and tax carbon emissions. But we also need businesses to step up and innovate. We’re seeing a systematic tendency to villainise the role of business in carbon emissions and pollution. Yes, business has had a major role in this, but so have consumers, so have voters, so have all of us. The reality is that we will need the help of business to solve the problem, and we should not make this a question of us versus them.
