Saturday, September 30, 2006

Smith Had Nothing to Say on CSR- for or against!

Corporate Social responsibility (CSR) is a modern proposition. Much of it arising from the problems associated with pollution, or with extractive methods that do not account for the environmental damage a firm’s operations cause to a locality.

Two responses already exist, or can be put under the ambit of laws, namely that polluters pay and that extraction processes must include the cost of restoring the land or sea to the situation before the process commenced. If ‘clean up’ costs make an operation unprofitable, then it should not commence, until technology resolves the clean up requirement.

But CSR that goes beyond these type of requirements, to requiring a firm to engage in social expenditures that do not arise from its operations, when not voluntarily offered, and are really an additional ‘tax’ on its revenues, in addition to the taxes on employee incomes, on local taxes for local amenities provided by local taxpayers, and on its profit taxes and other charges, are problematical. They are also the subject of current debate.

In (‘where your opinion counts’), Wayne H. Winegarden Ph.D., Chief Economist, Economic Solutions, makes a case against CSR in its wider sense. My problem with his article is not his opposition to CSR, but is that he ropes in Adam Smith, quite inappropriately in my view, to suggest that his writings provide ammunition against wider CSR, a line taken by Milton Friedman some time ago.

Wayne H. Winegarden writes:

Economic theory posits that by pursuing one’s self interest, the greater good can be achieved. As Adam Smith famously noted, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” Free markets work because generally, Smith’s observation provides the optimal social outcome.

CSR proponents argue that this is not the case for modern corporations. They claim that private individuals serve their private interests at the expense of the public interest. The solution, which should come as no surprise, is an elaborate CSR scheme that redefines private interests of corporations to include public concerns. This definition contradicts the very foundations of our free market economy and society, and consequently poses a clear and present danger to the health and vitality of our economy.

To require that private company investments should also include public development investments redefines the basic economic principles that are responsible for the unprecedented welfare gains our economy has produced over the past 300 years. These are the benefits that Adam Smith was describing in his famous quote. They are the best way to ensure prosperity now and in the future – for both private individuals and the broader community.”

‘Economic theory’ in its neo-classical form certainly does advance that argument, but Adam Smith did not. The famous reference to the ‘benevolence of the butcher, the brewer, and the baker’ had nothing to do with CSR (a wholly modern phenomenon); it was about the exchange process that enabled trade to function.

Nor did self interest automatically mean that ‘the greater good can be achieved.’ It could as easily, and in Smith’s day often did, mean that an individual’s self interest could have malign, not benign, outcomes for society.

The lifting of only one part of the possible outcomes of the exercise of self interest and transmuting into a universal ‘law’ of ‘the optimal social outcome’, does great disservice to the development of appropriate social policies and to the reputation of Adam Smith, a far more nuanced theorist than presented by the dogmatic school from Chicago.

Wealth of Nations contains many more examples of malign self-interest operating for personal gain at the expense of others, of which the many cases of mercantile political economy are the most well known. Competition was favoured, not because it arises automatically, but it was the only way to ensure that individuals were disciplined by a force they could not subvert.

So unreliable was the motive of self-interest on its own to provide the optimal outcome and so distrusted was the benign nature of self-interest alone, that the power of competition was required to override the monopolizing tendencies of self-interest.

In passages related to the ‘butcher, the brewer, and the baker’ Smith draws attention to the need for the parties to trading transactions to mediate their conflicting self-interests by their addressing the self-interest, not of themselves, but of the other party. Self-interest is not enough! Self-interest brings the parties to the verge of a beneficial trading transaction (you want your dinner, and the butcher, brewer, and baker’ want your payments – to provide their means to other trades); itisin the mediation of their differences, not the unrestrained insistence of their own self-interest, that results in the ‘optimal outcome’, when, that is, both parties reduce their initial demands and raise their initial offers, otherwise known as bargaining.

Only in this Smithian interpretation of what he meant by the ‘benevolence’ passage is it true that “Free markets work because generally, Smith’s observation provides the optimal social outcome” from their transactions. That is why the first requirement of corporate responsibility includes the full costing of a corporation’s impact on the environment (polluters pay; full cost restoration of environmental damage or disruption).

Whether it should go further is a matter of debate, to which Adam Smith had nothing to say. for or against. We must use our own (new) arguments to these ends and not appeal to the authority of a name, and misinterpretations of his legacy, to make a case inappropriately.


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