Adam Smith on CSR

I've mentioned the Bill Gates/Mike Kinsley/Conor Clarke creative capitalism project before. A new highlight on the site is a piece by my esteemed colleague Martin Wolf. (This is what Martin does on his holidays.) I'm not entirely sure what Martin's note has to do with "creative capitalism"--the idea is mentioned and dismissed in the last paragraph--but he has written the best short essay on the political preconditions for capitalism I have ever read.

Consider a society in which everybody was a profit-maximizer. What would it be like? It would be one in which rulers, soldiers, judges, bureaucrats would take whatever they could. It would be one in which bribery and corruption were the norms. It would be one in which market capitalism of the kind Professor Landsburg (and I) extol would be impossible. It would be one in which almost everybody would be poor. And because it would be one in which almost everybody was very poor, it would also be one in which the only way to obtain wealth would be to join in the race for political power. This would be all too natural. It would also be a negative-sum society, in which life tended to be nasty brutish and short.

Profit-maximization is not a generalizable norm for a successful capitalist society. Indeed, it is not an ethical principle at all, for it violates Kant's categorical imperative -- that one should "act only according to that maxim whereby you can at the same time will that it should become a universal law." Profit-maximization is a situational ethic, applicable only to economic activity -- that is, activity carried out under competitive conditions. Monopoly providers of public goods -- security, justice and so forth -- must not act under profit maximization.

We do not even want people engaged in private business to be profit-maximizers tout court. Let us suppose, for example, that a business knows of an undetectable way of dumping poisonous waste, thereby saving itself vast sums of money. Do we believe that it 'ought' to do this? I certainly do not. Do we believe businesses ought to create cartels? No, again. Do we regard it as right for business leaders to manipulate their pay -- by back-dating stock options, for example -- in order to steal as much as possible from their shareholders? No, yet again. Yet all these people are doing is maximizing their personal profits, as individuals in the market economy supposedly should


So the big problem with competitive capitalism is not that it is uncreative. It is certainly highly creative. The problem is that it is unnatural. There have to be rules, ethical norms and institutional constraints governing profit-maximizing behavior, to ensure that the maximization operates for the social good. Of course, pure libertarians would deny this. They believe that a society could be constructed on the basis of voluntary exchange, with no coercion. I think that would last until the first well-organized gang came over the hill, as Thomas Hobbes argued. We need the Leviathan. The question is how we tame it.

Reluctant as I am to follow that performance, it so happens I have posted a new contribution too. Mike and Conor asked me earlier for some thoughts on what Adam Smith would make of creative capitalism. If you're interested, and with all due diffidence, I'll post what I sent them after the jump. More...

Adam Smith on creative capitalism

In his speech at Davos, Bill Gates quoted the opening lines of Adam Smith's Theory of Moral Sentiments:

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.

Bill doubtless meant this as a reply to those fond of quoting selectively from the other Adam Smith, author of Wealth of Nations. People who say they admire that book are especially keen on this sentence:

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 interest.

Bill is telling us that even Smith--"the father of capitalism...who believed strongly in the value of self-interest for society"--praised the impulse to altruism. Society needs both, and this is where creative capitalism comes in. Its aim is to marry sentiment and self-interest; to unite, as it were, the two Adam Smiths.

I agree that Smith is badly served by many of his supposed followers. The idea that "greed is good", which one often sees attributed to him, is a travesty. He was no libertarian either. His idea of "natural liberty" was almost the opposite of what it is usually taken to mean (namely, "do as you wish"). He was at pains in both books to emphasize the importance of self-control, of regard for the opinions of others, and of an expansive role of government in providing security, rule of law, and economic infrastructure. Way ahead of his time, he was even in favor of compulsory schooling.

But I think it is wrong to regard Moral Sentiments as somehow at odds with Wealth of Nations, which seems to be the prevailing view. You quote one or the other, according to taste, but never both. Smith certainly saw no rift. The two books, though written with different purposes (Wealth of Nations to sway legislators, Moral Sentiments more to guide and inform a wider educated public) were a single intellectual project and fit together comfortably. Of the two, by the way, Wealth Of Nations takes the dimmer view of "merchants"--paradoxically, since this is the title favored by free-enterprise types. Moral Sentiments, name-dropped mainly by the left, is more kindly towards men of business, because it wants to establish the civilizing effects of commerce. What a difference it would make if anybody actually read these books.

Smith believed that most people are self-interested, sympathetic, and wish to be well thought of. Successful commercial societies, he argued, are built on these traits. The question is, how can they best be combined? In modern terms, how can institutions and incentives shape, channel, and balance these sometimes conflicting instincts to promote greater peace and prosperity? This is the subject of both books.

In Wealth of Nations, addressed to rulers, Smith exalts competition as the way to keep self-interest in check, and to subordinate producers to consumers. That is why the book is so opposed to protected monopolies and, above all, barriers to trade. In Moral Sentiments, he puts less weight on public policy and more on the wellsprings of virtue. He underlines the need for the approval of others, not just as an end in itself but also as a requirement for flourishing in commercial society. In short, competition disciplines producers (Wealth of Nations); commercial interaction nurtures propriety and prudence (Moral Sentiments). These are different perspectives, but by no means contradictory.

What would Smith, cited so freely by both sides, have made of the modern CSR debate? Hard to say, and pointless to speculate--but let's do so anyway. I am sure about one thing. He would have disagreed with Bill that a new kind of capitalism is needed to marry sentiment and self-interest. This is exactly what ordinary profit-seeking commerce achieves, in Smith's telling. This is the over-arching idea in both books.

Of course you can reject the cod-philosophical gestures of the Davos speech and still conclude that CSR is a good thing. Smith might well have done so. He was ever a pragmatist, suspicious of thinkers who like their principles cut, dried and few in number. I cannot imagine him saying that CSR is always a good thing, or always bad. That would be very unSmithian. He would say it depends. It usually does.

As a general matter, it would be true to the spirit of Moral Sentiments to say that owners of businesses should attune their conduct to the good opinion of mankind. But note that I say "owners", not managers. Who knows what Smith would have thought of 21st century corporate governance? The modern corporation is a form he could barely have envisaged.

As a relentless advocate of ethical conduct, he might say that managers are trustees, and owe their first duty to the owners of the assets under their control. In that case, doing good works at the expense of profits to seek "recognition" (as Bill advocates) would be straightforwardly unethical. On the other hand, he might observe that modern shareholders are not really "owners" at all: they have limited liability and accept little or no responsibility for the firm's conduct. Managers carry that burden, and their concerns for "stakeholders" (over and above what maximum profits require) are therefore, arguably, ethically legitimate.

The debate over the rights and wrongs of CSR is usually cast as a question about the duties of the corporation. But a lot of our disagreement, I think, boils down to a narrower question: what are, or should be, the duties of managers with respect to shareholders? Do we prosper best if we oblige managers to act strictly as agents, or if we indulge their desire to act as owners? I say the first. I don't know what Smith would say.