By Tony Ditta

 

Debora Spar headshotDebora Spar is the Jaime and Josefina Chua Tiampo Professor of Business Administration at Harvard Business School and Senior Associate Dean for Business and Global Society; before that she was the President of Barnard College. She teaches a class called “Capitalism and the State” and co-leads The Institute for the Study of Business in Global Society, which examines “where business and society interact and occasionally collide” and explores how “business can help address some of society’s greatest challenges.”

Since returning to Harvard Business School in 2018, Professor Spar has noticed more and more students questioning the role of business in society. Can it be a force for good in the world? Can it be part of the solution to social and environmental challenges? It’s easy to cynically dismiss these questions as virtue signaling or “greenwashing,” but Spar doesn’t share this cynicism. She is teaching students that came of age in the Great Recession and the COVID-19 pandemic. These students have seen the “dark side” of capitalism, and Spar believes they genuinely want to do better. So how do we do better? How do we harness the power of business for good?

Out with the old

To begin with, our understanding of the function of firms needs to change. They are more than just engines of profit maximization. However, in economics, descriptive models of firms treat them as solely profit maximizing. This descriptive approach implicitly makes its way into normative recommendations – or explicitly in the case of the Friedman Doctrine. But are firms only oriented around maximizing profits? And should they be?

To some extent, they are, but this reflects a social choice, not the intrinsic nature of business. If society is oriented around profit maximization – if that’s what’s taught in business schools and forms the basis of social and professional reputations – then of course business leaders will try to maximize profits. But it need not be this way. People want more than just money; Spar’s students care about sustainability and justice, and their business decisions could reflect that.

Society expects more. Consider the case of Nike in the 90s and its use of exploited labor (on which Spar wrote a case study). At the time, Nike was playing by the rules. Paying miniscule wages, maintaining poor working conditions, and hiring children was culturally and legally acceptable (even admirable among those who saw profits as the only social goal of the firm). It wasn’t Nike’s problem — until it was. When the issue became a cultural flashpoint, people demanded better. Social acceptance of the Friedman Doctrine has its limits.

More generally, Spar talks about how business leaders face constant pressure to “manage to quarterly returns.” Maintaining short term profit maximization is a massive constraint on even the best-intentioned executives. If the model prevents people from doing good, we should change the model.

Policy options

With a more holistic model of firms in mind, we shouldn’t think about all business leaders as monomaniacal profit seekers. While such people certainly exist, Spar believes that there are many who want to do better but are constrained by the rules of the game: social and legal obligations around competition and making money. If the rules allow harmful behavior to increase profits, somebody will act on it, and competitors will follow to keep up. The behavior becomes entrenched, and unilateral action to improve it becomes infeasible: a prosocial firm bears the whole cost of improving but only a fraction of the benefit. This is especially pronounced in massive issues like climate change. A firm acting alone to reduce carbon emissions pays the costs on its own, while the benefits are spread across the globe. When the rules of the game lead to undesirable behavior, there’s opportunity for policy to step in and make changes.

Devising a solution requires understanding the problem. For example, with profit maximization: businesses are not legally required to maximize profits or shareholder value. This principle is enforced in classrooms and boardrooms, not courtrooms. So a policy solution has to be more subtle than just repealing a law about profits. One method is to require more transparency so undesirable business behavior can be subject to public scrutiny. Spar argued that just changing accounting standards – like requiring firms to report carbon emissions or the difference in salary between the CEO and the lowest-paid employee – could promote better behavior. If the public can monitor businesses and hold them accountable, firms will be pressured to improve without even needing strict regulation.

Of course, some problems do require strict regulation. Spar recommends a “guardrails” approach. Even when people can’t agree on the perfect level of regulation, it’s usually possible to to build consensus around behaviors that should obviously be required or forbidden. She refers to the history of driving laws. In the early 20th century, the problem seemed intractable. Streets were chaotic and automobile deaths per vehicle were 20 times higher than today. But it wasn’t necessary to regulate every facet of driving – especially not immediately. Lawmakers started with the basics (like speed limits and drunk driving laws) and built from there. 

Working up from the bare minimum will require input from stakeholders – including business leaders. Designing and evaluating the effects of a policy, including its costs and benefits, requires information, and no one has more information than the businesses themselves. Their input is necessary for policy to achieve its goals.

However, the natural concern with this input is that private interests will be given undue influence — that the process will be “captured” in the economic sense. There’s certainly a long historical precedent for this, so how do we avoid it in the future? Spar offers a couple suggestions:

  • Consortial model: Don’t limit input to a single executive or a single firm. Develop a broader understanding of the industry in consultation with a wide variety of firms (big and small, young and old, etc.)
  • Other affected parties: Don’t limit input to business/capital interests. Spar especially emphasized the importance of giving labor interests a voice. There should also be advocates for consumers/users at the table.

All told, the effect of business on policy should reflect what it contributes to the process: knowledge and ingenuity. It should not reflect the ability to fund campaigns, maintain the revolving door between regulators and lobbyists, or otherwise pour money into politics.

Interrogating capitalism

The policies mentioned above offer improvements over existing arrangements, but they don’t change the system itself. Spar recommends digging into the roots of capitalism to build a system which works for everyone. She highlighted three aspects of capitalism that deserve special attention.

  • Property rights: Although they are probably the most fundamental feature of a capitalist system, property rights are often simply taken for granted. But maintaining property rights requires answering big questions. What are people’s rights over information? Does your genetic information belong to you? If a Large Language Model is trained using your words, does the model’s output belong to you? Technology gives us capabilities outside the realm of socially agreed upon property rights, but functioning markets require consensus over what constitutes ownership.

    Any rules about property rights also (often implicitly) take a stance on equity. Spar gives the example of John Locke, who says that property is established by adding labor to nature. When you gather acorns (Locke’s example), your work of gathering them makes them belong to you. But this has limits. Locke argues that people in need have property rights over the surpluses of the rich: “As Justice gives every Man a Title to the product of his honest Industry… so Charity gives Man a Title to so much out of another’s Plenty, as will keep him from [extreme] want.” In other words, your rights over acorns extend only as far as everyone has enough acorns to survive. Most capitalist systems (and economists who study them) readily treat Locke’s first entitlements (to the “product of [one’s] honest industry”) as fundamental property rights, but they treat Locke’s second entitlements (to “another’s Plenty” which keeps one from extreme want) as something very different: as redistribution – not fundamental, instead requiring justification in a tradeoff of efficiency versus equity. This asymmetry is a choice; society gets to decide what defines property rights. “Redistribution” doesn’t inherently contradict property rights or a functioning capitalist society.
     
  • Competition: Markets need competition between firms to rein in the power of individual businesses, but markets often fail to deliver the right level of competition. Beginning with the Reagan administration, the United States rolled back antitrust enforcement, but this bias against “government interference” may be misguided. Sometimes the government must exercise its power to prevent businesses from overstepping theirs.
     
  • The State: Spar teaches a course titled “Capitalism and the State”, so she has thought carefully about this relationship. Sometimes private and public interests align. Businesses and individuals can profit from socially valuable things: efficiency, productivity, and innovation. In these cases, the state can let the private sector operate freely – and even contribute by enforcing fair laws and funding public inputs like infrastructure and education.

    But when interests don’t align, someone must decide whose interests win, and that is the role of the state. Sometimes that means overriding private interests for the public good, or using state power to address the adverse effects of certain business activities – what economists call “negative externalities.” This won’t always be universally popular; people with plenty will resist redistribution, and people with market power will resist competition. The state needs to be strong enough to act anyway. Spar puts it simply: “I don’t want business making laws. I want the government making laws.”

Spar concedes that she often comes with more questions than answers, and that the answers she does have are messy and complicated and require work. But the issues are too important to be ignored — questioning a problem is better than overlooking it, and messy answers are better than no answers at all.

On the Other Hand is a blog series that highlights insights on the economy from outside mainstream economics. We are reaching out to scholars in fields like sociology, history, and political science, for their perspectives on pressing economic issues. We aim to unpack the inequality-perpetuating features of existing institutions, successful institutional arrangements, and alternative institutional trajectories for the future with a particular focus on local labor market, industrial, and development policies.

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