Today I would like to talk about big business, consumers and corporate social responsibility.
The first thing you should know, is that consumers rule the market. This is standard economic theory. We know that demand creates supply. This is exactly what happens when businesses aim to provide goods or services that consumers want. We must realize therefore, that all goods, businesses, and business conduct is ultimately ruled by the market. By the market I mean the preferences expressed by each individual market participant.
Moreover, not only do consumers determine the goods and services that businesses provide, but the market will also act to correct any specific failures of firms, and will ultimately act as a “judge” for what society, the consumers, want.
Therefore, the idea of attempting to regulate businesses so that they pursue “social” causes and act “socially” “responsibly, in my humble opinion fails in two ways.
First, it fails at determining exactly what these social objectives really are. All the arguments in favor of CSR end up being quite vague.
Secondly, it fails to see that, as I explained before, the actions of businesses and firms are ultimately decided by consumers. The success of a business has and always will be determined by the success with which it satisfies its customers. Looking at the issue in this light, we might even say that the social responsibility of firms is simply to create profits. Profits, which after all, are the monetary measure of the success of the company. Put simply, higher profits mean a higher utility for society.
This does not mean, however, that businesses can get away with anything, quite the opposite, as I said before, businesses will do what consumers want.
The problem comes when we attempt top regulate businesses in an explicit, political way.
What you might call the “free” market solution, comes with the use of moral codes.
Moral codes, are an informal, decentralized way of regulation. When issues such as the environment become part of our moral code, businesses are forced to respond by adjusting their behavior to fit this moral code.The cost of not doing this, will be reflected in the discontent of its customers, its loss of reputation and ultimately a fall in profits.
What I am saying is, that if people truly value environmentally friendly firms, or firms that hire only locals, or what have you, then these businesses will thrive. There is no need to impose formal rules of conduct through politics, since rules of conduct are already imposed through the market in an informal way.
Like with most situations, allowing firms and individuals to act freely will lead to the most efficient outcome.