Sunday, October 4, 2009

Socially-Responsible Organizations

In his latest book, Ralph Nadertries his hand at fiction and describes an interesting idea: a handful of disillusioned, elderly billionaires pool their resources to find remedies to not only the problems facing the world, but to the corruption in the political system itself. It begins in 2003 with a fictionalized Warren Buffett who views the disastrous aftermath of Katrina and becomes convinced that the U.S. government has failed its constituents on a fundamental level, and is incapable of ensuring basic rights, not to mention its inability to respond to escalating worldwide problems.

Mr. Buffett decides to tackle this issue head on. He gathers 17 like-minded billionaires (e.g. Bill Cosby, Ted Turner, Yoko Ono, and Leonard Riggio, CEO of Barnes & Noble) and they form a 2-year plan to fix government corruption, make the media more impartial, and address social issues such as healthcare and pollution. They build an infrastructure of consumer watchdog groups, assemble their own media outlet, and recruit spokesmen and demonstrators across the nation. As this is a Ralph Nader-styled utopia, the end result involves many nationalized industries and substantial unionization, but to each his own…

Underlying Theory

Neoclassical economics claims that a large group of varied individuals acting out of self interest can actually lead to a situation that is better than the sum of its component participants: each market player utilizes unique talents and inputs through specialization, and by acting selfishly each player inadvertently benefits others as well. Many college students emerge from Economics 101 believing that the Invisible Hand rocks the American cradle, but never stop to examine the costs of unbridled selfish behavior.

The neoclassical scenario demands some prerequisite assumptions in order to work, one of which is the existence of an impartial regulatory body to enforce civil and property rights. If the referees themselves are utility-maximizing individuals, we have a large moral hazard to deal with. Another assumption is symmetrical information—if both parties understand the design of an automobile, the market will find an appropriate price: but if the manufacturer alone knows that a mild rear-end collision may turn the car into a blazing inferno, the market will probably get the price wrong.

Herein lays the glaring problem with a system that runs on rampant self-interest—you have every reason to lie, cheat, and steal, and you have little incentive to produce real solutions to the world’s problems. There are entire markets built on bait-and-switch tactics: businesses and agencies advertise solutions to problems, but deliver the minimum value for the maximum profit possible. In economic terms, we are a society of rent-seekers.


This theory of non-satiation may not actually be true. Some social scientists claim that many individuals have an ideal lifestyle in mind, and seek to minimize the cost of getting and staying there (for many people, it may not even be an expensive lifestyle.) A corporate analog to this could be a nonprofit entity that aims to change something in the world. It may seek to eliminate war, or just make a better hammer -- the important point is that the bottom line of the organization is to (1) provide its workers reasonable compensation for their contributions, and (2) make the world a better place. The shifting of focus from profit-maximization to maximized effectiveness eliminates some significant moral hazards, and if our social scientists are correct, this type of organization may fit more harmoniously within our instinctual social preferences.

While opinions on Mr. Nader’s politics, or even motives, may differ widely, I think the concept introduced in this book is powerful, and should be examined by all individuals and the organizations they compose. We can follow the path of profit maximization at all costs; or we can take the time to envision the world we want to live in, and then use our talents and resources to make lasting, beneficial changes to it.

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