why greed is an unhelpful characterisation of rational economic choices

Competition among businesses is obviously vital to a functioning market. A business that doesn’t have to compete doesn’t have to offer competitive products, pay, etc. Competition on one hand and regulation on the other form an opposing pair of constraints that channels a business’s pursuit of growth, dominance, profit, and development into benefit for society. I posit that the typical root cause of so-called greedy business practices (such as poverty wages, price gouging, lay-offs, cutting costs via human and animal cruelty, environmental pollution, and so on) is not a moral failing of the chief decision-makers, but rather inadequate regulation.

Yesterday my wife said to me “Kroger is offering to pay $100 to each employee who gets the COVID vaccine. Funny how they’ll do that, but they won’t give hazard pay for working during the pandemic!”.

“Well, hazard pay would be a lot more expensive, wouldn’t it?”

“Yes — $4 per hour in Seattle.” So after one week, this would exceed the one-time $100 bonus for full-time employees. “I know it would be costly, but the work is dangerous right now. The employees deserve it.”

“I agree,” I said, “but to control costs a company can’t pay a whole lot more than the market rate for whatever type of labour it needs. Outspending the competition for the same thing is bad for business.”.

“I don’t really care what’s bad for business. Paying workers fairly is the right thing to do. The greed required to put profit before ethics is disgusting.”

what’s bad for business

So, why don’t businesses generally “do the right thing” even if it’s costly? So what if the competition outcompetes them? Winning isn’t everything, right? Sure, but losing is everything. In a stable market, there’s a kind of competitive equilibrium. An uncompetitive company risks being driven out of the market by competitive companies.

Couldn’t a company just take some money out of profits to pay better, to make more environmentally friendly choices, or whatever? Well, profit makes a company an attractive investment. A company competes not only for customers, but for investors, too. If one company becomes a less attractive investment than its competitors, investors reallocate their investments for better performance. Sacrificing for the greater good is a sacrifice, and the cost is market share.

Okay, so why don’t businesses make the sacrifice — give up market share or possibly go out of business — in the service of ethics? Because less market share means less power to do the right thing. Companies that have made such sacrifices don’t dominate the market. “Unethical” companies do. One might be able to do the right thing for a little while, but one’s contribution to society will be short-lived.

what’s bad for consumers and workers

Some say consumers should vote with their wallets. It feels good to support small local businesses, to boycott sweatshops, to put your money where your morals are. Unfortunately it’s more costly. What Walmart lacks in charm and scruples it makes up for in discounts.

Other than wealthy consumers who can afford the luxury of consistent ethical choices in the market, the rest of the consumers are in a bind. It’s a matter of preservation of quality of life (or in the extreme, self-preservation) to seek the best deal we can get. The principal form of competition among consumers is not so much “keeping up with the Joneses” as it is making our dollar go as far as everyone else’s. For each ethical spending decision we make, we have less money overall to work with than someone with a similar income who makes the most economically rational choice. So are we going to pay extra for cruelty-free eggs or for cruelty-free clothes? We can’t do this for everything all at once. If all of our purchases are the ethical option, we can’t afford some things that others can afford. Something has to give, and because we are competing with other wage-earners, the result is downward class mobility, a slow spiral into poverty.

If not individual choices, then what?

So businesses and consumers both are in a bind where competition dictates that they make economically rational choices or lose. Efficiency is maximised at great environmental and social cost. Individual choices mean squat because “the invisible hand” of the market punishes certain ethical choices and eventually diminishes the influence of ethical agents such that their agency has little effect.

But what if everyone did the right thing? A market full of agents voluntarily choosing the right thing is wide open for someone to take advantage.

Okay, but what if everyone had to do the right thing? Consider the minimum wage. Apart from a few egregious loopholes, businesses in most industries have to abide by it. Does Kroger suffer a competitive loss by paying its employees the minimum wage? No, because all of the other grocers have to do likewise. Something still has to give, but it’s not a consumer’s standard of living or a business’s market share. The money really can come out of profits in this case. If it’s coming out of all grocers’ profits, investors can’t very well get out of paying for it by divesting from one grocer (or one industry) to invest in another. Almost the whole economy is equally affected, so investors don’t have much of an alternative to taking the loss and moving on. When everyone is forced to make an ethical choice, competitive standing is no longer at stake in making it.

the economy as a game

Imagine a sport very much like football (not American hand-egg) wherein there is no such thing as a foul. It would be a perfectly valid (if unethical) strategy to injure the other team relentlessly until they were unable to mount a competent opposition, and then to score goals unchallenged for the remaining time. (Trust me - as a kid, I tested this strategy in Fifa 98 with fouls turned off.)

Well, perhaps not unethical if you consider that the risk would be obvious and participation voluntary. Participation in the market is hardly voluntary (apologies to any hunter-gatherers I may offend), though the risks are obvious.

So how do we achieve the utilitarian outcome of minimising the risk of injury in our sport, given that everyone is entered into this tournament at birth? We could just try to play ethically on an individual basis, or try to shift the general attitudes of many players against violence. But the people who kick shins will end up playing the most matches in this tournament, because their strategy still works. We choose to lose by abstaining from exploitation individually, so we choose to allow the shin-kickers to dominate. We’re in a bind. The “ethical” choice does not fix the systemic problem that causes the bad outcome. With this set of rules, either choice leads to the same bad outcome. Well, obviously we need to reinstate the foul rule! If it’s impossible to win by kicking shins, there ceases to be any competitive advantage in doing so, and we can all benefit from a game with less shin-kicking.

Choosing ethically in commerce may assuage our guilt, but it does not make the world a better place. Regulations would actually make a difference.