Are Businesses Hard-Hearted?

The incentive to make a profit harmonizes with normal human decency.

By David R. Henderson.

"How often have you heard a line something like the following: “Because businesses care only about making money, they and their executives are hard-hearted towards their customers and employees.” Even some people who think that, on net, businesses are good for our economy, often characterize them as being hard-hearted because of their profit motive.

I don’t defend all businesses. That would be silly. But I want to point out a recent case and a case about twenty-three years ago, about businesses going above and beyond. While these two cases are probably outliers, anyone who has been around businesses much can probably vouch for my claim that businesses are more caring than the above quote claims. Moreover, because people who make the hard-hearted claims often want government to regulate, we should realize that governments are typically much worse.

Citigroup in Ukraine

Here’s a segment from an April 23 Wall Street Journal report about Citigroup’s continuing presence in war-torn Ukraine:

When Russia invaded in February 2022, McWhorter [Citigroup’s top executive in Ukraine] and [Amy-Anne] Fairhurst [head of Citi’s Global Crisis Management Program] were both woken in the middle of the night. 

Their first priority was the staff. They realized they had to ensure the safety of more people than they were planning for.  

While they knew how many employees they had, about 240, Citi suddenly felt responsible for wider families, support staff who weren’t direct employees and others. The count ballooned to 850. 

The report is titled, “Turning a Vault Into a Bomb Shelter: How Citigroup Has Kept Its Bank Running Inside Ukraine.”

The report goes on to tell of measures that Citigroup took to keep its employees relatively safe and to compensate them for the added risk. Also, in a section titled, “Don’t worry about paying us,” the Journal reporter quotes Alexander McWhorter telling the bank’s clients, “Look, don’t worry about paying us; worry about your own employees and your own operations.” 

Why would Citigroup go to such lengths? David Benoit makes the answer clear: the executives at Citigroup are betting that when the war is resolved, however it’s resolved, people in Ukraine will want to deal with banks and Citi will be there. Moreover, although reporter Benoit doesn’t say it explicitly, Citi is also betting that with the goodwill it is now creating in Ukraine, it will be one of the banks that Ukrainians are pretty sure they can trust.

Back to Citi in a few paragraphs, but first another story from the horrible week following 9/11.

A commitment after 9/11

After terrorists brought down the two main World Trade Center buildings on September 11, 2001, the head of the firm that maintained those buildings wanted to get back to be with his employees. The problem was that he and his firm were based in San Francisco and the federal government had banned travel by commercial airline. What could he do? He got creative. He drove up to Vancouver, British Columbia, flew from Vancouver to Montreal, and then drove from Montreal to New York. Although I can’t find the story online, I remember it well because it made such an impression.

This CEO’s commitment to his employees almost certainly went above and beyond what most CEOs would do. But it shows the extent to which some heads of companies care for their employees.

The profit motive

Does either of the above stories show that heads of companies do well for their employees solely out of the goodness of their hearts? No. As the Citi story makes clear, Citi wants to position itself to make beaucoup bucks once the Russia/Ukraine war ends. And the executives at Citi have figured out that a way to raise the probability that the firm will be around is to stay around during the war. That means treating their employees well and cutting some slack for their current debtors. 

The case of the CEO who spent over twenty-four hours getting from San Francisco to New York to see his employees is less clear. The odds are high, though, that his main motive was to show his employees that he cared. That could be because he knew that showing he cared was a way to make them care. Or it could be that he simply cared, full stop, as the British say.

From profit motive to human motive

That brings me to a basic fact about employers. If employers want to succeed, they have to care about employees and about customers. Those who ignore employees and customers will fail. The profit motive does wonders for causing them to care. But then something happens that is very natural. Many employers who, because of the profit motive, start by caring about their employees in order to succeed, end up actually caring about their employees almost independent of the profit motive. Employers are humans who regard their employees as humans.

An extreme example is the case of the Oskar Schindler, whom many of us got to know about from the movie Schindler’s List. Schindler began not caring about his employees except as producers of pots and pans that he could sell to the German government. He did not care about his employees as people. But he was around them every workday. So Schindler started caring deeply about his employees.

Here’s what I wrote about his transformation in my book The Joy of Freedom: An Economist’s Odyssey:

This transformation made some movie critics call Schindler “complicated” (San Francisco Chronicle) and “puzzling” and “contradictory” (Atlanta Journal and Constitution). But Schindler’s growing humanity is about as hard to understand as cold weather in January and should surprise only those people who think about Marxist cardboard characters—“workers” and “capitalists”—rather than real human beings. Schindler had started to like the people he worked with. Commerce does that. Schindler’s actions were heroic because he took a big risk. But what led to his heroic actions was his caring for his employees, something that is quite normal. Almost all of us care for the people we work with, whether they are our employees, our employers, or our fellow workers. Virtually all of us would be willing to take some risks to help those around us, and the bigger the threat to their well-being, death obviously being the biggest threat, the bigger the risk we’re willing to take. We think of fellow workers who don’t care about anyone else as being odd, troubled, unusual. And anyone who knows employers knows that the part of the job many of them hate most is firing somebody. So the transformation in Schindler, though heroic, was entirely normal. Markets created an environment in which Schindler learned to value people; in a sense, markets taught Schindler morality. 

Bonus: markets tend to make people better

An old saying goes, “Fake it ’til you make it.” I think of that when I think of how in a free market, the profit motive, and incentives generally, cause people to act as if they care and, then, to actually care.

This applies to more than employers. It also applies to employees. From the early 1990s to the early 2000s, I coached girls’ basketball for the Pacific Grove Recreation Department. One year, when I was coaching girls in seventh and eighth grade, I had one girl who was hard to work with. She wouldn’t listen, she had attitude, and she didn’t get along well with a number of her teammates.

About five or six years later, I was in a local Safeway and the young woman behind the counter was very pleasant to me. She seemed to be doing quite a professional job. It suddenly dawned on me that she was the same person I described above, but her attitude was completely different.

What changed? Her incentives. I would bet that when she started that job, assuming it was her first job, she had a tougher time. But then she learned that she would do better if she had a more positive attitude. She probably faked it until she made it. Did she become virtuous? I don’t know. But she acted as if she did. And just by treating customers well, whatever her motives, she’s more virtuous than if she treated them badly.

How about the government?

And let’s remember what people who think businesses are hard-hearted often propose: more government regulation of business. Getting into the details would require looking at specific proposals for government regulation, and I can’t, in this short space, do that, although I’ve done so extensively in my previous writing.

What we can do is consider the incentives of government officials. When they make mistakes, even big ones, are they fired? Not often. Do they take a pay cut of even 10 percent? Virtually never. So don’t be surprised if, when you avoid ideological blinders and consider government officials’ actions, you conclude that many of them act as if they’re hard-hearted."

The morality of markets in theory and empirics

By Ginny Seung Choi & Virgil Storr. 

"Originally published in Journal of Economic Behavior & Organization

Find the full article here.

The academic conversation on the relationship of markets and morality is a longstanding one. While both the critics and defenders of markets acknowledge that markets can and do substantially and undeniably increase the material wealth of nations and improve people's lives materially, the dominant view within this academic debate and the social discourse around it is that markets can and often do corrupt the moral values of the people whose lives they touched. Interestingly, the topic has been underexplored empirically and it is possible to discuss the morality of markets quantitatively and qualitatively. In this article, we survey the quantitative economic literature on prosocial behavior as it relates to the market, its values, its actors and their interactions. While the evidence does not uniformly nor definitively tip the scale to a side of the debate, the bulk of the evidence suggests that markets, by and large, encourage prosocial attitudes and promote prosocial behavior."

The humanizing effect of market interaction

By Colin Harris (Department of Economics, St. Olaf College), Andrew Myers (Department of Political Science, Stanford University) and Adam Kaiser (Department of Economics, George Mason University). From The Journal of Economic Behavior & Organization.

"Abstract

The quality and quantity of intergroup contact affects how outgroups are perceived. Positive interaction tends to have a humanizing effect of moral inclusion. Negative interaction instead tends towards dehumanization and moral exclusion. One avenue of intergroup contact that has been empirically underexplored is interaction in a market. Do markets generate moral sympathy, or do they allow us to ignore or deny the moral status of others? We create a measure of moral sentiment that captures the frequency, valence, and type of moral language used about an outgroup. We match our novel sentiment data to dyadic measures of market interaction to test if markets act as a (de)humanizing force. We find a positive relationship between market interaction and the use of (1) moral, (2) virtuous (but not vice), (3) bridging, and (4) bonding language to talk about a contacted outgroup. Our results suggest market interaction has a humanizing effect."

Market integration accounts for local variation in generalized altruism in a nationwide lost-letter experiment

By Delia Baldassarri of the Department of Sociology, New York University. Excerpts:

"Significance

Why do communities vary in their levels of prosocial behavior? And are members of the ingroup and outgroup treated differently? According to the generalized altruism hypothesis, the more people engage in market-exchange dynamics, the more they are forced to interact with unknown others, thus creating the premises for the extension of prosocial behavior beyond close-knit circles to include outgroup members. This paper uses a large-scale, nationwide lost-letter experiment in a sample of Italian communities and finds a positive relationship between market integration and prosociality: In areas where market exchange is dominant, letter-return rates are high. Moreover, prosocial behavior toward ingroup and outgroup members moves hand in hand, thus suggesting that norms of solidarity extend beyond group boundaries.

Abstract

What explains variation in levels of prosocial behavior across communities? And are members of the ingroup and outgroup treated differently? According to evolutionary theories of generalized altruism, market integration should lead to greater levels of prosociality: Market exchange forces people to interact with unknown others, thus creating the conditions for the extension of prosocial behavior beyond close-knit circles to include outgroup members and strangers. Moving away from the evolutionary focus on cross-cultural variation, this article uses the market-integration hypothesis to explain intracultural variation in levels of prosociality in an advanced society. Taking advantage of an ideal setting, this study reports results from a large-scale, nationwide lost-letter experiment in which 5,980 letters were dispersed in a sample of 188 Italian communities. The study confirms the relevance of market integration in accounting for differences in levels of prosociality: In areas where market exchange is dominant, return rates are high. It also casts a light on the relationship between ingroup and outgroup prosociality: Return rates for both Italian and foreign recipients are the same; they vary together; and ingroup returns are highly predictive of outgroup returns at the community level.

 

You are walking down the street on a warm April afternoon and stumble upon a sealed, stamped letter. Someone must have dropped it accidentally. What do you do? And what would your neighbors do? And does it matter who the letter recipient is? In a lost-letter experiment, sealed, addressed, stamped, but unmailed letters are dispersed in public spaces (e.g., sidewalks, storefronts, parks, etc.). Passersby can either ignore, destroy, or mail the envelopes. Rates of return are commonly treated as an unobtrusive behavioral measure of prosocial behavior at the community level (1–3)."

The Invisible Hand Increases Trust, Cooperation, and Universal Moral Action

From Alex Tabarrok.

"Montesquieu famously noted that

Commerce is a cure for the most destructive prejudices; for it is almost a general rule, that wherever we find agreeable manners, there commerce flourishes; and that wherever there is commerce, there we meet with agreeable manners.

and Voltaire said of the London Stock Exchange:

Go into the London Stock Exchange – a more respectable place than many a court – and you will see representatives from all nations gathered together for the utility of men. Here Jew, Mohammedan and Christian deal with each other as though they were all of the same faith, and only apply the word infidel to people who go bankrupt. Here the Presbyterian trusts the Anabaptist and the Anglican accepts a promise from the Quaker. On leaving these peaceful and free assemblies some go to the Synagogue and others for a drink, this one goes to be baptized in a great bath in the name of Father, Son and Holy Ghost, that one has his son’s foreskin cut and has some Hebrew words he doesn’t understand mumbled over the child, others go to heir church and await the inspiration of God with their hats on, and everybody is happy.

Commerce makes people traders and by and large traders must be benevolent, agreeable and willing to bargain and compromise with people of different sects, religions and beliefs. Contrary to what one naively might expect, people with more exposure to markets behave more cooperatively and in less nakedly self-interested ways. Similarly, in a letter-return experiment in Italy, Baldassarri finds that market integration increases pro-social behavior towards in and outgroups:

In areas where market exchange is dominant, letter-return rates are high. Moreover, prosocial behavior toward ingroup and outgroup members moves hand in hand, thus suggesting that norms of solidarity extend beyond group boundaries.

Also, contrary to what you may have read about the mythical Wall Street game versus Community game, priming people in the lab with phrases evocative of markets and trade, increases trust.

In a new paper, Gustav Agneman and Esther Chevrot-Bianco test the idea that markets generate more universal behavior. They run their tests in villages in Greenland where some people buy and sell in markets for their primary living while others in the same village still rely for a substantial part of their subsistence on hunting, fishing and personal exchange. They use a dice game in which players report the number of a roll with higher numbers being better for the player. Only the player knows their true roll and there is no way to detect cheaters on an individual basis. In some variants, other people (in-group or out-group) benefit when players report lower numbers. The upshot is that people exposed to market institutions are honest while traditional people cheat. Cheating is only ameliorated in the traditional group when cheating comes at the expense of an in-group (fellow-villager) but not when it comes at the expense of an out-grou member. More generally the authors summarize:

…We conduct rule-breaking experiments in 13 villages across Greenland (N=543), where stark contrasts in market participation within villages allow us to examine the relationship between market participation and moral decision-making holding village-level factors constant. First, we document a robust positive association between market participation and moral behaviour towards anonymous others. Second, market-integrated participants display universalism in moral decision-making, whereas non-market participants make more moral decisions towards co-villagers. A battery of robustness tests confirms that the behavioural differences between market and non-market participants are not driven by socioeconomic variables, childhood background, cultural identities, kinship structure, global connectedness, and exposure to religious and political institutions.

Markets and trade increase trust, cooperation and universal moral action–it is hard to think of a more important finding for the world today."

The market as a process for the discovery of whom not to trust

From Journal of Institutional Economics. By Ginny Seung Choi and Virgil Henry Storr.

"Abstract

Trust is an important component of all successful commercial exchanges. Indeed, there is now a considerable literature on the economic importance of trust as well as the relationship between trust and institutions. Although there is now a sizeable literature on the economic importance of trust, and on the institutions that are associated with higher levels of trust, this literature remains relatively silent on the potential of markets to generate trust and, more specifically, how market actors discover whom to trust and, perhaps more importantly, whom not to trust. In this paper, we build on research by market process theorists that understands the market as a discovery process. We argue that the market is also a discovery process through which market participants acquire knowledge about their trading partners' dispositions, moral priorities, and personalities. Specifically, we argue that the market facilitates the identification of trustworthy and untrustworthy individuals and is, thus, a process for the discovery of whom to trust and whom not to trust. Additionally, we report experimental evidence that suggests that although market participants are trusting of strangers (at least in our experimental setting), they are less trusting of trading partners who have proven to be untrustworthy in past dealings."

Societies that use markets extensively develop a culture of co-operation, fairness and respect for the individual

See Montesquieu's "sweet commerce" and Cobden's "God's diplomacy" by Matt Ridley. Excerpt:

"The “ultimatum game” is a fiendish invention of economists to test people’s selfishness. One player is asked to share a windfall of cash with another player, but the entire windfall is cancelled if the second player rejects the offer. How much should you share? When people from the Machiguenga tribe in Peru were asked to play this game, they behaved selfishly, wanting to share little of the windfall. Not far away, the Achuar in Ecuador were much more generous, offering almost half the money to the other player — which is roughly how people in the developed world react.

What explains the difference? The Machiguenga are largely isolated from the world of markets and commerce. The Achuar are used to buying and selling to and from strangers at markets. The same pattern emerges throughout 15 small-state societies all over the world, in a fascinating study done by the Harvard anthropologist Joe Henrich and his colleagues. The more integrated into the commercial world people are, the more generous they are. As one of the authors, the economist Herb Gintis, summarises the results: “Societies that use markets extensively develop a culture of co-operation, fairness and respect for the individual.”

This would not have surprised Montesquieu, who spoke of “sweet commerce”, or Voltaire, who marvelled at the friendly collaboration of “the Jew, the Mahometan and the Christian” on the floor of the London stock exchange, or Adam Smith, David Ricardo and Richard Cobden, the radical champions of free trade in the early years of the industrial revolution.

Cobden said: “Free trade is God’s diplomacy and there is no other certain way of uniting people in the bonds of peace.” He was right. Recent studies have confirmed that commerce is the main cause of peace. “Within the developing world, economic development leads to interstate peace, whereas democracy does not,” concludes Faruk Ekmekci of Ipek University in Turkey. The evidence is overwhelming that markets do not just make people richer, they make people nicer too, less likely to fight and more likely to help each other.

So why on earth has it become accepted wisdom that every move towards free markets and free trade is towards selfishness, conflict and greed, whereas the state is the source of all kindness? When Daniel Hannan launched the Institute for Free Trade at the Foreign Office last week it was attacked by critics as an inappropriately “hard Brexit” initiative, even though free trade has been the British government’s ambition on and off since 1846. As Liam Fox put it at the launch: “Long before Brexit and long before the EU, the United Kingdom was the champion of global free trade.”

If freer trade is to be defined as “hard Brexit”, what does that say about the European Union? The critics are implicitly conceding what Remainers usually deny: that the EU prevents us being a global trader. They cannot criticise the “global Britain” Leavers, like Boris Johnson and Liam Fox, without admitting that the EU is a protectionist empire devoted to imperial-preference trade behind an external barrier — a discredited economic philosophy from the 1930s.

 

Hannan’s critics, such as the misleadingly named campaign Open Britain, imply that free trade is unkind in another way: it leads to lower standards of welfare provision, but this is demonstrably nonsense. Is welfare worse in free-trading New Zealand or protectionist Venezuela? In South or North Korea? In Singapore or Burma? The correlation between free trade and high living standards, including high welfare standards, is tight and causal. Government intervention in social policy goes hand in hand with economic development.

The astonishing enrichment of the world in the past 50 years, when extreme poverty has fallen from more than 50 per cent to below 10 per cent of the world population, could not have happened without free commerce and the innovation it delivers. No serious economist denies this. The liberalisation of world trade since the Second World War has been responsible for making the world not just wealthier but healthier, happier and kinder too. If that sounds incredible to millennials, then perhaps they should ask their professors to give them some less Marx-inspired reading matter."

Free markets make people more virtuous, happier and richer

See Free, good and happy by Scott Sumner at EconLog.

"It's a common misconception that markets make people more selfish. Deirdre McCloskey wrote an entire book on the way that markets instill good values. Here are some other pieces of evidence:

1. Statist polices like rent controls and minimum wage laws encourage people to be evil. It becomes in one's self interest to treat renters poorly, or to treat employees poorly. Some of that occurs even under a free market, but at least under a market system people have some incentive to treat customers, tenants and employees well.

2. People who lived for decades under highly statist governments in Russia and China developed a society with low levels of civic virtue.

3. At least in the Chinese case, there is evidence of causation running from exogenous changes in economic structure to civic virtue. Mainland Chinese visitors to Taiwan tend to notice a higher level of civic virtue, a "better culture".

4. Back in 2008 I did a study that showed that countries that were more neoliberal also tended to be less corrupt, happier and richer.

Like David Brooks, I'm a bit worried about cultural decline (although much less worried than he is). My specific fear is that a $15 minimum wage and expanding rent controls will make people in California meaner. (I hope to retire in California someday.) In fairness, they may be about to legalize pot, which would reduce the footprint of the war on drugs, and thus make society a bit nicer. Ditto for their right to die law, which recently took effect. Indeed it's quite possible that by next year the entire West Coast will have both legal pot and a (limited) right to die law."

Co-operation within groups leads to antagonism within them -- if you leave out trade

See Why are we nice to strangers? by Matt Ridley. Excerpts:

"The more evolution encourages niceness within groups, the more it produces nastiness between them. Dr. Wilson thinks "the future is bleak if we don't turn our groups into organisms," by which he means entities that emulate the team behavior of cells in a body. But surely the future is bleak if we do turn groups into such organisms. Consider gangs, armies, sports fans and companies, which have taken this advice—and, as a result, fight each other.

As Adam Smith pointed out, kindness works among friends and relatives, but for cooperation among strangers, human beings use a wholly different mechanism: a division of labor that encourages people to engage in mutual service. Plenty of other animals (from chimpanzees to ants) show cooperation within groups and proportionate antagonism between them, whereas none has exchange and specialization between strangers. History shows that it is trade that dissolves hostility between groups.

A few years ago, Joe Henrich of the University of British Columbia and his colleagues did a series of experiments in small-scale societies in the Amazon, New Guinea and Africa. They asked people to play the "ultimatum game," in which a player must decide how much of a windfall he needs to share with another player to prevent the other player from exercising his right to veto the whole deal. The more the small-scale society is enmeshed in modern commerce, the more generous the offers people make. This may shock those who believe in Rousseau's idea of the "noble savage," but not those who believe in the virtues of what Montesquieu called "sweet commerce."