Business as Family

by Russ Roberts on November 18, 2005

in The Profit Motive

In a recent post I mentioned an insight of Hayek’s from The Fatal Conceit.  Here’s the quote:

Part of our present difficulty is that we must constantly adjust our lives, our thoughts and our emotions, in order to live simultaneously within the different kinds of orders according to different rules.  If we were to apply the unmodified, uncurbed, rules of the micro-cosmos (i.e. of the small band or troop, or of, say, our families) to the macro-cosmos (our wider civilisation), as our instincts and sentimental yearnings often make us wish to do, we would destroy it.  Yet if we were always to apply the rules of the extended order to our more intimate groupings, we would crush them.  So we must learn to live in two sorts of world at once.

The italics are in the original.  But why is it destructive to treat the wider extended order, the world of the marketplace in the same way that we treat our brothers and sisters, our husbands and wives.  Why is it destructive of civilisation (a very bold claim) to ask businesses to share their profits in good times or to treat workers with more compassion than the profit motive alone provides?  Yes, the profit motive when combined with competition encourages businesses to treat its workers and customers well, but wouldn’t it be better for those businesses to go beyond profits and treat workers and customers even better?  Surely, the world would be a better place if businesses paid workers more than the market wage, offering health insurance to employees even when the employees would be willing to work for lower wages and fewer benefits.  Surely it is better to be George Bailey than Mr. Potter.

Yet Hayek says no.  Why?  I don’t think Hayek addresses the question posed in quite this way (at least in The Fatal Conceit) so I’m going to post on this topic from time to time as a way of working out my own thoughts on the matter.

Here is one answer.  Suppose you have a 6:30 AM flight to visit a dying friend.  If you miss the flight, you will miss the chance to say goodbye to your friend.  You don’t have a car.  Here are four ways to get to the airport:

1.  Your brother who lives around the corner will get up early with you and take you.
2.  A limo service will drive you.
3.  A local charity that provides rides for people without cars will take you.
4.  A stranger you met yesterday who heard your story and feels sorry for you will take you.

As you go to bed the night before the flight, which way gives you the most confidence that your ride will indeed show up in time to get you there?

I have ranked them in the order that would give me the most confidence, but then again, I have a very reliable brother.  You might rank the order a little differently.  But think of two and three.  Would you rank them the way I did?  Would you rather rely on someone who is motivated  by money or by love?  In one sense, it’s a silly question.  Surely, there is room for both.  But let’s make it stark.  Would you rather depend on someone to pick you up who only cares about the money or someone who refuses money and only wants to do it for the privilege of helping others?  Love would be great, but there’s not that much love to go around.  (HT: Dennis Robertson—I’ll post his quote later) My brother, I think, does love me, and I could rely on him.  But the charity doesn’t love me in the same way.  It may claim to.  But it is not the same.  There are saints in the world, but they are very scarce.

Okay, says the skeptic.  But couldn’t you ask a business to act a little bit like a charity?  But what is the meaning of this?  What does it mean?  Who would decide when to give a particularly indigent customer a price break or to give an employee whose child is ill, a larger holiday bonus than merited by the employees performance alone?  Is it better instead to allow private individuals give to such people rather than asking businesses?  What happens when we allow well-intentioned motives to change the role of prices and profits in the extended order.

This is something economists have written little about.  I hope to write more on this in the future.  But let me close with two examples of that sentimental yearning that Hayek mentions.

Two nights ago, I was in New Jersey for a night and stayed at a Howard Johnson hotel.  At the front desk as we checked in was a sign:

WE LOVE PETS

However, they are not allowed at this Howard Johnson out of courtesy to all our guests.

We love pets?  Who is this "we" that loves pets?  The stakeholders of the Howard Johnson "community"?  HoJo bans pets because they’re costly.  They can damage carpets and furniture and imposing those costs on all guests in the form of higher prices would lower HoJo’s profits.  Those higher prices and lower profits would indeed be bad for the other guests.  But this direct, baldfaced way of putting it does not communicate well to the average person.  So instead, the rational business decision is cloaked in a lie: We Love Pets.  Nonsense.  There is no "we" and if there were, there is no love.  The sign exploits my sentimental desire to think that Howard and I are engaged in something other than a commercial transaction.

My father tells me that in his town of Huntsville, Alabama, one local bank advertises with billboards that say "We Want To Be Your Friend."  But we don’t want our bank to be our friend.  We have friends for that.  We want our bank to take care of our money and serve us promptly.  We’d prefer smiling bank tellers to rude ones.  But that is not friendship.  Here is what I wrote on a similar topic elsewhere:

Surprisingly, relying on strangers beats relying on friends. We don’t have enough of the latter if we want to enjoy the standard of living with all of its
             material and nonmaterial satisfactions. Relying on friends or relying only on our family would lower our standard of living back to the level of subsistence. Self-sufficiency is the road to poverty.

Relying on strangers also frees up our friends to specialize in being friends and
    do what friends do best. I don’t want to buy a shoulder to cry on from the low-cost seller behind a counter. I want friends and families to give that out of love. But my friends and family have more time for comfort and
delight
                 because the extended order of human cooperation out in the market
place means I’m not expecting them to sew my clothes or forge a car for me.

             

 

Hayek was right.  Mingling our family behaviors with our market behaviors is deeply appealing and deeply troubling.

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{ 5 comments }

Randy November 18, 2005 at 11:41 am

Perhaps its a simple matter of scarcity. Its one thing for me to care for all the members of my family equally, but another for me to care for everyone in the nation or the world. To ask me to do so is asking me to give such a very small portion of caring as to be, in effect, not caring at all. I have to prioritize my caring, because it is a limited resource. So if I apply myself to those I choose to care about and the profession I choose to care about, and you do the same, then we can create the possibility of exchange. And through exchange we can create additional wealth, some of which can be diverted to caring for those who cannot care for themselves.

Bob Howland November 18, 2005 at 12:04 pm

Perhaps I'm stating the obvious, but the bank advertisement that "We Want To Be Your Friend." is simply blatant manipulation of potential advertisers. They are saying that they "commit" to being a reliable ally in the future. Because of shared genetics, family tends to be the most reliable allies over a wide range of domains. Furthermore, we are willing to make ourselves more vulnerable to people that we believe will be committed future allies than to strangers or casual acquaintances who are believed to lack committment.

Believing that somebody is a committed ally allows us to be more vulnerable with them for an extended period. We feel confident that he or she will not take advantage of us, then terminate the relationship without compensating us. The bank simply wants to convince us to make ourselves more vulnerable to them.

In addition to willingness to be a reliable ally, there is the issue of an individual's ABILITY to be a strong ally. Ability tends to be domain specific. The abilities that I want in a wife are different from the abilities that I want in my banker (male or female) and completely different than the abilities I want in my fellow fire team members in a battle in Iraq. But in all domains, I always want committed allies that will do what I want.

David November 18, 2005 at 2:12 pm

There is also the argument that in most cases these large corporations are public companies and are beholden to their stockholders. These stockholders have their own personal money in the company and it is the company’s stated goal to try and make them more money. A corporation that goes beyond what is expected is actually losing money for the stockholder in those transactions. That is unless of course it is priced into the equation, which isn’t what we are talking about here, or purely in the pursuit of a selfish goodwill that the management believes will end in increased profits. If it is not one of these two things than by going the extra mile businesses are being socially irresponsible, by not doing they’re job to the fullest, instead of socially responsible like many people want to believe.

Drtaxsacto November 18, 2005 at 2:31 pm

You've made some profound points. Hayek consistently offered up gems like that in many areas. Where property is not secure – the problems of family/friends and business are exacerbated.

Avinash November 19, 2005 at 1:37 am

Brutally honest. Checked for consistency and clarity by 'The Daily Unusual'.

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