Dogma Premise # 13

 The most profitable projects are also the most socially worthy projects (as selected by the general population of consumers/purchasers, as if by an invisible hand)

Dogma Premise #13 is perhaps the most shameful and blatantly false of the Dogma Premises, but also among the most important, because atop this empirically false premise is to be built much of the moral justification for Capitalism.

The basic idea is this: Profits derived from voluntary exchange are by definition morally good, because the position of both parties is improved by the deal.  You cannot, it is said, make money in a free, profit-driven economy other than by helping others, because if the good or service you are offering is not helpful -- if it is not worth what you are charging or even more -- then the deal will not occur.

You can imagine a world in which this is true -- where all exchanges are voluntary, they are based on adequate information, and the punishment for market misbehavior (e.g., knowingly selling someone a defective product) is so swift and sure that intentional misbehavior is rare.

The real world isn’t like that at all.

The simplest and most common example occurs when it is more profitable to supply less value.  For example, it is more profitable to sell a product that will wear out frequently and must be re-purchased, than it is to sell a product that will continue to function indefinitely.  Planned obsolescence is so pervasive in our economy that we hardly notice it, although people often express a general sense that things don’t last as long as they used to.

It is also more profitable to externalize costs than to internalize costs.  So, for example, a manufacturer that takes care to avoid creating toxic wastes, or disposes of waste properly, or deploys technology that prevents dangerous chemicals from fouling the water or the air will always be less profitable than the same company that is willing to destroy the environment because it has higher costs in producing the same product.

Economists propose two solutions to this problem.

First, if buyers were fully informed about the hidden social cost of certain goods, then they would shun the deceptively low prices.  In the real world, of course, buyers know hardly anything about the production processes associated with their purchase of a toaster, microwave, automobile, or a gallon of gasoline -- whether it might involve child labor, unsafe working conditions, dangerous land-use practices, or environmental exploitation.  And in truth, we could never expect or even desire that every buyer absorbed a research paper’s analysis on each of a product’s various components before making a purchase.  And even if they did, the individual buyer’s economic incentive is not to shun the low priced product, but to instead buy it and hope someone else cleans up the mess.

Second, it is proposed that government regulation create a “level playing field” in which all producers adhere to minimal guidelines that protect against externalities.  This doesn’t work in the real world because it simply makes the game more sophisticated -- the most profitable producers are the ones that learn to conceal their wrongdoing, change the rules, or limit their enforcement.  But this approach also doesn’t work in theory, because it entirely concedes the point that private profit is not instrinsically aligned with social benefit.

No wonder we could fill a book with counter-examples.  Here are a few more ways to increase profitability and harm the world in a single blow: artificially creating scarcity, obtaining market power and raising prices, suppressing competition through a variety of legal means and raising prices, creating defective products, marketing via false or deceptive advertising, winning business via rigged bidding processes or no-bid government contracts, committing acts of corporate espionage, and creating customer lock-in.

Customer lock-in deserves a special note, because it is such a common method of gaining improper profits.  The basic method is to sell someone a product that creates an ongoing dependence on the producer, and then exploit the dependence for great profits.  A common example today would be printers and ink.  Printer manufacturers may make more money selling ink than they do from selling printers, because the cost of buying a proprietary ink container is less than buying a whole new printer.  Consumers would be better off if printer ink cartridges were standardized, but printer producers would be less profitable, and so profitability is increased through a subtle form of coercion and opaque pricing -- the manufacturer reveals an attractive up-front cost for the printer, but the ongoing cost is harder to know, and indeed can be changed in the future.  The same trick applies with respect to replacement parts in all kinds of industries, from cars to refrigerators to water filters, and with complex business software, and all kinds of online companies that convince you to let them host your data and make it hard to switch hosts.

But leaving aside the subtle machinations of increasing profits -- there are literally an infinite number of ways to take advantage of people in the market -- the presence of straight-out crime, such as kidnapping, murder-for-hire, or bank robbery, let alone organized crime syndicates, should be enough to dispel any assumption that profitable activities are necessarily socially beneficial.

Or if you don’t believe that economic crime and market misbehavior are all that common, then examine the very definition of profit: trading someone an item for more than it cost.  It seems intuitively obvious, and consistent with the basic theories of supply and demand, that efficiency is achieved when a market generates prices that are close to costs.  If prices are far above costs, the market is in disequilibrium and will operate inefficiently until more competition brings in more suppliers to force prices down.  So if high profits correspond to market inefficiency, why is it considered socially beneficial when producers engineer such conditions, and even more socially beneficial if the producers are able to sustain the disequilibrium?

The very definition of high profits -- at least over the long run -- corresponds to economic dysfunction, not social benefit, unless you postulate that a firm is constantly innovating and discovering new products before others can catch up.  But a survey of profitable corporations and the business literature reveals that profits are more often driven by anti-competitive and coercive practices than by a long run of marketing leading innovation.  And even companies that are consistently innovative, like Apple, also employ the other techniques -- for example, songs purchased from Apple’s iTunes store will not play on competing devices, as well as purchasing 3rd party patent portfolios to raise costs for competitors.

Or compare non-profit organizations, which by definition are attempting to effect social improvement.  If profits are the measure, then these organizations are acting against the broad social interest.  This by itself would seem enough to destroy the notion that profits and public benefit are necessarily related.

To all of these examples it might be objected that the challenged behavior should be prohibited - indeed IS prohibited in many instances - and therefore, within a proper framework with an effective enforcement mechanism profit would nonetheless be a fair measure of social utility.

Anyone who has read the literature around trade regulation knows that creating an effective enforcement mechanism is an impossibly difficult premise, considering the infinite variety of devices that may be used to obscure the nature of a transaction.

But leaving aside the workability of creating such a framework, it is fair to say that if the rules were specified at this tremendous level of detail and consistency, then the normative benefits coming from trades would not be the result of the profit motive, but instead would have been injected into the system externally by the rules themselves, which would be the ultimate determiners of socially valuable versus prohibited activity, not profitability.  At that point, the economic system is really a social democracy that allows trading, and not a capitalist free market whose actors for the most part of unfettered freedom to pursue profits.  And that would be because the pursuit of profits does not, in fact, or by definition, make everyone better off.

Profitability does not even loosely correspond with social worthiness -- if anything, they are inversely correlated.

Dogma Premise 14

All Dogma Premises