Big businesses used to be pillars of the community as well. Now, they have a tendency to tear communities apart. This needs to change.
As a business and economics student, I have been inundated with a core set of tenets. Firms exist to maximize profitability. And firms must presumably limitlessly increase growth and profits year after year or face market backlash, activist investors, and/or going out of business.
The underlying theory is that this maximization of profits eventually optimizes societal welfare; meanwhile, the desire for growth will drive innovation, moving the production frontier and increasing the volume of goods and services society can provide over time. While valid in many cases, it has also been pushed uncritically and relentlessly as an absolute truth.
But does this pursuit for growth and profits always provide value? Is there a limit? At some point, when does value creation stop and slide into zero-sum redistribution, or even devolve into a net reduction in societal welfare?
In his book Capital In the Twenty-First Century, French economist Thomas Piketty painstakingly establishes what happens when returns to capital outpace economic growth over long periods of time. Eventually, income and wealth becomes increasingly concentrated in the hands of the owners of capital, raising inequality. In conjunction with this, multiple studies have established a connection between very high levels of inequality and reduced social mobility. In other words, equality of opportunity, a core tenet most of us value, gets undermined: in a world of equality of opportunity, we expect social mobility to be high and frequent movement of individuals across income percentiles. Instead, more born poor remain poor, while those born rich retain their wealth. As the wealthy gain power, they also have an incentive to keep it. We’ve seen this through their immense influence in political and academic circles, as their money funds policy research and critical operations in each.
But perhaps all this is too abstract for many people to observe. What are some more tangible ways to express the dangers of growth?
Perhaps we can first dive into the processed food and beverage industry. As Michael Moss documented in Salt, Sugar, and Fat, we have seen dramatic growth in this market over the past couple decades. Companies create innovative new formulas and a combination of flavors and textures designed to meet a “bliss point” — where our taste buds would be maximally satisfied. They have complemented this product design with extremely successful marketing campaigns, building highly valuable brands over time (PepsiCo, for instance, has 22 brands worth $1 billion or more). They executed their strategies at an inflection point of societal change, where the entry of women into the workforce and the decline in home economics awareness drove the need for on-the-go food and products requiring little prior preparation. From a business strategy perspective, their work overall has been absolutely phenomenal, and the book sometimes reads like a series of one successful business case after another.
No doubt there is substantial social value in what these companies did. By creating needs that people did not even know they craved until they experienced it, these food companies literally created value. Surely one would struggle to come to terms with a world without Classic Coke, Lay’s, Lucky Charms, or any one of hundreds of products that have become classic treats or even staples. They support the lives and passions of hundreds of thousands of employees. When public health concerns mounted, they buoyed other industries such as dietary supplements and healthier food products and juices. And at least recently, companies had made a point to do philanthropic work and to emphasize sustainability and social responsibility.
But all this growth came at terrible social and ethical cost. The “bliss points” in taste happen well beyond when a product would be considered unhealthy. Their combination of addictiveness and low satiety encouraged overeating. Time and time again, companies marketed to low-information consumers, who may lack awareness of the nutritional implications. They even made product lines and marketed them explicitly for children, who would develop dependence on the unique taste while they were still cognitively developing and who could uniquely pressure parents to make these purchases.
In combination with more sedentary lifestyles and reduced time or willingness for physical activity, obesity rates jumped. This placed great burden on health care, not just due to increases in heart attack and strokes, but also from the need to constantly monitor someone with diabetes or hypertension. And food companies bore almost none of the burden for this massive negative externality for which they were at least partially responsible.
The rise in dietary supplements and “healthy options” is similarly suspect in terms of value. Oftentimes, dietary fads play completely on a consumer’s need for instant gratification, and do not produce tangible results. They can come with deceptive advertising and sham endorsements from popular figures such as Dr. Oz. While healthy options are more legitimate, they more often than not only offer an appearance of health or freshness, with only modest reductions in calorie count, and carry similar risks of low satiety and overeating. Sometimes, they simply become an additional, high-margin apparatus of food companies.
Surely some employees saw through the enormous harm that was done and tried to counteract it? The truth is, they tried. But the same goals of growth and profit that incentivized this behavior made it very hard to correct it. When Campbell’s soup attempted to reduce the sodium content of its soups, what was left was a bitter, metallic taste. When other companies tried to increase the sustainability of the growth by, for instance, pushing healthier products and reducing marketing towards children and low-information consumers, Wall Street rebelled, and the subsequent drops in share price and market evaluations forced them to reconsider. Spurred by the quest for profits, their hands are now tied by the same mechanism.
But perhaps that is simply an extraordinary example with a product category that had a clear negative effect on public health. Surely the extraordinary success of a company like Apple offers a more inspiring story?
Sadly, the growth in demand for consumer electronics, particularly smartphones, in combination with a need to maximize profits, had a lot of negative side effects. In 2010, 18 workers of Foxconn, a subcontractor for Apple and a number of other consumer electronics companies, attempted to commit suicide due to harsh working conditions and low pay.
Even though Apple made some changes through its commission of the Fair Labor Association, there is still work to be done. Wage increases have not kept up with productivity: although they have increased by 9 percent, quotas have risen 25 percent. Purchasing power has also been eroded with sharp increases in food and housing costs. Workers still exceed the 49 hour limit per week stipulated by Chinese law. New issues such as insufficient lighting and high noise levels have been found. Moreover, Apple has not relaxed Foxconn’s harsh contractual conditions or provided any money to finance the improvements, reducing Foxconn’s ability to make reforms quickly. Clearly, even the current pace of reform has left much to be desired.
To be sure, the direct financial benefits in accelerating reform are uncertain, but the costs are significant and tangible. It may be difficult to push change faster than the current pace taking place. Of course, one could argue that despite these harsh conditions, they may still represent an increase in the standards of living for Chinese workers. But Apple and other multinational firms could have done so much more to accelerate this. Still, the welfare of nearly a million Chinese workers at Foxconn is at stake. Moreover, any breakthrough there would send ripple effects throughout the Chinese manufacturing industry, help transition China towards a consumer economy and a bigger market for Apple, and accelerate international convergence in wages.
It’s quite telling that “if iPhones were assembled in the United States — assuming labor costs ten times [in 2008, it was 25 times] that in China, equal productivity, and constant component costs — Apple would still have an ample profit margin, but it would drop from 64 percent to 50 percent. In effect, Apple makes 22 percent of its profit margin… from the much higher rate of exploitation of Chinese labor” (from The Endless Crisis, Robert McChesney and John Foster). Even if Apple asked Foxconn to double wages and slash worker hours, the impact to its margins would be minor — 2 percent at most. That it does not do so suggests the sheer power of the gospel of profit maximization, along with Wall Street’s rigid enforcement of this tenet, and the relative lip service companies give to social responsibility in comparison.
A final example is not as visibly harmful, but the implications are nonetheless troubling. Here’s Tom Ford on why marketing Gucci is critical:
A black pair of pants from Gucci, to be honest, is not that much different from a black pair of pants from Prada or a black pair of pants from any of our other competitors… But in the customer’s mind, this basic pair of pants can be endowed with a quality that makes her feel she’s wearing the right basic pair of pants, the cool pair of pants, the pair of pants that’s going to make her whole life come together, and that’s in a sense also what you’re selling.
Again, there is some justification to differentiation on an emotional basis. For instance, it is one of the most effective signals that a given brand exudes quality or trendiness. Nonetheless, there is something ethically unsettling that playing on emotions and psychological need is able to trump actual differentiation in terms of materials and product features.
Even if this strategy is not zero-sum by growing the market instead of redistributing market share, a different issue arises: sustainability. In the case of any tangible product, manufacturing more product requires the use of natural resources and energy. Pursuing infinite growth in sales and profits, whether by emotional manipulation or actual differentiation, increases the risk of over-consumerism, which crowds out spending in other areas that are more sustainable, and also places immense strain on natural resources and the environment.
At its core, the pursuit of infinite growth and profits is an excellent strategy for the individual firm. What is not so clear is whether that same benefit extends to the industry as a whole, or even to society as a whole. Eventually, this relentless pursuit raises the risk of increased inequality, worker exploitation, psychological manipulation, and environmental strain. There needs to be a much stronger emphasis on sustainability, and multinational corporations should be leading the charge.