Pages Menu
TwitterRssFacebook
Categories Menu

Posted by on May 17, 2010 in TG Roundup

Profit Motive & Evil Corporations?

In the era of “evil corporations” and full-scale assault on free markets and capitalism, I thought I would share a video of Friedman debating a student at Cornell about self interest and corporations’ profit motive.

In the first video, the student quizzes Friedman about a power company that turned off service for non-payment of bills that resulted in an old man’s death.

In the second video, the student complains about Ford not installing a $14 piece of plastic on its Pinto model, that resulted in 200 deaths.

No one does a better job than Mitlon Friedman in explaining the simple concepts of free markets and capitalism.

Power Company Video 

Car Company Video

7 Comments

  1. – Your point about information asymmetry is well taken. However, in aggregate, I think the harm done by these regulations is far more than the good it intends to do.

    – I don’t know any libertarian that is against regulation. Libertarians are against regulation that will interfere with individual liberties. Since we are on the subject of automobiles, I will use it as an example. I am against seat belt regulations, I am against air bag regulation. On the other hand, I am for speed limits; exercising my individual liberties can harm others i.e., driving at 100 mph. I am for limits on cell phone usage while driving. I am “in principle” for emission controls, but not at the level and for the reasons pushed by environmentalists.

    – I don’t believe in man-made global warming, hence the discussion on carbon credits is moot

    • Thanks so much for you patience in answering my queries/rants 🙂 I’ve learned quite a bit from your arguments and the subsequent thought process.

  2. Yes, I’ve been waiting for another of these posts about free markets… I’ve thought of this issue before and wanted to ask you about it on the discussion you had on MMGL, but unfortunately could not make it.

    There is an assumption, here, that people have complete knowledge of the products that they buy. On the level of, say a car or a regular consumer product, it seems ok to believe (as a “principle”) that the consumer ought to have complete knowledge and should have done a thorough research about the product.

    Let’s take the example of Ford Pinto. Now each an every consumer, who plans to buy Pinto should have a done an economic analysis of how much is his/her value of life is and then decide whether taking that risk is “worth” it. This is what the “principle” is, right ?

    But there are so many uncertainties involved in the economic analysis and one cannot expect each and everybody to do it accurately. Besides, it is by now a well established fact that human’s ability to ‘estimate’ quantifiable factors is hardly accurate. You can see the work my Kahneman and Tversky, who won the Nobel prize for Economics.

    Now add to this the constant consumer marketing techniques used in the media. You hardly get see through the smoke screens. I don’t have to separately specify, on a policy level, how certain media channels could be used to propagate the “interests” of some sections.

    Now if people are having such difficulty in seeing through the smoke and do q satisfactory economic analysis for normal consumer products, how do you even expect the above-average minds, if not the best, to sift through the tons of info corresponding to some of these complex financial instruments ?

    How can the regulation-free market proponents assume that the consumers have a complete knowledge about these extremely complex financial instruments ?

    You could say that those who actually do an accurate analysis of their financial investment should get more benefit. And say this super brain’s neighbor suffers due to his own “poor” analytical skills. Then you blame this super brain that he was not charitable enough to save his neighbor…

    I’m not even bringing in the aspects of greed and insane amounts of bonuses, etc.

    I have one more question on outsourcing, the regulation-free market proponents’ take on it and how they expect a govt. to behave in order to protect their people’s economic interests. If you get a chance please do address them.

    • Sandeep,

      First of all, there is no “Nobel Prize for Economics.” The correct title is “Nobel Memorial Prize for Economics.”

      Second, I believe that Chakravarthy is not opposed to regulation.

      Media channels DO USE their own outlets for propaganda and political gains. Fox is the most blatant and obvious example. However, in the past a couple of overzealous producers at NBC and ABC have produced rigged evidence to support their negative stories on GM and Food Lion. They were eventually caught and fired. Also, very recently (in the last 5 years) a reporter at NY Times was caught writing completely made-up stories and got fired.

      I have one more question on outsourcing, the regulation-free market proponents’ take on it and how they expect a govt. to behave in order to protect their people’s economic interests. If you get a chance please do address them.

      Bush was a big proponent of regulation-free free markets. But when import prices of steel dropped rapidly, he hit the steel importers with hefty tariffs. Not to mention that he buckled under pressure from Paulson to bailout Fraud Street. Such is human nature. When your own survival is at stake, nobody clings to the ideology.

      By its very nature, imposing ideology of any kind (left or right) on mankind is utterly impractical because it tries to control basic instincts of humans. A loosely regulated or unfettered regulation-free free markets will lead to corporations and big money interests to get in bed with governments. A Corporatistan if you will. By that I mean, the state is an oligarchy of corporations, which is what we have in United States today. This further widens the gap between the rich and poor.

      There is no dividing line between “economic self-interest” and “political self-interest” as suggested by Friedman. Self interest is self interest. Corporations with money will always manage to lobby and tweak regulations in their favor. I know this is not the idealistic “free market” Adam Smith proposed and Friedman advocated. But, this is an inevitable consequence of concentrated money and power. The stupidest of stupid 5 judges on the Supreme Court now decided that corporations are equal to humans. Excuse me? Humans are mortals. Corporations have perpetual life. In fact, by allowing Corporations to contribute as much as they want to political campaigns, they have almost guaranteed the demise of democracy as we know in this country. Lest we forget, PEOPLE HAVE LIMITS on campaign contributions. Now, corporations don’t. [Can’t help but recall George Orwell: “all pigs are equal. but some pigs are more equal than the others.”]

      These 5 judges have their ideology rooted in the “Free Market” philosophy. Friedman’s “Free markets” is an ideology. Plain and simple. Many who graduated with MBAs from top schools I know adore Adam Smith and Friedman, and are ready to sing the virtues of “Free Markets.” This is nothing but a twisted sense of ‘entitlement’ – meaning, they are smart and therefore the world owes them bazillion dollars. Many of them detest government involvement, and yet live off government handouts.

      Of course, I know what the response back on my own brethren – i.e., academics. Many brand us as incompetent ideologues who couldn’t succeed at producing and selling anything. That’s OK. Every profession has a taboo. And your own mindset seeks that profession (i.e. profession is a choice).

      I don’t like to be told how to think and act. My preference is to make my own decisions based on how the world works. That’s why I like to read Orwell. Not Friedman, and certainly not Rand. Ultimately, “freedom” means it is a freedom to think differently. Friedman tells you how the world SHOULD be. Orwell tells you how the world IS!

      • Mohan garu,
        Thanks for your reply. I was not trying to criticize at Chakravarthy garu. My argument was to kind of show that even with an “economic” argument what Friedman says is not entirely logical, as a principle. I mean, even the recent economic findings proves that the idea doesn’t work.

        Aside from that the Friedman principles work well if the demand and supply are based only on the quality of the product. But the media smoke screens influence the demand by changing the perception of consumers (in a positive or a negative way for the product)

        Your Orwell, Friedman comparison is so apt. I’m a big fan of Orwell as well.

    • Sandeep garu,
      I apologize for not responding to your earlier post. I wish we had time to discuss your other questions on the show. I will be happy to spend a few minutes over the phone to give my view on your questions posed earlier. That is far less time consuming than typing a reply 🙂

      In my view one has to blend free market theory with real-world experiences to reach a point where things start making sense. Free market philosophy is often counter-inutitive, otherwise all the countries would have adopted it in a wholesale manner and we would all be living in a better world.

      Now to your questions.

      1) Yes a common consumer like me would never know how safe a Ford Pinto is. However, there are enough privately run independent companies like Edmunds, Kelly’s blue book, Motor Trends, Carfax, cars.com and many others that already rate auto safety across several parameters. Also, look at how Toyota is being slammed by the media today and that is a very desirable free market phenomenon.

      2) It is in the car companies self-interest to make safe cars. One of my previous car had 6 air bags and that is the price I wanted to pay to ensure the safety of my kids. However, a poor man who has kids to feed, wants a car that gets him to work economically even if it doesn’t have the air bags. His priority is to earn money to feed his kids, even if it means driving a car without air bags. Now, government in its infinite wisdom comes up with mandatory air bags, non-sensical emission standards, and a whole slew of safety rules, that make a car so expensive it becomes beyond the reach of the common man. Most government regulation, as Adam Smith observed over two hundred years ago, actually hurts the exact same people that the “do-gooders” want to help.

      3) Also, the system of courts play an important role in the free market system. For example, if Ford Pinto or Toyota have deliberately misled or concealed safety information of their vehicles, they should be made liable.

      4) Lastly and most importantly, free markets are imperfect. However, it is the best known system to maximize economic productivity and to alleviate poverty. Most government regulation that impinges on individual liberties has time and again, in aggregate, has proven to do more harm than good.

      5) What is greed? Can you define it for me? Honestly, I am not being a smarty-pants. The word gets thrown around liberally and it is always the other person that is greedy but never me.

      6) What is wrong with the bonuses? Executives should take all the bonus that they can get their hands on- with two preconditions: i) Bonus money should not come from tax payers ii) The business should not be relying on government’s coercive powers to make a profit.

      7) Don’t know which free-market proponent opposes outsourcing, if it is Obama that doesn’t count 🙂 If free-market proponents oppose outsourcing, they’ve failed to understand Laissez Faire.

      • Chakravathy garu,

        Thanks a lot for your reply. I totally understand the principle of free-market capitalism. I’m was only arguing that information is the real key for consumers to be satisfied and the principle to be put to practice and when and where regulations are needed.

        This information has to be provided in clear terms. Some perceptive people can get it and some don’t. Some can see through the smoke screens and some don’t. (I’m not referring specifically to Ford Pinto) It is very difficult to decide whether the information is reaching the consumer correctly. Even in the case when the consumer obtains the info, his perception of the risk will be variable. So I don’t see why there should not be regulations be placed by an authority to ensure the consumer safety.

        It is clear to me that you are not against regulations, so let’s call for truce there – just like you and Mohan garu seemed to have done 😛 (kidding !)

        One other aspect of having regulations is that for demand for a “bad” product to go down, some consumers have to “evaluate” the product. This evaluation, depending on the product, might lead to some unfortunate consequences. So essentially, withing the time it takes for the “bad” product to be branded as “bad”, it may be at the cost of some peoples’ lives and livelihoods. So regulations in this respect are agreeable to me.

        I’m not sure what emissions standards you are talking about. There will be some *irreparable* damage done to the environment if people only bought polluting cars. (I’m assuming that you agree that global warming exists.) The environment is not as elastic as consumer demand.

        BTW, do you agree if the govt. instead came up with carbon tax instead of emission standards ? In which case the cost of both polluting and non-polluting ones will be about the same, if the tax levied correctly.

        PS: when I said “greed” and “bonuses” I was referring to the public money being used, just like you pointed out. I should have made it clear.