Mar 22

The Gap in the Market

Currently, it is against the law for any business to engage in any practice that they believe will fail to maximize profit for their investors. In a way, this makes sense. People invest in companies because they believe that these companies will give them a good return on their investment. If companies were allowed to behave in ways that didn’t meet their investor’s interests, then investors would stop funding start-ups, the economy would stagnate, and unemployment would go up dramatically. The effect of this policy on businesses, however, is that they aren’t allowed to have a conscience about anything else, and any socially beneficial actions must be justified on the grounds that the activity increases public relations or publicity, and therefore helps the investor.

There is an alternative way to be charitable, of course, and that is to start a private charity. Here, people who invest in your organization don’t expect to see their money come back to them. They simply give it to the organization, trusting that they will do more good with it than the investor could have done on her own. Private charities are great things, especially in the face of serious problems that a lot of people would want to help solve.

There is, however, an obvious gap in the marketplace here. The current situation requires investors to be either purely selfish or purely altruistic in their motives when they decide to invest in something they believe in. But real people rarely have such pure cognitive motives, and the intermediate areas are being inefficiently wasted by the current policies. If we could establish a middle market where investors could establish what counts as a successful return on investment in ways that reflect all their intentions in investing, then companies could both be charitable and profitable to the degrees that the investor wants them to be.

This middle market would make the free market solutions to problems far better. Currently, there are any number of problems the solutions to which aren’t sufficiently profitable to spur much investment in solving, but whose social benefits are too limited or too mundane to motivate much desire for charitable contributions. These problems must therefore either be left unsolved, or left to the government to deal with. By creating a market that can address a more realistic set of investor interests, we could start to address these problems through private mechanisms and move further away from the need for government action. We would also have versatility to handle more problems than we currently can solve.

1 comment

  1. Paddy

    I am currently studying Business in Ireland and in response to the economic crisis many lecturers proposed the idea that businesses of the future will not act purely in the interest of profit.

    “Paper profits never benefit anyone”. The alternative proposed is that companies will seek to survive in a competitive marketplace, creating employment and providing a product or service that will benefit consumers. In this scenario “creative accounting” and other unethical practices would be eliminated.

    I don’t think we have your profit maximisation laws here but directors do have legal responsibilities to shareholders including to act in the best interest of the company and its shareholders. I feel this approach to legislating company directors allows for more leeway in promoting so called “positive businesses”.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>