Tag: profit

Profit is a Better Goal Than ‘Social Good’

Yesterday I got an email from Kickstarter that at first I laughed off as silly PR and signalling.  Then it made me sad.  Then it made me upset.

I like Kickstarter.  I use it.  It’s a supercool platform and has opened up a whole new world of crowdfunding, the effects and possibilities of which we are only beginning to see.  So what did they send me that rubbed me so wrong?

Kickstarter is no longer a traditional corporation but a Public Benefit Corporation (PBC).  I have not looked into the legal structure of PBC’s nor am I any kind of legal expert.  The way a company chooses to structure itself doesn’t really matter to me.  The thing that got me was the description in the email:

Until recently, the idea of a for-profit company pursuing social good at the expense of shareholder value had no clear protection under U.S. corporate law, and certainly no mandate. Companies that believe there are more important goals than maximizing shareholder value have been at odds with the expectation that for-profit companies must exist ultimately for profit above all.

Benefit Corporations are different. Benefit Corporations are for-profit companies that are obligated to consider the impact of their decisions on society, not only shareholders. Radically, positive impact on society becomes part of a Benefit Corporation’s legally defined goals.

What could it mean to have legal “protection” and, far more ominous, “mandate” to pursue social good?

The most obvious questions are what is social good and who gets to define it?  Even if specific goals or outcomes are written in to a legal charter, who gets to interpret them?  If an investor puts millions in to a business with expectation of financial return and the money gets squandered on a giant made-from-recycled-shoes art project at the office, could it be argued that this was the legally correct move because it’s good for the community or some other undefinable value?

Firms are not profit driven because they are evil.  They’re not even profit driven because they care more about profit than anything else.  No one got together and decided to make firms profit driven as an evil conspiracy.  They simply ended up that way because it’s the best possible method of accountability to value creation.

They’re profit driven because profit is the only uniform, objective measure of all the diverse goals and desires of everyone involved in the enterprise.  Designers might want to make the world more beautiful, customer service people may want to help others solve little problems (except maybe at Comcast), investors may want to be a part of something new and exciting, founders may want to change the world, and customers may want a specific feeling the product provides.  To keep creating value in these myriad ways the firm needs resources.  They can’t be consuming more value than they produce.  They need to create something that is valued by the customers more than the raw inputs were valued on the market.  The only way to measure all these subjective preferences is with profit and loss.

When people decry profit they seem to treat it as a one-sided bilking affair.  Profit is really, really hard.  Loss is far more common.  And loss is just as important.  Loss is the greatest force for resource conservation the world has ever known.  It lets us know that a company is, quite literally, destroying value.  It puts the brakes on fun but destructive behavior.  They are consuming resources valued at X and are only able to sell them at X-1.  They have transformed resources into something less valued by society.

Profit and loss are the best signals humanity has ever had to make decisions about resource allocation.  Relying on warm fuzzies or good intentions is far less effective and can even be downright deadly.  If you allocate resources based on perceived need or good feels you’ll end up with big shortages and surpluses, like every planned economy ever, and the poorest will suffer from lack of access to food, health care, etc.  This is how mass starvation happens.  High minded ideals replace organically emerging prices as the means by which resources are allocated, and well-intentioned elites from on high replace self-interested individual decisions makers on the ground.

I’m not trying to get dramatic here.  For all I know PBC’s could be an improvement over current state offered options for incorporation like 501c3’s or C-Corps or what have you.  I’m also not such a fool to think technical legal jargon so powerful that it can override informal institutions or cause investors to make horrible decisions with their money.  Chances are, if you’re knowingly investing in a PBC, you trust the assumed definition of “social good” or whatever other goals enough to take the risk.

The troubling thing is the rhetoric and the built-in assumption that profit and loss provide worse information about how to improve the world than vague things like a “commitment to the arts”.  Being committed to a high ideal without really knowing enough to bring it about in the everyday lives or real people (hint: none of us do) is a great way to waste a lot of resources and do a lot of damage while feeling good about yourself.  Being committed to accounting profit and loss is a great way to create value for the world, whether you intended to or not.

*BONUS

I was discussing this with a friend on Voxer, and added this very important point about what prices really are.  They’re not only about incentivising people to do things.  Even in a world where people were able to rise above self-interest, prices would still be crucial for the information they convey.  It’s an incentive wrapped in information.  Here’s an excerpt from our conversation:

When to Take Action

I’m highly action biased.  I get the frustration of identifying a problem or having a new idea and wanting to do something about it, good and hard.  I believe jumping in with both feet as soon as possible is always preferable to lots of analysis.  Still, there are times when the best thing to do is nothing.

This is particularly true when the problem is a grand one that affects all of society.  Just because you realize that there is something wrong with X system or process doesn’t mean there is an obvious and immediate action to take.  The realization is the first, often most powerful but also most fleeting step.  It’s easy for action biased people to get antsy and want to do something quick.  Start a campaign, write an article, launch an organization, etc.  Often though there is no clear vision, understanding of causal factors involved, or strategy.

Our culture is one that provides social rewards for any kind of action.  If you say you’re doing something to alleviate poverty, people congratulate you no matter how stupid or useless or even counter-productive your efforts might be.  Volunteering is deemed noble and effective, whether or not it’s either of these things.  The obsession with nonprofits and vilification of win-win for profit activities further incentivizes blind action.  Start a club.  Host a fundraiser.  Do something!

The most profound improvements in the world are typically born out of many years of following the initial identification of a problem deep down the rabbit hole.  Those who see something they don’t like and jump to do something come and go, as do the effects of their efforts.  Those who internalize the problem – let it steep, let it alter the way they think, pursue an in-depth understanding of the problem and knowledge of tried and untried solutions, and only act when the idea they hold is one that doesn’t just suggest but demands action – are typically the ones who best solve it.

There are a lot of dysfunctional beliefs and institutions around us.  Discover them.  But when it comes to action if you feel the itch ask yourself exactly what kind of action you want to take and why.  Do your ideas demand action?  That specific action?  Will you be unable to sleep without taking that specific action?  More importantly (and much harder) ask if the solution you have in mind can be obtained within the context of a for-profit business model.  If not, the odds that it will work are incredibly low.  If a solution is real, it will create value.  Non-profits can create value, but it’s much, much harder to know if they are and far too easy for them to do the opposite.  If the solution is political it’s almost assuredly going to do more harm than good.  If the goal is good feels, launch a nonprofit effort or lobby politicians.  If the goal is effectiveness, try as hard as you can to discover a way in which your ideas can generate a profit.

Until action is clear, and clearly value-creating, let your ideas direct you to further understanding.  Channel your hunger to act towards the act of learning more.  When the time is right and the idea is ripe you’ll know.

If You Don’t Like Profit, Advocate Free Markets

I don’t find anything at all distasteful about profit.  Profit seeking behavior is as natural and inescapable in humans as breathing, and deserves no moral censure.  When placed in an open and voluntary institutional setting profit is an indicator of value created for others.  Still, a great many people find profit disturbing and wish to curb it.  If that is you, you have no practical choice but the full-fledged support of free-markets.

Competition exerts a relentless downward pressure on profit.  Open markets invite competition and power positions in the market are never secure.  It is for this reason that those in the temporary position of high profit-earners are most likely to be the ones lobbying for new rules and regulations.  They don’t want to compete, they want to monopolize.

The only true monopoly is government monopoly.  All other applications of the term are illusory and not to be feared.  Peter Thiel has famously advocated for monopoly, but he uses the word to represent a business that creates a product so unique it is all but impossible to be replicated by competitors for a long period of time.  That is not the same as the textbook description of monopoly with all of its attendant dangers.  The only true and dangerous form is government monopoly.  It eliminates not only present competition, but potential competition.

Unlike competition, monopoly exerts no downward pressure on profit.  Indeed, its sole purpose is to suppress competition so that profit can balloon, without any corresponding increase in value creation.  In this sense, the critique that, “There is too much profit in X industry”, or, “The profit motive corrupts Y good or service”, is correct.  In a truly monopolized industry, the profit motive is terrible.  Again, not because of the motive itself, which is ever-present in all humans, but because of the institutional setting which prevents all of the incentives to curb and corral profit motive towards value creation and away from plunder.

In monopolized industries the profit motive is very destructive.  Do not be fooled by tax designations or accounting terminology.  Governments and “non-profits” are also profit driven.  It is here where profit is the most dangerous and often deadly.  The justice and law enforcement industry is all-but entirely monopolized by the state.  Because it faces no real competition there is no downward pressure on profits.  It is therefore one of the most profit-driven enterprise imaginable, only it needn’t create value to profit.

An ever growing number of laws and regulations ensure that more and more people are guilty of crimes.  This is a highly profitable state of affairs for the justice system.  Law enforcement routinely harass and abuse and give out tickets for violations of no practical importance.  They find or plant illegal substances for the sole purpose of seizing assets of the accused.  Prosecutors, medical examiners, judges and law enforcement regularly lie, exaggerate, and falsely convict.  The profit motive is what drives them.  They have a monopoly on the administration of justice, so they invent whatever means they can of increasing the profitability of the enterprise.  The greater the number of crimes, the greater the receipts.  Indeed, the origin of government monopolized police and courts attest to the revenue-enhancing motive at their core.

We cannot wish away the profit motive, or hope to elect or appoint people who magically do not possess it. (How would they win an election or appointment without it?)  We can, however, realize the danger of granting monopoly status to any profit-seeking enterprise, including governments.  If it is profit that is driving the corruption and abuse among police, courts, and other sectors, the surest way to suppress the ability to generate more profit is to open it up to competition.