Robert Frank: Ruthless self interest is not a good business strategy (a guest post)

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Branko Milanovic is not alone in his skepticism about whether private morality has a useful role to play in the capitalist system (see The Iron Logic of Gordon Gekko). The logic of the competitive model does indeed seem to suggest that if people can gain by breaking the rules when no one is looking, they will do so, in the process creating competitive pressure for rivals to do likewise.

Not all interactions, however, are zero sum. Because of widespread economies of scale, individuals who can cooperate successfully with one another often compete successfully against others who lack that capacity. But successful cooperation often requires trust, which, as Professor Milanovic obviously recognizes, can be hard to maintain under intense competition.

There are of course many examples of people who behave in the ruthlessly self-interested manner that Professor Milanovic describes. Yet surely he also recognizes the empirical fact that many others refrain from cheating even when the probability of detection is extremely low. Since evolution presumably favored individuals with higher material payoffs, the interesting question is, how did genuinely honest people—those who value doing the right thing for its own sake—manage to survive in competition with others who reaped material gains by merely pretending to be honest?

A possible answer is suggested by this simple thought experiment:

You have returned from a crowded concert to discover that you have lost an envelope containing $10,000 in cash from your coat pocket. (You had just sold your car late that afternoon and had planned to deposit the money the next morning.) Your name and address were written on the front of the envelope. Can you think of anyone, not related to you by blood or marriage, who you feel certain would return your cash if he or she found it?

Most people say they can, usually adding that they have in mind a longtime friend. Since there would be no way to know if the friend had kept cash found under such circumstances, they implicitly recognize that their prediction isn’t based on directly relevant behavioral evidence. Rather, they seem to feel that it’s possible to know people well enough to make informed character judgments about them. If that’s right, and the evidence I survey in the first four chapters of my What Price the Moral High Ground? (Princeton, 2004) suggests that it is, we can see how an honest person might prosper despite passing up opportunities to cheat when no one’s looking. Such a person is extremely valuable in positions that require trust. Few executives would appoint a someone to such a position if they thought that person would fail to return the envelope in question.

For analogous reasons, we can envision a vibrant role within the capitalist system for firms and other organizations that behave in a socially responsible manner even when the threat of external sanctions is extremely weak. The title essay from What Price the Moral High Ground? explores the relationship between a firm’s perceived social responsibility and its ability to recruit and retain highly qualified workers. Most people would prefer to leave the office each day being able to say to themselves that they’d done something valuable for society, or at least that they’d caused no harm. Firms that can credibly offer this amenity to their employees, it turns out, enjoy an incredibly powerful recruiting advantage. It’s probably the most important way that socially responsible firms manage to overcome what would often be the serious cost disadvantages that make Professor Milanovic skeptical about there being a productive role for morality in the capitalist system.

Robert H. Frank is the Henrietta Johnson Louis Professor of Management and a Professor of Economics at the Samuel Curtis Johnson Graduate School of Management at Cornell University. For more than a decade he was a regular Economic View columnist for The New York Times. His most recent book is The Darwin Economy: Liberty, Competition, and the Common Good (Princeton 2011).

 

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Yoram Gat

Can you think of anyone, not related to you by blood or marriage, who you feel certain would return your cash if he or she found it?

I’d go with Bernie Sanders.

al loomis

many people would behave in an ethical manner, the result of childhood experience rather than intellectual analysis. but it only needs a few rotten apples, never in short supply, to corrode a society to the point that ethical people leave, or change.

Ross Hartshorn

Paul Graham (who is an early investor in mostly software startups) gives a good example of this, from the venture capital industry: http://paulgraham.com/ronco.html
“In almost every domain there are advantages to seeming good. It makes people trust you. But actually being good is an expensive way to seem good. To an amoral person it might seem to be overkill.

In some fields it might be, but apparently not in the startup world. Though plenty of investors are jerks, there is a clear trend among them: the most successful investors are also the most upstanding. ”

More generally, I think it would apply in any field where you need people (who have a choice about who to do business with) to think of you before many other options, and where the payoff from success can be much bigger than the cost of being a “nice guy”.

Juan Alfonso

I think that Zahavi´s Hándicap principle might help to solve this puzzle.

We are all senders and receivers of all kind of meaningful signals. Costly Signaling Theory states that signals that are costly and/or diffilcult to fake are what we, discerning signal receivers, need to make our choices. Mates or partners, it doesn´t really matter.

This reasoning makes plausible the evolution of behavioral phenotypes that are genuinely trust-worthy. There is no doubt that being genuinely trust-worthy is costly, and it can also be really difficult to fake. For example, we receivers are well aware of physiological signals that indicate honest embarrasment when misbehaving (like blushing or stuttering). Just the kind of reactions that sociopaths lack. We tend to trust those people more and prefer them as partners, so in the end this phenotypes yield net benefits.

Firms that invest heavily in creating and maintaining a good reputation would eventually accrue more benefits than their less prestiged competitors in terms of being chosen more often by clients, high quality workers and even share-holders.

Rory Sutherland

An interesting extra question. Do you know anyone who would return the money anonymously?

Koen Smets

Perhaps the same people who make anonymous donations. But nobody knows who they are!

Koen Smets

This is a great thought experiment (with very interesting comments).

I think Juan Alfonso makes a good point. Many (most?) firms not only don’t cheat even when they’re unlikely to get caught, but they treat employees, customers and suppliers better than strictly necessary by law.
Reputation is valuable it seems—which is also why so much attention goes to building and maintaining a positive brand perception.

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