Tag Archives: economics

We’re All in the Same Bathtub

When I was much younger, 34 years ago, I ended up having to take Economics 101, 102 before I could start graduate school. I was in the DC area, poor (in the way college kids are poor, which is different from how struggling families are poor), and so I enrolled at Prince George’s Community College. The professor, whose name I can’t remember, was a smart fellow, an engaging teacher, and clearly quite conservative in his economic and political orientation. It was fun and I learned a lot.

During one afternoon lecture, I remember Prof getting quite excited about how wrong it was for government to promulgate laws and regulations that imposed non-economic costs on businesses. How it messed up the purity of economics, I guess. At the time he was citing examples such as the relatively new requirement for companies to control pollution. Everyone in the class nodded in agreement but I decided I couldn’t let that one go. I raised my hand and noted, based on my not very commanding knowledge of economic history, that over the centuries many different “noneconomic” costs had been imposed on businesses: they couldn’t employ children just to get the cheapest labor; they couldn’t force workers to toil in unhealthy conditions; they couldn’t build cars that were firetraps. In the end, it seemed to me then and it still seems to me now, businesses are just another element in society and culture, and they essentially have no choice but to operate in accordance with whatever the socio-cultural norms are at the time. Being a business doesn’t exempt them, neither does the argument that certain costs are noneconomic. Given that currency itself is a social construct, in the final analysis all costs are noneconomic, or so it seems to me. (I know that last sentence doesn’t really make any sense, but it does accurately convey my thinking (muddy) here.)

The “occupy” events of the past few weeks and the growing discussion of Corporate Social Responsibility have reminded me of that Economics 101 class. I can’t help but think that we keep making silly distinctions about what category things fall into–such as economic vs. noneconomic, domestic vs. international, nature vs. man-made–when the rather obvious reality is: We’re All in the Same Bathtub. The “occupy” protests really are about trying to change the current social norms as they apply to business and profit. My guess is the very act of protesting is already changing those norms, but it is also probably true that the fact the protests are occurring indicates the norms are already changing.

In doing a little research for this post, I found an interesting discussion on this blog about economic and noneconomic costs in society. The following expresses what I’m thinking much better than I ever could:

Donohue-White submits (with very good reason) that every “market economy is shaped by the culture in which it exists, and, in turn, it affects the daily practices and customs of the people that comprise it.” By the rather broad term culture, she means the sum of “customs, traditions, and practices of a people.” In turn, the market exerts an influence on the culture in which it subsists, fostering particular sets of virtues or vices. Market and culture–while certainly conceptually distinct–are inextricably bound up in the concrete, practical affairs of a people. On this view, the market cannot be properly evaluated without recourse to the culture and society that shapes it AND to the impact the market has on this same culture and society. The “economic rationality” exhibited by many contemporary corporations seems to be largely devoid of the consideration of non-economic “costs,” particularly with respect to treatment of workers (wage, outsourcing, lay-offs), wealth accumulation and disregard for local and expansive tradition.

Because we’re all in the same bathtub, the argument that socially responsible behavior is not relevant to corporations or doesn’t make good business sense just falls apart.  US companies for example are already feeling the consequences of our declining education system. They can’t find the highly skilled workers they need, or at least not enough of them. Their transportation costs are rising because of the decaying transportation system. Internationally, I remember people making the argument that Somalia was not worth anyone’s attention, and so we ignored it. Ten years later, Somali pirates over the last two years have cost business $7-12 billion once you count all the related costs.

As automation and internet networks intrude into every line of business, I’m betting these changes will not only cost jobs; they will eventually shrink the size of corporations, including their profits and revenues. I can imagine a day when corporations evolve away from being primarily money-making activities to actually embracing their social responsibilities as one of the fundamental reasons for their existence. Business and government both will become less important organizing concepts for society. At first corporations will embrace greater community involvement as a clever way to market what they do; eventually I think some of these community activities may actually end up generating revenues for them and perhaps creating new types of jobs for the economy. They may no longer be profit-making entities, although they will still make money. Already I think you can see signs of this in the rise of NGO’s and other nonprofits in the world economy. Public Services International notes that NGO’s are now the 8th largest economy in the world, employing more than 19 million paid workers. The US is currently home to about 1.5 million nonprofits, with 30-50K being created every year.

Being in the same bathtub applies to the world economy as well. When the bathwater gets dirty–i.e. during the global financial crisis–everyone suffers. Until we discover sentient (and prosperous) life on other planets, we will have to find a way to make this financial system work, despite its imbalances. There is simply no other place for China, or any other country, to invest its trillions.

One final link. The latest piece in the Harvard Business Review by Rosabeth Moss Kanter powerfully discusses some of these dynamics. Money quote:

Only if leaders think of themselves as builders of social institutions can they master today’s changes and challenges.

About Airline Fees, the Washington Nationals, and Dan Snyder

Economics has never been my strong point. In fact, anything mathematical  leaves me without clues. I was once asked to do a job at the CIA that essentially amounted to editing the work of economists, and it was the one job I felt most insecure in doing. (Although I soon learned that most economists, like most–but not all–deep or single-threaded experts, need help in putting things in perspective and in understanding the noneconomic consequences of their findings.)

But it has struck me this week that there is an unhealthy trend manifesting itself in American companies that does not bode well for the vibrancy of the US economy. It is the explosion in using fees to bolster profitability, rather than doing things to make money the old-fashioned way, by earning it through increased productivity, efficiencies, and innovations.

This hit me quite personally yesterday when I went online to buy tickets for a Nationals game this weekend.  As I started to check out, I realized I was being charged almost $15 in fees for the transaction, including a ridiculous, I believe it was $1.75 fee, to print the tickets using my own equipment at home. What is this I thought?! I’m being charged almost 15% in fees for online transactions that, by the way, have miniscule marginal costs. I immediately cancelled the transaction, and, as I was subwaying downtown anyway for a meeting, just wandered by the stadium and got my tickets there at face value.

But if you’re paying attention, you know that it’s not just baseball teams that are garnering additional revenues through the imaginative use of fees. Credit card companies were really champion performers here at least until recent legislation passed aimed at tempering them. Airlines, of course, are on a fee rampage. They made $8 billion dollars in revenues last year from fees. I couldn’t easily find an overall revenue number to compare that to, but for at least one airline the income from fees accounted for 20% of their total revenues. (By the way, we really need to get on the media for so often not providing context for the numbers they use. That is just sloppy journalism and analysis. We are often told that X activity is going to cost [insert here some really scary number], but are rarely told what percentage that number represents of  total revenues or expenses. This is not an insignificant issue, because it is this very lack of context that obfuscates the real meaning of most developments. But I digress…)

And if you want to read about a really hideous example of using fees diabolically, read this story about the beloved owner of the Washington Redskins, Dan Snyder. It just sickens you.

And it also points out the real problem with American companies getting on the fees bandwagon. You’ll notice in the article that the company Dan Snyder was running, Six Flags, went bankrupt anyway despite its excessive use of fees. Companies seem to be using fees in lieu of other and much healthier ways of increasing revenues, such as through greater efficiency or innovation. As managers and leaders, we need to rise to the challenge of doing our missions better and not sink to employing clever machinations to compensate for substandard results.

You may not think as a manager of a small group, for example, that you collect fees rather than fix and innovate. But you may very well collect fees, they are just not monetary. Every time you impose some new control step in your process to guard against a recurring error committed by some, for example, you are collecting a fee and avoiding dealing with root causes of undesirable performance.  Managing by rule-making is essentially managing through non-monetary fees. And just as reliance on fees threatens to stifle innovation in American companies, managing through rules does the same for any small group effort.