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The Case Against Corporate Social Responsibility

Aneel Karnani has produced a coherent analysis of the predicament of CSR: if it makes money, business will do it anyway; if it doesn’t, CSR won’t happen. The main solution to ensuring social needs get met is regulation, supported by campaigning. This is another branch of the well-trodden path taken by David Henderson, Milton Friedman and others. It’s depressing, but is it right?

In large part – yes. This position is upsetting to those promoting CSR because it presumes that there is no general purpose business case for CSR, which can always commercially justify an ethical stance. There isn’t: slavery made some people a lot of money.

Yet there are many subtleties around the edges of the dichotomy as the positioning of the market within society changes. Not only do new markets constantly emerge, but market behaviour is permeated and influenced (to some extent) by social values. The function of ‘social enterprise’ is a case in point. What was once entirely innovative and on the leading ethical edge of the market can move into the mainstream. This is happening to fair trade at the moment.

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Is Capitalism in Question?

The excellent review of 2009, ‘Capitalism in Question’ breaks one of the stronger taboos or our time: daring to debate the place of business in society.

The question for coming years is whether breaking this taboo will become a secret, guilty pleasure for a few, privileged CSR practioners – or a serious debate amongst policy-makers. There is not yet much sign of the latter.

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Chinese Puzzle

Google’s ingenious move to say it will offer an uncensored search engine in China if it can, or withdraw altogether if it can’t, is to be applauded.

It also reveals the spirit of the previous agreement: ‘define the rules and let me operate freely within them’. And suggests that the Chinese government was behind the attempts to access GMail accounts.

If all that is so it means that Chinese national sovereignty may be maintained at the expense of trust. That is going to be costly for everyone. It is not a long term solution.

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Taxing Corporate Citizens

If companies would like to be seen as ‘corporate citizens’, then they should expect other citizens (the public) to judge their actions from a moral perspective. They must expect the same horror of corporate tax avoidance as is shown towards MPs fiddling expenses. At the moment the public is largely unaware of the issue – but when informed, they are in no doubt as to the injustice of corporate tax policies.

As I pointed out some time ago in Corporate Truth, many of the solutions are well known – and some have even been espoused by the G20. But what is really lacking is the political will to follow through.

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Small is beautiful

What to do with financial insituitions that are too big to fail? Simply make them smaller!

Some suggestions from the US include having an upper size limit for comapnies or establishing insurance to protect the innocent.

Another way is to encourage them to limit themselves: rather than forbidding companies above a certain size directly, just transfer the risk to those running them. A straightforward way to do this would be to remove limited liability from companies above a certain size. That should focus the minds of directors and shareholders rather more clearly on risk. And it would also remove a large market distortion.

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Crashing & Crunching

It is important to separate the crunch from the crash.  The credit crunch led to, and preceded, the crash. However the consumer economy, especially, was over-leveraged and just waiting to collapse.

The credit crunch arose because house prices started to fall in the US.  But this was compounded by several factors.  Firstly lending institutions had over-lent to borrowers who could not afford to take out a mortgage; the trick was to disguise the actual level of repayment through very cheap instalments for the first 6 months or so.  Then the mortgages were sold on; so those who had done the deal were no longer liable for anything if the house-owners defaulted, which they were likely to do if they could not afford repayments and the price of their house was falling.

On top of that, the mortgages were typically sold on after being mixed with other loan portfolios of a different risk profile, a practice that was rewarded with spectacular personal bonuses for the bankers involved.  As a result it became impossible to discover which bank actually owned which mortgages, and particularly who had the mortgages which were not being repaid.  But everyone knew that it was going to be a bank.  The other banks knew this too, so they could not, with a clean conscience lend to each other since they could not know what the risks might be and whether they would be repaid.  And all the banks were in this position.  So no one bank trusted or wanted to lend to any other.
In the end, the banks became reluctant to lend to anyone.  Initially banks did not want to lend to house-owners, since house prices were generally falling.  However because of the cost of money to the banks, it soon became necessary to raise the cost of borrowing for all.  The price of money (interest rates) rose.  The result, a credit crunch: credit of any kind is hard to obtain and expensive.  And banks started to fail.

This is now beginning to affect the ‘real’ economy, which is the one in which people make things other than money.  It is harder for businesses to borrow even for short term working capital.  And individual borrowers are starting to find their credit card payments are too onerous.  But quite independently of the mechanism of the credit crunch, the real economy has been suffering – partly driven by the cooling of the Chinese economy and by rising commodity prices.  The realisation of this, coupled with the nervousness created by the credit crunch, the computer-based automatic selling of shares and the practice of short selling, (that is selling shares you do not have) turned the fall in the stock prices of banks into a general stock market collapse.

But compared to the looming environmental crash, the economic crash is trivial…

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It's just not worth it!

The Conservatives appear to think that the Labour party is spending far too much money on re-booting the economy.

Their argument is that stimulating the economy, along the lines of Keynesian policy, will increase government debt and will only have to be paid for by all of us through taxes later on.  They are probably right about that.

But to say that it should therefore not be done implies that the economy is just not worth it.  Not much of a vote of confidence in the future there…

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Trust & the City

The root of the banking crisis is a lack of trust.  Trust is central.  Money is trust and its price is high – as measured by the interest rate.  What this means is that the banks will not trust each other, and will not give each other much credit.  The literal meaning of credit is ‘to believe’.

The cause of the lack of trust is the sale by most of the banks to most of the others of loans containing ‘junk’ derived from the US housing mortgage market.  The fatal error was to disguise the proportion of junk in these loans.  It is not clear how far it is feasible to discover, and be transparent about, those proportions at this stage.

But without transparency over the content of such loans, there will be uncertainty.  And there will therefore be little trust, even if the banks are re-capitalised.  So short of writing off the loans, which contain good quality loans as well as bad, can there be a resolution to the crisis?

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Green by turns

According to The Economist – “Voters have good reason to worry about energy, security and their environment. But they may have to get used to more pricey petrol. Historically cheap gasoline, partly as a result of low taxes, has enabled what even George Bush has called an American addiction to oil. More pricey oil might be one factor that reduces carbon emissions.”

It is good to see that enviornmental issues are now an accepted part of mainstream politics.  Or will they be confined to electioneering?

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An economic system you can respect

The Bushmen of the Kalahari look as though they will lose their legal battle to their lands.  It seems to be impossible to live in a way that does not fit in with a modern economy – at least if you have resources that someone else wants.  Are there any other ways of life which our economic system actually respects?