J. M. Clark and the Economics of Responsibility
Champlin Dell P., Knoedler, Janet T., Journal of Economic Issues
In his 1930 essay, "The Socializing of Theoretical Economics," John Maurice Clark criticized orthodox economics, or, as he termed it, "Euclidean economics" (Clark 1921, 132 ff.). He believed that the treatment of business under orthodox economics--which asserted the primacy of individualism, free contract, and laissez-faire--produced an "economics of irresponsibility." By this he meant excessive individualism and a denial of any responsibility for the public interest. In its place, he proposed an "economics of responsibility" in which business recognized and accepted its responsibility for the public interest and in which the rest of society worked toward that same end (29).
In the first part of this paper, we sketch out Clark's critique of Euclidean economics and his economics of responsibility. The second part is devoted to a brief discussion of the various options for social control of business which Clark believed to be necessary for an economics of responsibility. In the third part, we consider the role of public opinion in potentially bringing about corporate responsibility.
Euclidean versus Non-Euclidean Economics
Clark argued that economics was founded on broader social underpinnings than the individualistic premises of orthodox economics. In his words, the focus of orthodox economics on efficiency was "from a broader social point of view, ... limited or warped, either by excluding certain values ... or by accepting certain partial or imperfect judgments of value" (1936, 4). In other words, the individualistic and private interest orientation of orthodox economics and its focus on private measures of economic efficiency were but a "half truth."
Clark applied the term "Euclidean economics" to the orthodox approach to indicate that its axioms were as far from the economics of Veblen as "the geometry of Euclid" was from non-Euclidean geometry (1936, 22). He took several well-known propositions of orthodox economics and "inverted" them to show just how different non-Euclidian economics was. For example, the familiar orthodox premise that consumption is the end of all economic activity, with production simply a means to that end, considers only individual sensation and ignores "society's interest" (133). Instead of these "hedonistic ethics," Clark posited an ethical standard that considers "the well-rounded development and use of human faculties" (134). He concluded that "the quality of the activity involved in work is more important as a positive social value than the quantity or quality of consumption." Instead of humans working merely to consume, Clark believed that work was important in its own right.
Clark also criticized the orthodox premise that all economic transactions were undertaken between freely contracting individuals in the private sector and thus were "only incidentally, under special conditions, ... 'affected with a public interest'" (1936, 29). Instead, he asserted that "All industry and trade is primarily affected with a public interest" (italics in original). The orthodox view was based on the belief that individuals will only exert effort for their individual ends. However, Clark observed that, in modern corporations and other large organizations, employees have to act in the interest of the collective whole: "this loyalty has, indeed, become a dominant quality of the modern economic man, vitally necessary to the continued truth of 'individualistic' economics" (31).
Clark's major concern was that reliance on the precepts of "individualistic," or orthodox, economics permitted business enterprise to eschew its responsibility to the public interest:
[W]ith this dangerously inadequate idea of bargaining and contract, and with the equally inadequate idea of business competition as a sort of Darwinian struggle for survival, constantly tending toward the natural selection of the fit, it is small wonder if the business man is willingly convinced that in the struggle for financial success he is fulfilling the whole duty that society can reasonably impose upon his business hours. In other words, theory and practice combine to further an irresponsible attitude among leaders of industry and laborers alike. (1916, 219)
In short, Clark termed the business system of free contract and laissez-faire a "system of irresponsibility" (Clark 1916, 218). He derided the notion that private enterprise can be governed solely by private interests:
[W]e are coming to see that our everyday business dealings have more far-reaching effects than we have ever realized, and that the system of free contract is by itself quite inadequate to bring home the responsibility for these effects. We have begun to realize the many inappropriate values that are created and the many unpaid damages that are inflicted in the course of business exchanges. (Clark 1916, 218)
Clark's alternate vision of an economics of responsibility was one in which business recognized and accepted its responsibility for the public interest and in which the rest of society worked toward that same end. In articulating his economics of responsibility, Clark argued for greater social control of business to be exercised on behalf of the larger society as a means of curbing the excessive individualism promoted by Euclidean or orthodox economics. Clark recognized that systems of control were usually seen to interfere with business practices, given the pervasive use of Euclidean economics as the primary tool to understand business enterprise. However, Clark argued that social control of business was needed to serve the broader interests of the community rather than the narrower private interests of individual businesses or persons. Thus, he posited an economics of responsibility as a framework for both theory and policy, with a proactive role for a variety of instruments of social control to achieve the public interest: "many common interests are left at the mercy of individualism in sheer default of any clear social judgment or effective social policy" (Clark 1969, 50).
Clark's vision of an economics of responsibility thus derides the notion that private enterprise can be governed solely by private interests. His economics of responsibility abandoned the rhetoric of individualism, which was obviously at odds with the reality of the modern economy, but still served to give cover to irresponsible actions on the part of business. Clark's vision of an economics of responsibility was one in which business recognized and accepted its responsibility for the public interest and in which the rest of society worked toward that same end.
We now turn to the issue of social control and the question of how to address corporate irresponsibility.
The Economics of Irresponsibility and Social Control
A recent series of articles in The New York Times noted that the U.S. Occupational Safety and Health Administration (OSHA) does not, as a rule, pursue prosecution for deaths in the workplace (David Barstow, "U.S. Rarely Seeks Charges for Deaths in Workplace," December 22, 2003). The reporter went on to note that over the past twenty years OSHA declined to pursue prosecution in 93 percent of the cases of employee death where investigators found "willful" employer negligence. This disturbing article demonstrates an all too familiar ambivalence in public policy. On one hand, there are laws designed to regulate business behavior and to protect consumers and workers. On the other hand, such laws are less than effective due either to weak enforcement provisions in the law or to a lack of political will to enforce the provisions that do exist. In this section, we suggest that this ambivalence is the inevitable outcome of an "economics of irresponsibility" as a guide to public policy.
Workplace injuries are but one of many notorious instances where business activities clearly do not serve the public interest. Examples of corporate malfeasance resulting in harm to consumers, investors, or workers are readily available, not only from recent headlines but from any decade of the twentieth century. Even the most ardent supporters of business would agree that business misconduct occurs and that, at times, it results in serious harm to the public. (1) While few dispute that business may act against the public interest, there is a great deal of dispute over what, if anything, to do about it.
The solution to the problem of corporate misconduct offered by Euclidian economics is to rely on the market to eliminate anti-social behavior. An alternative solution is to rely on government to curb business excesses and protect the public interest. We conclude that neither of these two traditional choices alone is effective in the current policy environment. Government and business are no longer "countervailing" powers but business partners, and the public interest is thus not a primary concern of either business or government. An "economics of responsibility" requires the mobilization of public opinion to establish norms of behavior for both business and government. Historically, policies in the public interest have occurred only when the public demands them (Kagan and Thornton 2003). Ultimately the question is whether the public is currently willing or able to fulfill this historical role.
The market solution to business misconduct is the one favored by Euclidian economics; competition is believed to provide the necessary vehicle to ensure that the pursuit of private interests by business will ultimately serve the public interest. This is also the free market approach to business ethics. In essence, bad behavior by business is bad for business. Unethical firms are ultimately unprofitable and will be eliminated by market forces. There is no need for government regulation and no need of any behavior modification by business executives. Simply maximize profits, and the proper and ethical course of action will be apparent (Champlin 1998).
The "free market" solution is often attributed to Milton Friedman, who asserted his corporate responsibility views more than thirty years ago in an article in The New York Times Magazine ("The Social Responsibility of Business Is to Increase Its Profits," September 1, 1970).
[T]here is one and only one social responsibility of business-to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.
Note that Friedman was promoting laissez-faire according to "the rules of the game." He was not promoting the unbridled pursuit of self-interest by any means possible, including polluting the air and water, defrauding investors, and killing off workers. Friedman's position was not that corporations should not act according to legal and social conventions but that business should hOt engage in "social responsibility." In the famous debate that Friedman sparked thirty years ago, "social responsibility" was understood to mean corporate actions taken solely to promote the public good. In a sense, "social responsibility" was an argument to change the rules from a consideration of shareholder interests only to a broader consideration of "stakeholders." Friedman opposed what he saw as an attempt to dislodge profit maximization as the proper goal of the business firm.
In the years since Friedman's famous article first appeared, others have attempted to reconcile social responsibility with profit maximization. The argument has been made that no choice is necessary. For example, a recent article in Fortune carried the lead "Some of America's biggest corporations believe that the best way to make money is by saving the world. And guess what? They just might be right" (Gunther 2003). The article gives various examples of socially responsible activities such as increased recycling or resource conservation. (2) The underlying message of the article and others based on Euclidian economics, however, is that socially responsible behavior by business will, with few exceptions, not occur unless it is compatible with profit maximization.
If some socially responsible behaviors such as recycling, producing healthier and safer food, or providing secure, well-paid jobs must wait until business finds a way to make them profitable, there do exist laws requiring certain actions by business even if profits must be sacrificed. After all, the instances of business misconduct making the headlines in recent years have not been cases of corporations failing to pursue some socially desirable course of action but situations where corporations violate the law or violate widely accepted norms of appropriate behavior. That is, these actions are not questions of social responsibility but corporate irresponsibility or a lack of corporate accountability. It is one thing to maximize profits; it is quite another to commit fraud or inflict physical harm on consumers or workers in the process. As Friedman noted, business must maximize profits according to the rules of the game. If responsible corporate behavior is not compatible with the current rules, then the solution is to change the rules.
Much to the dismay of Euclidian economists and free market enthusiasts, the "rules of the game" have changed from the ideal of laissez-faire. Government regulation of business expanded significantly during the twentieth century. However, as we noted at the beginning of this section, there is a considerable gap between passage of a regulatory law and effective enforcement. Business resists, arguing that government regulation is harmful not just to profits but to the public interest, defined conventionally and quantitatively as wealth (Jacobs 1998). Business is aided in this rhetoric by Euclidian economics, which argues that competition is sufficient to ensure the public interest defined in utility terms; in other words, the public gets what it wants and chooses. The result is the current ambivalence of public policy. Laws are passed with loopholes or weak enforcement, or laws are continually amended as being too "onerous" for business (Vogel 2003). (3)
Karl Polanyi's explanation of this struggle was the "double movement" (1957). Unbridled capitalism poses intolerable hardships; government steps in to mitigate the worst problems, and capitalism survives. John K. Galbraith portrayed business and government as "countervailing forces" (1956, 108 ff.). Both Polanyi and Galbraith saw laissez-faire as the ultimate problem--the unfettered pursuit of self-interest by private individuals. Indeed, for most of the twentieth century, policy choices have been framed in this dualistic fashion: free markets versus government regulation. However, there has always been another possibility: that government acts in service to private interests rather than to the broader public interest. Public choice economists use the term government failure to describe the pursuit of private interests by public officials (cf. Musgrave and Musgrave 1980). There is no assertion that this sort of behavior will advance the public interest. Adam Smith railed against another type of government failure in The Wealth of Nations ( 1909). Mercantilism is not merely the failure of individual public officials to act in the public interest but rather a state policy of promoting private interests. As long as the role of government is perceived to be the promotion of the broad public interest, then government may be the solution to business misconduct. On the other hand, when the promotion of private interests becomes the role of government, it is no longer capable of providing any countervailing force to businesses' excesses.
Where does this leave the consumer, the worker, the environmental activist, or the economist interested in promoting an economics of responsibility? We now turn to the role of the public in curbing business excesses and protecting the public interest.
Economics of Responsibility
Changing the "rules of the game" within which business operates means not only changing the legal environment but changing the institutions surrounding appropriate business behavior. In this section, we briefly explore the third possible solution to corporate misconduct: public opinion. How effective is this solution?
According to Euclidian economics, public opinion, or at least consumer opinion, is extremely effective. It is, in fact, the cornerstone of laissez-faire. There is no need for government involvement--no need to risk "government failure" whether caused by the self-interested public official or by the capture of public policy by self-interested, private business interests. Loss of profits is sufficient punishment to ensure proper conduct. In order for the "stick" of lost profitability to work, of course, it is necessary that corporations actually lose profits when they engage in irresponsible behavior. Does this actually occur? Evidence suggests that, in some cases, it does. For example, the notorious case of Johns-Manville, which knowingly exposed workers to asbestos for years and then covered it up, did result in the bankruptcy of the company (Sells 1994).
What about the investor? There is also some evidence that investor outrage over accounting scandals at WorldCom and Enron are producing more circumspect accounting and reporting behavior (Gunther 2003). (4) On the other hand, there are also numerous examples of executives and corporations suffering no consequences at all from irresponsible behavior.
If the public's power to elicit appropriate behavior from business is, at best, hit or miss, what about the public's ability to compel government to work in the public interest even if business interests are opposed? David Vogel has suggested that effective consumer and environmental protection laws in the United States and Europe are strongly linked to public opinion (2003). While the United States took the lead in environmental and consumer protection until the mid 1980s, European countries are now much more likely to impose stringent standards on business (Vogel 2003; Vogel and Bensedrine 2002).
The public's distrust of government and business in Europe occurred in response to a series of disasters such as Chernobyl, the tainted blood scandal in France, and Mad Cow Disease in England. As a consequence, governments have now shifted to a higher aversion to risk in consumer and environmental protection. In contrast, in the United States the past two decades have witnessed a resurgence of the rhetoric of the economics of irresponsibility in the guise of promoting individual responsibility--welfare "reform," environmental "reform," freedom to farm, and privatization of Social Security and Medicare, as well as shifting much of the responsibility for other key public goods to the private sector. The corporate scandals of 2002 increased the public's distrust of corporate leaders but have yet to produce a significant change in public policy. Some progressives believe that it will take a major crisis, such as another major depression or a major regulatory failure, to wake up the public (Godley 2003). The question is whether in the absence of a major catastrophe public opinion can be mobilized into an effective force to promote an economics of responsibility. While we plan to address this question in a future paper, for now we conclude that an important step would be to bring Clark's vision for an economics of responsibility into the mainstream of out modern economic rhetoric.
(1.) In a 2002 speech supporting a "corporate responsibility" law, President George W. Bush urged business executives to "act responsibly" and asserted that "[i]n order to be a responsible American, you must behave responsibly" (quoted by Susan Milligan in The Boston Globe July 16, 2002). The same article quoted Vice President Dick Cheney expressing concern over business misconduct and stating that "[g]overnment will dearly investigate and pursue the wrongdoers." Note in both cases that they individualize the irresponsibility--not "we" but "you" must behave responsibly; government will investigate not the failed policy but the presumed few irresponsible wrongdoers.
(2.) Marc Gunther noted that the idea that socially responsible behavior will be profitable, and the corollary that profit incentives are sufficient to ensure socially responsible behavior, is mostly just an assertion or a theory (2003).
(3.) Indeed, the "problem" is often reframed as the policy itself. Witness the shift in the "War on Poverty" to the "War on Welfare." The problem is not poverty but policies to combat poverty. The goal is to reform or eliminate the policy, to the extent allowable, whether or not the underlying social problem that led to the policy in the first place is actually resolved.
(4.) In addition, the "carrot" approach has been shown to have some effect. A study comparing corporations with ethical codes of conduct to those without suggests that a reputation for ethical conduct enhances financial success (Verschoor 1997).
Champlin, Dell. "Toward an Ethics of Corporate Restructuring." International Journal of Social Economics 25, no. 9 (1998): 1353-67.
Clark, John Maurice. "The Changing Basis of Economic Responsibility." Journal of Political Economy 24, no. 3 (March 1916): 209-229.
--. "Soundings in Non-Euclidean Economics." American Economic Review 11, no. 1 (1921): 132-143.
--. "The Socializing of Theoretical Economics." In The Trend of Economics, edited by Rexford Tugwell. New York: F. S. Crofts & Co., 1930.
--. Preface to Social Economics. New York: Farrar & Rinehart, Inc., 1936.
Galbraith, J. K. American Capitalism. Boston: Houghton Mifflin Co., Sentry Edition, 1956.
Godley, Wynne. "The U.S. Economy: A Changing Strategic Predicament." The Levy Economics Institute, March 2003.
Gunther, Marc. "Tree Huggers, Soy Lovers, and Profits." Fortune 147, no. 13 (June 23, 2003): 98-103.
Jacobs, David. "Labor and Social Legislation in the United States: Business Obstructionism and Accommodation." Labor Studies Journal 23, no. 2 (Summer 1998): 52-74.
Kagan, Robert A., and Dorothy Thornton. "Explaining Corporate Environmental Performance: How Does Regulation Matter?" Law and Society Review 37, no. 1 (2003): 51-72.
Musgrave, Richard, and Peggy Musgrave. Public Finance in Theory and Practice. New York: McGraw Hill, 1980.
Polanyi, Karl. The Great Transformation. Boston: Beacon Press, 1957.
Sells, Bill. "What Asbestos Taught Me about Managing Risk." Harvard Business Review (March-April 1994): 76-85.
Smith, Adam. The Wealth of Nations. 1776. Reprint, New York: P. F. Collier and Son, Co., 1909.
Verschoor, Curtis C. "Principles Build Profits." Management Accounting 79, no. 4 (October 1997): 42-47.
Vogel, David. "The Hare and the Tortoise Revisited: The New Politics of Consumer and Environmental Regulation in Europe." British Journal of Political Science 33, no. 4 (October 2003): 557-81.
Vogel, David, and Jabril Bensedrine. "Comparing Risk Regulation in the United States and France: Asbestos, AIDS, and Genetically Modified Agriculture." French Politics, Culture and Society 20, no. 1 (Spring 2002): 13-32.
Dell P. Champlin is Associate Professor at Eastern Illinois University, Charleston, and Janet T. Knoedler is Associate Professor at Bucknell University, Lewisburg, Pennsylvania, USA. This paper was presented at the annual meeting of the Association for Evolutionary Economics, San Diego, California, January 3-5, 2004.…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: J. M. Clark and the Economics of Responsibility. Contributors: Champlin Dell P. - Author, Knoedler, Janet T. - Author. Journal title: Journal of Economic Issues. Volume: 38. Issue: 2 Publication date: June 2004. Page number: 545+. © 1999 Association for Evolutionary Economics. COPYRIGHT 2004 Gale Group.
This material is protected by copyright and, with the exception of fair use, may not be further copied, distributed or transmitted in any form or by any means.