Monday, June 4, 2012

Corporate Social Responsibility

There are plenty of ways to raise economists' hackles. Price controls, trade barriers, subsidies, taxes, regulation, if the state has a hand in it, you can bet some economist somewhere has something to say about it.

Corporate social responsibility efforts are another kettle of fish however. Here we have private firms picking up the banner of charity and "giving back" to the community (under the assumption that they've earned their profits illegitimately, perhaps?). Freshwater economists point to firms' fiduciary duty and cry "foul": the responsibility of a firm begins and ends with maximizing share value. Profits are a signal that the firm is producing consumer surplus, that is, delivering value to the customer. This is what the firm specializes in: it is what they do best, and we are all made better off through specialization and trade. If shareholders are interested in charity, it is more efficient to convert dividends into donations to those organizations that specialize in the business of charity.

Is not corporate charity euvoluntary? Investors aren't coerced into buying stock of Home Depot (well-known for building community playgrounds and refurbishing forgotten municipal parks) or Whole Foods (never one to shy away from posting the money they've raised for a hodge-podge of community projects). There's no hint of coercion anywhere, not from the customers, not from the business owners, and not from investors. Customers can just as easily frequent the classic, miserly firms. Owners are constrained by standard competitive forces and the limits of their imagination. And investors? There are plenty of stocks on the NYSE and plenty of no-load index funds available. What's to object to?

It seems there's a bit of a pickle here (just a lil' gherkin though, not a big ol' kosher dill) for Free-Market Euvoluntaryists. Freedom of association is an important virtue, but efficiency is also good; efficiency is an ingredient in material abundance and is necessary for the amelioration of poverty. We want to see resources finding their way to their highest value use and when voluntary transactions conducted within good institutions, well-defined property rights and the rule of law don't get us there, it can be a little flustering. For those of you taking (or teaching) upper-division econ courses, here is how I might approach the topic with my students.

Questions for discussion:

  • Do modern Western states actually have free markets in charity or has the state effectively crowded out smaller community organizations?
  • For the charitable assistance that the state does provide, is it sufficiently welfare-enhancing? Are there gaps in the provision of assistance? 
  • If the state has crowded out private charity, and it does do a relatively poor job of making communities better off, is there a role for other organizations to fill the void?
  • Specifically, is there an appropriate role for corporate charity: do corporations conduct de facto social responsibility experiments or are they feel-good vanity projects with no feedback and little or no accountability? Where is the substitute for profit and loss signals? How do corporations stack up against organizations that rely strictly on voluntary contributions?
  • If state-run transfer programs were discontinued, would you expect specialized private charities to bounce back or is it likely that corporate entities would continue or expand their charitable activities?
I'm not sure I have good answers to all of these questions. Predicting general equilibrium conditions is tricky and we don't have much empirical evidence of how private charities operate in a modern setting absent any current or past state intervention. Institutions are persistent and if corporate social responsibility is already a trope, it may well be here to stay.


  1. I would have to say that I do believe there is room for another organization to step into the charity sector, if the state did in fact crowd out private charities. This would be due to the inefficiencies, so humanitarian would see the lack of response and helpfulness provided by the state or even corporate institution and desire to fill that void. While I would not say that corporate charity should be the sole producer of charity, I do believe it does have a role it could play. Private charities are the most efficient provider of charity, this is due to there ability to gain close, relative knowledge, which the state or large corporations cannot achieve. In many instances though, corporations will support local charities through donations, this is where I believe their sole role lies for charitable givings. In this sense, they can still feel like they are making a difference and fulfill some social responsibility they may have, but allow the private charities who are on the local level provide the necessary assistance. I also don't believe that it is a corporations responsibility to become directly involved in charity work. It is not what a firm was set-up and designed to do. They do not have the incentives to effectively make a difference; we can see this in that many corporations give unneeded or useless donations of goods in order to get a tax right off.

  2. In many cases, the state does not have the amount of information that local charity organizations have. This lack of information can lead to the state making improper decisions about how to allocate their resources efficiently where as a local charity or organization might have more information about the needs of the local community to allocate their resources more efficiently. Social welfare increases when resources are allocated more efficiently. This can lead to a more productive community. However, are large corporations responsible to donate a percentage of their revenue to charitable causes? No. Their responsibilities are to their employees and share holders. Once those people are issued their dividends, the corporations can chose what to do with the remainder of their revenue.

  3. Local and corporate charity organizations exists for specific purposes in society. Unfortunately, if the state was given the power the to allocate funds raised by local charities, the charity would then become more inefficient. Local and corporate charities exist because they focus on specific topics, allowing them to best allocate the money they need to perform the necessary research. Because the state has the motivation to possibly utilize the charitable funds (if given the power) to provide for other resources, the charity would then become less useful. The targeted beneficiaries would not receive the funding they would need and those who may value the charities less would benefit more. Too much central power leads to communication problems and possible unnecessary taxation on society.

    People in society donate to private charities under free will. If the state were to take over charities, people may be less incline to donate and the state may choose to tax society in order to gain funding for their charity. Coerced gains from taxation is not profit and does not benefit society. In order for the charity to reach maximum utility, their contributors can't be forced-riders.


Do you have suggestions on where we could find more examples of this phenomenon?