Beyond the invisible hand

The word “business” is used today within a fairly narrow range of meanings, and for the most part, while not necessarily negative, the connotations are far from unambiguously complimentary. To be “businesslike,” to “get down to business,” or to “take care of business” is to get things done—typically necessary things—and to do so in a manner that dispenses with pleasantries, ceremony, even emotion. In the general parlance, business is about the rational, left-brain, mercenary angels of our nature: our desires for material wealth and the soulless accomplishment of requisite but uninspiring objectives.

The business community tends to perpetuate this characterization when its members insist that improvements could be found if this or that organization or endeavor was managed more “like a business.” This typically means that what’s required is a more dispassionate examination of costs and benefits, a more ruthless attention to greater efficiencies, and above all, a greater reliance on “market mechanisms” to allocate resources and reward good performance.

This last requirement—the hegemony of the market and the primacy of price as a way to measure the worth of many things—is perhaps the signal characteristic of “businesslike” behavior. Deciding what to do based on subjective assessments of value rather than the objective judgment of the market is to substitute politics for economics and power for worth.

Markets motivate through reward, not punishment, and create powerful incentives for innovation and efficiency. But there is increasing disenchantment with markets and, by implication, with business generally. The global financial crisis has provided only too visible an example of business’s downside.

The limitations of market forces go beyond cyclical fluctuations, however severe. In some instances, especially in the case of critical resource stocks, it’s unclear whether the seemingly inevitable overshoot and correction characteristic of markets can be tolerated. For example, Canada had to shut down its East Coast cod fishery in 1992—and has yet to reopen it, as fish stocks show little sign of recovering. But the closure was not foreshadowed by rising prices for cod: According to price signals, there was just as much cod as always, right up until they disappeared. This is, in part, because as prices rose in response to scarcity, the fishing industry found ways to be more efficient in extracting resources. The cod fishery was competing with substitute fish stocks, which weren’t under similar pressure. More than 20 years later, there’s still no sign of recovery.

As overfishing threatens the long-term viability of the ocean as a food source or as carbon-based pollution threatens just about everything—the list is long—it seems increasingly the case that it is possible to rely too much on markets as a mechanism for allocating resources.

Considerable effort is going into “internalizing” these externalities. For example, the notion of “cap and trade” is   designed to impose upper limits on carbon emissions that are lower than what markets might lead us to conclude are acceptable. In principle, no matter what a would-be emitter wants to pay for an extra ton, it’s simply not to be had at any price. Proponents of such schemes argue that there is only so much carbon the planet can cope with and that we shouldn’t put a price on carbon beyond that limit. Precisely where that cap should be is subject to debate and the complex interplay of science and politics. But it is not, nor should it be, subject exclusively to market forces.

And it is when grappling with how to transcend market forces that, perhaps ironically, business again has much to teach society at large, for companies are not merely “applied economics.” They are at the intersection of sociology and economics, the interaction of groups within markets. We know that organizations that are successful over the long term are often driven by a concern for the larger good in a way that makes it possible for people to balance their checkbooks with their philanthropic books.

The market matters, but only within the context of an overriding culture that defines the terms of exchange. Society can learn from business in this regard. Companies—the durable, successful ones—have done a better job at containing market excesses and failings than the broader body politic. Markets can help us effectively allocate our most precious resources and guide our most irreversible decisions only if they are constrained in ways that are consistent with our deepest values. We cannot avoid the hard work of coming to a consensus about what those values are. And in that task, what politicians have to learn from managers is not how best to apply economic tools but how best to pull the more ethereal levers of leadership: vision, aspiration, a sense of shared destiny, and the ability of all to make a difference.