Why companies misbehave | Business

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Are successful entrepreneurs heroes or villains? Countless examples of each can be found in fictional stories, from Charles Dickens’s miserable Ebenezer Scrooge to Ayn ​​Rand’s rugged individualistic businessman John Galt. In The Great Gatsbyby F. Scott Fitzgerald, Tom Buchanan represents the old privileged money, with its cruelty and lack of empathy, while Jay Gatsby is a self-made millionaire who does not skimp on sentimentality and idealism.

The same distinctions can be found in social science descriptions of entrepreneurs. Joseph Schumpeter and his followers saw entrepreneurs as the engines of growth, the heroic figures who brought “windstorms of creative destruction.” Friedrich Engels’s The Situation of the Working Class in England, on the other hand, accumulated disdain for British industrialists who pushed their workers, not into poverty, but into inhuman working and living conditions. But later he and Karl Marx made both roles an essential part of their theory of capitalism: ruthless employers exploit workers, but they also generate innovation and growth, ultimately transforming society.

These conflicting portraits reflect the complex views that corporate society has. Obviously, it would be naive to expect all entrepreneurs to be either heroes or villains. Like most of us, it is often both. Many names we now associate with philanthropy or higher education originally belonged to the unscrupulous capitalists of the late 19th and early 20th centuries. Tycoons like John D. Rockefeller, Andrew Carnegie, and Cornelius Vanderbilt had no qualms about intimidating and buying rivals in order to monopolize their respective markets and drive up prices. They were also blatantly brutal—and sometimes bloodthirsty—with any worker who had the temerity to demand higher pay or better conditions.

Leland Stanford, the founder of Stanford University, was probably even worse. He and his associates not only monopolized the railroad construction industry on the Pacific coast, they also hatched a plan to make the taxpayers pay for it. Stanford also savagely exploited migrant workers, especially Chinese, who worked in such harsh conditions, and for such low pay, that very few Americans wanted to work for him.

Stanford then jumped into politics to consolidate his earnings and profit even more at the taxpayer’s expense. He forced the state Executive and the municipal governments of California to issue bonds that generated more public money for their railroads. And as governor of the state, he organized murderous raids against native populations and fomented hatred against the very Chinese who had been so crucial to his success.

Today, the myth of heroic entrepreneurs is no longer as relevant. Johnson & Johnson, once lauded for its proactive product recalls to protect consumers, is resorting to a dubious legal maneuver (the “Texas two-step” or “divisional merger”) to avoid paying damages for its marketing and sales of contaminated talcum powder. Big oil companies, after decades of denying and sowing disinformation about climate change, now say they are committed to environmental activism. But no one believes that ruse.

And then, of course, there is the tech industry, where many entrepreneurs got their start as idealistic people from another field who promised to make the world a better place. Google’s motto was “Don’t be evil”. But now Big Tech is synonymous with market domination, consumer manipulation, tax evasion and other abuses. (In 2018, Google removed its tagline from the preface of its code of conduct.)

For years, the biggest players in the industry have been buying or simply copying new entrants’ products to reinforce their own dominance. A revealing example is the purchase of Instagram, in 2012, and WhatsApp, in 2014, by Facebook. Internal company documents have shown that these purchases were motivated by top executives’ desire to neutralize potential competitors.

Even more questionable are “killer acquisitions”: a company buys a new technology under the guise of integrating it into its own ecosystem, only to completely dismantle it. These monopolistic methods occur alongside other tried and tested tactics, such as bundling products to prevent users from switching to rival services, as Microsoft did to take down Netscape, and as Apple has done with its iOS ecosystem. Last but not least, Big Tech has benefited greatly from rampant data collection, which allows a dominant player to know much more about consumers than potential competitors, and erects formidable barriers to market entry. The result is not only market concentration, but also massive manipulation of users, sometimes through misleading product offers and many more times through digital advertisements.

Fortunately, companies don’t have some kind of incorrigible tendency to do wrong. From turn-of-the-century industrialists to today’s corporate bad actors, the common denominator has been a system that lacks proper controls against abuse. If we want better behavior and better innovation from companies, we need to ensure the right institutional context and the right kind of regulation.

Together with James A. Robinson we have tried to emphasize this point in Why Nations Fail, when we compare Bill Gates and the Mexican telecommunications magnate Carlos Slim. Both men, we said, had an interest in making a lot of money with all the means at their disposal; but Slim behaved much more expansively than Gates, due to the differences between the legal and regulatory regimes in Mexico and the United States. In retrospect, I now think that we were too generous with the United States. Although North American companies had a greater incentive than their Mexican counterparts to innovate, there were also myriad ways in which they could misbehave. Opportunities to exploit the system were already multiplying by the time Microsoft had become a leading company, and have since become much more endemic, at colossal costs to the US economy.

The tragedy of villainous business behavior is that it is largely preventable. To create the proper balance of controls and incentives, we must shed the myth of the heroic entrepreneur and recognize that gales of creative destruction do not blow automatically. Only with better regulations and stronger institutions can we achieve prosperity and hold the most powerful people in society accountable for their behavior.

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