Businesses have strong incentives to treat others well. Think first about how a business serves customers. A business will never succeed if it’s not relentlessly thinking about how to care for existing and future customers even more effectively than it or its competitors do currently. Many new ventures fail because they ignore one simple requirement: Any entrepreneurial act must be preceded by a visionary grasp of what’s needed—sometimes before others realize it themselves. NYU economist Israel Kirzner’s entire career has focused on this entrepreneurial vision.
This fact should drive every act taken by a business. Any viable business must (1) perceive unmet needs, (2) imagine creative ways to address such needs, then (3) sort out how to address those needs in a way that keeps costs sufficiently low so that customers will be happy to accept the price offered. If a business cannot see what’s needed, it fails. If it cannot address that need, it fails. And if it cannot contain costs, it fails—even if the idea is brilliant.
In short, businesses have an obligation to treat customers well. And it really is an obligation: If businesses ignore, overlook or forget that truth, they’re toast … and remembered only as the “case studies” business students review when learning what not to do.
Just as a firm needs to care for customers, a firm also needs to care for its talent. Economists understand this well: Economic models called “efficiency wage” models remind us that treating workers better than the minimum necessary to attract them pays off over the longer term by (1) increasing productivity, (2) reducing costly turnover costs of searching, hiring or training and (3) improving the overall quality of the applicant pool. When everyone knows you treat your team better than anyone else in the same industry, new applicants will be attracted to you—and current staff won’t want to mess it up!—because everyone knows the grass is browner on the outside.
For a firm, then, it might be “efficient” to pay more than the minimum. Or to offer slightly better benefits than others.
But notice that there is a tension here for the successful manager: The employer, which needs to treat workers well, also needs to contain costs sufficiently to make the value proposition it offers clients worthwhile. While it’s true a firm might lose good workers if it pays too little, it risks losing customers if it pays more than necessary to keep their team members happier than in their next-best option.
The same is true with other costs, whether they are advertising, warehousing, shipping or regulatory compliance costs. Any increase in costs—even for compelling reasons—reduces the likely value proposition for the customer. Caring for customers requires being accountable to them. And that requires containing costs the likely value proposition for the customer. Caring for customers requires being accountable to them. And that requires containing costs.
In 1970, economist and Nobel laureate Milton Friedman considered, in a New York Times Magazine essay, whether it’s appropriate for a business to incur costs to pursue social concerns beyond those dictated by the simultaneous necessities of offering value to customers while also rewarding workers well.
In short, Friedman argued that when a business spends money on something not directly related to business operations, it results in either higher prices for consumers or smaller payments to its workforce. That is, corporate social caring can restrict a firm’s ability to care for those to whom it has a more primary responsibility.
If this is true, and basic accounting suggests it is, then perhaps the most caring things our businesses here in SWFL can do is serve customers well and treat workers well, too. When firms do, each of us has more money in our pockets to engage personally in even more charitable giving of our own, which is something to be thankful for.
Victor V. Claar is associate professor of economics in Florida Gulf Coast University’s Lutgert College of Business, where he holds the BB&T Professorship in Free Enterprise. He also serves on the Research Advisory Council of the James Madison Institute.