Wednesday, October 11, 2017

"We have an ingrained anti-profit bias that blinds us to the social benefits of free markets"

Thus sayeth the shrinks.
From the British Psychological Society's Research Digest, August 4, 2017:
“Harnessing the ‘base’ motive of material self-interest to promote the common good is perhaps the most important social invention mankind has yet achieved,” said the American economist Charles Schultz. And you can see why. While acknowledging its problems, many credit free market capitalism for the dramatic reduction over recent decades in the proportion of people in the world living in extreme poverty, not to mention rising health standards and technological advances. Conversely, according to some commentators, one only has to look to modern-day Venezuela to see the dangers of extreme anti-profit socialism.

And yet, according to a new paper in Journal of Personality and Social Psychology, most of us have an instinctual anti-profit bias. We view for-profit companies and industries – upon which capitalism is based – with inherent distrust, assuming that the more profitable they are, the more harm they do to society. In fact, research shows the opposite is true: companies that make greater profits actually tend to contribute more value to society, for example in terms of their environmental responsibility and corporate philanthropy.

The authors of the new paper, led by Amit Bhattacharjee at Erasmus University, believe this anti-profit bias leads many voters and politicians to endorse anti-profit policies that are likely to lead to the very opposite outcomes for society that they want to achieve. “Erroneous anti-profit beliefs may lead to systematically worse economic policies for society, even as they help people satisfy their social and expressive needs on an individual level” they said.

Through seven separate studies involving hundreds of online participants, the researchers present evidence that the anti-profit bias arises because we think about for-profit motives in a somewhat superficial, ego-centric fashion. Because the desire for profit is seen as based on selfish intent, we extrapolate to assume that the activities of for-profit companies and industries must be bad for society, disregarding the reality that selfish intents can have positive consequences.

We also refer to our own mundane “zero sum” experiences, such as buying a car, in which the seller’s profitable gain inevitable comes at our loss. We fail to consider how market forces operate on a massive scale, in which for-profit companies (competing in a free market with informed customers) need to innovate, behave fairly and develop a good reputation in order to be profitable over the long term.

For instance, in the first study, participants rated Fortune 500 companies in terms of how profitable they thought they were and how much they thought they engaged in bad business practices, such as operating at the expense of others with no concern for society. There was a clear pattern: the more profitable participants thought a company was, the more they assumed that it engaged in more bad business practices. In fact expert assessments of the firms shows the opposite pattern....MORE