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Erroneous assumptions about business persons

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By Bernardo M. Villegas

Bernardo M. Villegas

Bernardo M. Villegas

Free market economics has led to many social ills because, by making wrong assumptions about the motivation of those who go into business, it actually encouraged business persons to be exclusively focused on maximizing profits in their operations.  After the Second World War, the economics taught in leading universities all over the world, especially in the United States, was very much influenced by that famous statement of the father of laissez faire economics, Adam Smith:  That it is not benevolence that motivates the baker or the butcher to make their goods available for sale to consumers.   It is their exclusive desire to make money.  By addressing the desire to make profit, the market economy is supposed to lead to the economic welfare of every citizen through some kind of “invisible hand.”

This caricature of a business person or firm, together with the assumption that every consumer is exclusively obsessed with maximizing his or her satisfaction, were the very foundation of economics learned by millions of students in the second half of the last century.The miseducation of entire generations of students was aggravated by the quixotic attempt of leading economists to transform their field of study into an “exact” science that could compete with physics or chemistry for mathematical precision.  They failed to consider that economics is a social science and as such, its main subject is the human person as he exists in society and who has both intellect and free will that cannot be completely captured in mathematical models.

The negative image about business persons was actually reinforced by the assumption of the opposing economic theory prevalent during the same period after the Second World War:  The Marxist paradigm that was applied in the USSR and China and in some South American and African economies. This view of capitalism presented the business person or capitalist as completely focused on accumulating capital:  “Accumulate, accumulate, that is the law of Moses and the prophets.”The “bad” capitalist was contrasted with the virtuous State who could be counted on to promote the welfare of the masses by having exclusive possession and management of the vital industries, except the smallest businesses. Because business persons could not be trusted to work for the common good, the Marxist model required private ownership of land and capital to be banned.  All means of production have to be owned by the State. As was experienced in the China of Mao Zedung and the Russia of the USSR regime, the abolition of private property led to even more disastrous consequences than the free market model: Starvation of millions of people in the countryside and the failure of efforts at industrialization. The horrendous collapse  of the economies run along socialist lines in Latin America in recent times (like Venezuela, Nicaragua, and Argentina) also attests to the dangers to adopting  the Marxist model.

Although each country will have to fashion a combination of the market economy and the indispensable role of the State that is unique to its historical, cultural, political and moral circumstances, there are some very basic principles rooted in the very nature of man that have to be taken into account in structuring an economy that will lead to a just and humane society.The very first is the inherent dignity that has to be accorded to every human being.This means respecting his inalienable human rights and, in the economic sphere, the right of individual economic initiative.This would involve respecting the right to private property because the human right to individual economic initiative would not be possible if all property belongs to the State.  The State can claim a preeminent role in providing basic education, health services and affordable housing  to the  population; delivering rural infrastructures(especially farm-to-market roads, irrigation, post-harvest facilities); and preventing uncompetitive behavior among business persons and institutions.

At the macroeconomic level, only the Government can maintain economic stability through appropriate monetary, fiscal and trade policies.  The Philippines is fortunate as we enter the third decade of the Third Millennium because, through successive Administrations over at least the last 30 years, our macroeconomic officials have succeeded in crafting reasonably creative and prudent policies in inflation targeting, interest rate and foreign exchange rate management, taxation, fiscal management, and export promotion.  Much still has to be done in industrial policy but the seeds have been planted in the road maps that each industry sector was required to prepare during the Administration of former President Benigno S. Aquino III.  Thankfully, the technocrats in the Duterte Administration have both the common sense and humility to continue whatever good had been accomplished by past Administrations.

To build an economy that will really lead to inclusive growth in which the vast majority of our citizens will share in the 8 to 10 percent growth in GDP expected in the coming years, we have to increasingly think more positively of the business person as a human being who can draw from the vast potential for generosity and gratuitousness that is part of his nature as created by God.  I know of at least one leading business school (there are many more) that is tireless in teaching its students that they can be successful business people (to do well) by focusing on doing good (providing a product or service that improves society).  These business persons who want to make a positive impact on society (impact investing) may or may not still  be a minority.  The fact that they already exist in various forms (e.g. social entrepreneurs, impact investors, CSV (Creating Shared Value) investors gives the lie to the assumption of free market economics that business persons are necessarily narcissistic.  Since we can assume that the majority of those who go into business practice one religious faith or another (Islam, Christianity, Judaism, etc.), many of them can be assumed to have the capacity of being inspired by their respective faith to do good to others through the businesses they establish.  By incorporating this alternative assumption about the behavior of business persons into the economic theories we teach in our schools, we may yet produce a larger number of people in business who will be determined to make money in business (doing well) by aiming at first doing good (benefiting society in one way or another).

For comments, my email address is bernardo.villegas@uap.asia.

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