It's strange to me that Friedman is viewed (at least by economists and "business" folk) as a paragon of logical reasoning and empiricism, all the while his views reek so strongly of ideology. There are tons of reasons why the quoted statement might be false whether you're a policy maker (negative externalities) or even the most cold-hearted capitalist (short-term incentives).
Perhaps relatedly, it's actually not true that corporate responsibility to profit is codified in the law. See e.g. https://en.wikipedia.org/wiki/Shlensky_v._Wrigley (discussed further in https://www.amazon.co.uk/Shareholder-Value-Myth-Shareholders...)
A single business is not responsible for externalities, any more than a single citizen is. We are ALL responsible for negative externalities like pollution and have to solve those problems together, using the political process and sharing the costs among everyone.
And his statement isn't specific to the short term. Increasing profits is maximizing total profits. Making of ton of profits today and none thereafter is in no way as good as making a ton more profits over time.
Imagine you can invest your life savings of $100,000 and a lot of sweat equity to build a business (including the opportunity cost of giving up your $100k a year job). You estimate it will fail half the time and you will lose your life savings. But the other half of the time you estimate will make $500k a year in profit, after paying all employee compensation, taxes and other costs.
Then you are told that if you succeed, you can't have the $500k a year. That half of that has to go to the employees who risked nothing and got market wages from you for helping build the business (and quit whenever they pleased for better compensation elsewhere). And another half has to go to the "community" to help support the arts, or some other noble cause that did nothing to help you start or grow your business.
You still want to risk your life savings?
Companies are owned by shareholders. Property rights are one of the most fundamental liberties we have. I don't go into your house and raid your fridge whenever I feel like it. Why should you be able to go into my business and tell me how I need to spend my money?
I think this is especially true in the case of Etsy, which as the article points out, is registered as a B corporation and so arguably has agreement from the shareholders that benefiting society is part of the mandate of the company.
This argument of shareholders wanting to be ecologically conscious is such a privileged idea. The majority of money in the stock market doesn't come from the rich who can afford to be flippant with their stock returns. It comes from people relying on consistent equity appreciation so they can afford to retire.
We already know how to deal with negative externalities such as pollution. Evaluate how much it costs society and tax it accordingly.
I don't understand this, can it not be the case that the companies can 'afford' to keep polluting, even if paying the tax? Especially if pollution "cost on society" is relatively constant or not increasing according to profit. How is this cost on society determined, and what if I think that the cost is too high, even for taxation to deal with it?
This seems like a band aid on one of the problems inherent with the profit motive.
And Etsy isn't a B corporation. It's CEO tried to make it one and failed.
So it's temporary status doesn't belie the fact it's not going to be one and shouldn't be treated as one.
Here's what 3 minutes of googling indicates:
* most states have b corps
* most states that have b corps based them on the Model Benefit Act, drafted by B-Lab
* Delaware has b corps, but they are not based on the Model Benefit Act
* whether the Model Benefit Act was used affects all sorts of things (requirements, reporting, standards, decision makers, enforcement…)
So it seems fair to say that delaware has b corps, but they are not like the others.
If we go by your logic, then the only thing people are allowed to pool their money together for is to make the most money possible. Am I not allowed to incorporate a public company that has another purpose? A company is, and should be, controlled by the shareholders, since they are the owners. If those shareholders want to do something besides maximize their profits, they should be allowed to do that.
And then, when other people buy a controlling interest in your company, they are just as free to change it. Public companies do what a majority of their shareholders want, and people who buy stock are overwhelmingly interested in profit.
Their website says Etsy has been a certified B Corp since 2012: https://www.bcorporation.net/community/etsy
If you are environmentally conscious and decide to standardize all your cars on the cleaner catalytic converter, and consumers react poorly and sales suffer, you aren't serving your shareholders. It's not a problem your company can or should solve, you are part of a shared organizations and your ownership doesn't trump your shareholders.
Instead you should take your share of the profits and your massive paycheck and work to get cleaner and more intelligent exhaust standards put into law, so that all new cleaner catalytic converters are as clean as you think they should be. Or find alternative and better ways to reduce emissions.
But you can't steal profits from your shareholders to fit your own agenda.
It is "contra-survival" to poison the air. You cannot breath profits.
The world is bubble-shaped, and we are all trapped together sandwiched between hard vacuum and molten rock.
Poisoning in the short-term to make money to make laws to stop poisoning in the long-term is a poor strategy, and I think we as sentient human beings can do better.
"Never let ideological purity interfere with effective action."
Whether your metric for this disaster is cash or clean air I think the proximate cause was profit-seeking to the exclusion of other values.
The obvious argument, especially in Etsy's case is 'well, this works for the short term but can mean no profits in the long term as you commoditize your business and what makes a company like Etsy, Etsy fades into market oblivion.'
To which the next statement is 'Oh. Well, Friedman meant all expected profits even into the long term.' which may even be true, but the statement is used to justify all sorts of business behavior that is not in keeping with that idea.
In Etsy's case, paying above market wages and benefits does nothing for the company and it's shareholders, it's just a gift from the CEO to workers, paid for out of shareholder accounts. Etsy didn't get the best web site or software out from it, they got rampant entitlement and sub-par work.
Again, we can use Friedman on both sides of the argument (which was my original point as to the meaningless of the statement if not in original intent then in popular application).
I could argue under the same statement that such a move would do plenty for the company in establishing itself as a very good place to work making it likely to attract and retain top talent. It could also make individuals 'hand crafting' items to sell, who are more likely to be a conscientious lot, feel good about continuing to do business with Etsy. These factors could lead to a more solid niche in the market, longer company survival, and more consistent profits over time.
I'm not saying that's what I believe but let's assume it is true.
Since long term profit projections get hazy, the safer bet almost always is to follow a short term profit argument and take surer profits as soon as possible even though, in perfect hindsight, a long term approach would have yielded greater overall profits.
I'd bet this happens a lot and this idea that everything is subservient to profits paradoxically hurts value more than it helps.
The real problem in compensation is executive pay, which reaches extraordinary levels, explicitly rewards failure (Yahoo passim) and tends to be a gift from the CEO to themselves.
Death of the author. Most people who read, and quote, Friedman's quote, haven't read Friedman's other writings or watched his speeches. People can't apply context that they don't have.
Market value means that your turnover should already be low, your employees can't leave for better paying jobs. Obviously there is more to retainment than just wages, there is managerial competency and how you treat people. Bad workplaces have to pay more than market to retain people, good workplaces shouldn't.
But again, it's a silly argument that paying substantially more than market is going to benefit shareholders in some obtuse way. There are as many disadvantages as advantages, such building a complacent, insular underperforming culture just like that Etsy appears to have.
And another is using excess comp to build a "cult of personality" so the CEO can be worshipped, and those are terrible for business/shareholders.
"It could also make individuals 'hand crafting' items to sell, who are more likely to be a conscientious lot, feel good about continuing to do business with Etsy. These factors could lead to a more solid niche in the market, longer company survival, and more consistent profits over time.
I'm not saying that's what I believe but let's assume it is true."
Do you really think those people are going to leave Etsy because it no longer has the CEO's cult cheerleader squad decorating the offices?
"Since long term profit projections get hazy, the safer bet almost always is to follow a short term profit argument and take surer profits as soon as possible even though, in perfect hindsight, a long term approach would have yielded greater overall profits."
Do you really think Etsy's massive admin spending, far higher than similar companies, is really translating into long term value and higher profits? This is money not spent on partners or customers or brand, but internally.
"I'd bet this happens a lot and this idea that everything is subservient to profits paradoxically hurts value more than it helps."
The easiest response is to ask you to read some Warren Buffett. All his shareholder letters are free to read going back to the 1970s on Berkshirehathway.com. Long term value in a business is created by building a unique and defensible product offering, a brand, a technology, etc.
It's not from throwing more employee parties and increasing employee compensation. Employees can walk out the door at any time, even the CEO. One of Warren's favorite quotes is you want a business any fool can run, because sooner or later a fool will be running it.
In Etsy's case, it needs to be the best source/destination for it's unique crafts. To do that it needs to provide a viable market place to it's partners. Otherwise it's entire business will just dissipate to Amazon and Ebay and the Kum ba yah nirvana will disappear anyways.
Paying engineers $200k a year when they would be content if they made $150k a year is simply wasting $50k each on something that doesn't add value to the business. That excess comp would be far better spent hiring more people to build more and better competitive advantages, or marketing campaigns to get more partners and better build Etsy's brand, or kept in the bank to safeguard against rainy days, or returned to the shareholders as dividends and better support the value of it's stock.
The curve isn't flat.
>Do you really think those people are going to leave Etsy because it no longer has the CEO's cult cheerleader squad decorating the offices?
I think people that spend their time learning a craft then peddling hand crafted objects for, let's face it, love over money, will not want to work for anything approaching a Wal-Mart or other 'soulless corporation'. Speaking generally, of course.
I've read plenty of Buffet, Munger, Graham, Dodd and the rest. Pretty common knowledge.
What you are missing in your analysis is that Buffet et. al. invest in very well understood businesses (hell, they didn't even touch Amazon). Very well understood businesses tend to have very well understood systems (including the people and their roles and contribution to those systems. They have settled to a point where they /are/ interchangeable. They also tend to be boring and have well understood moats like huge capital or regulatory requirements. They can thrive in the fat part of the curve (or even a bit below it if they have stellar management).
Etsy is none of those things. They are carving out a new niche (or an very old niche with very new scope) with new technology in a constantly changing landscape that, really, anyone with a laptop and some free time could monkey. They will die if they try to live with average, interchangeable parts. No doubt about it.
But truth is, their business isn't from Mars, it's easy to understand, even if it's not easy to optimize. And if they truly need special custom development, why are they so poor at doing it? Where are the benefits of all that admin spending?
And BTW, I can't think of one Berkshire business that has any significant moat from "like huge capital or regulatory requirements". In Insurance their real moat is either the direct cost model (GEICO), or their underwriting discipline and long term thinking.
Etsy should know what makes it special to customers. Why isn't it more efficient at delivering that?
It is a Very Hard Problem and I don't envy them at all.
Verification of authenticity. I honestly wouldn't know where to begin. Spot check with live people? Expensive and begging for errors. Have sellers document their process? Easy to fake and expensive to check. Have a hair trigger for banning people that are clearly breaking the rules?
They also have the structural problem that Painstakingly Crafted generally takes time. That means less throughput.
And all of that is on top of the general problems of running an internet retailer with global reach.
Because of all of the pressures of throughput and the cost of verification they decided to ignore all of that and just give up, for the most part. And now it is a race to find a new 'quirky stuff that looks crafty' niche like an online Hobby Lobby to live in or lose their brand completely. I don't think it will work in the long term and I think we are witnessing a slow motion Pets.com.
Probably, what they'd need to do is split what they are doing.
One side would be how most of Esty is right now: a bunch of Hobby Lobby level quality crafty looking things that aren't actually hand crafted in any meaningful sense. It would be the place to go to get cheap, somewhat unusual gifts.
On the other side would be high end items. Hand crafted $2000 rocking chairs, for example. Something that can be marked up significantly and that it is worth it to go the extra mile by Etsy and sellers to verify is handcrafted. Maybe video walkthroughs of the process, spot checks, samples sent in to Etsy to be examined by experts etc.
Sellers can exist in both areas or one. The Verified Crafted side would buttress the Crafty but not Crafted side brand wise and the Crafty side would have a larger, more predictable income stream to make sure Verified Crafted can tackle the sticky problems it faces.
Speaking of Buffet, this sounds a little bit like his explanation of the "Institutional Imperative" http://www.berkshirehathaway.com/letters/1989.html (just above the 'miscellaneous' section at the bottom)
This isn't an argument about making the company "soulless". You can still have a great and fun work environment without spending 25% of sales on admin. And much of what makes work enjoyable isn't benefits, but leadership. Having management that is competent, humble, approachable, and driven to empower employees can change a lot.
I should have said G&A (general and administrative expenses). Essentially the cost of your workforce, the offices, benefits, etc. Etsy's is huge compared to any reasonable comp, and nowhere has anyone explained why it must be so.
Ebay has bigger economies of scale, so maybe Etsy can't really get to 10% with their smaller sales, but it should be in the 10-20% range. If it's "correct" number for G&A is 14%, they are essentially taking 10% of every sales dollar to spend on a party for the employees.
It also means their total compensation per employee might be as much as 70% higher than market. Total comp is pay, payroll taxes, benefits such as medical/dental/parking/mass transit/etc. Probably not, since it also includes office expense such as the cost of the CEO's merry band of office decorators. But it's not hard to imagine that they might be 40-50% over market in employee comp, plus spend way too much on office costs.
So you are talking about executive management, finance, and other overhead staff not developers or product development.
I asked because you mentioned developer salaries earlier in the thread.
24% does seem awfully high.
"We made this decision because it improves environmental sustainability" may or may not be a prudent decision depending on whether the justification of environmental sustainability correlates positively or negatively with financial success.
Clearly running your business into the ground through over-spending, even if it generates modest short-term results, is a poor application of Friedman's idea.
This might be a case of where there's a vocal minority who like to quote Friedman when it's convenient for their political position, so I do understand why it is hard to avoid the impression you have.
His academic contributions to the field are recognized when they've held up, but his views and who he sided with is not without criticism.
In the U.K. at least his views, along with Hayek's, tend to be associated indelibly with Margaret Thatcher. If there's someone who is seen as a paragon of reason whilst being actually quite ideologically biased, it's Adam Smith.
Motivated reasoning is a very powerful force. Of course people with the same ideology are going to hold up someone who supports them as a paragon of reason, and use him as protective camoflage for policies harmful to the rest of us.
I don't know exactly what it'd look like if a man on the street started acting like Shell is acting in the Arctic, but I'm quite sure there would be severe and immediate consequences.