(First of two parts)
Social enterprise, sustainable products, workplace diversity and inclusion, work-life balance, and mental health—these are words I never spoke or heard of when I was a kid. Back then, the only balance I knew was on a see-saw, and I worried about my health only when I started to shiver from fever. Today, I have three kids—one millennial, two zillennials. I hear them and their friends discuss carbon emissions, balance and mental health. This signals a shift in how we should think about ourselves, manage our affairs, and run our organizations and society. We have to tweak our frameworks or models of thinking and doing. One of these is the free market model.
Take the case of Aling Nita, who sells GG (galunggong fish). She sells at a specific price and is willing to sell at a lower price if you buy more. Many people look, haggle and buy.
Classical and neoclassical economists tell us that self-interest motivates all this buying, selling and negotiation. They also figuratively refer to an invisible hand that orchestrates all this self-interested activity toward agreed market prices, often alluded to as market equilibrium. This framework we’ve been using since the 19th century to explain the interplay of these three elements (buyers, sellers and market price) is what we will call the free market model or Model for short.
As with all frameworks to explain reality, our Model makes assumptions. For instance, it assumes buyers and sellers always act rationally and have complete information on prices and goods. Our Model also creates unintended side effects.
Side Effect 1: Devaluation of the Priceless
The Model uses the idea of price to measure value, say, P190 is the value of one kilo of GG. We use price and value interchangeably, and unconsciously, end up thinking, “Only things that have a price are valuable,” or worse, “If it has no price, it has little or no value.” Household chores like cleaning, cooking and caring—all necessary to get the economic actors productive—have value but aren’t priced. Unpaid work of community volunteers are undeniably valuable but aren’t priced either. Natural resources and energy used as input to production aren’t priced. Their extraction, distribution and profit margins are, but not the resources themselves. Waste disposal into the biosphere’s water and air isn’t priced. Seemingly intangible social capital, present when we describe a community or society as ‘generous,’ ‘willing to help,’ or with ‘strong social support,’ isn’t priced either. Despite not showing up in gross domestic product (GDP) figures, social capital as trust and reciprocity resulting from social networks spurs economic activity.
The market may produce public goods like roads, electricity, water and communication infrastructure because these are prominent enablers of economic activity. But, left on its own, the market has no mechanism to support priceless goods.
Side Effect 2: Wealth Inequality
The Model ignores increasing wealth accumulation from free market reign. Due to the reinforcing feedback loop of wealth and market power, both create a wealth inequality trap. The wealthy gain more negotiating power in the daily buying and selling, leverage this power to push prices up if they are sellers, or down if they are buyers, and accumulate more wealth as a consequence. A vicious cycle of wealth concentration ensues. We can’t consider this a mere ‘side’ effect. It is impactful enough to undermine the competitive nature that makes the Model work in the first place.
Some may argue that we should focus on poverty, not wealth inequality. Yes, poverty is a thorn, but reducing it does not absolve inequality. Wilson and Pickett, in their book Spirit Level, provide strong empirical evidence that national inequality, not wealth, brings about worse social outcomes in teenage pregnancy, mental illness, drug use, obesity, crime, school dropouts, life expectancy, social mobility and trust. Higher inequality is also associated with weaker environmental policies and higher ecological degradation.
Both side effects call for some solutions. Here are two:
Solution 1: Strong Institutions
Institutions for public goods monitor, regulate and correct these market externalities. They should also support the development of the ignored valuable goods that are unpriced by the market. They should govern and use their purchasing power to steer economic activity and innovation to provide public goods, temper the excesses of the market and develop unpaid work, natural resources and social capital. These institutions include local governments, regulatory bodies, government-owned and controlled corporations, public hospitals and schools, the military and the police. We need robust institutions, decoupled from personality politics. Well-crafted laws and good governance come through dependable institutions.
Solution 2: Socially-Oriented Mindset
Self-interest is only part of what we are and will get us only part of what we want to be. We are economic beings, but we are also social, altruistic and emotional ones. As social individuals, our survival and well-being are inextricably tied to others. As altruistic beings, we love our partners, rear our kids, care for our elderly, help out a work colleague, console a friend, help an old woman cross the street, volunteer at medical missions, serve at food kitchens, and contribute to the open-source digital community. We also act on emotion, habits and biases.
A socially-oriented mindset is considerate about the impact of our actions on the well-being of others and predisposes us who have to act as stewards for those who have not. This mindset underlies distributive policies and practices that promote priceless goods and temper wealth inequality. It allows us to take on an identity that goes beyond moneymaking.
Social enterprise, sustainable products, workplace diversity and inclusion, work-life balance, and mental health are ideas that transcend the goals of economic man. They reflect aspirations for richer human flourishing. To achieve a society that provides conditions that help us flourish, let’s design governance and policies that strengthen our institutions and support a socially-oriented view of ourselves as citizens. To take this forward, as we will see in the next article, GDP is never enough. INQ
The article reflects the personal opinion of the author and not the official stand of the Management Association of the Philippines. Eala is founder and CEO of technology firm Synerbyte Ltd., and author of the book Sh*tty Places & Selfish People: 7 Rules of Engagement.