...the business of business is business.
CSR includes: community health, safety, education...and so on an so forth. My question in this case is quite obvious: aren't all these spheres and activities the primarily concerns of the government? And shouldn't the government take care of their citizens to prevent crime, save the environment and satisfy the basic human needs and desires rather than business?In principle, yes. The incentives for companies are not to maximise social good - any more than are the incentives for individuals. This is why we appoint governments on our behalf - as a coordination mechanism, to solve the problem that competing individual incentives are sometimes destructive of social benefit. Simplistically put, government's job is to solve the tragedy of the commons and the prisoner's dilemma.
A government with perfect knowledge and correct incentives is, in theory, the best way to maximise total welfare across the population. Much of public choice economics is about how to best meet these two conditions - perfect knowledge and correct incentives are not easy to bring about.
And it's in circumstances where these conditions fail, that there may be a role for CSR after all. If the government (which by its nature, must try to aggregate the preferences of millions of people) does a bad job of understanding the needs of some individuals, other forms of aggregation may be more effective. The management of a company might know their customers, employees or communities better than more remote political representatives. They may therefore be in a better position to provide services that would benefit those people.
That's the knowledge side of the equation. What about incentives? Why would companies have an incentive to accurately meet the needs of communities which are not directly buying a product from them?
As a starting point, we could look at the incentives for governments to meet those needs. Or the incentives of individuals within government to meet those needs. Those are, in conventional economic theory, market incentives. Money, a preference for power, or for the social influence and admiration that comes from a position of responsibility.
The admiration preference could apply in the corporate context too, but is unpredictable and relies on the individual preferences of the firm's managers or owners rather than the intrinsic incentives of the company itself. It's more likely that a company can be incentivised to make a social contribution by taking advantage of the preferences, or information gaps, of people in its community.
There's a parallel again with the government case - governments are partly taking advantage of a preference for reciprocity and sharing between citizens to co-opt them into participating in redistribution (and voting). In the company case, there are a couple of ways in which this could work:
- In a competitive market, companies seek ways to distinguish their services other than on price. If the company's delivery of social services is productive, buying a slightly more expensive product may be an economically efficient way for consumers to make a social contribution. The company is therefore offering consumers an economy of scale for achieving the consumer's own social objectives.
- In some markets there is an information asymmetry: companies can't always prove that they're trustworthy, or that their quality is high. Then, they may seek ways of signalling commitment to a marketplace and that they have a reputation at stake. In this case, social contributions serve the same purpose as a bank's traditional marble pillars and gilt edging: showing that the company is willing to sink costs into a market and therefore that they plan to stick around for a while. If the value of trust or perceived quality is high, it can be worthwhile for a company to engage in CSR.
- Similar competitive and signalling processes may exist in the company's relationship with its employees, instead of with its customers.
- In the signalling case, the informational benefit is present whether the actual social contribution is large or small. So this works best for big companies which can make a small contribution (relative to their total revenue or profit) but spread the news widely across thousands of employees or customers. The productivity case scales more easily down to small firms.
The macroeconomic question is more complicated: what does it look like to have a society and an economy where social good is sometimes achieved by companies instead of by government? My suspicion is that it will be rare to find a stable situation where firms provide a significant share of social goods - but 5-10% might be expected. Some careful general equilibrium modelling would be needed to learn more about the dynamics of a system like this.
So the following thought of Tatsiana's is close to the mark, but we needn't be quite this cynical:
CSR can create a luring shine around a company, given that all people like when somebody takes care of their needs. But does business really care about the well-being of the general public or CSR is simply a smokescreen or window dressing?Actually, business doesn't need to care - but it might still make a difference anyway.