What ESGers Don’t Understand

In her excellent AIER essay “The Charge to Change Capitalism and Why the Profit Motive Must be Preserved” Kimberlee Josephson wisely warns of the dangers posed to the economy by ESG investing, “common-good capitalism,” and other schemes to achieve allocations of resources different from the allocations that would be achieved by markets. Advocates of these policies don’t seem at all to be troubled by the dubious ethics of persons A and B commandeering the resources of persons C and D in order to engineer into existence A’s and B’s particular vision of the good society. Having read countless apologia for ESG and related programs, I’m confident in saying that each ESGer keeps his conscience clean merely by presuming that the pattern of resource allocation that he aims to achieve with his scheme is so indubitably superior to what the market will bring about that no intelligent and well-intentioned person could possibly object. ESGers & Co. have something of a God complex.

But why do so many people believe them? Why hasn’t the arrogance of ESGers & Co. led them to be widely discredited? What explains the warm reception given by so many professors, pundits, preachers, and politicians to proposals to allocate resources ‘socially consciously’ and in contradiction of the wishes of investors and consumers who spend their own – and only their own – money?

In a few cases, the answer is obvious and requires no further explanation than narrow self-interest – as, for example, when a labor-union executive supports ESG investing requirements in the hopes that some corporation will be compelled to admit him onto its board of directors. Yet much support for ESG and related schemes seems not to be rooted in venal considerations. Much of this support is well-meaning but is rooted in profound economic ignorance.

The Importance of “No” and Freedom of Entry

A general summary of the economic error made by sincere supporters of ESG and related proposals is straightforward: These supporters fail to understand the elementary logic of free markets. They don’t grasp the fact that market prices, along with profits earned and losses suffered in markets in which the government does not restrict entry, are sufficient to incite and guide entrepreneurs, investors, and corporate managers to serve their fellow citizens as reliably and as fully as possible. It follows that as long as the market process is allowed to operate freely, there’s no further improvement in the public welfare that can possibly be achieved even by the most ideally conducted ESG or “common-good capitalism” policy.

Unfortunately, to adequately grasp this logic of free markets typically requires at least a few hours of attention given to a competent teacher of the principles of microeconomics. So allow me here – perhaps in a spasm of arrogance of my own – to try to supply a shortcut to the understanding of why free markets can and should be relied upon to promote the public good.

The shortcut that I propose turns on the word “no” combined with the freedom of entrepreneurs to enter whichever industries they choose using whichever peaceful means are at their disposal.

A too-little-appreciated virtue of private property rights is that each owner is free to say “no” regarding the uses of his or her property. And each and every one of us owns private property, even if that property is only the capacity to supply labor services. For each of us, our current ‘basket’ of property rights is protected by our ability to say “no.” If I offer to employ you to mow my lawn at a certain wage, your ability to say “no” ensures that you’ll not spend your time in ways that make you worse off. If you, as you personally judge matters, have better ways to spend your time than in mowing my lawn under the terms that I offer, you’ll reject my offer. (And, by the way, who’s in a better position than you to judge whether you should reject or accept my offer?) Even if you reject my offer, my making it doesn’t worsen your welfare.

Of course, you’ll accept my offer if you believe that doing so will improve your welfare.

Importantly, your freedom to say “no” incites me to improve the terms that I offer to you if my more generous offer still leaves me benefitting from employing you to mow my lawn. And if competition for your lawn-mowing services is coming also from my neighbors, that competition from other potential employers of yours will prompt me – if I value your services more highly do any of my neighbors – to offer you more than is offered by anyone else who wishes to employ you.

If you accept my revised, improved offer of employment, you – and I – are made better off. And because I, too, have the ability to say “no,” any offer from you to mow my lawn must make me better off if I’m to accept it. The ability of each of us to veto any proposed deal means that every such deal if it is to happen, must secure the unanimous consent of all parties to it. Each party’s ability to say “no” gives every market participant incentives to offer terms to others that are mutually advantageous.

This lesson, while simple, is nevertheless profoundly important. And it scales up nicely. Even a highly profitable multinational corporation can hire and maintain the workers that it needs only by making those workers better off. A job offer that doesn’t improve a worker’s welfare is a job offer to which that worker says “no.” The same logic applies to consumers. A company that offers for sale a product to which too many consumers say “no” is a company that will either lower the price of that product or stops offering it for sale as the company brings to market a different product that it hopes will better please consumers.

Nothing more than the market process, in which all participants are free to say “no,” and in which entrepreneurs are free to enter with different proposals, is necessary to fuel ongoing efforts of businesses – from minuscule moms’n’pops to massive multinationals – to offer deals to workers, consumers, and investors that improve the welfare of each and every party to the deals. Put differently, a profit-conscious business operating in a free market is necessarily also a business that acts as if it is socially conscious.

Here’s the kicker: The veto power that arises from everyone’s freedom to say “no” ensures that all market outcomes are agreed to unanimously. And if an outcome wins unanimous agreement, the presumption is surely strong that it promotes the public interest. Further, freedom of entry justifies the additional presumption that market outcomes promote the public interest as well as possible. This is because the only way to earn especially handsome profits in a market economy is to be alert to opportunities to serve the public even better than it’s currently being served – for example, to put workers to more productive and highly paid uses, or to offer the public better consumer goods. Seeking such profits, entrepreneurs strive to offer workers and consumers ever-better opportunities in the hopes that enough of them will say “yes” to these offers.

Unanimity Is No Exaggeration

“Surely you jest!” you’ll respond in genuine disbelief. “While each contract in a market secures the unanimous agreement of the parties to that contract, such contracts often have negative consequences on people who aren’t party to them. Very often negative effects fall on individuals who can’t say ‘no’ to deals that harm them. Think, for example, about factory workers who lose their jobs to imports!”

Such is the widespread belief that market outcomes are not unanimously approved. But this belief is mistaken.

Consider the worker who lost her job to imports. By choosing to work in the market, this worker chose to subject herself to the competition of market forces. She knew – or must be presumed to have known – that her job isn’t guaranteed even if she works hard, is competent, and commits no wrongdoing. She agreed, in exchange for her pay – which is much higher than it would be were she and all other workers protected from losing their particular jobs – to bear this risk. When consumers later purchase so many more imports that she loses her job, what happens to this worker is an outcome the possibility of which she earlier consented to shoulder. The fact that she would prefer not to lose her job is indisputable. This fact, however, no more shows that she did not agree to play by the market’s rules than does the fact that I’d prefer in 2023 not to keep paying the monthly payments on the 15-year mortgage that I voluntarily took out on my house in 2013 show that I did not agree to play by the market’s rules.

ESGers & Co. want corporate managers, who are agents for shareholders, to have the discretion to violate their fiduciary obligations in order to bestow unearned and unbargained-for benefits on whichever particular groups happen to be politically loudest or best able to serve as mascots for this or that ideological cause. ESGers & Co., in short, want the power to free favored individuals or groups from having to play by the rules of the market. The fact that many ESGers & Co. are unaware that they are advocates of breaking rules doesn’t change the reality that they are, in fact, advocates of breaking rules – rules that other people must continue to obey if the intended beneficiaries of ESG investing are actually to have any such benefits to enjoy.

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This article was published by AIER, The American Institute for Economic Research, and is reproduced with permission.