Market Forces Can Help Winnow Out Bad Charities as Well as Bad Businesses

Business has a bad reputation in some quarters. For many, corporations are synonymous with greedy, soulless institutions that value profits over people.

Are there bad actors in business? Yes. Are there corrupt businesspeople and companies that engage in unethical business practices? Again, yes, just as there are corrupt and unethical people in all walks of life–in nonprofits, in government, in education, in churches, everywhere.

Because people are imperfect, even fallen, there will be bad actors–and bad actions wherever there are people.

So, it should not be surprising that there are recurring stories of business malfeasance. Indeed, the more surprising fact is that, despite our imperfect nature, there are so many good businesspeople, and so many honorable businesses.

Honorable business? Is there such a thing? Yes, there is.

In a properly functioning market economy, the only way a businessperson or a firm can make a profit is by providing a product or service that others think improves their lives.

Honorable business is benefiting oneself only by simultaneously benefiting others–according to those others’ own values.

That means that, in a profound sense, businesses are captives of consumers. And consumers are picky.

If people think a company’s goods or services aren’t worth the price, if they don’t like the way the company conducts its business, or if they think another company is doing things better, they will exercise their “opt out” option, say “no, thank you,” and go elsewhere.

The fact that consumers–that is, we, the people–can opt out constitutes a significant disciplining factor on businesses.

We tend to think that businesses can be controlled only by “front end” measures, like laws and regulations intended to prevent bad action and channel business activity only in certain prescribed directions. But consumer choice provides a powerful “back end” discipline.

The fact that we can choose which businesses to patronize or work for means that to succeed they must please us. And when they don’t, we go elsewhere, taking our skills and money with us.

In the end, corrupt businesspeople and unethical or underperforming businesses lose our business, and virtuous businesspeople and honorable businesses get our business.

When people choose which businesses to patronize, they do so based on a variety of factors–everything from price to service to virtue. They choose, therefore, on the basis of their values, which includes their moral values.

As Joseph Schumpeter, the economist who identified “creative destruction” as capitalism’s essence, argued, the intense competition in which firms engage to gain our business “disciplines” them to figure out what we value and pits them in a life-or-death struggle to please us. In markets, the consumer really is king.

The process is imperfect, of course, as are all human relationships.

Some unethical businesspeople or firms might still succeed, at least in the short run. But if a firm really is unethical, competition from other firms will relentlessly seek to expose it. They will want to do things better–according to how we consumers define “better”–so that they can succeed by capitalizing on other firms’ errors.

Thus, what we might call “consumer sovereignty”–or perhaps “citizen activism”–has a powerful effect on business practice. Consumers and citizens vote both with their dollars and with their labor. By deciding where to buy and where to work, we place enormous pressure on businesses to conform to our values, or else.

This process of winnowing applies also to nonprofits. Amazon, for example, has a program called “AmazonSmile,” by which it donates a portion of customers’ purchases to charities that customers choose. However, Amazon has asked the Southern Poverty Law Center to vet its list of eligible charities. Customers will not be able to choose any charity that does not fit the SPLC’s ideological vision.

If you agree with the SPLC’s particular politics, you might like that. But SPLC’s vision excludes many mainstream charities that millions of Amazon’s customers might want to support.

As a private company, Amazon can recommend whatever charities it wants, just as it recommends products it wants. But the front-end restriction of choices to only those that mirror SPLC’s vision hamstrings the process of discovering worthy charities and distinguishing them from unworthy.

Perhaps some of SPLC’s recommended charities are worthier than some of those it excludes. Perhaps not. But we won’t know unless we allow the back-end disciplining that consumer choice provides. It’s the testing crucible that allows the best to rise to the top.

Honorable charities, like honorable business, arise when consumers can review the field, say “yes, please” to one option and “no, thank you” to the rest. Only in that way do we discipline both charities and businesses to ensure that they continuously seek ways to provide the most value to the world.

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