Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!)

Friday's Wall Street Journal had an article titled "Conspicuous Virtue and the Sustainable Sofa." You have to be a subscriber to read it online. But here is the intro:

"Lance Armstrong's ubiquitous yellow "Live Strong" wristbands have become a world-wide phenomenon: More than 60 million have sold since 2004, one of the greatest successes in nonprofit fund-raising history, with the proceeds going to cancer-related causes. No doubt some wear the bands in solidarity, or for inspiration -- but, that said, the wristband conceit was simply ingenious. It allowed people to make a show of their virtue. They could give to a good cause, and they could advertise their caring to everyone else. Not for nothing did John Kerry flaunt a Live Strong."

The author, Joseph Rago, calls this "conspicuous virtue." It is inspired by the term "conspicuous consumption" coined by Thorstein Veblen in his book The Theory of the Leisure Class. (the whole book is online there)

This site which has a short bio for Veblen, an economist who lived from 1857-1929, states:

"Veblen is best known for his book The Theory of the Leisure Class. In it he introduced the term "conspicuous consumption." Conspicuous consumption was consumption undertaken to make a statement to others about one's class or accomplishments. This term, more than any other, is what Veblen is known for."

But The Wall Street Journal article argues that now people are buying certain items to show how virtuous they are, like a Toyota Prius to show that you care about the environment even though "fuel savings do not justify the price premium of a gasoline-electric power train."

Adam Smith may have beaten Veblen to the punch. In The Wealth of Nations, he wrote:

"With the greater part of rich people, the chief enjoyment of riches consists in the parade of riches, which in their eyes is never so complete as when they appear to possess those decisive marks of opulence which nobody can possess but themselves. In their eyes the merit of an object which is in any degree either useful or beautiful, is greatly enhanced by its scarcity, or by the great labour which it requires to collect any considerable quantity of it, a labour which nobody can afford to pay but themselves. Such objects they are willing to purchase at a higher price than things much more beautiful and useful, but more common." (the entire book is online)

In Veblen's chapter on "Conspicuous Consumption," there is no mention of Adam Smith. There is statistical or empircal evidence that supports Veblen's theory. A Ph. D. student found that rich families do spend more on "Conspicuous Consumption." Click here to read about it. See also Doctoral Thesis Says Rich People Spend More on Conspicuous Things

Payless sold its discount shoes for $600 a pair at mock luxury influencer event

By Mike Snider of USA TODAY. Excerpt:

"The privately held Topeka, Kansas-based shoe seller executed the reverse of a bait-and-switch operation recently with a luxury influencer event held in Santa Monica, California.

Payless took over a former Armani store, renamed the retail location as "Palessi" and stocked the outlet with its discount-priced boots, heels, tennis and leisure shoes. Then, it invited a flock of partygoers and sold them the shoes, typically priced at $20 to $40 in Payless stores, at inflated designer price tags of $200 to $600.

"Palessi" sold about $3,000 worth of shoes within a few hours and, after the shoppers paid, staffers told them that the shoes were actually from Payless, according to AdWeek, which reported on the event Wednesday. "They are elegant (and) sophisticated," one shopper described her purchase as, in a Payless video posted on YouTube.

Then, the woman, who Payless says is a real person not an actor, was told the shoes actually were the handiwork of Payless. "You’ve got to be kidding me," she said.

Another shopper, this one a man, said about his purchase, "I could tell it's made with high-quality material.""

 This reminds me of conspicuous consumption, a well known term in economics and sociology. See Thorstein Veblen and What is Conspicuous Consumption. Veblen first coined the term over 100 years ago. The idea is that rich people buy things just to show how rich they are.

Adam Smith may have beaten Veblen to the punch. In The Wealth of Nations, he wrote:

"With the greater part of rich people, the chief enjoyment of riches consists in the parade of riches, which in their eyes is never so complete as when they appear to possess those decisive marks of opulence which nobody can possess but themselves. In their eyes the merit of an object which is in any degree either useful or beautiful, is greatly enhanced by its scarcity, or by the great labour which it requires to collect any considerable quantity of it, a labour which nobody can afford to pay but themselves. Such objects they are willing to purchase at a higher price than things much more beautiful and useful, but more common." (the entire book is online)

See also an earlier blog post I did called Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) . See also Doctoral Thesis Says Rich People Spend More on Conspicuous Things

Federal Reserve Economists May Have Discovered Another Cause Of Bankruptcy

See Why You Might Go Bankrupt If Your Next-Door Neighbor Wins the Lottery by Ben Leubsdorf at The Wall Street Journal blog. In case that link does not work, try Here’s why winning the lottery makes your neighbors go broke by the same author in The New York Post. Excerpts from the WSJ blog:

"Winning the lottery can be hazardous to your neighbors’ financial health.

Research released this month by the Federal Reserve Bank of Philadelphia found a significant jump in bankruptcies among households living near someone who won a big lottery jackpot. The economists theorized that people may have seen the good fortune next door and felt pressure to accumulate more assets of their own, especially flashy purchases like cars, that they simply could not afford.

“Income inequality induces poorer neighbors to consume more visible (rather than invisible) commodities to signal their abilities to ‘keep up with the Joneses’ to their richer neighbors,” economists Sumit Agarwal, Vyacheslav Mikhed and Barry Scholnick wrote. “This tendency can lead to additional and unsustainable borrowing among the relatively poor to finance this additional conspicuous consumption, which can eventually result in financial distress and bankruptcy.”"

"The headline finding: For every $1,000 increase in the lottery prize, there was a 2.4% increase in bankruptcy filings by the winner’s neighbors over the next few years. “These results are more pronounced for low-income neighborhoods and high income-inequality areas,” they wrote.

Why would someone winning the jackpot cause someone living down the street to go bankrupt a year or two later? The economists argued that people who feel they are poorer than their peers may spend more in a conspicuous fashion, financing their purchases with debt. But that debt will need to be repaid, potentially leading to financial difficulties and even bankruptcy.

Messrs. Agarwal, Mikhed and Scholnick analyzed the Canadian bankruptcy data and found “evidence that those who filed for bankruptcy after a larger lottery win of a close neighbor have significantly larger holdings of visible assets (e.g., cars, motorcycles, houses) relative to the holdings of these same visible assets by those who filed for bankruptcy after smaller lottery wins of a close neighbor,” they wrote. There was no similar difference for “invisible assets” like cash or pensions, they said.

In other words, when someone wins a big lottery prize, neighbors appear more likely to buy cars and remodel their houses to show that they can keep up—and go broke in the process."

I put conspicuous consumption in red because that is a well known term in economics and sociology. See Thorstein Veblen and What is Conspicuous Consumption .Veblen first coined the term over 100 years ago. The idea is that rich people buy things just to show how rich they are.

Adam Smith may have beaten Veblen to the punch. In The Wealth of Nations, he wrote:

"With the greater part of rich people, the chief enjoyment of riches consists in the parade of riches, which in their eyes is never so complete as when they appear to possess those decisive marks of opulence which nobody can possess but themselves. In their eyes the merit of an object which is in any degree either useful or beautiful, is greatly enhanced by its scarcity, or by the great labour which it requires to collect any considerable quantity of it, a labour which nobody can afford to pay but themselves. Such objects they are willing to purchase at a higher price than things much more beautiful and useful, but more common." (the entire book is online)

See also an earlier blog post I did called Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) . See also Doctoral Thesis Says Rich People Spend More on Conspicuous Things

Do You Know the Difference Between Being Rich and Being Wealthy?

To one man, money was a plaything. To another, it was a possibility. Guess which one came out ahead in the end?

By Jason Zweig of The WSJ. He discusses investing, consumption and the book “The Psychology of Money” by Morgan Housel (reminds me of the book Money and the Meaning of Life by philosopher Jacob Needleman).

Excerpts from the article:

"Money isn’t primarily a store of value. Money is a conduit of emotion and ego, carrying hopes and fears, dreams and heartbreak, confidence and surprise, envy and regret."

"Investing isn’t an IQ test; it’s a test of character."

One person "could defer gratification and had no need to spend big so other people wouldn’t think he was small. From such old-fashioned virtues great fortunes can be built." (reminds me of the concept of conspicuous consumption-see related post linked below).

"Analyzing two of the biggest stock-market winners of the past few decades, Mr. Housel says Netflix Inc. returned more than 35,000% between 2002 and 2018. Monster Beverage Corp. gained more than 300,000% from 1995 through 2018.

Yet, along the way, many investors quit; each stock spent at least 94% of the time trading below its previous all-time highs."

Investors "should regard it (volatility ) as a “fee,” the unavoidable cost of participation." "patience can make it bearable."

"Warren . . . accrued at least 95% of his wealth after age 65. (The chairman of Berkshire Hathaway Inc. will turn 90 at the end of this month.)

Had Mr. Buffett earned his world-beating returns for only 30 years rather than much longer, he would be worth 99.9% less"

"Housel . . . draws a critical distinction between being rich (having a high current income) and being wealthy (having the freedom to choose not to spend money).

Many rich people aren’t wealthy, Mr. Housel argues, because they feel the need to spend a lot of money to show others how rich they are. He defines the optimal savings level as “the gap between your ego and your income.” Wealth consists in caring less about what others think about you and more about using your money to control how you spend your time.

He writes: “The ability to do what you want, when you want, with who[m] you want, for as long as you want to, pays the highest dividend that exists in finance.”"

Related post

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!)

C.E.O.s Are Qualified to Make Profits, Not Lead Society

An old debate over the proper role of C.E.O.s has entered the political arena. But chief executives aren’t well equipped to take on broad social issues.

By Greg Mankiw. Excerpts:

“It’s way past time we put an end to the era of shareholder capitalism, the idea the only responsibility a corporation has is with shareholders,” he said. “That’s simply not true. It’s an absolute farce. They have a responsibility to their workers, their community, to their country.”

Mr. Biden echoed a stand taken last year by the Business Roundtable, a lobbying group. In a new “Statement on the Purpose of a Corporation,” 181 chief executives belonging to the organization committed themselves “to lead their companies for the benefit of all stakeholders — customers, employees, suppliers, communities and shareholders.”

In forsaking a mandate of narrow self-interest for one of broad social welfare, this approach to corporate management sounds noble, perhaps even obvious. But it is more problematic under closer scrutiny.

Imagine that you are the chief executive of an auto company. Your management team brings you a proposal: Let’s close a plant producing gasoline cars in Michigan and open one producing electric cars farther south. You must decide whether to approve the plan.

Under a conventional approach to management, you ask yourself one question: Would the change yield greater profits for shareholders?"

Under the Biden and Business Roundtable approach to management, you must ask many more questions. The range is dizzying. Here are just a few:

• How much will the closure of the old plant hurt its workers and their community?
• How do you weigh those losses against the gains to the would-be workers at the new plant?
• Given the nation’s history of systemic racism, should you consider the racial makeup of the two groups of workers, in an effort to reduce economic inequality?
• Does it matter whether the new plant is in South Carolina, providing jobs for American workers, or in Mexico, providing jobs for Mexican workers?
• How should you weigh the benefit of electric cars in mitigating climate change? Should you consider the global impact of climate change or only the impact on the United States?
• How should you balance these concerns against the interests of shareholders, who entrusted you to invest their savings?"

"From a company’s share price, a board of directors can glean how well its chief is serving shareholders."

"No similar metric is available to judge how effectively a chief executive is serving society as a whole."

Related posts

ESG Investing in the Pandemic Shows Power of Luck

ESG Investing Shines in Market Turmoil, With Help From Big Tech: The strength of socially responsible funds suggests they have staying power; ‘ESG is not a fad’

Funds that market themselves as sustainable investments aren’t necessarily focused on companies that fight climate change, develop wind turbines or promote diverse boards

ESG Funds Draw SEC Scrutiny (companies that pursue strategies to address environmental, social or governance challenges)

Is it a retailer’s job to keep shoppers from their vices? (or Adam Smith vs. CVS pharmacy)

Can You Find Virtue by Investing in Vice?

What if companies pledge to adhere to social and environmental accountability guidelines?

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) 

Data show that socially responsible investments can outperform the S&P 500 index
 
Is altruism a result of selfishness?

Do you have to be selfish to make more money?

Does collective self-deception mask selfish behavior?

Why Doing Good Makes It Easier to Be Bad

Businesses intentionally display their social and environmental performance in addition to their financial performance to stakeholders

Should you invest according to religious guidelines?

For a humorous view of this issue see

A Snickers a Day Keeps the Doctor Away: Why does CVS want to make my migraine cures hard to find? by Joseph C. Sternberg of the WSJ

ESG Investing in the Pandemic Shows Power of Luck

Multiplicity of environmental, social and governance grading schemes sows confusion

By James Mackintosh of The WSJ.

I am usually interested in these articles since economists say that people act on their own self interest. But in this case, they may be trying to be a bit altruistic if they accept lower returns to invest in ESG. If they are not getting lower returns, then maybe it is not altruistic.

Excerpts:

"Does ESG investing make money? The trouble with asking about environmental, social and governance investing is that it isn’t a thing that can be measured—or rather, it is lots of things all measured differently."

"ESG investing makes money" (fund managers  say)

"Reams of studies show ESG outperforming traditional approaches.

The trouble is that reams of other studies show ESG underperforming. The reason is simple: there is no one thing that’s ESG investing"

"there is no consistent answer to the question of whether ESG has outperformed."

"Even from a single index provider you can get different results. MSCI’s USA Extended ESG Focus index, which aims to minimize divergence from the wider market, beat MSCI USA—its equivalent to the S&P 500—both for the year so far and since stocks peaked on Feb. 19. But the MSCI USA ESG Leaders index is slightly behind for the year, and has fallen more than a percentage point more than the ordinary index since the February top.

Use S&P or FTSE Russell indexes and you get different answers, too. The ESG version of the S&P 500 handily beat the benchmark this year; the Russell 1000 ESG index fell more than the ordinary index.

Even where an ESG index did beat the market, it had little to do with environmental, social or governance issues. Instead, it came down to luck: did they happen to pick the stocks that best rode out coronavirus lockdowns? It is better to be lucky than right; but having, as some did, less exposure to cruise liners or long-haul airlines because of their carbon footprint was luck, not a well-thought-out way to avoid the stocks hurt most by Covid-19. There are several reasons why Microsoft tends to score well on ESG, but its cloud services being in demand because everyone is working from home isn’t among them."

"The ESG measures are so different that one of them is almost bound to be outperforming over any given period. There‘s almost certainly another that is underperforming."

"A chairwoman trying to find something to boast about in her company’s annual report need only split the E, S and G scores separately and look across the rating agencies, and the business is bound to be above average on something. Florian Berg of MIT Sloan School of Management examined five scoring systems for 924 companies, and found that only 35 of them were below median on each of the E, S and G scores from all five rating agencies in 2017."

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ESG Investing Shines in Market Turmoil, With Help From Big Tech: The strength of socially responsible funds suggests they have staying power; ‘ESG is not a fad’

Funds that market themselves as sustainable investments aren’t necessarily focused on companies that fight climate change, develop wind turbines or promote diverse boards

ESG Funds Draw SEC Scrutiny (companies that pursue strategies to address environmental, social or governance challenges)

Is it a retailer’s job to keep shoppers from their vices? (or Adam Smith vs. CVS pharmacy)

Can You Find Virtue by Investing in Vice?

What if companies pledge to adhere to social and environmental accountability guidelines?

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) 

Data show that socially responsible investments can outperform the S&P 500 index
 
Is altruism a result of selfishness?

Do you have to be selfish to make more money?

Does collective self-deception mask selfish behavior?

Why Doing Good Makes It Easier to Be Bad

Businesses intentionally display their social and environmental performance in addition to their financial performance to stakeholders

Should you invest according to religious guidelines?

For a humorous view of this issue see

A Snickers a Day Keeps the Doctor Away: Why does CVS want to make my migraine cures hard to find? by Joseph C. Sternberg of the WSJ

ESG Investing Shines in Market Turmoil, With Help From Big Tech: The strength of socially responsible funds suggests they have staying power; ‘ESG is not a fad’

By Caitlin McCabe of The WSJ. Excerpts: 

"Funds focused on socially responsible investing have been a rare bright spot in this year’s market meltdown, the latest evidence that the practice is more than a bull-market trend.

In the first four months of 2020, investors poured a record of at least $12.2 billion into funds that say they invest in environmental, social and governance practices, according to investment research platform Morningstar Direct. That is more than double the amount that ESG funds attracted during the same time last year, when the U.S. was in the midst of its longest-running bull market in history.

The steady inflows into ESG funds come as the group has logged better-than-average returns, despite this year’s wild ride in markets that has pulled the S&P 500 down 11%. More than 70% of ESG funds across all asset classes performed better than their counterparts during the first four months of the year, data provided by Morningstar Direct show.

The strength of sustainable investing suggests that ESG has staying power. Skeptics have long said investors might be willing to put their money into financial products that reduce their exposure to fossil fuels, for example, when stocks charged higher. But they predicted investors would abandon the practice for higher returns in times of turbulence."

"According to a study published last month by Mr. Serafeim and researchers from State Street Associates, companies that protected their labor forces and supply chains during this year’s stock-market drawdown saw more net inflows from institutional investors and better returns than their industry peers.

Kroger Co., KR 2.24% for example, said in March that it would pay a bonus to its front-line workers, provide paid time-off to employees placed under quarantine and make funds available to workers experiencing financial troubles during the pandemic. Shares of the supermarket company, which receives a high rating from MSCI ESG Research on issues such as labor management, rose 5.2% between Feb. 19 and March 23. In comparison, Walmart Inc. WMT -0.64% and Costco Wholesale Corp., COST -1.09% which have lower ESG ratings than Kroger, according to MSCI, fell 2.9% and 12%, respectively, during the period."


"A Wall Street Journal analysis of ESG equity funds found that nearly 150 of about 200 funds outpaced the average return of a fund’s broader category.

For example, the Integrity Growth & Income Fund Class A—which holds Thermo Fisher Scientific Inc. TMO -2.48% and Intel Corp. INTC -1.39% as part of its mission to invest in companies with “ethical business practices” and “evolutionary innovation”—declined 8.8% in the first four months of the year. In contrast, the category of large-cap value and growth stock funds in which the Integrity fund is included fell 11%, according to Morningstar Direct.

Yet the equity funds that earned the highest returns overall, the data showed, were largely ones that heavily invested in big technology companies."
"One of the biggest criticisms of ESG investing is that funds often look no different than big technology portfolios."

"Still, ESG advocates say, big tech companies aren’t necessarily the kinds of sustainable investments that people envision when they think of ESG. Jeff Buffum, of Buffum Wealth Management, which is affiliated with Northwestern Mutual Wealth Management Co., said he started building an ESG portfolio after clients expressed interest in renewable-energy investments and disdain for gun-manufacturing companies.

However, Jon Hale, Morningstar’s director of sustainability investing research, said that being generally overweight in the technology sector didn’t provide ESG funds much of a boost. Instead, he found, the bigger drivers of ESG success were having less energy-sector exposure and a selection of stocks—including in the technology sector—that scored better on ESG credentials than their peers."

Related posts:

Funds that market themselves as sustainable investments aren’t necessarily focused on companies that fight climate change, develop wind turbines or promote diverse boards

ESG Funds Draw SEC Scrutiny (companies that pursue strategies to address environmental, social or governance challenges)

Is it a retailer’s job to keep shoppers from their vices? (or Adam Smith vs. CVS pharmacy)

Can You Find Virtue by Investing in Vice?

What if companies pledge to adhere to social and environmental accountability guidelines?

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) 

Data show that socially responsible investments can outperform the S&P 500 index
 
Is altruism a result of selfishness?

Do you have to be selfish to make more money?

Does collective self-deception mask selfish behavior?

Why Doing Good Makes It Easier to Be Bad

Businesses intentionally display their social and environmental performance in addition to their financial performance to stakeholders

Should you invest according to religious guidelines?

For a humorous view of this issue see

A Snickers a Day Keeps the Doctor Away: Why does CVS want to make my migraine cures hard to find? by Joseph C. Sternberg of the WSJ

Funds that market themselves as sustainable investments aren’t necessarily focused on companies that fight climate change, develop wind turbines or promote diverse boards

See Big Technology Stocks Dominate ESG Funds: The most commonly held S&P 500 stocks in actively managed sustainable equity funds last fall were giants including Microsoft, Alphabet and Apple by Akane Otani of The WSJ. Excerpts:

"Funds that market themselves as sustainable investments aren’t necessarily focused on companies that fight climate change, develop wind turbines or promote diverse boards.

Instead, many of them look a lot like a portfolio of big technology stocks.

The five most commonly held S&P 500 stocks in actively managed sustainable equity funds last fall were Microsoft Corp., MSFT 0.89% Alphabet Inc., GOOG 0.40% Visa Inc., V 1.39% Apple Inc. and Cisco Systems Inc., CSCO -0.74% according to an RBC Capital Markets analysis.

Companies focused on issues that the environmental, social and governance (ESG) movement has come to be associated with, such as renewable energy, clean water, and racial and gender diversity, are relatively underrepresented among such funds. For instance, NextEra Energy Inc. is the world’s largest operator of wind and solar farms. It wasn’t on RBC’s list of widely owned stocks in ESG funds. But big tech companies like Amazon.com and Facebook are on the list.

The data point to one of the biggest frustrations critics have about the world of socially conscious investing: There is no industrywide rulebook to determine what should go into ESG funds.

Some fund managers screen out all companies from a certain industry, like oil and gas, and focus on smaller, lesser-known firms at the forefront of areas like clean energy or boardroom diversity. That risks delivering returns that might drastically trail behind the broader market. So the institutions behind the biggest ESG funds often follow another playbook: They try to minimize how much their fund deviates from the broader market by creating a portfolio that, for the most part, looks like today’s technology-dominated S&P 500—just stripped of the companies with the worst ESG practices within each industry."

"Many of the tech companies that are among the most popular stocks in sustainable funds have earned high ratings across multiple elements that analysts consider in evaluating ESG practices.

Index provider MSCI Inc. gave Microsoft an “AAA” rating on ESG—the highest possible score, awarded to just 4% of companies in the software and services industry. It cited the company’s strength on privacy and data security, corporate governance, lack of corruption and instability, and clean-tech-innovation capacity.

Yet other companies often included in sustainable funds have struck investors as more controversial choices.'

MSCI gave Facebook and Amazon poor ratings on privacy and data security and on labor management, respectively. The two stocks are held by a number of large sustainable funds anyway since they satisfy other criteria. For instance, Brown Advisory’s Sustainable Growth Fund excludes companies that conduct animal testing for nonmedical purposes, own fossil-fuel reserves, derive revenue from “controversial weapons,” or defy the United Nations Global Compact Principles—but doesn’t have in its prospectus any language that disqualifies companies with controversies related to user privacy or labor rights."

"'The fact that definitions of ESG can vary so much from firm to firm has caught the eye of the Securities and Exchange Commission. The agency has sent letters to companies asking advisers how and what they determine are socially responsible investments, The Wall Street Journal reported last year.

Republican SEC Commissioner Hester Peirce has criticized not only the ESG movement but also the way that companies produce ESG ratings and scorecards—saying in a June speech that “ESG is broad enough to mean just about anything to anyone.”"

Related posts:

Is it a retailer’s job to keep shoppers from their vices? (or Adam Smith vs. CVS pharmacy)

Can You Find Virtue by Investing in Vice?

What if companies pledge to adhere to social and environmental accountability guidelines?

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) 

Data show that socially responsible investments can outperform the S&P 500 index
 
Is altruism a result of selfishness?

Do you have to be selfish to make more money?

Does collective self-deception mask selfish behavior?

Why Doing Good Makes It Easier to Be Bad

Businesses intentionally display their social and environmental performance in addition to their financial performance to stakeholders

Should you invest according to religious guidelines?

ESG Funds Draw SEC Scrutiny (companies that pursue strategies to address environmental, social or governance challenges)

For a humorous view of this issue see

A Snickers a Day Keeps the Doctor Away: Why does CVS want to make my migraine cures hard to find? by Joseph C. Sternberg of the WSJ

Businesses intentionally display their social and environmental performance in addition to their financial performance to stakeholders

See It is all about the money when discussing ‘planet, people and profits’ by Prasad Padmanabhan. He is a professor of finance at St. Mary’s University.

Adam Smith's "invisible hand" suggests that if you follow your own self interest, you will promote the interests of society. I have had some posts on this issue of being selfish vs. being altruistic and if they can actually be separated before. So those links are at the end.

Adam Smith talked about the invisible hand and how profit seeking firms would provide what the public wanted. But what about trying to make the world a better place? What if companies do that because buyers demand it? Maybe if they didn't they would not maximize profits. That is what Padmanabhan's article is about.

Here is an excerpt from The Wealth of Nations found at The Library of Economics and Liberty.

"But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it."

Now excerpts from Professor Padmanabhan's article, which says if companies want to make a profit, they have to do good.

"Rightly or wrongly, firms now believe that they should routinely report their performance along financial and nonfinancial lines to outside stakeholders. It seems important for them to prominently display their social and environmental performance in addition to their financial performance to stakeholders. Arguably, each generation of stakeholders believes it is more conscious about social and environmental issues than the previous generation. Hence, firms may seem to be pandering to the needs of these generational stakeholders by showcasing their nonfinancial performance as well.

Blue Apron and Plated are two firms offering meals that target young adults and provide information on their websites to appeal to these stakeholders. Plated, for instance, indicates that its produce is grown organically and its poultry and fish originate from sustainable sources. “Look,” it seems to say. “We are good custodians of the planet and take care of our stakeholders!”

Additionally, in today’s social media world, good and bad news about anything or anyone is instantly disseminated globally. Firms and individuals must increasingly manage information flow very carefully. Together, increased stakeholder focus on environmental and social issues, and the relative ease of information dissemination, can be a deadly combination for firms.

One faux pas on either of these counts can prove disastrous to a firm’s image. Witness the response to the United Airlines CEO’s apology blaming the victim in reaction to a video circulating on social media of a man dragged off a plane. And how about tweets from Adidas congratulating Boston Marathon survivors? It was forced to take down that ad after furor from Twitter followers who suggested this ad reminded individuals of the tragedy.

The cost to erase these errors in judgment proved extremely expensive to the firms involved. To avoid costly missteps like these, firms are more proactively inclined to expend valuable resources to hire people to manage their corporate social responsibility, or CSR, profiles and their advertising campaigns."

"But in today’s globalized, social-media-filled world, a firm cannot be profitable unless it takes care of the people and the planet. The most profitable firms of today are successful because they are good stewards of the planet and take good care of the people."

Research by my colleagues and me also indicates a direct link between a firm’s CSR activities and its future financial performance. We found evidence that current CSR activities for a group of service firms are strongly positively correlated with how much future profits the firms can generate from its assets, after controlling for other factors.

In another study, we found that global manufacturing and service firms use CSR dollars as strategic dollars to be spent carefully for maximum financial benefits.

Another related analysis found that banks offer lower interest rates on bonds to firms that follow good CSR principles relative to firms that do not. Bankers may feel good about firms that implement good CSR practices, but they still follow the money. They offer lower interest rates to such firms since they may recognize that such firms are likely to attract higher revenues in the future — lowering their business risks, which translates into more money — capital.

Ultimately, firms cannot make money unless they take care of their stakeholders. The harsh limelight of social media punishes irresponsible firms because potential, and even loyal, customers will avoid its products. Decreased revenues, in turn, lead to lower profits. Lower profits can negatively affect the stakeholders of the firm. It is essentially unimaginable for any firm today to earn sustained profits while being irresponsible custodians of the planet and/or not taking care of its employees and customers."

Here is a link to another interesting article by Prasad Padmanabhan: Corporate activism in politics creates business strategy dilemmas.

Related posts:

Why Doing Good Makes It Easier to Be Bad

Is it a retailer’s job to keep shoppers from their vices? (or Adam Smith vs. CVS pharmacy)

Can You Find Virtue by Investing in Vice?

What if companies pledge to adhere to social and environmental accountability guidelines?

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) 

Data show that socially responsible investments can outperform the S&P 500 index
 
Is altruism a result of selfishness?

Do you have to be selfish to make more money?

Does collective self-deception mask selfish behavior?

For a humorous view of this issue see

A Snickers a Day Keeps the Doctor Away: Why does CVS want to make my migraine cures hard to find? by Joseph C. Sternberg of the WSJ

What if companies can't afford real models for their ads? Use AI generated fake pictures

See Dating apps need women. Advertisers need diversity. AI companies offer a solution: Fake people by Drew Harwell of Washington Post. Excerpts:

"Artificial intelligence start-ups are selling images of computer-generated faces that look like the real thing, offering companies a chance to create imaginary models and “increase diversity” in their ads without needing human beings.

One firm is offering to sell diverse photos for marketing brochures and has already signed up clients, including a dating app that intends to use the images in a chatbot."

"Icons8, an Argentina-based design firm that sells digital illustrations and stock photos, launched its online business Generated.photos last month, offering “worry-free, diverse models on-demand using AI.”

The site allows anyone to filter fake photos based on age (from “Infant” to “Elderly”), ethnicity (including “White,” “Latino,” “Asian” and “Black”) and emotion (“Joy,” “Neutral,” “Surprise”), as well as gender, eye color and hair length. The system, however, shows a number of odd gaps and biases: For instance, the only available skin color for infants is white.

The company says its faces could be useful for clients needing to jazz up promotional materials, fill out prototypes or illustrate concepts too touchy for a human model, such as “embarrassing situations” and “criminal proceedings.” Its online guide also promises clients they can “increase diversity” and “reduce bias” by including “many different ethnic backgrounds in your projects.”

Companies infamously have embarrassed themselves through haphazard diversity-boosting attempts, Photoshopping a black man into an all-white crowd, as the University of Wisconsin-Madison did on an undergraduate booklet, or superimposing women into group photos of men.

But while the AI start-ups boast a simple fix — offering companies the illusion of diversity, without working with a diverse set of people — their systems have a crucial flaw: They mimic only the likenesses they’ve already seen. Valerie Emanuel, a Los Angeles-based co-founder of the talent agency Role Models Management, said she worried that these kinds of fake photos could turn the medium into a monoculture, in which most faces look the same.

“We want to create more diversity and show unique faces in advertising going forward,” Emanuel said. “This is homogenizing one look.”

Icons8 created its faces first by taking tens of thousands of photos of about 70 models in studios around the world, said Ivan Braun, the company’s founder. Braun’s colleagues — who work remotely across the United States, Italy, Israel, Russia and Ukraine — then spent several months preparing a database, cleaning the images, labeling data and organizing the photos to the computer’s precise specifications.

With those images at the ready, engineers then used an AI system known as StyleGAN to output a flood of new photos, generating 1 million images in a single day. His team then selected the 100,000 most convincing images, which were made available for public use. More will be generated in the coming months.

The company, Braun said, signed three clients in its first week: an American university, a dating app and a human-resources planning firm. Braun declined to name the clients.

Clients can download up to 10,000 photos a month starting at $100. The models will not be paid residuals for any of the new AI-generated images built from their photo shoots, Braun said.

Another firm, the San Francisco-based start-up Rosebud AI, offers clients a chance at 25,000 photos of “AI-customized models of different ethnicities.” Company founder Lisha Li — who named it after an infinite-money cheat code she loved as a kid for the people-simulator game “The Sims” — said she first marketed the photos as a way for small businesses on online-shopping sites to invent stylish models without the need for pricey photography.

Her company’s source images came from online databases of free and uncopyrighted photos, and the system allows clients to easily superimpose different faces on a shifting set of bodies. She promotes the system as a powerful tool to augment photographers’ abilities, letting them easily tailor the models for a fashion shoot to the nationality or ethnicity of the viewer. “Face is a pain point that the technology can solve,” she said."

Related posts:

A fake job reference can be just a few clicks away.

Fake Economist Fools Portugal.

Slave Redemption in Sudan. (Fake slaves are sold to those who buy slaves and then give them their freedom)

Can A Product Work Just Because It's Expensive?. (fake medicine)

If It Pays To Have Friends, Can You Pay To Have Friends?. (you can hire fake boyfriends)

Study: Half of American Doctors Give Patients Placebos Without Telling Them.

Saudis grapple with fake street sweepers .

Rent a White Guy: Confessions of a fake businessman from Beijing (by Mitch Moxley in The Atlantic Monthly)

Can adding a phantom third story to their homes help families find a wife for their son?

Why do employers pay extra money to people who study a bunch of subjects in college that they don’t actually need you to know? Signaling

Mexicans buy fake cellphones to hand over in muggings
 
Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!)

How does a company selling used luxury goods spot fakes? (signalling and conspicuous consumption).

Why do stores sometimes pay people to be fake shoppers?

ESG Funds Draw SEC Scrutiny (companies that pursue strategies to address environmental, social or governance challenges)

Wall Street's growing foray into impact investing has regulators questioning investors’ ESG criteria

By Juliet Chung and Dave Michaels of The WSJ.

I have done a number of posts on "socially responsible corporations." Will they make more money by "doing good" instead of just trying to maximize profits? Those are listed at the end.

Adam Smith's "invisible hand" suggests that if you follow your own self interest, you will promote the interests of society. He even wrote:

"I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it."

Now excerpts from the article:

"Many investment firms have been touting new products as socially responsible. Now, regulators are scrutinizing some funds in an attempt to determine whether those claims are at odds with reality.

The Securities and Exchange Commission has sent examination letters to firms as record amounts of money flow into ESG funds. These funds broadly market themselves as trying to invest in companies that pursue strategies to address environmental, social or governance challenges, such as climate change and corporate diversity.

But there have been critics of the growth in these funds. Some argue investment funds should focus solely on returns, and some firms have faced questions about how strictly they adhere to ESG principles."

"It has focused on advisers’ criteria for determining an investment to be socially responsible and their methodology for applying those criteria and making investments.

One letter the SEC sent earlier this year to an investment manager with ESG offerings asked for a list of the stocks it had recommended to clients, its models for judging which companies are environmentally or socially responsible, and its best- and worst-performing ESG investments, according to a copy of the letter viewed by The Wall Street Journal."

"“Now the SEC is saying, ‘Wait, how do you know these are ESG products and that you don’t have a fossil fuel company with known, poor ESG performance in there?’ ”" (said Betty Moy Huber, co-head of law firm Davis Polk & Wardwell LLP’s environmental, social and corporate governance group)

"Examiners can issue deficiency letters based on their findings that tell companies they are out of step with rules. While the letters don’t trigger fines, examiners can refer their findings to SEC enforcement attorneys for a formal investigation.

The regulator in the letter asked whether the adviser followed well-known policies for socially responsible investing, including the United Nations’ Principles for Responsible Investment.

Investment firms including BlackRock Inc. and Fidelity Investments have signed onto the U.N. framework, according to the PRI, which administers the effort in partnership with the United Nations."

"The letter asked for proxy voting records and documents that related to how the adviser decided to vote on an ESG issue.

Investors’ focus on the environmental and social impact of companies has grown in recent years as issues like climate change and gender equality have become more mainstream. Mounting data suggest paying attention to such factors can boost returns, say investors.

Other topics frequently grouped under the ESG umbrella include companies’ use of natural resources and how they treat workers"

"Senior SEC officials have sometimes expressed concern that focusing too narrowly on corporate morality could undermine a money manager’s duty to act in the best interest of clients."

"Ms. Peirce has criticized ESG for having no enforceable or common meaning."

"many ESG factors rely on research that is far from settled,” she said"

"trying to figure out to what extent ESG might stand for ‘enabling stakeholder graft.’”

Flows into funds focused on socially responsible investing have soared from $2.83 billion in 2015 to $17.67 billion this year"

Related posts:

Is it a retailer’s job to keep shoppers from their vices? (or Adam Smith vs. CVS pharmacy)

Can You Find Virtue by Investing in Vice?

What if companies pledge to adhere to social and environmental accountability guidelines?

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) 

Data show that socially responsible investments can outperform the S&P 500 index
 
Is altruism a result of selfishness?

Do you have to be selfish to make more money?

Does collective self-deception mask selfish behavior?

Why Doing Good Makes It Easier to Be Bad

Businesses intentionally display their social and environmental performance in addition to their financial performance to stakeholders

Should you invest according to religious guidelines?

For a humorous view of this issue see

A Snickers a Day Keeps the Doctor Away: Why does CVS want to make my migraine cures hard to find? by Joseph C. Sternberg of the WSJ

Why do stores sometimes pay people to be fake shoppers?

When desperate storeowners want to convince passersby to stop in, they hire fun, happy people to pose as shoppers. They’re actually out-of-work actors, retirees, and me.

See Confessions of a Professional Fake Shopper by Sam Dunnington.

In economics, signaling theory says that we send out signals to convince people we have certain traits. For example, a college degree is a signal to employers that you might be smarter and more hard working than the average person.

But sometimes people try to fake the signal (at the bottom I have links to many other posts I have done on this. There is alot of faking out there).

Excerpts from the Dunnington article (the whole article is interesting):

"John spread his arms like a tent revivalist and addressed the 50 of us standing in the subterranean concourse of Philadelphia’s Jefferson Station. John, the hiring manager for the temp agency, was a tall man with a big belly, a nice smile, and 10 drops of sweat perpetually shining on his pate. “Good afternoon,” John said. John had zeal. “We are today creating an atmosphere of fun, and crowds, and happy shoppers.” John explained that street construction had decimated walk-up traffic to a department store down the street. A client had hired the temp agency to turn that around: People would peer through the scaffolding and jackhammer dust, see a Fun Crowd of Happy Shoppers inside the store, and thus be compelled to join in. John looked around at us in the dank gloaming of the train station and beamed."

 "“No one should think for a second that you are not a real shopper,” John said through his smile. That was why we were meeting in the train station. “Imagine you are on a break from work, maybe for lunch, just out to do a bit of shopping.” When he said this, he made a little rectangle with his hands, like a director coaching an ensemble cast. “We will not reimburse you for purchases,” John said, “but if you want to buy a hot dog? Sit down and eat it right outside the store? Knock yourself out.” Two of the waistcoats next to me nodded to one another, as if we’d been negotiating, and the opportunity to eat hot dogs on the clock sealed the deal. John warned us we would be supervised, even if we didn’t see them coming, and dispatched us to the store."

Related posts:

A fake job reference can be just a few clicks away.

Fake Economist Fools Portugal.

Slave Redemption in Sudan. (Fake slaves are sold to those who buy slaves and then give them their freedom)

Can A Product Work Just Because It's Expensive?. (fake medicine)

If It Pays To Have Friends, Can You Pay To Have Friends?. (you can hire fake boyfriends)

Study: Half of American Doctors Give Patients Placebos Without Telling Them.

Saudis grapple with fake street sweepers .

Rent a White Guy: Confessions of a fake businessman from Beijing (by Mitch Moxley in The Atlantic Monthly)

Can adding a phantom third story to their homes help families find a wife for their son?

Why do employers pay extra money to people who study a bunch of subjects in college that they don’t actually need you to know? Signaling

Mexicans buy fake cellphones to hand over in muggings
 
Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!)

How does a company selling used luxury goods spot fakes? (signalling and conspicuous consumption).