This article is the fourth in a series by Nathan McLellan on a Christian vision for economics. Nathan is completing a Ph.D. in Christian ethics at Southern Methodist University. He holds a master’s degree in economics from Massey University and master’s degree in theology from Regent College. He was formerly the Head of Research at the Marketplace Institute Regent College and an economist at the New Zealand Treasury. He is the author of research on economic growth, productivity, and business cycles. He is also a Research Fellow at the New Zealand Maxim Institute.
In modern societies a range of institutions, including the family, churches, other civil organizations, and the state, is required for humans to live in obedience to the cultural mandate and to find their fulfillment in relationships with God, other humans, and the rest of creation. In modern societies, however, businesses have a particular role to play in cultivating the gift of creation in order to make material provision for humanity. This task must not be separated from a Christian understanding of the human person and society. This article takes the relational understanding of economic life discussed in What is a Christian vision for economic life? and considers the implications for business. As a way of structuring this discussion, this article answers the three basic economic questions—what goods should be produced, how should these goods be produced, and for whom should these goods be produced—from the perspective of business. It also adds a fourth question: where should goods be produced? The level of prescription and detail in addressing these questions is necessarily greater than when discussing an entire economic system, however, care has been taken not to be overly prescriptive, recognizing that the embodiment of the features discussed below will require adaptation depending on the context. Throughout this article, pertinent comparisons are made with capitalism’s understanding of business in order to draw out the differences with a Christian vision of business.
Given the relational orientation of economic life in the Christian scriptures, what goods and services should be produced? First, those goods and services that provide for basic human needs, such as food, clothing and shelter. Without these basic ‘goods’, which are necessary for physical survival, persons have but a remote chance of fully participating in a modern developed society. Second, those goods and services that enable persons to participate fully in a modern developed society. This includes a range of goods and services, from transportation to education and health services. Third, those goods and services that contribute more generally to human flourishing (e.g., artistic and cultural goods).
The particular decision of what goods and services to produce, for one who has a vocation in business, will depend on a variety of additional factors, including the business person’s temperament, aptitude and skills, the needs of a particular community, the proximity and availability of suppliers, workers, transport and communication networks. In contrast, however, to capitalism’s understanding of business, profit should not be the sole motivation and determinant of what to produce. In this direction, John Paul II helpfully writes:
The purpose of a business firm is not simply to make a profit, but is to be found in its very existence as a community of persons who in various ways are endeavouring to satisfy their basic needs, and who form a particular group at the service of the whole of society. Profit is a regulator of the life of business, but it is not the only one; other human and moral factors must also be considered which, in the long term, are at least equally important for the life of a business.
Note that John Paul II is not saying profit is not important nor a legitimate pursuit of business. In the above quote, he notes that “profit is a regulator of business” and in the same section of Centesimus annus that “profit [is] an indication that a business is functioning well… [for] when a firm makes a profit, this means that productive factors have been properly employed and corresponding human needs have been duly satisfied.”
A firm must generate a profit over the long term in order to remain in business; therefore, it is legitimate—indeed necessary—for a business to pursue profit. However, making a profit is not the reason for a business’s existence or its primary objective: the pursuit of profit must remain subservient to the relational orientation of the Christian scriptures. In practical terms, this will mean that, at times, businesses will have to forgo the opportunity to make additional money in order to operate in a way that is in accordance with a Christian anthropology and understanding of society.
In addition to deciding what to produce, a business also needs to decide how it will go about producing goods and services. This pertains to matters such as, labor, finance, and the supply of materials. Recall that for businesses operating within capitalism’s paradigm, the pursuit of profit as the sole objective means that firms will seek to produce goods and services in the most efficient way possible (i.e., for a target level of output, to produce this output at the lowest possible cost). Businesses should arrange their relationships with others in order to minimize unit labor costs, the cost of capital, and unit material costs.
Some will charge that this paradigm leads to exploitation, especially of workers. Undoubtedly, exploitation has occurred, but proponents of capitalism will point out that capitalism has raised the material living standards of numerous persons. While all have not shared equally in the benefits of economic growth, it is hard to deny that capitalism has generated large increases in material living standards for many, making the case for a one-to-one relationship between capitalism and exploitation difficult to sustain. Nonetheless, owing to the stress on means-ends (practical rationality) in the single-minded pursuit of profit, capitalism tends towards the instrumentalization of labor where “managers treat employees well [i.e., provide good remuneration, benefits, conditions, a hospitable work environment, etc.] not because they are created in the image of God, but because it will maximize shareholder wealth.”
In contrast, if John Paul II’s contention is to be taken seriously, that the “purpose of a business firm is not simply to make a profit, but is to be found in its very existence as a community of persons who in various ways are endeavouring to satisfy their basic needs,” what does this mean for how a business relates to its workers? First, it means that a business should compensate workers in a way that is commensurate with their skill and experience; and which provides, at minimum, a level of remuneration that enables workers to meet their basic material needs and to participate in modern society. There are a number of complex issues relating to this point, including the equity of pay differential within a business (for example, what is an acceptable ratio of the highest to the lowest income within a business?), the dynamics of lifetime earnings, and the relationship between a minimum wage and the level of (un)employment. At minimum, however, it means that workers should not be viewed as expendable resources. Second, if work is a central facet of the human vocation, as suggested by a Christian anthropology, then this work must be meaningful for the persons concerned. In the contemporary situation, where tasks are increasingly ‘broken-down’ in order to reap productivity from the division of labor, greater consideration needs to be given to work design and particularly whether there comes a point at which the further division and allocation of subtasks actually obliterates the meaning of work. Finally, if businesses are the principle vehicle for creating wealth—and owning productive forms of wealth is an important means of helping persons participate fully in a modern society—then businesses should consider ways in which they can help workers to acquire productive wealth.
The issue of encouraging workers to accumulate productive wealth/assets dovetails with the issue of how a business should be financed. Financial theory suggests, given certain assumptions, a firm should be indifferent about whether it finances itself through equity or debt. In reality, policy in many countries actually encourages the use of debt (e.g., the ability to expense interest payments against revenue before tax). From a relational perspective, however, a strong case can be made that preference should be given to equity financing. Compared to debt, equity financing tends to foster relationships among persons: those who have an equity stake in a business are incentivized to cultivate a more active interest in a business, whereas those holding debt are often only concerned that interest payments are made and the principal eventually repaid.
Some forms of equity are more likely to encourage relational connections than others. For example, in encouraging relational connections, owning shares in a publicly listed company may differ little from holding bonds in the same company. In contrast, a person who has a large holding of equity in a local business is likely to be more relationally connected with this business. This is likely to be more so the case for employees who have an equity stake in the business where they work. In this case, not only are employees’ relational connections with a business strengthened and their incentives concerning the success of a business reinforced, but employees also hold a productive asset.
The final of the three basic economic questions is: for whom should businesses produce goods and services? Before addressing this question, an additional question needs to be addressed—where should goods and services be produced—which has implications for the ‘for whom’ question. Capitalism pays little attention to the role of ‘place’ in economic life, and neoclassical economics has reinforced this tendency. In this connection Shuman rightly notes:
For traditional economists and their critics, place was beside the point. The basic unit of analysis for microeconomics was the firm, and for macroeconomics the nation. Community, a level of organization somewhere in between, didn’t really fit.
‘Place’, then, is viewed neutrally: a blank canvas, or a shuffleboard upon which pieces can move around with ease. Place is important in as much as labor and capital, encouraged by the ideology of capitalism, move to those ‘places’ where it can achieve the highest rate of return (i.e., earning the highest salary/wage or profit). In contrast, the Christian scriptures recognize the importance of place: in the creation narrative, humans are placed within the cosmos; Israel is given a specific land as a gracious gift from YWHW; and Jesus comes to a particular people, in a particular time, in a particular place.
The importance of place for the human person is captured well by Shuman when he writes:
Our deepest yearnings are linked to a sense of place. We care especially about our neighbors, our community institutions, and our ecological heritage. Even post-modern nomads who crisscross the globe for pleasure or profit carry loyalty to somewhere. Why else do you get excited when you’re driving down a highway, a thousand miles from home, and see a car with your state’s license plate or with your university’s name prominently displayed on the back windshield? Why, when you’re in a foreign airport and discover that the person standing next to you grew up in your home-town, is there an odd sense of connection, familiarity, and comfort with someone who is otherwise a total stranger?
Given the importance of place for the human person, a business should take seriously the question of where to produce goods and services, but, unlike capitalism, the sole determinant should not be where a business is likely to earn the highest profit, but rather where relational connectedness is best fostered. The key word here is proximity. Because relationships are fostered best when people are physically proximate, a business needs to weigh its location based on proximity to customers, employees, suppliers, investors and other stakeholders. In other words, business should have a local focus.
A focus on the local provides a partial answer to the question: for whom should goods and services be produced? Goods and services should be supplied to local customers, but not exclusively so, as there should be a place for interregional and international trade. There is, however, a further dimension to this question. Capitalism contends that goods and services should be supplied to those consumers who can purchase them. Furthermore, in the situation where a person does not have sufficient income to purchase the goods and services necessary for survival, say because of un(der)employment, the state is viewed as having a responsibility to provide a sufficient level of income so that these goods can be purchased. Without wanting to minimize this function of the state, do businesses have a more direct role to play in helping persons who are in need? Again, if one takes seriously the relational orientation of the Christian scriptures, it seems there is a role for business in providing goods and services at reduced prices for those who are in need.
Is a particular form of business structure more conducive to embodying some of the relational principles discussed above? All business structures can embody some of the relational principles discussed above. For example, even a multinational corporation can embody a local focus in the places where its various subsidiaries are located and can see itself as “a community of persons”, where workers are more than “cogs in a machine” engineered to generate a profit. Nevertheless, some of the relational principles discussed above will be easier to implement in some business structures compared with others. For example, the cooperative business structure may be more conducive to employee participation and ownership and retaining a local focus through the use of charters that specify residency requirements for worker- or consumer-owners than a limited liability company. For this reason, someone seeking to run a business with the relational principles discussed above in mind will need to give serious consideration to the type of business structure.
- What would be excluded are positional goods--those goods that are used to signal a person's 'superior' status over another person. A pure positional good has the characteristic that consumption of this good by an individual person or group of persons reduces the consumption of another person or group of persons by the corresponding level. See Massimiliano Vatiero, Positional Goods: A Diagrammatic Exposition (Department of Economics, University of Siena, 2009).
- Centesimus annus, 35 David J O'Brien and Thomas A Shannon, eds., Catholic Social Thought: The Documentary Heritage (Maryknoll, N.Y.: Orbis Books, 1992).
- Paul Bowles, Capitalism (Longman, 2007), 55-88.
- S.A. Cortright and Michael J. Naughton, eds., Rethinking the Purpose Of Business: Interdisciplinary Essays from the Catholic Social Tradition, 1st ed. (University of Notre Dame Press, 2002), 13. In a similar vain, Sasso writes concerning 'corporate responsibility' that "even though corporate social responsibility efforts are a significant step forward, it still remains the case that the prevailing logic of the marketplace remains largely untouched: attempts to exercise a wider responsibility are still subordinated to the generation of some type of result--typically of course, money revenue. Of course, not all of this is misleading--for results matter, after all--but it runs the risk of subordinating relationality to pragmatism." Eduardo Sasso, "Shared-Bread Companies: Reclaiming Community and Creativity as the Backbones of Business Life," Faith in Business Quarterly 14, no. 3 (2011): 3.
- Centesimus annus, 35, O'Brien and Shannon, Catholic Social Thought. Emphasis added.
- But neither are the two equivalent. For example, a shareholder is allowed to attend the annual general meeting, elect company directors, and vote on some important issues.
- This helps to mitigate any so-called "principle-agent problem" because those who own the company are also the managers and workers.
- Michael Shuman, Going Local: Creating Self-Reliant Communities in a Global Age , 1st ed. (Routledge, 2000), 38. Emphasis added.
- Ibid., 31.
- Bowles, Paul. Capitalism . Longman, 2007.
- Cortright, S.A. and Michael J. Naughton, eds. Rethinking the Purpose Of Business: Interdisciplinary Essays from the Catholic Social Tradition . 1st ed. University of Notre Dame Press, 2002.
- O'Brien, David J, and Thomas A Shannon, eds. Catholic Social Thought: The Documentary Heritage . Maryknoll, N.Y.: Orbis Books, 1992.
- Sasso, Eduardo. "Shared-Bread Companies: Reclaiming Community and Creativity as the Backbones of Business Life." Faith in Business Quarterly 14, no.3 (2011): 1-6.
- Shuman, Michael. Going Local: Creating Self-Reliant Communities in a Global Age . 1st ed. Routledge, 2000.
- Vatiero, Massimiliano. Positional Goods: A Diagrammatic Exposition Department of Economics, University of Siena, 2009.
Source: Marketplace Institute