What does it mean when corporations are as economically powerful as governments?

In 2016, a non-governmental organization by the name of Global Justice Now, based out of the UK, produced a report listing the largest governments and corporations by revenue. Their report stated that the “10 biggest corporations make more money than most countries in the world combined and that 69 of top 100 economic entities are corporations not countries.” The complete listing of governments and corporations is here.

An article in the Journal of Economic Perspectives by Luigi Zingales of the University of Chicago provides the following commentary about corporations that rival the size of governments:

In some cases, these large corporations had private security forces that rivaled the best secret services, public relations offices that dwarfed a US presidential campaign headquarters, more lawyers than the US Justice Department, and enough money to capture (through campaign donations, lobbying, and even explicit bribes) a majority of the elected representatives. The only powers these large corporations missed were the power to wage war and the legal power of detaining people, although their political influence was sufficiently large that many would argue that, at least in certain settings, large corporations can exercise those powers by proxy.

The 2015 list produced by Global Justice Now consisted of 26 governments and 24 corporations in the top 50. Walmart was number 10, ahead of Spain, Australia and the Netherlands. I’ve updated the list for 2016 (see below). Walmart is now number 9 on the list, and there are 26 corporations in the top 50 in terms of revenue.

What does it mean when corporations are as large and economically powerful as governments? Is this a good thing? Governments can coerce people, while companies grow by persuading people to buy their products, unless businesses use their economic power and resulting political influence to suppress competition—a common practice in both the developed and developing world. But are governments a more effective and appropriate steward over the vast wealth they control than corporations? Politicians and government bureaucrats are not likely more altruistic or caring of people than business executives and managers. (This reminds me of an excellent interchange between the late Milton Friedman, a Nobel Prize winning economist and academic at the University of Chicago, and talk show host Phil Donahue about the relative greed of people in business and government, here). Perhaps the more important question is whether appropriate checks and balances remain between business and government when businesses rival the size and economic power of governments. I don’t know. I’m just asking questions.

Here is the ranking of governments and corporations by revenue in 2016. Data on government revenue (not GDP) from the CIA World Factbook for 2016 and on business revenue from the Fortune Global 500 list.

Rank Type Name Revenue, $billion
1 Government United States 3,363.0
2 Government China 2,300.0
3 Government Japan 1,696.0
4 Government Germany 1,523.0
5 Government France 1,308.0
6 Government United Kingdom 996.3
7 Government Italy 842.5
8 Government Canada 594.7
9 Corporation Walmart (US) 485.9
10 Government Spain 461.3
11 Government Australia 420.5
12 Government Netherlands 340.8
13 Corporation State Grid (China) 315.2
14 Government Brazil 311.9
15 Government South Korea 297.3
16 Government India 273.3
17 Corporation Sinopec Group (China) 267.5
18 Corporation China National Petroleum (China) 262.6
19 Corporation Toyota (Japan) 254.7
20 Government Sweden 248.3
21 Corporation Volkswagen Group (Germany) 240.3
22 Corporation Royal Dutch Shell (Netherlands) 240.0
23 Government Belgium 232.3
24 Government Mexico 224.3
25 Corporation Berkshire Hathaway (US) 223.6
26 Government Switzerland 215.9
27 Corporation Apple (US) 215.6
28 Corporation Exxon Mobil (US) 205.0
29 Government Norway 199.8
30 Corporation McKesson (US) 198.5
31 Government Austria 187.3
32 Corporation BP (UK) 186.6
33 Government Russia 186.5
34 Corporation United Health (US) 184.8
35 Corporation CVS Health (US) 177.5
36 Corporation Samsung Electronics (South Korea) 174.0
37 Corporation Glencore (Switzerland) 173.9
38 Corporation Daimler (Germany) 169.5
39 Corporation General Motors (US) 166.4
40 Corporation AT&T (US) 163.8
41 Government Denmark 156.9
42 Corporation Exor (Italy) 154.9
43 Corporation Ford Motor (US) 151.8
44 Government Saudi Arabia 149.7
45 Corporation Industrial & Commercial Bank of China (China) 147.7
46 Government Turkey 146.4
47 Corporation AXA (France) 143.7
48 Corporation Amazon (US) 136.0
49 Corporation Foxconn (Taiwan) 135.1
50 Corporation China Construction Bank (China) 135.0
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The sciences need social sciences

The US National Academies of Sciences, Engineering and Medicine recently completed a report to determine if funding by the National Science Foundation (NSF) for research that included a social, behavioral and economic (SBE) component was worth the investment. In other words, do we need the social sciences to do good science research?

The National Academies of Sciences held a public forum and live webcast to announce their findings and promote their report, all of which can be found online (here).

The answer is an unqualified “yes.” We need the social sciences to do good science research, especially research funded by the NSF. As noted in the report, “the committee concludes that the social, behavioral, and economic sciences advance the missions of NSF and other federal agencies and serve well many of the most important needs of society. SBE research also can be applied to business and industry and has enhanced the U.S. economy.”

The committee made three main conclusions.

First: “Overall, the social, behavioral, and economic sciences produce a better understanding of the human aspects of the natural world, contributing knowledge, methods, and tools that further the mission of the National Science Foundation to advance health, prosperity and welfare, national defense, and progress in science.”

Second: “The understanding, tools, and methods provided by the social, behavioral, and economic sciences—including research supported by the National Science Foundation—provide an essential foundation that helps other agencies achieve their missions.”

Third: “The social, behavioral, and economic sciences have provided advances in understanding and tools and methods that have been applicable to business and industry and that enhanced the U.S. economy.”

That’s good news for someone like me working in the social sciences. The challenge, of course, is getting other scientists to accept these findings.

The reality is that every major challenge we face on this planet has a human component to it and therefore requires a social science perspective. Global climate change is a case in point. Do we really think we will make any progress if scientists studying climate change are not consulting social scientists? Science can get us only so far if its pursuit of answers to problems either caused by or impacting humans does not also include insights from the social, behavioral or economic sciences. “Having a fundamental understanding of how people and societies behave, why they respond the way they do, what they find important, what they deeply believe or value, and what and how they think about others is critical in today’s shrinking global world,” as stated in the report.

I also like this statement: “Like all sciences, the SBE sciences bring a rigorous, methodical approach to pursuing knowledge—collecting data, formulating and testing hypotheses, analyzing evidence—that sheds light on the underlying nature of problems and can help point the way toward remedies.”

So, my colleagues in the sciences, do yourself a favor. Next time you write a grant proposal for research on an important scientific problem, invite a social scientist to be part of your team.

 

Doing good makes you want to do more good

Can you learn to be kinder, more charitable and helpful? If so, then what can you do to increase such virtuous feelings and tendencies? A recent study published by economists (no kidding!) showed that there is a correlation between altruistic acts and increased preferences for doing altruistic acts. The study, “Altruistic Capital,” was published in the American Economic Review.

Most economists assume that preferences are fixed. That is, my preference for being kind or for wearing blue colored shirts or for eating chocolate will not change. In contrast, the authors assume that preferences for altruism can change. They liken altruism to a type of capital. Just as physical capital (machinery, buildings, etc) or human capital (learning, skills, etc) can be enhanced through investments in machinery or learning, altruistic capital can be enhanced through investments. What investments increase altruistic capital? Doing altruistic acts. In other words, doing good increases the desire for and perceived benefits from doing good.

The authors conducted a study of persons working in the banking industry and showed that “altruistic capital grows proportionally to the effort devoted to altruistic tasks,” consistent with Aristotle’s assertion that “virtue is an asset that grows through righteous acts” (quoting the authors). Specifically, the authors found that “employee’s perceived returns to altruistic acts … are [positively] associated with more prosocial behavior at work.” In other words, getting people to do good can create a “virtuous circle”, where doing good increases the perceived personal benefits of doing good, which in turn increases the desire for and tendency to engage in good acts, such as cooperation with others.

We need more good in the world. So do some good, and bring someone with you when you do.

Economic principles and healthcare reform

On Thursday, May 4, 2017, the US House of Representatives passed a bill repealing major aspects of President Obama’s healthcare law (Obamacare), as reported (here) in the Wall Street Journal and other news outlets. The bill goes to the Senate for a vote. The bill ends mandates for people to carry health insurance and for companies to offer specific types of health coverage, among other things. Another Wall Street Journal article (here) states that backers of the bill “are betting that these changes will engender competition, draw healthier people into the insurance pool and cut premium prices overall.” Interesting, this is the same justification that backers of Obamacare gave when it was passed in 2010.

I know a thing or two about economics. There is nothing in economic theory or experience to suggest that anything in the old or new laws will necessarily increase competition or lower costs. Competition exists when there are many buyers and sellers in the market, where it is relatively easy for buyers and sellers to enter or exit the market, and where “all” sellers sell products or services that are similar enough so that it is relatively easy for buyers to comparison-shop for the best product at the best price. In this system, sellers have incentives to lower costs and prices and to increase quality in order to attract customers to their products. Companies that do this well are rewarded with profits; companies that don’t do this well go bankrupt. The incentive to lower costs and prices and to increase quality diminishes when it is difficult for buyers to compare products and services — that is, when it is costly for consumers to shop around, and when companies know it is costly for consumers to shop around — and when it is difficult for potential sellers to enter markets — that is, when there are barriers to market entry. The health care system is rife with problems of comparison shopping and market barriers. That is, the health care system is not a great model of markets and competition, and it won’t be anytime soon.

The root cause of the problem with contemporary health care is the thing Americans like most about it. We pay a monthly fee for health insurance. Then when we get sick or need health care services, we might pay a nominal fee (e.g., $20) in return for health services, while most of the cost of care is paid by insurance companies whose revenue comes from the thousands of patrons paying the monthly fee. Once we have health insurance, we have no incentive to shop for the best healthcare product at the best price, but rather the best healthcare product at any price, because the primary cost of service is paid by the insurance company. The insurance company does not have a strong incentive to induce health care providers to lower costs because the company can pass costs on to patrons.

Even when individuals want to know the cost of a particular medical procedure or service, it is nearly impossible for them to get a straight answer. “How much will the physical therapy cost?” I once asked a clerk at the reception desk? “I don’t know. It depends on the contract your insurance company has with us,” was the reply. “What is your normal rate, and what discount does my insurance company offer on that rate?” I asked. “I don’t know what our main charge is. Your discount will depend on your co-pay and co-insurance.” The conversation never got any better. Only after I got the bill did I learn what the cost of the service was.

Transparency in pricing for medical care will help here. Giving individuals an incentive to price-comparison shop will help, too. Health savings accounts can do this. Recently I have been scrutinizing our health insurance bills because we have a health savings account. It’s time consuming because there are so many individual charges, most of which I do no understand. In one instance we received a bill for a doctor’s visit on a day we could prove no one in our family was at the clinic. If I was not paying out of a health savings account I would not have thought twice about questioning the bill. The insurance company would have paid it. But I did question the charge and was able to get it removed.

I understand the health care system is very complex. But economic principles are not.

Paying more for airline passengers to give up seats

In a previous blog post about the mishandling by United Airlines of a passenger that had already boarded the plane, I suggested the following thought experiment: “Suppose United offered $10,000 to each person who gave up their seat. I suspect most passengers sitting on the plane would have volunteered.”

The next day, AP News reports that “Delta OKs offers of up to $9,950 to flyers who give up seats.”

This must be just a coincidence.

A United case for free markets and clearly defined rights

A lot has been written and said about United Airlines and their mishandling of a problem of overbooking. In case anyone missed the story, a United Airlines flight was overbooked. The airline also needed to fly crew members to the plane’s destination. The airline asked for volunteers to give up seats and even offered some money as an inducement, but that wasn’t enough. So the airline randomly selected passengers to remove involuntarily. Three agreed to leave the plane but one refused. The airline called airport police, who forcibly removed the passenger. Photos and videos of the passenger being dragged out of the plane caused worldwide criticism of the incident and airline. There are numerous memes floating on the internet now inspired by the event.

I am not going to criticize the airline or defend it. Others are doing that. However, I think the story provides an ideal case for illustrating two important economic principles: the superiority of free markets and the importance of clearly defined property rights.

First, economic systems determine how scarce resources are allocated. There are different ways of doing this. One involves free markets, where the exchange of money determines how resources are reallocated. Another involves various forms of command and control, where government or other entities dictate who does what and what goes where.

The airline had (some may say created) a problem of scarcity. There were more people who needed seats than there were seats available. A free market solution to the problem is simple: offer enough money to induce people to voluntarily give up their seat. Here is a thought experiment. Suppose United offered $10,000 to each person who gave up their seat. I suspect most passengers sitting on the plane would have volunteered. The airline said it offered compensation (the WSJ article linked above states that the airline offered up to $1,000). Clearly, the airline did not offer enough. In a free market environment, if the buyer values the resource more than the holder of the resource does, then an efficient exchange can occur if the buyer offers more than the seller’s value. If it was worth more than $1,000 a seat to United to get a crew member on the plane, then the airline should have offered more. If it was not worth more than $1,000, then the airline should not have pursued the matter further. That is the simplicity of the free market.

When there is command and control, such as when the government decides who flies and who doesn’t, then the government uses the power of the state to enforce its preferences, which we saw clearly here when the airline utilized police to drag an unwilling passenger off the plane. If the airline had utilized market principles, then there would have been no incident worth reporting. Stated differently, when markets function well (and when they are allowed to function well), then there is almost never a story to report. I find that interesting.

Second, when there is confusion about property rights, then there will be conflicts. People who buy plane tickets, either with a seat assignment or who are sitting in a seat, believe they have rights to the seat on the plane. In contrast, airlines not only can overbook but also can involuntarily deny boarding of passengers and even tell passengers they have to get off the plane, suggesting the airline believes it has rights to the seat on the plane. (Anyone interested can read United’s Contract of Carriage document here, especially rule 25, which describes what the airline’s obligations and rights are with respect to “denied boarding compensation”).

Regardless of whether passengers or airlines actually own rights, it is the beliefs they hold that matter most here. If passengers believe they have rights to the seat and if airlines believe they control those rights, then there will be a conflict when there is a problem of overbooking (that is, economic scarcity). Markets won’t work well here because there is no basis for determining who should pay and how much, since there is uncertainty about who initially owns the right to be transferred. If the airline believes it has the right, then it doesn’t need to offer any compensation. It can just drag unwilling passengers off the plane and place other passengers in the vacated seats.

The Nobel winning economist Ronald Coase described this problem and pointed to a solution: make clear who has rights to the seat. According to the Coase Theorem, bargaining is efficient when property rights are clearly defined and when bargaining is reasonably feasible. Airlines have demonstrated that bargaining for overbooked seats can work if they just offer enough compensation, suggesting they effectively acknowledge the beliefs of passengers that passengers hold rights to seats they have paid for, regardless of what their overbooking rules say.

The lesson here is therefore simple. If airlines are going to overbook their flights, then they should be prepared to pay passengers enough to induce volunteers to vacate their seats on the plane.

Corruption, 2016

Transparency International is a non-governmental organization, headquartered in Berlin, with a mission to document and root out public corruption worldwide. The organization defines corruption as “the abuse of entrusted power for private gain. It can be classified as grand, petty and political, depending on the amounts of money lost and the sector where it occurs.”

For more than two decades Transparency International has produced an annual Corruption Perceptions Index. The most recent edition of the index (here) ranks 176 countries from the least corrupt to the most corrupt. The index ranges from a scale of 0 to 100, “where a 0 equals the highest level of perceived corruption and 100 equals the lowest level of perceived corruption.” The Index  “aggregates data from a number of different sources that provide perceptions of business people and country experts of the level of corruption in the public sector.”

CPI2016_Map_web

The least corrupt countries are Denmark, New Zealand, Finland and Sweden. They always stay at the top of the list. The most corrupt countries are Syria, North Korea, South Sudan and Somalia. Denmark’s score is 90 while Somalia’s is 10. The United States is number 18 on the list, with a score of 74, below Canada, Germany and the UK. That’s alarming. Not that the US is below other countries but that the US is more than halfway to the midpoint of the CPI scale (Slovakia and Croatia have scores of 51 and 49 respectively).

Corruption matters because it erodes public trust in government and business, and trust is very important for promoting economic growth and well-being. For example, note the following figure I produced showing the correlation between corruption and per capita gross domestic product. Of course, correlation does not mean causation. And we can debate whether corruption produces low growth or whether low growth invites corruption, but the correlation is stark. Highly corrupt countries are very poor. Moreover, for every 10 point improvement in a country’s perceived corruption, GDP per capita increases by more than $7,000 (that’s what the equation in the figure shows).

CPI-GDP2016

Transparency International also draws a connection between corruption and social inequality. As noted on their website (here): “it’s timely to look at the links between populism, socio-economic malaise and the anti-corruption agenda. Indeed, [US President] Trump and many other populist leaders regularly make a connection between a ‘corrupt elite’  interested only in enriching themselves and their (rich) supporters and the marginalisation of ‘working people’. Is there evidence to back this up? Yes. Corruption and social inequality are indeed closely related and provide a source for popular discontent. Yet, the track record of populist leaders in tackling this problem is dismal; they use the corruption-inequality message to drum up support but have no intention of tackling the problem seriously.”

In other words, we preach virtues but don’t practice them ourselves.

Which reminds me. After discussing these ideas in my applied ethics class I suggested that students can obtain an automatic A in the class if they leave me a $100 bill with their name written on it in pencil. Some students laughed while others wanted to negotiate the price. Apparently they didn’t learn anything.