Part 7: Implementation, Strategy, and Stakeholder Duties
92 What does classical economics tell us about the challenges in implementing CSR / ESG issues?
Classical economics provides a number of explanations for why integrating ethical and stakeholder principles into company operations are challenging.
There are many reasons why implementing the principles from this text may be difficult in practice. Economic theory is helpful to articulate some of these reasons, and then may help suggest responses.
- (1) Rationality: Companies seeking profit will produce what people want, not what consumer say they want. Consumers often face significant budget constraints in their own lives, and often practicing CSR / ESG principles may result in higher direct costs to those consumers.
- (2) Externalities: We have previously covered externalities, which are costs not internalized by firms. Unless regulation requires external costs to be internalized, companies may not include these costs in their analyses.
- (3) Barriers to entry: If firms cannot enter markets because of scale / regulation / market dominance of existing players, then they may have little incentive to respond to stakeholder concerns. For a classic example, a monopolist need not be responsive to consumer welfare because of the ability to set non-competitive market prices.
- (4) Information asymmetries: Information asymmetries occur when firms have more information than consumers. As a result, consumers lack the information to make informed decisions about a company’s practices.
Responses to these issues include that people, and firms, are often not fully rational. For instance, considering only short-term versus long-term effects of an action may not be a fully rational response. The next Question will consider this aspect.
Exercises
- Compare what it takes to enter the market of vehicle manufacturing versus app development. Which market is more likely to see a new entrant if existing firms are not responsive to stakeholders?
