Natural selection in the business world?

Note: This is the third of several blog posts reviewing Tyler Cowen’s book “Big Business: A Love Letter to an American Anti-Hero.”

Let’s proceed into Chapter 2 of Tyler Cowen’s book on “Big Business.” Chapter 2 poses an intriguing question: Are business firms more fraudulent than the rest of us? Strategically speaking, I like Professor Cowen’s bold decision to begin his book (after his opening roadmap chapter) with the problem of corporate corruption and business fraud, especially given all the media attention to big-time business scandals in recent years, like Volkswagen (doctored emissions controls), Theranos (bogus medical devices), and Wells Fargo (phantom accounts).

In brief, Professor Cowen invites us to take a pragmatic view of the problem–not a Puritanical one. I will summarize his argument this way: Given human nature, some amount of fraud is unavoidable, so the question is not whether business fraud is bad. Of course it is. The question is, how pervasive is business fraud? And to answer that question, we must ask: compared to what? So, Cowen concedes up front that business firms often engage in rampant fraud. But instead of trying to explain away such corporate malfeasance, Cowen literally “turns the tables” and points an accusatory finger at the rest of us! His novel defense of business fraud can thus be summed up crudely but accurately in three words: Get over it! Yes, business firms often engage in unscrupulous behavior, but so do most, if not all, people to various degrees. We lie on our resumes and on dating sites; we cheat on our taxes; we download stuff illegally; etc., etc.

But wait; there’s more! Professor Cowen’s has something else up his proverbial sleeve, and this “something else” is even stronger than his “compared to what?” argument. Specifically, the rise of the Internet and of social media platforms has made it much easier than ever before for individual consumers and watchdog groups to call out corporations that engage in fraudulent activities. Furthermore, Cowen points out that the CEOs of business firms care about their companies’ reputations (and about their firms’ potential legal liability, I would add). As a result, these two powerful forces–the Internet and reputation costs–operate as a kind of “corporate natural selection” (my term, not Cowen’s), so to speak. Business firms thus have a strong incentive to minimize their misconduct and level of dishonesty because only the most honest business firms can thrive in such a treacherous environment!

For my part, I find Professor Cowen’s “corporate natural selection” argument far more persuasive than his “compared to what?” argument. After all, who gives a hoot if some 25 year-old lies on a dating site or illegally downloads the latest superhero movie. Cowen is comparing individual apples (e.g. the social cost of people lying on dating sites) to corporate oranges (e.g. the social cost of Theranos’s fraudulent medical devices). The next two chapters of Cowen’s book (Chs. 3 & 4) will address the issue of CEO pay (which has risen astronomically) and worker pay (which has remained stagnant), so we will proceed to Chapters 3 and 4 in our next post …

What Is Natural Selection? — Definition & Importance - Expii

About F. E. Guerra-Pujol

When I’m not blogging, I am a business law professor at the University of Central Florida.
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