Rejecting the "cult of the market"

French President Nicholas Sarkozy is onto something (no, not "on something") here.

"A great revolution is waiting for us. For years, people said that finance was a formidable creator of wealth, only to discover one day that it accumulated so many risks that the world almost plunged into chaos," argues the French leader. "The crisis doesn't only make us free to imagine other models, another future, another world. It obliges us to do so."

Sarkozy's "revolution" would still use measures of economic growth and contraction in the analysis of a nation's success. But the definition would be expanded beyond traditional gross domestic product (GDP) models to include measures of well-being and what Sarkozy describes as "the politics of civilization." These include environmental sustainability, the quality of public services and the amount of time citizens of a country have to meet family responsibilities -- which the French leader values as "personal services provided within a family circle."

I've been thinking along these lines quite a bit during the past few months, and have been contemplating what I'm tentatively calling "social profit." The general idea is that the standard measure of a company's profitability - revenues minus expenses - is skewed almost entirely toward the interests of shareholders and executives, and ignores the impact of a company's actions on its workers, its suppliers and customers, its community and society as a whole.

Under standard accounting, if a corporation fires a thousand workers and realizes payroll and other cost savings which are greater than the lost revenue which those workers generated, then the corporation's accounting profit improves. Shareholders and executives benefit (from the resulting improvement in the corporation's stock price) while workers and their families suffer. If a corporation determines that belching mercury and other toxic matter from its smokestacks into the atmosphere can be done at a lower cost (from resulting legal actions and regulatory penalties) than responsibly installing state-of-the-art pollution control equipment, then its accounting profit improves, again benefiting shareholders and executives while harming everyone who lives nearby with the nasty enviromental fallout. If a corporation forces its suppliers into unreasonable cost concessions, it lowers its own input costs but only by lowering the revenue of the suppliers, which may result in the suppliers freezing or reducing wages to its workers, or even instituting layoffs. Again, the corporation's shareholders executives gain, while the suppliers and their workers lose. Or, as Sarkozy might note, if a corporation demands that its employees work such unreasonably long hours that their family lives are disrupted or even damaged, the corporation gains through greater output and efficiency while families are harmed.

Simply put, accounting profit is too narrowly focused. It evaluates a corporation as if it exists in a vacuum, as if its sole responsibility is to enrich its shareholders and executives while all other stakeholders - workers, suppliers, customers, the community - are of little or no consequence. Social profit, by contrast, would measure a corporation's actions on all of its stakeholders. If a company generates high accounting profits, that's perfectly fine, but only if it does so while not damaging the rest of society in the process. Though my concept of social profit applies specifically to corporations, it could easily be extended to national economies, where Sarkozy rightly suggests GDP is as unreasonably narrowly focused as an economic benchmark as accounting profit is for corporations.

I like where Sarkozy is going with this, and hope he finds a receptive audience at the G-20 summit.