A Philosopher's Blog

Toyota & The Invisible Hand

Posted in Business, Ethics by Michael LaBossiere on February 24, 2010
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In an interesting coincidence I happened to be teaching about ethical egoism about the time that the Toyota problems were hitting a peak. Ethical egoism is, crudely put, the moral theory that people ought to maximize their own self interest. So, I should maximize my self interest and so should you. Famous theorists in this camp include Thomas Hobbes, Adam Smith, and Ayn Rand.

Interestingly, Hobbes argued that out of self-interest we should cooperate and obey the laws of the state. This was, of course, to avoid the horrors of the state of nature (a “war of all against all”). As such, our self interest is supposed to motivate us to keep our self-interest in check.

Adam Smith, the theorist who gave us the “invisible hand“, argued that market forces would sort things out between individuals who were acting on the basis of self-interest. What is often overlooked in Smith’s theory is his view that the end is to create social utility via the free market. Of course, the motivation to act well is based in self-interest.

Altruistic views, which are typically presented as the opposing views to the various forms of ethical egoism, enjoin us to take into account the interests of others and not just our own. In the case of altruism, it is often claimed that people should act well because it is the right thing to do and not merely a matter of self interest.

One obvious concern about taking the self-interest approach is that a person will (and should) act against the interest of others when doing so is in his interest. Put rather crudely, if a person can gain more by doing what might seem to be wrong, then that is what the person should do. Naturally, this takes profit to be the measure of right.

In the case of Toyota, there is evidence that the company might have taken deliberate action to avoid having to recall vehicles so as to keep their profits. While this certainly seems to have put people at risk (and perhaps even killed and wounded some people), it would be a prudent act on the part of the folks at Toyota, provided that their gain exceeds their losses. In fact, this seems to be a rather standard practice in numerous fields. For example, a drug might turn out to cause heart attacks, but this might simply be covered up (perhaps with the collusion of regulatory folks) so as to keep profits high.  Obviously, individuals use the same approach in their own lives, doing less than upstanding things so as to gain or to avoid a loss.

Getting back to Smith’s invisible hand, what is supposed to happen is that the misdeeds of businesses are supposed to create a loss for them. As such, they have an incentive to act well so as to maintain their profits. Toyota seems to have gambled that by avoiding recalls they could keep substantial profits. Currently, of course, Toyota is reaping what it has sown and is taking a massive PR hit. Of course, Toyota might still come out ahead. If so, delaying the recalls might turn out to have been a good decision.

One factor that allowed Toyota to do what it did (and perhaps helped motivate the action) is the fact that the folks responsible for making such misdeeds costly seems to have been under the sway of Toyota. This seems to be a general problem-all too often the regulatory agencies are very cozy with the companies they are supposed to regulate. Then again, if the goal in life is to maximize self interest, then the companies and the regulatory folks are acting as they should-they are all trying to get the biggest slice of money pie that they can. Naturally, the public is suffering because of this, but that is because the public seems unable to ensure that it is in the best interest of the regulators t0 make sure that it is in the best interest of companies to not act against the interests of the public.

When company decisions makers are acting prudentially in regards to profits, they elect to take the actions they believe will maximize profits. Naturally, the actions that maximize profits might be regarded as rather immoral (such as marketing a risky drug or not fixing defective vehicles). Since appealing to what is right seems to have little impact on people (this is why police carry guns rather than handbooks on moral philosophy) what needs to be done is to ensure that actions that are wrong will come with a high cost. For example, rather than allowing the regulatory folks to let Toyota get away with their alleged misdeeds, the cost of not fixing such problems needs to be increased until it is not prudent to allow them to persist.

Of course, it is reasonable to be worried that people are not prudent. After all, there are harsh penalties for crimes and for doing stupid things, yet people persist in doing both. So, maybe corporate folks would continue to do such things even when the cost outweighs the profit. It is also reasonable to be worried that the regulatory agencies will always slide into cozy relations with the industries they are supposed to regulate.

I won’t even argue that we should hope that people will do the right thing because it is right.

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25 Responses

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  1. T. J. Babson said, on February 24, 2010 at 9:35 am

    It is probably worth pointing out that the New Testament is filled with idea of promoting one’s self interest (storing up riches in heaven, etc.), so in some sense these ideas can be said to have been informed by Christianity.

    • P.E.N.Name said, on February 24, 2010 at 12:09 pm

      Unfortunate isn’t it. Pascal’s wager is based on self-interest. Pascal thought it was an adequate argument.

  2. magus71 said, on February 24, 2010 at 11:28 am

    “After all, there are harsh penalties for crimes and for doing stupid things, yet people persist in doing both.”

    That’s because people don’t think they’ll get caught.

    I don’t believe in the “either/or” argument between altruism and self-interest. Adam Smith himself was a very altruistic person. He did not preach that people should be ethical egoists, but that wehen we observe large populations, those populations tend to be guided by self-interest. Therefore his system of freemarket simply states that the natural system of people learning to get along works better than artificial, patchwork rules.

    Hobbes described human interaction by comparing the various geometric shapes colliding in space, each having to make space for the other. I believe this is a sufficiantly accurate comparison, at least for immature people.

    Take a child for instance. At a young age they are very selfish. They gain pleasure from thinking only of themselves and by doing things that please themselves. Over time, as they are rebuked by others for their selfishness, which interposes into the “geometric sphere” of someone’s personality or activity, they come to associate pain with bad manners. Slowly, over years, a child will come to gain pleasure from sharing, from being polite, from talking nicely instead of hitting. They will come to see that others will do things for them that they would not have done if the child was rude and ill behaved.

    Good behavior and altruism are learned behaviors and massively impacted by culture.

    • P.E.N.Name said, on February 24, 2010 at 12:28 pm

      Who determines what one’s self interest is? Wherein does a sociopath’s self-interest lie? How much good behavior can be learned? Can everyone learn good behavior to the point where we never behave badly? What we learn when we are ‘learning to get along’ ends up eventually as rules/laws/regulation. At some point the ‘true/pure free market’ concept pushed by some economic theorists has to open up to a necessary amount of regulation. Because people aren’t perfect. Can’t be perfected.

      • magus71 said, on February 24, 2010 at 1:26 pm

        The biggest problem I see with true free market are monopolies.

        No one has ever claimed perfection for a free market. Few have claimed perfection for anything. Socialism can work for small groups–in some situations a command economy is superior. A group of ten people can easily be rationed goods and services but 100 million cannot. A free market is far, far superior for country-level economics.

        Just because a law, rule or regulation does immediate good does not mean it is really good. Take a look at airport security for instance. We are balancing the screening process with the ability to move efficiently. While it may be good to heavily screen a single individual, when you add thousands of people to the mix, it quickly becomes not good.

        I’m for some regulation but it should be carefully considered. Also, if we see a regulations that’s bad, we should immediately remove it. We rarely get rid of laws, we just keep piling them on until we’ve made Frankenstein.

      • Michael LaBossiere said, on February 24, 2010 at 5:40 pm

        Good question. Socrates took the view that true self interest lies in acting justly. Other folks take it to be whatever a person wants. My inclination is that people can be mistaken about what is in their best interest. Whether this can be grounded in an objective moral system or not, well…

    • P.E.N.Name said, on February 24, 2010 at 2:11 pm

      ‘No one has ever claimed perfection for a free market.’ No one has to claim the free market is perfect. At its core it’s based on an assumption of perfection that can’t be achieved. Give me a government, an institution, an ideology that weaves an undertanding and acceptance of flawed humanity into its core. It will have a better chance to succeed and survive. Unlike one that blindly assumes that inherent human weaknesses will ‘take care of themselves’.

      • magus71 said, on February 24, 2010 at 3:17 pm

        “At its core it’s based on an assumption of perfection that can’t be achieved.”

        No. At it’s core it is the economic system free societies default to. On this I agree with Ayn Rand: Capitalism is the only moral economic system.

        • Michael LaBossiere said, on February 24, 2010 at 5:39 pm

          How is capitalism moral? Do you mean morally good?

          • magus71 said, on February 25, 2010 at 12:55 am

            It is not moral for governments to take away the the right of free trade. Free men must be able to buy and sell. Of course small regulations are needed to ensure people get a fair deal. But government control is like the ultimate monolopy, which is bad.

            • P.E.N.Name said, on February 25, 2010 at 9:41 am

              Again, who implements the ”small’ regulations’ that prevent monopolies and financial meltdowns? If not government, then the private sector?

            • magus71 said, on February 25, 2010 at 10:24 am

              <<<<<<<<<<<<<<<<<<<Now setting torch to strawman #241 (or there abouts).

              Who ever said that government can't implement regulation?

              We should err on the side ofr less regulation when there is a question. Our voters, in the end, are responsible for what we get.

            • P.E.N.Name said, on February 25, 2010 at 10:51 am

              Hit the comment button too soon.Apologies. I just assumed that “government control is like the ultimate monolopy, which is bad.” eliminated government from the equation since you didn’t specify who/what would write, implement and enforce those regulations. And your ‘Please give me an example of a regulation that wouldn’t damage the whole country if we implemented it, but would ensure nothing bad happens.’ kind of implies that all regulations large or small, no matter how well-meaning put us on the well-known slippery slope. (My 2/25/10/9:36).’Thou shalt not kill’ involves an overwhelmingly complex,body of case law. What happens with “Thou shalt not crash the markets?” “Thou shalt not permit your customer to be killed if you can at all avoid it?” So the only result I can see is having no regulations since even small regulations can be catastrophic. Fortunately one thing we all (except anarchists) agree on is that regulations/laws/rules are needed. Because man is imperfect.

      • P.E.N.Name said, on February 24, 2010 at 5:18 pm

        We could go back and forth on this forever. “At its core it’s based on an assumption of perfection that can’t be achieved.” I’ll stand by it. If the financial system were perfect. Based on a perfect understanding of how people operate individually and in groups. Then predicting the markets would be a piece o’ cake. No one’s saying it’s not the best we’ve got. But we can’t treat it as a perfect untouchable entity. One that must be held above regulation because it will magically take care of itself. We do and we’re doomed to fiscal failure. I stand by the whole post actually.

        • Michael LaBossiere said, on February 24, 2010 at 5:44 pm

          It is also based on assumptions about rationality: that people are rational and rationality is defined a certain way.

  3. P.E.N.Name said, on February 24, 2010 at 1:36 pm

    Should we have modernized Glass-Steagall instead of eliminating it? What kinds of rules should exist against monopolies? Should the line between investment banks and commercial banks be guarded/regulated/ like the Korean DMZ?

  4. magus71 said, on February 24, 2010 at 3:19 pm

    John Stossel has some excellent points:

    My favorite:

    “Because Toyota is the evil business of the month, every accident caused by a drunk or careless driver can suddenly be attributed to safety defects in the vehicle. No human wants to admit “human error.” “Toyota error” is a much better story to tell dad. The parasite circus of trial lawyers invites bad drivers to blame gas pedals.

    Try Googling “Toyota accelerator defect.” When as wrote this, six out of the top ten hits are from law firms soliciting business:

    As innocent drivers continue to report acceleration issues and more and more are becoming injured in accidents resulting from the auto product defects…

    If you or a loved one has been injured in a New York Auto Accident as a result of what you believe to be an automotive defect, the New York defective auto part attorneys at Wingate, Russotti & Shapiro, L.L.P., would like to meet with you.

    I’m sure they would. Truth wont matter much. Personal injury lawyers spewed junk science about breast implants and asbestos and got juries to award billions. The Toyota circus may be no different. Once the media-politician-lawyer cabal is inflamed, hysteria and greed eclipse rational analysis.”

    http://stossel.blogs.foxbusiness.com/2010/02/24/the-parasite-circuit/

    • Michael LaBossiere said, on February 24, 2010 at 5:38 pm

      It would be an error to assume that all accidents involving Toyotas are caused by vehicle defects. However, even Toyota now admits they have problems with their vehicles. The lawyers who are in a frenzy about exploiting the situation for cash are morally on par with how Toyota acted when the folks in charge (allegedly) decided to cover up the defects rather than recall the vehicles. That is, acting badly.

    • P.E.N.Name said, on February 24, 2010 at 5:45 pm

      Stossel. Struesel. Lawyers are just another part of a system that needs to be reigned in by adequate regulation. No? Yes? But if yes, why them and not Wall Street? Why not big business? Etc.I note Stossel doesn’t cite studies that show asbestos doesn’t harm individuals. Or that breast implants are safe. He doesn’t cite current research. I wish he would. Of course it’s all the rage now to slam science and its process. What’s truly sad about Stossel is he uses claims he doesn’t support /and that are believed likely only by his select audience /to support rather weakly the claim in his preceding sentence.”Truth wont matter much.” Not surprisingly he ends with this. Toyota’s internal documents referred to the administration as “not industry friendly” and listed as a challenge the “Activist Administration & Congress.” Such business bashing activists threaten our prosperity. What hides behind that man’s mustache?

  5. kernunos said, on February 25, 2010 at 1:16 am

    Toyota has been hammered on Capitol Hill by Senate hearings. Toyota has recently been the most successful automotive company. FBI agents have raided multiple Toyota parts suppliers.

    Meanwhile Chrysler has over 300,000 recalls on airbags. Will we see a senate hearing on Chrysler and FBI raids? I am guessing not. The problem is when the government is involved with running companies up to their elbow it is hard to pull out without smelling like crap. I smll a conflict of interest here. After getting all of the tax payer money they are definitelly too big to fail.

  6. magus71 said, on February 25, 2010 at 1:53 am

    My word. I spend more time burning strawmen than actually talking about anything meaningful.

  7. magus71 said, on February 25, 2010 at 2:15 am

    I really don’t get what the point Mike or PEN is making.

    Toyota messed up. They are suffering. They will lose business.

    Mike said:

    “For example, rather than allowing the regulatory folks to let Toyota get away with their alleged misdeeds, the cost of not fixing such problems needs to be increased until it is not prudent to allow them to persist.”

    You’ve said this before. Like what Mike? Please give me an example of a regulation that wouldn’t damage the whole country if we implemented it, but would ensure nothing bad happens. Maybe we should dissolve the whole company as punishment.

    It’s the dream of communists, to regulate into Utopia. Can’t we just move on?

    • P.E.N.Name said, on February 25, 2010 at 9:36 am

      Earlier you wrote ‘I’m for some regulation but it should be carefully considered.’ Then you write ‘Please give me an example of a regulation that wouldn’t damage the whole country if we implemented it, but would ensure nothing bad happens.’ Well liely none of the Ten Commandments don’t qualify there. We could implement ‘Thou shalt not kill’. But we have. And people still kill. And followed exactly we wouldn be unable to defend ourselves. It seems these regulations have to be perfect in just the way you want them to be perfect.’Some regulation’. ‘Carefully considered’. As determined by whom? The corporations themselves? Industry self-regulation? With the bottom line always in sight would be a joke. Who else could make those considerations? Government? Seems the general belief is that anything that’s government regulated is on some slippery slope or another. So who’s left? Why perhaps it’s you. Either as an individual or as a member of the military industrial complex.

    • Michael LaBossiere said, on February 25, 2010 at 8:03 pm

      I cannot provide perfect laws. However, laws aimed at deterrence need to provide enough penalty to deter while not being excessive (that is, they must also be just). So, if car makers were fined the cost of making repairs and paying damages caused by their defects, then they would have a greater incentive to fix problems rather than letting them drag out. However, as I said, punishment only deters when the agent is at least rational enough to make a calculation about the law and capable of acting on the basis of said rationality. If that is not the case, then the law will have little impact beyond serving to justify (legally) the punishment.

  8. P.E.N.Name said, on February 25, 2010 at 10:39 am

    Apologies. I just assumed that “government control is like the ultimate monolopy, which is bad.” eliminated government from the equation since you didn’t specify who/what would write, implement and enforce those regulations. And your ‘Please give me an example of a regulation that wouldn’t damage the whole country if we implemented it, but would ensure nothing bad happens.’ kind of implies that all regulations put us on the well-known slippery slope. (My 2/25/10/9:36)


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