- CSR Text: Chapters 1-3
- 2021 Beal Objective Function Ch03 (Proof).pdf download
- https://en.wikipedia.org/wiki/Circular_flow_of_income (Links to an external site.)
1) Conservation of Economic Value
Take at Figure 1. This is a modified circular flow diagram (like you might see in a macroeconomics course). For a brief introduction to (or review of) circular flow diagrams, go here: http://en.wikipedia.org/wiki/Circular_flow_of_income (Links to an external site.) (and/or google the phrase “circular flow diagram”).
Firms engage in exchanges to secure labor inputs, to secure capital, and to sell their output (goods/services). Inter-firm transactions are ignored (because we’re talking about firms in a collective sense), and there are a few other simplifications (e.g. the way government and the “rest of the world” are represented).
Think for a minute about what it means for economic value to be transferred in a voluntary exchange. For example, if I go to a store and buy a shirt that I feel is worth $30 (in other words, I am indifferent about whether or not I have the shirt or I have $30), and the shirt costs $20, then I come away feeling $10 richer (this is referred to as consumer surplus). In this exchange, $10 of economic value is transferred to me, the customer. The same principle can be applied to exchanges with labor and exchanges with capital.
The notion of conservation of economic value suggests that if a firm creates economic value, it must “go” somewhere (it doesn’t just disappear), and there are only three places (or exchanges) where it can go. This implies that created economic value has to go to either labor (in the form of wages that are above the minimum value that labor would have accepted or that are considered to be “fair” based on norms or societal standards), to customers (in the form of consumer surplus, as illustrated by the shirt example above) or to those who have supplied capital (the “owners”) in the form of return on investment above the minimum they would accept. It is assumed that the company receives collective inputs (or public goods, subsidies, etc.) that are equal to the value of any taxes paid, and any transactions with the “rest of the world” are ignored.
From your reading of the case materials (in the Getting Started thread), here are a few questions to get the discussion going:
- What is economic value?
- How is economic value created?
- Once economic value is created, who gets it?
- What does it mean for value to go to labor, customers, and/or investors? What would (or does) that “look like” in each case? How would you be able to tell if these groups were receiving economic value from the organization?
2) Where Does Economic Value Go?
In a properly functioning economic market, where does the economic value created by firms go? In other words, who gets it? Why?
Think about the phrase “properly functioning economic market” in the previous sentence. What does this mean? This assumption (“in a properly functioning economic market. . .”) is intended to imply that Figure 1 is a closed system (i.e. that it’s possible, for example, for individual firms to operate in a market context without producing externalities, positive or negative). Is this really possible? For example, given that firm behavior has the potential to contribute to the stability (or instability) of the larger economic system itself, doesn’t this imply that firms always have some systemic or social responsiblity?
Systemic analysis is about understanding the role of firms in the larger social system. Take a look at the rectangle labeled “firms” in the above sketch. What kind of control, if any, should society be able to exercise over what goes on in this box? How can (do) firms exercise influence over society with regard to societal attempts to control firm behavior (see arrows #4 and #5 in Figure 1)?
3) It’s Complicated
The following articles do a good job of illustrating what the contours of the academic discussion about the role of business and society looks like (at least the dialogue in scholarly journals). You don’t need to read all these articles. Skim one or two and see if you can find something you think is interesting to comment on (and then comment on what other students have posted).