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| September 26, 2005

Nobel laureate economist Milton Friedman and Cypress Semiconductor CEO T.J. Rodgers say greed is good; Whole Foods honcho John Mackey has his own organic, free-range vision of capitalism. They square off in a battle royale from our October issue.

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|9.26.05 @ 10:16AM|

"Whole Foods Market doesn�t engage in junk science or fear mongering, and neither do 99 percent of our customers or vendors"

Bullshit.

Take a walk down their food supplements aisle. Take a look at the packaging of so much of their food, which boasts of "No GMO!"

|9.26.05 @ 10:24AM|

Whatever one might think of the various positions taken, as a debater John Mackey clearly handled himself well. He staked out a position and pointed to concrete accomplishments. Friedman couldn't really find much to argue with, and Rodgers launched into a lot of ad hominem.

Even if you disagree with Mackey (I'm certainly not sold on the superiority of natural foods), he clearly rose to the challenge as a debater. And anybody who considers himself or herself to be in Rodgers' camp should be lamenting how poorly he articulated the position.

Face it, when an entrepreneur says that he wants to make money while adhering to certain practices and supporting certain causes, and then proceeds to do so in a spectacularly profitable fashion, it's probably not a good idea to compare him with Ralph Nader. Especially if your own company is having a tough time. Find a better argument or let somebody else do the debating.

Phil|9.26.05 @ 10:25AM|

Not to mention, SY, their embarrassing and unrepentant peddling of homeopathic "medicine."

|9.26.05 @ 10:30AM|

Does it really count as "engaging in junk science" to sell non-GMO food or echinacea when consumers demand those things, even if their reasons for demanding them are ill-founded?

|9.26.05 @ 10:38AM|

Well Julian, it all depends on whether those selling non-GMO foods have partnered with those educating the sheeple in the ways of junk science. It's one think to see an opportunity and take advantage of it. It's another thing entirely to be a part of creating that opportunity by peddling in lies.

|9.26.05 @ 10:41AM|

To be fair, while I'm no fan of the notions motivating much of the interest in "natural" food, Whole Foods also has a lot of yummy snack foods. I don't think it's a product of their "natural" aspect so much as their yuppie clientele. But yummy is yummy.

|9.26.05 @ 10:42AM|

Bad science.

Great marketing!

"Whole" foods, organic produce, homeopathy, bottled water, and so on, are sort of like good magic acts: it's all a trick, but it can still be wildly entertaining.

Phil|9.26.05 @ 10:44AM|

Julian, there's probably a market for perpetual-motion machines, too; but if I act as a middleman offering some whacko's "free energy" machine to eager, gullible buyers, of course it counts as "engaging in junk science." Not to mention fraud. I'm selling a product that not only doesn't do what it's advertised to do, it can't do it.

|9.26.05 @ 10:45AM|

Does anyone suppose it's possible�just possible� that not everyone who shops at Whole Foods is a disciple of 'junk science.' Could it be that there are other motivations for shopping at Whole Foods and even (insert indignant gasp here) buying organic food? Is it conceivable that they have good produce, and foods that aren't readily available elsewhere?
It appears that even self-described libertarians can't resist the urge to declaim and harrangue from atop a high horse.

|9.26.05 @ 10:50AM|

Man, that was a blowout.

Friedman can claim Mackey as one of his own all he wants. It's easy to do so, now that Mackey has been raking megabucks for years using his socially responsible model. But if Friedman had been in the room when Whole Foods was drawing up its mission statement back in the day, does anyone doubt he would have savaged them as economically illiterate hippies?

|9.26.05 @ 10:51AM|

I'm with Number 6. I don't shop there regularly, because I'm not buying into the alleged inherent superiority of their product, and the prices can be steep. But if you look past the health claims made, those yuppie chow stores tend to have really nice snack foods and appetizers. Every now and then it's worth buying yuppie chow, if you just disregard the rhetoric and focus on taste.

Since I consider eating to be about nutrition and taste rather than ideology, I have no problem ignoring their rhetoric and buying the yuppie chow when I want something especially yummy.

I'll be happy to mail in my decoder ring if necessary. Or, if somebody wants to come and claim it in person that's fine. I'll make sure to have some hors d'ouerves (spelling?) ready when you show up.

|9.26.05 @ 10:54AM|

Whole Foods has the best meat selection anywhere near me. Thank god, too, because if I can't get churrasco, I'll snap.

|9.26.05 @ 10:56AM|

My question to Mackey is this:

You keep talking about balancing the needs of your 'stakeholders'. At what point do you actually make a business decision that is perfectly legal and moral that you know for a fact will harm your shareholders in favor of, what, your local community?

If you don't make these kinds of decisions, you are just taking a big picture look at creating shareholder value, and no one, including Friedman, is disputing that is what you should be doing.

|9.26.05 @ 10:57AM|

Thoreau- I guess we'll both have to turn in our rings; I occasionally shop there. To make the horror more complete, when I do go there, it is to purchase a certain type of granola cereal I enjoy.

That cereal is made with hemp, though, so maybe I can get some points back.

|9.26.05 @ 10:59AM|

Does anyone suppose it's possible�just possible� that not everyone who shops at Whole Foods is a disciple of 'junk science.'

Nothing was said about people who shop there. The claim was made that the company doesn't peddle junk science. Clearly it does.

I avoid Whole Paycheck like the plague, but that's because I'm fortunate enough to live in the Bay Area where Berkeley Bowl sells better stuff at half the price. It's still full of junk science, but at least the heirloom tomatoes cost less than platinum.

Mike|9.26.05 @ 11:04AM|

Among my crowd -- healthy urban liberals (gag if you like) -- "organic" is just a code-word for fresh. Yea, their supplement aisle is atrocious, but circle around the produce, fish, meat, and cheese area and it's clear that they have good, reliably fresh (or not, in the case of cheese) food. Sure, it's expensive. But where else you gonna get it? Food Lion?

Whole Foods, for most people, is about being a foodie, not a hippie. It's just that foodies sometimes like to *think* they're hippies.

|9.26.05 @ 11:06AM|

SY-I don't see any evidence that the stores are promoting any sort of science. The organic produce is labeled as such, and they do have an aisle devoted to various nostrums, but I've never seen any real endorsement of any sort of health claims. Perhaps the Whole Foods I go to is an exception.

Interesting that when someone complains about bosses who treat employees like chattel, that person is accused of being a closet pinko and told that it's just the working of the market . When someone mines a market niche, and makes an assload of money doing it, why it's immoral propagation of junk science!

I'll be in the corner rolling my eyes.

Phil|9.26.05 @ 11:08AM|

Does anyone suppose it's possible�just possible� that not everyone who shops at Whole Foods is a disciple of 'junk science?'

Sure, it's possible -- I shop there, too, because in my area they have some vegetarian items I can't get anywhere else, and they're close to my office, so I frequently use their salad bar. So, as one of their customers, I feel even more comfortable dinging them for peddling homeopathy than I would if I didn't shop there.

|9.26.05 @ 11:10AM|

Number 6 hits the nail on the head.

|9.26.05 @ 11:11AM|

One more thing, while I'm on the subject: don't most libertarians agree that the FDA is silly and that people should be free to make their own decisions about their health, even if that includes holisitic medicine?

|9.26.05 @ 11:12AM|

I really don't understand the hating on the granola types. It tastes better.

Anyway, let's compare CEOs.

|9.26.05 @ 11:18AM|

Hmm, here's a thought...

Some of the natural foods types, despite their dubious rhetoric, sell some pretty darn tasty stuff. (No, not all of them, I know.) But rather than just saying that their stuff is yummy they sometimes want to tell you that it's also a miracle cure and the more moral way to do things.

Now take libertarian ideas: We can make a good case that many of our ideas will generally make people happier, wealthier, safer, etc. Yet some libertarians on this forum can't bring themselves to say "Look, less crime, more jobs, cheaper housing, whoo-hoo!" No, they have to explain that our ideas are also morally and philosophically superior, and they do so in a manner that rubs some people the wrong way.

So, John Mackey is creating jobs, benefiting all sorts of causes that he likes, delivering a good return to his investors, and selling a lot of yummy stuff. But his philosophical schtick is rubbing some people the wrong way.

Phil|9.26.05 @ 11:27AM|

My only response to that, Number 6, is to ask:

1) Who besides you brought up the FDA? and,
2) What does making decisions about one's own health care have to do with the fraud inherent in selling products that do not and cannot do what they are advertised to do?

|9.26.05 @ 11:27AM|

"This means that in its entire 23-year history, Cypress has lost far more money for its investors than it has made. Instead of calling my business philosophy Marxist, perhaps it is time for Rodgers to rethink his own."

Wow. I think it's on.

|9.26.05 @ 11:30AM|

Phil:
1) No one. I was making a point about logical consistency.

2) Presupposing 'fraud' is begging the question.

digamma|9.26.05 @ 11:31AM|

Rodgers got his ass handed to him.

|9.26.05 @ 11:31AM|

Beer and chips, man, just give me the beer and chips.

MP|9.26.05 @ 11:32AM|

Phil,

Does Whole Foods actually advertise that their Organic products are better than the alternative? If they simply say "We have great Organic products", I see no fraud.

Warren|9.26.05 @ 11:37AM|

Has anybody else ever been to the Wegmans flagship store in Pittsford NY? I swear it's a flippen grocery cathedral. It's so amazing, I once took a date there.

Wegmans has made a name for itself as being the best company to work for.

Back in the 80's they tried to run every other grocery out of town. Only Tops (based in Buffalo) slugged it out with them (triple coupons!) and was still left standing. Tops is more value and budget but because they had to compete with Wegmans, they put in salad bars, stocked grommet cheese and coffee, maintained the quality of their fresh produce etc. Wegmans has better selection and higher quality, but because Tops is just down the street, they have to keep their prices competitive.

I'm telling you, upstate NY grocery shopping can't be beat.

|9.26.05 @ 11:38AM|

I don't buy organic animal products because of any supposed health benefits. I buy them because I don't want the evil that goes down in factory farms, high density feedlots, and industrial poultry operations on my consience. Also, I buy them for the same reason that I bring reusable bags to the grocerty store - because it's a more environmentally sustainable way to do things.

Warren|9.26.05 @ 11:39AM|

Damn it. link fix

the best company to work for.

Phil|9.26.05 @ 11:45AM|

Number 6, I don't want to threadjack this any more than necessary, but presupposing fraud is not out of the question. The fact that homeopathy is a heaping pile of crap is settled science; selling homeopathic remedies as anything other than little bottles of water is, well, fraudulent.

Everyone else, I have yet to take issue with any of WF's organic/natural foods products. I'm restricting myself completely to the homeopathy aisle here.

|9.26.05 @ 11:50AM|

Well, Phil, the grocery stores 'round here sell Santeria candles, with all kinds of zany claims made on the packaging, in the "ethnic" aisle.

I really don't see how anyone is getting hurt.

Phil|9.26.05 @ 11:54AM|

You don't see how selling someone a little tiny bottle of water and claiming it will cure (or "treat") some medical condition hurts people?

Uh, OK.

How do you feel about faith-healing televangelists and psychic surgeons, joe?

|9.26.05 @ 11:59AM|

Warren: The Pittsford store must be a veritable Shangri-La, if it beats the Wegmans in East Syracuse. I adored that place when I was there for college in the early-mid 90s.

That Wegmans certainly does dominate the Syracuse market, but last I looked there were passable alternatives in Price Chopper and P&C, and also a little podunk local chain -- I used to work at one for beer money -- called Peter's.

I too thought that Mackey cleaned Rodgers' clock in the debate, and that Friedman couldn't find much of substance to criticize about Whole Foods was telling. I see nothing wrong with WF selling scientifically dubious supplements, etc. if they sense there's a market to be served. Caveat emptor and all that. My local supermarket sells that crap too, and I don't doubt that their board of directors is made up of proud capitalists.

Above all, I'm glad to see that a firm that surely is lionized by limousine lefties is run by a guy whose capitalist and libertarian cred seems pretty legit.

|9.26.05 @ 12:01PM|

There's selling and then there's selling, Phil. If Whole Foods was getting all up in people's faces to shill for magical vibrating water, I'd have a problem with that. But just carrying stuff in their stores? That looks more like the special holy candles that the Market Basket has down by the Goya cans.

|9.26.05 @ 12:03PM|

Oh, and I thought that this was just a devastating (though judicious) smackdown by Mackey, worth posting here:

In contrast [to WF's documented successes], Cypress Semiconductor has struggled to be profitable for many years now, and their balance sheet shows negative retained earnings of over $408 million. This means that in its entire 23-year history, Cypress has lost far more money for its investors than it has made. Instead of calling my business philosophy Marxist, perhaps it is time for Rodgers to rethink his own.

Phil|9.26.05 @ 12:04PM|

So committing fraud is OK if you're just the middleman. Noted.

I'm surprised to find you taking that tack, joe, but whatever.

fyodor|9.26.05 @ 12:05PM|

Good post, Jason Ligon.

If creating the impression of caring and goodness is good for the bottom line, then of course there is no contradiction, and the debate is mooot. If caring and goodness at some point does hurt the bottom line, how are they making that decision?

I'd like to address a similar point but from a different perspective. When I read:

I�m a businessman and a free market libertarian, but I believe that the enlightened corporation should try to create value for all of its constituencies. From an investor�s perspective, the purpose of the business is to maximize profits. But that�s not the purpose for other stakeholders�for customers, employees, suppliers, and the community.

My first thought was that this was nonsense because the investors are the aggregate boss. You do what they want. Now, if consideration of other so-called stakeholders is part of what the boss wants, perhaps sometimes to the detriment of maximum prophet, then you give the boss what he wants. But what maximizes freedom is to allow the "boss" to freely choose what's best for him. Whatever that choices turns out to be is besides the point from a freedom maximizing perspective (unless that choice is to restrict others' freedoms, but that's another matter altogether and that's what the law is for). BTW, if having a corporate philosophy that stresses caring and goodness is intended to attract more investors, then this works nicely for both my construction of the issue and Jason's.

All that said, I've occasionally heard from lefties that corporate law is such that profit is inevitably stressed over all other considerations. I'm no expert on corporate law, so I don't know how to judge whether they have a relevant point or not. What makes most sense to me is that the officers of a corporation should be responsible to executing whatever it is that their investors want, and their investors should be free to ask whatever they wish (within legal bounds) of their corporate officers. That way lies freedom. And, heh-heh, goodness. If corporate law is such that it really does restrict considerations other than profit maximization, even to please investors' wishes, then perhaps some reform is in order.

|9.26.05 @ 12:05PM|

Phil,

You're free to shop anywhere your conscience, intellect, and your wallet dictates. Isn't that what being libertarian is all about? Supporting choice?

My initial impression from the debate was that Friedman is right fundamentally, Mackey falls into the "Ben & Jerry's" category of crunchy capitalism (which is fine by me), and that Rodgers sounded like a braying ass.

MP|9.26.05 @ 12:06PM|

Phil,

If you want to complain about a company shilling a junk science product, how about you pick on oil companies that promote high octane gasoline.

I have a hard time criticizing a retailer that sells dubious products unless the retailer is actively promoting the dubious nature of the products.

|9.26.05 @ 12:14PM|

The problem I see is selling Whole Foods' model as something that can work for any company. Their succeess is predicated on people paying more money for high margin food. That is made possible by cultural and community factors involving how people regard food at this particular place and time. I just don't think it would ever apply to a company that, say, makes wrenches. Or semi-conductors. Or supplies door handles for auto manufacturers.

|9.26.05 @ 12:14PM|

So, Mackey has said from day 1 that earning a profit will be crucial, but maximizing profit will not be the sole concern. Investors have signed on anyway, and profits have continued to grow. Consumers have been attracted by it. Employees and vendors don't have too much reason to bitch. Neighbors are kept happy.

Everybody is happy except Rodgers. I don't know if Mackey's model is the best way for everything to be done, but in his case it's working brilliantly. And he specifically refrains from telling other people that they should implement his idea in the exact same way. He just makes it clear that his big picture approach is working well and keeping everybody happy.

And while I'm not a fan of all of his products, he sells some yummy snacks.

If somebody wants to confiscate my decoder ring, give me advance notice and I'll have some yummy snacks waiting when you stop by.

|9.26.05 @ 12:15PM|

Yes, Phil. I have no problem with selling those silly Atkins frozen dinners, either - the ones that tell you to lose weight via mass consumption of bacon.

The answer to the Mackey smackdown Dave Straub quotes is simple: hey, if Mackey is making more money through his "socially responsible" shtick, more power to him. Good Capialist! Good Boy! Who loves a tummy rub! This is what Friedman tries.

But it just doesn't fly for me, because the very existence of this debate, and of Frienman's thirty five year old column, make it clear that the "shareholder supremacist" side of the equation presupposes that Mackey-ite concern about the environment, the workers, and the community is contrary to the High Capitalist ideals of maximizing profit for shareholders.

|9.26.05 @ 12:17PM|

thoreau

You seem obsessed with yummy snacks today. Any particular reason, or do you prefer to take the 5th on that?

|9.26.05 @ 12:19PM|

Phil- I think called everything that falls under the category of homeopathic fraudulent is a bit strong. While the more outlandish claims made by some of those folks are silly, there is reason to believe that some herbs like gingko and ginsing to have a measurable effect. Herbs don't cure cancer, but some can improve your memory or give you more energy.

|9.26.05 @ 12:20PM|

'Called' shoud be 'calling.' I've really got to start proofreading.

fyodor|9.26.05 @ 12:26PM|

thoreau,

I think the relevant issue for us (and everyone else) is whether Mackey's MO is really distinct from Friedman's or whether it's merely a subset of Friedman's view of capitalism that works best for a particular business within a particular industry. If it's the latter, as many of us are pointing out, then the argument is moot at best, and perhaps seriously misleading at worst. It has nothing to do with Rodgers's happiness or lack thereof. It has everything to do with what should the rest of us make of all this. If the implication is that profit maximization is evil, then we should take issue with it. If it is that the appearance of morality can contribute to profit maximization, then from a public policy viewpoint the whole argument is pointless, although as investors it might be very interesting....

|9.26.05 @ 12:30PM|

Herbs and homeopathy are two completly different things. Homeopathy is water; herbal supplements actually contain what they claim.

fyodor|9.26.05 @ 12:34PM|

the very existence of this debate, and of Frienman's thirty five year old column, make it clear that the "shareholder supremacist" side of the equation presupposes that Mackey-ite concern about the environment, the workers, and the community is contrary to the High Capitalist ideals of maximizing profit for shareholders.

Okay joe, time to break it down. The concept of social responsibility may be contrary to the view that some "High Capitalists" take, but not all. Where Friedman stands on this I'm not sure, but who cares, unless one is into celebrity worship. And unless you're most concerned with who's getting "slapped down" by whom, it's pretty obvious that there are those of us here that see no contradiction between social consciousness and profit maximization, under certain circumstances. As dead elvis points out, this model is not going to work all the time, to put it mildly. As I point out, there's nothing anti-freedom in allowing investors to choose other concerns than profit maximization. Unless the law is written such that corporate officers are restricted from honoring such wishes of their investors, the debate is purely moot other than as an opportunity for those who see themselves differently to root for their own guy over the other.

|9.26.05 @ 12:36PM|

fyodor-

The impression I got was that he is absolutely insistent on positive profits. But as long as the profits are in an acceptable range, maximizing profits is a concern that he weighs against other concerns.

Is it so different from the person who turns down a higher-paying job doing something else because he enjoys what he's doing and already makes enough money (profit) to live comfortably?

|9.26.05 @ 12:37PM|

Mackey's got a damn good point about the marketing of capitalism. At first I thought he was kinda hippy-dippy with his talk, and Milton was dead on.

But that's because Milton's preaching to the choir. Mackey's showing capitalism in better light, you know, trying to move cynics in favor of it. I like how he works. I think he pulled something over Milt.

|9.26.05 @ 12:48PM|

Here's a thought experiment for you:

You are driving down a deserted stretch of road, en route to an important business meeting that could decide the fate of your corporation. Up ahead you see noted economist Milton Friedman laying in a ditch by the side of the road, bloodied and beaten.

Do you sacrifice your capitalist responsibilities for the altruistic option of aiding Mr. Friedman? If so, what do you suppose his reaction to your choice would be? What would T. J. Rodgers do?

Please give your answer in essay form. Show all work.

MP|9.26.05 @ 12:51PM|

thoreau,

Uncle Miltie's point is that the act of maximizing profits is going to maximize social good by optimizing resource allocation. Mackey may believe that his firm, by being an active decisionmaker in the non-business related allocation of its resources, is doing a better job of maximizing social good than the market would by itself. I don't agree with him (I side with Uncle Miltie), but I don't think less of him for trying to prove me wrong.

fyodor|9.26.05 @ 12:53PM|

thoreau,

No, it is not different at all, except for one big difference. The person who takes a more satisfying job for less money is doing it for himself. A corporate CEO is making decisions for his investors. They (as best I understand the system) are the ultimate boss. Now, if that's what the investors want, to make less money in deference to other considerations, then yes, it is exactly like your example. (With the one remaining inevitable difference that your non profit maximizing worker is one whereas investors are many, which muddies the waters in some practical ways, but the principle remains exactly the same.) As long as investors are allowed to choose either way, then there is no policy matter at stake. And as long as people understand that that is what is going on here, not a denigration of profit mazimization in the many cases where investors do freely choose that, then no harm done.

|9.26.05 @ 12:57PM|

Another way to look at this is that social responsibility is simply a product.

Joe strikes me as the "proto-consumer" of socially responsible groceries. Whole Foods works because Joe is willing to pay a premium for fair trade, organic, heirloom, vegan, transfat-free tater tots. I may prefer Ore-Ida at $2 a bag, but if Joe wants to pay an extra for his brand, more power to him. The criticism of Whole Foods fails to grasp that the "Whole Foods" ethos is part of the product. If Whole Foods morphed into Food Lion, I presume they would lose some of the ability to charge premium prices which might lower profits. The criticism of Whole Foods also ignores the possibility that investors consider social responsibility a non-monetary return on investment. In other words, Whole Foods may be a very efficient market solution to Joe's need to both buy socially responsible groceries and invest in a socially responsible company.

The fraud argument is a load of organic horse fritters. If case for fraud could be made against a company like Burt's Bee Products, legal action would be happened long ago.

|9.26.05 @ 1:01PM|

I just want to see a list of things Whole Foods management has done that it knew for a fact would harm shareholders. This is the act that is implicit in 'balancing' shareholder value against other stakeholders. My suspicion is that the revolutionary aspects of the business model is mostly smoke. It is niche market marketing, which I think is just great.

fyodor|9.26.05 @ 1:08PM|

Good one, SPD!

And thanks for articulating the real difference between the two, MP.

My view on that is this. Freedom is the key, not profit maximization per se. That would seem to play into Mackey's hands.

But not necessarily. I'm not going to buy any one person's (or corporation's) view of what constitutes "social good." Rather than brag that their advancing "social good," I would prefer that people like Mackay would be more honest and say that they're advancing an agenda that they believe in. Of course, that's not as good marketing, so I understand their purpose. But still, talking of "social good" helps lead to the confusion at the heart of the debate. Maximizing profit (within a framework of ethical behavior*) is probably the most reliabe means across the board of advancing social good. But as SPD's example demonstrates, it's not always the case, especially in extreme circumstances. Of course, if rescuing Milton Friedman from the side of the road fits in that parenthetical ethical framework (*inserted after the succeeding sentence), maybe there's no contradiction anyway, except whether there can be "social good" in positive steps aside from ordinary ethical considerations. Again, the two sides start to fold into each other and lose distinction other than in the language used and sociological associations each side prefers. Except that your idea of what positive steps might advance "social good" may not be the same as my idea. Which is why it would be more accurate and honest for Mackay to say that he's advancing an agenda he believes in rather than protecting the "social good." But that's his right to do that, and it's his investors' right to advance such an agenda through their investing. And whatever system (read: set of laws) maximizes that freedom, that's the one I'm backing.

|9.26.05 @ 1:20PM|

I don't think you'll get a positive response regarding John Mackey's social conscience from the AFL-CIO.

Phil|9.26.05 @ 1:26PM|

MP, If you want to complain about a company shilling a junk science product, how about you pick on oil companies that promote high octane gasoline.

Because "If you don't complain about X, you can't complain about Y" is an inherently bullshit method of argument, that's why. Moreover, I neither know nor care anything about the topic; suffice to say that if it's promulgating pseudoscience, I'm agin' it. Next!

Number 6, I think called everything that falls under the category of homeopathic fraudulent is a bit strong. While the more outlandish claims made by some of those folks are silly, there is reason to believe that some herbs like gingko and ginsing to have a measurable effect.

Do you even know what homeopathy is? Because this statement sort of indicates that you don't. Here's a hint: There would be no detectable gingko or ginseng in a homeopathic solution called "Gingko" or "Ginseng." It's just water.

Still, I like seeing joe stand up for the right to make fraudulent health claims. That really did take me by surprise.

|9.26.05 @ 1:34PM|

A number of companies make regular charitable contributions because they are both tax-deductible and improve the public image of the company, which can prove to be as valuable to attracting investors as advertising is to attracting consumers. People like to feel good about themselves, and if shopping at earth-friendly store A instead of strictly-business store B evokes that sensation, then the company that promotes itself as socially responsible is, in these times, making a smart "business decision." They (the owners and stockholders) benefit and the recipients of their charity all stand to benefit from this action.

Pro-choice individuals in a free-market society can choose to neither buy from nor invest their money in Pepsi or Domino's if those companies are known to make contributions to anti-abortion organizations or individuals. Police officers are free to neither buy from nor invest in Ben & Jerry's because they contribute money to the defense fund of convicted cop killer Mumia Abu-Jamal. The opposite is also true in both cases, which means that companies that take a stand socially may help to attract investors that share their world view.

I guess my question is: What's wrong with that?

|9.26.05 @ 1:40PM|

A number of companies make regular charitable contributions because they are both tax-deductible and improve the public image of the company, which can prove to be as valuable to attracting investors as advertising is to attracting consumers. People like to feel good about themselves, and if shopping at earth-friendly store A instead of strictly-business store B evokes that sensation, then the company that promotes itself as socially responsible is, in these times, making a smart "business decision." They (the owners and stockholders) benefit and the recipients of their charity all stand to benefit from this action.

Pro-choice individuals in a free-market society can choose to neither buy from nor invest their money in Pepsi or Domino's if those companies are known to make contributions to anti-abortion organizations or individuals. Police officers are free to neither buy from nor invest in Ben & Jerry's because they contribute money to the defense fund of convicted cop killer Mumia Abu-Jamal. The opposite is also true in both cases, which means that companies that take a stand socially may help to attract investors that share their world view.

I guess my question is: What's wrong with that?

|9.26.05 @ 1:49PM|

The person who takes a more satisfying job for less money is doing it for himself. A corporate CEO is making decisions for his investors. They (as best I understand the system) are the ultimate boss. Now, if that's what the investors want, to make less money in deference to other considerations, then yes, it is exactly like your example.

Mackey makes this same point, and says that he's been upfront about it since day 1. If everybody knows that there are considerations that might trump profit maximization, and invest anyway, that is implicit consent to go ahead and make those trade-offs (as long as profits remain above some positive threshold).

Really, his argument is one that some libertarians might sympathize with: The investors are supplying the cash, but it's the entrepreneur (and now the CEO) who puts it all together and makes it work. That gives him a natural authority to decide what the priorities will be, provided that he's up-front and honest about his priorities with all of the other people involved. On paper it may very well be the investors who have ultimate authority, but he's the guy making it all happen. And if the investors don't like the way he's making things happen, they are free to sell their shares. Indeed, if they try to put the kibbosh on his way of doing things then he might just leave and go do something else.

I guess what it comes down to is that he sees the entrepreneur as central to the enterprise, since the entrepreneur is the one who takes the investors' capital and makes something profitable out of it. He feels like it's his baby, he should be able to use it to pursue whatever goals he wants to pursue as long as he remains profitable and keeps the investors informed about his intentions. If they don't like it, they can go elsewhere.

And it seems to be working for him.

|9.26.05 @ 1:57PM|

There is a clear legal standard for fraud, Phil. Toddle off to the local courthouse with a shopping cart full of offending items and make your case where it counts. If you lack the legal expertise, call the law offices of Peter Angelos. He is always looking for the next class action gold mine.

The reality is that while many products may have little or no discernable benefit, the marketing claims are usually carefully vetted by legal counsel. When companies overreach, they are sued (see Enzyte).

You are already free to to not shop at Whole Foods and not buy herbal products. You are further free to bitch about Whole Foods to your heart's content. What more do you want?

|9.26.05 @ 1:58PM|

I wonder if Mackey would distinguish between the prerogatives of a CEO who is also the founder, and a CEO who replaces the founder due to either voluntary retirement or "ostensibly voluntary but really not so voluntary" retirement after the Board (and implicitly the shareholders) gets upset.

fyodor|9.26.05 @ 2:08PM|

I guess my question is: What's wrong with that?

Absolutely nothing. And I don't know if anyone here is saying anything to the contrary. Except maybe MP who's maybe agreeing with Friedman who's maybe saying that such efforts inevitably reduce "social good" whenever they don't maximize profit. To which I can only say: pthfffffft!! Kinda reminds me of arguments I've heard on occasion (usually made by elder and financially successful adults to adolescents and young adults) that "bumming around" is somehow immoral because you're not contributing your full potential to society. Well, pthffffffft!! (Guess I'm being immoral whenever I goof off at work and comment here!)

I might also add that some of us take issue with how the issue is being framed rhetorically. But that's different from taking issue with the actual doing of it.

fyodor|9.26.05 @ 2:17PM|

thoreau,

We're talking nuts and bolts here, and I really don't think any of it particularly matters. Apologies if I was making any irrelevannt distinctions. Just trying to parse it out to its most logically clear construction. I really don't think there's a damn thing "wrong" with what Mackay is doing. In solidarity with things said by Jason Ligon and dead elvis, I only wonder if any of the rhetoric is misleading. But as long as Mackay makes clear that his ability to make a profit off the image that he's not putting profit first isn't meant to imply that those who do put profit first are evil, is all fine wid me.

|9.26.05 @ 2:25PM|

fyodor-

I think we more or less agree: Profit itself is a necessity in his model, but maximization must be weighed against other factors in his way of doing things. And as long as everybody involved is happy and signs on to this arrangement voluntarily, well, sounds to me like a great thing he's got going on.

As to the article itself, I'll repeat what I said earlier: Rodgers was pathetic in the debate. Even if one happens to agree with him, he was just totally overpowered by Mackey. Mackey presents this really nice arrangement he's got going and shows how great it is and how profitable it is and then suggests that other people might want to examine it and voluntarily adopt elements of it in a manner that works best for them.

Rodgers wants none of it and starts ranting about profits and arguing with "the liberal in his head." So Mackey just calmly says "Yes, let's talk profit" and then shows how he's whipping Rodgers' ass.

Point, set, match.

|9.26.05 @ 2:33PM|

I think Friedman's point is more of a wide view of the situation. If every business were run like Whole Foods, I'd think it would ultimately be detrimental to society. I think Friedman would be happier, as would many of us, if the people who say "Oh sure, anything in the name of profits" every time someone made a decision for efficiency's sake, had any idea what they were really saying.

Not to start adding Thoreau-like disclaimers to all of my posts, but there is nothing that should be illegal, and nothing fraudulent about what Whole Foods is doing.

MP|9.26.05 @ 2:47PM|

fyodor,

Saying that maximizing profits maximizes social good does not imply that it is immoral not to want to maximize social good. The logical statement, IF you want to maximize social good THEN businesses should work to maximize profits, does not have a moral component.

|9.26.05 @ 2:48PM|

Phil, I don't want to argue with someone who's on my side, but my concern wasn't on the fraud end or the right of Whole Foods to sell whatever quack bullshit they want to sell. Or the rights of morons to buy that stuff. I was merely jumping on Mackey's claim in this particular debate not to be peddling junk science. He does peddle junk science and it makes him a lot of money.

Over at James Randi's site, there's quite a nice bit of documentation on Whole Foods response to complaints about selling bullshit. Their response boils down to, we can do it if we want to and our customers want it. I agree with that. I do NOT agree with doing that and then trying to take the high ground as Mackey has hypocritically done in this debate. It makes me wonder about how many other lies he tells here.

|9.26.05 @ 2:53PM|

If Whole Foods was getting all up in people's faces to shill for magical vibrating water, I'd have a problem with that.

They do exactly that. The brand is called Penta.

|9.26.05 @ 3:00PM|

"They (as best I understand the system) are the ultimate boss. Now, if that's what the investors want, to make less money in deference to other considerations, then yes, it is exactly like your example."

OK, why do Friedman and Rodgers get to assume that the maximization of profit, to the exlusion of all other considerations whenever there is a potential conflict, is the stated desire of all shareholders? If I was the sole owner of a company, and my CEO was screwing little old ladies and chiseling the employees, I'd fire his ass. I wouldn't be magnanimous to the point of bankruptcy, but I wouldn't squeeze every dime, either. Most of the country incorporates ethical thinking into their economic decisions, to one degree or another. Yet Friedman and Rodgers chant a "shareholder, shareholder" mantra that simply asserts that shareholders are selfish, rational, profit-maximizing machines.

I can see where Friedman, as an economist who thinks like the hammer and sees only nails, would want to believe this. And I can certainly see how Rodgers, whose personal wealth is tied to the value of his company's stock, can want to believe this.

But to consider the issue a little more impartially, is the justification for this assumption about shareholders based on their consent, or their best interests?

|9.26.05 @ 3:26PM|

joe:

The measure of doing what shareholders want should probably be the long term trend of the share price. Friedman is indicating that you shouldn't act in such a way as to intentionally harm that trend.

Though I think it is all rhetoric, I don't agree with the notion of the stakeholder as some sort of equal partner. There is a direct pipeline between the customer and the shareholder, and it is enshrined in most all successful companies that maximization of customer experience IS maximization of shareholder value, so I completely understand that. Inviting other people to the party seems to be mostly fantasy.

You brother in law who shows up, sits on your couch and drinks your beer is not a stakeholder in your house. The whole point of the distinction is personal choice to invest something. Severing that important connection between the invested and the priorities of the company is a bad policy. Whole Foods doesn't do that.

|9.26.05 @ 3:57PM|

Re: "the poor people in the community" in Larry A's post.

That's not a problem for Mackey. There won't be any around on whom to piggyback a regulation. Sticking a Whole Foods in a neighborhood has become city planners' final stamp of eradication of poor people from their former communities.

My once-vibrant but now almost perfectly nu-urbanized (read: murdered for government profit) neighborhood is capping off its decade of hostilities against the economically average by planting a Whole Foods at the end of my block -- because the JAGUAR DEALERSHIP that's there now is attracting too many of the lower sort. Blight!

(Not that there's anything wrong with owning a Jaguar. But buying one? Now that they're only $48,000? How gauche.)

Score one for joe's team.

fyodor|9.26.05 @ 4:00PM|

Joe,

I haven't read the whole debate, but if Friedman and Rodgers make the assumption you attribute to them, then I'd say they're wrong.

That said, I'd venture to guess that the primary or only goal of the vast majority of investors is maximizing their return. I think most people would consider the most efficient means of achieving social good is to reap the highest return possible on their investments and then invest that return in the social good of their own choice. But that's not always the case, and ultimately I 100% agree that it's up to each individual investor to decide the best goals for his investment himself.

|9.26.05 @ 4:06PM|

The difference between the two approaches to capitalism (Friedman's vs. Mackay's - Rodger's hasn't given me a reason to consider his view) looks to be difference between viewing corporations as profit maximizing entities vs. value generating entities. This seems more than just a rhetorical difference: wouldn't the profit maximizing model be a subset of the value generating model?

Mackay states that "In the customer-centered business, customer happiness is an end in itself, and will be pursued with greater interest, passion, and empathy than the profit-centered business is capable of." I haven't seen anyone but joe comment on this. Woudn't the greater freedom of thought and action clearly implied by the second model (the customer-centered value-generating model) lead to "a more robust business model than the profit-maximization model that it competes against." That is, the ability to consider all of the possibilities of interaction between the corp and the cold, competitive world. Not that the profit-maximization model doesn't allow for all of this, but that it is not clearly implied.

Put it another way: if one has the goal of propagating the species, then love, caring, affection, ect are not clearly implied in that. But without them, good luck getting someone from anywhere but the bottom of the barrel (socially, physically, emotionally, or a combination) to have sex with you; much less have sex with you enough to ensure multiple children; much less stick with you long enough to raise those children right.

Where I and others might have a problem is that the second approach could lead to sloppy thinking. The profit-maximization core to the value-generating model can not be violated - and how to ensure it's transmission in Mackay's "brand" of capitalism?

|9.26.05 @ 4:25PM|

I have another question about the corporate philanthropy. Since where they send their money will be available to the public (for marketing purposes at least) it means that their choices for where they donate will be scrutinized - especially if corporate philanthropy increases, becomes more competitive. Would that make them better experts in philanthropy, in the long run, than the average individual? I mean, there are lots of shit charities that lots of people give money to.

|9.26.05 @ 4:29PM|

I am a little disappointed that Joe has neither confirmed nor denied a passion for fair trade, organic, heirloom, vegan, transfat-free tater tots.

Is Mackey a huckster, a new age goofball or just a business giving his customers what they want? Who knows? As long as the groceries are being purchased by consenting adults, it really isn't any of my concern.

fyodor|9.26.05 @ 4:31PM|

T Bone,

This is kinda getting a little circular, but my reaction to your post is to remind myself and us all that corporations are merely arrangements of PEOPLE, and what ARE people, after all, other than value generating entities? You'd have to be insane to only care about money since money is actually worthless without any other interests.

And then going further with both your point and mine, I think most if not all human endeavors contain within themselves the paradox that being overly (and crassly) fixated on one's goal is not necessarily the best way to achieve one's goal.

Funny that...

fyodor|9.26.05 @ 4:33PM|

Jose,

As long as the groceries are being purchased by consenting adults, it really isn't any of my concern.

Damn straight!

|9.26.05 @ 4:45PM|

"As long as the groceries are being purchased by consenting adults, it really isn't any of my concern."

Then shame on Milton Freidman for criticizing how Mackey does business, right? He didn't limit his comments on this sort of business, either in 1970 or in this debate, to "to each his own." He actually expressed the opinion that what Mackey is doing is wrong - he's wronging the shareholders by frittering away their money, and wronging the poor (and the children) in our society by putting money into less efficient channels than, er, paying stock dividends to his shareholders.

Well, screw Friedman, there are other values to consider than overall economic growth.

|9.26.05 @ 4:51PM|

They square off in a battle royale from our October issue.

Yes, but which one ended up with the lid to the cooking pot and which one got the UZI?

/too obscure?

|9.26.05 @ 4:55PM|

I guess what it comes down to is that there's always a way to make more profit. Whether it means trying harder, being tougher, being smarter, being more creative, or whatever, there's always a way to squeeze out more profit. Some of those ways might involve things that a lot of consumers would frown on, others involve things that consumers might applaud, and others would be things that consumers wouldn't care about one way or the other. But there's always a way.

Mackey's whole thing seems to be "Look, we're already making a lot of money, some of our do-gooder projects actually contribute to profits, and if other projects don't improve profits, well, so be it. We're still making a lot of money, we can afford to do a few projects that I feel strongly about. And nobody should feel cheated because I've been saying from day 1 that this is how I'll do things. It's not like they don't know that I devote some of our business activity to projects that may or may not improve the bottom line. This is my baby, I've been honest about what I'm doing with it, and we're making money."

Really, who can argue with that?

|9.26.05 @ 4:57PM|

Really, who can argue with that?

Well, besides, Rodgers, obviously.

|9.26.05 @ 4:57PM|

"Well, screw Friedman, there are other values to consider than overall economic growth."

Tyler Cowen over at Marginal Revolution made a comment about this some time ago while discussing the type of libertarian he is.

He indicated that he is not opposed to certain taxation schemes because it is unfair to the wealthier person to lose a greater percent of his wealth so that poor people will get money they didn't work for. Rather, he opposes such schemes because they harm growth, and growth is the most powerful force of sustained good on the earth. Growth destroys diseases, it increases the term of human life, it elevates the very standards of what poor means. At the end, whatever the proposal or value in question, if it is undertaken with the knowledge that it will harm growth, he is very, very skeptical at the outset.

A compelling statement of consequentialist libertarianism, I thought.

|9.26.05 @ 5:05PM|

Jason-

Growth is indeed a good thing. But who says that it is the moral obligation of every business executive to maximize growth without regard to other priorities that he might have? Should we castigate the small business owner who never franchises because he's making a comfortable living already and doesn't want to grow so large that he no longer has the time to work behind the counter and meet customers directly?

Should we assume that whenever somebody sells shares his only obligation is to maximize share price? What if he tells the investors from day 1 that he'll always turn a profit but maximizing share price won't be his sole priority? If they buy anyway, so what?

Should we castigate the guy who decides to donate some of his wealth to charity rather than investing it in another profitable enterprise?

What it comes down to is that Mackey has decided from day 1 to do things a certain way. He's always been committed to making a profit, but he's said that maximizing that profit won't be his sole concern. People have invested anyway and everybody involved has prospered. Maybe they could have prospered even more if they'd done things differently, but they've prospered nonetheless, knowing full well the nature of what was being done.

What's so wrong with that?

|9.26.05 @ 5:06PM|

I'd feel better about myself if Jason Ligon weren't so much better at making my points.

Once you select grocery stores as a society not by who provides the best groceries, but by who sends the most money to the Snail Darter Fund, you are degrading the efficiency of grocers in general. In the end it's sort of a division of labor thing.

The argument JL attributes to Tyler Cowen is not the end all be all, since deciding how much misery to alleviate now, vs. how much growth to encourage is an unanswerable question, but it'd be nice to know that people considered it.

|9.26.05 @ 5:09PM|

Last week everybody was upset when somebody criticized a private business without actually calling for coercive remedies.

Now we praise a businessman and we're told that his model is all wrong.

What up wit dat?

fyodor|9.26.05 @ 5:11PM|

Jason Ligon,

Good and interesting point. Growth is certainly very valuable.

But if, to take one possible example, all parents worked 80 hours per week to maximize ecomomic growth at the expense of their children's well-being, would this really be a good "consequentialist" outcome?

Not that that's likely. But it's one small counter-example to the notion that I think you're putting forth that economic growth necessary trumps all other values. I'm sure someone with more imagination than I could come up with one that's more pertinent to the discussion at hand. But again, I think it comes down to freedom. Given the freedom, people can decide for themselves how to best balance their various values. And in the long run, they'll make the best decisions if allowed the freedom to make their decisions on their own, making all discussions pitting economic growth versus advancing "social good" moot.

|9.26.05 @ 5:16PM|

fyodor is right about freedom and tradeoffs. And Mackey is a guy who decided early on what sorts of trade-offs to make, and he's always been honest about it with his investors. They invest anyway. He turns a respectable profit despite these tradeoffs. His operation continues to grow despite these tradeoffs. And he derives personal satisfaction from these tradeoffs. He's a guy who decided what he wanted to do and did it and made a lot of money for himself and his investors in the process. And he's also created a lot of jobs.

I'm still trying to figure out what's so wrong with this.

fyodor|9.26.05 @ 5:33PM|

JDM,

I think you'll see that I made the same point you illustrate with the snail darter example earlier when I said that most people would prefer that their investments bring them the highest return possible so that they would have the most money possible to put towards "doing good." This can be seen as a matter of doing-good comparative advantage.

I would think, though, that there may be times that a business really does have a comparative advantage for some sort of doing-good. I won't bother to think up examples cause that's not MY comparative advantage :-) but I think it's self-evident that it's possible.

Furthermore, I think that given the maximum freedom to decide for themselves, investors will ultimately make the right decision (regarding whether to invest to maximize return versus to do so to advance a social agenda which may be at odds with maximum return) more often than if their freedom is curtailed, either by the law or by gratuitous chastisement of whatever kind.

That said, since knowledge is never absolute, the more that investors who are considering investing for "social good" are knowledgeable about comparative advantage and its implications for their goal of advancing a particular agenda, the more enabled they will be to make a Reasoned decision on the matter! :-)

Gene Berkman|9.26.05 @ 5:33PM|

So everyone is down on the most over-priced grocery store for being altruistic?

Whole Foods Market sells plenty of products with sugar or white flour as ingredients, sells dead animal products and alcohol, and people here accuse WFM of promoting health quackery?

When I ran the herb section of Safer Way - Mackey's store before Whole Foods - I avoided homeopathic remedies, and kept prices reasonable. In the first quarter, the herb section was the most profitable part of the store.

When I worked for John Mackey, he was a Keynesian just out of college. Running his own beusiness has taught him alot about economics. I don't think anyone has to worry about altruism messing with the bottom line for Whole Foods Market.

fyodor|9.26.05 @ 5:39PM|

JDM,

I think you'll see that I made the same point you illustrate with the snail darter example earlier when I said that most people would prefer that their investments bring them the highest return possible so that they would have the most money possible to put towards "doing good." This can be seen as a matter of doing-good comparative advantage.

I would think, though, that there may be times that a business really does have a comparative advantage for some sort of doing-good. I won't bother to think up examples cause that's not MY comparative advantage :-) but I think it's self-evident that it's possible.

Furthermore, I think that given the maximum freedom to decide for themselves, investors will ultimately make the right decision (regarding whether to invest to maximize return versus to do so to advance a social agenda which may be at odds with maximum return) more often than if their freedom is curtailed, either by the law or by gratuitous chastisement of whatever kind.

That said, since knowledge is never absolute, the more that investors who are considering investing for "social good" are knowledgeable about comparative advantage and its implications for their goal of advancing a particular agenda, the more enabled they will be to make a Reasoned decision on the matter! :-)

|9.26.05 @ 5:46PM|

thoreau:

The correct answer to the original question about corporate responsibility, to me, has to be Friedman's. A corporation must ultimately be responsible to its shareholders.

What this means to me is that if there are ever disagreements between shareholders and other stakeholders, the corporation's obligations are clear. If the corporation knowingly acts against the interests of its shareholders, it will not last as a public entity.

What I've been trying to get at is that I don't believe Whole Foods is really run in such a way as to act against the interests of shareholders in the name of some other stakeholder. The whole stakeholder spiel is marketing. I happen to find the spiel a bit distasteful and disturbing in its implications - that some guy who lives in the same town as a Whole Foods can trump the invested owners.

As to whether we castigate small business owners who could grow and choose not to, it depends on what you mean by castigate. If they have the potential to contribute significantly to economic growth and they choose not to, it is certainly their right. If they believe that they are helping humanity at large more through their secondary persuits than they would be by way of creating value in the marketplace, I question not their intentions but their sense of efficacy. I'm reminded of Ted Turner donating to the UN.

Growth is demonstrably the most powerful force for increasing global welfare ever to exist on this planet. The Cowenian caution (my term) is to consider that carefully before choosing to do something much less effective but more directly tuned to your sense of charity.

fyodor|9.26.05 @ 6:11PM|

Jason Ligon,

You're right that the corporation's obligation is to its shareholders. But when the shareholders were told before investing that the corporation would be run in a certain way, I'm not sure if changing that way of doing business would ever be right. Although, if the shareholders change their mind...? Your post raises some labyrinthian questions about the nature of consent. Can you consent to be restrained in the future? Are people who buy shares from another shareholder constrained the same way a shareholder who buys in directly is? That's a similar paradox to the question of housing covenants.

Luckily, as you point out yourself, it's mostly a moot issue. But suffice to say that some guy who lives in the same town as a Whole Foods could only "trump" the invested owners if doing so were consistent with the business model that the invested owners had bought into.

As for Turner and the UN, you're right that charitable givings are not always the most wise use of one's assets. But again, I think in the long run we can make better decisions about that without someone drawing an imaginary line between what is or is not acceptable to do with our own money.

|9.26.05 @ 6:36PM|

fyodor:

One last note on the whole issue of shareholders being told in advance of the business plan. One argument Mr. Semiconductor got absolutely right was the notion of who hires whom when a company goes public. If controlling interest of your company is in the float, you are just an employee. If original business plan comes into conflict with majority shareholder interest, business plan loses.

|9.26.05 @ 7:00PM|

Maybe I could shed some light on this "debate" from personal experience. My very tiny company provides engineering and software products and services to its customers.

I can recognize a perpetual motion machine, a data hiway to nowhere, or yet another re-invention of the wheel before my customers can even finish describing it to me. When I hear these kinds of requests I always advise them not to waste their money.

There are two big diffs between Mackey and me, perhaps they are related: 1) I will tell my customer when he is wasting his money. Mackey will not. 2) I don't have much money. Mackey does.

fyodor|9.26.05 @ 7:12PM|

jdog,

Homeopathic products may have more potential for a placebo effect than a perpetual motion machne! :-)

Jason Ligon,

Thanks for the info. In that case, I revert back to my original point, that if it's what the investors want, then fine. If not, well then the CEO is likely to soon become an ex-CEO, I imagine. But it's still up to the shareholders to decide whether it's in their interest to have other interests considered besides their own financial interest. But the only reason other interests can be considered is that the shareholders ultimately say so. Whether the shareholders are improving the world by taking this attitude versus pushing only for profit maximization, I will leave alone, but I will back their right to decide for themselves.

|9.26.05 @ 7:25PM|

"Homeopathic products may have more potential for a placebo effect than a perpetual motion machne! :-)"

Homeopathic medicines have a wider appeal than perpetual motion machines, but a perpetual motion machine will, in fact, cure many of the headaches experienced by product development executive's for several months. :-)

|9.26.05 @ 7:42PM|

Profit itself is a necessity in his model, but maximization must be weighed against other factors in his way of doing things. And as long as everybody involved is happy and signs on to this arrangement voluntarily, well, sounds to me like a great thing he's got going on.

Likewise. Personally, I think deriding someone for not ruthlessly maximizing profits is as narrow-minded and presumptious as condemning someone for not throwing enough of his/her profits towards one's pet causes.

If every business were run like Whole Foods, I'd think it would ultimately be detrimental to society.

I grab this remark out of context, but hey. I'm not worried at all about every business choosing to run like Whole Foods. (I can imagine being worried about every business being forced to run something like Whole Foods, but that's another issue.) That obviously can't and won't happen, since someone will be eager to sell me perfectly decent non-"organic" (strontium-based?) food (or whatever) for less.

Does it really count as "engaging in junk science" to sell non-GMO food or echinacea when consumers demand those things, even if their reasons for demanding them are ill-founded?

"Hawking snake oil" when it comes to homeopathic products, maybe. But then, I've been irritated at Dr. Scholl's for selling placebo magnetic insoles for some time, and it's easy to find homeopathic crap almost everywhere.

I think called everything that falls under the category of homeopathic fraudulent is a bit strong. While the more outlandish claims made by some of those folks are silly, there is reason to believe that some herbs like gingko and ginsing to have a measurable effect.

No, pretty much by definition, anything "homeopathic" is hokum. If a homeopathic remedy had any "measurable effect", you wouldn't see small print on the bottles explaining how nothing on the label or packaging can be construed as claiming that it could have any effect.

It appears that even self-described libertarians can't resist the urge to declaim and harrangue from atop a high horse.... don't most libertarians agree that the FDA is silly and that people should be free to make their own decisions about their health, even if that includes holisitic medicine?

(Um, 6, are you under the impression that libertarians don't declaim and harrangue?)

Yeah, so? You got something against criticizing corporations? :) I'm admittedly of the "if a random liberal or leftist is squealing about the evils of a random company, it's probably not true" bent, but I do believe in caveat emptor as a motto for the consumer.

Mackey falls into the "Ben & Jerry's" category of crunchy capitalism

Mind you, I've never heard of Mackey's company accused of union-busting or trying to mislead the public about dioxin in its products.

If somebody wants to confiscate my decoder ring, give me advance notice and I'll have some yummy snacks waiting when you stop by.

I'll play the pretentious outsider and point out that the sniping in the comments here seems a lot more cultural than political. If one has a thing against Hippy-Dippy Granola Eaters or Snobbish Yuppies, the hackles rise against Mackey. If one has a thing against Evil Vulcan Businessmen, one preens over his success.

And if you doubt me, raise your hand if you'd really take a different side in this argument if Mackey was unsuccessful and Rodgers was the most successful businessman on the planet.

|9.26.05 @ 8:24PM|

fyodor,

To put this into something of a more coherent point:

Say for the sake of argument that charity food drives are an area of comparitive advantage for grocers, since they have a lot of food distribution infrastructure already. Meaning a person who wants to enact good thinks they get more for their money investing in the grocer who holds food drives and not by investing less money in another pure grocer, and investing the difference in a separate food drive provider.

Inasmuch as they are acting as a grocer, their grocerdom is still degraded by asking them to act as a "grocer/charity food drive sposor" instead of just a grocer. The world may indeed be better off with no grocers and only hybrid "grocer/charity food drive sposor"s or some mixture of the two. The question is unanswerable. But there is no doubt that the practice of grocing is degraded if there are fewer pure grocers. Some of the benefits of having more efficient grocers are lost at any given time. Delayed until later.

I think that the Friedman school of thought is that it is better to have businesses act as pure profit and efficiency seeking machines since there is no quantifiable way to deterimine how much do-gooderism maximizes actual good. I don't think it's hard to understand the extent to which business become inefficient if decisions are always muddled by do-gooding.

Two people trying to invest or set budgets or processes to maximize profits are going to come to similar conclusions compared to 2 people trying to "maximize profits/add a fuzzy amount social good."

I think in the end it is impossible for the greater good not to suffer if people take what is usually a somewhat quantifiable, answerable question(how to maximize efficiency of a particular service,) and replace it with an infinite number of questions that no 2 people can ever agree on.

(Second disclaimer of the thread for me: I realize that none of the grocery related words I made up here are real.)

Jadagul|9.26.05 @ 8:31PM|

I have two points to make. First, I think JDM understands Mackey's argument pretty well, even if he disagrees: Mackey thinks that his company will do a better job of investing money in charities than his investors would. That is, one function of his company is to act as an agent for charitable giving. If his grocery can do that more efficiently than all the investors could separately, were they given their dividends back, more power to him. He seems to think he can.

Second, on some level this could be viewed as an addition to Mackey's compensation package. That is, if I went to work for a company that was going to pay me $50,000 a year and asked them to compensate me by donating $50,000 to charity instead, that seems totally legit. But Mackey's labor is worth a lot more than mine; part of his compensation package is the 5% of profits that he donates to charity. The fact that this also attracts investors who share his goals, and thus don't feel the loss as keenly, is just laginappe.

|9.26.05 @ 8:33PM|

Mackey begins his response by saying that the disagreement between him and Milton Friedman is not merely rhetorical. Yet his fundamental argument against Friedman seems to be this:

"Why don�t Friedman and other economists consistently teach this idea? Why don�t they talk more about all the valuable contributions that business makes in creating value for its customers, for its employees, and for its communities? Why talk only about maximizing profits for the investors? Doing so harms the brand of capitalism."

So if it all comes down to arguing over which method is best for presenting free market capitalism to people who aren't yet convinced, is that not a mere rhetorical disagreement?

|9.26.05 @ 8:42PM|

Friedman's argument against Mackey comes down that Mackey is being dishonest to the reader and probably to himself in describing his motivations for operating his company as he does. I think he has a point but that is an unsatisfactory tack for a philosophical debate, as it they disagree on semantic points. Rodgers, on the other hand, gets personally offended by Mackey's smug self-righteous tone, and it ruins his effectiveness at making his point.

Rodgers, makes a telling point when he discusses Mackey's relationship with his investors and that it may not be what Mackey thinks it is. Mackey says: "This is because I believe the entrepreneurs, not the current investors in a company's stock, have the right and responsibility to define the purpose of the company." Perhaps, but apparently Mackey's been successful in attracting investors that agree with his business philosophy or are at least willing to tolerate it. If his investors decide that that philosophy no longer serves their interests and challenge his decisions, Mackey may be shocked as to who has the right decide the future of his company.

|9.26.05 @ 8:42PM|

"Whether the shareholders are improving the world by taking this attitude versus pushing only for profit maximization, I will leave alone, but I will back their right to decide for themselves."

Perhaps it *is* best to leave that alone. But I'll bother with it anyway, just a bit. A marketplace that just takes one person's money and hands it to someone else in exchange for something worthless, as is the case with placebo medicines and many so called health foods, does not produce wealth.

Real and lasting wealth is produced by the likes of that silly little U-shaped pipe at the bottom of your toilet that prevents toxic gas from feeding back into your house and by the elaborate array of semi-conductors that make your computer work. It is not produced by exploiting the expectations of fools.

Notice that neither Freidman nor Mackey can give us any clue as to how to produce wealth, that is, how to *make* money, not just shuffle it around.

|9.26.05 @ 9:11PM|

Bottom line: He's making money, his investors are happy, his charities are benefiting, the customers obviously like the stuff, the neighbors are happy, and the employees haven't tried to unionize. Sounds like all is well at Whole Foods Market.

And Rodgers can't stand that thought.

Uncle Sam|9.26.05 @ 10:02PM|

Without bothering to read all previous 109+ posts, I will point out the obvious that Rodgers comes across like an asshole, which means he probably is an asshole (unless you're a buddy).
I suppose, though, he doesn't rank up there with Santorum, etc.

I rarely shop at Whole Foods, as the nearest one is inconveniently distant. Perhaps is mackey plowed that 5% into expansion, he could build an outlet closer to me (and others) so it appears that he is not so interested in serving potential customers.

Trader Joe's does have an outlet near me, so I do buy stuff there. I do usually pass up the organic stuff and I avoid preservative free bread as best I can. I brought home some pf pita bread once and found mold growing on it when I got home.
No more.

The 5% committed to charity may or may not "make the world a better place" but I, for one, will not choose to shop somewhere on that account. I prefer to make my own decisions on charitable giving.

celtlion|9.26.05 @ 11:21PM|

I liked Mackey's philosophy - where is it written in stone that the only acceptable goal for an investment is maximum return on investment?

Many investors, myself included have no problem with charitable pursuits through targeted investments given that they don't alter the overall growth plan of a company.

Besides, the root of capitalism still lie within small businesses located in even smaller communities - there we often see charitable ventures on a grander percentage basis than many Fortune 500 companies - local sport teams, local community scholarships, community donations...etc.

celtlion

fyodor|9.27.05 @ 11:06AM|

JDM,

I sympathize with your point that profit maximization is more concretely based than charitable giving.

But -- so what? All that proves is that life has its share of less concrete and objective more subjective and, you might say, squishy goals. At this point, I'm not sure if you're saying that anytime ANYONE diverts attention from concrete issues to subjective ones that the greater good sufferes or if that's the case only when corporations do so. If it's the former, you seem to arbitrarily place no or an inherently lesser amount of value of charitable works, based on the difficulty of quantifying the good being done. While I might agree that charitable activities could likely use more rational means of measurement to insure that the stated goals are being met in the most efficient way, to make such a broad statement would inevitably lead down the road than NO activities that are less quantifiable are as good as activities that ARE quantifiable, and that way leads to insanity, pure and simple. I won't bore you with why as it should be self-evident. If it's only corporations that should be immune from subjective decisions and activities, again, it seems like an arbitrary distinction to make. If an individual can rationally be faced with trade-offs between objective and subjective goals, why not a corporation at the behest of its investors, who are merely making this decision for themselves en masses and decideing that the corporation can handle the decision better?

Either way, while I understand the difficulties inherent in addressing all subjective issues in life versus more quantifiable matters, it seems arbitrary to say that because of that it is inappropriate for corporations to ever address such issues or that doing so inevitably reduces the greater good, which, after all, can only be reached by all individuals having the maximum just freedom to pursue their personally chosen goals.

fyodor|9.27.05 @ 11:31AM|

jdog,

A marketplace that just takes one person's money and hands it to someone else in exchange for something worthless, as is the case with placebo medicines and many so called health foods, does not produce wealth.

I'm afraid you have an utterly misguided notion of wealth and worth. Worth is based on what someone is willing to pay for something, regardless of what YOU think of that decision. Wealth is the accumulation of assets whose cumulative worth is based on what people would be willing to pay for them, again, regardless of what YOU think of the assets. Worth is not limited to things solid or tangible like a piece of hardware. If someone has homeopathic medicines that others are willing to pay a million bucks for, that person or business has a lot more wealth than someone who has possession of one of those U-shaped pipes and nothing else. Another thing to consider is that perhaps someone who helped manufacture or installed the U-shaped pipe did so so that he could buy more homeopathic medicines! Or does that not compute? FWIW, my girlfriend sells pretty stones and jewelry she makes out of them, often at what are called "Metaphysical Fairs," which she has come to notice are, somewhat surprisingly, frequently largely by working class women. So, to come up with a quite plausible scenario from real life experience, maybe the guy who installed the U-shaped pipe worked overtime to earn money so that his wife could buy some stones she liked for their supposed "metaphysical" properties, which I assume you'd find every bit as "worthless" as homeopathic remedies. But obviously, the desire to have such items drives our economy and produces wealth every bit as much as the desire for the tangible items to which you are more inclined to attribute "worth." (Need I remind you that my girlfriend uses the money she makes to buy other goods and services, some of which you might see worth in and some of which you might not. Thus the economy (and the free market) works.)

|9.27.05 @ 12:31PM|

jdog:

A marketplace that just takes one person's money and hands it to someone else in exchange for something worthless...

But the free market doesn't take anyone's money! As fyodor observed, worth is subjective. And the free market allows individuals choice in pursuing their own assessments of worth.

|9.27.05 @ 1:12PM|

"At this point, I'm not sure if you're saying that anytime ANYONE diverts attention from concrete issues to subjective ones that the greater good sufferes or if that's the case only when corporations do so."

I'm saying that is unknowable how much attention diverted from growth achieves how much good vs. not diverting it. I agree that it's best left (and can only be left) to people to decide freely on their own.

It is also best left for corporations, etc. to decide on their own.

"If an individual can rationally be faced with trade-offs between objective and subjective goals, why not a corporation at the behest of its investors, who are merely making this decision for themselves en masses and decideing that the corporation can handle the decision better?"

I'm just trying to clarify what I believe to be Friedman's school of thought here. An organization is going to function better with clear rules for decision making. Muddying the organizational rules which are definable (rule 1 - profit) between shareholders, corporations, customers with additional rules whose outcomes are undefinable (improve social value for the neighborhood) necessarily causes inefficiency. It in effect makes it harder for anyone to obtain "perfect" information.

Capitalism is a process, just as science is a process. Why shouldn't scientists fudge their results to achieve a greater good? It's a similar, though obviously not the same question. One of the answers is because you pollute one entire information gathering process.

On the political point, we agree. I'm just trying to explain what I see as the Friedman view on why capitalism as a decision making process should stay free from trying to do much "social good" beyond the social good achieved by it remaining a system for efficient production of goods.

Personally I just want people to understand the "goodness" of growth and efficiency mostly, and also (less importantly) the ideas I'm trying to describe about muddying a decision making system so they can plug it into the process you describe when deciding where to invest. In the end I think it will, minus the occasional Whole Foods and Ronald McDonald house.

(As an aside, I'm all for Ronald McDonald house.)

|9.27.05 @ 1:21PM|

"In the end I think it will, minus the occasional Whole Foods and Ronald McDonald house."

Err, "in the end I think capitalism will remain largely the same, minus blah blah blah" is more what I meant. Bad editing by me.

Dave W.|9.27.05 @ 2:53PM|

I don't buy organic animal products because of any supposed health benefits. I buy them because I don't want the evil that goes down in factory farms, high density feedlots, and industrial poultry operations on my consience. Also, I buy them for the same reason that I bring reusable bags to the grocerty store - because it's a more environmentally sustainable way to do things.

Now if they could just find some code for non-food products manufactured under conscionable conditions.

Dave W.|9.27.05 @ 3:08PM|

I think it is good when markets have many small suppliers, and each supplier can set policy its own way according to a unique vision. I call this capitalism.

I think it is bad when there are only a few huge companies in a market and the thinking and strategizing becomes uniform and hegemonic. I call this oligopoly or top-down control.

I think Mackey is from one world and Rodgers the other.

|9.27.05 @ 5:24PM|

Lots of fascinating commentary on the article/debate. I will jump in here with a few thoughts:

1. In the article I make the argument that feeling responsibility for various stakeholders (customers, employees, investors, vendors, communities, and the environment) is a voluntary decision that the entrepreneurial leadership of the company has the right to make provided that it has investor approval. Social responsibility (like love) should not and probably cannot be coerced from the outside. If any particular business entrepreneur doesn't care about anything but maximizing investor profits with his company he is free to do so. That is o.k. with me. Whole Foods in contrast was started by entrepreneurs with strong social consciousness who always believed that business should be both financially successful and socially responsible to all of its various constituencies at the same time. We received permission from our original investors to operate our business this way. Subsequent investors have not objected to this philosophy and still have the power to
A. Sell their stock if they disagree with the company's well publicized philosophy or don't buy it in the first place.
B. Change the company philosophy by replacing the management of the company.
C. Change the company philosophy by submitting a shareholder resolution.

I honestly don't understand how any libertarian who really believes in freedom could object to what Whole Foods is doing from either an ethical or legal perspective.

2. I believe that the economic models that many free-market economists (and some commentators on this Board) believe in are radically oversimplified and their views on human nature are quite inadequate. Most of these models have a kind of "mechanistic" and "industrial" way of thinking about business which doesn't really correspond very well with how business really works in my experience. Creating profits for investors is obviously one of the most important purposes for all businesses--including Whole Foods. The question is, is that the only purpose for most businesses? It seems obvious to me that it isn't and that very few businesses consistently act at all times soley to maximize investor profits.

3. Perhaps my most important (and radical) idea that I don't think I was able to express as well as I would like to have done in the article is the idea that businesses such as Whole Foods not only create more value for their customers, employees, and communities, but also create more investor value as well. This is counter intuitive for most people who think mostly in terms of zero sum games--your gain is necessarily my loss and vice versa. The common wisdom is that it is impossible to optimize value for all constituencies simultaneously--that additional money paid to employees necessarily lowers profits or money donated to help various communities is money that should have been paid out to the investors in dividends or reinvested in the business to create higher future profits. Our real world experience at Whole Foods refutes this "common wisdom", however.

Let me give you a recent real world example: Hurricane Katrina and New Orleans. When Katrina hit we were forced to close down our 2 stores and it will take a few months to repair and reopen them. Even after insurance payments are collected we will likely still suffer a few millions of dollars worth of losses. Despite these large losses to our investors, Whole Foods did a number of things consistent with our stakeholder philosophy that will definitely harm investor profits in the short-term. We guaranteed the jobs of all 600+ of our Team Members in New Orleans and relocated almost all of them at company expense to other stores across the United States--wherever they wanted to relocate to. We now have New Orleans Team Members working in 25 different cities, in 15 different states. We will also move any of these Team Members back to New Orleans if/when they wish to return. Interestingly, over 50% of these relocated Team Members don't plan on moving back. We made this commitment to our New Orleans Team Members because we care about them and wanted to do what we could do to help them. It "cost" our investors well over $1 million to relocate all these Team Members. However, as a result of our commitment to the New Orleans Team Members morale throughout the 36,000+ Team Member base is sky high right now. Why? Because our concrete actions to help our New Orleans Team Members clearly demonstrated that we care about our Team Members well being and that we'll stand by them when times get tough. How do you quantify the increase in Team Member spirit and morale? How do you put a dollar figure on the long-term increased productivity and better customer service that our actions will likely result in? I don't know how to quantify it, but I know it will be large and I believe that over the long-term our investors will benefit.

Whole Foods also committed to match customer donations of cash given to the American Red Cross up to $1 million in cash. So far our customers have donated $1.5 million, so we've already paid the $1 million commitment. We had several customers make cash donations at our stores of $5,000 to $20,000 because they knew that Whole Foods was going to match their donations, thus leveraging the donation further. Whole Foods also donated 25 truckloads worth of food to relief efforts in the city and our Team Members volunteered huge numbers of hours to help distribute that food to needy people. We estimate that we fed over 300,000 people in the first 10 days after Katrina. These donations cost our investors well over $2 million in cash and food given to help New Orleans during this disaster. We made these donations because we believed it was the "right thing to do" to support our community stakeholder in New Orleans. However, our care and generosity has created enormous good-will with our customers, Team Members, many investors, and thousands and thousands of New Orleans citizens. How do you quantify the value of this good will or the positive media coverage that our generosity has helped create? I don't know how to do so, but over the long-term I believe our investors will likely recoup the donations that we have given.

A business consists of people and the relationships of those people with the company and with each other, as well as the sense of purpose and meaning that people experience through the business. The "Spirit" of all those people (customers, employees, vendors, investors, and communities) is an intangible asset that dwarfs all other assets in value. It is impossible to quantify the true value of that Spirit; it is therefore never reported on a company's Balance Sheet; and no economic model that I'm aware of accounts for it. Whole Foods stakeholder model works extremely well and it creates far more Spirit than the simplistic profit model that it competes against. It is not only possible to create value simultaneously for all stakeholder groups, but doing so is the best way to maximize investor value as well.

Here is the essence of what I call "the paradox of maximizing shareholder value": We maximize shareholder value best by creating value for all of the other constituencies of the business besides the shareholders. We prosper in business by doing good for others. The more good we do for others the more prosperous our business will become. That has been my experience at Whole Foods for over 25 years now.

|9.27.05 @ 6:05PM|

There has been a fair number of comments about Whole Foods and "junk science" on the Board as well. It seems that some of the posters are more than a little skeptical about homeopathy and some of the other products we sell in our Whole Body departments.

I don't want to get into a debate about the efficacy of homeopathy, herbs, vitamins, etc. on this Board which would likely waste time and convince no one. I do want to point out, however, is that Whole Foods is a retailer and we are in business to sell the products that our customers want to buy--for whatever reasons they might have. If an individual thinks homeopathy is nonsense then he or she shouldn't buy these products. However, shouldn't other people have the freedom to buy these products if they wish to buy them?

Every day Whole Foods is criticized and attacked by people with their own agendas who are upset about some of the products that we sell (and don't sell). Sometimes its people complaining that homeopathy is utter nonsense that scientific testing has exposed as fradulent; sometimes its people telling us that all herbs and vitamins should be prescribed only by doctors instead of self-prescribed by individuals; sometimes its opponents of GMOs telling us to ban all food from our shelves that have any GMOs in them (yes Whole Foods sells food with GMOs in it); sometimes its supporters of GMOs telling us that any food we label as free of GMOs is "junk science"; sometimes its animal rights folks telling us that meat is murder and that we should stop selling meat; sometimes its people with various allergies telling us that we shouldn't sell gluten, or corn, or soy, or dairy products; sometimes people are upset by the fact that we sell beer and wine which can lead to alcoholism and wrecked lives; sometimes its people telling us that we should stop sellling farm raised seafood because it is exploitative or lobsters because they are in tanks or wild-caught seafood because they are endangered; and sometimes its people very committed to organic foods telling us that we should stop selling any foods that aren't organic. There are actually several more prohibitions that we hear every day as well, but I think I've made my point.

The solution is simple: don't buy what you don't believe in and let other people have the freedom to buy what they believe in. Isn't that the libertarian way? If Whole Foods is guilty of "junk science" because we sell some products that don't yet have strong scientific evidence supporting their value, well then so are all other food retailers too.

|9.28.05 @ 1:35PM|

Rick:

"But the free market doesn't take anyone's money! As fyodor observed, worth is subjective."

I said wealth, not worth. I never said anything about money.

Sorry, very late on this.

I do not think wealth is subjective, but worth is. Toilets and the wheels are examples of what I meant by wealth, even though they are commodities. Money and worth are indeed subjective. I'd rather be a poor man with a toilet and a wheel, than a rich man with neither. IOW, I'd rather be a poor man living in a trailor park in Tulsa than a rich man living a castle in Rangoon.

|9.28.05 @ 2:22PM|

John Mackey,

I enjoy the sandwiches and many of the other offerings at the Whole Foods deli counter.

Though I don't think your business (nor mine) makes a big dent in anyone's quality of life, choices are cool. When its my turn to buy lunch I often suggest going to a market like Whole Foods. I got fishy looks a few years ago when suggesting this, but no more.

Thank you for being in business.

|9.29.05 @ 11:14AM|

Friedman is correct that much of corporate philanthropy might just be good business rather than actual philanthropy. But what about corporate philanthropy that does not increase the cash flows of the firm? Is there any moral justification for it in a free society?



The responsibility of the corporation is not to maximize the wealth of the investors. The responsibility of the corporation is rather in line with the goal of economics--to maximize the utility of investors. Investors come in many types. Some want to maximize profits and others want to get a good return and a warm feeling from contributing to charitable causes--defined however investors define "charitable".



What is interesting is that, if and only if all the investors are on board with the company's social initiatives, the stock price will be unharmed by these social initiatives, even though these investments might decrease profit. In our forthcoming article in Academy of Management Review, we argue that the potential exists for a firm to maximize its stock price, but not maximize the profits of the firm, by engaging in socially conscious behavior. In our model, investors who value socially conscious business practices congregate their investment dollars in firms that implement the practices their investors believe in. These socially conscious investors must value their socially conscious stock as highly as wealth-maximizing investors value their wealth-maximizing stock, or else wealth-maximizing investors will lead a hostile takeover of the socially conscious firm, changing its management to a wealth-maximizing management.



An example: Two firms are identical, except one is run with a social mission?donating money to an endowed chair at the University of Chicago's economics department (Or Yale English, if you prefer). The donation does nothing to help the socially conscious firm's bottom line. Both have profits with a present value of $100, but the socially conscious firm only has net profits of $80 after funding its social mission.



The stock market value of the wealth-maximizing firm is obvious--$100. But less obvious is that, in an efficient market, the stock market value of the socially conscious firm is also $100. This is because the socially conscious investors must not be willing to sell their socially conscious shares for anything less than $100, otherwise wealth-maximizing investors will takeover the socially conscious firm for less than $100, stop funding the endowed chair, and greedily reap the profits when the stock price jumps up to $100.



All parties act in their own rational self-interest, only the two different kinds of investors have different interests. In fact, this scenario is no different from the case in which both firms are run to maximize profits, and the socially conscious investors get together on their own to fund the chair, except for the tax benefits as Dr. Friedman mentioned, and the costs of the investors getting together to agree upon where to donate their money. Whole Foods seems to follow this model, as the initial investors bought in to Mackey's (no relation) vision.



If Mackey's vision of corporate philanthropy takes hold, it will not be because it makes more money than wealth-maximizing firms, but because investors demand it of the managers they pay.



Jay Barney

Alison Mackey

Tyson Mackey

The Ohio State University

|9.29.05 @ 4:55PM|

Hi Tyson,

Sorry to hear we aren't related. I'll have to take you out of my will now.

Who says that the purpose of the corporation is to maximize either investor profits or investor utility? Everyone seems to buy into this belief, but I've yet to hear good arguments that this is really the case. The usual way economics textbooks explain it is that a bunch of investors get together who want to maximize their profits, create a company, and then hire management to run it. Management's job is therefore to fulfill the purpose that the investors hired them to do, which is to maximize their profits. With rather rare exceptions, however, this isn't really how businesses actually work. The way most businesses begin is that an entrepreneur(s) has a vision or dream of some kind and then creates a business to fulfill that vision or dream. That entrepreneur(s)then organizes all the factors together necessary to operate the business and fulfill the vision/dream--intellectual capital, labor, land, financial capital, management, etc. None of those factors of production is coerced to cooperate with the entrepreneur, but does so through voluntary exchange with the entrepreneur/organization for mutual benefit. This includes the investors. The investors therefore don't create the purpose of the business, but merely participate as one of the constituencies in the business. Since the investors are paid last for their voluntary cooperation with the enterprise by their claim on residual profits it is essential that the investors have a legal right to replace the management. Without this right the investors would be foolish to invest because they might never be "paid" as the management could siphon off all the profits into their own pockets. However the right to replace the management does not therefore translate into determining what the purpose(s) of the business is.

I know lots of entrepreneurs who have built very successful businesses and with only one or two exceptions none of these entrepreneurs created their businesses primarily to maximize investor profits. They created their businesses for the sheer fun of it, or to test their theories in the real world, to fulfill some dream of changing or bettering the world, or to prove to something to their father, or for a variety of other reasons. Sure they all want to make money, but with few exceptions this is very much a secondary motivation.

What is the point of all this? My point is that economists simply made up the "myth" that the purpose of business is to maximize investor profits or shareholder value or investor utility, etc., etc. The myth is being sustained by constant repetition, but doesn't really correspond to why entrepreneurs create businesses. I want to explode this myth. It isn't true.

One more point: I want to reiterate what I said in a previous post and which Tyson, Alison, and Jay appear to disagree with me about: My vision of responsibility toward all stakeholders creates more investor profits and shareholder value over the long-term than its intellectual competitor who are "wealth maximizers" in the narrow sense that I believe they mean it. I made an argument for the importance of "Spirit" being an incredibly important intangible asset of every organization. Spirit is more fully realized with organizations that have "higher purposes" than merely maximizing profits. Very few employees get excited about maximizing investor profits, but they can get very excited when the understand that their work is helping people, society, and the environment. Corporations such as Whole Foods are very complex systems with a huge variety of relationships both within and ouside the company that ultimately determine the success or failure of the business. They are very Hayekian in their complexity and the way they evolve. I no longer spend much time trying to manage individual people at Whole Foods. Instead I try to help the collective "Spirit" of our complex, spontaneous order evolve in positive ways. By trying to create value for all of the various constituencies it has been my experience that this strategy creates the most value for the investors too. The investors will not continually flourish over the long-run unless the other constituencies flourish as well. Capitalism is about win-win-win-win relationships. I believe that over the long-term corporations such as Whole Foods will become more and more common in the marketplace because they simply work much better. The marketplace will ultimately decide what types of businesses flourish and which perish. The narrow profit maximizer types of business will not compete well over the long-term. The critics of Whole Foods believe that we are successful despite our "handicap" of social responsibility. I think that the exact opposite is true and that it is the narrow profit maximizers that are handicapped in the competition. Their inability to generate much "Spirit" will eventually destroy them. A great example of this is what has happened in the airline business where companies such as Southwest Airlines and Jet Blue (which have similar values to Whole Foods)are systematically bankrupting the old paradigm airlines such as United, American, Northwest, and Delta.

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