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Facebook's Economic Lesson for Obama   May 22nd, 2012
Profit is a good thing       


More observations...

The Facebook IPO debacle is a lesson in economics to President Obama, liberals in general, and to those that are expressing interest in feel-good "benefit corporations."

In the several short days since Facebook went public and its stock value tanked, people are asking themselves, "What went wrong?" One compelling explanation relates to some of Zuckerberg's comments in recent SEC filings.

Those comments include:
    "Facebook was not originally created to be a company. It was built to accomplish a social mission, to make the world more open and connected... We've always cared primarily about our social mission, the services we're building and the people who use them. This is a different approach for a public company to take... Simply put: we don't build services to make money; we make money to build better services.' These days I think more and more people want to use services from companies that believe in something beyond simply maximizing profits... We don't wake up in the morning with the primary goal of making money, but we understand that the best way to achieve our mission is to build a strong and valuable company."

This is a perfect example of the liberal perversion of capitalism that says that a company's primary focus shouldn't be about maximizing profit, but rather be some kind of "social mission."

It would appear that Facebook would be a perfect candidate for a "benefit corporation."

I hadn't heard about benefit corporations until recently when the Colorado legislature almost passed legislation that would allow their creation within the state. When I investigated, I discovered that a benefit corporation is essentially a corporate entity where corporate officers don't have a fiduciary responsibility to stockholders to maximize profits, but are rather relieved of that responsibility in order to pursue some kind of social mission defined in their corporate charter.

Wikipedia describes a benefit corporation as "a class of corporation required by law to create general benefit for society as well as for shareholders."

The fundamental error here is that generating jobs for employees and providing dividends for shareholders is a general benefit for society. In fact, providing jobs and wealth is the only purpose of people coming together to form a company in the first place. Providing a general benefit for society is something that employees and stockholders can (and should) do individually with the wealth they receive from the company. Non-profit organizations already exist to direct the efforts of individuals for "general benefit of society."

The question may be asked, "What's wrong with a company doing some social good?" There's nothing wrong with it as long as that's not the primary purpose of the company. If the company wants to set aside some percentage of their profits to donate to causes, wonderful! That's the company's choice. But that should never be the primary concern of the company.

This isn't some philosophical argument without a cause. It's a very important point that shouldn't be ignored.

As soon as a company no longer has a fiduciary duty to the stockholder to maximize profits, it becomes nearly impossible to accurately value the company. Stockholders can't know what a company is worth, can't make an educated guess at their potential investment returns, and thus can't determine whether and how much to invest in the company.

If part of a benefit corporation's charter is to clean-up and maintain a local river, what is the value of that to society? Beyond that, what's the value of that to the stockholder that invested money into the corporation with the expectation of making money? Since neither the value of that project to society or to the company can be known, it's impossible for a stockholder to ascertain the value of the company and make an intelligent bid on its stock. This turns the free market on its head and makes wise decision-making virtually impossible.

That's not to say that cleaning-up and maintaining a river isn't a worthwhile cause. But a profit-making corporation is not the entity that should be doing it. The profit-making corporation should be focused on making a profit so that it can create jobs for employees and dividends for investors--and those employees and investors can then use their earnings for worthwhile goals in society.

Benefit corporations are a bad idea because they distort the free market and make it impossible for participants to make rational decisions.

For this reason, Zuckerman's comments that Facebook "[doesn't] build services to make money" should be a huge red flag to investors. If making money isn't the goal, investors can't possibly know what the company is worth and make rational investing decisions.

While there are certainly a host of reasons why Facebook's value plummeted post-IPO, and there's certainly every possibility that Facebook can still expand as a successful company if it becomes more profit-driven, it should be noted that it might not be entirely coincidental that Facebook's CEO doesn't appear focused on what should be the company's primary mission: Earning money.

And if a company doesn't focus on earning money, it's more likely that that company won't earn money, or will earn less. And when that happens, fewer people will have jobs and fewer investors will receive dividends... and those people will be less likely to contribute their wealth to endeavors that help society.

And this goes back to the inherent failure of President Obama's recent attacks on Mitt Romney.

Obama said "But understand that their priority is to maximize profits, and that's not always going to be good for communities or businesses or workers... If your main argument for how to grow the economy is, 'I knew how to make a lot of money for investors,' then you're missing what this job is about."

What Obama fails to understand is that when an organization maximizes profits, it is doing what's good for the communities, businesses and workers. Of course the person that loses a job might not see it that way, but that's because he has no knowledge of the two jobs created elsewhere in the economy by the wealth that was generated.

In fact, when a corporation doesn't attempt to maximize profits, regardless of intent, it's not doing what's best for the individuals, workers, communities, or country. That's because by reducing profits, it's reducing the amount of money that employees and investors can contribute to societal improvements. And in the case of Facebook, investors that have lost money are less likely to be able to give charitably to worthy causes than if they had earned a profit.

The fundamental misunderstanding (or deception) of Democrats is the idea that profits and wealth are evil. Nonsense!

Profits and wealth are what make everything else possible.

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