The Psychology of People Against Profit By Bryan Caplan

I just read a fascinating new working paper by Penn’s Amit Bhattacharjee, Jason Dana, and Jonathan Baron (henceforth BDB). The title: “Is Profit Evil? Associations of Profit With Social Harm.” The paper is not yet publicly available, but I have the authors’ permission to share a sneak peak.

The paper starts by noting the apparent tension between laymen’s and experts’ beliefs about the social effects of profit. Laymen often seem to equate profit with social harm. But:

The scholarly consensus is that profits arise as part of a win-win situation in which the pie becomes much larger as a result of efficiency and investment, leading to larger slices for both consumers and producers… Even scholars who have highlighted the shortcomings of the market… readily agree that our profit-driven economic system has produced tremendous technological innovation and provided the public with unprecedented value.

Could the public really overlook the social benefits of the profit motive in favor of crude populism? BDB put some experimental subjects to the test – or rather, a series of tests.

In Test 1a, subjects rated the profitability and social value of 40 firms from the Fortune 500.

[S]ubjects firstindicated their familiarity with the firm on a 3-point scale (1=Never heard of it, 3=Familiar). Next, they rated the firm on perceived profit (“How much profit do you think this business made on the average (of businesses in general) in the last year?”; 1=Zero or less, 6=A lot more than average). Subjects then indicated… the perceived value of the firm to society (“What do you think about the value of this business to society, on the whole?”; 1=It would be better if it did not exist, 5=It is important and useful).

They found a strong negative relationship (r=-.62) between perceived profit and perceived social value. Check out the fun scatter plot – and see what’s in the lower right-hand corner. More amazingly, they found that the correlation between actual profit and perceived social value worked about as well (r=-.57). People’s average guesses about relative profitability are amazingly accurate, even though their average guesses about social value are way off-base.

In Test 1b, BDB replaced specific firms with industries, and once again checked the correlation between perceived profitability and perceived social value. r=-.67! Check out the next fun scatter plot. Credit cards, the basis of virtually all internet commerce, absurdly occupy the lower right-hand corner. Solar energy, in contrast, is rated the most “important and useful” (?!) of all the named industries. The only bright spot: BDB find that a pro-profit minority is out there:

For Study 1a, 66% of participants had a negative correlation, indicating anti-market bias, 30% had a positive correlation. For Study 1b, the corresponding percentages were 91% and 9%. Thus, most, but not all, participants hold anti-profit beliefs, and more variation in these beliefs occurs for individual firms, with whom people may have had variable individual experiences.

BDB’s final test tries to establish causality with randomized hypotheticals:

The scenarios described: 1) an organization that requests volunteer donations of blood plasma and sells it to hospitals; 2) an organization that buys quality handmade jewelry and crafts from poor artisans in developing nations and sells them at high margins in retail outlets in developed nations; 3) an organization that buys the rights to promising new medical technologies from the inventors, then develops and sells the technologies to hospitals; 4) an organization that provides microloans to poor people in developing nations at high interest rates; and 5) an organization that sells Fair Trade coffee at higher prices so that small coffee farmers are paid more. The key manipulation varied only whether the organization was described as a “for-profit corporation” or a “non-profit organization.”

BDB predictably find that merely changing a hypothetical organization from a non-profit to a for-profit noticeably reduces its perceived social value.

The paper’s punchline is eloquently depressing:

People apparently have little faith in the power of markets to create and reward value for society. Across actual firms (Study 1a), entire industries (Study 1b), and hypothetical organizations (Study 2), our participants associated greater levels of profit with social harm and less social value. Further, they saw greater profits as undeserved and at the expense of others. Though firms themselves were not seen as generally evil or devoid of value, profit was viewed as evil. Increasing firm profitability (or profit motive) greatly detracted from perceived social value… These results are quite in opposition to the view of markets espoused by economists and scholars that supply, demand, and competition will most reward profit-seekers that provide what society wants. Even in one of the most market-oriented societies in human history, people do not believe in the invisible hand.

In a just academic world, “Is Profit Evil?” would go very far indeed. Fingers crossed, and I’ll post a link once the full article is available.