Institutions Must Be Designed with an Understanding of Business

Humanity’s history of understanding economics is short. It was only when Adam Smith wrote *The Wealth of Nations* in 1776 that people became familiar with economic ways of thinking. Even today, most countries still do not understand economic principles well enough to achieve the accomplishments of the Industrial Revolution. Of course, living in an advanced country does not mean one understands economics either. Economic logic is, in fact, that difficult to grasp. Understanding business is even harder. Many economics textbooks fail to adequately explain the firm. Even among economists and business scholars, many remain ignorant about business. Because it is difficult to understand, it is easy to misunderstand, and in the end, businesses are often reduced to objects of envy.

Human beings are creatures that can fall into greed in an instant. That weakness is part of human nature. Moreover, when such people gather to form massive organizations and take on roles that underpin society, people naturally feel uneasy and find them hard to trust. So they want the government to control them, and politicians strive to create regulations aimed at controlling large corporations. But this is ineffective. Institutions created without sufficient understanding of business and its underlying principles merely restrict the freedom to do business; they cannot restrain human greed.

It is also common for famous companies to become targets of social attack. As a result, companies today consider the possibility of social criticism when making decisions. Large corporations therefore approach consumers very cautiously. In being overly conscious of consumers, they sometimes anthropomorphize themselves and present themselves as friendly, benevolent entities. Such publicity has the side effect of encouraging people to take a more dependent attitude toward large corporations and to make greater moral demands of them. The essence of a business is to benefit consumers; exaggerating as though it can play the role of a warm family departs from that essence.

Google’s motto is “Don’t be evil.” Taken simply, this could be interpreted as, “Let’s show that it is possible to make money without doing bad things,” but its essential meaning lies elsewhere. Platform companies encompass the things of the world on a massive scale. Like infrastructure facilities that form the foundation of society, many activities take place on top of them. In that sense, Google is a company that embraces the world, an entity like a vast empire. If things go wrong, people can become trapped inside it, and freedom can be infringed. In fact, some countries use IT technology as a means of control, which makes this meaning all the more important. But Google made a commitment to pursue goodness by enhancing people’s welfare and expanding freedom.

Technological innovation creates an environment in which even larger companies can emerge. But when larger companies appear, people become wary and seek to limit them. Fear of the unknown and a sense of dread also play a role. Checks and restraints designed to institutionalize hatred and envy also emerge. Innovation does not arise in societies where freedom is suppressed. Contracts distorted by regulation, guild-like ways of thinking, and political allocation make the social structure rigid and murky. In modern capitalist society, firms are the units of competition. Competition takes place through firms, and innovation is achieved through firms. Some say it is created by the ecosystem, but unlike an organization, an ecosystem functions more like a market. It refers to the process of trading and exchange among participants. The agents of that exchange and the agents of production are still individuals and organizations.

Most criticism of large corporations stems not from an understanding of the business economy but from political logic. Politicians stir up anti-business sentiment and exploit it politically because they believe it helps their pursuit of power. If we want to change corporate culture, we can change the institutions. What are better institutions? The key is a shift toward pro-market institutions that create a business-friendly environment. Now is the time to revisit economic principles and establish institutions that support business.

Sung-no Choi

President, Center for Free Enterprise (CFE)

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Original title: 기업을 이해하고 제도 만들어야

Author: Sung-no Choi

Date: 2021-12-08

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=24378