Chapter 7

The entrepreneur and the firm

There are four topics still to discuss dealing with economics: the firm and its relation to the public, the relation between employer and employee (whether in a firm or not), the firm that has employees within it, and finally government's actions in the economic field. I am going to leave the last three of these until the next section (or sections, depending on the length), because all of them involve aspects of the social relationship. Even a person who hires an employee as, say, a servant, has gained authority over his actions; and authority is a characteristic of the social relation, not the economic one. Hence, this chapter on the entrepreneur and the firm in general will be the last of this section.

What I am going to say here will be directed at the firm that is called the "single proprietorship," and also at a firm which has no employees within it; but since this is the simplest case of a firm, what I will be saying here will apply mutatis mutandis to more complex firms.

Let me begin with some definitions:

An entrepreneur is a person who offers a service or product to the public.

A firm or business is a social entity which offers a service or product to the public.

The public is the set of people who might find the service of product of value to them or necessary for them.

A consumer or customer is one of the public.

The point in these definitions is that an entrepreneur does not perform his service for one definite person (then he's an employee), but has a service that he hopes enough people will be interested in for him to be able to make a living; and so he offers it to that undefined segment of the human race called the "public" that might want or need the service. As I said earlier in discussing sellers, essentially what the entrepreneur is offering is his service, even when he sets himself up in the business of making fancy dolls to sell to people.

Perhaps the first thing to note here is that a firm cannot, strictly speaking, be owned. True, when an entrepreneur begins a business, it is his, and it usually involves owning or renting things like an office, various types of equipment, perhaps certain materials, and so on; but he doesn't own the business as such, for the simple reason that the business is essentially a relation to the public, and you can't own a relation.

And this is recognized. If an entrepreneur sells a business, it is recognized that he not only sells the building, say, the materials, the equipment, and so on, but also the "intangible assets" like "good will," based on how the firm has treated consumers in the past, inducing them to want to patronize it again. This, of course, will change as the new entrepreneur takes charge, if for no other reason than that his personality will make him relate to customers in a different way, altering the reputation of the firm. But it is just this relation between the firm and potential customers that is the very essence of the firm as such: every firm has this, and firms have nothing else in common. When you own something, it is nobody's concern (except their own protection) what you do with it; but with a business, the public is involved and has expectations based on the fact that the firm necessarily relates itself to them.

So we can immediately say this:

Conclusion 23: Every firm has at least two coordinate purposes: (a) to serve the public and (b) to make money for the entrepreneur. Neither of these is the means toward the other.

That is, firms are not simply machines for making money. It may be that the entrepreneur's motive for creating the firm is to make money; but this does not mean that it is the sole purpose of the firm he creates, because the firm is greater than himself, since it relates him to the public (who, after all, are going to pay him for the service). What the firm is doing from the public's point of view is obviously providing the service, and from their point of view, the entrepreneur's making money is simply the means to induce him to perform the service.

Now since the relation between the entrepreneur and the public is one relation, and if you look at the motives from either end, one of what I called the "coordinate purposes" appears as the means toward the other one, then it follows that in the firm as it actually exists, each of these purposes is on the same plane as the other, and neither can be subordinated to the other. The entrepreneur cannot ignore the fact that the public's motive for buying his service is the service itself (or he won't have any customers); and the public cannot ignore that the reason he is in business is to make money, or it enslaves him.

We will see later in discussing firms with employees that the fact that the firm then becomes a society performing the service means that it has another coordinate purpose: that of providing a living for the employees. But for now, it is enough to show that the statement, "The reason people are in business is to make money" is an oversimplification. The reasons people are in business are to serve the public and make money in the service (not "by means of it").

Given this relation with the public, then, the first thing the entrepreneur must do is let them know that he is offering the service (or product) and what it is that he is offering. He must advertise. And since advertising is a statement, and we have seen that lying is morally wrong, we can say this:

Conclusion 24: It is morally wrong for a firm to misrepresent the service or product it is offering the consumer.

That, of course, is obvious. To communicate that the product will do something that it won't do, in the hopes that buyers will find a value in it that isn't there and you can make money off this is inconsistent with the function of the firm as serving the consumer.

Note that even if what is said is not literally false, if it communicates what is false, it is false advertising. For instance, to advertise a headache pill as containing "the pain reliever doctors recommend most" gives the impression (and is calculated to give the impression) that it contains something much more potent than just aspirin--though that is what doctors recommend most. Hence, this kind of advertising is a lie. If you say, "But everyone knows that we're talking about aspirin," then why didn't you name it? Because it takes the force out of what you were saying. Precisely.

It is also morally wrong to conceal information about dangers or defects which would not be generally known to the public and which would be relevant to a rational decision to buy the product or service. For instance, if you are selling aluminum ladders, a buyer would not necessarily know how to use them safely and might not advert to the fact that aluminum conducts electricity. Hence, warnings about how not to place the ladder and warnings about not letting it touch electrical wiring are in order. You don't, however, have to assume that the public are a bunch of idiots, and, morally speaking, you don't have to issue explicit warnings dealing with obvious abuse of the product. If somebody wants to use a pair of ladders as a ramp to lift his car with, and it falls on top of him, you are not responsible for his folly.

Government has recognized this aspect of the duty of a firm, and, as is its wont, has passed legislation that goes much too far in protecting irrational consumers from firms' "concealment" of dangers; so the problem nowadays is not so much that firms must not conceal dangers as to how to rein in the government from trying to create by legislation a risk-free society. Government's duty, as we will see, has to stop as soon as real dehumanization is reasonably prevented, not to coddle the citizenry.

A third morally wrong way to advertise is to present something as if it were a necessity when it is only a value: that is, to present something as if using it were avoiding harm, when in fact what it is doing is advancing one toward a goal. To give the impression that you're risking being unhealthy by not eating a given breakfast food or that social ostracism is inevitable unless you smell like a rose is misrepresentation. It works, because people are free to give up goals, but have a moral obligation to have necessities; and so if you can convince them that your product is a necessity, you will find more people buying it. But the fact that it works better doesn't make it right.

A variation on this is very serious: it is to create a situation in which the valuable product becomes a necessity. The Nestlé company once sent people dressed as nurses into maternity hospitals in third-world countries, giving free samples of its infant formula to new mothers--with the result that their milk dried up and they were then forced to buy the formula afterwards. Nestlé has since stopped this, because it was documented that children were dying because mothers couldn't afford to buy a supply of the formula and were watering it down. But irrespective of the damage, it is still essentially a lying way to advertise.

Any attempt to use a threat to induce people to purchase a product or service is morally wrong. In cases involving necessities, of course, the consumer is already under a threat, which means that it is morally wrong for entrepreneurs to advertise beyond letting the public know what their service is.

This is what is really behind the strictures against advertising in the "professions," such as medicine and law. It is "unethical," as they say (i.e. it at least gives the appearance of immorality), not because it is infra dig, but because the public (a) needs the service, and (b) needs no more of it than what will correct the dehumanization. Hence, any provider who is competent is "as good as" the greatest expert unless the problem is so complex that the specialist's special services are called for. I find it outrageous that hospitals are spending money advertising even on television (that most expensive of all media) that they have this and that extra helping service for their clientele--evidently with the idea of drumming up business. If there is anything which should be consumer-driven and not supplier-driven, it is the providing of necessities.

But assuming that we are dealing with values, there is nothing wrong with trying to persuade the public to buy the product or service. Many is the person who has not realized that he can be a certain type of person if he chooses this as his goal; and there is absolutely nothing wrong with opening out new vistas in life for people. For example, to show what a writer can do with a computer and a printer can be a revelation to someone who thought that computers were just fancy typewriters.

That is, you can show the value in the product, as long as it is really there. A sports car not only moves a person from place to place, but does so with panache and elegance; and so it does enhance his "image." There is nothing morally wrong with pointing this out and portraying the car as adding to a person's personality. The value, remember, is how the object leads to the person's goals, and is something intangible about it; and buyers buy things for their value, not for the material object itself.

Teilhard de Chardin, in The Divine Milieu, had a chapter on the spiritual value of the material; and I am in complete agreement with the idea. What material possessions do is enable a person to live a fuller life, and it is one's own acts that are the goal. Having possessions becomes materialism when a person succumbs to the temptation of the affluent and has things simply because he has to spend his excess money somehow, as I mentioned earlier. But if he has a purpose for owning material things, this is not crass, it is exalted, and it exalts the material thing into a partnership with spirit. Advertising, properly done, can show how to accomplish this, and when it does it is an extremely noble service to mankind.

Secondly, concealing irrelevant information is not morally wrong. In fact, it can be the case that revealing the "warts" of what you have for sale would itself be misinformation, because the consumer might take it that the information makes a difference when it doesn't. For instance, if a house has once had minimal termite damage and this was taken care of (and there is no real harm done and no danger now of termites), then volunteering the information that the house had had termites but that they were treated would be likely to mislead the buyer into thinking that the damage was serious (because otherwise you would have kept quiet about it). That is, buyers assume that you are putting the best face you can on what you are selling; so if you are "scrupulously honest," then you are actually communicating that this is the best that can be said of what you are selling, and that therefore there is a lot more bad about it that you aren't mentioning. Obviously, it's tricky to walk the tightrope of letting people know all that is relevant to a rational choice to buy without giving the impression that what is for sale is worse than it is.

As far as goodness and badness are concerned, since they are subjective and one person's evaluation differs from another's insofar as his standards are different, then there is nothing wrong with advertising the product or service as better than the competition. You can't misrepresent it by saying such things. It is rather far-fetched to assume that an entrepreneur wouldn't think what he was offering was better at least in some respect than the competition; and everyone knows this, and realizes that if you say that your widget is better, this is from your subjective point of view. Hence, you aren't communicating anything false.

Of course, if you allege facts or studies to prove that your widget is better, then these must not be misrepresentations. I once startled a young neighbor kid who had begun selling vacuum cleaners door-to-door and came to demonstrate his machine to me and my wife. He had me vacuum a small area of rug until I thought it was clean. Then he put some tissue over the intake of his machine and vacuumed over what I had done, showing me the dirty tissue that my machine had missed. Blair the Skeptic then put some tissue over the intake of my machine and vacuumed over the area he had just vacuumed after my initial vacuuming--and, just as I suspected, the tissue showed dirt that both of us had missed. I advised him to give up working for the company if it was selling using that pitch.

Now then, having advertised his service, does the entrepreneur have to serve anyone who comes to him for it, provided he has the money? At first glance, it would seem so, because the entrepreneur has offered his service to the public; but he has not by that fact already promised to serve everyone indiscriminately, or he would have to serve those who can't buy his service for as much as he wants.

So there is nothing wrong in itself with a restaurant's refusing to serve people who are not wearing jackets and ties. Assuming that there are other ways in which the tieless can eat, they are not dehumanized by not being able to eat at Delmonico's.

Now of course in that case, they can put on a jacket (especially if they have enough money to eat in these places); but what about those entrepreneurs who don't want to work for Black people? In the case where there is a de facto conspiracy to prevent a whole class of people from getting a service of a certain kind, then morally speaking each entrepreneur who refuses the service is saying that people of this type "don't deserve" this kind of service; and that is a falsification of their humanity. Whether he explicitly says this or not is irrelevant; even if he says, "I wish them all well; I just don't like the idea of serving them," the fact is that he is one of a group who together are depriving Blacks, say, of something that others think they have a right to because they belong to the general public, not because of some privileged status they have. Prejudice against a group of people can only be indulged in by isolated individuals; and it must be as possible and convenient for the excluded group to get the same service elsewhere. Obviously, if the service is a necessity, then to the extent that the person you have a prejudice against is going to be harmed without having it from you, then you have an obligation to provide it. My point is that this is also the case when the service is a value and the person can't get it from any other entrepreneur either.(1)

Once the customer approaches the entrepreneur, the two agree on (a) what the service is to be, with its conditions; and (b) what the price is to be. As far as price is concerned, everything that I want to say has been said, except for the following definition:

Profit is that part of the price the entrepreneur receives that is beyond compensation for his costs.

There is nothing special about profit except the term; but it has become a dirty word in some circles. Obviously, it is the part of the price that is above the seller-value for the service; and, as I said earlier, it is perfectly moral, when only values are involved, to agree on a price that is extravagantly above the seller value (and which, therefore, involves enormous profit). It is only when necessities enter the picture that the profit from the service must be modest. Some profit is necessary in this case also, or the entrepreneur is the same as a slave; but the profit must not lead to great affluence. We saw all that.

The agreement establishes a contract, with each party having rights and obligations. The consumer has the right to the product or service as advertised and agreed on, and the entrepreneur has the right to the money.

First let us note that there are certain things which have the appearance of contracts and are not contracts. A contract establishes rights against the other party, which create specific moral obligations in him. Thus the basis of contractual obligations is moral. The laws about contracts simply reinforce in this life the obligations you have acquired morally.

The essence of a contract, then, is that of a promise. The reason breaking a promise is morally wrong (i.e. inconsistent with the nature of the promiser) is that a promise supposes self-determination, when the person agrees that he now chooses to change his reality in such a way that the act he agreed on will in fact be performed by him. To break the promise is to act as if the choice does not determine your reality, and hence deliberately to break a promise is immoral, involving eternal frustration (and, of course, the legal sanction of a lawsuit).

But since the expectation of the other party that you are going to fulfill your contract is fundamentally an expectation that you are going to act in a morally right way, the following conclusion emerges:

Conclusion 25: Contracts in which one of the parties is to perform a morally wrong act are non-contracts, and laws must be passed to prevent them from being made.

A case in point at the moment is "surrogate mother" contracts, where a woman agrees to be impregnated (usually by artificial insemination, which is itself morally wrong) with the sperm of the husband of the couple who wants a baby but whose wife is sterile, and then to give up the baby to them once he is born.

But the woman is the mother of that child, and the child, as we will see, has a right to be brought up by his biological parents. Hence, it is morally wrong deliberately to conceive a child who cannot be brought up by his biological parents; and therefore, this "contract," since it involves each party's doing several immoral acts, and since most especially it is a violation of the child's rights, must be declared null and void, and such contracts must not be allowed in law. It doesn't matter if both parties are willing; no one must be allowed to be able to hold another to something that is morally wrong. And since it has happened that women change their mind during pregnancy, realizing what they have done and are doing, and refuse to give up their baby, it is morally wrong to put a woman in this position, even if she at the moment is willing to do the act and sees nothing wrong with it. The same, of course, applies to implantations of in vitro fertilized ova of the wife of the man whose sperm fertilized them into a surrogate. But again several morally wrong things have to be done: Human beings are killed in this process (since more eggs are fertilized than actually "take"); the whole sexual process is now just technological manufacture of a baby; and a woman is not an incubator; her womb is for her child, and is not for rent--not to mention that allowing it puts pressure on poor women to hire themselves out as, as it were, baby-making prostitutes.(2)

But supposing that the contract is a legitimate one, these are the traditional three ways in which the entrepreneur can fail to live up to his part of the bargain:

Nonfeasance consists in not performing the service agreed on.

Malfeasance consists in performing the agreed-on service badly.

Misfeasance consists in doing something other than what was agreed on.

If a person, for instance, sells a chair to a consumer and then doesn't deliver it as agreed, this is nonfeasance. If he delivers a damaged chair, this is malfeasance; and if he delivers a sofa when a chair was ordered, this is misfeasance. And of course, the point is that you can't just perform any old service to the consumer; you have to do what you agreed to do; and if it is for some reason difficult to do it, then that's just too bad for you.

Therefore, we can say the following:

Conclusion 26: The entrepreneur must morally perform the service, even if for some reason it has become very difficult for him to do so; and the consumer must pay for it, even if it becomes very difficult for him to do so.

The contract does not say, "I will do this for you as long as it is easy to do it," or "I will pay as long as it remains convenient for me to pay." The entrepreneur may have thought it was going to be easy for him to do the job; but circumstances beyond his control--which he didn't foresee at the time--may make it now very difficult to live up to his part of the bargain. Nevertheless, the difficulty does not excuse him. The same goes for the consumer, when financial reverses force him to borrow money to pay his debt to the entrepreneur, for instance.

Of course, in these cases, there is nothing wrong with trying to renegotiate the contract, explaining to the other party what happened. But if the other party is adamant, one is still bound.

But within reason. In the first place, if circumstances change the nature of what was contracted for, then to hold a person to the original terms of the contract can be wrong because in fact it is absurd. To hold a contractor who is building a house to complete the building when an earthquake has made it dangerous to have a building there would be a case in point.(3)

Secondly, if fulfillment of the contract involves actual dehumanization, then the contract is like one of those non-contracts I spoke of earlier, except that this time, the dehumanization is due to unforeseen circumstances that arose after it was originally made. But contracts are human documents, and suppose that human beings fulfill them; and so one of the parties cannot demand that the other dehumanize himself just because he originally agreed to perform the act or pay the money.

And this is why bankruptcy is morally legitimate.

A person or firm is bankrupt if he or it is legally permitted to perform only a fraction of his obligations toward others.

The idea here is that he would be significantly dehumanized if he were held to the full contract; and so the government decides what percentage of the contract he may still fulfill without dehumanization, and demands (using its authority based on the relation of cooperation, rather than the economic relation) that the other parties yield that part of what theoretically they have a right to.

This is another instance of the fact that contractual rights are not absolute.

But to say more about firms, I have to get into what the social, cooperative relationship is; and so here is the place to end this chapter and this section.



1. 1My wife and I experienced an amusing (or tragic, depending on your point of view) instance of this. Our next-door neighbor (who was Black, but very light-skinned) asked one day if my wife would ask the Black housekeeper who came to clean for us once a week if she would be available to help at a party the neighbor was having the following week. When we asked her, she replied, "Tell me, Mrs. Blair, is she Black?" My wife said, "Yes, why?" She thought for a moment, and then said, "All right, Mrs. Blair, I won't be prejudiced and I'll do it." When my wife, startled, asked what she meant, she answered that most Blacks wouldn't act as housekeepers for other Blacks.

2. In order to save the life of an already existing embryo, a woman could agree to have him implanted in her, using the Double Effect, just as a family can adopt a child who has already been born and will suffer without the adoption.

3. Again, a personal experience connected with this. I had engaged Larry, a contractor, to have remodeling work done on the house. Instead of specifying everything in writing beforehand, we would ask him whether he could do this or that, and he agreed to do it on a cost-plus basis, knowing how much we had to spend in total on this project, and giving us a running estimate of cost. By September, all was done, and I asked Larry, "Are we square?" and he agreed that I had paid basically all I needed to pay, though his bills were not all in yet. It turned out that Larry was too optimistic. But it wasn't until March that he sent me a bill for three thousand dollars (which at the time I simply didn't have), because when he'd finally gotten around to making his accounts, it turned out that he should have charged this much more. I called a lawyer, who told me that if he finished the work six months before and gave me no hint I owed anything, legally I was in the clear. On the other hand, I didn't want Larry to lose from what he had done for us, and I had about half of what Larry wanted. So I asked for an itemized list of what this three thousand dollar bill involved, and found that his actual expenses amounted to about what I had available; so I sent him a check for that amount, writing on it that if he endorsed it, he agreed that this was payment in full. He signed it. The point here is that waiting six months before informing the customer that he still owes money is unreasonable business practice.