Welcome to Comm101
Principles of Responsible Commerce
Dr Frank Neri
Senior Lecturer
School of Economics.

What is socially irresponsible commerce? • Perhaps the Global Financial Crisis is the latest large scale manifestation of some s.i.c.
• What caused the GFC?
• This question does not have a simple answer.
• But roughly speaking, the GFC began when a large housing price bubble in the USA burst.
• Asset prices tumbled, and then so did the financial position of some very large banks and other corporations.
• The global links of these corporations meant that these collapses had knock on effects in many other countries.
• The response of many remaining banks: severely tighten lending. This led to economic slowdown, increasing unemployment, and hence the term GFC.

Do these events involve socially irresponsible behaviour?
• My view is that, to some extent, YES.
• Why?
• Because not all ‘players’ have equal access to, or equal understanding of, relevant information.
• In economics we call this problem ‘asymmetric information’. • Asymmetric information can promote socially irresponsible behaviour, and hence individual and social harm.
• The existence of asymmetric information is as old as commerce itself. For example, what does the following data refer to?

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Semper Augustus

Prices paid for tulip bulbs in 17th century Holland.
• Flowers appear in May/June.
• Bulbs were bought/sold at flowering (initially) by enthusiasts, later by the general public.
• Bulbs lifted after flowering (June/July) and kept dry indoors for re-planting in September.
• Sellers promised to deliver bulbs when lifted to buyer, who promised to pay the agreed price on delivery.
• Honour/trust (social capital) very important here.
• With rapidly escalating prices, speculation via a futures market quickly developed.
• Market collapsed on 7th February 1637.

What does this suggest?
• 1. Speculative manias/bubbles are not new.
• 2. Speculation per se, whilst at times akin to gambling
(and so perhaps unwise) is not illegal nor necessarily socially irresponsible.
• 3. But problems may arise when information asymmetries exist and those with important information exploit those without. • Re: GFC, who do I have in mind?
• Some lenders, brokers, risk assessors, auditors, financial advisors, CEO’s, boards of management, etc.

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Consider the following discussion between Waermondt, a craftsman, and Gaergoedt, a tulip broker.
• W. “You offer me a lot and I do not know whether I dare accept. I fear once I start, I will want to go on with it, again and again. And as one wave drives another, so one deal would bring forth the other, and so, methinks, it is better I stay with my poor business and my profession. I make no great profit and suffer no great loss”.
• G: “That’s well said. But could you not venture a little? You give no money till it’s summer and then you have sold all your stuff; or if you have any on hand you plant it and it brings still more profit”.

Discussion continued...
• W: “It is well for those who have enough money, but for me I do not find it good advice. For if I have a penny, I must put it into my business”.
• G: “You can barely earn 10% on the money that is in your business, and even then only by giving a caution, but with
Flora it is cent for cent. Yes, ten for one, a hundred for one, and sometimes a thousand”.
• W: “Vainly have I done such hard labour, and have many parents slaved and toiled. What need is there for merchants to have any style, or to risk their goods overseas, for the children to learn a trade, for the peasants to sow and to work so hard on the soil, for the skipper to sail on the terrible seas, for the soldier to risk his life for so little gain, if one can make profits of this sort?” Irresponsible behaviour?
• 1. Asymmetric information: W knows nothing of the market: G knows more. Is G trustworthy?
• 2. Timing? What if this discussion was taking place as the market was collapsing?
• 3. No mention by G of risks, only highlighting potential
(seemingly certain) profits.
• So episodes such as these can be very profitable to some, and harmful to others.
• When the bubble bursts, social capital (trust) is often severely eroded.
• But there are other problems also.

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The last paragraph by W makes the point beautifully.
• Speculative bubbles, particularly if they last for a while, can distort incentives.
• Why work hard to become a doctor, teacher, tradesman, etc., if such large profits can be made, seemingly with little risk, via simply buying low and selling high?
• So too many individuals (from a social perspective) become speculators.
• This sort of speculation does not promote social development, only private gain.

In Comm101 we will examine some of the important issues concerning socially responsible and irresponsible commercial behaviour. Thank you.

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