Profit At Any Cost

[mweiss]

It is a common issue in the public eye, that corporations have more than a tendency to cheat, when left to govern themselves.

No clearer example I could find than that of Ford Motor Company's first compact car, known at the Pinto.

Lee Iaccoca knew that the design flaws of this car would cause deaths to the occupants when the car was involved in rear-end collisions. Yet, he calculated the estimated cost of lawsuits against the cost of correcting the design flaws and determined that it was cheaper to pay the victims' families in court, rather than correct the designs.

I ran across a fascinating history of the car and the philosophy of the men who allowed this heap of junk onto the market to harm unsuspecting buyers.:

http://www.fordpinto.com/blowup.htm

The question this raises is whether there can be such a thing as a corporation that acts responsibly without government oversight. We see it again and again with Enron, Global Crossing, MCI et al, the agregious cheating in the name of taking in an extra buck.

I'm a strong proponent of Capitalism, but examples like this give me genuine concern over leaving industry to regulate itself.

I'd like to hear some ideas on how these issues could realistically be solved, so that corporations would behave and not cheat the clients out of goods and services promised in advertising.

[HaloNoble6]

All I have to say is buyer beware, and know the terms of a trade.

I don't know the details of the contract when you purchase a car, but I doubt that it would include a manufacturer guarantee that you will not die by typically survivable accidents. That being said, it is the buyer's ignorance that Ford played on, and profited from. So, though Ford acted despicably, they should not be punished for a buyer's ignorance. In a free market, one death caused by the explosion of a gas tank would expose the poor design and tank sales. The market is self-corrective, there is no need to impose protections or regulations. But this is a side issue, the fact is that Ford and its customers are equal traders with equal rights, and each must know the terms of a trade and know exactly what they're getting.

[ex_banana-eater]

At aynrand.org, go to Media, then the Interviews section and listen to Yaron Brook on the Thom Hartman program address this question and example on the clip "Do Corporations Have Rights." That is a good starting place to look, and he'll probably say it better than I.

[scottkursk]

Lee Iaccoca knew that the design flaws of this car would cause deaths to the occupants when the car was involved in rear-end collisions. Yet, he calculated the estimated cost of lawsuits against the cost of correcting the design flaws and determined that it was cheaper to pay the victims' families in court, rather than correct the designs.

I'm a strong proponent of Capitalism, but examples like this give me genuine concern over leaving industry to regulate itself.

Actually that sort of behaviour is actually encouraged by law and is used by regulators themselves. It's called Risk Tradeoff Analasis or RTA. I can't find the GAO link but any time a regulation is modified, they are required to calculate the possible effect on the number of lives based on an actuary chart. So basically if more people die it's not really a problem for regulators because they actually peg a value per person on them.

I seem to remember the number was 10million per life saved. Basically, someone at the GAO figured that reducing the economy by 10mill would cause one death that wouldn't occur otherwise. So, as the thought goes if a regulation costs 9mill then it's worth it since it would "help" more than it would hurt. If a regulation costs the economy 100mill then the proposed regulation would have to save at least 10 lives. Concrete example: Forcing new scrubber stacks on oil refineries would cost 30mill per life the reduction in pollution would save then it's not considered a good regulation. If it would only cost 5 million per life saved, then the GAO would think they are doing a good thing.

This is a VERY rough description of RTA but that is the way the govt calculates it. As for corporations, they do it every day. There is a reason Volvo's cost so much more than other cars; Volvo spends that extra .001 per nut and bolt and that extra .50 on this part and that. It all adds up to making the car more expensive. I love Volvos personally because of the fact that they are much safer than your normal car. So I'm willing to pay the extra cost for the safety.

The best designed motorcycle in the world is still more dangerous than the being in a Miata tailgaiting a Pinto and followed by a Mustang while driving around a curve next to a hard top Samurai in high winds. It's all a trade off the consumer makes.

For a non life or death example of RTA, ask any person that worked for a bank or airline or any company for that matter that changed their IS systems. From 1st hand experience, you know that something is going to go wrong and you'll have downtime. You know that a certain % of customers will sue you over the downtime. You have to balance those costs of the suits compared to the long term savings you get by using the new system. The delicate balancing act that has to be performed by any company is answering the question: if I make this change will my overall cost go down or profit go up.

I'm allergic to strawberrys so I have to be on the lookout and don't hesitate to ask if I think there is a chance in heck there may have been some contact. Same reason I looked and did tons of research before buying my Volvo. Caveat Emptor.

[softwareNerd]

A buyer often does not have as much information about an item being sold than a seller.

If you've bought a used car or house you know this and act accordingly, by having an expert look it over. Corporations do this all the time: for instance, a firm that is outsourcing software development might require its vendor to undergo regular audits and be certified as "ISO-9000 Compliant" or "CMM-Level 3", etc. Similarly, there used to be a Swiss firm called "SGS" (might still be around) that was very big in the import/export business. Goods would only be imported if the product was SGS-certified.

Today, the government has usurped this business, particularly with goods that are sold to the consumer. In a free economy, t is quite probable that the FDA, the USDA, the NHTSA and so on would be replaced with private businesses. Yes, one can make the case that a drug-manufacturer loses by making dangerous drugs, but it is quite likely that insurance firms will ask for external certification. It is also possible that external certification becomes an advantage in selling.

Other than testing and certification, another way a buyer protects himself is by requiring the seller to provide express warranties. If you buy a house, you ask the seller to sign a certain set of warranties. For instance, you might have a sheet of paper that asks questions like: "Has the basement ever flooded?" and the seller signs it. I do not remember the exact questions, but something like this is standard practice in my state.

[scottkursk]

If you buy a house, you ask the seller to sign a certain set of warranties. For instance, you might have a sheet of paper that asks questions like: "Has the basement ever flooded?" and the seller signs it. I do not remember the exact questions, but something like this is standard practice in my state.

Common here is has the house ever flooded. You never know in Houston when you'll wake up to ankle deep water at 3am by a frantic dog. Ours included if anyone had died in the house and was it murder. Some sort of state requirement. Since the answer was yes to both we got a good deal. Again, an example of something that would keep people away attracts others. The cut on the price part, not the whole living where someone shot their husband part.

Some people wouldn't touch the house with a 10 ft pole if a death, especially violent happened because of the whole ghost issue.

[softwareNerd]

Some people wouldn't touch the house with a 10 ft pole if a death, especially violent happened because of the whole ghost issue.

Scott, That's really funny .

Wanted: House with bad "Feng Shui" where previous resident lost job, went mad and shot entire family.

Come to think about it, one could apply this principle to other decisions: seek out that which others irrationally reject, if you get it cheaper. Like a fruit-shopper who says: "See these marks. People won't buy it because it doesn't look as good, but it's actually very sweet. In a pie, the look doesn't matter. I'll ask for half-price."

Alternatively, one can apply the idea that Michael Milken did with junk bonds: buy something that really has a negative, but where the discount is irrationally low. I suppose investors like Marty Whitman, who have an eye for near-bankrupt firms do the same. And then, one has firms like Providian, who try to loan money to risky debtors, at a higher rate...but miscalculate

[A.West]

The corporations you mentioned (Ford, Worldcom, Enron, Global Crossing) did not gain any long run benefits from their misbehaviors. And Ford is a totally different case, anyway, which is why it's just been a long run underperformer, rather than a total collapse like the others. Some individuals working in some of those corporations collected a short term benefit at the expense of long term shareholders. What was lacking was shareholder oversight of their properties. The government already provides massive "oversight" of corporations and securities markets. As a pro-capitalist would expect, this oversight leads to opposite results, with the government preventing truly active oversight by large institutional owners. And investors were lured by empty govenment promises into the belief that their interests were being protected.

Owners actively protecting their long term interests has always been the most effective form of corporate governance, not more "government oversight".

[scottkursk]

Scott, That's really funny .

Wanted: House with bad "Feng Shui" where previous resident lost job, went mad and shot entire family.

Funny you mention "Feng Shui". I had someone that was real hesitant to open an acccount because of the layout of my office focused negative energy where customers filled out applciations. He got a random account number and wouldn't invest in his planned mutual fund because the number rhymed with death or something like that in his language.

Of course, if he had an account number with as many #8's then his investment would be good. Of course, I pointed out to him what about that guy that also owns the same mutual fund that has nothing but 4's and 5's and married a woman this year (seems to also be very bad luck since I mentioned I was engaged to him, something to do with a chicken or a monkey) that also owns the same mutual fund as him. Would mister 8's good luck outweigh the bad luck boy and turn his investment magically good? After nearly an hour, he still didn't see that his random account # wasn't going to make a difference on whether his mutal fund would go up or down.

There are times I really miss being a plumber.

[Yes]

All I have to say is buyer beware, and know the terms of a trade......the fact is that Ford and its customers are equal traders with equal rights, and each must know the terms of a trade and know exactly what they're getting.

While I agree with your post, Felipe, there is one item I take issue with:

"That being said, it is the buyer's ignorance that Ford played on, and profited from."

There is a significant scene in Rand's Atlas Shrugged that deals with a similar incident. I refer to the incident of Rearden Steel's trial and accusing Rearden of being liable for an accident involving his steel. I am attempting to draw a parallel with Ford and the Ford Pinto and this scene in Atlas Shrugged.

Ford knew what they were doing when they developed the Pinto. They wanted to offer affordable private transportation in the market place. A consequence of driving a Pinto or cars similar to it is that such car is less crashworthy than a larger vehicle. The vulnerable gas tank is a part of such consequence.

Many drivers drove Pintos who did not get involved in such crashes.

With that in mind, it is hard for me to understand why you contend that Ford played upon the buyer's ignorance. I assume, and rightly so, that car buyers in this country have volition, and also lots of resources available to them regarding resarching prospective car purchases.

Edited April 28, 2005 by Yes

[Tettrabyte]

I am curious about the notion of being aware of the defect. If a company is aware of a defect in a product and they know that it could be life threating. Shouldn't they either act to fix the problem or warn the customer before buying the product. It seems to me that either of these actions are morally correct, and ignoring the problem immoral. I think it is even worst to sit and calculate the amount of money that it would cost to pay out settlements and opt to do that instead of fixing the car. This reminds me of some of the things the cigarette companies did in the past. They knew that smoking could be harmful to people, yet they fabricated data and reports to make it look like cigarettes were healthy. Although I do have to say that it seems like the idea that smoking being harmul would be self-evident, i.e. a fire in a house. That being said I believe that many of the tabacco lawsuits were unwarrented and should not have had the massive payouts that they did. And the government suddenly deciding to turn on the companies that had been pading their pockets for decades, is just astonishing. Well many predictable, but it shows that government needs to take a weaker role in business regulation. I also think that companies need to have values and any effort that they udnertake should not contradict or break such values. If enron had a value, like honesty, then there would be no major scandals. Although I agree with the point about buyer beware, I do question the morlity of choosing to ignore a known defect with a product.

Tettra

[softwareNerd]

If a company is aware of a defect in a product and they know that it could be life threating. Shouldn't they either act to fix the problem or warn the customer before buying the product. It seems to me that either of these actions are morally correct, and ignoring the problem immoral.

The first question is: what does "life-threatening" mean? It's not an obvious idea. Is it a certain statistical probability of death?

If we agree on a certain way to figure the "level of risk", then we can reasonably assume that there is a certain level of risk where a reasonable person would expect a warning. Along with "caveat emptor" comes the idea that a transaction has a certain set of "implied warranties". The list of such warranties is highly contextual. It would impossible to lay down all the rules, and often a jury would need to figure what type of implied warranty a reasonable man would expect, in the overall context of caveat emptor.

In the cigarette smoking case consider this: years before warnings appeared on packets, reasonable people suspected that smoking was harmful. I've heard many not-so-well-educated people say: "These cigarettes will kill me!" or "I really need to give up this bad habit!" As a juror I would have a very hard time with anyone saying that they were acting reasonably when they thought that cigarette smoking would not harm them in some way. [i wouldn't be surprized if the person whjo first invented smoking, cough violently and wondered if it would kill him.]

However, I do not know enough about the real dangers of cigarettes (are they significantly more dangerous than was generally believed? What did the companies know about them? etc.) to make a judgement. If a firm claimed that cigarettes were less dangerous than they knew them to be, then that is surely immoral, and might even be illegal.

[scottkursk]

However, I do not know enough about the real dangers of cigarettes (are they significantly more dangerous than was generally believed? What did the companies know about them? etc.) to make a judgement. If a firm claimed that cigarettes were less dangerous than they knew them to be, then that is surely immoral, and might even be illegal.

Agreed. Nobody in their right mind thinks that the Egg McMuffin is healthy. Still, it can be consumed safely as a part of an otherwise healty diet. With cigarettes, they did know the risks and had the marketing line "Not a cough in a carload". That really does imply that the use of their product carries no risk of which they aren't willing to admit was there in the first place. Kinda like McDonald's saying "McMuffins; McHealthy for you!" Now that would really be pushing it.

I think though that there is an assumption in the use of most normal items (firearms, canisters of black powder, a can of gasoline etc excepted) that you assume won't kill you with normal use. The users of the Pinto's did I think have a reasonable expectation that a very small accident would not cause a massive fiery explosion.

David could have specific knowledge that the color combination that OO.net is using causes cataracts and infertility (yes that is going over the top but I'm making a point) and he did nothing to change it or disclose the risks, then I'd say he shares in some of the responsiblity of the results.

[softwareNerd]

David could have specific knowledge that the color combination that OO.net is using causes cataracts and infertility

I've got that covered.

[if] he did nothing to change it or disclose the risks, then I'd say he shares in some of the responsiblity of the results.

Sure. And, I do not really disagree about the cigarette case. I really do not have the facts a jury would need (for instance, I had no idea of the "cough in a carload" slogan.)

A related issue is the whole idea of suing firms who did something in good faith and with the best science and knowledge of their time, only to discover later that they were wrong and their product was harmful. The question becomes: can a person be called negligent if they acted in a way that a cautious, rational man would act. Perhaps that's a different thread.

[scottkursk]

A related issue is the whole idea of suing firms who did something in good faith and with the best science and knowledge of their time, only to discover later that they were wrong and their product was harmful. The question becomes: can a person be called negligent if they acted in a way that a cautious, rational man would act. Perhaps that's a different thread.

It's actually one of the few things the tobacco industry did to get me ticked. See Here for an example. It's pretty much acknowledging a problem but then they deny it. Still, smoking made you cough, your teeth turn brown, and your voice turn horse, it is common sense that that can't be healthy. I don't need Dr Koop to tell me that. Since the govt. forced them to disclose that they were dangerouse on the packs themselves I can't find much any simpathy for smokers. I have said in other posts I smoke cigars occasionally so I don't expect sympathy if I get oral cancer.

But I agree that what used to be called the "reasonable man" standard is a different thread entirely. It was a standard that used to be applied to everything but now things have to be totally moron proof and then some to win in court. Even then, speaking form experience, the cost of defending yourself and winning can sometimes be significantly higher than that of what you were sued for in the 1st place. That's why so many companies settle quickly.

[DavidOdden]

These problems have a simple solution in an unregulated economy, but I think it's important to recognise the difference between an unregulated economy and anarchy. An unregulated economy simply means that there is no prior restraint via preemptive regulation on trade, but it does not mean that participants have no legal rights whatsoever (as would be the case under anarchy). The Ford Pinto matter is a straightforward example of negligence. All sales contracts have implied warrantees of suitability, e.g. if you sell something that is obviously supposed to be drinkable milk, you are implicitly warranteeing that it is not poison, and so you can't just declare "Well, I never literally promised that it wasn't poison". Implicit warrantees can be "cancelled" by disclaiming any particular representations about the suitability of the product, so you could rightfully sell a gun which would explode when fired, as long as you clearly state that you are not selling the gun as a functioning gun that does not explode when fired. Ford fraudulently sold an unsuitable product, and under very straightforward application of common law tort principles, they are liable (extremely liable, given the number of actual deaths involved). If this had been a latent and unknown defect, or one which could not be reasonably prevented, there would not be any liability (under normal free-market contract law). Without any government butting in, you know that as a manufacturer, you have a responsibility to use ordinary caution in making your product, and that you have a duty to state any known, significant and non-obvious risks. I think that it is self-evident that you need to be careful with power nail guns, and the company does not have an obligation to warn you specifically not to stick a loaded one in your mouth. About 40 years ago, there was little knowledge of peanut allergy, at which point it would not be reasonable to expect a manufacturer to include a "Warning: contains peanuts" notice on a product. Now, however, it is well known that peanuts can be deadly to some people, and giving notice of this known threat to life is a reasonable basic requirement on selling food (I wold make an exception for any food whose name contains the word "peanut" -- it is self evidence that "peanut butter" contains peanuts). The remedy for such fraud is reachable in civil courts, as it has been for millenia.

As Scott notes, regulation encourages irresponsibility, on both sides: on the side of the manufacturer who then thinks they have no duty to provide a suitable product other that imposed by the state, and on the customer who thinks that they have a right to "what they want to buy" so that their unspoken wishes become a claim on the rights of the manufacturer (e.g: the insane idea that when you buy a dangerous object, you have no duty to use it non-negligently). Note btw that requirements on negligence cut both ways: the manufacturer must manufacture the product with due care, and the buyer must also not use it negligently.