ECONOMICS FOR ECCLESIASTICS

Entrepreneurs, Firms, Growth and Poverty

The firm and the entrepreneur

Antonio Argandoa
Emeritus Professor of Economics
la Caixa Chair of Corporate Social Responsibility
and Corporate Governance

MCE Research Center

Rome, November 28 December 1, 2014
 Introduction

Economics is easy
Economics is not easy
Economics deals with the efficient use of scarce resources for
alternative uses
Which uses?
What does efficient mean?
Economics is a treatise on human action (and organizations)
Economics has an implicit anthropology

Prof. Antonio Argandoa 2

The ideas of economists and political
philosophers, both when they are
right and when they are wrong are
more powerful than is commonly
understood. Indeed, the world is ruled
by little else. Practical men, who
believe themselves to be quite
exempt from any intellectual
influences, are usually slaves of
some defunct economist.

John M. Keynes (1936)

Prof. Antonio Argandoa 3

The Church acknowledges the legitimate role of profit as an
indication that a business is functioning well. When a firm makes
a profit, this means that productive factors have been properly
employed and corresponding human needs have been duly
satisfied. But profitability is not the only indicator of a firm's condition
(). In fact, the purpose of a business firm is not simply to make a
profit, but is to be found in its very existence as a community of
persons who in various ways are endeavouring to satisfy their basic
needs, and who form a particular group at the service of the whole of
society.
Saint John Paul II, Centesimus annus, n. 35

These criticisms are directed not so much against an economic system

as against an ethical and cultural system. The economy in fact is
only one aspect and one dimension of the whole of human activity. If
economic life is absolutized () the reason is to be found not so
much in the economic system itself as in the fact that the entire
socio-cultural system.
Saint John Paul II, Centesimus annus, n. 39

Prof. Antonio Argandoa 4

If by capitalism is meant an economic system which recognizes the
fundamental and positive role of business, the market, private
property and the resulting responsibility for the means of production,
as well as free human creativity in the economic sector, then the
answer is certainly in the affirmative.
Saint John Paul II, Centesimus annus, n. 42

It must be remembered that the market does not exist in the pure state.
It is shaped by the cultural configurations which define it and give
it direction.
Benedict XVI, Caritas in veritate, n. 36

Business is a vocation, and a noble vocation, provided that those

engaged in it see themselves challenged by a greater meaning in
life; this will enable them truly to serve the common good by striving
to increase the goods of this world and to make them more
accessible to all.
Pope Francis, Evangelii Gaudium, n. 203

Prof. Antonio Argandoa 5

 The firm

Prof. Antonio Argandoa 6

A definition of the firm

A firm consists of people with different

past, different culture, different
leanings, different aspirations
And all these people, from different
ages and cultures, with different
jobs... have to accomplish the
miracle of working together, so that
the outcomes of the firm are the right
ones. Today and tomorrow.

Giovanni Agnelli, CEO, Fiat SpA

Prof. Antonio Argandoa 7

 More formal definitions

An organization is a system of consciously coordinated activities

or efforts of two or more persons.
Chester Barnard

An organization is a group of people who coordinate their

actions to achieve objectives in which they have an interest,
albeit for different reasons.
Juan A. Prez Lpez (1993)

A firm is a group of people who work together to offer goods

and services that are useful to its customers, creating
economic value in the process, fostering the development
of the people who work in it, and respecting the laws and
the environment in which it operates.

Jordi Canals (2010), p. 58

Prof. Antonio Argandoa 8

 The firms responsibilities
To be in a position to satisfy the needs of those who
are part of the organization [community of persons,
participation]
when they satisfy the needs of customers, by
producing goods and services [with efficiency]
To act efficiently, creating value for its members and
for society as a whole
To ensure continuity of the firm
To contribute to a society that offers the right
environment for its development

9 Prof. Antonio Argandoa 9

Business is simple. Managements job is to take care of the
employees. The employees job is to take care of the customers.
Happy customers take care of the shareholders. Its a virtuous
circle.

John Mackey, Founder of Whole Foods

Prof. Antonio Argandoa 10

The manager has to get
Economic results
Economic dimension
A place in which people may learn and enjoy
Social dimension
A place where people can develop or flourish as individuals
Ethical dimension

Prof. Antonio Argandoa 11

 Three tasks of the manager

To create and develop the vision of a business, a potentially

profitable project (entrepreneur)
To identify opportunities and to exploit them
To have the knowledge, the capabilities and the will to carry out
the project within the current context of the firm and the
market (strategist)
To draw up well-defined objectives
To communicate the goals and the means
To motivate those who must put them into practice
To coordinate those people who are capable and willing to do
To organize the work, to find the means, to deploy them
To command: to get other people to do what she commands
To adapt everything to the changing context

Prof. Antonio Argandoa 12

To continually improve the quality and value of the interactions
between people (leader)
So they can discover the meaning of what they are doing within the firm
Help them flourish as people
Create trust within the organization
Develop their potential skills and empower them to use them well
To improve her own leadership qualities

Prof. Antonio Argandoa 13

 Why firms?

A way to reduce transaction costs

Why are there islands of conscious power [hierarchies: firms] in this
ocean of unconscious cooperation [the market], like lumps of
butter coagulating in a pail of buttermilk? (Coase, 1937, p. 388)
A set of assets, of property rights
A nexus of contracts
A means of coordinating knowledge and capacities
The action of an entrepreneur: discovering opportunities in
conditions of uncertainty

Prof. Antonio Argandoa 14

Three models of firm

Prof. Antonio Argandoa 15

 The model of value maximization for the
shareholders
The aim of the company is to maximize the value for its owners
The company is owned by its shareholders
The company is a nexus of contracts
Each part is protected by its contract
... and is remunerated in accordance with its contribution to the
value produced
The owner has the right to the residue (profit)
... because he has incentives to maximize it
Under certain conditions, this maximize the value created for the
society
The owner delegates the direction and control of the company
to the manager

Prof. Antonio Argandoa 16

There is one and only one responsibility of business to use its
resources and engage in activities designed to increase its profits
so long as it stays within the rules of the game, which is to say,
engages in open and free competition without deception or fraud
Milton Friedman 1962, 133

while conforming to the basic rules of the society, both those

embodied in law and those embodied in ethical custom
Milton Friedman 1970, 138

Prof. Antonio Argandoa 17

 The value of value maximization for all the
stakeholders

The companys goal is to maximize the value created for all

stakeholders
Value is added with the collaboration of the stakeholders
The manager must get the cooperation of all
The society expects that the company will act in this way
Problem: how is value distributed?

Prof. Antonio Argandoa 18

 The model of the community of persons

The firm has three objectives: to serve the needs of the market,
to serve the needs of the members of the company
and to provide for the continuity of the company

The company is a place of professional coexistence, in which

each individual is responsible for the level of implementation
of his own abilities to work and can achieve his own goals
within the framework of the goals of the company.
Antonio Valero, first Dean of IESE Business School

Prof. Antonio Argandoa 19

A brief recent history of the firm

Prof. Antonio Argandoa 20

 The years 1920-1950

The large, diversified corporation organized in divisions

appears
... which is financed through shares
Limited responsibility of the owner
Distant owners: separation of ownership and control
The management is borne by professionals
Theory of the fiduciary responsibility of the managers
Development of the welfare state

Prof. Antonio Argandoa 21

 The years 1950-1970

Post-World War II: recovery, growth, employment,

opportunities
The company meets the expectations, in terms of economic,
political and social outcomes
Confidence in managers
Management for all stakeholders
Control by the Board of Directors

Prof. Antonio Argandoa 22

 The years 1970-1990

1960s and 70s: stagnation, inflation, increasing competition

The company does not seem to be at the height of what is expected
of it
Emphasis on the maximization of profit (Friedman 1962, 1970)
1980s: new technologies, layoffs, outsourcing
Difficulties to meet the societys expectations
The agency theory: proprietors against management
Financial deregulation: financialization of the economy
Government for the shareholders

Prof. Antonio Argandoa 23

 The years1990-2010

1990s: managers-owners
Managers and owners vs. financial sharks
Governance for owners
Senior managers as a class apart
Growth of the remuneration of the directors
2000s: global financial crisis
Closer scrutiny of the company: scandals, compensation...
Varieties of Corporate Social Responsibility
2010-...: the future

Prof. Antonio Argandoa 24

Thank you!

argandona@iese.edu
blog.iese.edu/antonioargandona