The maximization curse

Two main guidelines structure the corporate management system: maximization and competition. Maximization is centered on financial results, and for results you must outrun the others. You can claim adherence to ESGs, but the real game is about maximization and economic war, whatever the costs. What we need is another paradigm, based on balanced growth and collaboration. Management needs to be grounded in values.

(Ladislau Dowbor)

Manolito, isn’t it true that there are other values, not just money? Manolito: Of course there are, we also have cheques.

(Quino, Mafalda)

In this new, networked age, the traditional paradigm of competition needs to give way to complementarity, connectivity, and cooperation.

(Keyu Jin, p. 282)¹

The management models in the corporate world are structured to maximize results, and these are defined as the main target, financial profits, and dividends. Some call it optimization, and it sounds good. The results must also be reached in the shortest possible time, locking the corporate world in a permanent race. The long-term and systemic results are kept out of the decision-process horizon, and wider-scale impacts are qualified as “externalities”, washing the corporate hands clean. A classical example is the reaction of the firearms industry to criticism: we produce arms, but we don’t pull the trigger. Another interesting example is the ultra-processed food industry: it would be the consumer’s responsibility to read the labels and protect his health. In fact, this led to another booming industry, the pharma response to the obesity explosion. Thus, we have two booming industries, one producing bad food, the other producing the remedy, and we pay for both. Producing healthy food could be a better choice, but not in the interest of profit maximization, either in the food or in the pharma sectors.

Competition in Adam Smith’s times could look good and even continue to be positive in small and medium companies. A bakery has to produce good bread at reasonable prices, or another bakery will show up. But if a chocolate-producing firm in Belgium can get cheaper cocoa in Ghana, closing its eyes on child labour, the responsible competitor who respects some basic human rights will be out-paced. If a beef-industry corporation in Europe can get a better deal from JBS in Brazil, whatever the external costs for the Cerrado or the Amazon, it will force competitors to resort to similar practices, not to be out-priced. When a Pfizer algorithm sets the price for Paxlovid, pills for Covid treatment, at 1390 dollars, while the production cost, according to a Harvard University research, is 13 dollars, it is just calculating that the very rich will pay anything for their health, and this is the optimal price in profit-maximizing terms. It is not about maximizing health impact, selling the product with reasonable profit, and making it accessible to the many.

Max Fisher’s study on the social, economic, and political impact of social media makes the issues clear. Facebook, YouTube, and a few similar platforms are basically marketing companies, selling our attention time to corporations. Marketing, for example, represents 98% of Meta’s revenues. The marketing fees depend on how many people are reached, for how long, and other “engagement” criteria. As the algorithms are structured to maximize engagement, what comes to the top is what hits deeper in our guts, not intellectual or cultural interest, empathy, or collaboration, but powerful motivations like hate, prejudice confirmation, the feeling of belonging (“us” against “them”) and other attention-maximizing emotions. How deep this goes can be seen in so many conflicts and absurd political polarizations radically expanded by social media. Fisher’s book is rightly titled The Chaos Machine.

The legitimate optimization of profit by the baker in Adam Smith’s time, when inserted into algorithms in the age of the digital revolution, with global connectivity and epidemic confirmation biases, has dramatic negative impacts. This is not about our being “good” or “bad”, it is about magnifying powerful instincts that exist in all of us. We tend to forget that we are fundamentally still primates, with great intelligence, no doubt, but with deeply problematic motivations concerning what we use this intelligence for. We are partly rational, but the added brain capacity did not eliminate the deeper motivations we inherited. Frans de Waal’s study of Our Inner Ape shows this very clearly. It is how we are made, in our DNA. Communication platforms can ride on these emotions, and using modern technology to maximize our primate behavior is just wrong.

Facebook messages reach almost 4 billion, with hours of attention time, and ride on radically reduced costs in comparison with the newspaper advertisements we once had. We are just fed, and over-fed, with toxic individually adjusted messages. Ads and messages just glue to your eyes, and filter deep down, whether we like it or not. ²

Let us remember these are the top world corporations, selling our attention time is the big present business. Here also maximization works hand in hand with competition: if one corporation uses this kind of emotional engagement manipulation, others will follow, because it works, and they are fighting for the same commodity, our personal attention time. Which is, actually, the time of our lives, our most precious personal capital. Robert Reich sums it up: “Those seeking our attention — advertisers, marketers, and politicians — are facing increasing competition to grab it. When they succeed, our attention shifts away from everything else. This is why attention is becoming such a scarce resource.” ³

The Brazilian banking system is another rich example. In this case, it is not competition, but collusion. Five banks control 85% of the credit, and they roughly charge the same extorsive interest rates for families, companies, or events on public debt. Interest on private persons' debt during 2023 oscillated around 55%, for an inflation of around 4%. This led to a financial drain on families, equivalent to 10% of GDP, drastically reducing purchasing power, and hence the demand stimulus on the economy. The average interest rate for businesses is around 23%, which led to a reduction in productive investment. For anyone having capital, considering demand is stalled, and the interest rates very high if he needs financial support, he will simply opt to invest in the public debt, paying 8% net of inflation. Solid profit, no risk, no production efforts. When financial rent pays more than productive investment, this is where the money goes. This is simply killing the goose, with short-term maximization. The economy is stalled. ⁴

This is not about market ups and downs. It is a structured system of rent extraction. One dimension is disinformation. Before 1994, Brazil faced hyperinflation, reaching over 50% a month. This led banks to present interest rates per month. Hyperinflation was brought down, but banks continue to present interest rates every month, which makes them similar to the rest of the world's yearly interest rates. A 100% interest rate will be presented, in banks or commerce, as 6%, or preferably 5.9%. People would think things could not be so simple: it would be scandalous usury. Yet this is precisely what it is, Merchant of Venice style, in a country where very few people know how to calculate the year equivalent of a monthly interest rate. All banks in Brazil, including international ones like Santander, use this scheme. We have 72 million adults on the credit default list, roughly half the adult population.

Shouldn’t the Central Bank regulate this usury system? In the 1988 Constitution, article 192 stipulated that real interest rates above 12% per year would be considered a crime. In 2003, as recently elected Lula entered government, the banks managed to eliminate Article 192. Usury, at present, is not a crime, it just is not even mentioned as a legal issue. And the Central Bank, more recently, was declared autonomous, de facto put in the hands of banks and the financial system. Which led to public debt paying the highest interest rates in the world, basically to the same financial system. In 2023, the corresponding drain on the budget reached the equivalent of 7% of GDP. The overall unproductive financial drain I presented in a Congress hearing in Brasilia is equivalent to 30% of GDP. Since a great part of congressmen have strong financial investment, and therefore want to keep interest rates as high as possible, it has become a structural deformation. It is a drama for the economy and for society, but is politically solid. How far can democracy resist as inequality reaches absurd levels?

The drain of natural resources is another example. Water is a public good, and is rapidly becoming a scarce resource. The Guardian brings us comments on the Fresh Water Report, showing the impact of privatization: “Over 30 years on from water privatisation, with widespread urbanisation and agricultural intensification, a fresh approach – including potential reform of water regulators – is needed,” the report says. “With levels of trust in water companies impacted by repeated reports of pollution and profiteering, both public and water practitioners want more transparency and assurance that companies are acting in the interest of society and the environment.” ⁵

Only 14% of the rivers in the UK are “in good ecological status”. The logic is simple: when water management is privatized, selling water is good business, and sewage treatment is a cost. We face similar issues in São Paulo, where partly privatized water management company Sabesp maximizes sales of water, but keeps sewage treatment low. Paris has shown the way, with public management of water and sewage restored. Balanced interests.

These are just a few examples. But the overall impact is dramatic. Oxfam presents the impact on sustainability: “Since 2020, the richest five men in the world have doubled their fortunes. During the same period, almost five billion people globally have become poorer. Hardship and hunger are a daily reality for many people worldwide. At current rates, it will take 230 years to end poverty, but we could have our first trillionaire in 10 years. A huge concentration of global corporate and monopoly power is exacerbating inequality economy-wide. Seven out of ten of the world’s biggest corporations have either a billionaire CEO or a billionaire as their principal shareholder. Through squeezing workers, dodging taxes, privatizing the state, and spurring climate breakdown, corporations are driving inequality and acting in the service of delivering ever-greater wealth to their rich owners.” ⁶

In Brazil, for a population of 203 million, we have 33 million going hungry, and 125 in food insecurity. What we produce is equivalent to over four kilos of grain per person a day. Couldn’t we at least feed the children?

All those corporate moguls claim their adherence to the ESG principles, the top politicians sign the successive COP resolutions, OECD is stern on its fight for BEPS, John Ruggie struggled a decade for corporate respect of human rights, but as he wrote himself, “for international corporations, it is just business”. The truth is that unless the corporations efffectively organize for the systemic common good, and learn how to collaborate, given their overall power, things will not work out. We are locked in a self-destructive process. How deep must we get into this critical economic, social and environmental crisis, until we have an overall reaction? We did after WWII, creating a minimum of global governance. That was in another age.

We can of course imagine we have been made in God’s image. Stephen Jay Gould, in his Wonderful Life, is more down to earth, reminding us that we are “mere naked apes who adopted an upright posture.” High-tech naked apes. Don’t they see what is happening? We must rationally learn how to cope with irrationality. Meanwhile, politicians have learned how to sail on our worst gut feelings. It works.