Tag: Company Purpose

The Power of Ideas

In the interests of full disclosure, the following post was written by Google Notebook LM’s “blog” report writing feature. It references a paper titled “When Ideas Trump Interests,” by economist Dani Rodrik I read a while back but never got around to writing up.

Over to Notebook LM ….

Introduction: The Hidden Force in Politics

It is a common and cynical view of politics: powerful “vested interests” and special interest groups always get their way at the expense of the general public. We see it as a battle of raw power, where lobbies and elites push their agenda, and the rest of us pay the price. This perspective is so ingrained that it forms the foundation of most modern models of political economy.

But what if this view is incomplete? In his paper, “When Ideas Trump Interests,” economist Dani Rodrik challenges this conventional wisdom. He argues that before we can even talk about interests, we have to talk about “ideas”—a powerful, often overlooked force that shapes what those interests are, how actors understand the world, and what they believe is possible. This perspective doesn’t dismiss the role of powerful groups, but it places them in a new context where their influence is not a foregone conclusion.

This post will distill the most surprising and impactful takeaways from Rodrik’s argument. We will explore how ideas about our identity, our understanding of the world, and our policy imagination are the true drivers of political outcomes.

Three Surprising Ways Ideas Shape Our World

The standard political playbook focuses on interests and power, but the real story is often more complex. Here are three key insights that reveal how ideas, not just interests, shape our world.

Takeaway 1: Your ‘Interests’ Aren’t Fixed—They’re an Idea About Who You Are

The concept of “self-interest” seems simple enough—we all want what’s best for ourselves. But Rodrik argues that before anyone can pursue their interest, they must first have an idea of their “self.” Who we believe we are fundamentally determines what we value and, therefore, what we pursue.

This identity isn’t fixed or purely economic. We might see ourselves primarily as a member of a social class (‘middle class’), an ethnic group, a religion, a nation (‘global citizen’), or a profession. These identities dictate our priorities, which can easily override purely material concerns. As the source text notes, abstract ideals and moral conceptions can be powerful motivators:

“humans will kill and die not only to protect their own lives or defend kin and kith, but for an idea—the moral conception they form of themselves, of ‘who we are’”

This is a profoundly counter-intuitive point because it helps explain a wide range of “anomalous” political actions. When people vote against their immediate material interests, it’s often because an idea about their identity—their values, their community, their place in the world—has taken precedence.

Takeaway 2: Policy Is Driven by Beliefs About How the World Works

Policymakers and political groups don’t operate in a vacuum; they act based on their “worldviews,” or their mental models of how the economy and society function. These underlying ideas create the entire framework for political debate and lead to vastly different policy preferences. Think of the great economic debates: laissez-faire vs. planning, free trade vs. protectionism, or Keynesian vs. Hayekian economics. Each position stems from a different core idea about how the world works.

The 2008 global financial crisis is a perfect case study. It’s easy to blame powerful banking interests for the policies that led to the meltdown, and they were certainly a factor. However, their success was enabled by a prevailing set of ideas that favored financial liberalization and self-regulation. The argument that won the day wasn’t that deregulation was good for Wall Street, but that it was good for Main Street—that it was in the public interest.

But this isn’t a one-sided phenomenon. As Rodrik points out, the other side of the debate was also driven by ideas. Many observers argued the crisis was caused by excessive government intervention to support housing markets. This view wasn’t just a cover for other interests; it was grounded in powerful ideas about the social value of homeownership and the need to correct for the financial sector’s inattentiveness to lower-income borrowers. Powerful interests rarely win by nakedly arguing for their own gain; they seek legitimacy by framing their goals within a popular and persuasive idea. This is critical because it tells us that changing policy isn’t just about overpowering an opposing group. It requires challenging the underlying ideas and narratives that give that group’s position its legitimacy in the first place.

Takeaway 3: Political Gridlock Can Be Broken by Creative Policy—Not Just Power Shifts

A common argument in political economy is that entrenched elites often block efficient, growth-oriented policies because they fear losing their political power. If a new policy threatens their position, they will fight it, even if it benefits society as a whole. This creates a state of permanent gridlock where progress is impossible.

Rodrik offers a more optimistic counter-argument, introducing a concept he calls the “political transformation frontier”—the set of maximal economic outcomes elites believe they can achieve without losing power. The standard view assumes this frontier is fixed. But Rodrik argues that new policy ideas can shift the entire frontier outward, creating win-win scenarios that allow for progress without directly threatening elite power. The key is not to overpower the elites, but to reframe the problem with an innovative solution.

China’s “dual-track” reform is the prime example. In the 1970s, liberalizing agriculture would have created huge efficiency gains but destroyed the state’s tax base. Instead of abolishing the old system, Chinese leaders grafted a market system on top of it. Farmers still had to meet state grain quotas at fixed prices, but they were free to sell any surplus on the open market. This creative idea allowed China to gain the benefits of market incentives while protecting the rents and power of the state sector. The Communist Party was strengthened, not weakened.

This principle is a recurring pattern, not a one-off. A similar dynamic played out in Japan after the Meiji restoration. There, elites spurred industrialization but designed it in a way that would “strengthen the centralized government and increasing the entrenchment of bureaucratic elites.” In both cases, a creative idea allowed elites to pursue economic gains not as a threat to their power, but as a means of consolidating it. This takeaway has an optimistic implication: many political problems that seem impossible may be solvable with the right innovative idea.

Conclusion: It’s the Ideas, Stupid

The traditional view of politics as a raw contest of vested interests is compellingly simple, but ultimately incomplete. Interests are not fixed, pre-ordained forces. They are shaped and defined by ideas—ideas about our identity, ideas about how the world works, and ideas about what is possible.

As Rodrik’s work powerfully argues, the failure to see the role of ideas leads to a pessimistic and static view of political change. By putting ideas back at the center of the analysis, we see that political outcomes are not inevitable. The source text concludes with a thought that perfectly captures this shift in perspective:

“What the economist typically treats as immutable self-interest is too often an artifact of ideas about who we are, how the world works, and what actions are available.”

This leaves us with a final, crucial question. If ideas are this powerful, perhaps the most important political question isn’t just ‘who has power?’ but ‘which ideas will define our future?’

Dee Hock, the Father of Fintech

Marc Rubinstein writing in his “Net Interest” newsletter has a fascinating story about the history of Visa. The article is interesting on a number of levels.

It is partly a story of the battle currently being played out in the “payments” area of financial services but it also introduced me to the story of Dee Hock who convinced Bank of America to give up ownership of the credit card licensing business that it had built up around the BankAmericard it had launched in 1958. His efforts led to the formation of a new company, jointly owned by the banks participating in the credit card program, that was the foundation of Visa.

The interesting part was that Visa was designed from its inception to operate in a decentralised manner that balanced cooperation and competition. The tension between cooperation (aka “order”) and competition (sometimes leading to “disorder”) is pervasive in the world of money and finance. Rubinstein explores some of the lessons that the current crop of decentralised finance visionaries might take away from this earlier iteration of Fintech. Rubinstein’s post encouraged me to do a bit more digging on Hock himself (see this article from FastCompany for example) and I have also bought Hock’s book (“One from Many: VISA and the Rise of Chaordic Organization“) to read.

There is a much longer post to write on the issues discussed in Rubinstein’s post but that is for another day (i.e. when I think I understand them so I am not planning to do this any time soon). At this stage I will just call out one of the issues that I think need to be covered in any complete discussion of the potential for Fintech to replace banks – the role “elasticity of credit” plays in monetary systems.

“Elasticity of credit”

It seems pretty clear that the Fintech companies offer a viable (maybe compelling) alternative to banks in the payment part of the monetary system but economies also seem to need some “elasticity” in the supply of credit. It is not obvious how Fintech companies might meet this need so maybe there remains an area where properly regulated and supervised banks continue to have a role to play. That is my hypothesis at any rate which I freely admit might be wrong. This paper by Claudio Borio offers a good discussion of this issue (for the short version see here for a post I did on Borio’s paper).

Recommended

Tony – From the Outside

Corporate social responsibility – going back to the source

The 50th anniversary of Milton Friedman’s 1970 essay has triggered a deluge of commentary celebrating or critiquing the ideas it proposed. My bias probably swings to the “profit maximisation is not the entire answer” side of the debate but I recognised that I had not actually read the original essay. Time, I thought, to go back to the source and see what Friedman actually said.

I personally found this exercise useful because I realised that some of the commentary I had been reading was quoting him out of context or otherwise reading into his essay ideas that I am not sure he would have endorsed. I will leave my comment on the merits of his doctrine to another post.

Friedman’s doctrine of the limits of corporate social responsibility

Friedman’s famous (or infamous) conclusion is that in a “free” society…

“there is one and only one social 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 fraud.”

My more detailed notes on what Friedman wrote can be found here. That note includes lengthy extracts from the essay so that you can fact check my paraphrasing of what he said. My summary of his argument as I understand it runs as follows:

  • Friedman first seeks to establish that any meaningful discussion of social responsibility has to focus on the people who own or manage the business, not “the business” itself.
  • If we focus on the corporate executives who manage the business as agents of the shareholders, Friedman argues that these executive should only use the resources of a company to pursue the objectives set by their “employer” (i.e. the shareholders).
  • What do the shareholders want the business to do?
  • Friedman acknowledges that some may have different objectives but he assumes that profit maximisation constrained by the laws and ethical customs of the society in which they operate will be goal of most shareholders
  • The key point however is that corporate executives have no authority or right to pursue any objectives other than those defined by their employer (the shareholders) or which otherwise serve the interests of those people.
  • Friedman also argues that the expansion of social responsibilities introduces conflicts of interest into the management of the business without offering any guide or proper process for resolving them. Having multiple (possibly ill defined and conflicting) objectives is, Friedman argues, a recipe for giving executives an excuse to underperform.
  • Friedman acknowledges that corporate executives have the right to pursue whatever social responsibilities they choose in their private lives but, as corporate executives, their personal objectives must be subordinated to the responsibility to achieve the objectives of the shareholders, their ultimate employers.
  • It is important to understand how Friedman defined the idea of a corporate executive having a “social responsibility”. He argues that the concept is only meaningful if it creates a responsibility that is not consistent with the interests of their employer.
  • Friedman might be sceptical on the extent to which it is true, but my read of his essay is that he is not disputing the rights of a business to contribute to social and environmental goals that management believe are congruent with the long term profitability of the business.
  • Friedman argues that the use of company resources to pursue a social responsibility raises problematic political questions on two levels: principle and consequences.
  • On the level of POLITICAL PRINCIPLE, Friedman uses the rhetorical device of treating the exercise of social responsibility by a corporate executive as equivalent to the imposition of a tax
  • But it is intolerable for Friedman that this political power can be exercised by a corporate executive without the checks and balances that apply to government and government officials dealing with these fundamentally political choices.
  • On the grounds of CONSEQUENCES, Friedman questions whether the corporate executives have the knowledge and expertise to discharge the “social responsibilities” they have assumed on behalf of society. Poor consequences are acceptable if the executive is spending their own time and money but unacceptable as a point of principle when using someone else’s time and money.
  • Friedman cites a list of social challenges that he argues are likely to lay outside the domain of a corporate executive’s area of expertise
  • Private competitive enterprise is for Friedman the best way to make choices about how to allocate resources in society. This is because it forces people to be responsible for their own actions and makes it difficult for them to exploit other people for either selfish or unselfish purposes.
  • Friedman considers whether some social problems are too urgent to be left to the political process but dismisses this argument on two counts. Firstly because he is suspicious about how genuine the commitment to “social responsibility” really is but mostly because he is fundamentally committed to the principle that these kinds of social questions should be decided by the political process.
  • Friedman acknowledges that his doctrine makes it harder for good people to do good but that, he argues, is a “small price” to pay to avoid the greater evil of being forced to conform to an objective you as an individual do not agree with.
  • Friedman also considers the idea that shareholders can themselves choose to contribute to social causes but dismisses it. This is partly because he believes that these “choices” are forced on the majority by the shareholder activists but also because he believes that using the “cloak of social responsibility” to rationalise these choices undermines the foundations of a free society.
  • That is a big statement – how does he justify it?
  • He starts by citing a list of ways in which socially responsible actions can be argued (or rationalised) to be in the long-run interests of a corporation.
  • Friedman acknowledges that corporate executives are well within their rights to take “socially responsible” actions if they believe that their company can benefit from this “hypocritical window dressing”.
  • Friedman notes the irony of expecting business to exercise social responsibility by foregoing these short term benefits but argues that using the “cloak of social responsibility” in this way harms the foundations of a free society
  • Friedman cites the calls for wage and price controls (remember this was written in 1970) as one example of the way in which social responsibility can undermine a free society
  • But he also sees the trend for corporate executives to embrace social responsibility as part of a wider movement that paints the pursuit of profit as “wicked and immoral”. A free enterprise, market based, society is central to Friedman’s vision of a politically free society and must be defended to the fullest extent possible.
  • Here Friedman expands on the principles behind his commitment to the market mechanism as an instrument of freedom – in particular the principle of “unanimity” under which the market coordinates the needs and wants of individuals and no one is compelled to do something against their perceived interests.
  • He contrasts this with the principle of “conformity” that underpins the political mechanism.
  • In Friedman’s ideal world, all decisions would be based on the principle of unanimity but he acknowledges that this is not always possible.
  • He argues that the line needs to be drawn when the doctrine of “social responsibility” extends the political mechanisms of conformity and coercion into areas which can be addressed by the market mechanism.
Friedman concludes by labelling “social responsibility” a “fundamentally subversive doctrine”.

But the doctrine of “social responsibility” taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collectivist doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means.

That is why, in my book “Capitalism and Freedom,” I have called it a “fundamentally subversive doctrine” in a free society, and have said that in such a society, “there is one and only one social 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 fraud.”

Hopefully what I have set out above offers a fair and unbiased account of what Friedman actually said. If not then tell me what I missed. I think he makes a number of good points but, as stated at the beginning of this post, I am not comfortable with the conclusions that he draws. I am working on a follow up post where I will attempt to deconstruct the essay and set out my perspective on the questions he sought to address.

Tony – From the Outside