Constraints on Free Markets

Fair & Lovely is clearly doing well; it is a very profitable and high- growth brand for Unilever in many countries. The company is not breaking any laws; millions of women voluntarily buy the product and seem to be loyal customers.

In a classic free market argument, HUL says, “The protests of women’s activist groups bear no relationship to the popularity of Fair & Lovely.”63 Unilever is behaving legally, as a capitalistic firm in a free market. But there is an evident contradiction between this argument and HUL’s explicit and vociferous espousal of corporate social responsibility. The free-market approach does not work well in this case because of the vulnerability of the con- sumers—poor girls and women—who are also victims of racist and sexist prejudices within the society. This concern is greater when children use the product. Unilever did not create the sexist and racist prejudices that, at least, partially feed the demand for this product. However, it is likely that the company has helped to sustain these prejudices even if unwittingly.

When there is a divergence between private profits and public welfare, markets should not be left totally free, and some intervention is warranted. When the profit-maximizing behavior of firms results in negative consequences to public welfare, as in the case of Fair & Lovely, constraints need to be imposed on the behaviors of firms. Constraints can be achieved through four mechanisms: corporate social responsibility, self-regulation by industry, activism by civil society, and government regulation. First, a firm could voluntarily constrain its own behavior and act in the public interest. The firm might choose to do so because it exercises corporate social responsibility even though it involves some financial penalty. A second possibility is for firms in an industry (or industries) to self-regulate their conduct perhaps to reduce free-rider problems and to pre-empt government regulation. The third possibility is for civil society to pressure companies to act in the public interest. Finally, the government could regulate firm conduct to achieve public welfare. Unfortunately, none of these constraints is working well in this case so far.

< Prev   CONTENTS   Source   Next >