The Morality of For-Profit Prison Investments

When Seth Klarman was asked about the ethics of his investments into companies that gave high-interest loans to customers with poor credit histories, he defended his investment on the grounds of personal responsibility and mentioned that no one puts a gun to the head of someone taking out a loan–it is an act of consent between an adult and a financial institution. Klarman also reiterated that people do not enter into commercial transactions unless they believe it is in their interest to do so–if you have never paid off an obligation to creditors in your life, and you need $500 in car repairs to keep your job, then agreeing to 18% interest is an improvement over your status quo otherwise you wouldn’t take out the loan in the first place.

When Charlie Munger was asked about his investments in Wells Fargo and U.S. Bancorp, an interviewer asked him whether his investment is unethical. Munger mentioned that almost every large company at some point will do something he personally does not endorse, but successful investing necessarily involves “viewing the world as it is rather than how we would prefer that it might be.”

Both Klarman and Munger serve as sources of inspiration and guidance when I think about my own moral code that should be applied to investing. My focus on the intersection between morality and business always comes back to free will. I deeply respect the right of every American (and global citizen since most of my writing focuses on multinational companies) to live life as they see fit. I respect that autonomy so much that I will not even recommend interference if someone uses their free will to make decisions that will lead them to die broke, drunk, or drug addicted. As a friend or fellow member of a community, I will use what resources I have to prevent that from happening, but inherent in my respect for self-determination is a sequence of choices that can lead to self-destruction.

I trust free will and the marketplace (which is a global collection of actors exercising free will) to settle most disputes. Although I do not approve of many of 3G’s management practices, I do see this philosophy as ultimately self-correcting in the end. The underinvestment in brand quality and human capital has already caused both the Heinz brand and the Bud Light brands–most notably among others–to lose market share at a quicker rate than any other time in its history.

The superior talent goes to competitors to improve their offerings, and the diluted product offerings may cause customers to go elsewhere (I contend that the cost-cutting at the core Anheuser-Busch brands is a contributing factor to the rise of the craft beer/microbrew phenomenon.)

I also recognize that there is a difference between what people say they want and what they actually want. The Atlantic recently posted a survey that suggested readers want more hard-hitting, intelligent, factual, in-depth news pieces, yet when they are alone at the privacy of their computer, the read the articles about the Kardashians, superficial looks at racial tensions, and general celebrity and political gossip.
You’ve probably all heard the claim that McDonald’s is in trouble because it does not enjoy the support of millennials. If you read online commentary, that is a fair impression. But if you look at Morgan Stanley’s research on the topic, you will see that McDonald’s is the most visited chain for people between the ages of 18 and 34. Almost 70% of Millennials reported visiting McDonald’s in the past three months, while the typical stereotype Starbucks has only been visited by 40% of Millennials in the past three months.

And the most common item ordered by a millennial McDonald’s customer is a cheeseburger. People don’t eat cheeseburgers because McDonald’s serves them; it’s engineered the other way around. People desire cheap fast food and McDonald’s meets that demand (after all, the healthier items like salads are options yet their sales pale in comparison.) If people truly wanted healthier items, and manifested it through market demand, McDonald’s would adjust.

Regarding the vices of beer and tobacco, I view it the same way. People are on clear notice what the ill effects associated with long-term use (and in some cases even short-term use.) Tobacco companies can’t advertise through mainstream channels anymore. The Surgeon General website makes the risks clear. Anti-smoking initiatives regularly advertise on television. Basic online searches will inform you of the risks. Heck, the pack itself will inform you of the risk. The ease of access to tobacco information, coupled with taxation and regulation deterrents against smoking, place the responsibility more on the user than the provider.

With alcohol, it is possible to be an occasional social user without ill effects, thus lessening the moral ambiguity. If the product can be used responsibly, why should you shy away from it because some people abuse its availability?

All of these arguments so far are a product of free will. You can choose not to smoke. You can choose not to drink. You can choose not to eat at McDonald’s. This avenue of free will allows you to trace each company’s product line to personal responsibility. People seek out these things, and use their own money to purchase them, and in Munger’s terms, you are seeing the world as it is rather than how you wish people would exercise their rights.

With for-profit prisons, this element of free will does not exist. If you commit a felony, you do not get to choose whether or not you spend your time behind bars in a government prison or a for-profit prison. This free will element does not exist. There is a past record that indicates for-profit prisons have delivered exceptional abuse compared to those run by governments. “Cost cuts” in the industry do not have a free market remedy; the prisoners cannot switch to another provider and are at the mercy of whatever executive action is taken. Other than social backlash or government regulation, there is no self-correcting check upon for-profit prison excess.

That is what makes it a distinct category of immoral activity compared to other investments covered on this site. The profit motive without self-correcting oversight leads to abuse at the philosophical level, and this poor incentive does manifest itself in inferior conditions based on track record and history. That’s why I view for-profit prisons as one of the few investment areas I would not touch on a moral basis. With other products that arguably cause harm, people choose the harm. In some cases, the product can be used responsibly, and in others, there is enough notice of the risks that the individual assumes the risk with use. The free will element does not exist for the constituents of the for-profit prison industry, and this inability to walk away from abuses you encounter is why I would not feel comfortable investing in the sector.

Originally posted 2015-11-04 23:58:29.

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