Business ethics does not need ethical theory

BUSINESS IN

ETHICAL FOCUS nd edition2

A n A n t hol o g y

Fritz Allhoff, Alexander Sager, and Anand J. Vaidya

EDITED BY

broadview press

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Unit 1

PRELIMINARIES Introduction: Why Study Business Ethics?

Anand J. Vaidya and Fritz Allhoff

THE WHAT AND WHY OF

BUSINESS ETHICS

What is business ethics, and why study it? One good way to get an answer to this question is by taking note of what business is, what ethics is, and then tying the two together.

Business as will be understood here is the sum total of the relationships and activities that surround the trading of goods or services. In most cases, businesses seek to profit from their activities, though it is increasingly common for businesses such as social enterprises to operate as non-profits. As a category, business includes everything from the selling of handmade products between two neighboring villages in India to large-scale multi- national corporations such as Nike and Microsoft engaged in global trade. Both the relationships between individuals involved in any aspect of business and the relationships between groups— corporations, divisions of them, unions, etc.—are important to understanding business as a whole.

Business ethics is important because it is involved centrally in most people’s lives. Almost all people are consumers of commercial goods. Businesses also employ many people, giving them not only a wage, but in many cases an identity and an opportunity to express creativity.

Ethics, in its broadest sense, is an investigation into how humans should live. Ethics is distinct from law since laws themselves can be objects of ethical criticism. Within the confines of a moral investigation, one can inquire as to whether a legal statute is consistent with morality.¹ For

example, slavery was once considered to be both morally permissible and legally permissible. Later many people disputed its morality even though it remained legally permissible.

Many ethicists divide their discipline into three branches: meta-ethics, normative ethics, and applied ethics. Meta-ethics explores conceptual and foundational questions in morality. Some of the questions are the following: Are there moral facts? Is morality objective? How do we come to know moral truths? Are moral claims the kinds of things that can be true or false, or are they sim- ply expressions of emotion? What is the primary object of moral evaluation?

Normative ethics is the study of which prin- ciples determine the moral permissibility and impermissibility of an action, or, more simply, what constitutes right and wrong. One approach to this, deontology, holds that morality is consti- tuted by rights and duties, and that those features take priority over the consequences of actions. An alternative approach, consequentialism, maintains that it is only the consequences of actions (often measured in terms of happiness and unhappiness) that determine the moral rightness of an action. Yet other theories, such as virtue theory, argue that actions are not the central objects of moral evaluation; rather, a person as a whole (and per- haps their character in particular) is the object of moral evaluation.

Applied ethics is the area which investigates specific problems and questions. Applied ethics includes such areas as biomedical ethics, computer ethics, environmental ethics, and, of course,

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business ethics. In applied ethics, for example, one may ask, “Is it just for companies to pursue profit within the confines of the law without con- sidering if their actions further the public good?” or “Is it morally permissible to bribe government officials abroad when this practice is widespread?” In applied ethics, one is concerned with the specific ethical issues that arise from the area being investigated.

Philosophers dispute the precise relation- ship between meta-ethics, normative ethics, and applied ethics. Some philosophers hold that one’s meta-ethical views and position in normative ethics have important implications for what one should claim when investigating specific ethical issues. Nonetheless, it is often possible to reach reasoned conclusions in applied ethics without settling contentious questions about the nature of morality or the content and justification of funda- mental moral principles.

Putting together this understanding of business and ethics we arrive at the following conception of business ethics. Business ethics is the area of inquiry into issues that arise out of the relationships and activities surrounding the production, distribution, marketing, and sale of goods and services. We can further divide business ethics into micro, meso, and macro issues. Micro issues concern the behavior of individual workers and employers. Some of the questions revolve around the rights, responsibili- ties, and obligations that employees bear to each other and to their employers. Likewise there are questions about what rights, responsibilities, and obligations employers bear to employees. Does an employer have, for example, a right to infor- mation about the employee that is irrelevant to job performance? If not, how is the concept of job relevance to be defined? What set of rights, in general, do employees have when they sell their labor? Does this include a safe work environment? If so, is it the employer’s obligation to provide it? What moral considerations help us understand why this is the case?

The meso level focuses on how businesses ought to be structured if they are to justly fulfill their role in society. The central debate has been over whether the sole responsibility of business is to maximize profit for shareholders or whether businesses also have significant moral respon- sibilities to stakeholders that go beyond profit maximization. This debate enquires into the immediate physical and social environment in which businesses are embedded, and to the future physical and social environment they will create. As a consequence, there are a host of ethical questions about the permissibility of polluting in the physical environment, and promoting socially important causes in the social environment.

A final set of questions for business ethics concerns macro level questions of political econ- omy and distributive justice. Businesses operate in economic, legal, and social environments that both facilitate and constrain their actions and impact. Questions of corporate social respon- sibility and obligations to individual employees depend in part on our conclusions about a just society. What are the advantages and drawbacks of capitalism as an economic system? What constitutes a fair distribution of wealth? How do we understand democracy and to what extent should economic actors be subject to democratic control? In many cases, our conclusions about the macro, meso, and micro levels will inform each other, giving a more thorough ethical understand- ing of key issues faced by businesses, employees, and the public.

Finally we are left with the following question: Why study business ethics? The simple answer is that, if you are like most people, you will at some point enter some sector of the business world. And, if you are like most people, you will discover very quickly that there are significant questions about right and wrong that arise in this walk of life. The issues that this volume discusses can at least provide you with the following: an under- standing of the issues one faces in the business world; some theoretical and practical tools one

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Vaidya & Allhoff | Introduction | 3

can use for analyzing ethical issues; and a frame- work for helping one construct an overall moral point of view. It is the hope of the editors of this book that everyone who takes to a serious study of this volume will come away with an appreciation for the role of morality within the world of business.

NOTE

1 We follow many philosophers in using “ethics” and “morality” synonymously in this introduction since within the discipline there is not an agreed upon distinction between the two terms.

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Foundational Issues

– 1 – ILL-FOUNDED CRITICISMS

OF BUSINESS ETHICS Anand J. Vaidya

In the wake of corporate scandals such as Enron and WorldCom at the turn of the millen- nium, corporate executives and business schools were compelled to reflect on how to incorporate ethics into their organizations and curricula (Association to Advance Collegiate Schools of Business 2004). Nonetheless, one still finds a ten- dency amongst people to look at business ethics as not that relevant to doing good business. Insofar as the importance of business ethics is acknowledged, it is treated as a laundry list of codes that one must obey in order to avoid penalties, and that to a cer- tain degree can be broken if one is careful. Cynical comments about business ethics as a contradiction in terms are common. Often people have in the back of their mind a conception of corporations ruthlessly seeking profit without regard to legal niceties or human cost.

The underlying assumption of this line of thought is that the concept of ethical conduct cannot be appropriately conjoined to the concept of business, that the concept of business transac- tion and negotiation is in tension with the concept of ethical conduct. At root the idea may be as simple as the claim that ethics is about a concern for the other at a possible cost to oneself, while business transactions are motivated by self-interest. Business, they say, involves wheeling and dealing, getting the better of your opponent; and, so they continue, business leaves ethics at the door. Ideas

like this are found in business literature starting as far back as the 1950s. Albert Z. Carr’s “Is Business Bluffing Ethical?” (1958) argues that business is a lot like playing poker, and so one should adopt the ethics of poker, which is at odds with ethical codes prescribed by Christianity and other tradi- tional religions.

Others point out that even when businesses adopt a “socially responsible” persona they do so out of the profit motive. Being socially responsi- ble is profitable; if it weren’t companies could not afford it. In order to survive in the marketplace one needs to make a profit; if being socially responsible requires sacrificing profits, then one could expect that their competitors will eventually force them out of the marketplace. The logic of competition puts socially responsible companies at a disadvan- tage. Competitors who decided not to be socially responsible would be able to displace socially responsible ones.

In order to clear the ground for the study of business ethics and to open the door to the fruits that may come from studying it, and from actually employing an ethical perspective in business, an end needs to be put to the idea that “business eth- ics” is an oxymoron, a somehow confused idea. In this essay I hope to exonerate business ethics of a couple of different criticisms that go together with the claim that it is an oxymoron. In section one, I will present the most common complaints about

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business ethics, and offer rebuttals. In section two, I will offer a diagnosis of the source of the view that business and ethics are incompatible, and show that it rests on a false understanding of what it takes for business to flourish.

1. COMMON COMPLAINTS

ABOUT BUSINESS ETHICS

The four most common complaints about business ethics are that it is

∙ Useless because individuals upon reaching a certain age are incapable of changing the way in which they determine whether an action is morally permissible (i.e., good or bad).

∙ Unfeasible because the demands of market competition do not permit a sincere commit- ment to ethical considerations.

∙ Indeterminate because ethicists disagree over normative theories (e.g., consequentialism, deontology, virtue ethics) and principles (e.g., maximize happiness, distribute goods to the worst off, respect rights to private property, privacy, etc.) rendering decisive answers impossible, which consequently takes the value out of business ethics.

∙ Beside the point because ethical inquiry is not what is needed; rather individuals behaving ethically is what is needed.

Each of these complaints serves as a reason for avoiding business ethics discussions in the corpo- rate world. And each of these can easily be shown to be unfounded.

The claim that business ethics is useless because by the time people enter the business world, roughly in their mid 20s to late 20s, their moral character has been, for the most part, formed for bad or good, rests on bad psychology, as well as bad reasoning.

First, consider the psychological assumption that a person’s moral character is static rather than revisable. It may be true that it is harder for people to change how they morally evaluate a situation at

an older age than at a younger age, because certain moral habits or evaluative behaviors are more ingrained. And, it is probably true that most of us enter the work force at an age at which we have lots of opinions about what is morally right and wrong. However, it is false to say that it is impossi- ble for one to change their moral viewpoint. More importantly, the attitude expressed by the “useless” argument is exactly the attitude that bars one from learning as a result of participation in community discussion about what is right and wrong. The fact is that we can change our moral point of view, and that listening and discussing things with others can have this result. Thus business ethics is important.

Second, critics of business ethics have argued that the nature of business, especially in a capitalist economy, makes ethical behavior impossible over the long run. On this account, business is commit- ted to the logic of competition and profit maximi- zation in the market place. In a capitalist econ- omy, businesses that allow ethical considerations to impede focusing on the bottom line will not survive. Business leaders may want to act ethically, but those who allow corporate social responsibility or a commitment to sustainability as something more than a façade to attract consumers will find themselves replaced by boards looking after the interests of shareholders. One problem with this line of reasoning is that corporate social respon- sibility seems to have a neutral or slightly positive effect on the bottom line (Economist Intelligence Unit 2008). The claim that people in businesses must act unethically if they want to compete is probably false.

While some complain that business ethics is useless or impossible, a third complaint is that the real problem is that business ethics is indetermi- nate, and therefore valueless. The position they offer is not without initial plausibility. Anyone who has taken a freshman level course in ethics is aware that there are different schools of thought in ethics such as consequentialism, deontology, and virtue ethics. Each of these major schools of thought has its own criterion as to what constitutes right action or right living.

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One brand of consequentialism, act- utilitarianism, says that the right action is that action from the set of available actions that maxi- mizes aggregate happiness. One brand of deontol- ogy, Kantianism, says that the right action is that action whose maxim can be universalized without contradiction. Depending on which ethical school I subscribe to, I may give different answers as to the morality of any action I may have to take in the busi- ness world. So the critic of business ethics can argue:

“What I wanted in the first place was to decide what to do based on what was morally permissible, but it is not possible for me to determine what is morally permissible until I know which school of moral thought is correct, and the ethicists have not settled that. Consequently, discussions of ethics in business will be indeterminate.” And what is ultimately inde- terminate, the critic of business ethics will argue, is without value. In order to understand this argument and locate the weakness in it, consider it in the following formal presentation.

1. Business ethicists disagree over first principles. 2. If theorists in a field disagree over first

principles, then determinate answers cannot be reached.

3. If determinate answers cannot be reached in a field of inquiry, then that field of inquiry is without value.

4. Therefore, business ethics is without value.

Interestingly enough, we can formulate this argu- ment with respect to any realm of inquiry where scholars of the discipline disagree over first princi- ples and/or methodology. Consider the following argument about economics.

1. Economists disagree over first principles. 2. If theorists within a field of inquiry disagree

over first principles, then determinate answers cannot be reached.

3. If determinate answers cannot be reached in a field of inquiry, then that field of inquiry is without value.

4. Therefore, economics is without value.

By looking at the mirror argument with respect to economics we can see the flaw in the critic’s position. Before analyzing the premises we can note that while many in the business world feel comfortable offering the argument about business ethics, they would not feel as comfortable offering the corresponding argument for economics. Those that find themselves comfortable with the former argument, but not the latter put themselves in the following logical dilemma: accept the conclusion to both arguments, reject both arguments, or find the disanalogy between the two cases. In this case, we should reject both arguments as unsound because premises (2) and (3) are false.

First, regarding (2), it should be noted that the critic’s use of “indeterminate” betrays an ambiguity. It does not follow from the claim that there are dis- putes over first principles within a discipline that all areas within the discipline are indeterminate. Economists, for example, may disagree in funda- mental ways about human rationality, the tendency of markets to settle into equilibria, or government intervention, but nonetheless converge on specific issues. For example, almost all economists agree that international trade is beneficial on a whole, though specific segments of society may suffer when confronted with international competition. In some cases, there may not be major disputes about which tools from economics are useful for resolving an issue: for example, in public policy, few people deny that a cost-benefit-risk analysis is relevant for many decisions, even if they disagree about how this analysis is best conducted or about its weight compared to other considerations such as public support or civil rights.

This holds in the case of ethics as well. Though ethicists may disagree about ethical theory, their judgments may converge in many cases. For exam- ple, utilitarians, who base ethics on the promotion of happiness, will often call for the respect of rights and obligations. The reason is that societies in which most people’s rights and obligations are honored tend to be happier. Indeed, a good deal of applied ethics occurs without explicit discussion of moral theory, since most ethical theorists agree

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that we should avoid harms and promote wellbeing, that we need to justify coercion, that under most circumstances discrimination and deception are wrong, and much else.

Regarding (3), it is hard to maintain that the indeterminacy within a discipline over first principles and methodology renders the discipline valueless. The main reason for this is the fact that debates about principles and methodologies are themselves valuable insofar as they can lead to clarification, resolution, and innovation.

Unlike the critic above who thinks that the indeterminacy of ethics renders it valueless, the frustrated critic of business ethics has recourse to a fourth complaint: business ethics is beside the point because we already know how people should act. The problem is getting them to act in that way. The members of Enron knew what they were doing was wrong when they committed fraudulent accounting practices to inflate their share price and engaged in insider trading, and they created a culture in which certain goals led to breaking the rules. What was needed was not more insight into what is wrong, but rather putting into play mecha- nisms that lead to people behaving morally.

While it is true that in general we would all benefit from everyone behaving morally, it is just false that we already, in general, know how to behave. Ethics is an on-going project; as technol- ogy advances and business takes on a new face, new ethical questions arise; and the answers to an ethical dilemma presented by new technology and business practice are not always answered by just looking at what we said in the past in the most relevantly similar cases.

But even if it were true that for the most part we know what the morally correct thing to do is in a given situation, it still would not be true that business ethics is beside the point. The underly- ing assumption required to make that inference is that studying business ethics has no effect on our motivations.

However, studying business ethics is not necessarily motivationally inefficacious. What is important is how we unpack the idea of “studying.”

If studying business ethics just amounts to memo- rizing a bunch of codes and passing an exam, it is fair to say that studying it is likely to only provide one with knowledge of what codes and principles to obey. While this project might be worthy in itself, it does not come close to motivating one to be ethical. But there is another way of under- standing the idea of “studying” business ethics. Being part of a business community where one can openly discuss how business should be conducted, and where one’s contributions are taken seriously and reflected upon by others can often open one’s mind to the possibility of change in light of the criticism of others.

Those who find that the pressure of the real world corporate environment pushes them away from the moral principles they believed in prior to entering the corporate world may discover that these principles are reactivated when they read case histories and debate what to do in particular and common situations. One of the best ways to learn about the consequences of cruelty is to read and discuss the great novels that portray it. Likewise, reading case histories representing com- mon ethically relevant business situations, and dis- cussing them, can reinforce values and bring clarity.

Secondly, ethics in general requires healthy debate and exchange of ideas. When a person offers an ethical position on a topic, and another disagrees, both parties have a prima facie obliga- tion to offer reasons and justifications for their positions. Unlike disputes about what is the best flavor of ice cream, where opponents may disagree with one another with no other reason than that they like the particular flavor that they do, the nature of moral discussion requires that reasons be offered. Moral discussions are often about the pos- sibility of harm to others, and most people in most cultures see the actions which have potential to harm others as requiring reasons and justifications. Consequently, and as a result of moral engagement, individuals can come to be motivated to act one way rather than another by acquiring new desires and beliefs through moral debate. It is often times noted that people feel most comfortable with

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an action they are about to take when they feel confident in the reasons they have for taking that action. Moral discussions can provide reasons, and confidence in those reasons.

Third, all of us at one time were new to the corporate environment and the pressures that arise in it, and most of us looked for guidance, not just from our colleagues and our bosses, but also from a source beyond them. One reason we searched for this was that we weren’t always sure that our bosses and colleagues were doing the morally right thing, or, for that matter, that they were even con- cerned with the morally right thing to do. Clearly, business ethics can provide guidance here. The study of ethics can provide us with a firm grasp of principles that can be applied in new situations to help us determine for ourselves what the morally right action is. The ability to reason about ethics can provide us with that sense of independence in thought that allows us to judge for ourselves whether our actions are morally right, and to criti- cize others.

2. THE BAKER AND THE

BUTCHER REVISITED

Let’s go back to the beginning. Where does the idea that business and ethics do not fit together come from? One promising place to look would be at the role of self-interest in economics. There is a famous passage quoted from Adam Smith’s 1778 Wealth of Nations:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love ...

The standard story based on this passage is that the sellers want our money, we want their prod- ucts, and the exchange benefits us all. As a result, there doesn’t seem to be any need for ethics in the exchange matrix. Rational individuals pursuing their own self-interest are all it takes for day-to-day

business dealings. Any imposition of ethical prin- ciples would be redundant.

While it is true that Smith paid tribute to self-interest in the passage above, it is a mis reading of the passage, pointed out by Amartya Sen, to take it that it excludes ethics from the matrix of exchange. By locating the specific sense in which self-interest is being celebrated by Smith, Sen claims we can bring out the sense in which ethics is an essential component of a system of exchange. What Smith was saying is that our motivation for exchange is self-interest. We are motivated to come to the marketplace to exchange our goods, not out of love for the other, but out of the neces- sity of self-preservation. The butcher sells his meat, the brewer his beer, and the baker his bread out of the obvious desire to procure money in order to purchase the goods they desire. Smith is not saying that business can function without ethical princi- ples to guide the exchange. By making a distinc- tion between the motivation for exchange and the features necessary for the flourishing of business we can see the appropriate roles of self-interest and how business ethics makes sense.

Ethical principles and codes of conduct are what allow for a system of exchange to flour- ish over long periods of time. In order to see the necessity of ethical principles and codes of conduct in the marketplace it will be instructive to look at a point made by Socrates in Book 1 of The Republic.

In discussion with Thrasymachus, Socrates points out that if a group has a common goal and every member of the group acts unjustly, then the attainment of the common goal will be frustrated. His point is made in an attempt to praise justice against Thrasymachus’ diatribe. Thrasymachus has praised the life of injustice and thievery because he understands justice to be a weakness, and injustice to be the power to take advantage of others with impunity. Socrates has pointed out that even though it is correct that thieves take advantage of others, and at times with impunity, it is not true that they live wholly unjust lives. In fact, Socrates points out, in their dealings with

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other thieves they obey rules, and have a code of conduct, that allows for their thievery in groups to prosper. Even in modern times Socrates’ point is common knowledge. The mafia has their own code of conduct, and individuals within their circle obey a code of conduct out of fear of punishment. If you are convinced that “the ethics of the mafia” is not an oxymoron, then you should equally be con- vinced that “business ethics” is not an oxymoron.

Socrates’ point connects well with the dis- tinction between the motivation for exchange and those features of a system necessary for its flourishing. Codes of conduct, rules, and guide- lines—ethical principles—are all required in order for business to flourish over time. Without ethical principles and rules the common goal of business— the exchange of goods for the benefit of all—would be frustrated, and less successful.

So, business and ethics do go together; and business ethics is not useless, valueless because indeterminate, or beside the point. Rather, ethics and business are connected in a way that is essen- tial for the very flourishing of business.

BIBLIOGRAPHY

Association to Advance Collegiate Schools of Business, “Ethics Education in Business Schools: Report of the Ethics Education Task Force to AACSB International’s Board of Directors.” 2004. http:// www.aacsb.edu/publications/researchreports/ archives/ethics-education.pdf

Albert Z. Carr, “Is Business Bluffing Ethical?” Harvard Business Review (January/February 1968). See below, 526–34.

Economist Intelligence Unit, “Corporate Citizenship: Profiting from a Sustainable Business.” (London: Economist Intelligence Unit, Ltd., 2008).

Plato, “Book 1,” Republic, translated by G.M.A. Grube and revised by C.D.C. Reeve (Indianapolis, Indiana: Hackett Publishing Company, 1992).

Amartya Sen, “Does Business Ethics Make Economic Sense?” Business Ethics Quarterly 3.1 (January 1993). See below, 1–17.

Clarence C. Walton, “The State of Business Ethics,” Enriching Business Ethics (New York: Plenum Press, 1990).

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– 2 – DOES BUSINESS ETHICS

MAKE ECONOMIC SENSE? Amartya Sen

1. INTRODUCTION

I begin not with the need for business ethics, but at the other end—the idea that many people have that there is no need for such ethics. That conviction is quite widespread among practitioners of economics, though it is more often taken for granted implicitly rather than asserted explicitly. We have to understand better what that conviction rests on, to be able to see its inadequacies. Here, as in many other areas of knowledge, the importance of a claim depends to a great extent on what it denies.

How did this idea of the redundancy of ethics get launched in economics? The early authors on economic matters, from Aristotle and Kautilya (in ancient Greece and ancient India respectively—the two were contemporaries, as it happens) to medi- eval practitioners (including Aquinas, Ockham, Maimonides, and others), to the economists of the early modern age (William Petty, Gregory King, François Quesnay, and others) were all much con- cerned, in varying degrees, with ethical analysis. In one way or another, they saw economics as a branch of “practical reason,” in which concepts of the good, the right and the obligatory were quite central.

What happened then? As the “official” story goes, all this changed with Adam Smith, who can certainly be described—rightly—as the father of modern economics. He made, so it is said, eco- nomics scientific and hard-headed, and the new

economics that emerged, in the nineteenth and twentieth centuries, was all ready to do busi- ness, with no ethics to keep it tied to “morals and moralizing.” That view of what happened—with Smith doing the decisive shooting of business and economic ethics—is not only reflected in volumes of professional economic writings, but has even reached the status of getting into the English liter- ature via a limerick by Stephen Leacock, who was both a literary writer and an economist:

Adam, Adam, Adam Smith Listen what I charge you with! Didn’t you say In a class one day That selfishness was bound to pay? Of all doctrines that was the Pith.

Wasn’t it, wasn’t it, wasn’t it, Smith?¹

The interest in going over this bit of history—or alleged history—does not lie, at least for this conference, in scholastic curiosity. I believe it is important to see how that ethics-less view of economics and business emerged in order to understand what it is that is being missed out. As it happens, that bit of potted history of “who killed business ethics” is altogether wrong, and it is particularly instructive to understand how that erroneous identification has come about.

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2. EXCHANGE, PRODUCTION

AND DISTRIBUTION

I get back, then, to Adam Smith. Indeed, he did try to make economics scientific, and to a great extent was successful in this task, within the limits of what was possible then. While that part of the alleged history is right (Smith certainly did much to enhance the scientific status of economics), what is altogether mistaken is the idea that Smith demonstrated—or believed that he had demonstrated—the redundancy of ethics in economic and business affairs. Indeed, quite the contrary. The Professor of Moral Philosophy at the University of Glasgow—for that is what Smith was—was as interested in the importance of ethics in behavior as anyone could have been. It is instructive to see how the odd reading of Smith—as a “no-nonsense” skeptic of economic and business ethics—has come about.

Perhaps the most widely quoted remark of Adam Smith is the one about the butcher, the brewer and the baker in The Wealth of Nations:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love....”² The butcher, the brewer and the baker want our money, and we want their products, and the exchange benefits us all. There would seem to be no need for any ethics—busi- ness or otherwise—in bringing about this better- ment of all the parties involved. All that is needed is regard for our own respective interests, and the market is meant to do the rest in bringing about the mutually gainful exchanges.

In modern economics this Smithian tribute to self-interest is cited again and again—indeed with such exclusivity that one is inclined to wonder whether this is the only passage of Smith that is read these days. What did Smith really suggest? Smith did argue in this passage that the pursuit of self-interest would do fine to motivate the exchange of commodities. But that is a very limited claim, even though it is full of wonderful

insights in explaining why it is that we seek exchange and how come exchange can be such a beneficial thing for all. But to understand the lim- its of what is being claimed here, we have to ask, first: Did Smith think that economic operations and business activities consist only of exchanges of this kind? Second, even in the context of exchange, we have to question: Did Smith think that the result would be just as good if the busi- nesses involved, driven by self-interest, were to try to defraud the consumers, or the consumers in question were to attempt to swindle the sellers?

The answers to both these questions are clearly in the negative. The butcher-brewer-baker simplicity does not carry over to problems of pro- duction and distribution (and Smith never said that it did), nor to the problem as to how a system of exchange can flourish institutionally. This is exactly where we begin to see why Smith could have been right in his claim about the motivation for exchange without establishing or trying to establish the redundancy of business or ethics in general (or even in exchange). And this is central to the subject of this conference.

The importance of self-interest pursuit is a helpful part of understanding many practical problems, for example, the supply problems in the Soviet Union and East Europe. But it is quite unhelpful in explaining the success of, say, Japanese economic performance vis-à-vis West Europe or North America (since behavior modes in Japan are often deeply influenced by other conventions and pressures). Elsewhere in The Wealth of Nations, Adam Smith considers other problems which call for a more complex motiva- tional structure. And in his The Theory of Moral Sentiments, Smith goes extensively into the need to go beyond profit maximization, arguing that

“humanity, justice, generosity, and public spirit, are the qualities most useful to others.”³ Adam Smith was very far from trying to deny the impor- tance of ethics in behavior in general and business behavior in particular.

Through overlooking everything else that Smith said in his wide-ranging writings and

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concentrating only on this one butcher- brewer- baker passage, the father of modern economics is too often made to look like an ideologue. He is transformed into a partisan exponent of an ethics-free view of life which would have horrified Smith. To adapt a Shakespearian aphorism, while some men are born small and some achieve small- ness, the unfortunate Adam Smith has had much smallness thrust upon him.

It is important to see how Smith’s whole- ness tribute to self-interest as a motivation for exchange (best illustrated in the butcher- brewer- baker passage) can co-exist peacefully with Smith’s advocacy of ethical behavior elsewhere. Smith’s concern with ethics was, of course, extremely extensive and by no means confined to economic and business matters. But since this is not the occasion to review Smith’s ethical beliefs, but only to get insights from his combination of economic and ethical expertise to understand better the exact role of business ethics, we have to point our inquiries in that particular direction.

The butcher-brewer-baker discussion is all about motivation for exchange, but Smith was—as any good economist should be—deeply concerned also with production as well as distri- bution. And to understand how exchange might itself actually work in practice, it is not adequate to concentrate only on the motivation that makes people seek exchange. It is necessary to look at the behavior patterns that could sustain a flourishing system of mutually profitable exchanges. The pos- itive role of intelligent self-seeking in motivating exchange has to be supplemented by the motiva- tional demands of production and distribution, and the systemic demands on the organization of the economy.

These issues are taken up now, linking the general discussion with practical problems faced in the contemporary world. In the next three sections I discuss in turn (1) the problem of organization (especially that of exchange), (2) the arrangement and performance of production, and (3) the challenge of distribution.

3. ORGANIZATION AND

EXCHANGE: RULES AND TRUST

I come back to the butcher-brewer-baker exam- ple. The concern of the different parties with their own interests certainly can adequately motivate all of them to take part in the exchange from which each benefits. But whether the exchange would operate well would depend also on organizational conditions. This requires institutional development which can take quite some time to work—a lesson that is currently being learned rather painfully in East Europe and the former Soviet Union. That point is now being recognized, even though it was comprehensively ignored in the first flush of enthu- siasm in seeking the magic of allegedly automatic market processes.

But what must also be considered now is the extent to which the economic institutions operate on the basis of common behavior patterns, shared trusts, and a mutual confidence in the ethics of the different parties. When Adam Smith pointed to the motivational importance of “regard to their own interest,” he did not suggest that this motivation is all that is needed to have a flourishing system of exchange. If he cannot trust the householder, the baker may have difficulty in proceeding to produce bread to meet orders, or in delivering bread with- out prepayment. And the householder may not be certain whether he would be sensible in relying on the delivery of the ordered bread if the baker is not always altogether reliable. These problems of mutual confidence—discussed in a very simple form here—can be incomparably more complex and more critical in extended and multifarious business arrangements.

Mutual confidence in certain rules of behavior is typically implicit rather than explicit—indeed so implicit that its importance can be easily over- looked in situations in which such confidence is unproblematic. But in the context of economic development, across the Third World, and also of institutional reform, now sweeping across what used to be the Second World, these issues

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of behavioral norms and ethics can be alto- gether central.

In the Third World there is often also a deep- rooted skepticism of the reliability and moral quality of business behavior. This can be directed both at local businessmen and the commercial people from abroad. The latter may sometimes be particularly galling to well established business firms including well-known multinationals. But the record of some multinationals and their unequal power in dealing with the more vulnerable coun- tries have left grounds for much suspicion, even though such suspicion may be quite misplaced in many cases. Establishing high standards of business ethics is certainly one way of tackling this problem.

There is also, in many Third World countries, a traditional lack of confidence in the moral behavior of particular groups of traders, for example mer- chants of food grains. This is a subject on which— in the context of the-then Europe—Adam Smith himself commented substantially in The Wealth of Nations, though he thought these suspicions were by and large unjustified. In fact, the empirical record on this is quite diverse, and particular expe- riences of grain trade in conditions of scarcity and famine have left many questions to be answered.

This is an issue of extreme seriousness, since it is now becoming increasingly clear that typi- cally the best way of organizing famine prevention and relief is to create additional incomes for the destitute (possibly through employment schemes) and then to rely on normal trade to meet (through standard arrangements of transport and sales) the resulting food demand. The alternative of bureau- cratic distribution of food in hastily organized relief camps is often much slower, more waste- ful, seriously disruptive of family life and normal economic operations, and more conducive to the spread of epidemic diseases. However, giving a crucial role to the grain traders at times of fam- ine threats (as a complement to state-organized employment schemes to generate income) raises difficult issues of trust and trustworthiness, in particular, that the traders will not manipulate the

precarious situation in search of unusual profit. The issue of business ethics, thus, becomes an altogether vital part of the arrangement of famine prevention and relief.

The problem can be, to some extent, dealt with by skillful use of the threat of government inter- vention in the market. But the credibility of that threat depends greatly on the size of grain reserves the government itself has. It can work well in some cases (generally it has in India), but not always. Ultimately, much depends on the extent to which the relevant business people can establish exacting standards of behavior, rather than fly off in search of unusual profits to be rapidly extracted from manipulated situations.

I have been discussing problems of organiza- tion in exchange, and it would seem to be right to conclude this particular discussion by noting that the need for business ethics is quite strong even in the field of exchange (despite the near-universal presence of the butcher-brewer-baker motivation of “regard to their own interest”). If we now move on from exchange to production and distribution, the need for business ethics becomes even more forceful and perspicuous. The issue of trust is cen- tral to all economic operations. But we now have to consider other problems of interrelation in the process of production and distribution.

4. ORGANIZATION OF PRODUCTION:

FIRMS AND PUBLIC GOODS

Capitalism has been successful enough in gen- erating output and raising productivity. But the experiences of different countries are quite diverse. The recent experiences of East Asian econo- mies—most notably Japan—raise deep questions about the modelling of capitalism in traditional economic theory. Japan is often seen—rightly in a particular sense—as a great example of successful capitalism, but it is clear that the motivation pat- terns that dominate Japanese business have much more content than would be provided by pure profit maximization.

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Different commentators have emphasized distinct aspects of Japanese motivational features. Michio Morishima has outlined the special char- acteristics of “Japanese ethos” as emerging from its particular history of rule-based behavior pattern.4 Ronald Dore has seen the influence of “Confucian ethics.”5 Recently, Eiko Ikegami has pointed to the importance of the traditional concern with

“honor”—a kind of generalization of the Samurai code—as a crucial modifier of business and eco- nomic motivation.6

Indeed, there is some truth, oddly enough, even in the puzzlingly witty claim made by The Wall Street Journal that Japan is “the only commu- nist nation that works” (30 January 1989, 1). It is, as one would expect, mainly a remark about the non-profit motivations underlying many economic and business activities in Japan. We have to under- stand and interpret the peculiar fact that the most successful capitalist nation in the world flourishes economically with a motivation structure that departs firmly—and often explicitly—from the pursuit of self-interest, which is meant to be the bedrock of capitalism.

In fact, Japan does not, by any means, pro- vide the only example of a powerful role of busi- ness ethics in promoting capitalist success. The productive merits of selfless work and devotion to enterprise have been given much credit for economic achievements in many countries in the world. Indeed, the need of capitalism for a moti- vational structure more complex than pure profit maximization has been acknowledged in various forms, over a long time, by various social scien- tists (though typically not by many “mainstream” economists): I have in mind Marx, Weber, Tawney, and others.7 The basic point about the observed success of non-profit motives is neither unusual nor new, even though that wealth of historical and conceptual insights is often thoroughly ignored in professional economics today.

It is useful to try to bring the discussion in line with Adam Smith’s concerns, and also with the general analytical approaches successfully devel- oped in modern microeconomic theory. In order

to understand how motives other than self-seeking can have an important role, we have to see the lim- ited reach of the butcher-brewer-baker argument, especially in dealing with what modern econo- mists call “public good.” This becomes particularly relevant because the overall success of a modern enterprise is, in a very real sense, a public good.

But what is a public good? That idea can be best understood by contrasting it with a “private good,” such as a toothbrush or a shirt or an apple, which either you can use or I, but not both. Our respective uses would compete and be exclusive. This is not so with public goods, such as a livable environment or the absence of epidemics. All of us may benefit from breathing fresh air, living in an epidemic-free environment, and so on. When uses of commodities are non-competitive, as in the case of public goods, the rationale of the self- interest- based market mechanism comes under severe strain. The market system works by putting a price on a commodity and the allocation between con- sumers is done by the intensities of the respective willingness to buy it at the prevailing price. When

“equilibrium prices” emerge, they balance demand with supply for each commodity. In contrast, in the case of public goods, the uses are—largely or entirely—non-competitive, and the system of giving a good to the highest bidder does not have much merit, since one person’s consumption does not exclude that of another. Instead, optimum resource allocation would require that the com- bined benefits be compared with the costs of pro- duction, and here the market mechanism, based on profit maximization, functions badly.

A related problem concerns the allocation of private goods involving strong “externalities,” with interpersonal interdependences working outside the markets. If the smoke from a factory makes a neighbor’s home dirty and unpleasant, without the neighbor being able to charge the factory owner for the loss she suffers, then that is an “external” relation. The market does not help in this case, since it is not there to allocate the effects—good or bad—that work outside the market. Public goods and externalities are related phenomena,

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and they are both quite common in such fields as public health care, basic education, environmental protection, and so on.

There are two important issues to be addressed in this context, in analyzing the organization and performance of production. First, there would tend to be some failure in resource allocation when the commodities produced are public goods or involve strong externalities. This can be taken either (1) as an argument for having publicly owned enter- prises, which would be governed by principles other than profit maximization, or (2) as a case for public regulations governing private enterprise, or (3) as establishing a need for the use of non-profit values—particularly of social concern—in private decisions (perhaps because of the goodwill that it might generate). Since public enterprises have not exactly covered themselves with glory in the recent years, and public regulations—while useful—are sometimes quite hard to implement, the third option has become more important in public discussions. It is difficult, in this context, to escape the argument for encouraging business ethics, going well beyond the traditional values of honesty and reliability, and taking on social responsibility as well (for example, in matters of environmental degradation and pollution).

The second issue is more complex and less recognized in the literature, but also more interest- ing. Even in the production of private commodities, there can be an important “public good” aspect in the production process itself. This is because production itself is typically a joint activity, super- visions are costly and often unfeasible, and each participant contributes to the over-all success of the firm in a way that cannot be fully reflected in the private rewards that he or she gets.

The over-all success of the firm, thus, is really a public good, from which all benefit, to which all contribute, and which is not parcelled out in little boxes of person-specific rewards strictly linked with each person’s respective contribution. And this is precisely where the motives other than narrow self-seeking become productively important. Even though I do not have the opportunity to pursue the

point further here, I do believe that the successes of “Japanese ethos,” “Confucian ethics,” “Samurai codes of honor,” etc., can be fruitfully linked to this aspect of the organization of production.

5. THE CHALLENGE OF

DISTRIBUTION: VALUES

AND INCENTIVES

I turn now to distribution. It is not hard to see that non-self-seeking motivations can be extremely important for distributional problems in general. In dividing a cake, one person’s gain is another’s loss. At a very obvious level, the contributions that can be made by ethics—business ethics and oth- ers—include the amelioration of misery through policies explicitly aimed at such a result. There is an extensive literature on donations, charity, and philanthropy in general, and also on the willing- ness to join in communal activities geared to social improvement. The connection with ethics is obvi- ous enough in these cases.

What is perhaps more interesting to discuss is the fact that distributional and productional problems very often come mixed together, so that how the cake is divided influences the size of the cake itself. The so-called “incentive problem” is a part of this relationship. This too is a much discussed problem, but it is important to clarify in the present context that the extent of the conflict between size and distribution depends crucially on the motivational and behavioral assumptions. The incentive problem is not an immutable feature of production technology. For example, the more narrowly profit-oriented an enterprise is, the more it would, in general, tend to resist looking after the interests of others—workers, associates, consum- ers. This is an area in which ethics can make a big difference.

The relevance of all this to the question we have been asked to address (“Does business ethics make economic sense?”) does, of course, depend on how “economic sense” is defined. If economic sense includes the achievement of a good soci- ety in which one lives, then the distributional

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improvements can be counted in as parts of sensible outcomes even for business. Visionary industrialists and businesspersons have tended to encourage this line of reasoning.

On the other hand, if “economic sense” is interpreted to mean nothing other than achieve- ment of profits and business rewards, then the con- cerns for others and for distributional equity have to be judged entirely instrumentally—in terms of how they indirectly help to promote profits. That connection is not to be scoffed at, since firms that treat their workers well are often very richly rewarded for it. For one thing, the workers are then more reluctant to lose their jobs, since more would be sacrificed if dismissed from this (more lucrative) employment, compared with alternative opportu- nities. The contribution of goodwill to team spirit and thus to productivity can also be quite plentiful.