Does Business Ethics Make Economic Sense?
Given many people’s belief that the term ‘business ethics” is an oxymoron, the natural response to the question is “no.” However, Amartya Sen argues otherwise. It’s ironic really that we think business ethics does not make economic sense because many feel this was inspired by the father of classical economics, Adam Smith. However, it is often forgotten that before Smith wrote Wealth of Nations, he published a rather large tome on ethics titled The Theory of Moral Sentiments. Ethics was a central concern to Smith not only in everyday life but also in economics. As Sen points out, Smith says in The Theory of Moral Sentiments that “humanity, justice, generosity, and public spirit, are the qualities most useful to others.”
But still, Smith is seen as the great exponent of self-interest in economics thus making business ethics unnecessary. The main passage in Wealth of Nations that is responsible for this is the passage about the butcher, the brewer, and the baker. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard for their self-interest.”
Sen maintains that Smith stresses the importance of self-interest in motivating exchange but that there are other factors at work in making exchange possible. Additionally, economics is also concerned with production and distribution which cannot be adequately explained by self-interest alone. In the example of the butcher, the brewer, and the baker self-interest certainly does provide a reason for their desire to enter into an exchange but more is needed to make the exchange successful. What more is a set of ethical institutions. For example, trust is needed for an exchange to work. Think about credit for a moment. You go into a store and want to purchase some merchandise but instead of paying with cash you put it on your credit card. Now, for a merchant to accept this, there has to be some trust in place. This is because, in essence, you are simply promising to pay for the merchandise at a future time instead of right now. When you sign the credit receipt you are agreeing with the merchant. Now, you might say that this has nothing to do with ethics since you are obligated to pay the money, or else you’ll end up being punished. But, think about what punishment is in this case. It is simply a consequence of your failure to hold up your end of this trust agreement. It is important not to confuse the consequences of your failure to uphold an ethical standard with the ethical standard itself. And this is part of Sen‘s point.
Ethics is also important in the realm of production. The two issues where non-profit motives become particularly important in economics are public goods and externalities. A recurring question in capitalist economics is how can public goods be provided since there seems to be little profit motive to do so? To see the problem, we should distinguish a public good from a private good. Private goods are things that individuals consume and this consumption excludes another person from consuming the same product. An example Sen uses is a toothbrush. Using the toothbrush precludes your use of it. But public goods don’t work this way. For example, street lighting. My use of street lighting does not preclude your using them as well. The question is what economic incentive is there to produce such public goods since it is hard to see how anyone could make a profit from them? We’ll see in a later lecture another example of a public good that was thought to be unprofitable, namely the lighthouse. But the question remains. To produce public goods, something else must be at work other than economic self-interest. This something else must be other ethical considerations.
The problem of externalities involves costs that are passed on without an easy way to compensate for them. Sen’s example is pollution. If I live next to a factory I have to deal with the pollution from that factory and have no easy way to pass those costs back to the factory owner. So, what incentive do factory owners have to curtail their pollution if they are not paying the direct costs? The point of this example is that business without ethics not only provides no incentive to address this problem but that without ethics we run into the problem in the first place! So, we are much worse off as a community. But the point of an economic arrangement is to make us better off not only individually but also as a community. So, to do this other ethical considerations besides self-interest must come into play. Business ethics does make economic sense!
Finally, the area of distribution also benefits from business ethics. One could make the argument that here the market dictates how much of a product is produced and how the product is priced and distributed. But the question arises of whether this produces the optimal distribution. In economics, there is something called the Pareto Optimum (named for the economist Vilfredo Pareto). The idea here is that a given distribution of goods reaches the Pareto Optimum when any further change in the arrangement will make everyone worse off. Most arrangements of distribution are not optimum because some changes would make some involved better off. In an economic arrangement motivated ONLY by self-interest, the Pareto optimum cannot easily if at all, be reached. Whereas in an arrangement where other ethical considerations are in play, the arrangement is often improved, though it may still fall short of optimality.
So, it does seem that business ethics makes economic sense. But some might argue that whether it makes economic sense or not business ethics should be practiced. As Thomas Sowell puts it in his book Basic Economics some argue for “non-economic values” saying “economics is all very well, but there are also non-economic values to consider.” Sowell calls this a fallacy since “of course, there are non-economic values. In fact, there are only non-economic values. Economics is not a value in and of itself. It is only a way of weighing one value against another. Economics does not say that you should make the most money possible.” This may come as a great surprise to many including business and economics majors.
This relates to the point of Sen’s article since it does seem to be a common misconception that economics dictates that one should make as much money as possible no matter what. This is simply untrue. Economics does not say that one should rob a bank, for example. No, what economics does is simply provide us with a way of calculating the costs of one action over another. Other factors must be involved in making the decision. Likely as not those other factors are ethical considerations.
But still, Smith is seen as the great exponent of self-interest in economics thus making business ethics unnecessary. The main passage in Wealth of Nations that is responsible for this is the passage about the butcher, the brewer, and the baker. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard for their self-interest.”
Sen maintains that Smith stresses the importance of self-interest in motivating exchange but that there are other factors at work in making exchange possible. Additionally, economics is also concerned with production and distribution which cannot be adequately explained by self-interest alone. In the example of the butcher, the brewer, and the baker self-interest certainly does provide a reason for their desire to enter into an exchange but more is needed to make the exchange successful. What more is a set of ethical institutions. For example, trust is needed for an exchange to work. Think about credit for a moment. You go into a store and want to purchase some merchandise but instead of paying with cash you put it on your credit card. Now, for a merchant to accept this, there has to be some trust in place. This is because, in essence, you are simply promising to pay for the merchandise at a future time instead of right now. When you sign the credit receipt you are agreeing with the merchant. Now, you might say that this has nothing to do with ethics since you are obligated to pay the money, or else you’ll end up being punished. But, think about what punishment is in this case. It is simply a consequence of your failure to hold up your end of this trust agreement. It is important not to confuse the consequences of your failure to uphold an ethical standard with the ethical standard itself. And this is part of Sen‘s point.
Ethics is also important in the realm of production. The two issues where non-profit motives become particularly important in economics are public goods and externalities. A recurring question in capitalist economics is how can public goods be provided since there seems to be little profit motive to do so? To see the problem, we should distinguish a public good from a private good. Private goods are things that individuals consume and this consumption excludes another person from consuming the same product. An example Sen uses is a toothbrush. Using the toothbrush precludes your use of it. But public goods don’t work this way. For example, street lighting. My use of street lighting does not preclude your using them as well. The question is what economic incentive is there to produce such public goods since it is hard to see how anyone could make a profit from them? We’ll see in a later lecture another example of a public good that was thought to be unprofitable, namely the lighthouse. But the question remains. To produce public goods, something else must be at work other than economic self-interest. This something else must be other ethical considerations.
The problem of externalities involves costs that are passed on without an easy way to compensate for them. Sen’s example is pollution. If I live next to a factory I have to deal with the pollution from that factory and have no easy way to pass those costs back to the factory owner. So, what incentive do factory owners have to curtail their pollution if they are not paying the direct costs? The point of this example is that business without ethics not only provides no incentive to address this problem but that without ethics we run into the problem in the first place! So, we are much worse off as a community. But the point of an economic arrangement is to make us better off not only individually but also as a community. So, to do this other ethical considerations besides self-interest must come into play. Business ethics does make economic sense!
Finally, the area of distribution also benefits from business ethics. One could make the argument that here the market dictates how much of a product is produced and how the product is priced and distributed. But the question arises of whether this produces the optimal distribution. In economics, there is something called the Pareto Optimum (named for the economist Vilfredo Pareto). The idea here is that a given distribution of goods reaches the Pareto Optimum when any further change in the arrangement will make everyone worse off. Most arrangements of distribution are not optimum because some changes would make some involved better off. In an economic arrangement motivated ONLY by self-interest, the Pareto optimum cannot easily if at all, be reached. Whereas in an arrangement where other ethical considerations are in play, the arrangement is often improved, though it may still fall short of optimality.
So, it does seem that business ethics makes economic sense. But some might argue that whether it makes economic sense or not business ethics should be practiced. As Thomas Sowell puts it in his book Basic Economics some argue for “non-economic values” saying “economics is all very well, but there are also non-economic values to consider.” Sowell calls this a fallacy since “of course, there are non-economic values. In fact, there are only non-economic values. Economics is not a value in and of itself. It is only a way of weighing one value against another. Economics does not say that you should make the most money possible.” This may come as a great surprise to many including business and economics majors.
This relates to the point of Sen’s article since it does seem to be a common misconception that economics dictates that one should make as much money as possible no matter what. This is simply untrue. Economics does not say that one should rob a bank, for example. No, what economics does is simply provide us with a way of calculating the costs of one action over another. Other factors must be involved in making the decision. Likely as not those other factors are ethical considerations.