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The Economic Foundations of Contracts

Business Ethics

In business, hard decisions are made such as expansion and mergers, or closures, which are geared towards either growth of the firm or survival alone.  In effect, sacrifices are made.  Assets may have to be sold, relationships are broken, contracts are made to protect the firm or human resources are cut down to reduce costs.  While the business ought to survive in the current turbulent environment, the stakeholders of the business are also affected.  In the light of economic survival, the employees and consumers are also suffering at same time with the firm.

The business partnership between the firm and its environment, or Capital and Labor and/or firm’s leadership complementarity (i.e. leadership within the firm shared by two people as in the case of COO and CEO) could be best demonstrated in the boyfriend-girlfriend relationship.  In the face of danger, the boyfriend ran away for his life leaving his girlfriend with the criminals.

Is it ethical for the man to leave his girlfriend in the face of danger in order to survive?  If one freezes the incident in this particular scene, the man is automatically judged unethical.  The same event demonstrates whether managers should sacrifice the welfare of its employees and/or other stakeholders for its business’ survival?

But ethical actions are not viewed in a frame by frame fashion of event but rather the ultimate end and purpose of its actions.  If the man ought to survive to call for help and bring the criminals to justice by escaping danger, is it not ethical.  In business, when it has to reduce its employees in order to survive while the remaining ones get to keep their jobs instead of trying to survive as a whole but ultimately dragged the whole firm to closure.

“Help those in need” is the normative principle of applied ethics (Applied Ethics, 2008).  But one has to survive first.  One has to survive not at the expense of another but to survive for the sake of others.  In business, the reason for one’s survival is in economics.  Business firms avoid this kind of scenario of “choosing between the devil and the deep blue sea’ situation by forging contracts.

 It lays down the foundation of relationships and the ethical practices through common agreement.  And in reality, contracts are all incomplete (Besanko et al, 2004).  In the boyfriend-girlfriend scenario, there is an unwritten contract of mutual alliance but how to implement is simply implied.  Hence, actions should be viewed in its ultimate purpose and end depending on the situation before judging what is ethical and not.

Works Cited

“Normative Ethics: Ethics.” The Internet Encyclopedia of Philosophy. : http://www.iep.utm.edu/e/ethics.htm#SH2b. May 30, 2008.

Besanko, D., Dranove, D., Shanley M., and Schaeffer, S. Economics of Strategy: The Economic Foundations of Contracts

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. Third Edition.  John Wiley and Sons Inc. 2004: 118-121

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