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To What Extent is there a Responsibility for Business to Act Ethically?

Abstract:

This paper will argue that a true understanding of the market is necessary to enforce ethical behavior. The present European and American system is not a market system, but an oligarchy controlled by big finance and big media. Few could argue with that. However, the initial formation of the market mechanism by Smith envisaged relatively small producers services a more or less local market. Outside of this, the market fails, since firms are no longer transparent to those who they are trying to serve. Put differently, markets are non-bureaucratic, while oligarchy depends and functions according to bureaucratic models.

  1. The Nature of the Market as an Ethical Institution

For better or worse, there is no agreed upon sense of the word “ethics” in western societies. The question this essay seeks to answer is therefore misleading. It assumes that we all know what “ethically” means. We do not. But there is something to be said for the idea of the unregulated market in the way that Adam Smith and even John Locke envisaged it. In both cases, though using very different foundations, the market itself was a regulatory institution that enforced ethical behavior. But in this case, “ethical” was defined by the market, the most democratic institution of all. Since it is democratic at root, it solves the ethical problem by letting people decide on what products and services to buy.

In saying this, we are not saying that the present system in America or western Europe is in any way a market. The present system in the post-industrialized world is a financial oligarchy (Burnham, 1972). To confuse the present system with the free market in the classical sense is mental sloppiness at the highest level. Markets work, so long as they exist on the basis of diffused private property focused on the local level (Locke, 2003).

The traditional concept of the free market functions primarily as an ethical institution. While it can also be seen as a means of allocating resources and controlling investment, it serves primarily to regulate behavior. But this regulation is done under the aegis of the market, or the community itself that can decide which firms to support, and which to reject.

In the classical market model of Smith, the idea of perfect competition is itself a form of the “state of nature” theory. In this case, Smith’s state of nature is equal competitors in a free market. While this particular arrangement cannot last (some will always be more successful than others), it serves to underpin the human race as naturally competitive. But this is not a bad thing.

The model that Smith lays out is primarily an ethical institution for the simple reason that its primary purpose is to force firms to behave ethically, or face the sanctions of the market. A locality has many small businesses and industries. The locality represents the market. In this case, dishonest or otherwise unethical businesses will not be supported by the population. The market is sufficient in these cases to support ethical behavior. Smith’s concept is well known: the competition of firms ensures the best possible behavior relative to the market.

The simple reason for this is because the market forces people, otherwise greedy for gain, to behave in a way that would attract the most customers and, importantly, repeat business. This means that these firms must behave ethically (Buchanan, 1985).

The present problem is that mass advertising, foreign investment and oligarchy have eliminated the classical market and created capitalism: the rule of capital. This is a non-ethical institution because they create the market rather than respond to it. Actors in oligopoly are not “businesses” in the traditional sense of the word, but are mostly state connected functionaries. What occurs then is the pretense of ethical behavior rather than the real conformity to the community in the classic market scheme.

The State as Special Interest

Speaking in general terms, when someone talks about “business ethics” they often are speaking of the state regulating the behaviors of businesses and firms. The most obvious point here is that the state must do several things in order to make this a reality:

  • The state must be functioning from the point of view of an ethical theory. This ethical theory does not derive from the people, but from special interests that dominate the state, including the bureaucracy itself. In this case, the state is imposing one concept of the ethical upon a society (Svorny, 2009)
  • The state must use its coercive powers to force business to act according to its version of ethical standards.
  • The special interests who back the state’s regulatory powers (such as the American medical Association in the current health care debate) have no obligation to act in an ethical manner, since they are invisible tot he market and certainly not amenable to democratic control.
  • The state itself is a special interest. If the state uses its coercive capabilities to force its version of ethical life upon business, the state grows in power and influence. More specifically, the bureaucracy grows in power. This means that the least responsive part of the state—the bureaucracy—has more and more power over the life of business. The bureaucracy itself becomes a self-interested party (Norberg, 2009).
  • Lastly, the court system, equally non-democratic, then has the added power of interpreting these laws and statues, hence adding another layer of coercion over the society. Thus, even if the state were to be under democratic control relative to its regulatory apparatus, the courts then would be empowered to distort this even further.

The basic point here is that state regulation is no more an ethical actor that firms in oligopoly. There is no mechanism to transfer state greed into a public good. There is no market here by definition, since the state is that entity that has a monopoly on physical force. In this case, the state also has a monopoly over moral norms. Even worse, the state is often not an autonomous actor, but can move in a direction that is promoted by the special interests, who, in the halls of Congress or the bureaucracy itself, has no check on its power, no mechanism that makes its demands into a public good.

  • The Market as the Creator of Public Good

Put simply, the state, or pressure groups within or without the state, has no right to impose a moral good upon the population. However, the market hast he potential, if unleashed, to create the very same goods that are demanded by the state and its allies.

The voucher system is an important innovation in terms of reintroducing the market in areas that are presently dominated by state interests. The voucher system, putting it simply, is that system that actually puts tax money in the hands of the people themselves to spend it as they wish in areas that are normally dominated by the state. This has been tried on a limited scale in the public school system, while writers such as Arnold King (2009) have advocated it in areas such as Medicare.

Speaking more generally, state regulation and the imposition of a moral rule upon business has a tendency to destroy precisely the moral good that is supposed to come out of the regulation. Speaking of business ethics outside of the market—it should be noted—is really a reliance on state or pressure-group coercion. In this case, the demands that the state impose a moral good has a tendency to backfire. In the case of environmental protection, state intervention has a tendency to cushion businesses rather than forcing them to clean up their act (Nader, 2003).

Tariffs (presently proposed in relation to gas emissions) have a tendency to protect domestic industries, giving them a disincentive to clean up the environment (James, 2009). what has occurred in the past is that large businesses are already connected with the state, and can thus compromise with it (Nader, 2003).

Further, they can afford the extra costs and the coercive measures applied to realize the moral good. Smaller businesses cannot. Hence, big business and oligarchy ultimately win. The state imposes costs, and these costs are better borne by large than small industries. What writers such as Sallie James have argued is that free trade and the market do a better job of forcing businesses to clean up their act than the state does. No one wants to support a polluter.

John Norberg’s argument against regulation in the financial sectors is that the state’s rather cozy relationship with the major financial actors in America as been the primary ingredient that gave them incentives to lend recklessly. If they were basically guaranteed a state bailout because they were “too big to fail,” then the oligarchy rules this sector without competition. The banks then can lend in risky (but high profit) ventures that, over time, can collapse (as in the case of Latin America in the 1980s).

The more general point here is that under the conditions of oligarchy (not the market) state regulation to enforce ethical norms ends up giving more and more benefits to the oligarchs who already are state connected. Small business (the most responsive to local markets) cannot handle the strain in the manner that large businesses can. Small firms do not get state bailouts.

he conclusion can be stated in this manner: the market, working with small businesses closely monitored by the population (i.e. the market), are forced to behave ethically in every case. Large businesses that control the market (i.e. oligarchs) can do what they please. This means, again, that the title of this essay is highly misleading if it refers to present conditions. The best way, therefore, to force businesses to behave ethically is to deregulate, enhance local control and do all in our power to encourage small businesses, since these are the most transparent to market control.

Smith and Kant

In this section, the moral philosophy of Smith and Kant can serve as a foundation for the above more practical economic argument. Smith was a utilitarian while Kant is a deontologist, but that does not mean, despite their different foundations, that they say the same things in terms of a free market. Kant’s famed Categorical Imperative (CI) can be formulated this way: first, that all actions be amenable to be formulated into universal rules. Second, that humanity is treated as an end in all things, and never as a means (Kant, 1989).

What does this have to do with a free market? Kant has, whether he regarded it so or not, given a great justification to the argument for deregulation above. The market is a Kantian institution. The first formulation of the CI is basically a market transaction. In all cases, the market forces firms (firms transparent to the market) to behave in a way that can be seen as laying down a universal rule. The market represents this universality. Kant’s idea is that a violation of this leads to a contradiction.

If pollution is permitted by the market, over time, the market would suffer immensely. Hence, pollution will be stopped by the  community, ie. The market. No community would permit a health care system favoring the rich, and therefore, low cost health care firms would come into existence to fill this void. In the present health care debate, the market system would bring about a series of firms that would specialize in preventative health, alternative health, healthy lifestyles, low cost medications, etc. only in conditions of oligarchy is a health care system for the rich tolerated.

The free market is a Kantian system because the ends that derive from market action forces business to function universally, that is, to function according to the will of the community. The second formulation is considered likewise. The labor market, if it is truly to be a market, must have the same incentives as a consumer market. Labor will not work in places where they are treated as means, rather than ends. It was not that long ago when larger firms had their own medical staffs, and insurance was considered a fringe benefit.

In Asian states, firm hospitals and groceries are common, and lifetime employment is considered, for the most skilled, a right. In this case, the market is treating labor as ends, not means. These examples show that even large firms can treat employees ethically as a matter of ethic and communal culture, rather than as wards of the state and the interests who control it.

Putting this differently, a free market for labor can serve the CI in its second formulation, since the best and most productive workers will naturally gravitate to where they are treated well. Hence, forcing even the worst boss to obey the CI or risk lose good workers to the competition. Adam Smith, using utilitarian and consequentialist arguments, comes to the very same conclusion. In other words, the foundation does not matter. In both cases, the market serves as the universal standard that satisfied both deontology and utility.

In other words, it is both useful and right that workers be treated as ends, while the market regulates the behavior of firms. The CI gets its force through utility, since they both come to the same conclusion. One can, in other words, accept the CI on strictly utilitarian grounds, since it serves the market. The market would not tolerate (in free competition) a firm that is know for abusing workers, and good workers would never work there. Only under oligarchy is both utility and deontology violated.

Conclusion

The argument presented here as attempted to combine both practical economics and moral theory. Ultimately, the purpose here is to define the market in its best formulation: a basically local unit that exists to serve the local population. This was also Smith’s view. The firm must be transparent in its behavior or the market fails. Firms become opaque only when they become oligarchic and, as a result, begin to have close relations with the state, nullifying all attempts to regulate them.

This is the current American business environment. Returning to the market means the negation of oligarchy, Oligarchy is bureaucratic, while the market is entrepreneurial, oligarchy is coercive by definition, while the market is free, oligarchy has high entry costs, the market, low entry costs, oligarchy is for the few, the market is for the many, and hence, follows both formulations of the CI.

Bibliography:

Buchanan, Allen (1985) Ethics, Efficiency and Markets. Rowman and Littlefield

Burnham James (1972) The Managerial Revolution. Greenwood Press

Locke, John (2005) Two Treatises on Government. Digireads

James, Sallie (October 8, 2009) “Free Trade: A Boon for the Environment.” Cato Institute           Library. Cato.org

Nader, Ralph (2003) Cutting Corporate Welfare. Seven Stories Press

Kant, Immanuel (1989) The Metaphysics of Morals. Prentice Hall

King, Arnold (August 2 2009) “End Medicare.” Daily Press

Norberg, John (September 10 2009) “Regulation and Unintended Consequences.” Cato Institute           Library. Cato.org

Smith, Adam (2003) The Wealth of Nations. Bantam

Svorny, Shirly (August 6 2009) “Government Care: Victory for the Special Interests.” Investor’s            Business Daily.

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