The Context of Business Ethics: Economies and Organizations

Conditions of Capitalism Property is privately owned, protected by law. Investors earn rewards (profit) for placing their capital at risk. There is free and fair competition among suppliers of goods and services in pursuit of profit. There is free and full information so that both investors and customers can make informed market decisions. Prices fully reflect costs + profit and are also highly responsive to supply and demand.

Sources of Social Control (Types of Power) How are people persuaded? Coercive power – use or threat of use of force Economic power – use of material incentives, rewards, punishments Normative or symbolic power – use of symbols, arguments, language

Levels of Social Control Institutional (e.g., government, education, economy, religion, family) Inter-organizational (e.g., voluntary industry self-regulation) Organizational (e.g., policies & procedures) Group (e.g., praise, blame, acceptance…) Individual (e.g., conscience, values, reason)

Is There Room for Ethics in Capitalism? In The Theory of Moral Sentiments, Adam Smith wrote: "How selfish soever man may be supposed, there are evidently some principles in his nature which interest him in the fortune of others and render their happiness necessary to him though he derives nothing from it except the pleasure of seeing it."The Theory of Moral Sentiments, What’s your translation of this? What is Smith talking about?

Some Economists Say: That’s Not the Right Question! Kenneth J. Arrow – the price system can’t work for all values. Oliver Williamson – contracts are easier and less costly if there’s trust and honesty in the system. Amartya Sen – only a fool would live in an economy without trust and honesty!

Kenneth Arrow: tension between individual and societal wants/needs. tension between desired ends (values) and available means (opportunities). Tensions require rational balancing. Societies must have a system for resolving conflict over wants and needs, and over resource distribution. (Otherwise, force always wins.)

Does Price Help? As a regulatory and conflict resolution device, the price system has benefits: it allocates resources efficiently it requires little knowledge of people. it yields a sense of individual freedom.

Price Has Drawbacks makes a virtue of selfishness. fails with things that cannot be priced. cannot define what particular allocation is "better." Efficient allocation creates conflict among individuals. it doesn't work in government, or inside large firms.

So, what else do economies need? Distributive justice principles. Principles of ethics are "invisible institutions" -- agreements to supply mutual benefits and to distribute them fairly. Sympathy --ability to feel oneself to be in the other one's place. Core values: trust, loyalty, and truth-telling.

How does this happen? These things are not commodities. If you have to buy trust, do you really have it? Some other mechanism is needed: Government? (has a monopoly on coercive power) Organizational structure/culture? Interpersonal pressures? Individual motivations and desires? Internal ethical values? (Do these look like levels of social control??)

Internalized ethical values tend to be the most efficient means of "social control.“ Cooperation is necessary to achieve specialization of function. Ethical principles lead to compromises between individual & societal needs & wants, ensure that cooperation will happen, and ensure that people will be in general agreement about "the rules of the game."

OLIVER WILLIAMSON ON THE CONTRACTING DIMENSIONS OF TRUST AND INFORMATION IN THE ECONOMY

Transactions costs economics approach to ethics in business: The principal The agent The contract The problem: how do principals make sure that agents are meeting principals' interests, and not just agents' interests?

Opportunism …. There tends to be opportunism, or moral hazard, in the principal-agent relationship. When there is little or no trust between agent and principal, moral hazard leads to costly comprehensive contracting as each tries to pin down every possible way that one could cheat the other. Monitoring agents' behavior is cumbersome and expensive, and tends to be ineffective.

Trust changes this picture When there is trust, agent and principal are more likely to have general clause contracting, relying on a few core principles of behavior and trusting that each will abide by them. Trust and honesty in the system make transactions easier, less costly. Thus, the economy works better--more efficiently-- if there is trust and honesty in the system.

Here are Williamson’s variables: Bounded rationality -- decision making with limited knowledge, and Opportunism or moral hazard -- the chance to get away with breaking the rules and gaining from it.

Bounded Rationality is ABSENT (We know everything... or think we do.) Bounded Rationality is PRESENT (We don't and/or can't know everything.) Opportunism is ABSENT (we can't get away with anything) "BLISS" (wouldn't it be heaven?) GENERAL CLAUSE CONTRACTING (it's enough to have a core set of values, because everybody enforces them) Opportunism is PRESENT (we can benefit by breaking rules & not get caught) COMPREHENSIVE CONTRACTING (let's try to anticipate every possible loophole and plug it... darn; missed again.) CONTRACTUAL CONFUSION (nobody enforces the rules, so people get away with stuff.)

Amartya Sen: No one but a fool would cooperate in a system where there was no trust, loyalty, or honesty!

Williamson concludes: Trust is always a more efficient and less costly way to enforce contracts.