Lecture 3 MFA 2024 students.pptx

Leadership & Business Ethics Lecture 3: Responsibility of Leaders II MFA and making everyone better off Dr Siba Harb Wednesday, September 21, 2022 Today  MFA: The market failures approach o What is the MFA? o What are the arguments for it...

Leadership & Business Ethics Lecture 3: Responsibility of Leaders II MFA and making everyone better off Dr Siba Harb Wednesday, September 21, 2022 Today  MFA: The market failures approach o What is the MFA? o What are the arguments for it? o What are its weaknesses? Quiz Case: Dieselgate Case: Dieselgate How did Volkswagen’s managers “screw up”? By cheating? By being found out? According to the shareholder approach? According to the stakeholder approach? The Market Failures Approach (MFA) Fills in the gaps of the shareholder and stakeholder approaches o It tells us why profit maximization is good (not just for shareholders but for society) o It tells us which profit maximization strategies are good Joseph Heath: if we understand why profit- maximization is good (beyond self interest), we can understand why sometimes it is not good. Why is profit-seeking behavior good? Benefits of a market economy (Econ 101!) Voluntary exchanges: makes buyer and seller better off Making profit attracts other sellers: driving prices down and increasing general welfare Profit-seeking clears the market: market competition is the best way to have an efficient economy. An efficient economy increases general welfare The Ideal of a perfect market 1. No transaction costs 2. Symmetric information 3. No externalities 4. No barriers to entry 5. For all goods and services, there are many suppliers and many consumers Market Failures Approach I The argument: 1. An efficient economy increases general welfare 2. Profit-seeking behaviour under perfect market conditions leads to an efficient economy 3. Therefore, profit-seeking behaviour is good when and because it leads to an efficient economy 4. Profit-seeking that exploits market failures behaviour does not lead to an efficient economy 5. Therefore, managers and business owners ought to maximize profits without exploiting market failures (or while trying to stay as close as possible to the perfect market conditions) Market Failures Approach II Profit maximization is indirectly justified “The manager should seek to maximize profits for the same reason that the defense lawyer should seek to have his client acquitted” Analogy with Legal Ethics  Adversarial trial system  Institution with differentiated roles Market Failures Approach: A case Should you drop your price? What does the MFA say? What does the shareholder approach say? What about the stakeholder approach? MFA: beneficial and harmful strategies How can you increase profit without exploiting market failures? Do Product Innovation Improvement in Quality Cost Reduction Don’t Withhold information Produce negative externalities Thwart/lobby against regulator efforts MFA: Dieselgate According to MFA, how did VW screw up? 1. Withholding information from consumers 2. Withholding information from governments 3. Building High Emission Cars Problems for the MFA? Second-Best Objection MFA assumes that the closer we get to a perfect market, the closer we will get to perfect efficiency Second Best Objection BUT! it is not true that we always gain efficiency as we move closer to a perfect market Example: two chicken farms Second-Best Objection MFA assumes that the closer we get to a perfect market, the closer we will get to perfect efficiency BUT! it is not true that we always gain efficiency as we move closer to a perfect market So it is not true that MFA can guide us in non-perfect market conditions Merck & Co. and River Blindness Potentially relieve great suffering Definitely don’t cover costs Taken from Martin Sandbu (2011), Just Business, pp. 20-1. Merck MFA & Merck Case What does MFA tell us we should do in the Merck Case? Sightless among miracles by R.T Wallen Ethics as efficiency? Why should we care about efficiency? Heath: efficiency is instrumentally not intrinsically valuable What matters is satisfying human needs  MFA: two systems argument 1. Business should focus on efficiency: they increase the size of the pie 2. Government should redistribute to create a just distribution 3. The division of labor between the two systems help satisfy human needs Some problems with the two systems argument Justice failures National Boundaries Money can’t buy everything. Summary After today you should be able to: Explain why and when profit seeking-behavior is good according to the MFA Describe the ideal conditions of a perfect market and identify situations of market failures Explain what the market failures approach think is the responsibility of business managers/leaders Explain the argument for the MFA Apply the MFA to cases Explain the second best objection Distinguish between instrumental and intrinsic value (profit, efficiency) Explain the two systems argument and identify weaknesses in it  From MFA to Utilitarianism- Topic of Tutorials ! But if satisfying human needs is what matters, why not directly say: “Do what maximizes the satisfaction of human needs and desires!” Utilitarianism: Do what maximizes wellbeing