Business Ethics - MGT610 Midterm Syllabus PDF

Business Ethics –MGT610 VU LESSON 01 INTRODUCTION Let’s begins with a case study of Merck and Company, di...

Business Ethics –MGT610 VU LESSON 01 INTRODUCTION Let’s begins with a case study of Merck and Company, discussing how they dealt with the problem of developing a drug that was potentially life-saving but which presented them with little, if any, chance of earning a return on their investment. The drug was Ivermectin, one of their best-selling animal drugs. The potential market for the drug was those suffering from river blindness an agonizing disease afflicting about 18 million impoverished individuals in Africa and Latin America. The disease is particularly horrendous: worms as long as two feet curl up in nodules under an infected person's skin, slowly sending out offspring that cause intense itching, lesions, blindness, and ultimately death (though many sufferers actually commit suicide before the final stage of the disease). The need for the drug was clear. However, the victims of river blindness are almost exclusively poor. It seemed unlikely that Merck would ever recoup the estimated $100 million it would cost to develop the human version of the drug. Moreover, if there proved to be adverse human side effects, this might affect sales of the very profitable animal version that were $300 million of Merck’s $2 billion annual sales. Finally, Congress was getting ready to pass the Drug Regulation Act, which would intensify competition in the drug industry by allowing competitors to more quickly copy and market drugs originally developed by other companies. Questions: Was Merck morally obligated to develop this drug? Their managers felt, ultimately, that they were. They even went so far as to give the drug away for free. This story seems to run counter to the assumption that, given the choice between profits and ethics, companies will always choose the former. The choice, however, may not be as clear-cut as this dichotomy suggests. Some have suggested that, in the long run, Merck will benefit from this act of kindness just as they are currently benefiting from a similar situation in Japan. Even so, most companies would probably not invest in an R & D project that promises no profit. And some companies often engage in outright unethical behavior. Still, habitually engaging in such behavior is not a good long-term business strategy, and it is the view of this book that, though unethical behavior sometimes pays off, ethical behavior is better in the long run. A more basic problem is the fact that the ethical choice is not always clear. Merck, as a for- profit corporation, has responsibilities to its shareholders to make a profit. Companies that spend all their funds on unprofitable ventures will find themselves out of business. This book takes the view that ethical behavior is the best long-term business strategy for a company—a view that has become increasingly accepted during the last few years. This does not mean that occasions never arise when doing what is ethical will prove costly to a company. Such occasions are common in the life of a company, and we will see many examples in this book. Nor does it mean that ethical behavior is always rewarded or that unethical behavior is always punished. On the contrary, unethical behavior sometimes pays off, and the good guy sometimes loses. To say that ethical behavior is the best long-range business strategy means merely that, over the long run and for the most part, ethical behavior can give a company significant competitive advantages over companies that are not ethical. The example of Merck and Company suggests this view, and a bit of reflection over how we, as consumers and employees, respond to companies that behave unethically supports it. Later we see what more © Copyright Virtual University of Pakistan 1 Business Ethics –MGT610 VU can be said for or against the view that ethical behavior is the best long-term business strategy for a company. This text aims to clarify the ethical issues that managers of modern business organizations must face. This does not mean that it is designed to give moral advice to people in business nor that it is aimed at persuading people to act in certain moral ways. The main purpose of the text is to provide a deeper knowledge of the nature of ethical principles and concepts and an understanding of how these apply to the ethical problems encountered in business. This type of knowledge and understanding should help managers more clearly see their way through the ethical uncertainties that confront them in their business lives—uncertainties such as those faced by the managers of Merck. Business Issues According to the dictionary, the term ethics has a variety of different meanings. One of its meanings is: "the principles of conduct governing an individual or a group”. We sometimes use the term personal ethics, for example, when referring to the rules by which an individual lives his or her personal life. We use the term accounting ethics when referring to the code that guides the professional conduct of accountants. A second—and more important—meaning of ethics, according to the dictionary, is: Ethics is "the study of morality." Ethicists use the term ethics to refer primarily to the study of morality, just as chemists use the term chemistry to refer to a study of the properties of chemical substances. Although ethics deals with morality, it is not quite the same as morality. Ethics is a kind of investigation—and includes both the activity of investigating as well as the results of that investigation—whereas morality is the subject matter that ethics investigates. This chapter discusses the case of B.F. Goodrich to clarify these definitions. Kermit Vandivier was presented with a moral quandary: he knew that Goodrich was producing brakes for the U.S. government that were likely to fail, but was required by his superiors to report that the brake passed the necessary tests. His choice was to write the false report and go against his ethical principles, or be fired and suffer the economic consequences. He chose the former, even though his moral standards were in conflict with his actions. Such standards include the norms we have about the kinds of actions we believe are right and wrong, such as "always tell the truth." As Vandivier shows, we do not always live up to our standards. There are other types of standards as well, such as standards of etiquette, law, and language. Moral standards can be distinguished from non-moral standards using five characteristics: 1. Moral standards deal with matters that can seriously injure or benefit humans. For example, most people in American society hold moral standards against theft, rape, enslavement, murder, child abuse, assault, slander, fraud, lawbreaking, and so on. 2. Moral standards are not established or changed by authoritative bodies. The validity of moral standards rests on the adequacy of the reasons that are taken to support and justify them; so long as these reasons are adequate, the standards remain valid. 3. Moral standards, we feel, should be preferred to other values, including self-interest. This does not mean, of course, that it is always wrong to act on self-interest; it only means that it is wrong to choose self-interest over morality 4. Moral standards are based on impartial considerations. The fact that you will benefit from a lie and that I will be harmed is irrelevant to whether lying is morally wrong. © Copyright Virtual University of Pakistan 2 Business Ethics –MGT610 VU 5. Moral standards are associated with special emotions and a special vocabulary (guilt, shame, remorse, etc.). The fact that you will benefit from a lie and that I will be harmed is irrelevant to whether lying is morally wrong. Ethics is the discipline that examines one's moral standards or the moral standards of a society. It asks how these standards apply to our lives and whether these standards are reasonable or unreasonable—that is, whether they are supported by good reasons or poor ones. Therefore, a person starts to do ethics when he or she takes the moral standards absorbed from family, church, and friends and asks: What do these standards imply for the situations in which I find myself? Do these standards really make sense? What are the reasons for or against these standards? Why should I continue to believe in them? What can be said in their favor and what can be said against them? Are they really reasonable for me to hold? Are their implications in this or that particular situation reasonable? Taking Vandivier as an example, we might ask if writing the false report was really wrong given his responsibilities to support his family. Moreover, the company, not Vandivier, would be held responsible for any faulty brakes. Finally, even if he did not cooperate and was consequently fired, the brakes would still be manufactured and installed. The consequences of writing the report or not would be the same, except that if he chose not to participate he would be fired. It is in considering such points that we begin to do ethics. Ethics is the study of moral standards—the process of examining the moral standards of a person or society to determine whether these standards are reasonable or unreasonable in order to apply them to concrete situations and issues. The ultimate aim of ethics is to develop a body of moral standards that we feel are reasonable to hold—standards that we have thought about carefully and have decided are justified standards for us to accept and apply to the choices that fill our lives. Ethics is not the only way to study morality. The social sciences—such as anthropology, sociology, and psychology—also study morality, but do so in a way that is quite different from the approach to morality that is characteristic of ethics. Although ethics is a normative study of ethics, the social sciences engage in a descriptive study of ethics. © Copyright Virtual University of Pakistan 3 Business Ethics –MGT610 VU LESSON 03 THEORY OF ETHICAL RELATIVISM Some theorists maintain that moral notions apply only to individuals, not to corporations themselves. They say that it makes no sense to hold businesses "responsible" since businesses are more like machines than people. Others counter that corporations do act like individuals, having objectives and actions, which can be moral or immoral just as an individual's action might be. In 2002, for example, the Justice Department charged the accounting firm of Arthur Andersen for obstruction of justice. Arthur Andersen was caught shredding documents showing how they helped Enron hide its debt through the use of several accounting tricks. Critics afterward claimed that the Justice Department should have charged the individual employees of Arthur Andersen, not the company, because "Companies don't commit crimes, people do." Perhaps neither extreme view is correct. Corporate actions do depend on human individuals who should be held accountable for their actions. However, they also have policies and culture that direct individuals, and should therefore be held accountable for the effects of these corporate artifacts. Nonetheless, it makes perfectly good sense to say that a corporate organization has moral duties and that it is morally responsible for its acts. However, organizations have moral duties and are morally responsible in a secondary sense; a corporation has a moral duty to do something only if some of its members have a moral duty to make sure it is done, and a corporation is morally responsible for something only if some of its members are morally responsible for what happened. Virtually all of the 500 largest U.S. industrial corporations today are multinationals. Operating in more than one country at once produces a new set of ethical dilemmas. Multinationals can escape environmental regulations and labor laws by shifting to another country, for example. They can shift raw materials, goods, and capital so that they escape taxes. In addition, because they have new technologies and products that less developed countries do not, multinationals must decide when a particular country is ready to assimilate these new things. They are also faced with the different moral codes and laws of different countries. Even if a particular norm is not unethical, they must still decide between competing standards in their many operations. Ethical relativism is the theory that, because different societies have different ethical beliefs, there is no rational way of determining whether an action is morally right or wrong other than by asking whether the people of this or that society believe it to be right or wrong by asking whether people of a particular society believe that it is. In fact, the multiplicity of moral codes demonstrates that there is no one "right" answer to ethical questions. The best a company can do is follow the old adage, "When in Rome, do as the Romans do." In other words, there are no absolute moral standards. Cultural relativism asserts that morality varies from one culture to another, since similar practices are regarded as right in some cultures and wrong in others. However, regarding practices as right or wrong does not necessarily make them so, nor does it exclude the possibility of demonstrating that moral beliefs are mistaken. For this reason, cultural relativism does not prohibit the possibility of justification. Ethical relativism, on the other hand, makes the philosophical assertion that there is no standard of right or wrong apart from the morality of a culture. Whatever practices a culture holds to be right is actually right for that culture. There © Copyright Virtual University of Pakistan 6 Business Ethics –MGT610 VU is no possibility for justification because there exists no standard outside that culture. Ethical relativism results in an uncritical acceptance of all moral beliefs as equally valid. Critics of ethical relativism point out that it is illogical to assume that because there is more than one answer to an ethical question that both answers are equally correct ─ or even that either answer is correct. They also maintain that there are more similarities than differences even among what seem to be very divergent societies. The late Philosopher James Rachels put the matter quite succinctly: The fact that different societies have different moral codes proves nothing. There is also disagreement from society to society about scientific matters: in some cultures it is believed that the earth is flat, and evil spirits cause disease. We do not on that account conclude that there is no truth in geography or in medicine. Instead, we conclude that in some cultures people are better informed than in others. Similarly, disagreement in ethics might signal nothing more than that some people are less enlightened than others. At the very least, the fact of disagreement does not, by itself, entail that truth does not exist. Why should we assume that, if ethical truth exists, everyone must know it?' However, the most telling criticisms of the theory point out that it has incoherent consequences. For example, it becomes impossible to criticize a practice of another society as long as members of that society conform to their own standards. How could we maintain that Nazi Germany or pre-Civil War Virginia were wrong if we were consistent relativists? There must be criteria other than the society's own moral standards by which we can judge actions in any particular society. Though we should not dismiss the moral beliefs of other cultures, we likewise should not conclude that all systems of morality are equally acceptable. Finally, new technologies developed in the closing decades of the 20th century and the opening years of the 21st century are again transforming society and business and creating the potential for new ethical problems. They bring with them questions of risks, which may be unpredictable and/or irreversible. Who should decide whether the benefits of a particular technology are worth the risks? How will victims of bad technology be compensated for their loss? How will risk be distributed? How will privacy be maintained? How will property rights be protected? © Copyright Virtual University of Pakistan 7 Business Ethics –MGT610 VU LESSON 04 MORAL DEVELOPMENTS AND MORAL REASONING Moral Developments and Moral Reasoning This section investigates how we examine our own moral standards and apply them to concrete situations and issues. It first looks at the process of moral development itself. We sometimes assume that a person's values are formed during childhood and do not change. In fact, a great deal of psychological research, as well as one's own personal experience, demonstrates that as people mature, they change their values in very deep and profound ways. Just as people's physical, emotional, and cognitive abilities develop as they age, so also their ability to deal with moral issues develops as they move through their lives. Moral Reasoning & Kohlbergs’ Resaech Lawrence Kohlberg identified six stages of moral development: Level One: Pre-conventional Stages 1. Punishment and Obedience Orientation - At this stage, the physical consequences of an act wholly determine the goodness or badness of that act. The child's reasons for doing the right thing are to avoid punishment or defer to the superior physical power of authorities. There is little awareness that others have needs similar to one’s own. 2. Instrument and Relativity Orientation- At this stage, right actions become those that can serve as instruments for satisfying the child’s own needs or the needs of those for whom the child cares. At these first two stages, the child is able to respond to rules and social expectations and can apply the labels good, bad, right, and wrong. These rules, however, are seen as something externally imposed on the self. Right and wrong are interpreted in terms of the pleasant or painful consequences of actions or in terms of the physical power of those who set the rules. Level Two: Conventional Stages Maintaining the expectations of one's own family, peer group, or nation is now seen as valuable in its own right, regardless of the consequences. 1. Interpersonal Concordance Orientation - Good behavior at this early conventional stage is living to the expectations of those for whom one feels loyalty, affection, and trust, such as family and friends. Right action is conformity to what is generally expected in one's role as a good son, daughter, brother, friend, and so on. 2. Law and Order Orientation - Right and wrong at this more mature conventional stage now come to be determined by loyalty to one's own larger nation or surrounding society. Laws are to be upheld except where they conflict with other fixed social duties. © Copyright Virtual University of Pakistan 8 Business Ethics –MGT610 VU Level Three: Post-conventional, Autonomous, or Principled Stages 1. Social Contract Orientation - At this first post-conventional stage, the person becomes aware that people hold a variety of conflicting personal views and opinions and emphasizes fair ways of reaching consensus by agreement, contract, and due process. 2. Universal Ethical Principles Orientation - At this final stage, right action comes to be defined in terms of moral principles chosen because of their logical comprehensiveness, universality, and consistency. At these stages, the person no longer simply accepts the values and norms of the groups to which he or she belongs. Instead, the person now tries to see situations from a point of view that impartially takes everyone's interests into account. The person questions the laws and values that society has adopted and redefines them in terms of self-chosen moral principles that can be justified in rational terms. Kohlberg's own research found that many people remain stuck at an early stage of moral development. His structure implies that later stages are better than the earlier ones. Kohlberg has been criticized for this implication, and for not offering any argument to back it up. Carol Gilligan, a feminist psychologist, has also criticized Kohlberg's theory on the grounds that it describes male and not female patterns of moral development. Gilligan claims that there is a "female" approach to moral issues that Kohlberg ignores. Both Gilligan and Kohlberg agree that there are stages of growth in moral development, moving from a focus on the self through conventional stages and onto a mature stage where we critically and reflectively examine the adequacy of our moral standards. Therefore, one of the central aims of ethics is the stimulation of this moral development by discussing, analyzing, and criticizing the moral reasoning that we and others do, finding one set of principles "better" when it has been examined and found to have better and stronger reasons supporting it. © Copyright Virtual University of Pakistan 9 Business Ethics –MGT610 VU LESSON 05 MORAL REASONING Moral reasoning itself has two essential components: an understanding of what reasonable moral standards require, and evidence or information concerning whether a particular policy, person, institution, or behavior has the features of these moral standards. People often fail to make their moral standards explicit when they make a moral judgment, mainly because they assume them to be obvious. This assumption is not always true, however; often we must retrace a person's moral reasoning to deduce what their moral standards are. Of course, it is not always easy to separate factual information from moral standards. Moral reasoning refers to the reasoning process by which human behaviors, institutions, or policies are judged to be in accordance with or in violation of moral standards. Moral reasoning always involves two essential components: (a) an understanding of what reasonable moral standards require, prohibit, value, or condemn; and (b) evidence or information that shows that a particular person, policy, institution, or behavior has the kinds of features that these moral standards require, prohibit, value, or condemn. To evaluate the adequacy of moral reasoning, ethicists employ three main criteria: 1. Moral reasoning must be logical. 2. Factual evidence must be accurate, relevant, and complete. 3. Moral standards must be consistent. Consistency refers not only to the fact that one's standards must be able to coexist with each other, but also to the requirement that one must be willing to accept the consequences of applying one's moral standards consistently to others in similar circumstances. The consistency requirement is, in fact, the basis of an important critical method in ethics: the use of counterexamples and hypothetical examples. This consistency requirement can be phrased as follows: If I judge that a certain person is morally justified (or unjustified) in doing A in circumstance C, then I must accept that it is morally justified (or unjustified) for any other person: (a) To perform any act relevantly similar to A (b) In any circumstances relevantly similar to C. Arguments For and Against Business Ethics Some people object to the entire notion that ethical standards should be brought into business organizations. They make three general objections. First, they argue that the pursuit of profit in perfectly competitive free markets will, by itself, ensure that the members of a society are served in the most socially beneficial ways. Of course, the assumption that industrial markets are perfectly competitive is highly suspect. Even more, there are several ways of increasing profits that will actually harm society. Producing what the buying public wants may not be the same as producing what the entirety of society needs. The argument is essentially making a normative judgment on the basis of some assumed but unproved moral standards ("people should do whatever will benefit those who participate in markets"). Thus, although the argument tries to show that ethics does not matter, it can do this © Copyright Virtual University of Pakistan 10 Business Ethics –MGT610 VU only by assuming an unproved moral standard that at least appears mistaken. Second, they claim that employees, as "loyal agents," are obligated to serve their employers single-mindedly, in whatever ways will advance the employer's self-interest. As a loyal agent of his or her employer, the manager has a duty to serve his or her employer as the employer would want to be served (if the employer had the agent's expertise). An employer would want to be served in whatever ways will advance his or her self-interests. Therefore, as a loyal agent of his or her employer, the manager has a duty to serve his or her employer in whatever ways will advance the employer's self-interests. But this argument itself rests on an unproven moral standard that the employee has a duty to serve his or her employer and there is no reason to assume that this standard is acceptable. An agent's duties are defined by what is called the law of agency, (i.e., the law that specifies the duties of persons [agents] who agree to act on behalf of another party and who are authorized by the agreement so to act). Also, agreements to serve another do not automatically justify doing wrong on another's behalf. Third, they say that obeying the law is sufficient for businesses and that business ethics is, essentially, nothing more than obeying the law. However, the law and morality do not always coincide (again, slavery and Nazi Germany are relevant examples). Some laws have nothing to do with morality because they do not involve serious matters. These include parking laws, dress codes, and other laws covering similar matters. Other laws may even violate our moral standards so that they are actually contrary to morality. Thus, none of the arguments for keeping ethics out of business seems forceful. In contrast, there are fairly strong arguments for bringing ethics into business. One argument points out that since ethics should govern all human activity, there is no reason to exempt business activity from ethical scrutiny. Business is a cooperative activity whose very existence requires ethical behavior. Another more developed argument points out that no activity, business included, could be carried out in an ethical vacuum. One interesting argument actually claims that ethical considerations are consistent with business activities such as the pursuit of profit. Indeed, the argument claims that ethical companies are more profitable than other companies. The data is mixed on this question, but even though it cannot demonstrate that ethical behavior is always more profitable, it does clearly show that it is not a drag on profits. © Copyright Virtual University of Pakistan 11  Business Ethics –MGT610 VU LESSON 07 UTILITARIANISM Utilitarianism: Weighing Social Costs and Benefits Utilitarianism (or consequentialism) characterizes the moral approach taken by Caltex's management. Another example, Ford and its infamous Pinto, demonstrates just how closely the weighing of costs and benefits can be done. Ford knew that the Pinto would explode when rear-ended at only 20 mph, but they also knew that it would cost $137 million to fix the problem. Since they would only have to pay $49 million in damages to injured victims and the families of those who died, they calculated that it was not right to spend the money to fix the cars when society set such a low price on the lives and health of the victims. The kind of analysis that Ford managers used in their cost-benefit study is a version of what has been traditionally called utilitarianism. Utilitarianism is a Utilitarianism is an general term for any view that holds that actions and policies should be evaluated on the basis ethical theory that determines right from of the benefits and costs they will impose on society. In any situation, the "right" action or wrong by focusing on policy is the one that will produce the greatest net benefits or the lowest net costs (when all outcomes. alternatives have only net costs). Many businesses rely on such utilitarian cost-benefit analyses, and maintain that the socially responsible course to take is the utilitarian one with the lowest net costs. Jeremy Bentham founded traditional utilitarianism. His version of the theory assumes that we can measure and add the quantities of benefits produced by an action and subtract the measured quantities of harm it will cause, allowing us to determine which action has the most benefits or lowest total costs and is therefore moral. The utility Bentham had in mind was not the greatest benefit for the person taking the action, but rather the greatest benefit for all involved. For Bentham: “An action is right from an ethical point of view if and only if the sum total of utilities produced by that act is greater than the sum total of utilities produced by any other act the agent could have performed in its place.” Also, it is important to note that only one action can have the lowest net costs and greatest net benefits. To determine what the moral thing to do on any particular occasion might be, there are three considerations to follow: 1. You must determine what alternative actions are available. 2. You must estimate the direct and indirect costs and benefits the action would produce for all involved in the foreseeable future. 3. You must choose the alternative that produces the greatest sum total of utility. Utilitarianism is attractive to many because it matches the views we tend to hold when discussing governmental policies and public goods. Most people agree, for example, that when the government is trying to determine on which public projects it should spend tax monies, the proper course of action would be for it to adopt those projects that objective studies show will provide the greatest benefits for the members of society at the least cost. It also fits in with the intuitive criteria that many employ when discussing moral conduct. Utilitarianism can explain © Copyright Virtual University of Pakistan 15 Business Ethics –MGT610 VU why we hold certain types of activities, such as lying, to be immoral: it is so because of the costly effects it has in the long run. However, traditional utilitarians would deny that an action of a certain kind is always either right or wrong. Instead, each action would have to be weighed given its particular circumstances. Utilitarian views have also been highly influential in economics. A long line of economists, beginning in the 19th century, argued that economic behavior could be explained by assuming that human beings always attempt to maximize their utility and that the utilities of commodities can be measured by the prices people are willing to pay for them. Utilitarianism is also the basis of the techniques of economic cost–benefit analysis. This type of analysis is used to determine the desirability of investing in a project (such as a dam, factory, or public park) by figuring whether its present and future economic benefits outweigh its present and future economic costs. To calculate these costs and benefits, discounted monetary prices are estimated for all the effects the project will have on the present and future environment and on present and future populations. Finally, we can note that utilitarianism fits nicely with a value that many people prize: efficiency. Efficiency can mean different things to different people, but for many it means operating in such a way that one produces the most one can with the resources at hand. Though utilitarianism offers a superficially clear-cut method of calculating the morality of actions, it relies upon accurate measurement, and this can be problematic. There are five major problems with the utilitarian reliance on measurement: 1. Comparative measures of the values things have for different people cannot be made-we cannot get into each others' skins to measure the pleasure or pain caused. 2. Some benefits and costs are impossible to measure. How much is a human life worth, for example? 3. The potential benefits and costs of an action cannot always be reliably predicted, so they are also not adequately measurable. © Copyright Virtual University of Pakistan 16  Business Ethics –MGT610 VU LESSON 09 UNIVERSALIZABILITY & REVERSIBILITY Universalizability and The categorical imperative incorporates two criteria for determining moral right and wrong: reversibility are both universalizability and reversibility. Universalizability means the person's reasons for acting concepts in Kantian philosophy that help must be reasons that everyone could act on at least in principle. Reversibility means the determine if an action person's reasons for acting must be reasons that he or she would be willing to have all others is morally right use, even as a basis of how they treat him or her. That is, one's reasons for acting must be reasons that everyone could act upon in principle, and the person's reasons must be such that he would be willing to have all others use them as well. Unlike utilitarianism, which focuses on consequences, Kantian theory focuses on interior motivations. The second formulation Kant gives of the categorical imperative is this: "Act in such a way that you always treat humanity, whether in your own person or in the person of any other, never simply as a means, but always at the same time as an end." Or never treat people only as means, but always also as ends. What Kant means by "treating humanity as an end" is that everyone should treat each human being as a being whose existence as a free rational person should be promoted. For Kant, this means two things: (a) respect each person's freedom by treating people only as they have freely consented to be treated beforehand, and (b) develop each person's capacity to freely choose for him or herself the aims he or she will pursue. Kant's second version of the categorical imperative can be expressed in the following principle: “An action is morally right for a person if, and only if, in performing the action, the person does not use others merely as a means for advancing his or her own interests, but also both respects and develops their capacity to choose freely for themselves.” This version of the categorical imperative implies that human beings have an equal dignity that sets them apart from things such as tools or machines and that is incompatible with their being manipulated, deceived, or otherwise unwillingly exploited to satisfy the self-interests of another. However, even if the categorical imperative explains why people have moral rights, it cannot by itself tell us what particular moral rights humans have. And when rights come into conflict, it cannot tell us which right should take precedence. Still, there seem to be three basic rights that can be defended on Kantian grounds: 1. Humans have a clear interest in being provided with the work, food, clothing, housing, and medical care they need to live. 2. Humans have a clear interest in being free from injury and in being free to live and think as they choose. 3. Humans have a clear interest in preserving the institution of contracts. Despite the attractiveness of Kant's theory, critics have argued that, like utilitarianism, it has its limitations and inadequacies. A first problem that critics have traditionally pointed out is that Kant's theory is not precise enough to always be useful. Second, some critics claim that although we might be able to agree on the kinds of interests that have the status of moral rights, there is substantial disagreement concerning what the limits of each of these rights are and concerning how each of these rights should be balanced against other conflicting rights. A third group of criticisms that have been made of Kant's theory is that there are counterexamples that show the theory sometimes goes wrong. Most counterexamples to Kant's theory focus on the © Copyright Virtual University of Pakistan 21 Business Ethics –MGT610 VU criteria of universalizability and reversibility. A very different view of rights is based on the work of libertarian philosophers such as Robert Nozick. They claim that freedom from constraint is necessarily good, and that all constraints imposed on one by others are necessary evils, except when they prevent even greater human constraints. The only basic right we all possess is the negative right to be free from the coercion of other human beings. Libertarians may pass too quickly over the fact that the freedom of one person necessarily imposes constraints on other persons, if only that others must be constrained from interfering with that person. If I have the right to unionize, for example, I constrain the rights of my employer to treat me as he sees fit. Though libertarians tend to use Kant to support their views, there is no consensus on whether or not this is actually possible. There is also no good reason to assume that only negative rights exist. Justice and Fairness The dispute over "brown lung" disease caused by cotton dust illustrates how references to justice and fairness permeate such concerns. Justice and fairness are essentially comparative. They are concerned with the comparative treatment given to the members of a group when benefits and burdens are distributed, when rules and laws are administered, when members of a group cooperate or compete with each other, and when people are punished for the wrongs they have done or compensated for the wrongs they have suffered. Justice generally refers to matters that are more serious than fairness, though some philosophers maintain that fairness is more fundamental. In general, we think that considerations of justice are more important than utilitarian concerns: greater benefits for some do not justify injustices to others. However, standards of justice not generally override individual moral rights. This is probably because justice is, to some extent, based on individual moral rights. There are three categories of issues involving justice: 1. Distributive justice is concerned with the fair distribution of society's benefits and burdens. 2. Retributive justice refers to the just imposition of penalties and punishments 3. Compensatory justice is concerned with compensating people for what they lose when harmed by others. Questions of distributive justice arise when there is a scarcity of benefits or a plethora of burdens; not enough food or health care, for example, or too much unpleasant work. When resources are scarce, we must develop principles to allocate them fairly. The fundamental principle involved is that equals should be treated equally (and unequals treated unequally). However, it is not clear in just what respects people must be equal. The fundamental principle of distributive justice may be expressed as follows: “Individuals who are similar in all respects relevant to the kind of treatment in question should be given similar benefits and burdens, even if they are dissimilar in other irrelevant respects; and individuals who are dissimilar in a relevant respect ought to be treated dissimilarly, in proportion to their dissimilarity.” Egalitarians hold that there are no relevant differences among people that can justify unequal treatment. According to the egalitarian, all benefits and burdens should be distributed according © Copyright Virtual University of Pakistan 22 Business Ethics –MGT610 VU to the following formula: “Every person should be given exactly equal shares of a society's or a group's benefits and burdens.” Though equality is an attractive social ideal for many, egalitarianism has been strongly criticized. Some critics claim that need, ability, and effort are all relevant differences among people, and that it would be unjust to ignore these differences. © Copyright Virtual University of Pakistan 23 Business Ethics –MGT610 VU LESSON 10 EGALITARIANS’ VIEW Some egalitarians have tried to strengthen their position by distinguishing two different kinds of equality: political equality and economic equality. Political equality refers to an equal participation in, and treatment by, the means of controlling and directing the political system. This includes equal rights to participate in the legislative process, equal civil liberties, and equal rights to due process. Economic equality refers to equality of income and wealth and equality of opportunity. The criticisms leveled against equality, according to some egalitarians, only apply to economic equality and not to political equality. Capitalists argue that a society's benefits should be distributed in proportion to what each individual contributes to society. According to this capitalist view of justice, when people engage in economic exchanges with each other, what a person gets out of the exchange should be at least equal in value to what he or she contributed. Justice requires, then, that the benefits a person receives should be proportional to the value of his or her contribution. Quite simply: “Benefits should be distributed according to the value of the contribution the individual makes to a society, a task, a group, or an exchange.” The main question raised by the contributive principle of distributive justice is how the "value of the contribution" of each individual is to be measured. One long-lived tradition has held that contributions should be measured in terms of work effort. The more effort people put forth in their work, the greater the share of benefits to which they are entitled. The harder one works, the more one deserves. A second important tradition has held that contributions should be measured in terms of productivity. The better the quality of a person's contributed product, the more he or she should receive. Socialists address this concern by stating that the benefits of a society should be distributed according to need, and that people should contribute according to their abilities. Critics of socialism contend that workers in this system would have no incentive to work and that the principle would obliterate individual freedom. The libertarian view of justice is markedly different, of course. Libertarians consider it wrong to tax someone to provide benefits to someone else. No way of distributing goods can be just or unjust apart from an individual's free choice. Robert Nozick, a leading libertarian, suggests this principle as the basic principle of distributive justice: “From each according to what he chooses to do, to each according to what he makes for himself (perhaps with the contracted aid of others) and what others choose to do for him and choose to give him of what they've been given previously (under this maxim) and haven't yet expended or transferred.” “If I choose to help another, that is fine, but I should not be forced to do so.” Critics of this view point out that freedom from coercion is a value, but not necessarily the most important value, and libertarians seem unable to prove outright that it is more important to be free than, say, to be fed. If each person's life is valuable, it seems as if everyone should be cared for to some extent. A second related criticism of libertarianism claims that the libertarian principle of distributive justice will generate unjust treatment of the disadvantaged. Under the libertarian principle, a person's share of goods will depend wholly on what the person can produce through his or her own efforts or what others choose to give the person out of charity. © Copyright Virtual University of Pakistan 24 Business Ethics –MGT610 VU John Rawls' theory of justice as fairness is an attempt to bring many of these disparate ideas together in a comprehensive way. According to his theory, the distribution of benefits and burdens in a society is just if: 1. Each person has an equal right to the most extensive basic liberties compatible with equal liberties for all (the principle of equal liberty); and 2. Social and economic inequalities are arranged so that they are both: a) To the greatest benefit of the least advantaged (the difference principle), and b) Attached to offices and positions open fairly and equally to all (the principle of equal opportunity). Rawls tells us that Principle 1 is supposed to take priority over Principle 2 should the two of them ever come into conflict, and within Principle 2, Part b is supposed to take priority over Part a. Principle 1 is called the principle of equal liberty. Essentially, it says that each citizen's liberties must be protected from invasion by others and must be equal to those of others. These basic liberties include the right to vote, freedom of speech and conscience and the other civil liberties, freedom to hold personal property, and freedom from arbitrary arrest. Part of Principle 2 is called the difference principle. It assumes that a productive society will incorporate inequalities, but it then asserts that steps must be taken to improve the position of the most needy members of society, such as the sick and the disabled, unless such improvements would so burden society that they make everyone, including the needy, worse off than before. Part b of Principle 2 is called the principle of fair equality of opportunity. It says that everyone should be given an equal opportunity to qualify for the more privileged positions in society's institutions. Therefore, according to Rawls, a principle is moral if it would be acceptable to a group of rational, self-interested persons who know they will live under it themselves. This incorporates the Kantian principles of reversibility and universalizability, and treats people as ends and not as means. Some critics of Rawls point out, however, that just because a group of people would be willing to live under a principle does not mean that it is morally justified. © Copyright Virtual University of Pakistan 25 Business Ethics –MGT610 VU LESSON 12 THE ETHICS OF CARE 1. We each exist in a web of relationships and should preserve and nurture those concrete and valuable relationships we have with specific persons. 2. We each should exercise special care for those with whom we are concretely related by attending to their particular needs, values, desires, and concrete well-being as seen from their own personal perspective, and by responding positively to these needs, values, desires, and concrete well-being, particularly of those who are vulnerable and dependent on our care. An ethic of care, therefore, can be seen as encompassing the kinds of obligations that a so- called communitarian ethic advocates. A communitarian ethic is an ethic that sees concrete communities and communal relationships as having a fundamental value that should be preserved and maintained. The demands of caring are sometimes in conflict with the demands of justice, though, and no fixed rule exists to resolve these conflicts. Critics point out that the ethics of care can easily degenerate into unjust favoritism. Though the ethics of care can also lead to burnout, the advantage of the theory is that it is a corrective to the other approaches that are impartial and universal. Integrating Utility, Rights, Justice, and Caring So far, the chapter has outlined four main kinds of basic moral considerations: 1. Utilitarian standards - must be used when we do not have the resources to attain everyone's objectives, so we are forced to consider the net social benefits and social costs consequent on the actions (or policies or institutions) by which we can attain these objectives. 2. Standards that specify how individuals must be treated - must be employed when our actions and policies will substantially affect the welfare and freedom of specifiable individuals. Moral reasoning of this type forces consideration of whether the behavior respects the basic rights of the individuals involved and whether the behavior is consistent with one's agreements and special duties. 3. Standards of justice - indicate how benefits and burdens should be distributed among the members of a group. These sorts of standards must be employed when evaluating actions whose distributive effects differ in important ways. 4. Standards of caring - indicate the kind of care that is owed to those with whom we have special concrete relationships. Standards of caring are essential when moral questions arise that involve persons embedded in a web of relationships, particularly persons with whom one has close relationships, especially those of dependency. One simple strategy for ensuring that all four kinds of considerations are incorporated into one's moral reasoning is to inquire systematically into the utility, rights, justice, and caring involved in a given moral judgment, as in Fig. 2.1. One might, for example, ask a series of questions about an action that one is considering: (a) Does the action, as far as possible, maximize social benefits and minimize social injuries? (b) Is the action consistent with the moral rights of those whom it will affect? (c) Will the action lead to a just distribution of benefits and burdens? (d) Does the action exhibit appropriate care for the well-being of those who are closely related to © Copyright Virtual University of Pakistan 28  Business Ethics –MGT610 VU or dependent on oneself? Unfortunately, there is not yet any comprehensive moral theory to show when one of these considerations should take precedence. An Alternative to Moral Principles: Virtue Ethics Many ethicists criticize the entire notion that actions are the subject of ethics. The central issue (as Ivan Boesky's case demonstrates) is the kind of person an agent ought to be and what the character of humans ought to be. This does not mean that the conclusion of this type of ethics (called virtue ethics) will be much different, however. Rather, the virtues provide a perspective that covers the same ground as the four approaches, just from a different perspective. Moral virtue is a character trait that leads to good A moral virtue is an acquired disposition that is a valuable part of a morally good person, actions and exhibited in the person's habitual behavior. It is praiseworthy, in part, because it is an intentions. achievement whose development requires effort. The most basic issue, from the perspective of virtue ethics, is the question: What are the traits of character that make a person a morally good human being? Which traits of character are moral virtues? According to Aristotle, moral virtues enable humans to act in accordance with their specific purpose (which he held to be reasoning). Other philosophers, such as Aquinas, have come up with different lists of virtues. © Copyright Virtual University of Pakistan 29 Business Ethics –MGT610 VU LESSON 14 MORALITY IN INTERNATIONAL CONTEXTS The following four questions can help clarify what a multinational corporation ought to do in the face of these difficulties: 1. What does the action really mean in the local culture's context? 2. Does the action produce consequences that are ethically acceptable from the point of view of at least one of the four ethical theories? 3. Does the local government truly represent the will of its entire people? 4. If the morally questionable action is a common local practice, is it possible to conduct business there without engaging in it This chapter examines the ethical aspects of the market system itself—how it is justified, and what the strengths and weaknesses of the system are from the point of view of ethics. It begins by discussing the economic conditions in the U.S. at the close of the 20th century, when proponents of industrial policy were urging the government to help declining industries and their workers to adjust to new economic conditions. Others urged caution, advising the government to "avoid the pitfalls of protectionism." This dichotomy illustrates the difference between two opposite ideologies, those who believe in the "free market" and those who advocate a "planned" economy. These two ideologies take different positions on some very basic issues: What is human nature really like? What is the purpose of social institutions? How does society function? What values should it try to protect? In general, two important ideological camps, the individualistic and communitarian viewpoints, characterize modern societies. Individualistic societies promote a limited government whose primary purpose is to protect property, contract rights, and open markets. Communitarian societies, in contrast, define the needs of the community first and then define the rights and duties of community membership to ensure that those needs are met. These two camps face the problem of coordinating the economic activities of their members in two distinct ways. Communitarian systems use a command system, in which a single authority decides what to produce, who will produce it, and who will get it. Free market systems are characteristic of individualistic societies. Incorporating ideas from thinkers like John Locke and Adam Smith, they allow individual firms to make their own decisions about what to produce and how to do so. Free market systems have two main components: a private property system and a voluntary exchange system. Pure free market systems would have absolutely no constraints on what one can own and what one can do with it. Since such systems would allow things like slavery and prostitution, however, there are no pure market systems. Free Markets and Rights: John Locke John Locke (1632-1704), an English political philosopher, is generally credited with developing the idea that human beings have a "natural right" to liberty and a "natural right" to private property. Locke argued that if there were no governments, human beings would find themselves in a state of nature. In this state of nature, each man would be the political equal of all others and would be perfectly free of any constraints other than the law of nature—that is, © Copyright Virtual University of Pakistan 31 Business Ethics –MGT610 VU the moral principles that God gave to humanity and that each man can discover by the use of his own God-given reason. As he puts it, in a state of nature, all men would be in: “A state of perfect freedom to order their actions and dispose of their possessions and persons as they think fit, within the bounds of the law of nature, without asking leave, or depending upon the will of any other man. A state also of equality, wherein all the power and jurisdiction is reciprocal, no one having more than another... without subordination or subjection [to another].... But... the state of nature has a law of nature to govern it, which obliges everyone: and reason, which is that law, teaches all mankind, who will but consult it, that being all equal and independent, no one ought to harm another in his life, health, liberty, or possessions.” Thus, according to Locke, the law of nature teaches us that we have a natural right to liberty. But because the state of nature is so dangerous, says Locke, individuals organize themselves into a political body to protect their lives and property. The power of government is limited, however, extending only far enough to protect these very basic rights. Locke's views on property rights have been very influential in America. The Fifth Amendment to the U.S. Constitution even quotes Locke directly. In this view, government does not grant or create property rights. Rather, nature does, and government must therefore respect and protect these rights. Locke's view that labor creates property rights has also been influential in the U.S. © Copyright Virtual University of Pakistan 32 Business Ethics –MGT610 VU LESSON 15 FREE MARKET & PLANNED ECONOMY FREE TRADE THEORIES Economic Freedom: Idea, Performance, and Trends Economic freedom is characterized by the absence of government coercion or constraint on the production distribution, and/or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself. Thus, people are free to work, produce, consume, and invest in the ways they choose. The Economic Freedom Index approximates the extent to which a government intervenes in the areas of free choice, free enterprise, and market-driven prices for reasons that go beyond basic national needs. Presently, countries are classified as free, mostly free, mostly unfree, and repressed. Determining factors include: trade policy, the fiscal burden of the government, the extent and nature of government intervention in the economy, monetary policy, capital flows and investment, banking and financial activities, wage and price levels, property rights, other government regulation, and informal market activities. Over time, more and more countries have moved toward greater economic freedom. Countries ranking highest on this index tend to enjoy both the highest standards of living as well as the greatest degree of political freedom The explanatory power of the theories of absolute and comparative advantage is limited to the demonstration of how economic growth can occur via specialization and trade. The concept of free trade (a positive-sum game) purports that nations should neither artificially limit imports nor artificially promote exports. The invisible hand of the market will determine which competitors survive, as customers buy those products that best serve their needs. Free trade implies specialization—just as individuals and firms efficiently produce certain products that they then exchange for things they cannot produce efficiently, nations as a whole specialize in the production of certain products, some of which will be consumed domestically, and some of which may be exported; export earnings can then in turn be used to pay for imported goods and services. This chapter examines the ethical aspects of the market system itself—how it is justified, and what the strengths and weaknesses of the system are from the point of view of ethics. It begins by discussing the economic conditions in the U.S. at the close of the 20th century, when proponents of industrial policy were urging the government to help declining industries and their workers to adjust to new economic conditions. Others urged caution, advising the government to "avoid the pitfalls of protectionism." This dichotomy illustrates the difference between two opposite ideologies, those who believe in the "free market" and those who advocate a "planned" economy. These two ideologies take different positions on some very basic issues: What is human nature really like? What is the purpose of social institutions? How does society function? What values should it try to protect? In general, two important ideological camps, the individualistic and communitarian viewpoints, characterize modern societies. Individualistic societies promote a limited government whose primary purpose is to protect property, contract rights, and open markets. Communitarian societies, in contrast, define the needs of the community first and then define the rights and duties of community membership to ensure that those needs are met. These two camps face the problem of coordinating the economic activities of their members in © Copyright Virtual University of Pakistan 33 Business Ethics –MGT610 VU two distinct ways. Communitarian systems use a command system, in which a single authority decides what to produce, who will produce it, and who will get it. Free market systems are characteristic of individualistic societies. Incorporating ideas from thinkers like John Locke and Adam Smith, they allow individual firms to make their own decisions about what to produce and how to do so. Free market systems have two main components: a private property system and a voluntary exchange system. Pure free market systems would have absolutely no constraints on what one can own and what one can do with it. Since such systems would allow things like slavery and prostitution, however, there are no pure market systems. Free Markets and Rights: John Locke John Locke (1632-1704), an English political philosopher, is generally credited with developing the idea that human beings have a "natural right" to liberty and a "natural right" to private property. Locke argued that if there were no governments, human beings would find themselves in a state of nature. In this state of nature, each man would be the political equal of all others and would be perfectly free of any constraints other than the law of nature—that is, the moral principles that God gave to humanity and that each man can discover by the use of his own God-given reason. As he puts it, in a state of nature, all men would be in: “A state of perfect freedom to order their actions and dispose of their possessions and persons as they think fit, within the bounds of the law of nature, without asking leave, or depending upon the will of any other man”. © Copyright Virtual University of Pakistan 34 Business Ethics –MGT610 VU LESSON 16 LAW OF NATURE “A state also of equality, wherein all the power and jurisdiction is reciprocal, no one having more than another... without subordination or subjection [to another].... But... the state of nature has a law of nature to govern it, which obliges everyone: and reason, which is that law, teaches all mankind, who will but consult it, that being all equal and independent, no one ought to harm another in his life, health, liberty, or possessions.” Thus, according to Locke, the law of nature teaches us that we have a natural right to liberty. But because the state of nature is so dangerous, says Locke, individuals organize themselves into a political body to protect their lives and property. The power of government is limited, however, extending only far enough to protect these very basic rights. Locke's views on property rights have been very influential in America. The Fifth Amendment to the U.S. Constitution even quotes Locke directly. In this view, government does not grant or create property rights. Rather, nature does, and government must therefore respect and protect these rights. Locke's view that labor creates property rights has also been influential in the U.S. Although Locke never explicitly used his theory of natural rights to argue for free markets, several 20th-century authors have employed his theory for this purpose.19 Friedrich A. Hayek, Murray Rothbard, Gottfried Dietze, Eric Mack, and many others have claimed that each person has the right to liberty and property that Locke credited to every human being and consequently, government must leave individuals free to exchange their labor and their property as they voluntarily choose. Only a free private enterprise exchange economy, in which government stays out of the market and in which government protects the property rights of private individuals, allows for such voluntary exchanges. The existence of the Lockean rights to liberty and property, then, implies that societies should incorporate private property institutions and free markets. It is also important to note that Locke's views on the right to private property have had a significant influence on American institutions of property even in today's computer society. First, and most important, throughout most of its early history, American law has held to the theory that individuals have an almost absolute right to do whatever they want with their property and that government has no right to interfere with or confiscate an individual's private property even for the good of society. Second, underlying many American laws regarding property and ownership is Locke's view that when a person expends his or her labor and effort to create or improve a thing, he or she acquires property rights over that thing. Theory of Absolute Advantage In 1776 Adam Smith asserted that the wealth of a nation consisted of the goods and services available to its citizens. His theory of absolute advantage holds that a country can maximize its own economic well being by specializing in the production of those goods and services that it can produce more efficiently than any other nation and enhance global efficiency through its participation in (unrestricted) free trade. Smith reasoned that: (i) workers become more skilled by repeating the same tasks; (ii) workers do not lose time in switching from the production of one kind of product to another; and (iii) long production runs provide greater incentives for the development of more effective working methods. Smith also asserted that country-specific advantages can either be natural or acquired. © Copyright Virtual University of Pakistan 35 Business Ethics –MGT610 VU 1. Natural Advantage. A country may have a natural advantage in the production of particular products because of given climatic conditions, access to particular resources, the availability of labor, etc. Variations in natural advantages among countries help to explain where particular products can be produced most efficiently. 2. Acquired Advantage. An acquired advantage represents a distinct advantage in skills, technology, and/or capital assets that yields differentiated product offerings and/or cost-competitive homogeneous products. Technology, in particular, has created new products, displaced old products, and altered trading- partner relationships. 3. Resource Efficiency Example. Real income depends on the output of products as compared to the resources used to produce them. By defining the cost of production in terms of the resources needed to produce a product, the production possibilities curve shows that through the use of specialization and trade, the output of two countries will be greater, thus optimizing global efficiency. Comparative Advantage In 1817 David Ricardo reasoned that there would still be gains from trade if a country specialized in the production of those things it can produce most efficiently, even if other countries can produce those same things even more efficiently. Put another way, Ricardo’s theory of comparative advantage holds that a country can maximize its own economic well- being by specializing in the production of those goods and services it can produce relatively efficiently and enhance global efficiency through its participation in (unrestricted) free trade Locke's critics focus on four weaknesses in his argument: The assumption that individuals have natural rights: This assumption is unproven and assumes that the rights to liberty and property should take precedence over all other rights. If humans do not have the overriding rights to liberty and property, then the fact that free markets would preserve the rights does not mean a great deal. The conflict between natural (negative) rights and positive rights: Why should negative rights such as liberty take precedence over positive rights? Critics argue, in fact, that we have no reason to believe that the rights to liberty and property are overriding. The conflict between natural rights and justice: Free markets create unjust inequalities, and people who have no property or who are unable to work will not be able to live. As a result, without government intervention, the gap between the richest and poorest will widen until large disparities of wealth emerge. Unless government intervenes to adjust the distribution of property that results from free markets, large groups of citizens will remain at a subsistence level while others grow ever wealthier. Individualistic assumptions and their conflicts with the ethics of caring: Locke assumes that people are individuals first, independent of their communities. But humans are born dependent on others, and without caring relationships, no human could survive. The degree of liberty a person has depends on what the person can do. The less a person can do, the less he is free to do. But a person's abilities depend on what he learns from those who care for him as well as on what others care to help him to do or allow him to do. © Copyright Virtual University of Pakistan 36 Business Ethics –MGT610 VU Free Markets and Utility: Adam Smith Modifying Locke's views on free markets, Adam Smith's arguments rest on utilitarian arguments that unregulated markets and private property will produce greater benefits than any other system. According to Smith, when private individuals are left free to seek their own interests in free markets, they will inevitably be led to further the public welfare by an "invisible hand:" By directing [his] industry in such a manner as its produce may be of the greatest value, [the individual] intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end that was no part of his intention. By pursuing his own interest he frequently promotes that of society more effectively than when he really intends to promote it. Free markets, according to Smith, ensure that buyers will purchase what they need at the lowest prices they can find, and business will correspondingly attempt to satisfy these needs at the lowest prices they can offer. Competition forces sellers to drop their prices as low as they can and to conserve resources while producing what consumers actually want. Supply and demand, according to this view, will help allocate resources efficiently. When the supply of a certain commodity is not enough to meet the demand, buyers bid the price of the commodity upward until it rises above what Smith called the natural price (i.e., the price that just covers the costs of producing the commodity, including the going rate of profit obtainable in other markets). Producers of that commodity then reap profits higher than those available to producers of other commodities. The higher profits induce producers of those other products to switch their resources into the production of the more profitable commodity. As a result, the shortage of that commodity disappears and its price sinks back to its natural level. Conversely, when the supply of a commodity is greater than the quantity demanded, its price falls, inducing its producers to switch their resources into the production of other, more profitable commodities. The fluctuating prices of commodities in a system of competitive markets then forces producers to allocate their resources to those industries where they are most in demand and to withdraw resources from industries where there is a relative oversupply of commodities. The market, in short, allocates resources so as to most efficiently meet consumer demand, thereby promoting social utility. The best thing for government to do is nothing; the market, on its own, will advance the public welfare, giving people what they want for the lowest possible cost. It is important to note that, although Adam Smith did not discuss the notion of private property at great length, it is a key assumption of his views. Before individuals can come together in markets to sell things to each other, they must have some agreement about what each individual "owns" and what each individual has the right to "sell" to others. Unless a society has a system of private property that allocates its resources to individuals, that society cannot have a free market system. Smith's utilitarian argument is most commonly criticized for making what some call unrealistic arguments. First, Smith assumes that no one seller can control the price of a good. Though this may have been true at one time, today many industries are monopolized to some extent. Second, Smith assumes that the manufacturer will pay for all the resources used to produce a product, but when a manufacturer uses water and pollutes it without cleaning it, for example, someone else must pay to do so. Third, Smith assumes that humans are motivated only by a natural, self-interested desire for profit. This, say his critics, is clearly false. Many humans are concerned for others and act to help others, constraining their own self-interest. Market systems, say Smith's critics, make humans selfish and make us think that the profit motive is natural. © Copyright Virtual University of Pakistan 37 Business Ethics –MGT610 VU LESSON 17 FREE MARKETS AND UTILITY: ADAM SMITH Smith's utilitarian argument is most commonly criticized for making what some call unrealistic arguments. First, Smith assumes that no one seller can control the price of a good. Though this may have been true at one time, today many industries are monopolized to some extent. Second, Smith assumes that the manufacturer will pay for all the resources used to produce a product, but when a manufacturer uses water and pollutes it without cleaning it, for example, someone else must pay to do so. Third, Smith assumes that humans are motivated only by a natural, self-interested desire for profit. This, say his critics, is clearly false. Many humans are concerned for others and act to help others, constraining their own self-interest. Market systems, say Smith's critics, make humans selfish and make us think that the profit motive is natural. One especially influential critic of Smith was John Maynard Keynes. Keynes argued that government intervention was necessary because there is a mismatch between aggregate supply and demand, which inevitably leads to a contraction of supply. Government, according to Keynes, can influence the propensity to save, which lowers aggregate demand and creates unemployment. Government can prevent excess savings through its influence on interest rates, and it can influence interest rates by regulating the money supply. The higher the supply of money, the lower the rate at which it is lent. Second, government can directly affect the amount of money households have available to them by raising or lowering taxes. Third, government spending can close any gap between aggregate demand and aggregate supply by taking up the slack in demand from households and businesses. Keynes' arguments became less convincing after the stagflation of the 1970s, though. It has been replaced by a post-Keynesian school of thought, which argues for even more governmental intervention in the market. Social Darwinists had a different take on the utilitarian justification for free markets. They argued that economic competition produced human progress. If governments were to interfere in this process, they would also unintentionally be impeding human progress. Weak firms must be weeded out by competition, they claim. The basic problem underlying the views of the social Darwinist, however, is the fundamental normative assumption that survival of the fittest means survival of the best. That is, whatever results from the workings of nature is necessarily good. The fallacy, which modern authors call the naturalistic fallacy, implies, of course, that whatever happens naturally is always for the best. Free Trade and Utility: David Ricardo Adam Smith's major work, the Wealth of Nations, in fact, was primarily aimed at showing the benefits of free trade. There he wrote: It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The tailor does not make his own shoes but buys them from the shoemaker... What is prudence in the conduct of every family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage. Adam Smith's point here is simple. Like individuals, countries differ in their ability to produce goods. One country can produce a good more cheaply than another and it is then said to have © Copyright Virtual University of Pakistan 38 Business Ethics –MGT610 VU an "absolute advantage" in producing that good. These cost differences may be based on differences in labor costs and skills, climate, technology, equipment, land, or natural resources. Suppose that because of these differences, our nation can make one product for less than a foreign nation can, and suppose the foreign nation can make some other product for less than we can. Then clearly it would be best for both nations to specialize in making the product each has an "absolute advantage" in producing, and to trade it for what the other country has an "absolute advantage" in producing. It was Ricardo's genius to realize that both countries could benefit from specialization and trade even though one can make everything more cheaply than the other. Specialization increases the total output of goods countries produce, and through trade all countries can share in this added bounty. Ricardo's ingenious argument has been hailed as the single "most important" and "most meaningful" economic discovery ever made. Some have said it is the most "surprising" and "counterintuitive" concept in economics. It is, without a doubt, the most important concept in international trade theory today and is at the heart of the most significant economic arguments people propose today when they argue in favor of globalization. Ricardo makes a number of simplifying assumptions that clearly do not hold in the real world, such as that there are only two countries making only two products with only a fixed number of workers. But these are merely simplifying assumptions Ricardo made to get his point across more easily and Ricardo's conclusion could still be proved without these assumptions. There are other assumptions, however, that are not so easy to get around. First, Ricardo assumes that the resources used to produce goods (labor, equipment, factories, etc.) do not move from one country to another. Yet today multinational companies can, and easily do, move their productive capital from one country to another. Second, Ricardo assumes that each country's production costs are constant and do not decline as countries expand their production or as they acquire new technology. Third, Ricardo assumes that workers can easily and unreservedly move from one industry to another. Yet when a company closes down because it cannot compete with imports from another country that has a comparative advantage in those goods, the company's workers are laid off, suffer heavy costs, need retraining, and often cannot find comparable jobs. Finally, and perhaps most importantly, Ricardo ignores international rule setters. International trade inevitably leads to disagreements and conflicts, and so countries must agree to abide by some set of rules and rule-setters. Marx and Justice: Criticizing Markets and Trade Karl Marx offers the most critical view of modern private property and free market institutions. Marx claims that free-market capitalism necessarily produces extremes of inequality. Since capitalist systems offer only two sources of income–owning the means of production and selling one's labor–workers cannot produce anything without the owner of the productive forces. But owners do not pay the full value of the workers' labor; they pay workers what they need to subsist, keeping the rest for themselves and gradually becoming wealthier as a result. © Copyright Virtual University of Pakistan 39 Business Ethics –MGT610 VU LESSON 19 FREE MARKET ECONOMY Mixed Economy Economic system in which land, factories, and other economic resources are more equally split between private and government ownership. Government controls economic sectors important to national security and long-term stability. Generous welfare system supports unemployed and provides health care. 1. Origins of the Mixed Economy a. Successful economy must be efficient and innovative, but also protect society. Goals are low unemployment, low poverty, steady economic growth, and an equitable distribution of wealth. b. Many mixed economies today are modernizing to become more competitive. 2. Decline of Mixed Economies Mixed economies are converting to market-based systems. Government ownership means less efficiency, innovation, responsibility and accountability; higher costs; slower growth; and higher taxes and prices. a. Move Toward Privatization i. Selling government-owned economic resources to private companies and individuals. ii. Increases efficiency, cuts subsidies to state-owned firms, curtails appointment of managers for political reasons. 3. Market Economy Majority of a nation’s land, factories, and other economic resources are privately owned, either by individuals or businesses. Price mechanism determines: o Supply: The quantity of a good or service that producers are willing to provide at a specific selling price. o Demand: The quantity of a good or service that buyers are willing to purchase at a specific selling price. 1. Origins of the Market Economy Individual concerns are above group concerns. The group benefits when individuals receive incentives and rewards to act in certain ways. a. Laissez-Faire Economics French: “allow them to do [without interference].” Individualism fosters democracy as well as a market economy. 2. Features of a Market Economy o Free choice: individuals have purchase options. o Free enterprise: companies can decide what to produce and which markets to compete in. o Price flexibility: prices rise/fall reflecting supply and demand. o Focus on China © Copyright Virtual University of Pakistan 43 Business Ethics –MGT610 VU China’s theme is “Socialism with Chinese characteristics,” and the nation has undergone great economic reform over the past two decades. a. Early Years i. 1949: communes planned all agricultural and industrial production and schedules. Rural families owned their homes and land and produced particular crops. ii. 1979: government reforms allowed families to grow crops they chose and sell produce at market prices. iii. Township and village enterprises (TVEs) obtained materials, labor, and capital on open market and used a private distribution system. Legalized in 1984, TVEs laid the groundwork for a market economy. iv. Outside companies were allowed to form joint ventures with Chinese partners in the mid-1980s. b. Challenges Ahead i. Political and social problems loom. Skirmishes between secular and Muslim Chinese, and democracy restricted. ii. Unemployment, slow economic progress in rural areas, and misery of migrant workers. iii. China’s one country, two systems policy must preserve order, as Taiwan is watching closely. Bottom Line for Business Ongoing market reforms in formerly centrally planned and mixed economies have a profound effect on international business. Freer markets are spurring major shifts in manufacturing activity. Lured by low wages and growing markets, international companies are forging ties in newly industrialized countries and exploring opportunities in developing nations. Global capital markets make it easier to set up factories abroad, and some newly industrialized countries produce world-class competitors of their own. © Copyright Virtual University of Pakistan 44 Business Ethics –MGT610 VU LESSON 20 COMPETITION AND THE MARKET Introduction This chapter moves the consideration of business ethics from the morality of the economic system in general to the morality of specific practices within our system. Given that our system generally follows the free market model, which is based on competition; it may be surprising to note that there are so many examples of anticompetitive practices in the U.S. today. A report on New York Stock Exchange companies showed that 10 percent of the companies had been involved in antitrust suits during the previous five years. A survey of major corporate executives indicated that 60 percent of those sampled believed that many businesses engage in price fixing.6 One study found that in a period of two years alone over sixty major firms were prosecuted by federal agencies for anticompetitive practices. Actually, it is more than surprising. The morality of the free market system itself is based on the idea of competition creating a just allocation of resources and maximizing the utility of society's members. To the extent that the market is not competitive, it loses its moral justification for existing. To understand the nature of market competition and the ethics of anticompetitive practices, it is helpful to examine three abstract models of the different degrees of competition in a market: perfect competition, pure monopoly, and oligopoly. Perfect Competition In a perfectly free competitive market, no buyer or seller has the power to significantly affect the price of a good. Seven features characterize such markets: 1. There are numerous buyers and sellers, none of whom has a substantial share of the market. 2. All buyers and sellers can freely and immediately enter or leave the market. 3. Every buyer and seller has full and perfect knowledge of what every other buyer and seller is doing, including knowledge of the prices, quantities, and quality of all goods being bought and sold. 4. The goods being sold in the market are so similar to each other that no one cares from whom each buys or sells. 5. The costs and benefits of producing or using the goods being exchanged are borne entirely by those buying or selling the goods and not by any other external parties. 6. All buyers and sellers are utility maximizers: Each tries to get as much as possible for as little as possible. 7. No external parties (such as the government) regulate the price, quantity, or quality of any of the goods being bought and sold in the market. In addition, free competitive markets require an enforceable private property system and a system of contracts and production. In such markets, prices rise when supply falls, inducing greater production. Thus, prices and quantities move towards the equilibrium point, where the amount produced exactly equals the amount buyers want to purchase. Thus, perfectly free markets satisfy three of the moral criteria: justice, utility, and rights. That is, perfectly competitive free markets achieve a certain kind of justice, they satisfy a certain version of utilitarianism, and they respect certain kinds of moral rights. © Copyright Virtual University of Pakistan 45 Business Ethics –MGT610 VU The movement towards the equilibrium point can be explained in terms of two principles: the principle of diminishing marginal utility and the principle of increasing marginal costs. When a buyer purchases a good, each additional item of a certain type is less satisfying than the earlier ones. Therefore, the more goods a consumer purchases, the less he will be willing to pay for them. The more one buys, the less one is willing to pay. On the supply side, the more units of a good, a producer makes, the higher the average costs of making each unit. This is because a producer will use the most productive resources to make his or her first few goods. After this point, the producer must turn to less productive resources, which means that his costs will rise. Since sellers and buyers meet in the same market, their respective supply and demand curves will meet and cross at the equilibrium point. © Copyright Virtual University of Pakistan 46