A Market Failures Approach to Business Ethics
“Business ethics” is widely regarded as an oxymoron. The only way to be a good soldier in an unjust war is to disobey orders, or maybe even to desert. Many people believe, along similar lines, that the only way to maintain one’s ethical integrity in busin
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A Market Failures Approach to Business Ethics JOSEPH HEATH
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The Profit Motive What Justifies Profit? Milton Friedman A Market Failures Based Code Further Directions
"Business ethics" is widely regarded as an oxymoron. The only way to be a good soldier in an unjust war is to disobey orders, or maybe even to desert. Many people believe, along similar lines, that the only way to maintain one's ethical integrity in business is not to go into business. The reasons for this are not hard to find. Students are still routinely taught in their introductory economics classes that in a market economy, when engaged in market transactions, individuals act out of self-interest - whether it be by maximizing profits as producers, or by maximizing satisfaction as consumers. This sets up an almost indissoluble link in people's minds between "profit-maximization" and "self-interest." As a result, anyone who thinks that the goal of business is to maximize profits will also tend to think that business is all about self-interest. And since morality is widely regarded as a type of constraint on the pursuit of individual self-interest, it seems to follow quite naturally that business is fundamentally amoral, if not immoral. The problem is that the association between profit-maximization and selfinterest so often taken for granted is based upon a naive and inadequate theory of the firm. Profit-maximization and self-interest are not the same thing, and the failure to distinguish adequately between the two can be a source of enormous confusion. Business ethics, as a subject, is essentially concerned with the moral responsibilities of managers. Managers often find themselves placed in circumstances in which the imperative to "maximize
B. Hodgson (ed.), The Invisible Hand and the Common Good © Springer-Verlag Berlin Heidelberg 2004
JOSEPH HEATH shareholder value" conflicts with their self-interest. Thus there are many cases in which profit-maximization should be viewed as a managerial obligation, not as an expression of self-interest. Because of this somewhat elementary confusion, there has been a marked tendency in the business ethics literature to dismiss out of hand views that take the profit motive seriously. In particular, Milton Friedman's classic article "The Social Responsibility of Business is to Increase its Profits," is more often treated as a piece of apologetic than as a serious piece of moral reasoning. 1 This is unfortunate, since the moral laxity on display in Friedman's work is not so much a symptom of an inadequate normative framework as it is a consequence of specious economic reasoning. Or so I will attempt to show. The more serious consequence of this confusion is the widespread perception that, in order for business ethics to be genuinely ethical, it must extend managerial responsibility to groups other than shareholders. This is, I believe, often the intuition underlying "stakeholder" theories of managerial responsibility. In this paper, I will argue that such efforts are misguided. Profit-maximiz
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