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Foundations Study Guide: Business Ethics

Foundations Study Guide: Business Ethics

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April 23, 2010

Dr. Stephen Hicks is chairman of the philosophy department at Rockford College, and executive director of the Center for Ethics and Entrepreneurship. Among Hicks's publications are Explaining Postmodernism: Skepticism and Socialism from Rousseau to Foucault  and the DVD documentary Nietzsche and the Nazis.

Of the Institutions that have contributed to the quality of human life, business ranks with science, art, and education. Business has created the wealth that has given unprecedented numbers of individuals financial control of their lives. It has expanded immeasurably the range of goods and services available to individuals. It has broken down countless centuries-old barriers of racial, sexual, religious, and ethnic prejudice. And it has been the vehicle for countless numbers of individuals to develop their fullest potentials in achieving their dreams.  In short, business has been a prime mover in making it possible for millions to pursue their lives in a wealthy, healthy, rational and exciting world.

Yet no other human institution has been so plagued by suspicions of immorality. "Business ethics," the old joke goes, "Isn't that a contradiction in terms?"

How moralists evaluate business depends upon their fundamental moral principles. Most moral philosophy has included the assumption that morality and practicality are two different things. Older moralists typically argued that the demands of morality conflicted with the requirements of business practicality, and so condemned business. More recent moralists tend to adopt a less extreme version of the dichotomy, holding that determining what is practical and what is moral involves following two distinct lines of thought, although what is moral and what is practical happen to coincide in many cases.

 Objectivism offers a unique perspective on the full range of business ethics issues.

Since Objectivism is unique in its rejection of the traditional dichotomy of the moral and the practical, it offers a unique perspective on the full range of business ethics issues. Ayn Rand 's Atlas Shrugged, The Virtue of Selfishness, and Capitalism: The Unknown Ideal remain by far the best presentation of the broader moral context within which to evaluate the various dimensions of business practice.

The major issues in business ethics can be classified into four areas:

  • The relationship between business and consumers
  • The relationship between employers and employees
  • The nature and value of special forms of business organization—most notably, that of the corporation
  • The nature and value of financial markets

The issue of the proper scope of government regulation cuts across these four categories. Miscellaneous issues such as waste disposal ("the environment") and investing in morally dubious foreign nations (such as Communist China or Iraq) are often debated in the business ethics literature, but are primarily issues of political theory and so do not fit into the above business ethics categories.

HISTORY

Of special importance to discussions of business ethics is the fact that anti-business philosophies have shaped most historical discussions of business. The view that capitalism's history is, for example, a story of "robber barons" who grew rich by "exploiting the poor" has gained wide acceptance.

Several good books challenge this these myths. Burton Folsom, Jr.'s The Myth of the Robber Barons is a study of six 19th-century American business leaders: Commodore Vanderbilt, J.J. Hill, the Scrantons, Charles Schwab, John D. Rockefeller, and Andrew Mellon. Folsom makes the crucial distinction between "market entrepreneurs" and "politcal entrepreneurs"—i.e., between those who make money by providing better and cheaper goods and services, and those who acquire money by the use of political pull— and he shows how those who actually created wealth did so without government help and, in many cases, by out-competing rivals who were supported by huge government subsidies. Friedrich Hayek's Capitalism and the Historians is a collection of essays by five economic historians comparing the actual achievements of capitalism and the Industrial Revolution with the accounts given by historians. Gerald Gunderson's The Wealth of Creators is a well-written economic history of the United States, focusing on the important role entrepreneurs have played in developing the country.

CORPORATIONS

One of the major organizational innovations in the history of business was the development of the corporation. Corporations are distinguished from single proprietorships and partnerships (the two traditional forms of business organization) by two features: the organizational separation of ownership and management, and the legal limitation of owners' liability to the amount of their investment. The separation of ownership and management has proven enormously beneficial to both owners and managers, since it brings together those who have capital but not necessarily the skills or time to run a business and those who have managerial skills but not necessarily the capital. Corporations' limited liability has also made available increasing amounts of capital: since thsoe who provide the capital are legally liable only for the actions of management and only to the extent of their investment, they are more likely to be willing to invest.

The success of the corporation has brought a flood of criticism; in fact, during the past century the bulk of criticism of business has focused on the corporate form of business. Robert Hessen's In Defense of the Corporation is an excellent study of the corporation's historical and moral roots, and contains clear and accurate responses to the major criticisms of corporations.

FINANCIAL MARKETS

The growth of corporations would not have been possible without the corresponding growth of financial markets. Stock markets, for example, allow owners of stock a reasonable guarantee of liquidity for their holdings, thus making available to corporations the capital of those who are not necessarily interested in long term investments. Futures markets, to take another example, allow sellers and purchasers of commodities to make more accurate plans for the future by locking in some of their costs now. Speculators play a valuable role by providing liquidity and smoothing the rise and fall of prices as new information becomes available.

Financial markets have also generated much criticism, from charges that speculators make merely "paper profits," to claims that insider trading is unfair to outsiders, to suspicions that junk bonds deserve their name.

I am aware of no particular book that combines a thorough understanding of the functions of financial markets with a good moral discussion of the controversies surrounding them. " Gekko Echo ," by David Kelley and Jeff Scott, shows how financial innovations in the 1980s —including leveraged buyouts and "junk" bonds—created wealth. Fenton Bailey's Fall from Grace and Daniel Fischel's Payback are good accounts of the Michael Milken saga. While weak on understanding Milken's moral standing, both are very good at explaining the enormous value and impact of junk bonds and at documenting the often malicious and arbitrary behavior of Milken's opponents in business and government.

There are, however, many books that explain how markets work, and the information they contain can be useful for setting straight many of the misconceptions about the role of markets.

BUSINESS/CONSUMER AND EMPLOYER/EMPLOYEE RELATIONS

The core of business is the relationship between a business and its customers. While both sellers and buyers can defraud each other (e.g., sellers can misrepresent their products, and customers can knowingly write bad checks), most discussion of the moral problems in the business/consumer relationship focuses on more complex issues of advertising, the use of bluffing and bribery in negotiation, the setting of prices (e.g., worries about price fixing, "monopolistic" and "cutthroat" pricing), and drawing the line between caveat emptor and product liability.)

In a free market, the relationship between employers and employees is a voluntary exchange of values on terms acceptable to both sides. However, the thrust of much of the business ethics literature has been that employees are in an inherently weaker bargaining position compared to employers, and so there has been a push for governments to mandate special favors for employees. These have included granting monopoly power to some unions, pushing for affirmative action for women and members of minority groups, and making mandatory such benefits as minimum wages, paid vacation time, and health insurance. Other issues include privacy rights (e.g., whether employers have the right to test employees for drug use), how to protect whistle blowers (employees who expose their company's illegal activities), and how to deal with problems of sexual harassment, bosses who take credit for their subordinates' achievements, and so on.

Robert Jackall's Moral Mazes: The World of Corporate Managers is an eye-opening sociological study of the world inside several large corporations. Jackall is overly cynical in his conclusions about the nature of corporate life, but he presents much good data on the often turbulent world inside corporations, including many examples of feudal thinking, backstabbing, and the usual office politics. Tibor Machan's Commerce and Morality is a philosophical anthology that collects several solid articles by philosophers and political scientists discussing the moral dimensions of managing, advertising, employer/employee relations, and affirmative action.

OTHER SOURCES

Many anthologies exist for classroom use that include essays on the whole range of issues in business ethics. Some anthologies are noticeably biased against business in their selection of articles, but most attempt to include essays that represent all of the major sides of the debate. The best in this regard is the first edition of W. Michael Hoffman and Jennifer Mill Moore's Business Ethics: Readings and Cases in Corporate Morality. (The second and third editions are not as good.) A useful supplement to anthologies of theoretical essays is a collection of real-life cases. Tom Beauchamp's Case Studies in Business, Society, and Ethics is a good collection of 35 real-life cases representing the range of often difficult issues that business practice raises. An excellent introduction to the economic issues is David R. Henderson's The Fortune Encyclopedia of Economics. A surprising number of criticisms of business are based on ignorance of the economic facts involved, and Henderson's anthology collects brief, well written articles by experts on the full range of business and economic issues.

Very little in the business ethics literature captures the passion and commitment that most business professionals feel for their life's work, and very little in the literature communicates the sense that business is something that could be celebrated in poetry and song. This is a consequence of the "Business ethics is a contradiction in terms" attitude that underlies to some extent all writings in business ethics. Two books that fall outside the mainstream and that communicate a richer feel for the spirit animating successful business are Paul Hawken's Growing a Business and Cameron Hawley's Executive Suite. Hawken's book is an engaging, non-technical and non-philosophical account of entrepreneurship.

Hawken is not an Objectivist in principle, but his discussion of the commitments and characteristics necessary for successful business practice is directly on target. Hawley's Executive Suite is a fictional account of a struggle by five men for the presidency of a corporation, after the sudden and unexpected death of the energetic and charismatic man who had taken over a nearly bankrupt company and built it into a giant in its field. Hawley deftly profiles core characters of the main contenders for the presidency and shows a good sense for the actual machinations of corporate life as well as for the virtues of character that make business success possible.

FOUNDATIONS STUDY GUIDES

This is the third in the Foundations is a series of Study Guides, which designed to help individuals and discussion groups who wish to gain an overview of a field from an Objectivist perspective. Each Study Guide is prepared by an expert who selects and comments on readings that either reflect an Objectivist viewpoint or are valuable for other reasons. Specific works mentioned in this or other Study Guides should be read critically; their inclusion does not imply any endorsement by The Atlas Society.

Bibliography

Fenton Bailey. Fall From Grace: The Untold Story of Michael Milken. Birch Lane, 1992.

Tom Beauchamp. Case Studies in Business, Society, Ethics, 3rd edition. Prentice Hall, 1993.

Burton Folsom, Jr. The Myth of the Robber Barons: A New Look at the Rise of Big Business in America (Originally published as Entrepreneurs vs. The State, 1840-1920.) Reston, Va.: Young America's Foundation, 1987.

Daniel Fischel. Payback. Harper Business, 1995.

Gerald Gunderson. The Wealth Creators: An Entrepreneurial History of the United States. Truman Talley, 1989.

Cameron Hawley. Executive Suite. Boston: Delta Diamond, 1952.

Pawl Hawken. Growing a Business. New York: Simon and Schuster, 1987.

Friedrich Hayek, ed. Capitalism and the Historians. Chicago: University of Chicago Press, 1954.

David R. Henderson, ed. The Fortune Encyclopedia of Economics. Warner, 1993.

Robert Hessen. In Defense of the Corporation. Stanford, Calif.: Hoover Institution Press, 1979.

Michael W. Hoffman and Jennifer Mills Moore. Business Ethics: Readings and Cases in Corporate Morality, New York: McGraw-Hill, 1984.

Robert Jackall. Moral Mazes: The World of Corporate Managers. New York: Oxford University Press, 1988.

David Kelley and Jeff Scott. "Gekko Echo." Reason, Vol. 24, No. 9, February 1993.

Tibor Machan, ed. Commerce and Morality. Totowa, N.J.: Rowman and Littlefield, 1988.

Ayn Rand. Atlas Shrugged. New York: Random House, 1957.

Ayn Rand. Capitalism: The Unknown Ideal. New York: New American Library, 1966.

Ayn Rand. The Virtue of Selfishness. New York: New American Library, 1964.

Stephen Hicks Ph.D.
About the author:
Stephen Hicks Ph.D.

Stephen R. C. Hicks is a Senior Scholar for The Atlas Society and Professor of Philosophy at Rockford University. He is also the Director of the Center for Ethics and Entrepreneurship at Rockford University.

He is author of The Art of Reasoning: Readings for Logical Analysis (W. W. Norton & Co., 1998), Explaining Postmodernism: Skepticism and Socialism from Rousseau to Foucault (Scholargy, 2004), Nietzsche and the Nazis (Ockham’s Razor, 2010),  Entrepreneurial Living (CEEF, 2016), Liberalism Pro and Con (Connor Court, 2020), Art: Modern, Postmodern, and Beyond (with Michael Newberry, 2021) and Eight Philosophies of Education (2022). He has published in Business Ethics Quarterly, Review of Metaphysics, and The Wall Street Journal. His writings have been translated into 20 languages.

He has been Visiting Professor of Business Ethics at Georgetown University in Washington, D.C., Visiting Fellow at the Social Philosophy & Policy Center in Bowling Green, Ohio, Visiting Professor at the University of Kasimir the Great, Poland, Visiting Fellow at Harris Manchester College of Oxford University, England, and Visiting Professor at Jagiellonian University, Poland.

His B.A. and M.A. degrees are from the University of Guelph, Canada. His Ph.D. in Philosophy is from Indiana University, Bloomington, USA.

In 2010, he won his university’s Excellence in Teaching Award.

His Open College podcast series is published by Possibly Correct Productions, Toronto. His video lectures and interviews are online at CEE Video Channel, and his website is StephenHicks.org.  


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