Business Ethics And Sustainability

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MGMT 20134- Decsion Making 2.ppt

MGMT20134
Business Ethics and Sustainability

Ethical Decision Making 2: Forms of Justice

Society and Morality

Every society seeks to address the same problems of how, how to allocate scarce resources to provide goods and services, how to insure people have sufficient means of exchange to procure them, how to insure that they have access to them and then to do so in a way that is just and fair.

The choices we make about to do these things have moral implication-so our economic systems are not amoral as some suggest.

Economics, Scarcity and Justice.

When people find themselves competing for scarce resources the issue of distribution and the just and fair way to distribute these harms and benefits becomes the focus of the economic system and currently the dominant concept is that of the free market or capitalism.

However the concepts of “economic or distributive justice” rest on more than just one paradigm.

Justice

Ferrell, Fraedrich and Ferrell (2015) define justice as the fair treatment and due reward in accordance with ethical or legal standards including the disposition to deal with perceived injustices of other.

DeGeorge (2010) states that in its most general formulations justice consists giving each person his or her due, treating equals equally and unequals unequally.

McDonald (2015) advances that justice affirms what is morally ours and it drawn from many sources such as the law, rational thought and an intuitive sense of fairness and equity.

Theories of Justice

Theories of justice have been developed to provide general guidance on what type of justice is required in a particular set of circumstances or situations. They demonstrate or describe the how to distribute burdens and benefits for particular situations and circumstances.

The formal principle of justice claims that equals ought to be treated equally and unequals treated unequally.

This is why laws are introduced to protect the disadvantaged in society or to ensure individuals are not unfairly discriminated against due to a particular characteristic such as race, ethnicity or the presence of an disability, that whilst it affects the individual, may not have any impact on their ability to undertake a job or function.

Libertarian Justice

At the heat of libertarianism is the notion of non-interference and secondly the right to property that has been justly acquired.
It does not matter that some can acquire more than others, provided that they acquired it justly.
Libertarians believe in freedom of choice and the absence of interference in these systems

We can see economies that emphasise the free market, that minimise taxation and have small welfare systems and few “government businesses” as predominantly libertarian.

Egalitarian Justice

Rawls believes that there ae no traits or characteristics that make one person more deserving than any other. As such there are no differences between people that warrant the inequitable distribution of benefits and burdens- everyone should have an equal share.

Egalitarians advocate the need to introduce systems that seek to temper the imbalances directly- thus redistribution of wealth through taxation, welfare systems, increasing access to health and education funded by society through taxation etc.

Such societies are often referred to as mixed economies because they do exactly what libertarians argue against- interference.

Marxist Justice

Marxism advances the importance of society justice and that capitalism and the libertarian paradigm on which it rests should be rejected because of the inequalities that it generates

Marxism argues that allowing the accumulation of private wealth creates inequity which perpetuates the problem allowing the rich to get richer and the poor poorer. This economic inequality then leads to inequalities of liberty and power with the wealthy able to gain even greater control and thus even more wealth.

According to Marxism these problems can be solved by restricting the ownership of capital and property to the collective society- the government and by systematically planning the economy to deliver goods and services that are in need rather than what may be wanted.

Economics and Morality

We often approach economics as a game between multiple competitors and suppliers and consumers all within the confines of the market.

Hence it is often claimed that economics is amoral.

However as DeGeorge (2010) identifies this is a misnomer as economics is all about people and how they interact-people’s lives are affected by the way in which goods and services are made available and by the rules by which these exchanges occur.

As such questions of fairness, justice and the benefits and harms that are derived must also be addressed.

Following the collapse of the former Soviet Union in the 1990s, the Capitalism has become the dominant economic system throughout the world.

However to say that all forms of capitalism are the same is incorrect.

Scandinavia and the US both have market based systems, but the levels of Government intervention, taxation and welfare differ markedly.

There are three distinguishing features that differentiate capitalism form other systems

An available accumulation of industrial capital

Private ownership system of the means of production

A free market system

Capitalism and Morality

Many moral questions arise from the concept of the free market

The equilibrium price is determined by the interaction of demand and supply – but based on perfect knowledge, many buyers and sellers and non-interference
Is this realistic?
Does imperfect knowledge, market advantage favour some at the expense of others?

By definition the competitive market results in winners and losers, advantages and disadvantages.

How these are determined and distributed again raises question related to fairness and justice

Capitalism and Morality

The Invisible Hand Concept

Many of the moral questions that can be raised about capitalism and the free market are countered with the concept of the “invisible hand.”

Smith argued that self-interest on the part of individuals actually promotes the good of society, more so than when people consciously try to do good for society.

According to the invisible hand theory, each of us, acting in our own self-interests, generates a demand for goods and services that compels others to deliver those goods and services in the most efficient manner so that they may be able to receive compensation from others and make a profit in doing so.

In this process, resources are allocated in the most efficient manner, in contrast to a process that relies on a centrally planned system.

Free Market Movement

The success of the market relies on a reciprocal economic relationship.

A characteristic of capitalism is that people offer their services as part of the production process and that in return they receive wages which then can be used to purchase the gods and services that are produced by the economy.

Without money people cannot buy goods and services.

However investment is free to travel to those parts of the market where returns will be higher- the free movement of capital. This includes markets outside of national boundaries.

Can labour also move just as freely?

Social Contract - Licence to Operate

Adapted from Kohlberg’s Ethical Decision Making Model – Practical Business Ethics, French and Granose, Prentice Hall 1995

McDonald (2015) states that social contract theory proposes that an implied contract exists between a business and the state in which it operates regarding, rights, responsibilities and expectation of behaviour.

The implied social contract, sometimes also called a licence to operate, is that the state allows a corporation to form and operate and pursue a profit, only if it does so ethically, obeying laws and increasing the social welfare of that society

The benefits to society are increase in welfare through the availability of goods and services and by compensation for employment.

This would seem to suggest that a condition or expectation of social contract is that organisations are expected to employ people of that society.

Economically this is necessary for the market to operate- or is it? Does a corporation have a moral duty to meet its social obligation?

What is Society?

Adapted from Kohlberg’s Ethical Decision Making Model – Practical Business Ethics, French and Granose, Prentice Hall 1995

Rawls (1971) describes society as a ‘cooperative venture for mutual advantage’.

Carroll and Buchholtz (2015) define a society as a community, nation or a broad grouping of people with a common traditions, values, institutions and collective interests and activities.

Rawls (1971) advances the shared concept of justice as a mechanism for binding individuals since ‘among individuals with disparate aims and purposes, a shared conception of justice establishes the bonds of civic friendship; the general desire for justice limits the pursuit of other ends.

Social Contract

Adapted from Kohlberg’s Ethical Decision Making Model – Practical Business Ethics, French and Granose, Prentice Hall 1995

The social contract concept is used to explain the relationship between society and business (Shocker and Sethi, 1973).

Mathews (1993, p. 26) explains the idea of social contract as follows: “Society (as a collection of individuals) provides corporations with their legal standing and attributes and the authority to own and use natural resources and to hire employees. Organisations draw on community resources and output both goods and services and waste products to the general environment. The corporation has no inherent rights to these benefits, and in order to allow their existence, society would expect the benefits to exceed the costs to society”.

Social Contract - Rawls

Adapted from Kohlberg’s Ethical Decision Making Model – Practical Business Ethics, French and Granose, Prentice Hall 1995

The concept of social contract as described by Rawls (1971) suggests that organisations have implicit economic and social obligations to a society or nation when they are granted permission to establish an organisation or corporation.

Rawls offers general conceptions of justice linked to social contract; one being that social and economic inequalities are to be arranged so that they are to the greatest benefit of the least advantaged and are attached to offices and positions open to all under conditions of fair equality of opportunity (Sterba, 1990).

The Licence to Operate

Adapted from Kohlberg’s Ethical Decision Making Model – Practical Business Ethics, French and Granose, Prentice Hall 1995

The “licence or social licence to operate” is described as a community’s perception of the acceptability of a company and its operations (Thompson & Boutilier 2011).

Post et al., (2002) and Elkington, (1997) provide a more general interpretation suggesting that that organisations use strategic decision making to achieve a reduction of harms and create benefits to society so that it’s continued operation is acceptable to all parties involved.

Both Prakash Sethi (1974) and Carroll (2002) maintain that an organisation’s basic social responsibilities are economic and legal, usually described as acting within the law and to provide goods and services to a society that provides a return on investment to shareholders and stakeholders.

Social Contract and Obligation

Adapted from Kohlberg’s Ethical Decision Making Model – Practical Business Ethics, French and Granose, Prentice Hall 1995

If social contract and licence to operate are a forms of rights conferred on an organisation by a society then the question must be what are the obligations or duties of a firm to that society with regards the legal and economic reciprocity?

Is a firm obliged to be socially responsible by contract and or licence?

Types of Justice

If we are to hold individuals and organisations accountable and award moral praise and moral blame, we must also address the issue of justice and how we make decision about what is fair just and reasonable.

Buchholz, (1989, p. 36) describes three types of justice; distributive, compensatory and retributive, that can be used to describe the actions that are generated or rights that are deprived of an individual or an organization by a society for a wrong doing.

Ferrell, Fraedrich and Ferrell (2015) provide a slightly different interpretation describing procedural and interactional justice in addition to distributive.

Distributive justice

This form of justice is concerned with a fair distribution of society’s benefits and burdens.

It addresses the goods and services a society has available, through the major institutions of government and business and how these should be distributed.

Many governments pass laws that are directed at redistributing forms of benefits to individuals that for particular reasons are excluded or deprived of the benefit.

Many social welfare programs can be seen as such a form of justice- as is taxation whose purpose is primarily redistributive.

Compensatory justice

This form of justice is concerned with finding a way of compensating one for what they have incurred a loss or when wronged by others.

In the court system, individuals and organisations may be fined for breaking laws or contracts and ordered to pay recompense for the “injury” sustained to another party as a result of their actions.

This could be described as the compensation owed to an individuals when their rights have been infringed or not met.

Typically compensatory justice tends to be financial.

The problem is the subjectivity involved in assessing the value of the compensation against the injustice purport rated on the individual- real or artificial

Retributive Justice

This form of justice is concerned with the imposition of punishments and penalties such as the removal of rights or the ability to participate in a society, upon those who do wrong.

Examples include prison sentences, banning of people holding drivers licence for drink driving offences, disqualification of people holding political or corporate offices.

Again a contentious issue is the extent of the retribution – the length of the sentence or ban. Precedent- the legal concept of making a judgment which s similar to a previous judgment for a similar offence provides a degree of consistency.

Procedural Justice

Ferrell, Fraedrich and Ferrell (2015) identify this form of justice is concerned with the processes and activities that result in outcomes or consequences.

It addresses the methods by which decisions are made and reached.

It essentially advances that a just approach will emphasise the consistency of the decision making process, that it is open and participative involving those affected.

They describe the organizational context and organizational decision making as the basis for procedural justice.

Interactional Justice

This form of justice is based on relationships and the treatment of others but within the organisational context.

Ferrell, Fraedrich and Ferrell (2015) refer to concepts such as accuracy of information, respect for others and truthfulness between employers and employees.

MGMT 20134- Justification.ppt

MGMT20134
Business Ethics and Sustainability

Ethical Decision Making 2: Jusification

Justifying moral judgments

Justification of decisions has to do with providing some basis for our moral prescriptions so that others can examine what we prescribe or be persuaded or convinced that what we say has merit and deserves consideration.

The goal of justification is to provide such a convincing argument in support of certain normative principles that people will actually change their behaviour- to conform with these prescription

(Buchholz, 1989)

How can moral judgments be Justified?

Decisions can be justified in two ways

1. Internally : utilisation of the principles which are appropriate within an ethical theory

2. Externally: appeals to the non-rational or the unchallengeable

(Buchholz, 1989)

Internal Justification

From accepted ethical theories, moral principles can be derived that support the development of moral rules. These rules indicate the actions that ought or ought not be performed.

Successful justification occurs when there is successful grounding of an action in a standard that is independent on the action itself

An internal justification system has to assume the legitimacy of the next higher level- a fundamental principle of morality

(Buchholz, 1989)

Internal Justification

(Buchholz, 1989)

Ethical Theory

(Governs the institution or system of thought)

Rule

(Internal to the institution or system of thought)

Principle

(Internal to the institution or system of thought)

Judgment

(Needing Justification)

External Justification

External justification deals with justifying an entire system of moral beliefs and reasoning.

An appeal to an internal system is seen as an insufficient principle of morality

In effect it attempts to vindicate the entire set of rules and principles that are unique to that the system of thought

(Buchholz, 1989)

External Justification: Moral or Natural Law

Morally consists of accepting the basic set of rules and moral principles that govern the universe.

Belief in a fundamental natural order of things

This system is analogous to the physical sciences which proceeds on the basis of empirical investigation to discover the physical laws that govern the universe.

(Buchholz, 1989)

External Justification: Reason

Morally consists of acting rationally .
All human beings are fundamentally the same thus can be rational.
Task of reason is to find those universal moral principles which would be agreed to by all rational beings.

(Buchholz, 1989)

External Justification: Special Revelation

Ultimate truth is revealed by an external force or deity

Normative rules are recorded in a document-Scripture.

Religion interprets Scriptures and restate these in modern categories so that relevance is maintained.

(Buchholz, 1989)

External Justification: Social Contract

Assumption that anarchy is undesirable, thus people agree to a minimum set of rules to preserve social interaction.

(Buchholz, 1989)

External Justification: Moral Authority

Assumption that society has a recognized authority who is right.

Closely linked to revelation as often these are religious figures or crusaders. eg the Pope/ Dalai Lama/ Rabbis, etc
More recently popular figures have also been seen in a semi moral authority light

(Buchholz, 1989)

External Justification: Power

"Might makes right!"

Suggests that morality is determined and forced upon individuals by those who possess strength or can command loyalty.
There is some link to concept of natural law- survival of the fittest.

External Justification: Intuition

Ethical concepts such as good, right and bad cannot be known through empirical means but rather through intuition.

Value judgments about right and wrong are known to "right thinking" people.

External Justification: Culture

Also known as cultural relativism, this proposes that different cultures have a series of fundamental moral principles and values.

These are often found in constitutions, religious and secular literature etc.

External Justification: Procedural Justification

Based on the notion that if proper procedures are followed in arriving at a moral judgment, then it is justified.

Thus clarity, information, rationality, impartiality level headedness etc must be present

MGMT20134 Week 5.docx

MGMT20134 Business Ethics and Sustainability

Unit 5 Ethical Theories & Perspectives 1

Table of Contents Introduction 2 Learning objectives 2 Overview 3 Economics Scarcity and Justice 4 Libertarian, Egalitarian and Marxist Approaches 4 Economic Systems and Morality 5 Capitaism and Morality 6 The Invisble Hand 8 Social Contract 9 Types of Justice 10 Guided Readings 12 Journal Readings 12

Introduction

This topic explores the foundation of our economic systems and how ethical principles underpin the way in which we interact with each other. Every society seeks to address the same problems of how, how to allocate scarce resources to provide goods and services, how to insure people have sufficient means of exchange to procure them, how to insure that they have access to them and then to do so in a way that is just and fair.

The concepts of libertarianism, egalitarianism and Marxism are briefly explored and their relationship to economic systems established. Capitalism and the free market have become the mainstay of almost every society yet variations occur and moral questions do arise.

Learning objectives

This unit has the following learning objectives:

1. To define the concepts of justice and its importance to morality

2. To review Justice from three different perspectives of libertarianism, egalitarianism and Marxism and how these inform economic systems.

3. To review the concept of capitalism and the free market and the ethical challenges surrounding them.

4. To consider the validity of the “invisible hand” of the market

5. To consider whether organisations have a social contract.

6. To examine the types of justice and how they inform decision making

Overview

In the previous unit we examined some of the issues related to national culture and the way in which values inform the practices and etiquette of national cultures. This will be further explored in our final unit on international or global ethics. We also considered three basic values of integrity, fairness and justice and how these can be used to understand the ethical context surrounding decision that we need to make.

However these principles are far more complex and important and operate not only at the individual and organisational level in terms of decision making, but also inform the basis of our economic systems. In addition many of the laws and accepted practices of our societies are directly informed by these principles. Having a better understanding of these concepts at a macro level will help provide greater insights into the CSR versus free market debate. It will also assist in gaining a better understanding of the way in which people justify their actions or decision and whether these have a defendable position.

Economics, Scarcity and Justice.

As part of the MBA you will be studying a course in Economics. Some of you may already be familiar with economic principles and theories and will understand that economics is primarily concerned with the scarcity of resources and how we allocate these resources in society. As we will discuss in Unit 10 on Sustainability, the earth is a closed biological system. Almost everything on and in the earth is limited. Certainly there is a fixed and finite quality of natural resources such as air, water, minerals such as coal, iron ore, oil and gas, etc. Some countries have more resources than others which American strategist Michael Porter in the late 1990s called the competitive advantage of nations. However this uneven distribution of resources can and does lead to inequities which translates to benefits and harms or burdens. When people find themselves competing for scarce resources the issue of distribution and the just and fair way to distribute these harms and benefits becomes the focus of the economic system and currently the dominant concept is that of the free market or capitalism. However the concepts of “economic or distributive justice” rest on more than just one paradigm.

Justice

Ferrell, Fraedrich and Ferrell (2015) define justice as the fair treatment and due reward in accordance with ethical or legal standards including the disposition to deal with perceived injustices of other. DeGeorge (2010) states that in its most general formulations justice consists giving each person his or her due, treating equals equally and unequals unequally. McDonald (2015) advances that justice affirms what is morally ours and it drawn from many sources such as the law, rational thought and an intuitive sense of fairness and equity.

Justice is often expressed in terms of achieving a fair outcome or individuals or groups receiving what they deserve. People are seen to have been treated justly when they have been given what is owed or due to them or what they received what they can legitimately claim as theirs. The formal principle of justice claims that equals ought to be treated equally and unequals treated unequally. This is why laws are introduced to protect the disadvantaged in society or to ensure individuals are not unfairly discriminated against due to a particular characteristic such as race, ethnicity or the presence of an disability, that whilst it affects the individual, may not have any impact on their ability to undertake a job or function.

Libertarian, Egalitarian and Marxist Approaches to Justice.

There are many ways of explaining and debating concepts of justices and there are many different contributors to the discussion. Some of the most notable recent philosophers to have made a significant impact are John Rawls and Robert Nozick.

Libertarian justice.

At the heat of libertarianism is the notion of non-interference and secondly the right to property that has been justly acquired. Fr Nozick the concept of justice relates to the rules or processes that are established for people to acquire things so that it justly belongs to the owner. It does not matter that some can acquire more than others, provided that they acquired it justly. Thus it does allow for some people to receive a greater share of benefit or burdens than others. Libertarians believe in freedom of choice and the absence of interference in these systems. Therefore government actions that redistribute benefits and burdens, i.e. taxation, welfare etc. is seen as a violation of human rights and unjust.

We can see economies that emphasise the free market, that minimise taxation and have small welfare systems and few “government businesses” as predominantly libertarian. The most obvious would be the United States where individual rights and freedoms are greatly valued.

Egalitarian Justice.

Rawls believes that there ae no traits or characteristics that make one person more deserving than any other. As such there are no differences between people that warrant the inequitable distribution of benefits and burdens- everyone should have an equal share. Thus Rawls dismisses the notion of distribution systems that allows people to gain advantage at the expense of others- rather egalitarians advocate the need to introduce systems that seek to temper the imbalances directly- thus redistribution of wealth through taxation, welfare systems, increasing access to health and education funded by society through taxation etc. Such societies are often referred to as mixed economies because they do exactly what libertarians argue against- interference. Perhaps that most well-known examples of egalitarian societies are the Scandinavians where moderately high taxes results in extensive welfare systems, free education and health systems and government infrastructure. Individual rights are limited so as to generate greater equitable outcomes for society or the greater good.

Marxist Justice.

As the name suggests this view of justice has its origins in the writing and thoughts of Karl Marx and can be viewed as the opposite of libertarians. Marxism advances the importance of society justice and that capitalism and the libertarian paradigm on which it rests should be rejected because of the inequalities that it generates. Marxism is also referred to as socialism and it argues that allowing the accumulation of private wealth creates inequity, i.e. those who have capital and those who do not. This then perpetuates the problem allowing the rich to get richer and the poor poorer. This economic inequality then leads to inequalities of liberty and power with the wealthy able to gain even greater control and thus even more wealth.

According to socialists these problems can be solved by restricting the ownership of capital and property to the collective society- the government and by systematically planning the economy to deliver goods and services that are in need rather than what may be wanted. However socialist do not see this system as a restriction of individual freedom, rather they see it as a truer form of democracy because they believe in the rights of society to vote on not only on political system, but also the economic goals that ought to be pursued generate beneficial (equal) outcomes for society.

Economic Systems and Morality

The way we approach economics is often as a system, we consider the production of goods and services, the market place, demand and supply and how many buyers and sellers interact to establish equilibrium process etc. We talk about the “economy” and GDP, inflation rates and the impact of interest rates and the balance of trade, etc. We often approach economics as a game with little reference to people, hence it is often claimed that economics is amoral. However as DeGeorge (2010) identifies this is a misnomer as economics is all about people and how they interact-people’s lives are affected by the way in which goods and services are made available and by the rules by which these exchanges occur. As such questions of fairness, justice and the benefits and harms that are derived must also be addressed.

$\\MELSTAFF\segonm$\Profile\NEW BUS ETHICS COURSE\CSR LAw\Courseware\1 Bus Ethics\Icons\Icons - additional\Video.png$ Justice as Fairness- The Rawls Approach

The series the Scholars Chair sees Emeritus Professor Dr. Joe Oppenheimer discusses and explains the Theory of Justice by John Rawls is a relatively easy to understand approach.

http://www.youtube.com/watch?v=5A9o0fFBtVs

$\\MELSTAFF\segonm$\Profile\NEW BUS ETHICS COURSE\CSR LAw\Courseware\1 Bus Ethics\Icons\Icons - additional\Video.png$ Libertarianism: Milton Friedman

Noble prize winning economists presents his views on Libertarianism and the issue of freedom and rights. This video provides an insight not only into his views, as one of the most influential thinkers of the 20th Century, but also provides an effective description of libertarianism and its views regarding individuals, rights and the role of government.

http://www.youtube.com/watch?v=JSumJxQ5oy4

Capitalism and Morality

Following the collapse of the former Soviet Union in the 1990s, the Capitalism has become the dominant economic system throughout the world. However to say that all forms of capitalism are the same is incorrect. Scandinavia and the US both have market based systems, but the levels of Government intervention, taxation and welfare differ markedly.

Most economic systems produce goods and services and use money as a means of exchange however there are three distinguishing features that differentiate capitalism form other systems

1. An available accumulation of industrial capital

Capitalism is rests on the availability of industrial wealth or capital to establish the means of production. Industrialisation is a necessary part of capitalism- however it is not concerned with where capital or wealth comes from or how it was accumulated.

Clearly the accumulation of capital wealth and its distribution raises moral questions-

2. Private ownership system of the means of production

There are several perspectives that relate to private ownership. Firstly ownership relates to the means of production- factories, farms, companies etc. not private property. Secondly not everyone owns or can own the means of production- typically it is in the hands of a minority of individuals and or firms, and the vast majority of people sell their labour to these firms and thus earn a salary or wage.

Wages are the dominant form of income that hen provides consumers with the ability to purchase the goods and services produced by the economy.

A number of moral issues present themselves when considering private ownership and capital. Firstly the recognition that a small number of people actually control the capital means that inequity occurs. Is it right that people should own resources and others not? Questions of how wealth is accumulated and how it is perpetuated relate to matters of justice. Secondly the majority of people being wage earners also raises questions about what is a just and fair wage, and the possibility of exploitation. Consider the example of a number of banks in Australia that have made record profits in recent years, yet continue to retrench workers- is this just and fair?

3. A free market system

The third and final characteristic is the existence of a free market. There are three requirements for a perfect free market- firstly the absence of government control and intervention and the absence of control by any group- this eliminates the possibility of oligopolies and monopolies. As a result prices and wages are determined by the interaction of supply and demand,

Secondly competition is the mechanism by which buyers and sellers both enter the market and establish prices and wages-Lastly there is no restriction on the movement of resources – they can move to whatever part of the economy that will generate return on investment.

Many moral questions arise from the concept of the free market- for example if competition- the laws of supply and demand determine prices- is this a true reflection of cost- is it a fair price- it’s based on the assumption of perfect knowledge, but is this possible and clearly of knowledge is not perfect and one party has more than another does this open up the possibility of people taking advantage over this. Competition is also mistakenly assumed to create win-win scenarios. By definition competition results in winners and losers, advantages and disadvantages. How these are determined and distributed again raises question related to fairness and justice. We also recognise that often prices are determined on the basis of information and knowledge which may not be reflective of reality. For example the northern Atlantic cod was almost fished to the point of extinction, yet the price of cod in the marketplace did not change.

Due to competition creating imbalances, winners and losers, it means that some individuals gain more power than others- thus the setting of prices and wages may be adversely affected. Does competition itself encourage people to be selfish and self-serving?

The Invisible Hand Concept

Many of the moral questions that can be raised about capitalism and the free market are countered with the concept of the “invisible hand.” This is a theory put forward by Scottish moral philosopher and economist Adam Smith in the 18th century, and is advanced by many economists as an explanation as to the supposed ethical or moral outcomes of the market.

Smith argued that self-interest on the part of individuals actually promotes the good of society, more so than when people consciously try to do good for society. Smith provides a calrifying example: “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

Essentially the invisible hand concepts rests on the fact that people want and need things, like food, shelter, transport etc., in order to survive. Clearly in a modern society a persona cannot be 100% self-sufficient- others realise this and know that by providing these goods and services to others they can make a profit. Self-interest then further drives this. According to the invisible hand theory, each of us, acting in our own self-interests, generates a demand for goods and services that compels others to deliver those goods and services in the most efficient manner so that they may be able to receive compensation from others and make a profit in doing so. In this process, resources are allocated in the most efficient manner, in contrast to a process that relies on a centrally planned system.

$\\MELSTAFF\segonm$\Profile\NEW BUS ETHICS COURSE\CSR LAw\Courseware\1 Bus Ethics\Icons\Icons - additional\Video.png$ Adam Smith and The Invisible Hand

This is a short video in which Professor James Otterson talks about the importance of Adam Smith, his two significant contributions that resulted in the emergence of political economic thought and the relative importance of the invisible hand and the division of labour to the development of economic activity.

https://www.youtube.com/watch?v=EBifN69gcKY

Social Contract and the Licence to Operate

As identified above, one of the critical characteristics of capitalism and the market system is that people offer their services as part of the production process and that in return they receive wages. These wages then can be used to purchase the gods and services that are produced by the economy. This is in effect a reciprocal economic relationship that is a critical factor in maintaining a sustainable economy. Without money people cannot buy goods and services.

However there is somewhat of a contradiction with this relationship and the concept of a free market where investment is free to travel to those parts of the market where returns will be higher- the free movement of capital. In many ways global agreements and the reduction of tariffs and barriers to trade are consistent with this notion. However, one must ask whether labour is just as free as capital to move from one economy to another? As an Australian am I allowed to move to the United States or Japan, or China and work within those economies?

In our third Unit we considered the moral responsibility of companies as artificial persons. Perhaps now a question should be what is the economic duty of an organisation to a society, given the need for people to be employed so as to participate in the market.

What is Society?

Rawls (1971) describes society as a ‘cooperative venture for mutual advantage’. Carroll and Buchholtz (2015) define a society as a community, nation or a broad grouping of people with a common traditions, values, institutions and collective interests and activities.

Rawls (1971) advances the shared concept of justice as a mechanism for binding individuals since ‘among individuals with disparate aims and purposes, a shared conception of justice establishes the bonds of civic friendship; the general desire for justice limits the pursuit of other ends. One may think of a public conception of justice as constituting the fundamental charter of a well-ordered human association’.

Social Contract

The social contract concept is used to explain the relationship between society and business (Shocker and Sethi, 1973). Mathews (1993, p. 26) explains the idea of social contract as follows: “Society (as a collection of individuals) provides corporations with their legal standing and attributes and the authority to own and use natural resources and to hire employees. Organisations draw on community resources and output both goods and services and waste products to the general environment. The corporation has no inherent rights to these benefits, and in order to allow their existence, society would expect the benefits to exceed the costs to society”.

The concept of a social contract is also linked to legitimacy theory (Deegan, 2002). Companies and other organisations exist at society’s will and are therefore have a duty to abide by society’s wishes at least to some degree. Organisations can then achieve legitimacy if society perceives the company to be operating in accordance with its prevailing norms and values.

Makela and Nasi (2009, p 154) state that in terms of social responsibilities, when making decisions concerning the surrounding society – e.g. downsizing and closing down operations – the company in question should take into consideration all stakeholders as parties to the social contract, or otherwise society might not consider the operations of the company legitimate.

The concept of social contract as described by Rawls (1971) suggests that organisations have implicit economic and social obligations to a society or nation when they are granted permission to establish an organisation or corporation. In this sense the licence to operate would be very different to that described above with an understanding of specific duties or obligations as part of the contract.

McDonald (2015) states that social contract theory proposes that an implied contract exists between a business and the state in which it operates regarding, rights, responsibilities and expectation of behaviour. The implied social contract, sometimes also called a licence to operate, is that the state allows a corporation to form and operate and pursue a profit, only if it does so ethically, obeying laws and increasing the social welfare of that society. The benefits to society are increase in welfare through the availability of goods and services and by compensation for employment.

In Unit 9, we will consider the concept of Corporate Social Responsibility in details. However two of the leading thinkers in the CSR domain, Archie Carrol and Prakesh Sethi agree that one of the obligations of business to a society is an economic one. These economic duties are considered as based on reciprocity, it would require organizations to not only provide goods and services to members of that society but also to offer employment and contribute to the supply side of the economy so that the citizens have disposable income that allows them to participate in the demand side of that same economy.

Rawls offers general conceptions of justice linked to social contract; one being that social and economic inequalities are to be arranged so that they are to the greatest benefit of the least advantaged and are attached to offices and positions open to all under conditions of fair equality of opportunity (Sterba, 1990). This would seem to suggest that a condition or expectation of social contract is that organisations are expected to employ people of that society. Economically this is necessary for the market to operate- or is it? Does a corporation have a moral duty to meet its social obligation?

Licence to Operate

The “licence or social licence to operate” is described as a community’s perception of the acceptability of a company and its operations (Thompson & Boutilier 2011). According to Wilburn and Wilburn (2011) the concept of a social licence to operate involves organisations securing free, prior and informed consent to operate in territories that belong or are associated with particular indigenous people. They further state that the concept in effect a voluntary one and is unclear in terms of whether consent needs to be sought only from a specific group, a specific individual, i.e. a recognised leader, or the ‘society’ as a whole.

Post et al., (2002) and Elkington, (1997) provide a more general interpretation suggesting that that organisations use strategic decision making to achieve a reduction of harms and create benefits to society so that it’s continued operation is acceptable to all parties involved. Both Prakash Sethi (1974) and Carroll (2002) maintain that an organisation’s basic social responsibilities are economic and legal, usually described as acting within the law and to provide goods and services to a society that provides a return on investment to shareholders and stakeholders. Based on these descriptions it would appear that the concept of a licence to operate does not contain any formal obligations but rather a series of perceptions of groups regarding the activities of an organisation.

$\\MELSTAFF\segonm$\Profile\NEW BUS ETHICS COURSE\CSR LAw\Courseware\1 Bus Ethics\Icons\Icons - core\Activity.png$ A Social Contract and Obligation to Whom?

Recently one of the major Australian Banks announced the biggest profit in Australian Financial Industry history, i.e. the biggest profit ever made by an Australian Bank. That same year they retrenched over 1500 bank employees including over 100 staff in Tasmania whose jobs would be outsourced to a call centre in India.

What is the social obligation of the bank to the Australian economy?

Is it violating its social licence by moving services it needs to provide to Australian consumers to another economy?

Would it make a difference if the bank also trading providing financial services in that foreign country?

Types of Justice

Buchholz, (1989, p. 36) describes three types of justice; distributive, compensatory and retributive, that can be used to describe the actions that are generated or rights that are deprived of an individual or an organization by a society for a wrong doing. Ferrell, Fraedrich and Ferrell (2015) provide a slightly different interpretation describing procedural and interactional justice in addition to distributive.

Distributive justice:

This form of justice is concerned with a fair distribution of society’s benefits and burdens. It addresses the goods and services a society has available, through the major institutions of government and business and how these should be distributed. We can see that many governments pass laws that are directed at redistributing forms of benefits to individuals that for particular reasons are excluded or deprived of the benefit. Many social welfare programs can be seen as such a form of justice- as is taxation whose purpose is primarily redistributive. The summation above of the three forms of economic justice essentially addresses the debate about distributive justice.

Compensatory justice:

This form of justice is concerned with finding a way of compensating one for what they have incurred a loss or when wronged by others. Thus in the court system, individuals and organisations may be fined for breaking laws or contracts and ordered to pay recompense for the “injury” sustained to another party as a result of their actions.

Retributive Justice:

This form of justice is concerned with the imposition of punishments and penalties such as the removal of rights or the ability to participate in a society, upon those who do wrong. Once again we see evidence of such justice in everyday society with individuals being sentenced to prison terms- in effect we deprive them of their right to freedom or liberty. It can also include penalties such as bankrupts being forbidden from holding some official positions in organisations, or individuals convicted of drink driving offences being banned from holding a license for a length of time.

Procedural Justice

Ferrell, Fraedrich and Ferrell (2015) identify this form of justice is concerned with the processes and activities that result in outcomes or consequences. It addresses the methods by which decisions are made and reached. It essentially advances that a just approach will emphasise the consistency of the decision making process, that it is open and participative involving those affected. They describe the organizational context and organizational decision making as the basis for procedural justice.

Interactional Justice

This form of justice is based on relationships and the treatment of others but within the organisational context. Ferrell, Fraedrich and Ferrell (2015) refer to concepts such as accuracy of information, respect for others and truthfulness between employers and employees.

$\\MELSTAFF\segonm$\Profile\NEW BUS ETHICS COURSE\CSR LAw\Courseware\1 Bus Ethics\Icons\Icons - core\Activity.png$ Justice and a civil society

Using the distinctions of Justice classify the following providing a reason for each.

a) The introduction of a new tax on high income earners

b) A judge orders an employer to re-employ an worker after ruling unfair dismissal

c) A drunk driver is given a 3 year gaol term for causing the death of a pedestrian

d) A person is banned from holding a company director position for 10 years due to bankruptcy

e) Two drug traffickers are executed in South East Asia

Prepare a brief summary of your views for discussion in class responses in the discussion board

$\\MELSTAFF\segonm$\Profile\NEW BUS ETHICS COURSE\CSR LAw\Courseware\1 Bus Ethics\Icons\Icons - additional\Reading.png$ Required Reading

Reading 1

Ferrell, O.C., Fraedrich, J., & Ferrell, L. (2015). Business Ethics Ethical Decision making and Cases, Cengage Learning, Stamford. Pp.166-167

This short section in Chapter 6 provides a definition of Justice and outlines three types of justice, distributive, procedural and interactional.

Additional Reading

Reading 2

De George, R. (2010). Moral Issues in Business, Pearson, Upper Saddle River. Chpt 4 pp 73-89 Chpt 7

·

The last pages on Chapter 4 introduce concepts of Justice and in particular Rawls two principles of Justice. Chapter 7 provides a detailed examination of the Justice and Fairness of different economic systems contrasting the capitalist and socialist approaches to the allocation of resources and the moral questions that arise in each.

$\\MELSTAFF\segonm$\Profile\NEW BUS ETHICS COURSE\CSR LAw\Courseware\1 Bus Ethics\Icons\Icons - additional\Reading.png$ Journal Readings

Journal Reading 1

Wooten. K.C (2009), Ethics and justice in new paradigm and postmodern organization development and change, in Richard W. Woodman, William A. Pasmore, Abraham B. (Rami) Shani (ed.) Research in Organizational Change and Development (Research in Organizational Change and Development, Vol 17 , pp.241 – 300

Available through Emerald: http://dx.doi.org/

This article presents focuses on change within organisations and the various approaches to organisational development that are said to create value for businesses. Components of distributive, procedural, and interactional justice are explained relative to change management programs generally, and to emergent techniques specifically. Case studies are presented as illustrations of “just” change

Journal Reading 2

Forsgren, M & Yamin, M. (2010),"A Commentary on Adam Smith and International Business", Multinational Business Review, Vol. 18, No 1 pp. 95 - 112

Available in Emerald: http://dx.doi.org/10.1108/1525383X201000006

This article examines Smith’s major works “An Inquiry into the Nature and Causes of Wealth of Nations” and “The Theory of Moral Sentiments.” The authors note that whilst Smith is usually advanced as the father of free market thought, an examination of what he actually wrote provides a slightly different perspective and that the evolution of today’s global economy and multi-nationals may not have been what Smith’s was advocating at all.

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MGMT20134 | Week 5 | Page 15

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