Business Ethics paper

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Bus iness eth ics

8t h e di t ion

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Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Will iam H. Shaw San Jose State Univers i ty

Bus iness eth ics

8t h e di t ion

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Printed in the United States of America 1 2 3 4 5 6 7 16 15 14 13 12

Business Ethics, Eighth Edition William H. Shaw

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v

Preface  ix

pa rt one | mor a l philosoph y a nd busine ss 1

cha pter 1 the nature of Mor al it y 1 Ethics  3 Moral  versus Nonmoral  Standards  5 Religion  and Morality  10 Ethical  Relativism  13 Having Moral  Principles  15 Morality  and Personal Values  19 Individual  Integrity  and Responsibility  20 Moral  Reasoning  24 Study Corner  30 Case 1.1: Made  in  the U.S.A.—Dumped  in  Brazil, Africa,  Iraq  .  .  .  31 Case 1.2:  Just Drop off  the  Key,  Lee  34 Case 1.3: The A7D Affair  37

cha pter 2 norMat iv e theor ies of e th ics 4 0 Consequentialist  and Nonconsequentialist Theories  42 Egoism  43 Utilitarianism  46 Kant’s  Ethics  53 other Nonconsequentialist  Perspectives  59 Utilitarianism once  More  66 Moral Decision Making: A  Practical Approach  68 Study Corner  70 Case 2.1:  Hacking  into  Harvard  71 Case 2.2: The  Ford  Pinto  74 Case 2.3:  Blood  for  Sale  77

cha pter 3 Just ice and econoMic d istr iBut ion 80 The Nature  of  Justice  83 The Utilitarian View  86 The  Libertarian Approach  90 Rawls’s Theory  of  Justice  97

contents

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vi CONTENTS

Study Corner  106 Case 3.1:  Eminent Domain  107 Case 3.2:  Battling  over  Bottled Water  109 Case 3.3:  Poverty  in America  111

pa rt t wo | a mer ic a n busine ss a nd its basis 114

cha pter 4 the nature of ca p ital isM 114 Capitalism  116 Key  Features  of  Capitalism  119 Two Arguments  for  Capitalism  121 Criticisms  of  Capitalism  125 Today’s  Economic Challenges  133 Study Corner  139 Case 4.1:  Hucksters  in  the  Classroom  140 Case 4.2:  Licensing  and  Laissez  Faire  142 Case 4.3: one Nation  under Walmart  144 Case 4.4: A New Work  Ethic?  147 Case 4.5:  Casino  Gambling  on Wall  Street  148

cha pter 5 corpor at ions 150 The  Limited-Liability  Company  152 Corporate Moral Agency  154 Rival Views  of  Corporate  Responsibility  158 Debating  Corporate Responsibility  164 Institutionalizing  Ethics within  Corporations  169 Study Corner  176 Case 5.1: Yahoo!  in China  177 Case 5.2: Drug Dilemmas  179 Case 5.3:  Levi  Strauss  at  Home  and Abroad  182 Case 5.4:  Free  Speech  or  False Advertising?  186 Case 5.5:  Charity  to  Scouts?  188

pa rt thr ee | busine ss a nd societ y 191

cha pter 6 consuMers 191 Product  Safety  193 other Areas  of  Business Responsibility  205 Deception  and Unfairness  in Advertising  214 The Debate  over Advertising  224

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CONTENTS      vii

Study Corner  227 Case 6.1:  Breast  Implants  229 Case 6.2:  Hot Coffee  at McDonald’s  231 Case 6.3:  Sniffing Glue Could  Snuff  Profits  232 Case 6.4:  Closing  the Deal  234 Case 6.5: The Rise  and  Fall  of  Four  Loko  236

cha pter 7 the en v ironMent 239 Business  and  Ecology  242 The  Ethics  of  Environmental  Protection  246 Achieving our  Environmental Goals  251 Delving  Deeper  into  Environmental  Ethics  256 Study Corner  264 Case 7.1:  Hazardous Homes  in Herculaneum  265 Case 7.2:  Poverty  and Pollution  267 Case 7.3: The  Fordasaurus  269 Case 7.4: The  Fight  over  the Redwoods  270 Case 7.5:  Palm oil  and  Its  Problems  273

pa rt Four | the orG a niZ ation a nd the people in it 276

cha pter 8 the Work pl ace (1) : Bas ic issues 276 Civil  Liberties  in  the Workplace  277 Hiring  283 Promotions  289 Discipline  and Discharge  291 Wages  295 Labor  Unions  298 Study Corner  307 Case 8.1: AIDS  in  the Workplace  308 Case 8.2: Web Porn  at Work  310 Case 8.3:  Speaking out  about Malt  311 Case 8.4:  Have  Gun, Will Travel  .  .  .  to Work  312 Case 8.5:  Union Discrimination  314

cha pter 9 the Work pl ace ( 2 ) : today’s challenges 316 organizational  Influence  in  Private  Lives  317 Testing  and Monitoring  323 Working Conditions  329

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viii CONTENTS

Redesigning Work  337 Study Corner  341 Case 9.1:  Unprofessional  Conduct?  342 Case 9.2: Testing  for  Honesty  344 Case 9.3:  She Snoops  to Conquer  346 Case 9.4:  Protecting  the Unborn  at Work  348 Case 9.5:  Swedish  Daddies  351

cha pter 10 Mor al choices fac ing eMpl oy ees 353 obligations  to  the  Firm  354 Abuse  of official  Position  358 Bribes  and Kickbacks  364 Gifts  and  Entertainment  368 Conflicting obligations  370 Whistle-Blowing  372 Self-Interest  and  Moral obligation  377 Study Corner  381 Case 10.1: Changing  Jobs  and  Changing  Loyalties  382 Case 10.2: Conflicting  Perspectives  on Conflicts  of  Interest  383 Case 10.3:  Inside Traders  or Astute  observers?  384 Case 10.4: The Housing Allowance  386 Case 10.5:  Ethically Dubious Conduct  388

cha pter 11 JoB d iscr iMinat ion 390 The Meaning  of  Job Discrimination  393 Evidence  of Discrimination  394 Affirmative Action: The  Legal  Context  399 Affirmative Action: The Moral  Issues  404 Comparable Worth  408 Sexual  Harassment  410 Study Corner  414 Case 11.1: Minority  Set-Asides  415 Case 11.2: Hoop Dreams  417 Case 11.3:  Raising  the Ante  419 Case 11.4: Consenting  to  Sexual  Harassment  420 Case 11.5:  Facial  Discrimination  423

SuggeStionS for further reading  425

noteS  429

index  449

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ix

It  is difficult  to  imagine an area of study that has greater  importance to society or greater relevance to  students than business ethics. As this text enters its eighth edition, business ethics has become a well- established academic  subject. Most  colleges and universities  offer  courses  in  it,  and  scholarly  interest  continues to grow.

Yet some people still scoff at the idea of business ethics, jesting that the very concept is an oxymoron.  To be sure, recent years have seen the newspapers filled with lurid stories of corporate misconduct and  felonious behavior by individual businesspeople, and many suspect that what the media report represents  only the proverbial tip of the iceberg. However, these scandals should prompt a reflective person not to  make fun of business ethics but rather to think more deeply about the nature and purpose of business in  our society and about the ethical choices individuals must inevitably make in their business and profes- sional lives.

Business  ethics  has  an  interdisciplinary  character.  Questions  of  economic  policy  and  business  practice  intertwine with  issues in politics, sociology, and organizational theory. Although business ethics  remains anchored in philosophy, even here abstract questions in normative ethics and political philosophy  mingle with analysis of practical problems and concrete moral dilemmas. Furthermore, business ethics is  not just an academic study but also an invitation to reflect on our own values and on our own responses to  the hard moral choices that the world of business can pose.

• • •

goal s, org ani z at ion, and topics Business Ethics  has  four goals:  to expose students  to  the  important moral  issues  that  arise  in  various  business contexts; to provide students with an understanding of the moral, social, and economic environ- ments within which those problems occur; to introduce students to the ethical and other concepts that are  relevant for resolving those problems; and to assist students in developing the necessary reasoning and  analytical skills for doing so. Although the book’s primary emphasis is on business, its scope extends to  related moral issues in other organizational and professional contexts.

The book has four parts. Part one, “Moral Philosophy and Business,” discusses the nature of morality  and presents the main theories of normative ethics and the leading approaches to questions of economic  justice. Part Two, “American Business and Its Basis,” examines the institutional foundations of business,  focusing on capitalism as an economic system and the nature and role of corporations in our society. Part  Three, “Business and Society,” concerns moral problems involving business, consumers, and the natural  environment. Part Four, “The organization and the People in It,” identifies a variety of ethical issues and  moral challenges that arise out of the interplay of employers and employees within an organization, includ- ing the problem of discrimination.

Case studies enhance the main text. These cases vary  in kind and  in  length, and are designed to  enable instructors and students to pursue further some of the issues discussed in the text and to analyze  them in more specific contexts. The case studies should provide a lively springboard for classroom discus- sions and the application of ethical concepts.

Business Ethics covers a wide range of  topics relevant  to  today’s world. Three of  these are worth  drawing particular attention to.

preface

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

x PrEfaCE

Business and Globalization The moral challenges facing business in today’s globalized world economy are well represented in the book  and seamlessly integrated into the chapters. For example, Chapter 1 discusses ethical relativism, Chapter  4 outsourcing and globalization, and Chapter 8 overseas bribery and the Foreign Corrupt Practices Act; and  there are international examples or comparisons throughout the book. Moreover, almost all the basic issues  discussed in the book (such as corporate responsibility, the nature of moral reasoning, and the value of the  natural world—to name just three) are as crucial to making moral decisions in an international business  context as they are to making them at home. In addition, cases 1.1, 2.3, 5.1, 5.2, 5.3, 6.3, 7.2, 7.5, 9.5,  and 10.4 deal explicitly with moral issues arising in today’s global economic system. 

The Environment Because of its ongoing relevance and heightened importance in today’s world, an entire chapter, Chapter  7,  is devoted  to  this  topic.  In particular,  it  highlights  recent environmental disasters,  the environmental  dilemmas and challenges we face, and their social and business costs, as well as the changing attitude of  business toward the environment and ecology.

Health and Health Care Far  from being a narrow academic pursuit,  the study of business ethics  is  relevant  to a wide  range of  important social issues—for example, to health and health care, which is currently the subject of much  discussion and debate in the United States.  Aspects of this topic are addressed in the text and developed in  the following cases: 2.3: Blood for Sale, 4.2: Licensing and Laissez Faire, 5.2: Drug Dilemmas, 6.1: Breast  Implants, 8.1: AIDS in the Workplace, and 9.4: Protecting the Unborn at Work. 

• • •

changes in th is ed it ion Your Textbook Instructors who have used the previous edition will find the organization and general content of the book  familiar. They will, however, also be struck by its fresh design and by the graphs, tables, photographs, and  other information that now supplement the pedagogical features introduced in previous editions.

Feedback from students and instructors suggests that readers benefit greatly not only from marginal  summaries and highlights but also from visual breaks, visual guidance, and visual presentation of data and  information. So, the new design was crafted to help readers navigate the text more easily, retain content  more effectively, and review and prepare for tests more successfully. In addition, the Study Corner now  also includes “For Further Reflection,” a set of open-ended questions intended to help students articulate  their own response to some of the issues discussed in the text. An updated Suggestions for Further Reading is intended to provide appropriate material for independent research by students on topics cov- ered in Business Ethics.

The text itself has been thoroughly revised. I have updated and reorganized material throughout the  book in order to enhance the clarity of its discussions and the accuracy of its treatment of both philosophi- cal and empirical issues. At all times the goal has been to provide a textbook that students will find clear,  understandable, and engaging.

Forty-nine  case  studies—more  than  ever  before—now  supplement  the  main  text.  of  the  cases  that are new to this edition, two relate to the financial and mortgage industries: Case 1.2, “Just Drop off  the Key, Lee,” broaches the ongoing foreclosure crisis while Case 4.5, “Casino Gambling on Wall Street,”  discusses one of the financial instruments involved in the recent financial meltdown. Case 4.1, “Hucksters 

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

PrEfaCE      xi

in the Classroom,” deals with commercial intrusion into schools. The ethics of sales is the focus of Case  6.4, “Closing the Deal,” while Case 6.5, “The Rise and Fall of Four Loko,” highlights the question of regu- lating consumer products on paternalistic grounds. Case 8.5, “Union Discrimination,” examines some of  the ethical issues posed by unions. The environment and the push and pull between business and envi- ronmentalists are well illustrated in Case 7.5, “Palm oil and Its Problems.” Case 9.5, “Swedish Daddies,”  shows how the sometimes conflicting demands of parenthood and work life challenge today’s employees  and employers. Cases 10.2, “Conflicting Perspectives on Conflicts of Interest,” and 10.3, “Inside Traders  or Astute observers?,” provide recent examples of some of the ethical struggles employees can confront.  Finally, the issue of comparable worth is the focus of Case 11.3, “Raising the Ante.”

Your Media Tools The Business Ethics CourseMate is new to this edition. It can be accessed by searching for this book on  CengageBrain.com. There you will find an array of online tools designed to reinforce theories and concepts  and help students to understand and better retain the book’s content, and to review and study for tests:

Self-Tests Tutorial Quizzes (with answers) Essays Flashcards Current Events Glossary  PowerPoint Slides Web Links

In addition to these CourseMate offerings, video tutorials will complement each chapter. Watching and  reflecting on these can help students improve their grades.

Finally, Global Business Ethics Watch exposes viewers to a wealth of online resources, from photo- graphs to videos and articles. Updated several times a day, the Global Business Ethics Watch is an ideal  one-stop site for classroom discussion and research projects for all things related to business ethics. You and  your students will have access to the latest information from trusted academic journals, news outlets, and  magazines. You also will receive access to statistics, primary sources, case studies, podcasts, and much more.

• • •

Ways of us ing the Book A course in business ethics can be taught in a variety of ways. Instructors have different approaches to  the subject, different intellectual and pedagogical goals, and different classroom styles. They emphasize  different themes and start at different places. Some of them may prefer to treat the foundational questions  of ethical theory thoroughly before moving on to particular moral problems; others reverse this priority. Still  other instructors frame their courses around the question of economic justice, the analysis of capitalism, or  the debate over corporate social responsibility. Some instructors stress individual moral decision making,  others social and economic policy.

Business Ethics permits teachers great flexibility in how they organize their courses. A wide range of  theoretical and applied issues are discussed; and the individual chapters, the major sections within them,  and the case studies are to a surprising extent self-contained. Instructors can thus teach the book in what- ever order they choose, and they can easily skip or touch lightly on some topics in order to concentrate on  others without loss of coherence.

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

xii PrEfaCE

• • •

acknoWledgMents I wish to acknowledge my great debt to the many people whose ideas and writing have influenced me over  the years. Philosophy is widely recognized to involve a process of ongoing dialogue. This is nowhere more  evident than in the writing of textbooks, whose authors can rarely claim that the ideas being synthesized,  organized,  and  presented  are  theirs  alone.  Without  my  colleagues,  without  my  students,  and  without  a  larger philosophical  community  concerned with business and ethics,  this book would not  have been  possible.

I particularly want to acknowledge my debt to Vincent Barry. Readers familiar with our textbook and  reader Moral Issues in Business1 will realize the extent to which I have drawn on material from that work.  Business Ethics is,  in effect, a revised and updated version of  the textbook portion of  that collaborative  work, and I am very grateful to Vince for permitting me to use our joint work here.

1William H.  Shaw and Vincent  Barry, Moral Issues in Business,  12th  ed.  (Belmont,  Calif.: Wadsworth/Cengage  Learning,  2013).

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

1

part one | mor al philosophy and business

Ch a p t er 1

The N aT ure of Mor a l iT y

sometimes the riCh and mighty fall. Take Kenneth Lay, for example. Convicted by a jury in 2006 of conspiracy and multiple counts of fraud, he had been chair- man and CEO of Enron until that once mighty company took a nose dive and crashed. Founded in the 1980s, Enron soon became a dominant player in the field of energy trading, grow- ing rapidly to become America’s seventh biggest company. Wall Street loves growth, and Enron was its darling, admired as dynamic, innovative, and—of course— profitable. Enron stock exploded in value, increasing 40 percent in a single year. The next year it shot up 58 percent and the year after that an unbelievable 89 percent. The fact that nobody could quite understand exactly how the company made its money didn’t seem to matter.

After Fortune magazine voted it “the most innovative company of the year” in 2000, Enron proudly took to calling itself not just “the world’s leading energy company” but also “the world’s lead- ing company.” But when Enron was later forced to declare bankruptcy—at the time the largest Chapter 11 filing in U.S. history—the world learned that its legendary financial prowess was illusory and the company’s success built on the sands of hype. And the hype continued to the end. Even with the com- pany’s financial demise fast approaching, Kenneth Lay was still recommending the company’s stock to its employees—at the

same time that he and other executives were cashing in their shares and bailing out.

Enron’s crash cost the retirement accounts of its employ- ees more than a billion dollars as the company’s stock fell from the stratosphere to only a few pennies a share. Outside investors lost even more. The reason Enron’s collapse caught investors by surprise—the company’s market value was $28 billion just two months before its bankruptcy—was that Enron

had always made its financial records and accounts as opaque as possible. It did this by creating a Byzantine financial structure of off-balance-sheet special- purpose entities—reportedly as many as 9,000—that were supposed to be separate and independent from the main company. Enron’s board of direc- tors condoned these and other dubious accounting practices and voted twice to permit executives to pursue personal interests that ran contrary to those of the company. When Enron was obliged

to redo its financial statements for one three-year period, its profits dropped $600 million and its debts increased $630 million.

Still, Enron’s financial auditors should have spotted these and other problems. After all, the shell game Enron was playing is an old one, and months before the company ran aground, Enron Vice President Sherron Watkins had warned Lay that

IntroductIon

the reason enron’s

collapse caught investors by surprise . . . was

that enron had always made its financial

records and accounts as opaque as possible.

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2      part one  moral philosophy and business2      part one  moral philosophy and business

the company could soon “implode in a wave of accounting scandals.” Yet both Arthur Andersen, Enron’s longtime outside auditing firm, and Vinson & Elkins, the company’s law firm, had routinely put together and signed off on various dubious finan- cial deals, and in doing so made large profits for themselves. Arthur Andersen, in particular, was supposed to make sure that the company’s public records reflected financial reality, but Andersen was more worried about its auditing and consulting fees than about its fiduciary responsibilities. Even worse, when the scandal began to break, a partner at Andersen organ- ized the shredding of incriminating Enron documents before investigators could lay their hands on them. As a result, the eighty-nine-year-old accounting firm was convicted of obstruct- ing justice. The Supreme Court later overturned that verdict on a technicality, but by then Arthur Andersen had already been driven out of business. (The year before Enron went under, by the way, the Securities and Exchange Commission fined Andersen $7 million for approving misleading accounts at Waste Management, and it also had to pay $110 million to settle a lawsuit for auditing work it did for Sunbeam before it, too, filed for bankruptcy. And when massive accounting fraud was later uncovered at WorldCom, it came out that the company’s auditor was—you guessed it—Arthur Andersen.)

Enron’s fall also revealed the conflicts of interest that threaten the credibility of Wall Street’s analysts—analysts who are compensated according to their ability to bring in and support investment banking deals. Enron was known in the industry as the “deal machine” because it generated so much

investment banking business—limited part- nerships, loans, and derivatives. That may explain why, only days before Enron filed bankruptcy, just two of the sixteen Wall Street analysts who covered the company recom- mended that clients sell the stock. The large banks that Enron did business with played a corrupt role, too, by helping manufacture its fraudulent financial statements. (Subsequent lawsuits have forced them to cough up some of their profits: Citibank, for example, had to pay Enron’s victimized shareholders $2 bil- lion.) But the rot didn’t stop there. Enron and Andersen enjoyed extensive political connec- tions, which had helped over the years to ensure the passage of a series of deregula-

tory measures favorable to the energy company. Of the 248 members of Congress sitting on the eleven House and Senate committees charged with investigating Enron’s collapse, 212 had received money from Enron or its accounting firm.1

Stories of business corruption and of greed and wrongdoing in high places have always fascinated the popular press, and media interest in business ethics has never been higher. But one should not be misled by the headlines and news reports. Not all moral issues in business involve giant corporations and their well-heeled executives, and few cases of business ethics are widely publicized. The vast majority of them involve the mundane, uncelebrated moral challenges that working men and women meet daily.

Although the financial shenanigans at Enron were compli- cated, once their basic outline is sketched, the wrongdoing is pretty easy to see: deception, dishonesty, fraud, disregarding one’s professional responsibilities, and unfairly injuring others for one’s own gain. But many of the moral issues that arise in business are complex and difficult to answer. For example:

How far must manufacturers go to ensure product safety? Must they reveal everything about a product, including any possible defects or shortcomings? At what point does acceptable exaggeration become lying about a product or a service? When does aggressive marketing become consumer manipulation? Is adver- tising useful and important or deceptive, misleading, and socially detrimental? When are prices unfair or exploitative?

enron’s stock price in u.s. dollars in late 2001, before its spectacular collapse

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chapter one  The naTure of moraliTy      3chapter one  The naTure of moraliTy      3

• • •

e Thics ethics (or moral philosophy) is a broad field of inquiry that addresses a fundamental query  that all of us, at least from time to time, inevitably think about—namely, how should I  live my life? That question, of course, leads to others, such as: What sort of person should  I strive to be? What values are important? What standards or principles should I live by?  exploring these issues immerses one in the study of right and wrong. among other things,  moral philosophers and others who think seriously about ethics want to understand the  nature of morality, the meaning of its basic concepts, the characteristics of good moral rea- soning, how moral judgments can be justified, and, of course, the principles or properties  that distinguish right actions from wrong actions. Thus, ethics deals with individual char- acter and with the moral rules that govern and limit our conduct. It investigates questions  of right and wrong, fairness and unfairness, good and bad, duty and obligation, and justice  and injustice, as well as moral responsibility and the values that should guide our actions.

You sometimes hear  it  said that  there’s a difference between a person’s ethics and  his or her morals. This can be confusing because what some people mean by saying that  something is a matter of ethics (as opposed to morals) is often what other people mean 

summary Ethics deals with

individual character and the moral rules that govern and limit

our conduct. It investigates questions

of right and wrong, duty and obligation,

and moral responsibility.

Are corporations obliged to help combat social prob- lems? What are the environmental responsibilities of business, and is it living up to them? Are pollution per- mits a good idea? Is factory farming morally justifiable?

May employers screen potential employees on the basis of lifestyle, physical appearance, or personality tests? What rights do employees have on the job? Under what conditions may they be disciplined or fired? What, if anything, must business do to improve work conditions? When are wages fair? Do unions promote the interests of workers or infringe their rights? When, if ever, is an employee morally required to blow the whistle?

May employees ever use their positions inside an organization to advance their own interests? Is insider trading or the use of privileged information immoral? How much loyalty do workers owe their companies? What say should a business have over the off-the-job activities of its employees? Do drug tests violate their right to privacy?

What constitutes job discrimination, and how far must business go to ensure equality of opportunity? Is affirmative action a matter of justice, or a poor idea? How should organizations respond to the problem of sexual harassment?

learning objeCtives

These questions typify business issues with moral significance. The answers we give to them are determined, in large part, by our moral standards—that is, by the moral principles and values we accept. What moral standards are, where they come from, and how they can be assessed are some of the concerns of this opening chapter. In particular, you will encounter the fol- lowing topics:

1. The nature, scope, and purpose of business ethics

2. The distinguishing features of morality and how it differs from etiquette, law, and professional codes of conduct

3. The relationship between morality and religion

4. The doctrine of ethical relativism and its difficulties

5. What it means to have moral principles; the nature of conscience; and the relationship between morality and self-interest

6. The place of values and ideals in a person’s life

7. The social and psychological factors that sometimes jeopardize an individual’s integrity

8. The characteristics of sound moral reasoning

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

4      part one  moral philosophy and business

by saying that it is a matter of morals (and not ethics). In fact, however, most people (and  most philosophers)  see no  real distinction between a person’s  “morals”  and a person’s  “ethics.” and  almost  everyone uses  “ethical”  and  “moral”  interchangeably  to describe  people we consider good and actions we consider right, and “unethical” and “immoral”  to designate bad people and wrong actions. This book follows that common usage.

Business and OrganizatiOnal ethics

The primary focus of this book is ethics as it applies to business. business ethics is the  study of what constitutes right and wrong, or good and bad, human conduct in a busi- ness context. For example, would it be right for a store manager to break a promise to a  customer and sell some hard-to-find merchandise to someone else, whose need for it is  greater? What, if anything, should a moral employee do when his or her superiors refuse  to look into apparent wrongdoing in a branch office? If you innocently came across secret  information about a competitor, would it be permissible for you to use it for your own  advantage?

recent business scandals have renewed the interest of business leaders, academics,  and society at large in ethics. For example, the association to advance collegiate Schools  of Business, which comprises all the top business schools, has introduced new rules on  including ethics  in  their  curricula,  and  the Business roundtable  recently unveiled an  initiative to train the nation’s ceos in the finer points of ethics. But an appreciation  of the importance of ethics for a healthy society and a concern, in particular, for what  constitutes ethical conduct in business go back to ancient times. The roman philosopher  cicero (106–43 bce), for instance, discussed the example, much debated at the time,  of an honest merchant  from alexandria who brings a  large stock of wheat to rhodes  where there is a food shortage. on his way there, he learns that other traders are setting  sail for rhodes with substantial cargos of grain. Should he tell the people of rhodes that  more wheat is on the way, or say nothing and sell at the best price he can? Some ancient  ethicists argued that although the merchant must declare defects in his wares as required  by law, as a vendor he is free—provided he tells no untruths—to sell his goods as profit- ably as he can. others, including cicero, argued to the contrary that all the facts must be  revealed and that buyers must be as fully informed as sellers.2

“Business” and “businessperson” are broad terms. a “business” could be a food truck  or a multinational corporation that operates in several countries. “Businessperson” could  refer to a street vendor or a company president responsible for thousands of workers and  millions of shareholder dollars. accordingly, the word business will be used here sim- ply to mean any organization whose objective is to provide goods or services for profit.  businesspeople are those who participate in planning, organizing, or directing the work  of business.

But this book takes a broader view as well because it is concerned with moral issues  that  arise  anywhere  that  employers  and  employees  come  together.  Thus,  it  addresses  organizational  ethics  as  well  as  business  ethics.  an  organization  is  a  group  of  people  working together to achieve a common purpose. The purpose may be to offer a product  or a service primarily for profit, as in business. But the purpose also could be health care,  as in medical organizations; public safety and order, as in law-enforcement organizations;  education, as in academic organizations; and so on. The cases and illustrations presented  in  this  book deal with moral  issues  and dilemmas  in both business  and nonbusiness  organizational settings.

summary Business ethics is the

study of what constitutes right and wrong (or good and

bad) human conduct in a business context.

Closely related moral questions arise in other

organizational contexts.

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chapter one  The naTure of moraliTy      5

people occasionally poke fun at the idea of business ethics, declaring that the term is  a contradiction or that business has no ethics. Such people take themselves to be worldly  and realistic. They think they have a down-to-earth idea of how things really work. In  fact, despite its pretense of sophistication, their attitude shows little grasp of the nature  of ethics and only a superficial understanding of the real world of business. reading this  book should help you comprehend how inaccurate and mistaken their view is.

• • •

Mor al V ersus NoNMor al sTaNda rds Moral questions differ from other kinds of questions. Whether the old computer in your  office can copy a pirated DVD is a factual question. By contrast, whether you should  copy the DVD is a moral question. When we answer a moral question or make a moral  judgment,  we  appeal  to  moral  standards.  These  standards  differ  from  other  kinds  of  standards.

Wearing shorts and a tank top to a formal dinner party is boorish behavior. Writing  an essay that is filled with double negatives or lacks subject-verb agreement violates the  basic conventions of proper language usage. photographing someone at night without  the flash turned on is poor photographic technique. In each case a standard is violated— fashion,  grammatical,  technical—but  the  violation  does  not  pose  a  serious  threat  to  human well-being.

moral standards are  different  because  they  concern  behavior  that  is  of  serious  consequence to human welfare, that can profoundly injure or benefit people.3 The con- ventional moral norms against lying, stealing, and killing deal with actions that can hurt  people. and the moral principle that human beings should be treated with dignity and  respect uplifts the human personality. Whether products are healthful or harmful, work  conditions safe or dangerous, personnel procedures biased or fair, privacy respected or  invaded––these are also matters that seriously affect human well-being. The standards  that govern our conduct in these areas are moral standards.

a  second  characteristic  follows  from  the  first.  Moral  standards  take  priority  over other standards, including self-interest. Something that morality condemns—for  instance, the burglary of your neighbor’s home—cannot be justified on the nonmoral  grounds  that  it would be a  thrill  to do  it or  that  it would pay off handsomely. We  take moral standards to be more important than other considerations in guiding our  actions.

a third characteristic of moral standards is that their soundness depends on the ade- quacy of the reasons that support or justify them. For the most part, fashion standards  are set by clothing designers, merchandisers, and consumers; grammatical standards by  grammarians and students of language; technical standards by practitioners and experts  in the field. Legislators make laws, boards of directors make organizational policy, and  licensing boards establish standards for professionals. In those cases, some authoritative  body is the ultimate validating source of the standards and thus can change the standards  if it wishes. Moral standards are not made by such bodies. Their validity depends not  on official fiat but rather on the quality of the arguments or the reasoning that supports  them. exactly what constitutes adequate grounds or justification for a moral standard is 

Moral standards concern behavior that seriously affects human well-being.

Moral standards take priority over other standards.

The soundness of moral standards depends on the adequacy of the reasons that support them.

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

6      part one  moral philosophy and business

a debated question, which, as we shall see in chapter 2, underlies disagreement among  philosophers over which specific moral principles are best.

although these three characteristics set moral standards apart from other standards,  it is useful to discuss more specifically how morality differs from three things with which  it is sometimes confused: etiquette, law, and professional codes of ethics.

MOrality and etiquette

etiquette refers to the norms of correct conduct in polite society or, more generally, to  any special code of social behavior or courtesy. In our society, for example, it is considered  bad etiquette to chew with your mouth open or to pick your nose when talking to some- one; it is considered good etiquette to say “please” when requesting and “thank you” when  receiving, and to hold a door open for someone entering immediately behind you. Good  business  etiquette  typically  calls  for writing  follow-up  letters  after meetings,  returning  phone calls, and dressing appropriately. It is commonplace to judge people’s manners as  “good” or “bad” and the conduct that reflects them as “right” or “wrong.” “Good,” “bad,”  “right,” and “wrong” here simply mean socially appropriate or socially inappropriate. In  these contexts, such words express judgments about manners, not about ethics.

The rules of etiquette are prescriptions for socially acceptable behavior. If you violate  them, you’re likely to be considered ill-mannered, impolite, or even uncivilized, but not  necessarily immoral. If you want to fit in, get along with others, and be thought well  of by them, you should observe the common rules of politeness or etiquette. however,  what’s  considered  correct  or  polite  conduct—for  example,  when  greeting  an  elderly  person, when using your knife and  fork, or when determining how close  to  stand  to  someone you’re conversing with—can change over time and vary from society to society.

although rules of etiquette are generally nonmoral in character, violations of those  rules can have moral implications. For example, the male boss who refers to female sub- ordinates as “honey” or “doll” shows bad manners. If such epithets diminish the worth  of female employees or perpetuate sexism, then they also raise moral issues concerning  equal treatment and denial of dignity to human beings. More generally, rude or impolite  conduct can be offensive, and it may sometimes fail to show the respect for other persons  that morality requires of us. For this reason, it is important to exercise care, in business  situations and elsewhere, when dealing with unfamiliar customs or people from a differ- ent culture.

Scrupulous observance of rules of etiquette, however, does not make a person moral.  In fact, it can sometimes camouflage ethical issues. In some parts of the United States  fifty or so years ago, it was considered bad manners for blacks and whites to eat together.  however, those who obeyed this convention were not acting in a morally desirable way.  In the 1960s, black and white members of the civil rights movement sought to dramatize  the injustice that  lay behind this rule by sitting together  in luncheonettes and restau- rants. although judged at the time to lack good manners, they thought that this was a  small price to pay for exposing the unequal treatment and human degradation underly- ing this rule of etiquette.

MOrality and law

Before distinguishing between morality and law,  let’s examine the term  law. Basically,  there are four kinds of law: statutes, regulations, common law, and constitutional law.

summary We appeal to moral standards when we

answer a moral question or make a

moral judgment. Three characteristics of moral standards

distinguish them from other kinds of

standards.

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chapter one  The naTure of moraliTy      7

statutes  are  laws enacted by  legislative bodies. For example,  the  law  that defines  and prohibits reckless driving on the highway is a statute. congress and state legislatures  enact statutes. (Laws enacted by local governing bodies such as city councils are usually  termed ordinances.) Statutes make up a large part of the law and are what many of us  mean when we speak of “laws.”

Limited in their time and knowledge,  legislatures often set up boards or agencies  whose functions include issuing detailed regulations covering certain kinds of conduct— administrative regulations. For example, state legislatures establish licensing boards to  formulate regulations for the licensing of physicians and nurses. as long as these regula- tions do not exceed the board’s statutory powers and do not conflict with other kinds of  law, they are legally binding.

Common law refers  to  the  body  of  judge-made  law  that  first  developed  in  the  english-speaking world centuries ago when there were few statutes. courts frequently  wrote opinions  explaining  the bases of  their decisions  in  specific  cases,  including  the  legal principles those decisions rested on. each of these opinions became a precedent for  later decisions in similar cases. The massive body of precedents and legal principles that  accumulated over the years is collectively referred to as “common law.” Like administra- tive regulations, common law is valid if it harmonizes with statutory law and with still  another kind: constitutional law.

Constitutional law refers to court rulings on the requirements of the constitution  and the constitutionality of legislation. The U.S. constitution empowers the courts to  decide whether laws are compatible with the constitution. State courts may also rule on  the constitutionality of state laws under state constitutions. although the courts cannot  make laws, they have far-reaching powers to rule on the constitutionality of  laws and  to declare them invalid if they conflict with the constitution. In the United States, the  Supreme court has the greatest judiciary power and rules on an array of cases, some of  which bear directly on the study of business ethics.

people sometimes confuse legality and morality, but they are different things. on one  hand, breaking the law is not always or necessarily immoral. on the other hand, the legality  of an action does not guarantee that it is morally right. Let’s consider these points further.

1. an action can be illegal but morally right. For example, helping a Jewish family to  hide from the nazis was against German law in 1939, but it would have been a mor- ally admirable thing to have done. of course, the nazi regime was vicious and evil.  By contrast,  in a democratic society with a basically  just  legal order, the fact that  something is illegal provides a moral consideration against doing it. For example,  one moral reason for not burning trash in your backyard is that it violates an ordi- nance that your community has voted in favor of. Some philosophers believe that  sometimes the illegality of an action can make it morally wrong, even if the action  would otherwise have been morally acceptable. But even if they are right about that,  the  fact  that  something  is  illegal  does  not  trump  all  other  moral  considerations.  nonconformity to law is not always immoral, even in a democratic society. There  can be circumstances where, all things considered, violating the law is morally per- missible, perhaps even morally required.

probably no one in the modern era has expressed this point more eloquently  than Dr. Martin Luther King, Jr. confined in the Birmingham, alabama, city jail  on charges of parading without a permit, King penned his now famous “Letter from 

Legality should not be confused with morality. Breaking the law isn’t always or necessarily immoral, and the legality of an action doesn’t guarantee its morality.

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

8      part one  moral philosophy and business

Birmingham Jail” to eight of his fellow clergymen who had published a statement  attacking King’s unauthorized protest of racial segregation as unwise and untimely.  King wrote:

all segregation statutes are unjust because segregation distorts the soul and damages  the personality. It gives the segregator a false sense of superiority and the segregated  a false sense of inferiority. Segregation, to use the terminology of the Jewish philosopher  Martin  Buber,  substitutes  an  “I-it”  relationship  for  an  “I-thou”  relationship  and  ends up relegating persons to the status of things. hence segregation is not only politi- cally, economically, and sociologically unsound, it is morally wrong and sinful. . . .  Thus it is that I can urge men to obey the 1954 decision of the Supreme court,* for  it is morally right; and I can urge them to disobey segregation ordinances, for they  are morally wrong.4

2. an action that is legal can be morally wrong. For example, it may have been per- fectly legal for the chairman of a profitable company to lay off 125 workers and use  three-quarters of the money saved to boost his pay and that of the company’s other  top managers,5 but the morality of his doing so is open to debate.

or, to take another example, suppose that you’re driving to work one day and  see an accident victim sitting on the side of the road, clearly in shock and needing  medical assistance. Because you know first aid and are in no great hurry to get to  your destination,  you could  easily  stop  and assist  the person. Legally  speaking,  though, you are not obligated  to  stop and render aid. Under common  law,  the  prudent thing would be to drive on, because by stopping you could thus  incur  legal liability if you fail to exercise reasonable care and thereby injure the person.  Many  states  have  enacted  so-called Good Samaritan  laws  to provide  immunity  from damages to those rendering aid (except for gross negligence or serious mis- conduct). But in most states, the law does not oblige people to give such aid or  even to call an ambulance. Moral theorists would agree, however, that if you sped  away without helping or even calling for help, your action might be perfectly legal  but would be morally suspect. regardless of the law, such conduct would almost  certainly be wrong.

What then may we say about the relationship between law and morality? to a signif- icant extent, law codifies a society’s customs, ideals, norms, and moral values. changes in  law tend to reflect changes in what a society takes to be right and wrong, but sometimes  changes in the law can alter people’s ideas about the rightness or wrongness of conduct.  however, even if a society’s laws are sensible and morally sound, it is a mistake to see  them as sufficient to establish the moral standards that should guide us. The law cannot  cover all possible human conduct, and in many situations it is too blunt an instrument  to provide adequate moral guidance. The law generally prohibits egregious affronts to a  society’s moral standards and in that sense is the “floor” of moral conduct, but breaches  of moral conduct can slip through cracks in that floor.

summary Morality must be

distinguished from etiquette (rules for

well-mannered behavior), from law

(statutes, regulations, common law, and

constitutional law), and from professional

codes of ethics (the special rules governing

the members of a profession).

*In Brown v. Board of Education of Topeka  (1954),  the  Supreme court  struck down  the   half-century-old  “separate but equal doctrine,” which permitted racially segregated schools as long as comparable quality was  maintained.

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

chapter one  The naTure of moraliTy      9

PrOfessiOnal cOdes

Somewhere  between  etiquette  and  law  lie  professional codes of ethics.  These  are  the  rules  that  are  supposed  to govern  the conduct of members of  a given profession.  adhering to these rules is a required part of membership in that profession. Violation  of a professional code may result in the disapproval of one’s professional peers and, in  serious cases, loss of one’s license to practice that profession. Sometimes these codes are  unwritten and are part of the common understanding of members of a particular profes- sion—for example,  that professors  should not date  their  students.  In other  instances,  these codes or portions of them may be written down by an authoritative body so they  may be better taught and more efficiently enforced.

These written rules are sometimes so vague and general as to be of little value, and  often they amount to little more than self-promotion by the professional organization.  The same is frequently true when industries or corporations publish statements of their  ethical standards. In other cases—for example, with attorneys—professional codes can  be very specific and detailed. It is difficult to generalize about the content of professional  codes of ethics, however, because  they  frequently  involve a mix of purely moral  rules  (for example, client confidentiality), of professional etiquette (for example, the billing  of services to other professionals), and of restrictions intended to benefit the group’s eco- nomic interests (for example, limitations on price competition).

Given their nature, professional codes of ethics are neither a complete nor a com- pletely reliable guide to one’s moral obligations. not all the rules of a professional code  are purely moral in character, and even when they are, the fact that a rule is officially  enshrined as part of the code of a profession does not guarantee that it is a sound moral  principle. as a professional, you must take seriously the injunctions of your profession,  but you still have the responsibility to critically assess those rules for yourself.

You come upon this scene—the car is smoking, and it is clear that an accident just took place. In most states, you are not legally obligated to stop and offer help to the victims.

Re ch

ita n

So rin

/ S hu

tte rs

to ck

.co m

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10      part one  moral philosophy and business

regarding those parts of the code that concern etiquette or financial matters, bear in  mind that by joining a profession you are probably agreeing, explicitly or implicitly, to  abide by those standards. assuming that those rules don’t require morally impermissible  conduct, then consenting to them gives you some moral obligation to follow them. In  addition, for many, living up to the standards of one’s chosen profession is an important  source of personal satisfaction. Still, you must be alert to situations in which professional  standards  or  customary  professional  practice  conflicts  with  ordinary  ethical  require- ments. adherence to a professional code does not exempt your conduct from scrutiny  from the broader perspective of morality.

where dO MOral standards cOMe frOM?

So far you have seen how moral standards are different from various nonmoral standards,  but you probably wonder about the source of those moral standards. Most, if not all,  people have certain moral principles or a moral code that they explicitly or implicitly  accept.  Because  the  moral  principles  of  different  people  in  the  same  society  overlap,  at least in part, we can also talk about the moral code of a society, meaning the moral  standards shared by its members. how do we come to have certain moral principles and  not others? obviously, many things influence what moral principles we accept: our early  upbringing, the behavior of those around us, the explicit and implicit standards of our  culture, our own experiences, and our critical reflections on those experiences.

For  philosophers,  though,  the  central  question  is  not  how  we  came  to  have  the  particular principles we have. The philosophical issue is whether those principles can be  justified. Do we simply take for granted the values of those around us? or, like Martin  Luther King, Jr., are we able to think independently about moral matters? By analogy,  we pick up our nonmoral beliefs  from all  sorts of  sources: books,  conversations with  friends,  movies,  various  experiences  we’ve  had.  What  is  important,  however,  is  not  how we acquired the beliefs we have, but whether or to what extent those beliefs—for  example, that women are more emotional than men or that telekinesis is possible—can  withstand critical scrutiny. Likewise, ethical theories attempt to justify moral standards  and ethical beliefs. The next chapter examines some of the major theories of normative  ethics. It looks at what some of the major thinkers in human history have argued are the  best-justified standards of right and wrong.

But first we need to consider the relationship between morality and religion on the  one hand and between morality and society on the other. Some people maintain that  morality just boils down to religion. others have argued for the doctrine of ethical rela- tivism, which says that right and wrong are only a function of what a particular society  takes to be right and wrong. Both those views are mistaken.

• • •

rel ig ioN a Nd Mor al iT y any religion provides its believers with a worldview, part of which involves certain moral  instructions, values, and commitments. The Jewish and christian traditions,  to name  just two, offer a view of humans as unique products of a divine intervention that has  endowed  them with  consciousness  and  an  ability  to  love. Both  these  traditions posit 

You should take seriously the code that governs your

profession, but you still have a

responsibility to assess its rules for

yourself.

For philosophers, the important issue is

not where our moral principles came

from, but whether they can be justified.

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chapter one  The naTure of moraliTy      11

creatures who stand midway between nature and spirit. on one hand, we are finite and  bound to earth, not only capable of wrongdoing but also born morally flawed (original  sin). on the other, we can transcend nature and realize infinite possibilities.

primarily because of the influence of Western religion, many americans and others  view themselves as beings with a supernatural destiny, as possessing a life after death,  as being immortal. one’s purpose in life is found in serving and loving God. For the  christian, the way to serve and love God is by emulating the life of Jesus of nazareth.  In  the  life  of  Jesus,  christians  find  an  expression  of  the  highest  virtue—love.  They  love when they perform selfless acts, develop a keen social conscience, and realize that  human beings are creatures of God and therefore intrinsically worthwhile. For the Jew,  one serves and loves God chiefly through expressions of justice and righteousness. Jews  also develop  a  sense of honor derived  from a  commitment  to  truth, humility, fidel- ity, and kindness. This commitment hones their sense of responsibility to family and  community.

religion, then, involves not only a formal system of worship but also prescriptions  for  social  relationships.  one  example  is  the  mandate  “Do  unto  others  as  you  would  have them do unto you.” termed the “Golden rule,” this injunction represents one of  humankind’s highest moral ideals and can be found in essence in all the great religions of  the world:

Good people proceed while considering that what is best for others is best for  themselves. (Hitopadesa, hinduism)

Thou shalt love thy neighbor as thyself. (Leviticus 19:18, Judaism)

Therefore all things whatsoever ye would that men should do to you, do ye even  so to them. (Matthew 7:12, christianity)

hurt not others with that which pains yourself. (Udanavarga 5:18, Buddhism)

What you do not want done to yourself, do not do to others. (Analects 15:23,  confucianism)

no one of you is a believer until he loves for his brother what he loves for him- self. (Traditions, Islam)

although  inspiring,  such  religious  ideals  are  very  general  and  can  be  difficult  to  translate  into  precise  policy  injunctions.  religious  bodies,  nevertheless,  occasionally  articulate positions on more specific political, educational, economic, and medical issues,  which help mold public opinion on matters  as diverse as  abortion,  the environment,  national defense, and the ethics of scientific research. roman catholicism, in particular,  has a rich history of formally applying its core values to the moral aspects of industrial   relations and economic life. pope John paul II’s encyclical Centesimus Annus, the national  conference of catholic Bishops’ pastoral letter Economic Justice for All on catholic social  teaching and the U.S. economy, and the pontifical council for Social communication’s  reports on advertising and on ethics and the Internet stand in that  tradition––as does  pope Benedict XVI’s 2007 critique of the growing trend for companies to rely on short- term job contracts, which in his view undermines the stability of society and prevents  young people from building families.6

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12      part one  moral philosophy and business

MOrality needn’t rest On religiOn

Many people believe that morality must be based on religion, either in the sense that  without religion people would have no incentive to be moral or in the sense that only  religion can provide moral guidance. others contend that morality is based on the com- mands of God. none of these claims is convincing.

First, although a desire to avoid hell and to go to heaven may prompt some of us  to act morally, this is not the only reason or even the most common reason that people  behave morally. often we act morally out of habit or just because that is the kind of per- son we are. It would simply not occur to most of us to swipe an elderly lady’s purse, and  if the idea did occur to us, we wouldn’t do it because such an act simply doesn’t fit with  our personal standards or with our concept of ourselves. We are often motivated to do  what is morally right out of concern for others or just because it is right. In addition, the  approval of our peers, the need to appease our conscience, and the desire to avoid earthly  punishment may all motivate us to act morally. Furthermore, atheists generally live lives  as moral and upright as those of believers.

Second, the moral instructions of the world’s great religions are general and im precise:  They do not  relieve us of  the necessity of engaging  in moral  reasoning ourselves. For  example, the Bible says, “Thou shall not kill.” Yet christians disagree among themselves  over the morality of fighting in wars, of capital punishment, of killing in self-defense, of  slaughtering animals, of abortion and euthanasia, and of allowing foreigners to die from  famine because we have not provided them with as much food as we might have. The  Bible does not provide unambiguous solutions to these moral problems, so even believers  must engage in moral philosophy if they are to have intelligent answers. on the other  hand, there are lots of reasons for believing that, say, a cold-blooded murder motivated  by greed is immoral. You don’t have to believe in a religion to figure that out.

Third, although some theologians have advocated the divine command theory— that if something is wrong (like killing an innocent person for fun), then the only reason  it  is wrong  is  that God  commands us not  to  do  it—many  theologians  and  certainly  most philosophers would reject this view. They would contend that if God commands  human beings not to do something, such as commit rape, it is because God sees that rape  is wrong, but it is not God’s forbidding rape that makes it wrong. The fact that rape is  wrong is independent of God’s decrees.

Most believers think not only that God gives us moral instructions or rules but also  that God has moral reasons for giving them to us. according to the divine command  theory, this would make no sense. In this view, there is no reason that something is right  or wrong, other than the fact that it is God’s will. all believers, of course, believe that  God is good and that God commands us to do what is right and forbids us to do what is  wrong. But this doesn’t mean, say critics of the divine command theory, that it is God’s  saying so that makes a thing wrong, any more than it is your mother’s telling you not to  steal that makes it wrong to steal.

all this is simply to argue that morality is not necessarily based on religion in any  of these three senses. That religion influences the moral standards and values of most of  us is beyond doubt. But given that religions differ in their moral beliefs and that even  members of the same faith often disagree on moral matters, you cannot justify a moral  judgment simply by appealing to religion—for that will only persuade those who already  agree  with  your  particular  interpretation  of  your  particular  religion.  Besides,  most   religions hold that human reason is capable of understanding what is right and wrong, 

The idea that morality must be

based on religion can be interpreted in

three different ways, none of which is very

plausible.

summary Morality is not

necessarily based on religion. Although we draw our moral beliefs from many sources, for philosophers the issue

is whether those beliefs can be justified.

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

chapter one  The naTure of moraliTy      13

so it is human reason to which you will have to appeal in order to support your ethical  principles and judgments.

• • •

e Thical rel aT iV isM Some people do not believe  that morality boils down to  religion but  rather  that  it  is  merely a function of what a particular society happens to believe. This view is called ethi- cal relativism, the theory that what is right is determined by what a culture or society  says is right. What is right in one place may be wrong in another, because the only crite- rion for distinguishing right from wrong—and so the only ethical standard for judging  an action—is the moral system of the society in which the act occurs.

abortion, for example, is condemned as immoral in catholic Ireland but is prac- ticed as a morally neutral form of birth control in Japan. according to the ethical relativ- ist, then, abortion is wrong in Ireland but morally permissible in Japan. The relativist is  not saying merely that the Irish believe abortion is abominable and the Japanese do not;  that is acknowledged by everyone. rather, the ethical relativist contends that abortion  is immoral in Ireland because the Irish believe it to be immoral and that it is morally  permissible in Japan because the Japanese believe it to be so. Thus, for the ethical relativ- ist there is no absolute ethical standard independent of cultural context, no criterion of  right and wrong by which to judge other than that of particular societies. In short, what  morality requires is relative to society.

Those who endorse ethical relativism point to the apparent diversity of human values  and the multiformity of moral codes to support their case. From our own cultural per- spective, some seemingly immoral moralities have been adopted. polygamy, pedophilia,  stealing, slavery, infanticide, and cannibalism have all been tolerated or even encouraged  by the moral system of one society or another. In light of this fact, the ethical relativist  believes that there can be no non-ethnocentric standard by which to judge actions.

Some thinkers believe that the moral differences between societies are smaller and  less significant than they appear. They contend that variations in moral standards reflect  differing factual beliefs and differing circumstances rather than fundamental differences in  values. But suppose they are wrong about this matter. The relativist’s conclusion still does  not follow. a difference of opinion among societies about right and wrong no more proves  that none of the conflicting beliefs is true or superior to the others than the diversity of  viewpoints expressed in a college seminar establishes that there is no truth. In short, disa- greement in ethical matters does not imply that all opinions are equally correct.

Moreover,  ethical  relativism has  some unsatisfactory  implications. First,  it under- mines any moral criticism of the practices of other societies as long as their actions con- form to their own standards. We cannot say that slavery in a slave society like that of the  american South 160 years ago was immoral and unjust as long as that society held it to  be morally permissible.

Second, and closely related, is the fact that for the relativist there is no such thing as  ethical progress. although moralities may change, they cannot get better or worse. Thus,  we cannot say that moral standards today are more enlightened than were moral stand- ards in the Middle ages.

Ethical disagreement does not imply that all opinions are equally correct.

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

14      part one  moral philosophy and business

Third,  from the relativist’s point of view,  it makes no sense for people to criticize  principles or practices  accepted by  their  own  society. people  can be  censured  for not  living up to their society’s moral code, but that is all. The moral code itself cannot be  criticized because whatever a society takes to be right really is right for it. reformers who  identify injustices in their society and campaign against them are only encouraging peo- ple to be immoral—that is, to depart from the moral standards of their society—unless  or until the majority of the society agrees with the reformers. The minority can never be  right in moral matters; to be right it must become the majority.

The ethical relativist is correct to emphasize that in viewing other cultures we should  keep an open mind and not simply dismiss alien social practices on the basis of our own  cultural prejudices. But the relativist’s theory of morality doesn’t hold up. The more care- fully we examine it, the less plausible it becomes. There is no good reason for saying that  the majority view on moral issues is automatically right, and the belief that it is auto- matically right has unacceptable consequences.

relativisM and the “gaMe” Of Business

In his essay “Is Business Bluffing ethical?” albert carr argues that business, as practiced  by  individuals  as well  as by  corporations, has  the  impersonal  character of  a game—a  game  that  demands  both  special  strategy  and  an  understanding  of  its  special  ethical  standards.7 Business has  its own norms and rules  that differ  from those of  the rest of  society. Thus, according to carr, a number of things that we normally think of as wrong  are really permissible in a business context. his examples include conscious misstatement  and concealment of pertinent facts in negotiation, lying about one’s age on a résumé,  deceptive packaging, automobile companies’ neglect of car safety, and utility companies’  manipulation of regulators and overcharging of electricity users. he draws an analogy  with poker:

poker’s own brand of ethics is different from the ethical ideals of civilized human rela- tionships. The game calls for distrust of the other fellow. It ignores the claim of friend- ship.  cunning  deception  and  concealment  of  one’s  strength  and  intentions,  not  kindness  and openheartedness,  are  vital  in poker. no one  thinks  any  the worse of  poker on that account. and no one should think any the worse of the game of business  because its standards of right and wrong differ from the prevailing traditions of moral- ity in our society.8

What carr is defending here is a kind of ethical relativism: Business has its own moral  standards, and business actions should be evaluated only by those standards.

one  can  argue  whether  carr  has  accurately  identified  the  implicit  rules  of  the  business world (for example,  is misrepresentation on one’s résumé really a permissible  move in the business game?), but let’s put that issue aside. The basic question is whether  business is a separate world to which ordinary moral standards don’t apply. carr’s thesis  assumes that any special activity following its own rules is exempt from external moral  evaluation, but as a general proposition this  is unacceptable. The Mafia,  for example,  has an elaborate code of conduct, accepted by the members of the rival “families.” For  them, gunning down a competitor or terrorizing a local shopkeeper may be a strategic  move in a competitive environment. Yet we rightly refuse to say that gangsters cannot  be criticized for following their own standards. normal business activity is a world away  from gangsterism, but the point still holds. any specialized activity or practice will have 

summary Ethical relativism is the theory that right and

wrong are determined by what one’s society

says is right and wrong. There are many

problems with this theory. Also dubious is

the notion that business has its own

morality, divorced from ordinary ideas of right

and wrong.

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

chapter one  The naTure of moraliTy      15

its own distinctive rules and procedures, but the morality of those rules and procedures  can still be evaluated.

Moreover,  carr’s  poker  analogy  is  itself  weak.  For  one  thing,  business  activity  can  affect  others—such  as  consumers—who have not  consciously  and  freely  chosen  to play  the “game.” Business is indeed an activity involving distinctive rules and customary ways  of doing things, but it is not really a game. It is the economic basis of our society, and we  all have an interest in the goals of business (in productivity and consumer satisfaction, for  instance) and in the rules business follows. Why should these be exempt from public evalu- ation and assessment? Later chapters return to the question of what these goals and rules  should be. But to take one simple point, note that a business/economic system that permits,  encourages, or tolerates deception will be less efficient (that is, work less well) than one in  which the participants have fuller knowledge of the goods and services being exchanged.

In sum, by divorcing business  from morality, carr misrepresents both. he incor- rectly treats the standards and rules of everyday business activity as if they had nothing to  do with the standards and rules of ordinary morality, and he treats morality as something  that we give lip service to on Sundays but that otherwise has no influence on our lives.

• • •

haV iNg Mor al Pr iNciPles at some time in their lives most people pause to reflect on their own moral principles and  on the practical implications of those principles, and they sometimes think about what  principles people  should have or which moral  standards  can be best  justified.  (Moral  philosophers themselves have defended different moral standards; chapter 2 discusses  these various theories.) When a person accepts a moral principle, when that principle is  part of his or her personal moral code, then naturally the person believes the principle is  important and well justified. But there is more to moral principles than that, as the phi- losopher richard Brandt emphasized. When a principle is part of a person’s moral code,  that person is strongly motivated to act as the principle requires and to avoid acting in  ways that conflict with the principle. The person will tend to feel guilty when his or her  own conduct violates that principle and to disapprove of others whose behavior conflicts  with it. Likewise, the person will tend to hold in esteem those whose conduct shows an  abundance of the motivation required by the principle.9

other philosophers have, in different ways, reinforced Brandt’s point. to accept a  moral principle is not a purely intellectual act like accepting a scientific hypothesis or  a mathematical theorem. rather, it also involves a desire to follow that principle for its  own sake, the likelihood of feeling guilty about not doing so, and a tendency to evalu- ate the conduct of others according to the principle in question. We would find it very  strange, for example,  if Sally claimed to be morally opposed to cruelty to animals yet  abused her own pets and  felt no  inclination  to protest when some ruffians down the  street set a cat on fire.

cOnscience

people can, and unfortunately sometimes do, go against their moral principles, but we  would doubt  that  they  sincerely held  the principle  in question  if  violating  it did not 

By divorcing business from morality, Carr misrepresents both.

Accepting a moral principle is not a purely intellectual act like accepting a scientific hypothesis or a mathematical theorem.

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

16      part one  moral philosophy and business

bother  their conscience. We have all  felt  the pangs of conscience, but what exactly  is  conscience and how reliable a guide is it? our conscience, of course, is not literally a little  voice inside us. to oversimplify a complex piece of developmental psychology, our con- science evolved as we internalized the moral instructions of the parents or other authority  figures who raised us as children.

When you were very young, you were probably told to tell the truth and to return  something you filched to its proper owner. If you were caught lying or being dishon- est,  you  were  probably  punished—scolded,  spanked,  sent  to  bed  without  dinner,  or  denied a privilege. In contrast, truth telling and kindness to your siblings were probably  rewarded—with approval, praise, maybe even hugs or candy. Seeking reward and avoid- ing  punishment  motivate  small  children  to  do  what  is  expected  of  them.  Gradually,  children come to internalize those parental commands. Thus, they feel vaguely that their  parents know what they are doing even when the parents are not around. When children  do  something  forbidden,  they  experience  the  same  feelings  as when  scolded by  their  parents—the first stirrings of guilt. By the same token, even in the absence of explicit  parental reward, children feel a sense of self-approval about having done what they were  supposed to have done.

as  we  grow  older,  of  course,  our  motivations  are  not  so  simple  and  our  self-  understanding is greater. We are able to reflect on and understand the moral lessons we  were taught, as well as to refine and modify those principles. as adults we are morally  independent agents. Yet however much our conscience has evolved and however much  our adult moral code differs from the moral perspective of our childhood, those pangs of  guilt we occasionally feel still stem from that early internalization of parental demands.

the liMits Of cOnscience

how reliable a guide is conscience? people often say, “Follow your conscience” or “You  should  never  go  against  your  conscience.”  Such  advice  is  not  very  helpful,  however.  Indeed, it can sometimes be bad advice. First, when we are genuinely perplexed about  what we ought to do, we are trying to figure out what our conscience ought to be saying  to us. When it is not possible to do both, should we keep our promise to a colleague or  come to the aid of an old friend? to be told that we should follow our conscience is no  help at all.

Second,  it may not always be good for us to follow our conscience. It all depends  on what our conscience says. on the one hand, sometimes people’s consciences do not  bother them when they should—perhaps because they didn’t think through the impli- cations of what they were doing or perhaps because they failed to internalize strongly  enough  the  appropriate  moral  principles.  on  the  other  hand,  a  person’s  conscience  might disturb the person about something that is perfectly all right.

consider an episode in chapter 16 of Mark twain’s The Adventures of Huckleberry Finn. huck has taken off down the Mississippi on a raft with his friend, the runaway  slave Jim, but as they get nearer to the place where Jim will become legally free, huck  starts feeling guilty about helping him run away:

It hadn’t ever come home to me before, what this thing was that I was doing. But now  it did; and it stayed with me, and scorched me more and more. I tried to make out to  myself that I warn’t to blame, because I didn’t run Jim off from his rightful owner; but  it warn’t no use, conscience up and says, every time: “But you knowed he was running 

Telling someone to “follow your

conscience” is not very helpful, and

sometimes it can be bad advice.

summary Accepting a moral principle involves a

motivation to conform one’s conduct to that principle. Violating the

principle will bother one’s conscience, but

conscience is not a perfectly reliable guide

to right and wrong.

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

chapter one  The naTure of moraliTy      17

for his freedom, and you could a paddled ashore and told somebody.” That was so—  I couldn’t get around that, no way. That was where it pinched. conscience says to me:  “What had poor Miss Watson done to you, that you could see her nigger go off right  under your eyes and never say one single word? What did that poor old woman do to  you, that you could treat her so mean? . . . ” I got to feeling so mean and miserable   I most wished I was dead.

here huck is  feeling guilty about doing what we would all agree  is the morally right  thing to do. But huck is only a boy, and his pangs of conscience reflect the principles  that he has picked up uncritically from the slave-owning society around him. Unable to  think independently about matters of right and wrong, huck in the end decides to disre- gard his conscience. he follows his instincts and sticks by his friend Jim.

The point here is not that you should ignore your conscience but that the voice of  conscience is itself something that can be critically examined. a pang of conscience is like  a warning. When you feel one, you should definitely stop and reflect on the rightness of  what you are doing. But you cannot justify your actions simply by saying you were fol- lowing your conscience. terrible deeds have occasionally been committed in the name of  conscience.

MOral PrinciPles and self-interest

Sometimes doing what you believe would be morally right and doing what would best  satisfy your own interests may be two different things. Imagine that you are in your car  hurrying along a quiet road, trying hard to get to an important football game in time  to see the kickoff. You pass an acquaintance who is having car trouble. he doesn’t rec- ognize you. as a dedicated fan, you would much prefer to keep on going than to stop  and help him, thus missing at least part of the game. although you might rationalize  that someone else will eventually come along and help him out if you don’t, deep down  you know that you really ought to stop. self-interest, however, seems to say, “Keep  going.”

consider another example. You have applied for a new job, and if you land it, it will  be an enormous break for you. It is exactly the kind of position you want and have been  trying to get for some time. It pays well and will settle you into a desirable career for the  rest of your life. The competition has come down to you and one other person, and you  believe correctly that she has a slight edge on you. now imagine that you could spread a  nasty rumor about her that would guarantee that she wouldn’t get the job, and that you  could do this in a way that wouldn’t come back to you. presumably, circulating this lie  would violate your moral code, but doing so would clearly benefit you.

Some  people  argue  that  moral  action  and  self-interest  can  never  really  conflict.  although some philosophers have gone  to great  lengths  to  try  to prove  this,  they are  almost certainly mistaken. They maintain that if you do the wrong thing, then you will  be caught, your conscience will bother you, or in some way “what goes around comes  around,” so that your misdeed will come back to haunt you. This is often correct. But  unfortunate as it may be, sometimes—viewed just in terms of personal self-interest—it  may pay off for you to do what you know to be wrong. people sometimes get away with  their wrongdoings, and if their conscience bothers them at all, it may not bother them  very much. to believe otherwise not only is wishful thinking but also shows a lack of  understanding of morality.

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

18      part one  moral philosophy and business

Morality  serves  to  restrain  our  purely  self-interested  desires  so  we  can  all  live  together. The moral standards of a society provide the basic guidelines for cooperative  social existence and allow conflicts to be resolved by an appeal to shared principles of jus- tification. If our interests never came into conflict—that is, if it were never advantageous  for one person to deceive or cheat another—then there would be little need for morality.  We would already be in heaven. Both a system of law that punishes people for hurting  others and a system of morality that encourages people to refrain from pursuing their  self-interest at great expense to others help make social existence possible.

Usually,  following  our  moral  principles  is  in  our  best  interest.  This  idea  is  par- ticularly worth noting in the business context. recently, a number of business theorists  have  argued persuasively not only  that moral behavior  is  consistent with profitability  but also that the most morally responsible companies are among the most profitable.10  apparently,  respecting  the  rights  of  employees,  treating  suppliers  fairly,  and  being  straightforward with customers pay off.

But notice one  thing.  If you do  the  right  thing only because you  think you will  profit from it, you are not really motivated by moral concerns. having a moral principle  involves having a desire to follow the principle for its own sake—simply because it is the  right thing to do. If you do the right thing only because you believe it will pay off, you  might just as easily not do it if it looks as if it is not going to pay off.

In addition, there is no guarantee that moral behavior will always benefit a person  in strictly selfish terms. as argued earlier, there will be exceptions. From the moral point  of view, you ought to stop and help your acquaintance, and you shouldn’t lie about com- petitors. From the selfish point of view, you should do exactly the opposite. Should you  follow your self-interest or your moral principles? There’s no final answer to this ques- tion. From the moral point of view, you should, of course, follow your moral principles.  But from the selfish point of view, you should look out solely for “number one.”

Which option you choose will depend on the strength of your self-interested or self- regarding desires in comparison with the strength of your other-regarding desires (that  is, your moral motivations and your concern for others). In other words, your choice will  depend on your character, on the kind of person you are, which depends in part on how  you were raised. a person who is basically selfish will pass by the acquaintance in distress  and will spread the rumor, whereas someone who has a stronger concern for others, or a  stronger desire to do what is right just because it is right, will not.

although it may be impossible to prove to selfish people that they should not do the  thing that best advances their self-interest (because if they are selfish, then that is all they  care about), there are considerations that suggest it is not in a one’s overall self-interest  to be  a  selfish person. people who  are  exclusively  concerned with  their  own  interests  tend to have less happy and less satisfying lives than those whose desires extend beyond  themselves. This is usually called the paradox of hedonism, but it might equally well  be dubbed the “paradox of selfishness.” Individuals who care only about their own hap- piness will generally be less happy than those who care about others. Moreover, people  often find greater satisfaction in a life lived according to moral principle, and in being  the kind of person that entails, than in a life devoted solely to self-gratification. Thus, or  so many philosophers have argued, people have self-interested reasons not to be so self- interested. how do selfish people make themselves less so? not overnight, obviously, but  by involving themselves in the concerns and cares of others, they can in time come to  care sincerely about those persons.

Morality restrains our self-interested

desires. A society’s moral standards

allow conflicts to be resolved by an

appeal to shared principles of justification.

summary Part of the point of morality is to make

social existence possible by restraining

self-interested behavior. Sometimes doing what is morally right can conflict with

one’s personal interests. In general,

though, following your moral principles will enable you to live a more satisfying life.

When morality and self-interest conflict, what you choose to

do will depend on the kind of person

you are.

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

chapter one  The naTure of moraliTy      19

• • •

Mor al iT y a Nd PersoNal Val ues It is helpful to distinguish between morality in a narrow sense and morality in a broad  sense. In a narrow sense, morality is the moral code of an individual or a society (inso- far as the moral codes of the individuals making up that society overlap). although the  principles that constitute our code may not be explicitly formulated, as laws are, they do  guide us in our conduct. They function as internal monitors of our own behavior and  as a basis for assessing the actions of others. morality in the narrow sense concerns the  principles that do or should regulate people’s conduct and relations with others. These  principles can be debated, however. (take, for example, John Stuart Mill’s contention  that society ought not to  interfere with people’s  liberty when their actions affect only  themselves.) and a large part of moral philosophy involves assessing rival moral princi- ples. This discussion is part of the ongoing development in our moral culture. What is at  stake are the basic standards that ought to govern our behavior—that is, the fundamental  framework or ground rules that make coexistence possible. If there were not already fairly  widespread agreement about these principles, our social order would not be sustainable.

In addition we can talk about our morality in the broad sense, meaning not just  the principles of conduct that we embrace but also the values, ideals, and aspirations that  shape our lives. Many different ways of living our lives would meet our basic moral obli- gations. The type of life each of us seeks to live reflects our individual values—whether  following a profession, devoting ourselves to community service, raising a family, seek- ing solitude, pursuing scientific truth, striving for athletic excellence, amassing political  power, cultivating glamorous people as friends, or some combination of these and many  other possible ways of living. The life that each of us forges and the way we understand  that life are part of our morality in the broad sense of the term.

It  is  important  to  bear  this  in  mind  throughout  your  study  of  business  ethics.  although this book’s main concern is with the principles that ought to govern conduct  in certain business-type situations—for example, whether a hiring officer may take an  applicant’s  race  into account, whether  insider  trading  is wrong, or whether  corporate  bribery is permissible in countries where people turn a blind eye to it—your choices in  the business world will also reflect your other values and ideals or, in other words, the  kind of person you are striving to be. What sort of ideal do you have of yourself as a busi- nessperson? how much weight do you put on profitability, for instance, as against the  quality of your product or the socially beneficial character of your service?

The decisions you make in your career and much of the way you shape your work- ing life will depend not only on your moral code but also on the understanding you have  of yourself in certain roles and relationships. Your morality—in the sense of your ideals,  values, and aspirations—involves, among other  things, your understanding of human  nature, tradition, and society; of one’s proper relationship to the natural environment;  and of an individual’s place in the cosmos. professionals in various fields, for example,  will invariably be guided not just by rules but also by their understanding of what being  a professional involves, and a businessperson’s conception of the ideal or model relation- ship to have with clients will greatly influence his or her day-to-day conduct.

There is more to living a morally good life, of course, than being a good businessperson  or being good at your job, as aristotle (384–322 bce) argued long ago. he underscored  the necessity of our trying to achieve virtue or excellence, not just in some particular field 

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

20      part one  moral philosophy and business

of endeavor, but also as human beings. aristotle thought that things have functions. The  function of a piano, for instance, is to make certain sounds, and a piano that performs this  function well is a good or excellent piano. Likewise, we have an idea of what it is for a per- son to be an excellent athlete, an excellent manager, or an excellent professor—it is to do  well the types of things that athletes, managers, or professors are supposed to do.

But aristotle also thought that,  just as there is an ideal of excellence for any par- ticular  craft or occupation,  similarly  there must be an excellence  that we can achieve  simply as human beings. he believed that we can live our lives as a whole in such a way  that they can be judged not just as excellent in this respect or in that occupation but as  excellent, period. aristotle thought that only when we develop our truly human capaci- ties sufficiently to achieve this human excellence will we have lives blessed with happi- ness. philosophers since aristotle’s time have been skeptical of his apparent belief that  this human excellence would come in just one form, but many would underscore the  importance of developing our various potential capacities and striving to achieve a kind  of excellence in our lives. how we understand this excellence is a function of our values,  ideals, and worldview—our morality in a broad sense.

• • •

iNd iV idual iNTegr iT y a Nd resPoNsib il i T y previous sections discussed what it is for a person to have a moral code, as well as the  sometimes conflicting pulls of moral conscience and self-interest. In addition, we have  seen that people have values and ideals above and beyond their moral principles, nar- rowly understood, that also influence the lives they lead. and we have seen the impor- tance of reflecting critically on both moral principles and our ideals and values as we seek  to live morally good and worthwhile lives. none of us, however, lives in a vacuum, and  social pressures of various sorts always affect us. Sometimes these pressures make it diffi- cult to stick with our principles and to be the kind of person we wish to be. corporations  are a particularly relevant example of an environment that can potentially damage indi- vidual integrity and responsibility.

OrganizatiOnal nOrMs

one  of  the  major  characteristics  of  an  organization—indeed,  of  any  group—is  the  shared  acceptance  of  organizational norms  and  rules  by  its  members.  acceptance  can take different forms; it can be conscious or unconscious, overt or implicit, but it is  almost always present, because an organization can survive only if it holds its members  together. Group cohesiveness requires that individual members “commit” themselves— that  is,  relinquish  some of  their personal  freedom  in order  to  further organizational  goals. one’s degree of commitment—the extent to which one accepts group norms and  subordinates self to organizational goals—is a measure of one’s loyalty to the “team.”

The corporation’s overarching goal is profit. to achieve this goal, top management  sets specific targets for sales, market share, return on equity, and so forth. For the most  part, the norms or rules that govern corporate existence are derived from these goals. But  clearly there’s nothing in either the norms or the goals that necessarily encourages moral  behavior; indeed, they may discourage it.

summary Morality in the sense of the rules or principles

that regulate one’s conduct toward others can be distinguished from morality in the

broader sense of the values, ideals, and

aspirations that shape a person’s life.

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

chapter one  The naTure of moraliTy      21

according to a recent survey by the american Management association, pressure  to meet unrealistic business objectives and deadlines  is  the  leading cause of unethical  business  conduct.11  and  mounting  evidence  suggests  that  most  managers  experience  role conflicts between what is expected of them as efficient, profit-minded members of  an organization and what is expected of them as ethical persons. In a series of in-depth  interviews with recent graduates of the harvard MBa program, researchers Joseph L.  Badaracco, Jr., and allen p. Webb found that these young managers frequently received  explicit instructions or felt strong organizational pressure to do things they believed to  be sleazy, unethical, or even illegal.12 another survey found that a majority of managers  at all levels experience “pressure from the top” to meet corporate goals and comply with  corporate norms. of the managers interviewed, 50 percent of top managers, 65 percent  of middle managers, and 84 percent of lower managers agreed that they felt pressure to  “compromise personal standards to achieve company goals.”13

The young managers interviewed by Badaracco and Webb identified four powerful  organizational “commandments” as responsible for the pressure they felt to compromise  their integrity:

First, performance is what really counts, so make your numbers. Second, be loyal and  show us that you’re a team player. Third, don’t break the law. Fourth, don’t overinvest  in ethical behavior.14

although most corporate goals and norms are not objectionable when viewed by  themselves, they frequently put the people who must implement them into a moral pres- sure cooker. In addition, people can overlook the ethical implications of their decisions  just because  they are busy working on organizational goals and not  looking at  things  from a broader perspective. In these ways, the need to meet corporate objectives, to be a  team player, and to conform to organizational norms can sometimes lead otherwise hon- orable individuals to engage in unethical conduct.

cOnfOrMity

It is no secret that organizations exert pressure on their members to conform to norms  and goals. What may not be so widely known is how easily individuals can be induced to  behave as those around them do. a dramatic example is provided in the early conformity  studies by social psychologist Solomon asch.15

In a classic experiment, asch asked groups of seven to nine college students to say  which of three lines on a card matched the length of a single line on another card:

Pressure to meet corporate objectives, to be a team player, and to conform to organizational norms can sometimes lead people to act unethically.

1 2 3

only one of  the  subjects  in each group was “naive,” or unaware of  the nature of  the  experiment. The others were shills or stooges of the experimenter, who had instructed  them to make incorrect judgments in about two-thirds of the cases and in this way to  pressure the naive subjects to alter their correct judgments.

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22      part one  moral philosophy and business

The results were revealing. When the subjects were not exposed to pressure,  they  invariably  judged correctly, but when  the  stooges  all  gave  a  false  answer,  the  subjects  changed their responses to conform with the unanimous majority judgments. When one  shill differed from the majority and gave the correct answer, naive subjects maintained  their position three-fourths of the time. however, when the honest shill switched to the  majority view in later trials, the errors made by naive subjects rose to about the same level  as that of subjects who stood alone against a unanimous majority.

Why  did  they  yield?  Some  respondents  said  they  didn’t  want  to  seem  different,  even though they continued to believe their  judgments were correct. others said that  although their perceptions seemed correct, the majority couldn’t be wrong. Still other  subjects didn’t even seem aware that  they had caved  in to group pressure. even those  who held their ground tended to be profoundly disturbed by being out of step with the  majority and confessed to being sorely tempted to alter their judgments. Indeed, a subse- quent study found that students who stood firm in their judgments suffered more anxi- ety than those who switched. one student with the strength of his correct convictions  was literally dripping with perspiration by the end of the experiment.

In  these experiments, which cumulatively  included  several hundred  students,  the  subjects were not exposed to the authority symbols that people inside an organization  face—bosses, boards of directors, professional peers—nor were  they up against estab- lished policy and entrenched norms. correct responses would not have had the serious  career  consequences  that bucking  the  system can  sometimes have  for members of  an  organization: being  transferred, dismissed,  frozen  in a position, or made an organiza- tional  pariah.  and,  of  course,  the  students  did  not  bring  to  these  experiments  the  financial and personal investments that individuals bring to their jobs. Men and women  within an organization are under greater pressure to conform than were the students in  asch’s studies.

grOuPthink

almost all groups require some conformity from their members, but in extreme cases  the  demand  for  conformity  can  lead  to  what  social  psychologists  call  “groupthink.”  groupthink happens when pressure for unanimity within a highly cohesive group over- whelms its members’ desire or ability to appraise the situation realistically and consider  alternative courses of action. The desire for the comfort and confidence that comes from  mutual agreement and approval leads members of the group to close their eyes to nega- tive information, to ignore warnings that the group may be mistaken, and to discount  outside ideas that might contradict the thinking or the decisions of the group.

When under the sway of groupthink, group members may have the illusion that the  group is invulnerable or that because the group is good or right, whatever it does is per- missible. Individuals in the group tend to self-censor thoughts that go against the group’s  ideas and rationalize away conflicting evidence, and the group as a whole may implicitly  or explicitly pressure potential dissenters to conform. Groupthink thus leads to irrational,  sometimes disastrous decisions, and it has enormous potential for doing moral damage.

diffusiOn Of resPOnsiBility

pressure to conform to the group and to adhere to its norms and beliefs can lead to the  surrender  of  individual  moral  autonomy.  This  tendency  is  enhanced  by  the  fact  that 

summary Several aspects of corporate structure

and function work to undermine individual moral responsibility.

Organizational norms, pressure to conform

(sometimes leading to groupthink), and

diffusion of responsibility inside

large organizations can all make the exercise of individual integrity

difficult.

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chapter one  The naTure of moraliTy      23

group actions frequently involve the participation of many people. as a result, responsi- bility for what an organization does can become fragmented or diffused throughout the  group, with no single individual seeing himself or herself as responsible for what happens.  Indeed, it may be difficult to say exactly who should be held accountable. This diffusion of responsibility inside an organization leads individuals to have a diluted or diminished  sense of their own personal moral responsibilities. They tend to see themselves simply as  small players in a process or as cogs in a machine over which they have no control and for  which  they  are unaccountable. They  rationalize  to  themselves  contributing  to  actions,  policies, or events that they would refuse to perform or to authorize if they thought the  decision were entirely up to them. “It’s not my fault,” they think. “This would happen  anyway, with or without me.” Diffusion of responsibility encourages the moral myopia  of thinking “I’m just doing my job,” instead of taking a 20/20 look at the bigger picture.

This sense of diminished individual moral responsibility for an outcome that many  people bring about or allow to happen is something that social psychologists began stud- ying more closely as a result of the sad case of Kitty Genovese, a young woman who was  stabbed to death in the 1960s. although the murder was not in itself so unusual, it made  headlines and editorial pages across the nation because thirty-eight of her neighbors wit- nessed her brutal slaying. In answer to her pitiful screams of terror at 3 a.m., they came  to their windows and remained there for the thirty or more minutes it took her assailant  to brutalize her. (he evidently left for a while and then returned to finish her off.) of the  thirty-eight, not one attempted to intervene in any way; no one even phoned the police.

Why didn’t Kitty Genovese’s neighbors help her? Most social psychologists believe  that  an  individual’s  sense  of  personal  responsibility  is  inversely  proportional  to  the  number  of  people  witnessing  or  involved  in  the  episode.  The  more  people  who  are  observing an event, the less likely is any one of them to feel obliged to do something.  In emergencies, we  seem naturally  to  let  the behavior of  those around us dictate our  response—a phenomenon often called bystander apathy. But the point is more general.  In any  large group or organization, diffusion of  responsibility  for  its  actions can  lead  individuals to feel anonymous and not accountable for what happens. Submerged in the  group, the individual may not even question the morality of his or her actions.16

pressure to conform to organizational norms and a diminished sense of personal respon- sibility for group behavior undermine individual integrity and moral autonomy. Business  corporations are not necessarily worse than many other groups in this respect, but cer- tainly the pressure in business to help the company make a profit or achieve its other  goals, to do what is expected of you, and generally to be a loyal and cooperative team  player can foster, or at least do nothing to inhibit, these group propensities. Beyond that,  many corporations fail to institutionalize ethics. They don’t articulate or communicate  ethical  standards  to  their members;  they don’t  actively  enforce  them;  and  they  retain  structures and policies that thwart individual integrity. For example, when a Beech-nut  employee expressed concerns about the fact that the concentrate the company was pro- ducing for its “100% pure” apple juice contained nothing more than sugar, water, and  chemicals, his annual performance review described his judgment as “colored by naïveté  and impractical ideals.”17

employees frequently have to fight hard to maintain their moral integrity in a show- down with organizational priorities. consider,  for example,  those Wall Street analysts  pressured by their firms to recommend to clients stocks or bonds the analysts knew to be 

Diffusion of responsibility inside an organization can weaken people’s sense of moral responsibility.

Business corporations are no worse than other groups, but many of them do little to protect individual integrity and moral autonomy.

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24      part one  moral philosophy and business

“junk” or “dogs.”18 More dramatically, on June day in 2011, a US airways captain with  thirty years of experience stopped her flight from departing because she was worried that  a backup power system was defective. The company pressured her  to fly anyway, and  when she refused to do so, security officials escorted her out of the airport and threatened  to arrest her crew if they didn’t cooperate. When other pilots backed her up and refused  to fly the plane, US airways finally had technicians service the plane. They confirmed  that the component was faulty, and fixed it.19

often,  however,  the  problem  facing  people  in  business  and  other  organization  contexts is not that of doing what they believed to be right but rather of deciding what  the right thing to do is. They can sometimes face difficult and puzzling moral questions,  questions that need to be answered. how does one go about doing that? Is there some  reliable procedure or method for answering moral questions? In science, the scientific  method tells us what steps to take if we seek to answer a scientific question, but there is  no comparable moral method for engaging ethical questions. There is, however, general  agreement about what constitutes good moral reasoning.

• • •

Mor al re asoNiNg It is useful to view moral reasoning at first in the context of argument. an argument is a  group of statements, one of which (called the conclusion) is claimed to follow from the  others (called the premises). here’s an example of an argument:

argument 1

If a person is a mother, the person is a female.

Fran is a mother.

Therefore, Fran is a female.

The first two statements (the premises) of this argument happen to entail the third  (the conclusion), which means that if I accept the first two as true, then I must accept  the third as also true. not to accept the conclusion while accepting the premises would  result in a contradiction—holding two beliefs that cannot both be true at the same time.  In other words, if I believe that all mothers are females and that Fran is a mother (the  premises), then I cannot deny that Fran is a female (the conclusion) without contradict- ing myself. an argument like this one, whose premises logically entail its conclusion, is a  valid argument.

an  invalid argument is  one  whose  premises  do  not  entail  its  conclusion.  In  an  invalid argument, I can accept the premises as true and reject the conclusion without any  contradiction. Thus:

argument 2

If a person is a mother, the person is a female.

Fran is a female.

Therefore, Fran is a mother.

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chapter one  The naTure of moraliTy      25

The conclusion of this argument does not necessarily follow from the true premises.  I can believe that every mother is a female and that Fran is a female but deny that Fran is  a mother without contradicting myself.

one way to show this is by means of a counterexample, an example that is consist- ent with the premises but  is  inconsistent with the conclusion. Let’s  suppose Fran  is a   two-year-old, a premise that is perfectly consistent with the two stated premises. If she  is, she can’t possibly be a mother. or let’s suppose Fran is an adult female who happens  to be childless, another premise that is perfectly consistent with the stated premises but   obviously at odds with the conclusion. If an argument is valid (such as argument 1),  then no counterexamples are possible.

a valid argument can have untrue premises, as in the following:

argument 3

If a person is a female, she must be a mother.

Fran is a female.

Therefore, Fran must be a mother.

Like argument 1, this argument is valid. If I accept its premises as true, I must  accept its conclusion as true; otherwise I will contradict myself. however, although  argument  3  is  valid,  it  is  unsound  because  one  of  its  premises  is  false—namely,  “If a person  is a  female,  she must be a mother.” realizing  the patent absurdity of  one  of  its  premises,  no  sensible  person  would  accept  this  argument’s  conclusion.  But  notice  why  the  argument  is  unsound—not  because  the  type  of  reasoning  it  involves is invalid but because one of the premises is false. sound arguments, such  as argument 1, have true premises and valid reasoning. unsound arguments have  at least one false premise, as in argument 3, or invalid reasoning, as in argument 2,  or both.

now let’s consider some moral arguments, which can be defined simply as argu- ments whose conclusions are moral judgments. here are some examples that deal with  affirmative action for women and minorities in the workplace:

argument 4

If an action violates the law, it is morally wrong.

Affirmative action on behalf of women and minorities in personnel matters violates the law.

Therefore, affirmative action on behalf of women and minorities in personnel matters is morally wrong.

argument 5

If an action violates the will of the majority, it is morally wrong.

Affirmative action on behalf of women and minorities in personnel matters violates the will of the majority.

Therefore, affirmative action on behalf of women and minorities in personnel matters is morally wrong.

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26      part one  moral philosophy and business

argument 6

If an action redresses past injuries that have disadvantaged a group, it is morally permissible.

Affirmative action on behalf of women and minorities in personnel matters redresses injuries that have disadvantaged these groups.

Therefore, affirmative action on behalf of women and minorities in personnel matters is morally permissible.

argument 7

If an action is the only practical way to remedy a social problem, then it is morally permissible.

Affirmative action on behalf of women and minorities in personnel matters is the only practical way to remedy the social problem of unequal employment opportunity.

Therefore, affirmative action on behalf of women and minorities in personnel matters is morally permissible.

The first  premise  in  each of  these  arguments  is  a moral  standard,  the  second  an  alleged fact, and the conclusion a moral judgment. Moral reasoning or argument typi- cally moves from a moral standard, through one or more factual judgments about some  person, action, or policy related to that standard, to a moral judgment about that person,  action, or policy. Good moral reasoning will frequently be more complicated than these  examples. often it will involve an appeal to more than one standard as well as to various  appropriate factual claims, and its argumentative structure may be more elaborate. Still,  these examples illustrate its most basic form.

defensiBle MOral JudgMents

If a moral judgment or conclusion is defensible, then it must be supportable by a defen- sible moral  standard,  together with  relevant  facts. a moral  standard  supports  a moral  judgment if the standard, taken together with the relevant facts, logically entails the moral  judgment and if the moral standard itself is an acceptable standard. If someone argues that  affirmative action for minorities and women is right (or wrong) but cannot produce a sup- porting principle when asked, then the person’s position is considerably weakened. and if  the person does not see any need to support the judgment by appealing to a moral stand- ard, then he or she simply does not understand how moral concepts are used or is using  moral words like “right” or “wrong” differently from the way they are commonly used.

Keeping this in mind—that moral judgments must be supportable by moral stand- ards and  facts—will  aid your understanding of moral discourse, which can be highly  complex and sophisticated. It will also sharpen your own critical faculties and improve  your moral reasoning and ability to formulate relevant moral arguments.

Patterns Of defense and challenge

In  assessing  arguments,  one  must  be  careful  to  clarify  the  meanings  of  their  key  terms  and phrases. often premises  can be understood  in more  than one way,  and  this ambiguity may lead people to accept (or reject) arguments that they shouldn’t.  For example, “affirmative action” seems to mean different things to different people 

Moral judgments should be supported

by moral standards and relevant facts.

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chapter one  The naTure of moraliTy      27

(see chapter 11 on job discrimination). Before we can profitably assess arguments  4 through 7, we have to agree on how we understand “affirmative action.” Similarly,  argument 5 relies on the idea of “violating the will of the majority,” but this notion  has to be clarified before we can evaluate either the moral principle that it is wrong to  violate the will of the majority or the factual claim that affirmative action does violate  the majority’s will.

assuming  that  the  arguments  are  logically  valid  in  their  form  (as  arguments  4  through 7 are) and that their terms have been clarified and possible ambiguities elimi- nated,  then  we  must  turn  our  attention  to  assessing  the  premises  of  the  arguments.  Should we accept or reject their premises? remember that if an argument is valid and  you accept the premises, you must accept the conclusion.

Let’s look at some further aspects of this assessment process:

1. evaluating the factual claims. If the parties to an ethical discussion are willing to  accept the moral standard (or standards) in question, then they can concentrate  on  the  factual  claims.  Thus,  for  example,  in  argument  4  they  will  focus  on  whether affirmative action on behalf of women and minorities is in fact illegal. In  argument 7 they will need to determine whether affirmative action is really the  only practical way to remedy the social problem of unequal employment oppor- tunity. analogous questions can be asked about the factual claims of arguments  5 and 6. answering them in the affirmative would require considerable support- ing data.

2. Challenging the moral standard. Moral disagreements do not always turn on fac- tual  issues. The moral  standard on which a given moral argument relies may be  controversial.  one  party  might  challenge  the  standard,  contending  that  it  is  implausible or that we should not accept it. The critic might do this in several differ- ent ways—for example, by showing that there are exceptions to the standard, that  the standard leads to unacceptable consequences, or that it is inconsistent with the  arguer’s other moral beliefs.

In the following dialogue, for example, Lynn is attacking Sam’s advocacy of the  standard “If an action redresses past injuries that have disadvantaged a group, it is  morally permissible”:

Lynn: What would you think of affirmative action for Jews in the workplace?

Sam: I’d be against it.

Lynn: What about Catholics?

Sam: No.

Lynn: People of Irish extraction?

Sam: They should be treated the same as anybody else.

Lynn: But each of these groups and more I could mention were victimized in the past by unfair discrimination and probably in some cases continue to be.

Sam: So?

Lynn: So the standard you’re defending leads to a judgment you reject: namely, that Jews, Catholics, and Irish should be compensated by affirmative action for having been disadvantaged. How do you account for this inconsistency?

summary Moral reasoning and argument typically

appeal both to moral standards and to

relevant facts. Moral judgments should be

entailed by the relevant moral standards and the facts, and they

should not contradict our other beliefs. Both standards and facts must be assessed

when moral arguments are being evaluated.

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28      part one  moral philosophy and business

at this point, Sam, or any rational person in a similar position, has three alterna- tives:  abandon  or  modify  the  standard,  alter  his  moral  judgment,  or  show  how  women and minorities fit the original principle even though the other groups do not.

3. defending the moral standard. When the standard is criticized, then its advocate  must  defend  it.  often  this  requires  invoking  an  even  more  general  principle.  a  defender  of  argument  6,  for  example,  might  uphold  the  redress  principle  by  appealing to some more general conception of social justice. or defenders might try  to show how the standard in question entails other moral judgments that both the  critic and the defender accept, thereby enhancing the plausibility of the standard. 

In the following exchange, tina is defending the standard of argument 5: “If an  action violates the will of the majority, it is morally wrong”:

Tina: Okay, do you think the government should impose a national religion on all Americans?

Jake: Of course not.

Tina: What about requiring people to register their handguns?

Jake: I’m all for it.

Tina: And using kids in pornography?

Jake: There rightly are laws against it.

Tina: But the principle you’re objecting to—that an action violating the will of the majority is wrong—supports your moral stance on all these issues.

of course, tina’s argument is by no means a conclusive defense for her moral stand- ard. other moral standards could just as easily entail the judgments she cites, as Jake  is quick to point out:

Jake: Now wait a minute. I oppose a state religion on constitutional grounds, not because it violates majority will. As for gun control, I’m for it because I think it will reduce violent crimes. And using kids in pornography is wrong because it exploits and endangers children.

although tina’s strategy for defending the standard about majority rule proved  inconclusive, it does illustrate a common and often persuasive way of arguing for a  moral principle.

4. revising and modifying the argument. arguments 4  through 7 are only  illustra- tions, and all the moral principles they mention are very simple—too simple to accept  without qualification. (The principle that it is immoral to break the law in all circum- stances, for example, is implausible. nazi Germany furnishes an obvious counterex- ample to it.) But once the standard has been effectively challenged, the defender of the  argument, rather than abandoning the argument altogether, might try to reformulate  it. For instance, the defender might replace the original, contested premise with a bet- ter and more plausible one that still supports the conclusion. For example, premise 1  of argument 4 might be replaced by: “If an action violates a law that is democratically  decided and that is not morally unjust, then the action is immoral.” or the defender  might revise the conclusion of his or her argument, perhaps by restricting its scope.   a more modest, less sweeping conclusion will often be easier to defend.

summary Philosophical

discussion generally involves the revision and modification of

arguments; in this way progress is made in

the analysis and resolution of moral and

other issues.

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chapter one  The naTure of moraliTy      29

In this way, the discussion continues, the arguments on both sides of an issue  improve, and we make progress in the analysis and resolution of ethical issues. In  general, in philosophy we study logic and criticize arguments not to be able to score  quick debating points but rather to be able to think more clearly and deeply about  moral and other problems. our goal as moral philosophers  is not  to “win” argu- ments but to arrive at the truth—or, put less grandly, to find the most reasonable  answers to various ethical questions.

requireMents fOr MOral JudgMents

Moral discussion and the analysis of ethical issues can take different, often complicated,  paths. nevertheless, the preceding discussion implies that moral judgments should be (1)  logical, (2) based on facts, and (3) based on sound or defensible moral principles. amoral  judgment that is weak on any of these grounds is open to criticism.

Moral Judgments should Be logical to say that moral judgments should be logical implies several things. First, as indicated  in the discussion of moral reasoning, our moral judgments should follow logically from  their premises. The connection between (1) the standard, (2) the conduct or policy, and  (3) the moral judgment should be such that 1 and 2 logically entail 3. our goal is to be  able to support our moral judgments with reasons and evidence, rather than basing them  solely on emotion, sentiment, or social or personal preference.

Second,  our moral  judgments  should be  logically  compatible with our  other moral  and nonmoral beliefs. We must avoid inconsistency. almost all philosophers agree that if  we make a moral judgment—for example, that it was wrong of Smith to alter the figures  she gave to the outside auditors—then we must be willing to make the same judgment in  any similar set of circumstances—that is, if our friend Brown, our spouse, or our father  had altered the figures. In particular, we cannot make an exception for ourselves, judging  something permissible for us to do while condemning others for doing the very same thing.

Moral Judgments should Be Based on facts adequate moral judgments cannot be made in a vacuum. We must gather as much rel- evant information as possible before making them. For example, an intelligent assessment  of the morality of insider trading would require an understanding of, among other things,  the different circumstances in which it can occur and the effects it has on the market and  on  other  traders.  The  information  supporting  a  moral  judgment,  the  facts,  should  be  relevant—that  is,  the  information should actually  relate  to  the  judgment;  it  should be  complete or inclusive of all significant data; and it should, of course, be accurate or true.

Moral Judgments should Be Based on acceptable Moral Principles We know that moral  judgments are based on moral standards. at the highest  level of  moral  reasoning,  these  standards  embody  and  express  very  general  moral  principles.  reliable moral judgments must be based on sound moral principles—principles that are  unambiguous and can withstand close scrutiny and rational criticism. What, precisely,  makes a moral principle sound or acceptable is one of the most difficult questions that  the study of ethics raises and is beyond the scope of this book. But one criterion is worth  mentioning, namely, consistency with our considered moral beliefs.

Our moral judgments should follow logically from their premises.

Our moral judgments should be logically compatible with our other beliefs.

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30      part one  moral philosophy and business

These  beliefs  contrast  with  our  gut  responses,  with  beliefs  based  on  ignorance  or  prejudice,  and  with  beliefs  we  just  happen  to  hold  without  having  thought  them  through. as philosophy professor tom regan explains, our considered beliefs are those  moral beliefs “we hold after we have made a conscientious effort . . . to think about our  beliefs coolly, rationally, impartially, with conceptual clarity, and with as much relevant  information as we can reasonably acquire.”20 We have grounds to doubt a moral princi- ple when it clashes with such beliefs. conversely, conformity with our considered moral  beliefs is good reason for regarding it as provisionally established.

This does not imply that conformity with our considered beliefs is the sole or even  basic test of a moral principle, any more than conformity with well-established beliefs is  the exclusive or even fundamental test of a scientific hypothesis. (copernicus’s heliocen- tric hypothesis, for example, did not conform with what passed in the medieval world as  a well-considered belief, the ptolemaic view that the earth was the center of the universe.)  But conformity with our considered beliefs seemingly must play some part in evaluating  the many alternative moral principles that are explored in the next chapter.

summary Moral judgments

should be logical and based on facts and acceptable moral

principles. Conformity with our considered moral beliefs is an

important consideration in evaluating moral

principles.

s T u d y c o r N e r Key terms and ConCepts

administrative regulations argument business business ethics businesspeople bystander apathy common law conclusion conscience considered moral beliefs constitutional law

counterexample diffusion of responsibility divine command theory ethical relativism ethics etiquette groupthink invalid argument moral arguments moral standards morality in the broad sense

morality in the narrow sense organizational norms paradox of hedonism premises professional codes of ethics self-interest sound arguments statutes unsound arguments valid argument

points to review

• what happened at Enron (pp. 1–2)

• three characteristics of moral standards (p. 5)

• four types of law (pp. 6–7)

• what King’s violation of the law shows (pp. 7–8)

• the point of the example of not stopping to help an accident victim (p. 8)

• shortcomings of professional codes as an ethical guide (pp. 9–10)

• where we get our moral standards (p. 10)

• three ways in which morality might be thought to be based on religion (p. 12)

• three unsatisfactory implications of ethical relativism (pp. 13–14)

• what’s wrong with Carr’s idea that business is a game with its own moral rules (pp. 14–15)

• what’s involved in a person’s accepting a moral principle (p. 15)

• why telling someone “Follow your conscience” isn’t very helpful advice (p. 16)

• the point of the Huckleberry Finn example (pp. 16–17)

• what determines what a person will do when morality and self-interest collide (pp. 17–18)

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chapter one  The naTure of moraliTy      31

• morality in the broad sense vs. morality in the narrow sense (p. 19)

• Aristotle and the ideal of achieving excellence (pp. 19–20)

• what the experiments by Solomon Asch showed (pp. 21–22)

• dangers of groupthink (p. 22)

• diffusion of responsibility and the Kitty Genovese example (p. 23)

• the difference between valid and invalid, sound and unsound, arguments (pp. 24–25)

• moral judgments as resting on moral standards and facts (p. 26)

• what it means to say moral judgments should be logical (p. 29)

• role of “considered moral beliefs” in the evaluation of moral principles (pp. 29–30)

for further refleCtion

1. To what extent do our moral ideas reflect the society around us, and to what extent are we free to think for ourselves about moral matters?

2. Describe a situation in which you felt pressured to act against your moral principles or where you felt torn between conflicting moral values, rules, or principles. What did you do?

3. How do you explain the fact that in the business world basically good people sometimes act immorally?

when it Comes to the safety of young

children, fire is a parent’s nightmare. Just the thought of their young ones trapped in their cribs or beds by a raging noctur- nal blaze is enough to make most mothers and fathers take every precaution to ensure their children’s safety. Little won- der that when fire-retardant children’s pajamas first hit the market, they proved an overnight success. Within a few short years more than 200 million pairs were sold, and the sales of millions more were all but guaranteed. For their manufactur- ers, the future could not have been brighter. Then, like a bolt

from the blue, came word that the pajamas were killers. The U.S. Consumer Product Safety Commission (CPSC) moved quickly to ban their sale and recall millions of pairs. Reason: The pajamas contained the flame-retardant chemical Tris (2,3-dibromoprophyl), which had been found to cause kidney cancer in children.

Because of its toxicity, the sleepwear couldn’t even be thrown away, let alone sold. Indeed, the CPSC left no doubt about how the pajamas were to be disposed of—buried or burned or used as industrial wiping cloths. Whereas just

Case 1.1

made in the u.s.a.— dumped in brazil, africa, iraq . . .

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32      part one  moral philosophy and business

months earlier the manufacturers of the Tris-impregnated pajamas couldn’t fill orders fast enough, suddenly they were worrying about how to get rid of the millions of pairs now sit- ting in warehouses.

Soon, however, ads began appearing in the classified pages of Women’s Wear Daily. “Tris-Tris-Tris . . . We will buy any fabric containing Tris,” read one. Another said, “Tris—we will purchase any large quantities of garments containing Tris.” The ads had been placed by exporters, who began buy- ing up the pajamas, usually at 10 to 30 percent of the normal wholesale price. Their intent was clear: to dump* the carcino- genic pajamas on overseas markets. 21

Tris is not the only example of dumping. There were the 450,000 baby pacifiers, of the type known to have caused choking deaths, that were exported for sale overseas, and the 400 Iraqis who died and the 5,000 who were hospitalized after eating wheat and barley treated with a U.S.-banned organic mercury fungicide. Winstrol, a synthetic male hormone that had been found to stunt the growth of American children, was made available in Brazil as an appetite stimulant for children. DowElanco sold its weed killer Galant in Costa Rica, although the Environmental Protection Agency (EPA) forbade its sale to U.S. farmers because Galant may cause cancer. After the U.S. Food and Drug Administration (FDA) banned the painkiller dipy- rone because it can cause a fatal blood disorder, Winthrop Products continued to sell dipyrone in Mexico City.

Manufacturers that dump products abroad clearly are motivated by profit, or at least by the hope of avoiding finan- cial losses resulting from having to withdraw a product from the U.S. market. For government and health agencies that cooperate in the exporting of dangerous products, sometimes the motives are more complex.

For example, when researchers documented the dangers of the Dalkon Shield intrauterine device—among the adverse reactions were pelvic inflammation, blood poisoning, tubal pregnancies, and uterine perforations—its manufacturer, A. H. Robins Co., began losing its domestic market. As a result, the company worked out a deal with the Office of Population within

the U.S. Agency for International Development (AID), whereby AID bought thousands of the devices at a reduced price for use in population-control programs in forty-two countries.

The agencies involved say their motives are humanitarian. Because the death rate in childbirth is relatively high in third- world countries, almost any birth-control device is safer than pregnancy. Analogous arguments are used to defend the export of pesticides and other products judged too dangerous for use in the United States: Foreign countries should be free to decide for themselves whether the benefits of those prod- ucts are worth their risks. In line with this, some third-world government officials insist that denying their countries access to these products is tantamount to violating their countries’ national sovereignty.

This reasoning has found a sympathetic ear in Washington, for it turns up in the “notification” system that regulates the export of banned or dangerous products overseas. Based on the principles of national sovereignty, self-determination, and free trade, the notification system requires that foreign gov- ernments be notified whenever a product is banned, deregu- lated, suspended, or canceled by a U.S. regulatory agency. The State Department, which implements the system, has a policy statement on the subject that reads in part: “No country should establish itself as the arbiter of others’ health and safety standards. Individual governments are generally in the best position to establish standards of public health and safety.”

Critics of the system claim that notifying foreign health officials is virtually useless. For one thing, governments in poor countries can rarely establish health standards or even control imports into their countries. Indeed, most of the third- world countries where banned or dangerous products are dumped lack regulatory agencies, adequate testing facilities, and well-staffed customs departments.

Then there’s the problem of getting the word out about hazardous products. In theory, when a government agency such as the EPA or the FDA finds a product hazardous, it is supposed to inform the State Department, which is to notify health officials in other nations. But agencies often fail to inform the State Department of the product they have banned or found harmful, and when it is notified, its communiqués typically go no further than U.S. embassies abroad. When foreign officials are notified by U.S. embassies, they sometimes

* Dumping is a term apparently coined by Mother Jones magazine to refer to the practice of exporting to other countries products that have been banned or declared hazardous in the United States.

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chapter one  The naTure of moraliTy      33

find the communiqués vague or ambiguous or too technical to understand.

But even if communication procedures were improved or the export of dangerous products forbidden, there are ways that companies can circumvent these threats to their prof- its—for example, by simply changing the name of the prod- uct or by exporting the individual ingredients of a product to a plant in a foreign country. Once there, the ingredients can be reassembled and the product dumped. The United States does prohibit its pharmaceutical companies from exporting drugs banned in this country, but sidestepping the law is not difficult. “Unless the package bursts open on the dock,” one drug company executive observes, “you have no chance of being caught.”

Unfortunately for us, in the case of pesticides, the effects of overseas dumping are now coming home. In the United States, the EPA bans all crop uses of DDT and dieldrin, which kill fish, cause tumors in animals, and build up in the fatty

tissue of humans. It also bans heptachlor, chlordane, lepto- phos, endrin, and many other pesticides, including 2,4,5-T (which contains the deadly poison dioxin, the active ingredi- ent in Agent Orange, the notorious defoliant used in Vietnam) because they are dangerous to human beings. No law, how- ever, prohibits the sale of DDT and these other U.S.-banned pesticides overseas, where thanks to corporate dumping they are routinely used in agriculture. In one three-month period, for example, U.S. chemical companies exported 3.9 million pounds of banned and withdrawn pesticides. The FDA now estimates, through spot checks, that 10 percent of our imported food is contaminated with residues of banned pes- ticides. And the FDA’s most commonly used testing proce- dure does not even check for 70 percent of the pesticides known to cause cancer. With the doubling of exports of Mexican produce to the United States since the signing of the North American Free Trade Agreement (NAFTA), the problem of pesticide-laced food has only grown worse.22

An dr

ew M

cC on

ne ll/

Pa no

s

another hazard dumped in third-world countries is what has become known as ewaste: toxic electronic products and parts.

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34      part one  moral philosophy and business

Discussion Questions

1. Complete the following statements by filling in the blanks with either “moral” or “nonmoral” (e.g., factual, scientific, legal):

a. Whether or not dumping should be permitted is a ________ question.

b. “Are dangerous products of any use in the third world?” is a ________ question.

c. “Is it proper for the U.S. government to sponsor the export of dangerous products overseas?” is a ________ question.

d. Whether or not the notification system works as its supporters claim it works is a ________ question.

e. “Is it legal to dump this product overseas?” is a ________ question.

2. Explain what dumping is, giving some examples. Does dumping raise any moral issues? What are they? What would an ethical relativist say about dumping?

3. Speculate on why dumpers dump. Do you think they believe that what they are doing is morally permis- sible? How would you look at the situation if you were one of the manufacturers of Tris-impregnated pajamas?

4. If no law is broken, is there anything wrong with dumping? If so, when is it wrong and why? Do any moral considerations support dumping products overseas when this violates U.S. law?

5. What moral difference, if any, does it make who is dump- ing, why they are doing it, where they are doing it, or what the product is?

6. Critically assess the present notification system. Is it the right approach, or is it fundamentally flawed?

7. Putting aside the question of legality, what moral argu- ments can be given for and against dumping? What is your position on dumping, and what principles and values do you base it on? Should we have laws prohibiting more types of dumping?

HinDsigHt, tHey say, is 20/20. So, in retrospect, it is not so surprising that the boom in real estate prices of just a few years ago was followed by a painful collapse. Encouraged by low interest rates and a willingness of banks to lend money to almost anybody, many people had jumped into the housing market, sometimes buying expensive homes with mortgages they could barely afford, based on the belief, celebrated in

televisions shows like “Flip This House,” that housing prices would continue to go up and up and up. But the law of gravity applies to housing prices, too, it seems. Inevitably, the housing market cooled down, and housing prices stopped rising; then they slowly reversed direction and began steadily declining. As a result, many people found themselves making mortgage payments on homes worth far less than what they had

case 1.2

Just Drop off the Key, Lee

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chapter one  The naTure of moraliTy      35

originally paid for them. Moreover, many of them had been talked into taking mortgages they didn’t really understand, for example, mortgages with adjustable rates or with special “bal- loon” payments due after a few years, or that were too expen- sive for them to afford in the first place. The financial crisis of 2008 and the recession that followed only made things worse. Faced with monthly payments they could no longer sustain, these borrowers lost their homes through foreclosure. Widespread foreclosures, in turn, drove housing prices even lower, leaving more and more homeowners—by 2010 an estimated 5.4 million of them—“under water,” that is, with mortgage balances at least 20 percent higher than the value of their homes.

Consider 30-year-old software engineer, Derek Figg. He paid $340,000 for a home in the Phoenix suburbs. Two years later, its value had dropped to less than $230,000, but he still owed the bank $318,000. As a result, Figg decided to stop paying his mortgage, defaulted on his loan, and walked away from his home. Or consider Benjamin Koellmann. He paid $215,000 for an apartment in Miami Beach, which three years later was worth only $90,000. Although still paying his mortgage, he is thinking about fol- lowing Figg’s example.

What distinguishes Figg and Koellmann from many other homeowners whose homes are under water or who are in mortgage trouble is that both have good jobs and could afford to keep making their monthly payments—if they chose to. Moreover, they are smart guys and knew what they were doing, or thought they did, when they bought their homes. However, figuring that it would take years for their properties to regain their original value and that renting would be cheaper, they are among a growing number of homeowners who have either walked away from their mortgages or are considering it, not out of necessity, but because doing so is in their financial interest. Experts call this “strategic default.” Or, in the words of an old Paul Simon song, “Just drop off the key, Lee, and get your- self free.”

As any financial advisor will tell you, there are lots of good reasons not to default on a mortgage. A foreclosure

ruins a consumer’s credit record for seven years, and with a low credit score, one must pay a higher interest rate on auto and other loans. Moreover, some states allow lenders to seize bank deposits and other assets of people who default on mortgages. Benjamin Koellmann also worries that skip- ping out on his mortgage might hurt him with a future employer or diminish his chance of being admitted to gradu- ate school. Still, there’s no denying that for some borrowers simply mailing in the keys and walking away can make sense. But that leaves one question unanswered, Do they have a moral responsibility to meet their financial commitments?

The standard mortgage-loan document that a borrower signs says, “I promise to pay” the borrowed amount. A prom- ise is a promise, many people believe; they think you should keep making your mortgage payments even if doing so is inconvenient. In fact, eighty-one percent of Americans agree that it is immoral not to pay your mortgage when you can. George Brenkert, professor of business ethics at Georgetown University, is one of them. He maintains that if you were not deceived by the lender about the nature of the loan, then you have a duty to keep paying. If everybody walked away from such commitments, he reasons, the result would be disas- trous. As Paola Sapienza, a finance professor at Northwestern University, points out, each strategic default emboldens oth- ers to take the same step, which he describes as a “cascade effect” with potentially damaging consequences for the whole economy. Economist David Rosenburg adds that these borrowers were not victims. They “signed contracts, and as adults should be held accountable.”

Others disagree. Brent White, a law professor at the University of Arizona, says that homeowners should base the decision whether to keep paying or walk away entirely on their own interests “unclouded by unnecessary guilt or shame.” They should take their lead from the lenders, who, he says, “ruthlessly seek to maximize profits or minimize loss irrespec- tive of concerns of morality or social responsibility.” People who think like Professor White also argue that the banks fueled the housing boom in the first place by loaning money, based on unrealistic appraisals of home values, to people who

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36      part one  moral philosophy and business

were unlikely to be able to keep up their payments in order to resell those loans to other investors. Others suspect a double standard. Homeowners are criticized for defaulting but busi- nesses often declare bankruptcy even when they have money in the bank and could keep paying their bills. In fact, doing so is often thought to be a smart move because it trims their debt load and allows them to break their union contracts.

Benjamin Koellmann, for his part, remains conflicted. “People like me are beginning to feel like suckers. Why not let it go in default and rent a better place for less? . . . There is no financial sense in staying.” Still, he struggles with the ethical side of the question: “I took a loan on an asset that I didn’t see as overvalued,” he says. “As much as I would like my bank to pay for that mistake, why should it?” John Gourson, chief executive of the Mortgage Bankers Association, con- curs with this. In addition, he says, defaulting on your mort- gage and letting your home go into foreclosure hurts the whole neighborhood by lowering property values. He adds: “What about the message they still send to their family and their kids and their friends?”

For his part, Derek Figg admits that defaulting was the “toughest decision I ever made.” Still, he faced a “claustrophobic

situation,” he says, because if ever he lost or quit his job, he would have been unable to sell his house and move somewhere else. Moreover, he says, lenders “manipulated” the housing market during the boom by accepting dubious appraisals. “When I weighed everything,” he says, “I was able to sleep at night.”23

disCussion Questions

1. What would you do if you were in Figg’s or Koellmann’s situation? What factors would you consider?

2. Do people have a moral obligation to repay money that they borrow, as Professor Brenkert thinks, or is this simply a business decision based on self-interest alone, as Professor White thinks?

3. “It is morally permissible for homeowners whose homes are under water to default on their mortgages even if they could continue to pay them.” What arguments do you see in favor of this proposition? What arguments do you see against it?

4. When it comes to paying your debts, does it matter whether you borrow money from a bank or from an individual person? Explain why or why not.

5. Suppose your moral principles imply that you should keep on paying your mortgage, but financial self-interest counsels you to walk away. How are you to decide what to do?

6. Repaying a loan is a legal obligation. Is it also a moral obligation? Explain why or why not.

7. Are the banks responsible for the housing boom that enticed people to buy homes at inflated prices? If so, does this affect whether you have an obligation to repay your loan? What about Professor White’s contention that the banks themselves care only about maximizing profit?

date

percentages 2005 2006 2007 2008 2009 2010

Below 1% X From 1% to 2% X X From 2% to 3% From 3% to 4% X From 4% to 5% X X

u.s. foreclosure rates in recent years, in percentages

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

chapter one  The naTure of moraliTy      37 Pa

ul P

ric e/

Ge tty

Im ag

es

Kermit vandivier Could not have prediCted

the impact on his life of purchase order P-237138, issued by LTV Aerospace Corporation.24 The order was for 202 brake assemblies for a new Air Force light attack plane, the A7D, and news of the LTV contract was cause for uncorking the cham- pagne at the B. F. Goodrich plant in Troy, Ohio, where Vandivier worked. Although the LTV order was a small one, it signaled that Goodrich was back in LTV’s good graces after living under a cloud of disrepute. Ten years earlier, Goodrich had built a brake for LTV that, to put it kindly, hadn’t met expectations. As a result, LTV had written off Goodrich as a reliable source of brakes.

LTV’s unexpected change of heart after ten years was easily explained. Goodrich made LTV an offer it couldn’t refuse—a ridiculously low bid for making the four-disk brakes. Had Goodrich taken leave of its financial senses? Hardly. Because aircraft brakes are custom-made for a par- ticular aircraft, only the brakes’ manufacturer has replace- ment parts. Thus, even if it took a loss on the job, Goodrich figured it could more than make up for it in the sale of replacement parts. Of course, if Goodrich bungled the job, there wouldn’t be a third chance.

John Warren, a seven-year veteran and one of Goodrich’s most capable engineers, was made project engineer and lost no time in working up a preliminary design for the brake. Perhaps because the design was faultless or perhaps because Warren was given to temper tantrums when criticized, cow- orkers accepted the engineer’s plan without question. So there was no reason to suspect that young Searle Lawson, one year out of college and six months with Goodrich, would come to think Warren’s design was fundamentally flawed.

Lawson was assigned by Warren to create the final produc- tion design. He had to determine the best materials for brake lin- ings and identify any needed adjustments in the brake design.

This process called for extensive testing to meet military specifications. If the brakes passed the grueling tests, they would then be flight-tested by the Air Force. Lawson lost no time in get- ting down to work. What he particularly wanted to learn was whether the brake could withstand the extreme internal tempera- tures, in excess of 1,000 degrees F, when the aircraft landed.

When the brake linings disintegrated in the first test, Lawson thought the problem might be defective parts or an unsuitable lining. But after two more consecutive failures, he decided the problem lay in the design: The four-disk design was simply too small to stop the aircraft without generating so much heat that the brake linings melted. In Lawson’s view, a larger, five-disk brake was needed.

Lawson knew well the implications of his conclusion. The four-disk brake assemblies that were arriving at the plant would have to be junked, and more tests would have to be conducted. The accompanying delays would preclude on- time delivery of the production brakes to LTV.

Lawson reported his findings and recommendations to John Warren. Going to a five-disk design was impossible, Warren told him. Officials at Goodrich, he said, were already boasting to LTV about how well the tests were going. Besides, Warren was confident that the problem lay not in the four-disk design but in the brake linings themselves.

Unconvinced, Lawson went to Robert Sink, who supervised engineers on projects. Sink was in a tight spot. If he agreed with Lawson, he would be indicting his own professional judgment: He was the man who had assigned Warren to the job. What’s more, he had accepted Warren’s design without reservation and had assured LTV more than once that there was little left to do but ship them the brakes. To recant now would mean explaining the reversal not only to LTV but also to the Goodrich hierarchy. In the end, Sink, who was not an engineer, deferred to the

Case 1.3

The a7d affair

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38      part one  moral philosophy and business

seasoned judgment of Warren and instructed Lawson to con- tinue the tests.

His own professional judgment overridden, Lawson could do little but carry on. He built a production model of the brake with new linings and subjected it to the rigorous qualification tests. Thirteen more tests were conducted, and thirteen more failures resulted. It was at this point that data analyst and technical writer Kermit Vandivier entered the picture.

Vandivier was looking over the data of the latest A7D test when he noticed an irregularity: The instrument recording some of the stops had been deliberately miscalibrated to indicate that less pressure was required to stop the aircraft than actually was the case. Vandivier immediately showed the test logs to test lab supervisor Ralph Gretzinger. He learned from the tech- nician who miscalibrated the instrument that Lawson had requested the miscalibration. Lawson later said he was simply following the orders of Sink and the manager of the design engineering section, who were intent on qualifying the brakes at whatever cost. For his part, Gretzinger vowed he would never permit deliberately falsified data or reports to leave his lab.

A month later, the brake was again tested, and again it failed. Nevertheless, Lawson asked Vandivier to start prepar- ing the various graph and chart displays for qualification. Vandivier refused and told Gretzinger what he’d been asked to do. Gretzinger was livid. He again vowed that his lab would not be part of a conspiracy to defraud. Then, bent on getting to the bottom of the matter, Gretzinger rushed off to see Russell Line, manager of the Goodrich Technical Services Section.

An hour later, Gretzinger returned to his desk looking like a beaten man. He knew he had only two choices: defy his superiors or do their bidding.

“You know,” he said to Vandivier, “I’ve been an engineer for a long time, and I’ve always believed that ethics and integ- rity were every bit as important as theorems and formulas, and never once has anything happened to change my beliefs. Now this. . . . Hell, I’ve got two sons I’ve got to put through school and I just . . .” When his voice trailed off, it was clear that he would in fact knuckle under. He and Vandivier would prepare the qualifying data; then someone “upstairs” would actually write the report. Their part, Gretzinger rationalized, wasn’t really so bad. “After all,” he said, “we’re just drawing some curves, and what happens to them after they leave here—well, we’re not responsible for that.” Vandivier knew

Gretzinger didn’t believe what he was saying about not being responsible. Both of them knew that they were about to become principal characters in a plot to defraud.

Unwilling to play his part, Vandivier decided that he, too, would confer with Line. Line was sympathetic; he said he understood what Vandivier was going through. But in the end he said he would not refer the matter to chief engineer H. C. “Bud” Sunderman, as Vandivier had suggested. Why not? Vandivier wanted to know.

“Because it’s none of my business, and it’s none of yours,” Line told him. “I learned a long time ago not to worry about things over which I had no control. I have no control over this.”

Vandivier pressed the point. What about the test pilots who might get injured because of the faulty brakes? Didn’t their uncertain fate prick Line’s conscience?

“Look,” said Line, growing impatient with Vandivier’s moral needling, “I just told you I have no control over this thing. Why should my conscience bother me?” Then he added, “You’re just getting all upset over this thing for noth- ing. I just do as I’m told, and I’d advise you to do the same.”

Vandivier made his decision that night. He knew, of course, he was on the horns of a dilemma. If he wrote the report, he would save his job at the expense of his con- science. If he refused, he would honor his moral code and, he was convinced, lose his job—an ugly prospect for anyone, let alone a forty-two-year-old man with a wife and several chil- dren. The next day, Vandivier phoned Lawson and told him he was ready to begin on the qualification report.

Lawson shot over to Vandivier’s office with all the speed of one who knows that, swallowed fast, a bitter pill doesn’t taste so bad. Before they started on the report, though, Vandivier, still uneasy with his decision, asked Lawson if he fully under- stood what they were about to do.

“Yeah,” Lawson said acidly, “we’re going to screw LTV. And speaking of screwing,” he continued, “I know now how a whore feels, because that’s exactly what I’ve become, an engineering whore. I’ve sold myself. It’s all I can do to look at myself in the mirror when I shave. I make me sick.”

For someone like Vandivier, who had written dozens of them, the qualification report was a snap. It took about a month, during which time the brake failed still another final qualification test, and the two men talked almost exclusively about the enormity of what they were doing. In the Nuremberg

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chapter one  The naTure of moraliTy      39

trials they found a historical analogy to their own complicity and culpability in the A7D affair. More than once, Lawson opined that the brakes were downright dangerous, that any- thing could happen during the flight tests. His opinion proved prophetic.

When the report was finished, copies were sent to the Air Force and LTV. Within a week test flights were begun at Edwards Air Force Base in California. Goodrich dispatched Lawson to Edwards as its representative, but he wasn’t there long. Several “unusual incidents” brought the flight tests liter- ally to a screeching halt. Lawson returned to the Troy plant, full of talk about several near crashes caused by brake trou- ble during landings. That was enough to send Vandivier to his attorney, to whom he told the whole sorry tale.

Although the attorney didn’t think Vandivier was guilty of fraud, he was convinced that the analyst/writer was guilty of participating in a conspiracy to defraud. Vandivier’s only hope, the attorney counseled, was to make a clean breast of the matter to the FBI. Vandivier did. At this point both he and Lawson decided to resign from Goodrich. In his letter of resig- nation, addressed to Russell Line, Vandivier cited the A7D report and stated: “As you are aware, this report contains numerous deliberate and willful misrepresentations which . . . expose both myself and others to criminal charges of conspir- acy to defraud.”

Vandivier was soon summoned to the office of Bud Sunderman, who berated him mercilessly. Among other things, Sunderman accused Vandivier of making irresponsi- ble charges and of arch disloyalty. It would be best, said Sunderman, if Vandivier cleared out immediately. Within min- utes, Vandivier had cleaned out his desk and left the plant.

Two days later Goodrich announced it was recalling the qualification report and replacing the old brake with a new five-disk brake at no cost to LTV.

aftermath

• A year later, a congressional committee reviewed the A7D affair. Vandivier and Lawson testified as government witnesses, together with Air Force officers and a General Accounting Office team. All testified that the brake was dangerous.

• Robert Sink, representing the Troy plant, depicted Vandivier as a mere high school graduate with no technical training, who preferred to follow his own lights rather than organizational

guidance. R. G. Jeter, vice president and general counsel of Goodrich, dismissed as ludicrous even the possibility that some thirty engineers at the Troy plant would stand idly by and see reports changed and falsified.

• The congressional committee adjourned after four hours with no real conclusion. The following day the Department of Defense, citing the A7D episode, made major changes in its inspection, testing, and reporting procedures.

• The A7D eventually went into service with the Goodrich-made five-disk brake.

• Searle Lawson went to work as an engineer for LTV assigned to the A7D project.

• Russell Line was promoted to production superintendent.

• Robert Sink moved up into Line’s old job.

• Kermit Vandivier became a newspaper reporter for the Daily News in Troy, Ohio.

disCussion Questions

1. Identify the main characters in this case, and explain what happened.

2. To what extent did Lawson, Vandivier, and Gretzinger consider the relevant moral issues before deciding to participate in the fraud? What was their reasoning? What would you have done if you were in their situation?

3. How did Sink and Line look at the matter? How would you evaluate their conduct?

4. Do you think Vandivier was wrong to work up the qualifi- cation report? Explain the moral principle or principles that underlie your judgment.

5. Was Vandivier right to “blow the whistle”? Was he morally required to so? Again, explain the moral principles on which your judgment is based.

6. Describe the different pressures to conform in this case and discuss the relevance of the concepts of groupthink and dif fusion of responsibility. Do any of these factors excuse the con duct of particular individuals in this case? If so, who and why?

7. Should Goodrich be held morally responsible as a com- pany for the A7D affair, or just the individuals involved?

8. What might Goodrich have done, and what steps should it take in the future, to ensure more moral behavior?

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40

Head of a premier Hedge fund and former

president of the NASDAQ stock exchange, Bernard Madoff was a respected financier with a sterling reputation. So, when he stated in a speech that “in today’s regulatory environment, it’s virtually impossible [for fund managers] to violate the rules,” his listeners were unlikely to have doubted the truth of what he was saying. They were even less likely to have foreseen how eerily prophetic his words would turn out to be when the FBI arrested him a year later for perpetrating what may have been the greatest scam of all times.

Madoff’s celebrated hedge fund, it turns out, was a total fraud—in essence, a gigantic Ponzi scheme. In a Ponzi scheme, a con artist takes in money from investors but keeps it for himself rather than investing it as promised. On paper, the profits of the investors continue to grow. If they want to redeem some of their fund shares for cash, the fraudster uses money from new investors to pay them. This keeps investors happy and content but clueless about what really happened to their money.

The fact that Madoff’s phony hedge fund reported con- sistently strong returns in both good markets and bad, with never a down quarter, made a few financial analysts suspicious. However, the law doesn’t require hedge funds to operate as transparently as it does mutual funds, and Madoff was notori- ously secretive about his investment strategy. The Securities

and Exchange Commission, which is charged with policing the financial marketplace, never noticed anything amiss, and most business observers and investment advisors simply thought that Madoff had the Midas touch. And so it seemed he did—until, that is, the financial crisis of 2008 when the meltdown on Wall Street led more and more of his investors to seek to redeem fund shares for cash. With new investors now few and far between, Madoff simply had no money to pay those investors

who wanted to cash in some or all of their chips. Unable to keep the game up, he confessed to his sons that his fund was “one big lie.” They promptly turned him in to the authorities.

Madoff’s victims included insurance companies, pension and investment funds, banks in Europe and Asia, and a number of prominent individuals, such as Hall of Fame baseball pitcher Sandy Koufax, filmmaker Steven Spielberg, and

actors Kevin Bacon and John Malkovich. Many of these people were bilked for millions and millions of dollars, in some cases losing nearly all their savings. Likewise, some of the charities that had invested with Madoff were completely ruined. Having lost their assets, they were forced to shut down. A few investors, however, who had withdrawn money from their accounts on and off over the years, ended up in an ethical quandary. The money that they thought was in their Madoff accounts was, of course, gone, but over the years they had actually taken more money

IntroductIon

CH a p t er 2

Normat i v e the or ie s of e th ics

madoff’s

celebrated hedge fund, it turns out, was a total

fraud—in essence, a gigantic ponzi scheme.

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chapter two  Normative theories of ethics      41chapter two  Normative theories of ethics      41

out of the fund, sometimes substantially more money, than they had initially put into it. But what they thought at the time was legitimate profit was, they now realized, almost certainly money that Madoff had stolen from other clients. Should they keep quiet? Should they return the money to other investors, most of whom had ended up deep in the hole? Or should they insist that the money they received was legitimately theirs and push (along with all the other investors) to somehow get restitution of the balances that just a few weeks before they had assumed still remained in their Madoff accounts?

Under legal pressure, Boston philanthropist Carl Shapiro, an early investor with Madoff, agreed to hand over to other victims the $625 million he had received over the years from Madoff, and in 2011 trustees representing Madoff’s victims filed suit against Fred Wilpon and Saul Katz, the successful investors who own the New York Mets, on the grounds that they should have known that the $300 million they had earned from their Madoff accounts were “fictitious profits.” As a general mat- ter, though, the legal responsibilities of those Madoff investors who came out ahead are unclear; a number of legal battles are being waged, and some in Congress want to protect the profits of innocent Madoff investors. In addition, of course, it’s unclear where any individual investor’s money actually went. But it’s not just factual or legal complexities that make the question dif- ficult. There are competing moral considerations. If you yourself were scammed, it might seem that you have no moral obligation to help those whose losses were greater—after all, you were a victim, too. On the other hand, although Madoff was ostensibly paying you money that you were entitled to, he was, in fact, pay- ing you with embezzled funds. Do those later investors have a right to get their money back from you? Would you act wrongly in hanging on to what you were lucky enough to get from Madoff before his scheme crashed? Or are the Madoff investors morally required to pool their gains and try to equalize their losses?

You don’t need to study moral philosophy to see that Madoff acted immorally. Only a complete scoundrel steals from charities, pension funds, and friends and acquaintances who have entrusted him with their life savings. But determining what an investor should do who got back from Madoff more than other investors did— perhaps even more than his or her initial investment—is more difficult. Even if the person wants to do the right thing, what exactly does morality require, and how are we to determine what that is? On what basis are we to judge what is right or wrong?

Chapter 1 explained that defensible moral judgments must be underwritten by sound moral principles. That is because when we judge something wrong, we are not judging simply that it is wrong but also that it is wrong for some reason or by virtue of some general characteristic.1 Moral principles thus provide the basis for making moral judgments. The use of these principles, however, is not a mechanical process in which one cranks in data and out pops an automatic moral judgment. Rather, the principles provide a conceptual frame- work that guides us in making moral decisions. Careful thought and open-minded reflection are always necessary to work from one’s moral principles to a considered moral judgment.

But what are the appropriate principles to rely on when mak- ing moral judgments? The truth is that there is no consensus among people who have studied ethics and reflected on these matters. Different theories exist as to the proper standard of right and wrong. As the British philosopher Bernard Williams put it, we are heirs to a rich and complex ethical tradition, in which a variety of different moral principles and ethical considerations intertwine and sometimes compete.2

Learning objeCtives

This chapter discusses the different normative perspectives and rival ethical principles that are our heritage. After distinguish- ing between what are called “consequentialist” and “noncon- sequentialist” normative theories, it looks in detail at several ethical approaches, discussing their pros and cons and their relevance to moral decision making in an organizational context:

1. Egoism, both as an ethical theory and as a psychological theory

2. Utilitarianism, the theory that the morally right action is the one that achieves the most happiness for everyone concerned

3. Kant’s ethics, with his categorical imperative and his emphasis on moral motivation and respect for persons

4. Other nonconsequentialist normative themes: duties, moral rights, and prima facie principles

The chapter concludes by suggesting a practical way of approaching moral decision making, which reflects the major concerns of the different normative theories that have been discussed.

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42 part one moral philosophy aNd busiNess

• • •

coNsequeNt ial ist a Nd NoNcoNsequeNt ial ist theor ies In ethics, normative theories propose some principle or principles for distinguishing right actions from wrong actions. These theories can, for convenience, be divided into two kinds: consequentialist and nonconsequentialist.

according to consequentialist theories, the moral rightness of an action is deter- mined solely by its results. If its consequences are good, then the act is right; if they are bad, the act is wrong. consequentialists (moral theorists who adopt this approach) determine what is right by weighing the ratio of good to bad that an action will produce. The right act is the one that produces (or will probably produce) at least as great a ratio of good to evil as any other course of action open to the agent.

one question that arises here is, consequences for whom? Should one consider the consequences only for oneself? or the consequences for everyone affected? The two most important consequentialist theories, egoism and utilitarianism, are distinguished by their

Level 1: Initial investor recruits 3 members

Promoter

Level 2: Those 3 members each recruit 3 more members (= 9 new members)

Level 3: Those 9 members each recruit 3 more members (= 27 new members)

Level 4: Those 27 members each recruit 3 more members (= 81 new members)

Benefits as portrayed by promoter to level-1 investor Pyramid levels

− $500

+ $150 x 3 = $450

+ $30 x 9 = $270

+ $30 x 27 = $810

+ $30 x 81 = $2430

TOTAL = $3460

closely related to ponzi schemes are pyramid schemes. in one variant, each investor pays $500 to the promoter and is to recruit three new members, who pay out $500 each to the promoter. each of these three members then should recruit three more members (who also pay out $500 each to the promoter), and so on. the investor is told that he will receive $150 for each of the three members whom he enlists at the first level. the investor is also promised a $30 com- mission for each recruit at the next three levels. each new recruit is told that he is at the top of the pyramid and stands to benefit from new levels of recruits.

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chapter two  Normative theories of ethics      43

different answers to this question. egoism advocates individual self-interest as its guiding principle. Utilitarianism holds that one must take into account everyone affected by the action. But both theories agree that rightness and wrongness are solely a function of an action’s results.

By contrast, nonconsequentialist (or deontological) theories contend that right and wrong are determined by more than the likely consequences of an action. nonconsequentialists do not necessarily deny that consequences are morally significant, but they believe that other factors are also relevant to the moral assessment of an action. For example, a nonconsequen- tialist would hold that for Kevin to break his promise to cindy is wrong not simply because it has bad results (cindy’s hurt feelings, Kevin’s damaged reputation, and so on) but because of the inherent character of the act itself. even if more good than bad were to come from Kevin’s breaking the promise, a nonconsequentialist might still view it as wrong. what matters is the nature of the act in question, not just its results. This idea will become clearer later in the chapter as we examine some specific nonconsequentialist principles and theories.

• • •

eGo ism a few years after Firestone first introduced its “500” steel-belted radial tires, it was dis- covered that their tread was prone to separate at high speeds, with a house subcommit- tee later concluding that the tires had led to thirty-four highway deaths. In response to the controversy, Firestone announced that it was discontinuing the “500.” newspapers at the time interpreted this to mean that Firestone would immediately remove the tires from the market. In fact, Firestone intended only a “rolling phaseout” and continued to manufacture the tire. when a Firestone spokesperson was later asked why the company had not corrected the media’s misinterpretation of its intent, the spokesperson said that Firestone’s policy was to ask for corrections only when it was beneficial to the company to do so—in other words, only when it was in the company’s self-interest.

The view that equates morality with self-interest is referred to as egoism. according to it, an act is morally right if and only if it best promotes the agent’s own interests. (here an “agent” can be a single person or, as in the Firestone example, an organization.) egoism makes personal advantage (both short term and long run) the standard for meas- uring an action’s rightness. If an action will produce more good for the agent than any alternative action would, then that action is the morally right one to perform.

Moral philosophers distinguish between two kinds of egoism: personal and imper- sonal. Personal egoists claim they should pursue their own best interests, but they do not say what others should do. Impersonal egoists claim that everyone should let self-interest guide his or her conduct.

Misconceptions about egoisM

Several misconceptions haunt both versions of egoism. one is that egoists do only what they like, that they believe in “eat, drink, and be merry.” not so. Undergoing unpleasant, even painful experience meshes with egoism, provided such temporary sacrifice is neces- sary for the advancement of one’s long-term interests.

another misconception is that all egoists endorse hedonism, the view that pleasure (or happiness) is the only thing that is good in itself, that it is the ultimate good, the one

summary Consequentialist moral theories see the moral

rightness or wrongness of actions as a function of their

results. If the consequences are good, the action is

right; if they are bad, the action is wrong. Nonconsequentialist theories see other

factors as also relevant to the determination of

right and wrong.

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44 part one moral philosophy aNd busiNess

thing in life worth pursuing for its own sake. although some egoists are hedonistic—as was the ancient Greek philosopher epicurus (341–270 bce)—other egoists have a broader view of what constitutes self-interest. Some of them identify a person’s good with knowledge or power; others with what some modern psychologists call “self-actualization.” egoists may, in fact, hold any theory of what is good.

a final but very important misconception is that egoists cannot act honestly, be gracious and helpful, or otherwise promote other people’s interests. egoism, however, requires us to do whatever will best further our own interests, and doing this sometimes requires us to advance the interests of others. In particular, egoism tells us to benefit oth- ers when we expect that our doing so will be reciprocated or when the act will bring us pleasure or in some way promote our own good. For example, egoism might discourage a shopkeeper from trying to cheat customers because it is likely to hurt business in the long run. or egoism might recommend to the chair of the board that she hire as a vice presi- dent her nephew, who is not the best candidate for the job but of whom she is very fond. hiring the nephew might bring her more satisfaction than any other course of action, even if the nephew doesn’t perform his job as well as someone else might.

psychological egoisM

So egoism does not preach that we should never assist others but rather that we have no basic moral duty to do so. The only moral obligation we have is to ourselves. although you and I are not required to act in the interests of others, we should if that is the best way to promote our own self-interest. In short: always look out for “number one.”

proponents of the ethical theory of egoism generally attempt to derive their basic moral principle from the alleged fact that human beings are by nature selfish creatures. according to this doctrine, termed psychological egoism, people are, as a matter of fact, so constructed that they must behave selfishly. psychological egoism asserts that all actions are selfishly motivated and that truly unselfish actions are therefore impos- sible. even such apparently self-sacrificial acts as giving up one’s own life to save the lives of one’s children or blowing the whistle on organizational misdeeds at great personal expense are, according to psychological egoism, done to satisfy the person’s own self- interested desires. For example, the parent may seek to perpetuate the family line or to avoid guilt, and the employee may be after fame or revenge.

probleMs with egoisM

although egoism as an ethical doctrine has always had its adherents, the theory is open to very strong objections. It is safe to say that few, if any, philosophers today would advo- cate it as either a personal or an organizational morality. consider these objections:

1. psychological egoism is not a sound theory. Self-interest motivates all of us to some extent, and we all know of situations in which someone pretended to be acting altruistically or morally but was really motivated only by self-interest. The theory of psychological egoism contends, however, that self-interest is the only thing that ever motivates anyone.

This contention seems vulnerable to various counterexamples. take the actual case of a man who, while driving a company truck, spotted smoke coming from inside a parked car and a child trying to escape from the vehicle. The man quickly

According to egoism, we should assist

others when doing so best promotes our own interests.

There are strong objections to egoism

as an ethical doctrine.

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chapter two  Normative theories of ethics      45

made a U-turn, drove up to the burning vehicle, and found a little girl trapped in the backseat, restrained by a seat belt. Flames raged in the front seat as heavy smoke billowed from the car. Disregarding his own safety, the man entered the car and removed the child, who would otherwise have died from the flames and poisonous fumes. when the police and rescue workers arrived, he quietly slipped away.

or take a more mundane example. It’s Saturday, and you feel like having a beer with a couple of pals and watching the ball game. on the other hand, you believe you ought to take your two children to the zoo, as you earlier suggested to them you might. Going to the zoo would bring them a lot of pleasure—and besides, you haven’t done much with them recently. of course, you love your children, and it will bring you some pleasure to go to the zoo with them, but—let’s face it—they’ve been rather whiny lately and you’d prefer to watch the ball game. nonetheless, you feel an obligation and so you go to the zoo.

These appear to be cases in which people are acting for reasons that are not self- interested. of course, the reasons that lead you to take your children to the zoo—a sense of obligation, a desire to promote their happiness—are your reasons, but that by itself does not make them self-interested reasons. Still less does it show that you are selfish. anything that you do is a result of your desires, but that fact doesn’t establish what the believer in psychological egoism claims—namely, that the only desires you have, or the only desires that ultimately move you, are self-interested desires.

proponents of the theory of psychological egoism will claim that deep down both the heroic man who saved the little girl and the unheroic parent who took the children to the zoo were really motivated by self-interest in some way or another. Maybe the hero was hoping to win praise or the parent to avoid criticism or outshine his or her spouse. or maybe some other self-interested consideration motivated them. adherents of psychological egoism can always claim that some yet-to-be- identified subconscious egoistic motivation is the main impulse behind any action.

at this point, though, psychological egoism sounds a little far-fetched, and we may suspect its advocates of trying to make their theory true by definition. whatever example we come up with, they will simply claim that, contrary to appearances, somehow or other the person is really motivated only by self-interest. one may well wonder how scientific this theory is, or how much content it has, when the hero and the coward, the parent who goes to the zoo and the parent who stays home, are equally selfish in their motivations.

a defender of egoism as an ethical doctrine could concede that people are not fully egoistic by nature and yet continue to insist that people ought morally to pur- sue only their own interests. Yet without the doctrine of psychological egoism, the ethical thesis of egoism becomes less attractive. other types of ethical principles are possible. we all care about ourselves, but how much sense does it make to see self- interest as the basis of right and wrong? Do we really want to say that someone acting altruistically is behaving immorally?

2. ethical egoism is not really a moral principle at all. Many critics of egoism as an ethical standard contend that it misunderstands the nature and point of morality. as chapter 1 explained, morality serves to restrain our purely self-interested desires so we can all live together. If our interests never came into conflict—that is, if it

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46 part one moral philosophy aNd busiNess

were never advantageous for one person to deceive or cheat another—then we would have no need for morality. The moral standards of a society provide the basic guidelines for cooperative social existence and allow us to resolve conflicts by appeal to shared principles of justification.

It is difficult to see how ethical egoism could perform this function. In a society of egoists, people might publicly agree to follow certain rules so their lives would run more smoothly. But it would be a very unstable world, because people would not hesitate to break the rules if they thought they could get away with it. nor can ego- ism provide a means for settling conflicts and disputes, because it simply tells each party to do whatever is necessary to promote effectively his or her interests.

Many moral theorists maintain that moral principles apply equally to the con- duct of all persons and that their application requires us to be objective and impar- tial. Moral agents are seen as those who, despite their own involvement in an issue, can be reasonably disinterested and objective—those who try to see all sides of an issue without being committed to the interests of a particular individual or group, including themselves. If we accept this attitude of detachment and impartiality as at least part of what it means to take a moral point of view, then we must look for it in any proposed moral principle.

Those who make egoism their moral standard are anything but objective, for they seek to guide themselves by their own best interests, regardless of the issue or circumstances. They do not even attempt to be impartial, except insofar as imparti- ality furthers their own interests. and, according to their theory, any third party offering advice should simply represent his or her own interest.

3. ethical egoism condones blatant wrongs. The most common objection to egoism as an ethical doctrine is that it sometimes condones actions that are blatantly immoral. Deception, theft, or even murder can be morally right according to the standard of egoism, if it advances the agent’s self-interest (and the agent can get away with it).

In response, the defender of egoism might argue that this objection begs the question by assuming that such acts are immoral and then repudiating egoism on this basis when, in fact, their morality is the very issue that moral principles such as egoism are meant to resolve. Still, egoism fails to do justice to some of our basic ideas about right and wrong. a moral principle that permits murder if it successfully advances one’s self-interest clashes with our firmest moral convictions. If anything is wrong, that is wrong.

• • •

ut il ita r ia Nism utilitarianism is the moral doctrine that we should always act to produce the great- est possible balance of good over bad for everyone affected by our actions. By “good,” utilitarians understand happiness or pleasure. Thus, the greatest happiness of all con- stitutes the standard that determines whether an action is right or wrong. although the basic theme of utilitarianism is present in the writings of many earlier thinkers, Jeremy

summary Egoism is the

consequentialist theory that an action is right if and only if it promotes the individual’s best

interests. Proponents of this theory base their view on the alleged fact that

human beings are, by nature, selfish (the

doctrine of psychological egoism). Critics of egoism argue that (1) psychological egoism is implausible, (2) egoism is not really a moral principle, and (3) egoism condones

blatant wrongs.

Utilitarianism tells us to bring about the

most happiness for everyone affected by

our actions.

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chapter two  Normative theories of ethics      47

Bentham (1748–1832) and John Stuart Mill (1806–1873) were the first to develop the theory explicitly and in detail. Both Bentham and Mill were philosophers with a strong interest in legal and social reform. They used the utilitarian standard to evaluate and criticize the social and political institutions of their day—for example, the prison system and the disenfranchisement of women. as a result, utilitarianism has long been associ- ated with social improvement.

Bentham viewed a community as no more than the individual persons that it com- prises. The interests of the community are simply the sum of the interests of its members. an action promotes the interests of an individual when it adds to the individual’s pleas- ure or diminishes the person’s pain. correspondingly, an action augments the happiness of a community only insofar as it increases the total amount of individual happiness. This is what Bentham had in mind when he argued for the utilitarian principle that actions are right if they promote the greatest human welfare, wrong if they do not.

For Bentham, pleasure and pain are merely types of sensations. he offered a “hedonic calculus” of six criteria for evaluating pleasure and pain exclusively by their quantitative differences—in particular, by their intensity and duration. This calculus, he believed, makes possible an objective determination of the morality of anyone’s conduct, individual or collective, on any occasion.

Bentham rejected any distinctions based on the type of pleasure except insofar as they might indicate differences in quantity. Thus, if equal amounts of pleasure are involved, throwing darts is as good as writing poetry and baking a cake as good as com- posing a symphony; watching Shakespeare’s Hamlet has no more value than watching Jersey Shore. although he himself was an intelligent, cultivated man, Bentham main- tained that there is nothing intrinsically better about refined and intellectual pleasures than about crude or prosaic ones. The only issue is which yields the greater amount of enjoyment.

John Stuart Mill thought Bentham’s concept of pleasure was too simple. he viewed human beings as having elevated faculties that allow them to pursue various higher kinds of pleasure. The pleasures of the intellect and imagination, in particular, have a higher value than those of mere physical sensation. Thus, for Mill the utility principle must take into consideration the relative quality of different pleasures and pains, not just their intensity and duration.

although Bentham and Mill had different conceptions of pleasure, both men equated pleasure and happiness and considered pleasure the ultimate value. In this sense they are hedonists: pleasure, in their view, is the one thing that is intrinsically good or worthwhile. anything that is good is good only because it brings about pleasure (or hap- piness), directly or indirectly. take education, for example. The learning process itself might be pleasurable to us; reflecting on or working with what we have learned might bring us satisfaction at some later time; or by making possible a career and life that we could not have had otherwise, education might bring us happiness indirectly. In contrast, critics of Bentham and Mill contend that things other than happiness are also inherently good—for example, knowledge, friendship, and aesthetic satisfaction. The implication is that these things are valuable even if they do not lead to happiness.

Bentham and Mill cared about happiness because they implicitly identified it with well-being, that is, with what is good for people. In their view, our lives go well—we have well-being—just to the extent that our lives are pleasurable or happy. Some moral theorists have modified utilitarianism so that it aims at other consequences in addition to

Jeremy Bentham and John Stuart Mill were important early utilitarians.

Bentham and Mill had different conceptions of pleasure, but they both equated it with happiness and believed that pleasure was the ultimate value.

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48 part one moral philosophy aNd busiNess

happiness. and some utilitarians, wary of trying to compare one person’s happiness with another’s, have interpreted their theory as requiring us not to maximize happiness but rather to maximize the satisfaction of people’s desires or preferences. The focus here will be utilitarianism in its standard form, in which the good to be aimed at is human happi- ness or well-being, but what will be said about standard or classical utilitarianism applies, with the appropriate modifications, to other versions as well.

although this chapter will later consider another form of utilitarianism, known as “rule utilitarianism,” utilitarianism in its most basic version, often called act utilitarianism, states that we must ask ourselves what the consequences of a particular act in a particular situation will be for all those affected. If its consequences bring more net good than those of any alternative course of action, then this action is the right one and the one we should perform.

six points about utilitarianisM

Before evaluating utilitarianism, one should understand some points that might lead to confusion and misapplication. First, when deciding which action will produce the great- est happiness, we must consider unhappiness or pain as well as happiness. Suppose, for example, that an action produces eight units of happiness and four units of unhappiness. Its net worth is four units of happiness. Suppose also that an opposed action produces ten units of happiness and seven units of unhappiness; its net worth is three units. In this case we should choose the first action over the second. In the event that both lead not to happiness but to unhappiness, and there is no third option, we should choose the one that brings fewer units of unhappiness.

Second, actions affect people to different degrees. playing your radio loudly might enhance two persons’ pleasure a little, cause significant discomfort to two others, and leave a fifth person indifferent. The utilitarian theory is not that each person votes on the basis of his or her pleasure or pain, with the majority ruling, but rather that we add up the various pleasures and pains, however large or small, and go with the action that brings about the greatest net amount of happiness.

Third, because utilitarians evaluate actions according to their consequences and because actions produce different results in different circumstances, almost anything might, in principle, be morally right in some particular situation. For example, whereas breaking a promise generally produces unhappiness, there can be circumstances in which, on balance, more happiness would be produced by breaking a promise than by keeping it. In those cases, utilitarianism would require us to break the promise.

Fourth, utilitarians wish to maximize happiness not simply immediately but in the long run as well. all the indirect ramifications of an act have to be taken into account. Lying might seem a good way out of a tough situation, but if and when the people we deceive find out, not only will they be unhappy, but also our reputations and our relationships with them will be damaged. This is a serious risk that a utilitarian cannot ignore.

Fifth, utilitarians acknowledge that we often do not know with certainty what the future consequences of our actions will be. accordingly, we must act so that the expected or likely happiness is as great as possible. If I take my friend’s money, unbeknownst to him, and buy lottery tickets with it, there is a chance that we will end up millionaires and that my action will have maximized happiness all around. But the odds are definitely against it; the most likely result is loss of money (and probably of a friendship, too).

Six important things to understand about

utilitarianism.

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chapter two  Normative theories of ethics      49

Therefore, no utilitarian could justify gambling with purloined funds on the grounds that it might maximize happiness.

Sometimes it is difficult to determine the likely results of alternative actions, and no modern utilitarian really believes that we can assign precise units of happiness and unhappiness to people. But as Mill reminds us, we actually do have quite a lot of experi- ence as to what typically makes people happy or unhappy. In any case, as utilitarians our duty is to strive to maximize total happiness, even when it is difficult to know which action will produce the most good.

Finally, when choosing among possible actions, utilitarianism does not require us to disregard our own pleasure. nor should we give it added weight. rather, our own pleasure and pain enter into the calculus equally with the pleasures and pains of oth- ers. even if we are sincere in our utilitarianism, we must guard against the possibility of being biased in our calculations when our own interests are at stake. For this reason, and because it would be time-consuming to do a utilitarian calculation before every action, utilitarians encourage us to rely on rules of thumb in ordinary moral circumstances. we can make it a rule of thumb, for example, to tell the truth and keep our promises, rather than to calculate possible pleasures and pains in every routine case, because we know that in general telling the truth and keeping promises result in more happiness than do lying and breaking promises.

utilitarianisM in an organizational context

Several features about utilitarianism make it appealing as a standard for moral decisions in business and nonbusiness organizations.

First, utilitarianism provides a clear and straightforward basis for formulating and testing policies. By utilitarian standards, an organizational policy, decision, or action is good if it promotes the general welfare more than any other alternative. a policy is con- sidered wrong (or in need of modification) if it does not promote total utility as well as some alternative would. Utilitarians do not ask us to accept rules, policies, or principles blindly. rather, they require us to test their worth against the standard of utility.

Second, utilitarianism provides an objective and attractive way of resolving conflicts of self-interest. This feature of utilitarianism dramatically contrasts with egoism, which seems incapable of resolving such conflicts. By proposing a standard outside self-interest, utilitarianism greatly minimizes and may actually eliminate such disputes. Thus, individ- uals within organizations make moral decisions and evaluate their actions by appealing to a uniform standard: the general good.

Third, utilitarianism provides a flexible, result-oriented approach to moral decision making. By recognizing no actions of a general kind as inherently right or wrong, utilitari- anism encourages organizations to focus on the results of their actions and policies, and it allows them to tailor their decisions to suit the complexities of their situations. This facet of utilitarianism enables organizations to make realistic and workable moral decisions.

critical inquiries of utilitarianisM

1. is utilitarianism really workable? Utilitarianism instructs us to maximize happi- ness, but in difficult cases we may be very uncertain about the likely results of the alternative courses of action open to us. Furthermore, comparing your level of happiness or unhappiness with that of someone else is at best tricky, at worst

summary Utilitarianism, another

consequentialist theory, maintains that

the morally right action is the one that

provides the most happiness for all those

affected. After assessing as best we can the likely results of each action, not just in the short term but in the long run as well, we are to choose the

course of conduct that brings about the

greatest net happiness.

Three features of utilitarianism make it appealing in an organizational context.

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50 part one moral philosophy aNd busiNess

impossible—and when many people are involved, the matter may get hopelessly complex. even if we assume that it is possible to make comparisons and to identify the various possible results of each course of action that a person might take (and to determine the likelihood of each result), is it realistic to expect people to take the time to make those calculations and, if they do, to make them accurately? Some crit- ics of act utilitarianism have contended that teaching people to follow the basic utili- tarian principle would not in fact promote happiness because of the difficulties in applying utilitarianism accurately.

2. are some actions wrong, even if they produce good? Like egoism, utilitarianism focuses on the results of an action, not on the character of the action itself. For utili- tarians, no action is in itself objectionable. It is objectionable only when it results in less happiness than could otherwise have been brought about. critics of utilitarian- ism, by contrast, contend that some actions can be immoral and thus things we must not do, even if doing them would maximize happiness.

Suppose a dying woman has asked you to promise to send the $25,000 under her bed to her nephew in another part of the country. She dies without anyone else’s knowing of the money or of the promise that you made. now suppose, too, that you know the nephew is a spendthrift and a drunkard and, were the money delivered to him, it would be wasted in a week of outrageous partying. on the other hand, a very fine orphanage in your town needs such a sum to improve and expand its recreational facilities, something that would provide happiness to many children for years to come. It seems clear that on utilitarian grounds you should give the money to the orphanage, because this action would result in greater net happiness.

Individuals whose happiness levels must be measured and combined by the utilitarian.

H ap

p in

es s

Q u

o ti

en t

+4

+3

+2

+1

0

−1

−2

−3

−4

= Individual a’s units of happiness

= Individual b’s units of happiness

= Individual c’s units of happiness

= Individual d’s units of happiness

can we estimate the effects of our actions

well enough for utilitarianism to work?

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chapter two  Normative theories of ethics      51

Many people would balk at this conclusion, contending that it would be wrong to break your promise, even if doing so would bring about more good than keeping it. having made a promise, you have an obligation to keep it, and a deathbed prom- ise is particularly serious. Furthermore, the deceased woman had a right to do with her money as she wished; it is not for you to decide how to spend it. Likewise, hav- ing been bequeathed the money, the nephew has a right to it regardless of how wisely or foolishly he might spend it. Defenders of utilitarianism, however, would insist that promoting happiness is all that really matters and warn you not to be blinded by moral prejudice.

critics of utilitarianism respond that it is utilitarianism that is morally blind because it not only permits but sometimes even requires us to perform immoral actions. philosopher richard Brandt states the case against act utilitarianism this way:

act-utilitarianism . . . implies that if you have employed a boy to mow your lawn and he has finished the job and asks for his pay, you should pay him what you promised only if you cannot find a better use for your money. . . . It implies that if your father is ill and has no prospect of good in his life, and maintaining him is a drain on the energy and enjoyments of others, then, if you can end his life without provoking any public scandal or setting a bad example, it is your positive duty to take matters into your own hands and bring his life to a close.3

In the same vein, ethicist a. c. ewing concludes that “[act] utilitarian princi- ples, logically carried out, would result in far more cheating, lying and unfair action than any good man would tolerate.”4

Defenders of act utilitarianism would reply that these charges are exaggerated. although it is theoretically possible, for example, that not paying the boy for his work might maximize happiness, this is extremely unlikely. Utilitarians contend that only in very unusual circumstances will pursuit of the good conflict with our ordi- nary ideas of right and wrong, and in those cases—like the deathbed promise—we should put aside those ordinary ideas. The anti-utilitarian replies that the theoretical possibility that utilitarianism may require immoral conduct shows it to be an unsat- isfactory moral theory.

3. is utilitarianism unjust? Utilitarianism concerns itself with the sum total of happi- ness produced, not with how that happiness is distributed. If policy X brings two units of happiness to each of five people and policy Y brings nine units of happiness to one person, one unit each to two others, and none to the remaining two, then Y is to be preferred (eleven units of happiness versus ten), even though it distributes that happiness very unequally.

worse still from the critic’s point of view, utilitarianism may even require that some people’s happiness be sacrificed in order to achieve the greatest overall amount of happi- ness. Sometimes the general utility may be served only at the expense of a single individ- ual or group. For example, under the right of eminent domain (see case 3.1), the government may appropriate private property for public use (after compensating the owner). Thus, the government may legally purchase your house from you to widen a highway—even if you don’t want to sell the house or want more money than the govern- ment is willing to pay. The public interest is served at your private expense. Is this just?

summary In an organizational

context, utilitarianism provides an objective

way to resolve conflicts of self-interest and

encourages a realistic and result-oriented approach to moral

decision making. But critics contend that

(1) utilitarianism is not really workable,

(2) some actions are wrong even if they

produce good results, and (3) utilitarianism incorrectly overlooks

considerations of justice and the distribution of

happiness.

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52 part one moral philosophy aNd busiNess

or consider the Dan river experiment, part of the long-running controversy over the cause of brown lung disease. claiming that the disease is caused by the inha- lation of microscopic fibers in cotton dust, textile unions fought for years for tough regulations to protect their workers. The occupational Safety and health administration (oSha) responded by proposing cotton dust standards, which would require many firms to install expensive new equipment. a few months before the deadline for installing the equipment, officials at Dan river Mills, a textile manufacturer in Danville, Virginia, asked the government to waive the require- ments for a time so the company could conduct an experiment to determine the precise cause of brown lung disease. Both the state and the Department of Labor allowed the extension. In response, the textile workers union contended, “It is sim- ply unconscionable to allow hundreds of cotton mill workers to continue to face a high risk of developing brown lung disease.”5

Suppose that the Dan river project did expose workers to what is considered a high risk of contracting lung disease. If so, then a small group of individuals—633 textile workers at ten locations in Danville, Virginia—were being compelled to carry the burden of isolating the cause of brown lung disease. Is that just?

although their critics would say no, utilitarians would respond that it is, if the experiment maximizes the total good of society. Does it? In fact, the results of the experiment were inconclusive, but if the project had succeeded in identifying the exact cause of the disease, then thousands of textile workers across the country would have benefited. researchers might also have discovered a more economical way to ensure worker safety than by installing expensive new equipment, which in turn would have profited both consumers and the textile industry. certainly, utili- tarians would consider the potentially negative impact on workers, but only as one factor among others. at the time of the decision, after the interests of all affected parties have been weighed, if extending the deadline is likely to yield the greatest net benefit or utility, then doing so is just—even though workers might be injured.

the interplay between self-interest and utility

Both self-interest and utility play important roles in organizational decisions, and the views of many businesspeople blend these two theories. to the extent that each business pursues its own interests and each businessperson tries to maximize personal success, business practice can be called egoistic. But business practice is also utilitarian in that pursuing one’s economic interests is thought to benefit society as a whole, and playing by the established rules of the competitive game is seen as advancing the social good. The classical capitalist economist adam Smith (1723–1790) held such a view. he argued that leaving business and businesspeople free to pursue their self-interest will serve the good of society. Indeed, Smith believed that only through egoistic pursuits could the greatest economic benefit for the whole society be produced. The essence of Smith’s position can be seen in the following passage from the Wealth of Nations (1776), in which Smith underscores the interplay between self-interest and the social good and between egoism and utilitarianism:

every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed,

Business practice is egoistic, but Adam

Smith and others believe that it is also

utilitarian because the pursuit of

self-interest promotes the good

of society.

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chapter two  Normative theories of ethics      53

and not that of the society, which he has in view. But the study of his own advantage, naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society. . . .

as every individual, therefore, endeavours as much as he can . . . to employ his capital . . . [so] that its produce may be of the greatest value, every individual necessarily labors to render the annual revenue of the society as great as he can. he generally, indeed, nei- ther intends to promote the public interest, nor knows how much he is promoting it. . . . he intends only his own security; and by directing that industry in such a manner as its product may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.6

Many today would agree with Smith* that the pursuit of self-interest is central to our economic system because it provides the motivating force that turns the wheels of commerce and industry. although acknowledging that business is part of a social system and that certain ground rules are needed and should be followed, they would argue that society is best served by the active pursuit of self-interest within the established rules of business practice. Thus what we might call business egoism—the view that it is morally acceptable (or even morally required) for individuals to pursue their economic interests when engaged in business—is defended on utilitarian grounds.

• • •

K aNt’s e th ics Most of us find the ideal of promoting human happiness and well-being an attrac- tive one and, as a result, admire greatly people like Mother teresa (1910–1997), who devoted her life to working with the poor. Despite the attractiveness of this ideal, many moral philosophers are critical of utilitarianism—particularly because, like egoism, it reduces all morality to a concern with consequences. although nonconsequential- ist normative theories vary significantly, adopting different approaches and stress- ing different themes, the writings of the preeminent German philosopher Immanuel Kant (1724–1804) provide an excellent example of a thoroughly nonconsequentialist approach to ethics. perhaps few thinkers today would endorse Kant’s theory on every point, but his work has greatly influenced subsequent philosophers and has helped shape our general moral culture.

Kant sought moral principles that do not rest on contingencies and that define actions as inherently right or wrong apart from any particular circumstances. he believed that moral rules can, in principle, be known as a result of reason alone and are not based on observation (as are, for example, scientific judgments). In contrast to utilitarianism and other consequentialist doctrines, Kant’s ethical theory holds that we do not have

*chapter 4 examines Smith’s position in more detail.

Kant believed that moral reasoning is not based on factual knowledge and that the results of our actions do not determine whether they are right or wrong.

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54 part one moral philosophy aNd busiNess

to know anything about the likely results of, say, my telling a lie to my boss in order to know that it is immoral. “The basis of obligation,” Kant wrote, “must not be sought in human nature, [nor] in the circumstances of the world.” rather it is a priori, by which he meant that moral reasoning is not based on factual knowledge and that reason by itself can reveal the basic principles of morality.

good will

chapter 1 mentioned Good Samaritan laws, which shield from lawsuits those rendering emergency aid. Such laws, in effect, give legal protection to the humanitarian impulse behind emergency interventions. They formally recognize that the interventionist’s heart was in the right place, that the person’s intention was irreproachable. and because the person acted from right intention, he or she should not be held liable for any inadvert- ent harm except in cases of extreme negligence. The widely observable human tendency to introduce a person’s intentions in assigning blame or praise is a good springboard for engaging Kant’s ethics.

nothing, said Kant, is good in itself except good will. This does not mean that intel- ligence, courage, self-control, health, happiness, and other things are not good and desir- able. But Kant believed that their goodness depends on the will that makes use of them. Intelligence, for instance, is not good when exercised by an evil person.

By will Kant meant the uniquely human capacity to act from principle. contained in the notion of good will is the concept of duty: only when we act from a sense of duty does our action have moral worth. when we act only out of feeling, inclination, or self- interest, our actions—although they may be otherwise identical with ones that spring from the sense of duty—have no true moral worth.

Suppose that you’re the owner of a small convenience store. Late one night a cus- tomer pays for his five-dollar purchase with a twenty-dollar bill, which you mistake for a ten. only after the customer leaves do you realize you short-changed him. You race out the front door and find him lingering by a vending machine. You give him the ten dollars with your apologies, and he thanks you warmly.

can we say that you acted from good will? not necessarily. You may have acted from a desire to promote future business or to cultivate a reputation for honesty. If so, you would have acted in accordance with, but not from, duty. Your apparently virtuous ges- ture just happened to coincide with what duty requires. according to Kant, if you do not will the action from a sense of your duty to be fair and honest, your action lacks moral worth. actions have true moral worth only when they spring from a recognition of duty and a choice to discharge it.

what determines our duty? how do we know what morality requires of us? Kant answered these questions by formulating what he called the “categorical imperative.” This extraordinarily significant moral concept is the linchpin of Kant’s ethics.

the categorical iMperative

we have seen that egoists and utilitarians allow factual circumstances or empirical data to determine moral judgments. In contrast, Kant believed that reason alone can establish the moral law. we need not rely on empirical evidence relating to consequences and to similar situations. Just as we know, seemingly through reason alone, such abstract truths as “every change must have a cause,” so we can arrive at absolute moral truth through

summary Kant’s theory is an important example

of a purely nonconsequentialist approach to ethics. Kant held that only

when we act from duty does our action have

moral worth. Good will is the only thing that is

good in itself.

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chapter two  Normative theories of ethics      55

nonempirical reasoning, and thereby discover our duty. For Kant, the moral law must hold in all circumstances, free from any internal contradiction. If we can formulate this law or rule, he thought, everyone would be obliged to follow it without exception.

Kant believed that there is just one command (imperative) that is categorical and thus necessarily binding on all rational agents, regardless of any other considerations. From this one categorical imperative, this universal command, we can derive all the specific commands of duty. Kant’s categorical imperative says that we should always act in such a way that we can will the maxim of our action to be a universal law. So Kant’s answer to the question “what determines whether an act is right?” is that an act is mor- ally right if and only if we can will it as a universal law of conduct.

The obvious and crucial question that arises here is, “when are we justified in saying that the maxim of our action could become a universal law of conduct?”

By maxim, Kant meant the subjective principle of an action, the principle (or rule) that people in effect formulate in determining their conduct. For example, suppose building contractor Martin promises to install a sprinkler system in a project but is will- ing to break that promise to suit his purposes. his maxim can be expressed this way: “I’ll make promises that I’ll break whenever keeping them no longer suits my purposes.” This is the subjective principle—the maxim—that directs his action.

Kant insisted that the morality of any maxim depends on whether we can logically will it to be a universal law governing everyone’s conduct. could Martin’s maxim be universally acted on? That depends on whether the maxim as law would involve a contra- diction. The maxim “I’ll make promises that I’ll break whenever keeping them no longer suits my purposes” could not be universally acted on because it involves a contradiction of will. on the one hand, Martin is willing that it be possible to make promises and have them honored. on the other, if everyone made promises without intending to keep them, then promises would not be honored in the first place, because it is in the nature of promises that they be believed. a law that allowed promise breaking would contradict the very nature of a promise. Similarly, a law that allowed lying would contradict the very nature of serious communication, for the activity of serious communication (as opposed to joking) requires that participants intend to speak the truth. I cannot, without contra- diction, will both serious conversation and lying. By contrast, there is no problem, Kant thinks, in willing promise keeping or truth telling to be universal laws.

consider, as another example, Kant’s account of a man who, in despair after suffer- ing a series of major setbacks, contemplates suicide. while still rational, the man asks whether it would be contrary to his duty to take his own life. could the maxim of his action become a universal law of nature? Kant thinks not:

his maxim is this: From self-love I make it my principle to shorten my life when its continued duration threatens more evil than it promises satisfaction. There only remains the question whether this principle of self-love can become a universal law of nature. one sees at once a contradiction in a system of nature whose law would destroy life by means of the very same feeling that acts so as to stimulate the furtherance of life. . . . Therefore, such a maxim cannot possibly hold as a universal law of nature and is, consequently, wholly inconsistent with the supreme principle of all duty.7

when Kant insists that a moral rule be consistently universalizable, he is saying that moral rules prescribe categorically, not hypothetically. a hypothetical prescription tells us what to do if we desire a particular outcome. Thus, “If I want people to like me, I should be

If you make a promise that you don’t intend to keep, it is impossible to will the maxim governing your action as a universal law.

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56 part one moral philosophy aNd busiNess

nice to them” and “If you want to go to medical school, you must take biology” are hypo- thetical imperatives. They tell us what we must do on the assumption that we have some particular goal. If that is what we want, then this is what we must do; but if we don’t want to go to medical school, then the command to take biology does not apply to us. In con- trast, Kant’s imperative is categorical: It commands unconditionally. It is necessarily binding on everyone, regardless of his or her specific goals or desires, regardless of consequences. a categorical imperative takes the form of “Do this” or “Don’t do that”—no ifs, ands, or buts.

universal acceptability

There is another way of looking at the categorical imperative. each person, through his or her own acts of will, legislates the moral law. The moral rules that we obey are not imposed on us from the outside. They are self-imposed and self-recognized, fully inter- nalized principles. The sense of duty that we obey comes from within; it is an expression of our own higher selves.

Thus, moral beings give themselves the moral law and accept its demands on them- selves. But that is not to say we can prescribe anything we want, for we are constrained by reason and its requirements. Because reason is the same for all rational beings, we all give ourselves the same moral law. In other words, when you answer the question “what should I do?” you must consider what all rational beings should do. You can embrace something as a moral law only if all other rational beings can also embrace it. It must have universal acceptability.

to see whether a rule or principle is a moral law, we can thus ask if what the rule commands would be acceptable to all rational beings. In considering lying, theft, or murder, for example, you must consider the act not only from your own viewpoint but also from the perspective of the person lied to, robbed, or murdered. presumably, rational beings do not want to be lied to, robbed, or murdered. The test of the morality of a rule, then, is whether all rational beings looking at the matter objectively and impar- tially could accept the rule regardless of whether the action in question was performed by them or done to them. This is an important moral insight, and most philosophers see it as implicit in Kant’s discussion of the categorical imperative, even though Kant (whose writings are difficult to understand) did not make the point in this form.

The principle of universal acceptability has important applications. Suppose a man advocates a hiring policy that discriminates against women. For this rule to be universally acceptable, the man would have to be willing to accept it if he were a woman, something he would presumably be unwilling to do. or suppose the manufacturer of a product decides to market it even though the manufacturer knows that the product is unsafe when used in a certain common way and that consumers are ignorant of this fact. applying the universal-acceptability principle, the company’s decision makers would have to be willing to advocate marketing the product even if they were themselves in the position of unin- formed consumers. presumably they would be unwilling to do this. So the rule that would allow the product to be marketed would fail the test of universal acceptability.

huManity as an end, never as Merely a Means

In addition to the principle of universal acceptability, Kant explicitly offered another, very famous way of formulating the core idea of his categorical imperative. according to this formulation, as rational creatures we should always treat other rational creatures as

summary Kant’s categorical

imperative states that an action is morally right if and only if we can will the maxim (or principle) represented

by our action as a universal law. For

example, a person making a promise with no intention of keeping it cannot universalize the maxim governing his action because if

everyone followed this principle, promising

would make no sense. Kant believed that the categorical imperative is binding on all rational creatures, regardless of their specific goals

or desires and regardless of the consequences.

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chapter two  Normative theories of ethics      57

ends in themselves and never as only means to our own ends. This formulation under- scores Kant’s belief that every human being has an inherent worth resulting from the sheer possession of rationality. we must always act in a way that respects this humanity in others and in ourselves. when brokers at the Dallas office of prudential Securities encouraged unnecessary buying and selling of stocks by their clients in order to reap a commission (a practice called “churning”), they failed to do this. They were treating their clients simply as a means to their own ends and not respecting them as persons, as ends in themselves.8

as rational beings, humans would act inconsistently if they did not treat everyone else the way they themselves would want to be treated. here we see shades of the Golden rule. Indeed, Kant’s moral philosophy can be viewed as a profound reconsideration of this basic nonconsequentialist principle. Because rational beings recognize their own inner worth, they would never wish to be used as if they were entities possessing value only as means to an end.

Kant maintained, as explained first, that an action is morally right if and only if we can will it to be a universal law of conduct. we now have two ways of reformulating his categorical imperative that may be easier to grasp and apply:

First reformulation: an action is right if and only if its underlying principle is univer- sally acceptable, that is, acceptable to all rational parties whether the action is done by them or to them.

Second reformulation: one must always act so as to treat other people as ends in themselves.

Kant in an organizational context

Like utilitarianim, Kant’s moral theory has application for organizations. First, the categorical imperative gives us firm rules to follow in moral decision mak-

ing, rules that do not depend on circumstances or results and that do not permit indi- vidual exceptions. no matter what the consequences may be or who does it, some actions are always wrong. Lying is an example: no matter how much good might come from misrepresenting a product, such deliberate misrepresentation is always wrong. Similarly, it would be wrong to expose uninformed workers to some occupational health risk on the grounds that it advances medical knowledge.

Second, Kant introduces an important humanistic dimension into business deci- sions. one of the principal objections to egoism and utilitarianism is that they permit us to treat humans as means to ends. Kant’s principles clearly forbid this. Many would say that respect for the inherent worth and dignity of human beings is much needed today in business, where encroaching technology and the pressure of globalization tend to dehumanize people under the guise of efficiency. Kant’s theory puts the emphasis of organizational decision making where it belongs: on individuals. organizations, after all, involve human beings working in concert to provide goods and services for other human beings. The primacy Kant gives the individual reflects this essential aspect of business.

Third, Kant stresses the importance of motivation and of acting on principle. according to Kant, it is not enough just to do the right thing; an action has moral worth only if it is done from a sense of duty—that is, from a desire to do the right thing for its own sake. The importance of this point is too often forgotten. Sometimes when individuals and organizations believe that an action promotes the interests of everyone,

Two alternative formulations of the categorical imperative.

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58 part one moral philosophy aNd busiNess

they are actually rationalizing—doing what is best for themselves and only imagining that somehow it will also benefit others. worse still, they may defend their actions as morally praiseworthy when, in fact, they are only behaving egoistically. They wouldn’t do the morally justifiable thing if they didn’t think it would pay off for them. By stressing the importance of motivation, a Kantian approach serves as a corrective to this. even an action that helps others has moral value for Kant only if the person doing it is morally motivated—that is, acting on principle or out of moral conviction.

critical inquiries of Kant’s ethics

1. What has moral worth? according to Kant, the convenience store owner who returns the ten dollars to the customer is doing the right thing. But if his action is motivated by self-interest (perhaps he wants to get a reputation for honesty), then it does not have moral worth. That seems plausible. But Kant also held that if the owner does the right thing out of instinct, habit, or sympathy for the other person, then the act still does not have moral worth. only if it is done out of a sense of duty does the action have moral value. Many moral theorists have felt that Kant was too severe on this point. Do we really want to say that giving money to famine relief has no moral worth if one is emotionally moved to do so by pictures of starving children rather than by a sense of duty? we might, to the contrary, find a person with strong human sympathies no less worthy or admirable than the person who gives solely out of an abstract sense of duty.

2. is the categorical imperative an adequate test of right? Kant said that a moral rule must function without exception. critics wonder why the prohibition against such actions as lying, promise breaking, and suicide must be exceptionless. They say that Kant failed to distinguish between saying that a person should not except himself or herself from a rule and that the rule itself cannot specify exceptions.

If stealing is wrong, it’s wrong for me as well as for you. “Stealing is wrong, except if I do it” is not universalizable, for then stealing would be right for all to do, which contradicts the assertion that stealing is wrong. But just because no one may make of oneself an exception to a rule, it does not follow that the rule itself cannot specify exceptions.

Suppose, for example, that we decide that stealing is sometimes right, perhaps in the case of a person who is starving. Thus, the rule becomes “never steal except when starving.” This rule seems just as universalizable as “never steal.” The phrase “except. . . .” can be viewed not as justifying a violation of the rule but as building a qualification into it. critics in effect are asking why a qualified rule is not just as good as an unqualified one. If it is, then we no longer need to state rules in the sim- ple, direct, unqualified manner that Kant did.

In fairness to Kant, it could be argued that his universalization formula can be interpreted flexibly enough to meet commonsense objections. For example, perhaps we could universalize the principle that individuals should steal rather than starve to death or that it is permissible to take one’s own life to extinguish unspeakable pain. Yet to qualify the rules against stealing, lying, and taking one’s life seems to invite a non-Kantian analysis to justify the exceptions. one could, it seems, universalize more than one moral rule in a given situation: “Do not lie unless a life is at stake”

summary There are two

alternative formulations of the categorical

imperative. The first is that the action must be

acceptable to all rational parties

whether it is done by them or done to them. The second is that one

must always treat other people as ends,

never merely as means.

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chapter two  Normative theories of ethics      59

versus “Lying is wrong unless necessary to avoid the suffering of innocent people.” If so, then the categorical imperative would supply at best a necessary, but not a suffi- cient, test of right. But once we start choosing among various alternative rules, then we are adopting an approach to ethics that Kant would have rejected.

3. What does it mean to treat people as means? Kant’s mandate that individuals must always be considered as ends in themselves and never merely as means expresses our sense of the intrinsic value of the human spirit and has profound moral appeal. Yet it is not always clear when people are being treated as ends and when merely as means. For example, Kant believed that prostitution is immoral because, by selling their sexual services, prostitutes allow themselves to be treated as means. prostitutes, however, are not the only ones to sell their services. anyone who works for a wage does so. Does that mean that we are all being treated immorally, because our employers are presumably hiring us as a means to advance their own ends? presumably not, because we freely agreed to do the work. But then the prostitute might have freely chosen that line of work, too.

• • •

other NoNcoNsequeNt ial ist PersPect iv es For Kant, the categorical imperative provided the basic test of right and wrong, and he was resolutely nonconsequentialist in his application of it. You know now what he would say about the case of the deathbed promise: The maxim permitting you to break

summary Kant’s ethics gives us firm standards that do not depend on results; it injects a humanistic

element into moral decision making and

stresses the importance of acting

on principle and from a sense of duty. Critics, however, worry that

(1) Kant’s view of moral worth is too restrictive,

(2) the categorical imperative is not a

sufficient test of right and wrong, and (3)

distinguishing between treating people as

means and respecting them as ends in

themselves may be difficult in practice.

Is the categorical imperative an ade- quate test of right? A moral rule must function without exception, according to Kant. How appli- cable is that tenet to torture?

Ch ris

ta D

eR id

de r/

Sh ut

te rs

to ck

.co m

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60 part one moral philosophy aNd busiNess

your promise cannot be universalized, and hence it would be immoral of you to give the money to the orphanage, despite its bringing about more happiness. But nonconsequen- tialists are not necessarily Kantians, and several different nonutilitarian moral concerns emerged in the discussion of the deathbed promise example.

critics of act utilitarianism believe that it is faulty for maintaining that we have one and only one moral duty. a utilitarian might follow various principles as rules of thumb, but they are only calculation substitutes. all that matters morally to utilitarians is the maximization of happiness. Yet this idea, many philosophers think, fails to do justice to the richness and complexity of our moral lives.

priMa facie obligations

one influential philosopher who argued this way was the British scholar w. D. ross (1877–1971).9 ross rejected utilitarianism as too simple and as untrue to the way we ordinarily think about morality and about our moral obligations. we see ourselves, ross and like-minded thinkers contend, as being under various moral duties that can- not be reduced to the single obligation to maximize happiness. often these obligations grow out of special relationships into which we enter or out of determinate roles that we undertake. our lives are intertwined with other people’s in particular ways, and we have, as a result, certain specific moral obligations.

For example, as a professor, rodriguez is obligated to assist her students in the learning process and to evaluate their work in a fair and educationally productive way—obligations to the specific people in her classroom that she does not have to other people. as a spouse, rodriguez must maintain a certain emotional and sexual fidelity to her partner. as a par- ent, she must provide for the individual human beings who are her children. as a friend to Smith, she may have a moral responsibility to help him out in a time of crisis. having bor- rowed money from chang, rodriguez is morally obligated to pay it back. Thus, different relationships and different circumstances generate a variety of specific moral obligations.

In addition, we have moral duties that do not arise from our unique interactions and relationships with other people. For example, we ought to treat all people fairly, do what we can to remedy injustices, and make an effort to promote human welfare generally. The latter obligation is important, but for a nonconsequentialist like ross it is only one among various obligations that people have.

at any given time, we are likely to be under more than one obligation, and sometimes these obligations can conflict—that is, we may have an obligation to do A and an obligation to do B, where it is not possible for us to do both A and B. For example, I promise to meet a friend on an urgent matter, and now, as I am hurrying there, I pass an injured person who is obviously in need of help. Stopping to aid the person will make it impossible for me to fulfill my promise. what should I do? For moral philosophers like ross, there is no single answer for all cases. what I ought to do will depend on the circumstances and relative importance of the conflicting obligations. I have an obligation to keep my promise, and I have an obliga- tion to assist someone in distress. what I must decide is which of these obligations is, in the given circumstance, the more important. I must weigh the moral significance of the promise against the comparative moral urgency of assisting the injured person.

ross and many contemporary philosophers believe that all (or at least most) of our moral obligations are prima facie ones. a prima facie obligation is an obligation that can be overridden by a more important obligation. For instance, we take the keeping of promises seriously, but almost everyone would agree that in some circumstances—for

Ross believed that we have various

moral duties that cannot be reduced

to one single obligation to

maximize happiness.

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chapter two  Normative theories of ethics      61

example, when a life is at stake—it would be not only morally permissible, but morally required, to break a promise. our obligation to keep a promise is a real one, and if there is no conflicting obligation, then we must keep the promise. But that obligation is not absolute or categorical; it could in principle be outweighed by a more stringent moral obligation. The idea that our obligations are prima facie is foreign to Kant’s way of look- ing at things.

consider an example that Kant himself discussed.10 Imagine that a murderer comes to your door, wanting to know where your friend is so that he can kill her. Your friend is in fact hiding in your bedroom closet. Most people would agree that your obligation to your friend overrides your general obligation to tell the truth and that the right thing to do would be to lie to the murderer to throw him off your friend’s trail. although you have a genuine obligation to tell the truth, it is a prima facie obligation, one that other moral considerations can outweigh. Kant disagreed. he maintained that you must always tell the truth—that is, in all circumstances and without exception. For him, tell- ing the truth is an absolute or categorical obligation, not a prima facie one.

ross thought that our various prima facie obligations could be divided into seven basic types: duties of fidelity (that is, to respect explicit and implicit promises), duties of reparation (for previous wrongful acts), duties of gratitude, duties of justice, duties of beneficence (that is, to make the condition of others better), duties of self-improvement, and duties not to injure others.11 Unlike utilitarianism, ross’s ethical perspective is plu- ralistic in recognizing a variety of genuine obligations. But contrary to Kant, ross does not see these obligations as absolute and exceptionless. on both points, ross contended that his view of morality more closely fits with our actual moral experience and the way we view our moral obligations.

ross also saw himself as siding with commonsense morality in maintaining that our prima facie obligations are obvious. he believed that the basic principles of duty are as self-evident as the simplest rules of arithmetic and that any person who has reached the age of reason can discern that it is wrong to lie, to break promises, and to injure people needlessly. however, what we should do, all things considered, when two or more prima facie obligations conflict is often difficult to judge. In deciding what to do in any con- crete situation, ross thought, we are always “taking a moral risk.”12 even after the fullest reflection, judgments about which of these self-evident rules should govern our conduct are only “more or less probable opinions which are not logically justified conclusions from the general principles that are recognised as self-evident.”13

assisting others

nonconsequentialists believe that utilitarianism presents too simple a picture of our moral world. In addition, they worry that utilitarianism risks making us all slaves to the maximization of total happiness. Stop and think about it: Isn’t there something that you could be doing—for instance, volunteering at the local hospital or orphanage, collecting money for third-world development, helping the homeless—that would do more for the general good than what you are doing now or are planning to do tonight or tomorrow? Sure, working with the homeless might not bring you quite as much pleasure as what you would otherwise be doing, but if it would nonetheless maximize total happiness, then you are morally required to do it. however, by following this reasoning, you could end up working around the clock, sacrificing yourself for the greater good. This notion seems mistaken.

Ross’s pluralistic ethical perspective differs from utilitarianism. Ross also rejected Kant’s belief that our moral obligations are absolute and exceptionless.

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62 part one moral philosophy aNd busiNess

Most nonutilitarian philosophers, like ross, believe that we have some obligation to promote the general welfare, but they typically view this obligation as less stringent than, for example, the obligation not to injure people. They see us as having a much stronger obligation to refrain from violating people’s rights than to promote their happiness or well-being. From this perspective, a manufacturing company’s obligation not to violate oSha regulations and thereby endanger the safety of its employees is stronger than its obligation to open up day-care facilities for their children, even though the cost of the two is the same. The company, in other words, has a stronger duty to respect its legal and contractual employment-related obligations than to promote its employees’ happiness in other ways. Likewise, for a company to violate people’s rights by despoiling the environ- ment through the discharge of pollutants would be morally worse than for it to decide not to expand a job training program in the inner city, even if expanding the program would bring about more total good.

Different nonutilitarian philosophers may weigh these particular obligations differ- ently, depending on their particular moral theory. But they typically believe that we have a stronger duty not to violate people’s rights or in some other way injure them than we do to assist people or otherwise promote their well-being. a utilitarian, concerned solely with what will maximize happiness, is less inclined to draw such a distinction.

Many moral philosophers draw a related distinction between actions that are morally required and charitable or supererogatory actions—that is, actions that would be good to do but not immoral not to do. act utilitarianism does not make this distinction. although we admire Mother teresa and albert Schweitzer for devot- ing their lives to doing good works among the poor, we see them as acting above and beyond the call of duty; we do not expect so much from ordinary people. Yet people who are not moral heroes or who fall short of sainthood may nonetheless be living morally satisfactory lives.

nonutilitarian theorists see the distinction between morally obligatory actions and supererogatory actions not so much as a realistic concession to human weakness but as a necessary demarcation if we are to avoid becoming enslaved to the maximization of the general welfare. The idea here is that each of us should have a sphere in which we are free to pursue our own plans and goals, to carve out a distinctive life plan. These plans and goals are limited by various moral obligations, in particular by other people’s rights, but the demands of morality are not all-encompassing.

Moral rights

What, then, are rights, and what rights do people have? Broadly defined, a right is an entitlement to act or have others act in a certain way. The connection between rights and duties is that, generally speaking, if you have a right to do something, then someone else has a correlative duty to act in a certain way. For example, if you claim a “right” to drive, you mean that you are entitled to drive or that others should—that is, have a duty to—permit you to drive. Your right to drive under certain conditions is derived from our legal system and is thus considered a legal right.

In addition to rights that are derived from some specific legal system, we also have moral rights. Some of these moral rights derive from special relationships, roles, or cir- cumstances in which we happen to be. For example, if tom has an obligation to return Bob’s car to him on Saturday morning, then Bob has a right to have tom return his car. If I have agreed to water your plants while you are on vacation, you have a right to expect

Nonutilitarian philosophers

believe that we have a stronger

obligation to respect people’s rights and avoid

injuring them than we do to promote

their happiness.

summary Nonconsequentialists typically emphasize

moral rights— entitlements to act in a certain way or to have others act in a certain way. These rights can

rest on special relationships and roles, or they can be general human rights. Rights

can be negative, protecting us from

outside interference, or they can be positive, requiring others to

provide us with certain benefits or

opportunities.

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chapter two  Normative theories of ethics      63

me to look after them in your absence. as a student, you have a right to be graded fairly, and so on.

even more important are rights that do not rest on special relationships, roles, or sit- uations. For example, the rights to life, free speech, and unhampered religious affiliation are widely accepted, not just as the entitlements of some specific political or legal system but as fundamental moral rights. More controversial, but often championed as moral rights, are the rights to medical care, decent housing, education, and work. Moral rights that are not the result of particular roles, special relationships, or specific circumstances are called human rights. They have several important characteristics.

First, human rights are universal. For instance, if the right to life is a human right, as most of us believe it is, then everyone, everywhere, and at all times, has that right. By contrast, there is nothing universal about your right that I keep my promise to help you move or about my right to drive 65 miles per hour on certain roads.

Second, and closely related, human rights are equal rights. If the right to free speech is a human right, then everyone has this right equally. no one has a greater right to free speech than anyone else. In contrast, your daughter has a greater right than do the daughters of other people to your emotional and financial support.

Third, human rights are not transferable, nor can they be relinquished. If we have a fundamental human right, we cannot give, lend, or sell it to someone else. we cannot waive it, and no one can take it from us. That is what is meant in the Declaration of Independence when certain rights—namely, life, liberty, and the pursuit of happiness— are described as “unalienable.” By comparison, legal rights can be renounced or trans- ferred, as when one party sells another a house or a business.

Fourth, human rights are natural rights, not in the sense that they can be derived from a study of human nature, but in the sense that they do not depend on human institutions the way legal rights do. If people have human rights, they have these rights simply because they are human beings. They do not have them because they live under a certain legal system. human rights rest on the assumption that people have certain basic moral entitlements merely because of their humanity. no authoritative body assigns them human rights. The law may attempt to protect human rights, to make them explicit and safe through codification, but the law is not their source.

rights, and in particular human rights, can be divided into two broad categories: negative rights and positive rights. negative rights reflect the vital interests that human beings have in being free from outside interference. The rights guaranteed in the Bill of rights—freedom of speech, assembly, religion, and so on—fall within this category, as do the rights to freedom from injury and to privacy. correlating with these are duties that we all have not to interfere with others’ pursuit of these interests and activities. positive rights reflect the vital interests that human beings have in receiving certain benefits. They are rights to have others provide us with certain goods, services, or opportunities. today, positive rights often are taken to include the rights to education, medical care, equal job opportunity, comparable pay, and so on. correlating with these are positive duties for appropriate parties to assist individuals in their pursuit of these interests.

Thus a child’s right to education implies not only that no one should interfere with the child’s education but also that the necessary resources for that education ought to be provided. In the case of some positive rights—for example, the right to a decent stand- ard of living, as proclaimed by the United nations’ 1948 human rights charter—who

Human rights have four important characteristics.

Philosophers distinguish negative rights from positive rights.

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64 part one moral philosophy aNd busiNess

exactly has the duty to provide the goods and services required to fulfill those rights is unclear. also, interpreting a right as negative or positive is sometimes controversial. For example, is my right to liberty simply the right not to be interfered with as I live my own life, or does it also imply a duty on the part of others to provide me with the means to make the exercise of that liberty meaningful?

The significance of positing moral rights is that they provide grounds for making moral judgments that differ radically from utilitarianism’s grounds. once moral rights are asserted, the locus of moral judgment becomes the individual, not society. For example, if workers have a moral right to be informed about potentially dangerous working condi- tions and to decide for themselves whether to undertake the work in question, then it would be wrong to violate this right—even if doing so would somehow promote the com- mon good. again, if employees have a right to compensation equal to what others receive for doing comparable work, then they cannot be paid less on the grounds that doing so would be economically efficient or in some other way result in greater overall utility.

Utilitarianism, in effect, treats all such entitlements as subordinate to the general welfare. Thus, individuals are entitled to act in a certain way and entitled to have oth- ers allow or aid them to so act only insofar as acknowledging this right or entitlement achieves the greatest good. The assertion of moral rights, therefore, decisively sets non- consequentialists apart from utilitarians.

nonconsequentialisM in an organizational context

we have already looked at Kant’s ethics in an organizational context, but, as we have seen, many nonconsequentialists (like ross) are not Kantians, and their ideas also have impor- tant implications for moral decision making in business and nonbusiness organizations.

First, in its non-Kantian forms nonconsequentialism stresses that moral decision making involves the weighing of different moral factors and considerations. Unlike utilitarianism, nonconsequentialism does not reduce morality solely to the calculation of consequences; rather, it recognizes that an organization must usually take into account other equally important moral concerns. Theorists like ross emphasize that, contrary to what Kant believed, there can often be rival and even conflicting moral demands on an organization. For example, obligations to employees, stockholders, and consumers may pull a corporation in different directions, and determining the organization’s proper moral course may not be easy.

Second, nonconsequentialism acknowledges that the organization has its own legiti- mate goals to pursue. There are limits to the demands of morality, and an organization that fulfills its moral obligations and respects the relevant rights of individuals is mor- ally free to advance whatever (morally permissible) ends it has—public service, profit, government administration, and so on. contrary to utilitarianism, organizations and the people in them need not see themselves as under an overarching obligation to seek continually to enhance the general welfare.

Third, nonconsequentialism stresses the importance of moral rights. Moral rights, and in particular human rights, are a crucial factor in most moral deliberations, includ- ing those of organizations. Before it acts, any morally responsible business or nonbusi- ness organization must consider carefully how its actions will impinge on the rights of individuals—not just the rights of its members, such as stockholders and employees, but also the rights of others, such as consumers. Moral rights place distinct and firm con- straints on what sorts of things an organization can do to fulfill its own ends.

summary Nonconsequentialists needn’t be Kantians.

W. D. Ross, for instance, rejects both

Kantianism and utilitarianism, arguing that we are under a

variety of distinct moral obligations. These are prima facie, meaning that any one of them

may be outweighed in some circumstances

by other, more important moral considerations.

Nonconsequentialists believe that a duty to assist others and to

promote total happiness is only one of a number of duties

incumbent on us.

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chapter two  Normative theories of ethics      65

critical inquiries of nonconsequentialisM

1. How well justified are these nonconsequentialist principles and moral rights? ross maintained that we have immediate intuitive knowledge of the basic prima facie moral principles, and indeed it would seem absurd to try to deny that it is wrong to cause needless suffering or that making a promise imposes some obligation to keep it. only someone the moral equivalent of colorblind could fail to see the truth of these statements; to reject them would seem as preposterous as denying some obvious fact of arithmetic—for example, that 12 1 4 5 16. Likewise, it appears obvious—indeed, as thomas Jefferson wrote, “self-evident”—that human beings have certain basic and inalienable rights, unconditional rights that do not depend on the decrees of any particular government.

Yet we must be careful. what seems obvious, even self-evident, to one culture or at one time in human history may turn out to be not only not self-evident but actually false. That the earth is flat and that heavier objects fall faster than lighter ones were two “truths” taken as obvious in former centuries. Likewise, the inferi- ority of women and of various nonwhite races was long taken for granted; this supposed fact was so obvious that it was hardly even commented on. The idea that people have a right to practice a religion that the majority “knows” to be false—or, indeed, to practice no religion whatsoever—would have seemed morally scandal- ous to many of our forebears and is still not embraced in all countries around the world. today many vegetarians eschew meat eating on moral grounds and con- tend that future generations will consider our treatment of animals, factory farm- ing in particular, to be as morally benighted as slavery. So what seems obvious, self-evident, or simple common sense may not be the most reliable guide to mor- ally sound principles.

2. Can nonconsequentialists satisfactorily handle conflicting rights and principles? people today disagree among themselves about the correctness of certain moral principles. claims of right, as we have seen, are often controversial. For example, do employees have a moral right to their jobs—an entitlement to be fired only with just cause? to some of us, it may seem obvious that they do; to others, perhaps not. and how are we to settle various conflicting claims of right? Jones, for instance, claims a right to her property, which she has acquired honestly through her labors—that is, she claims a right to do with it as she wishes. Smith is ill and claims adequate medical care as a human right. Because he cannot afford the care himself, acknowledging his right will probably involve taxing people like Jones and thus limiting their property rights.

to sum up these two points: First, even moral principles that seem obvious or a mat- ter of common sense have to be examined critically; and second, nonconsequentialists should not rest content until they find a way of resolving disputes among conflicting prima facie principles or rights. This is not to suggest that nonconsequentialists cannot find deeper and theoretically more satisfactory ways of grounding moral claims and of handling disputes between them. The point to be underscored here is simply the neces- sity of doing so.

summary In an organizational

context, nonconsequentialism

(in its non-Kantian forms) stresses the

plurality of moral considerations to be

weighed. While emphasizing the importance of

respecting moral rights, it acknowledges that morality has limits and that organizations have legitimate goals

to pursue. Critics question whether (1) nonconsequentialist

principles are adequately justified

and whether (2) nonconsequentialism

can satisfactorily handle conflicting

rights and principles.

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66 part one moral philosophy aNd busiNess

• • •

ut il ita r ia Nism oNce more Until now, our discussion of utilitarianism has focused on the classic and most straight- forward version of it, namely, “act utilitarianism.” according to act utilitarianism, we have one and only one moral obligation, the maximization of happiness for everyone concerned, and every action is to be judged by this standard. But a different utilitarian approach, called “rule utilitarianism,” is relevant to the discussion of the moral concerns characteristic of nonconsequentialism—in particular, relevant to the nonconsequential- ist’s criticisms of act utilitarianism. The rule utilitarian would, in fact, agree with many of these criticisms. (rule utilitarianism has been formulated in different ways, but this discussion follows the version defended by richard Brandt.)

rule utilitarianism maintains that the utilitarian standard should be applied not to individual actions but to moral codes as a whole. The rule utilitarian asks what moral code (that is, what set of moral rules) a society should adopt to maximize happiness. The principles that make up that code would then be the basis for distinguishing right actions from wrong actions. as Brandt explains:

a rule-utilitarian thinks that right actions are the kind permitted by the moral code optimal for the society of which the agent is a member. an optimal code is one designed to maximize welfare or what is good (thus, utility). This leaves open the possibility that a particular right act by itself may not maximize benefit. . . . on the rule-utilitarian view, then, to find what is morally right or wrong we need to find which actions would be permitted by a moral system that is “optimal” for the agent’s society.14

The “optimal” moral code does not refer to the set of rules that would do the most good if everyone conformed to them all the time. The meaning is more complex. The optimal moral code must take into account what rules can reasonably be taught and obeyed, as well as the costs of inculcating those rules in people. recall from chapter 1 that if a principle or rule is part of a person’s moral code, then it will influence the per- son’s behavior. The person will tend to follow that principle, to feel guilty when he or she does not live up to it, and to disapprove of others who fail to conform to it. rule utilitar- ians must consider not just the benefits of having people motivated to act in certain ways but also the costs of instilling those motivations in them. as Brandt writes:

The more intense and widespread an aversion to a certain sort of behavior, the less fre- quent the behavior is apt to be. But the more intense and widespread, the greater the cost of teaching the rule and keeping it alive, the greater the burden on the individual, and so on.15

Thus, the “optimality” of a moral code encompasses both the benefits of getting people to act in certain ways and the costs of bringing that about. perfect compliance is not a realistic goal. “Like the law,” Brandt continues, “the optimal moral code normally will not produce 100 percent compliance with all its rules; that would be too costly.”16

Some utilitarian thinkers in earlier centuries adopted or came close to adopting rule utilitarianism (although they did not use that term). For example, the nineteenth- century legal theorist John austin wrote: “Utility [should] be the test of our conduct, ultimately, but not immediately. . . . our rules [should] be fashioned on utility; our con- duct, on our rules.”17 This accords well with the rule-utilitarian idea that we should apply

The notion of an optimal moral code takes into account

the difficulty of getting people to

follow a given set of rules.

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chapter two  Normative theories of ethics      67

the utilitarian standard only to the assessment of alternative moral codes; we should not try to apply it to individual actions. we should seek to determine the specific set of prin- ciples that would in fact best promote total happiness for society. Those are the rules we should promulgate, instill in ourselves, and teach to the next generation.

what will the optiMal code looK liKe?

rule utilitarians such as Brandt argue strenuously that the ideal or optimal moral code for a society will not be the single act-utilitarian command to maximize happiness. They contend that teaching people that their only obligation is to maximize happiness would not in fact maximize happiness.

First, people will make mistakes if, before they act, they try to calculate the con- sequences of each and every thing they might possibly do. Second, if all of us were act utilitarians, such practices as keeping promises and telling the truth would be rather shaky, because we could expect others to keep promises or tell the truth only when they believed that doing so would maximize happiness. Third, the act-utilitarian principle is too demanding, because it seems to imply that each person should continually be striv- ing to promote total well-being.

For these reasons, rule utilitarians believe that more happiness will come from instilling in people a pluralistic moral code, one with a number of different principles. By analogy, imagine a traffic system with just one rule: Drive your car in a way that maxi- mizes happiness. Such a system would be counterproductive; we do much better in terms of total human well-being to have a variety of traffic regulations—for example, obey stop signs, yield to the right, and pass only on the left. In such a pluralistic system we cannot justify cruising through a red light with the argument that doing so maximizes total hap- piness by getting us home more quickly.

The principles of the optimal code would presumably be prima facie in ross’s sense—that is, capable of being overridden by other principles. Different principles would also have different moral weights. It would make sense, for example, to instill in people an aversion to killing that is stronger and deeper than the aversion to telling white lies. In addition, the ideal code would acknowledge moral rights. teaching people to respect moral rights maximizes human welfare in the long run.

The rules of the optimal code provide the sole basis for determining right and wrong. an action is not necessarily wrong if it fails to maximize happiness; it is wrong only if it conflicts with the ideal moral code. rule utilitarianism thus gets around many of the problems that plague act utilitarianism. at the same time, it provides a plausible basis for deciding which moral principles and rights we should acknowledge and how much weight we should attach to them. we try to determine those principles and rights that, generally adhered to, would best promote human happiness.

Still, rule utilitarianism has its critics. There are two common objections. First, act utilitarians maintain that a utilitarian who cares about happiness should be willing to violate rules in order to maximize happiness. why make a fetish out of the rules?

Second, nonconsequentialists, while presumably viewing rule utilitarianism more favorably than act utilitarianism, still balk at seeing moral principles determined by their consequences. They contend, in particular, that rule utilitarians ultimately subordinate rights to utilitarian calculation and therefore fail to treat rights as fundamental and inde- pendent moral factors.

Rule utilitarians believe that the optimal moral code will not consist of just one rule—to maximize happiness.

summary Rule utilitarianism is a

hybrid theory. It maintains that the

correct principles of right and wrong are

those that would maximize happiness if society adopted them.

Rule utilitarianism applies the utilitarian

standard not directly to individual actions but rather to the choice of the moral principles

that are to guide individual action. Rule utilitarianism avoids

many of the standard criticisms of act

utilitarianism.

Critics of rule utilitarianism raise two objections.

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68 part one moral philosophy aNd busiNess

• • •

mor al dec is ioN maK iNG: a Pr act ical a PProach Theoretical controversies permeate the subject of ethics, and as we have seen, philoso- phers have proposed rival ways of understanding right and wrong. These philosophical differences of perspective, emphasis, and theory are significant and can have profound practical consequences. This chapter has surveyed some of these issues, but obviously it cannot settle all of the questions that divide moral philosophers. Fortunately, however, many problems of business and organizational ethics can be intelligently discussed and even resolved by people whose fundamental moral theories differ (or who have not yet worked out their own moral ideas in some systematic way). This section discusses some important points to keep in mind when analyzing and discussing business ethics and offers, as a kind of model, one possible procedure for making moral decisions.

In the abstract, it might seem impossible for people to reach agreement on contro- versial ethical issues, given that ethical theories differ so much and that people them- selves place moral value on different things. Yet in practice moral problems are rarely so intractable that open-minded and thoughtful people cannot, by discussing matters calmly, rationally, and thoroughly, make significant progress toward resolving them. chapter 1 stressed that moral judgments should be logical, should be based on facts, and should appeal to sound moral principles. Bearing this in mind can often help, especially when various people are discussing an issue and proposing rival answers.

First, in any moral discussion, make sure that the participants agree about the rel- evant facts. often moral disputes hinge not on matters of moral principle but on differing assessments of what the facts of the situation are, what alternatives are open, or what the probable results of different courses of action will be. For instance, the directors of an international firm might acrimoniously dispute the moral permissibility of a new overseas investment. The conflict might appear to involve some fundamental clash of moral princi- ples and perspectives when, in fact, it is the result of some underlying disagreement about the likely effects of the proposed investment on the lives of the local population. Until this factual disagreement is acknowledged and dealt with, little is apt to be resolved.

Second, once there is general agreement on factual matters, try to spell out the moral principles to which different people are, at least implicitly, appealing. Seeking to determine these principles will often help people clarify their own thinking enough to reach a solution. Sometimes they will agree on what moral principles are relevant and yet disagree over how to balance them. Identifying this discrepancy can be helpful. Bear in mind, too, that skepticism is in order when someone’s moral stance on an issue appears to rest simply on a hunch or an intuition and cannot be related to some more general moral principle. as moral decision makers, we are seeking not only an answer to a moral issue but an answer that can be publicly defended, and the public defense of a moral judg- ment usually requires an appeal to general principle. By analogy, judges do not hand down judgments based simply on what strikes them as fair in a particular case. They must relate their decisions to general legal principles or statutes.

a reluctance to defend our moral decisions in public is almost always a warning sign. If we are unwilling to account for our actions publicly, chances are that we are doing something we cannot really justify morally. In addition, Kant’s point that we must be willing to universalize our moral judgments is relevant here. we cannot sincerely endorse a principle if we are not willing to see it applied generally. Unfortunately, we occasionally

Recall that moral judgments should be logical and based on

facts and sound moral principles.

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chapter two  Normative theories of ethics      69

do make judgments—for example, that alfred’s being late to work is a satisfactory reason for firing him—that rest on a principle we would be unwilling to apply to our own situations; hence, the moral relevance of the familiar question: “how would you like it if . . . ?” Looking at an issue from the other person’s point of view can cure moral myopia.

obligations, effects, ideals

as a practical basis for discussing moral issues in organizations, it is useful to try to approach those issues in a way that is acceptable to individuals with differing moral view- points. we want to avoid presupposing the truth of one particular theoretical perspec- tive. By emphasizing factors that are relevant to various theories, both consequentialist and nonconsequentialist, we can find some common ground on which moral decision making can proceed. Moral dialogue can thus take place in an objective and analytical way, even if the participants do not fully agree on all philosophical issues.

what factors or considerations, then, seem important from most ethical perspec- tives? Following professor V. r. ruggiero, we can identify three shared concerns.18 The first is with obligations, that is, with the specific duties or moral responsibilities that we have in a given situation. every significant human action—personal and profes- sional—arises in the context of human relationships. These relationships, the roles we have assumed, and the expectations created by our previous actions can be the source of particular duties and rights. In addition, we are obligated to respect people’s human rights. obligations bind us. In their presence, morality requires us, at least prima facie, to do certain things and to avoid doing others. even utilitarians can agree with this.

a second concern common to most ethical systems is with the effects of our actions. when reflecting on a possible course of action, one needs to take into account its likely results. although nonconsequentialists maintain that things other than consequences or results can affect the rightness or wrongness of actions, few if any of them would ignore consequences entirely. almost all nonconsequentialist theories place some moral weight on the results of our actions. practically speaking, this means that in making a moral decision, we must identify all the interested parties and how they would be affected by the different courses of action open to us.

The third consideration relevant to most ethical perspectives is the impact of our actions on important ideals. an ideal is some morally significant goal, virtue, or notion of excellence worth striving for. clearly, different cultures impart different ideals and, equally important, different ways of pursuing them. our culture respects virtues such as generos- ity, courage, compassion, and loyalty, as well as more abstract ideals such as peace, justice, and equality. In addition to these moral ideals, there are institutional or organizational ideals: efficiency, product quality, customer service, and so forth. Does a particular act serve or violate these ideals? Both consequentialists and nonconsequentialists can agree that this is an important consideration in determining the moral quality of actions.

In isolating these three concerns common to almost all ethical systems—obligations, effects, and ideals—ruggiero provided a kind of practical synthesis of consequentialist and nonconsequentialist thought that seems appropriate for our purposes. a useful approach to moral questions in an organizational context will therefore reflect these considerations: the obligations that derive from organizational relationships or are affected by organizational con- duct, the ideals at stake, and the effects or consequences of alternative courses of action. any action that honors obligations while respecting ideals and benefiting people can be presumed to be moral. an action that does not pass scrutiny in these respects will be morally suspect.

summary Despite disagreements

on controversial theoretical issues, people can make

significant progress in resolving practical moral problems

through open-minded and reflective

discussion. One useful approach is to identify

the (possibly conflicting) obligations, ideals, and effects in a

given situation and then to determine

where the emphasis should lie among

these different considerations.

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70 part one moral philosophy aNd busiNess

This view leads to what is essentially a two-step procedure for evaluating actions and making moral choices. The first step is to identify the important considerations involved: obligations, effects, and ideals. accordingly, we should ask if any basic obligations are involved. If so, what are they and who has them? who is affected by the action and how? how do these effects compare with those of the alternatives open to us? what ideals does the action respect or promote? what ideals does it neglect or thwart? The second step is to decide which of these considerations deserves emphasis. Sometimes the issue may be largely a matter of obligations; other times, some ideal may predominate; still other times, consideration of effects may be the overriding concern.

If two or more obligations conflict, it is obvious that we should choose the stronger one, and when two or more ideals conflict, or when ideals conflict with obligations, we should obviously honor the more important one. Similarly, when rival actions have dif- ferent results, we should prefer the action that produces the greater good or the lesser harm. But in real-world situations, deciding these matters is often difficult, and there is no easy way of balancing obligations, effects, and ideals when these considerations pull in different directions. The fact is that we have no sure procedure for making such compara- tive determinations, which involve assessing worth and assigning relative priorities to our assessments. In large part, the chapters that follow attempt to sort out the values and principles embedded in the tangled web of frequently subtle, ill-defined problems we meet in business and organizational life. It is hoped that examining these issues will help you (1) identify the obligations, effects, and ideals involved in specific moral issues and (2) decide where the emphasis should lie among the competing considerations.

A two-step approach to moral decision

making is to identify the relevant

obligations, ideals, and effects and then

decide which consideration

deserves the most emphasis.

s t u d y c o r N e r Key terms and ConCepts

act utilitarianism business egoism categorical imperative consequentialist theories egoism eminent domain good will hedonism human rights

points to revieW

• consequentialist vs. nonconsequentialist normative theories (pp. 42–43)

• personal vs. impersonal egoism (p. 43)

• the difference between egoism as an ethical theory and egoism as a psychological theory (p. 44)

• three problems with egoism (pp. 44–46)

• Bentham’s and Mill’s differing views of pleasure (p. 47)

• six points about utilitarianism (pp. 48–49)

• three features of utilitarianism in an organizational context (p. 49)

• three critical inquiries of utilitarianism (pp. 49–52)

hypothetical imperative ideal legal rights maxim moral rights moral worth negative rights nonconsequentialist theories normative theories

optimal moral code positive rights prima facie obligations psychological egoism rule utilitarianism supererogatory actions universal acceptability utilitarianism

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chapter two  Normative theories of ethics      71

• the deathbed-promise example (pp. 50–51)

• business as combining self-interest and social good (or egoism and utilitarianism) (pp. 52–53)

• the convenience store owner and acting from a sense of duty (p. 54)

• Martin’s promise as an illustration of the categorical imperative (p. 55)

• hypothetical imperatives vs. the categorical imperative (p. 56)

• two alternative formulations of the categorical imperative (pp. 56–57)

• three features of Kant’s ethics in an organizational context (pp. 57–58)

• three critical inquiries of Kant’s ethics (pp. 58–59)

• how Ross’s theory differs from utilitarianism and from Kant’s categorical imperative (p. 61)

• four important characteristics of human rights (p. 63)

• the difference between negative and positive rights (p. 63)

• how rule utilitarianism differs from act utilitarianism (p. 66)

• the optimal moral code and the analogy with traffic rules (p. 67)

• two objections to rule utilitarianism (p. 67)

• two points drawn from Chapter 1 that can help moral discussions (p. 68)

• two-step procedure for morally evaluating actions and choices (p. 70)

for furtHer refLeCtion

1. What value, if any, do you see in business students studying the basics of ethical theory?

2. Which normative theory or general approach to ethics do you find the most plausible or attractive, and why?

3. Can people who disagree about normative ethical theory still reach agreement on practical ethical questions in the business world? If so, how?

everyone WHo Has ever appLied for admission

to a selective college or who has been interviewed for a highly desired job knows the feeling of waiting impatiently to learn the result of one’s application. So it’s not hard to identify with those applicants to some of the nation’s most prestigious MBA programs who thought they had a chance to get an early glimpse at whether their ambition was to be

fulfilled. While visiting a Businessweek Online message board, they found instructions, posted by an anonymous hacker, explaining how to find out what admission decision the business schools had made in their case. Doing so wasn’t hard. The universities in question—Harvard, Dartmouth, Duke, Carnegie Mellon, MIT, and Stanford—used the same application software from Apply Yourself, Inc. Essentially, all

Case 2.1

Hacking into Harvard

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72 part one moral philosophy aNd busiNess

one had to do was change the very end of the applicant- specific URL to get to the supposedly restricted page contain- ing the verdict on one’s application. In the nine hours it took Apply Yourself programmers to patch the security flaw after it was posted, curiosity got the better of about two hundred applicants, who couldn’t resist the temptation to discover whether they had been admitted.19

Some of them got only blank screens. But others learned that they had been tentatively accepted or tentatively rejected. What they didn’t count on, however, were two things: first, that it wouldn’t take the business schools long to learn what had happened and who had done it and, second, that the schools in question were going to be very unhappy about it. Harvard was perhaps the most outspoken. Kim B. Clark, dean of the business school, said, “This behavior is unethical at best—a serious breach of trust that cannot be countered by rationalization.” In a similar vein, Steve Nelson, the executive director of Harvard’s MBA program, stated, “Hacking into a system in this manner is unethical and also contrary to the behavior we expect of leaders we aspire to develop.”

It didn’t take Harvard long to make up its mind what to do about it. It rejected all 119 applicants who had attempted to access the information. In an official statement, Dean Clark wrote that the mission of the Harvard Business School “is to educate principled leaders who make a difference in the world. To achieve that, a person must have many skills and qualities, including the highest standards of integrity, sound judgment and a strong moral compass—an intuitive sense of what is right and wrong. Those who have hacked into this web site have failed to pass that test.” Carnegie Mellon and MIT quickly followed suit. By rejecting the ethically chal- lenged, said Richard L. Schmalensee, dean of MIT’s Sloan School of Management, the schools are trying to “send a message to society as a whole that we are attempting to produce people that when they go out into the world, they will behave ethically.”

Duke and Dartmouth, where only a handful of students gained access to their files, said they would take a case-by- case approach and didn’t publicly announce their individual- ized determinations. But, given the competition for places in

their MBA programs, it’s a safe bet that few, if any, offending applicants were sitting in classrooms the following semester. Forty-two applicants attempted to learn their results early at Stanford, which took a different tack. It invited the accused hackers to explain themselves in writing. “In the best case, what has been demonstrated here is a lack of judgment; in the worst case, a lack of integrity,” said Derrick Bolton, Stanford’s director of MBA admissions. “One of the things we try to teach at business schools is making good decisions and taking responsibility for your actions.” Six weeks later, however, the dean of Stanford Business School, Robert Joss, reported, “None of those who gained unauthorized access was able to explain his or her actions to our satisfaction.” He added that he hoped the applicants “might learn from their experience.”

Given the public’s concern over the wave of corporate scandals in recent years and its growing interest in corporate social responsibility, business writers and other media com- mentators warmly welcomed Harvard’s decisive response. But soon there was some sniping at the decision by those claiming that Harvard and the other business schools had overreacted. Although 70 percent of Harvard’s MBA students approved the decision, the undergraduate student newspa- per, The Crimson, was skeptical. “HBS [Harvard Business School] has scored a media victory with its hard-line stance,” it said in an editorial. “Americans have been looking for a sign from the business community, particularly its leading educa- tional institutions, that business ethics are a priority. HBS’s false bravado has given them one, leaving 119 victims in angry hands.”

As some critics pointed out, Harvard’s stance overlooked the possibility that the hacker might have been a spouse or a parent who had access to the applicant’s password and per- sonal identification number. In fact, one applicant said that this had happened to him. His wife found the instructions at Businessweek Online and tried to check on the success of his application. “I’m really distraught over this,” he said. “My wife is tearing her hair out.” To this, Harvard’s Dean Clark responds, “We expect applicants to be personally responsible for the access to the website, and for the identification and passwords they receive.”

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chapter two  Normative theories of ethics      73

Critics also reject the idea that the offending applicants were “hackers.” After all, they used their own personal identi- fication and passwords to log on legitimately; all they did was to modify the URL to go to a different page. They couldn’t change anything in their files or view anyone else’s informa- tion. In fact, some critics blamed the business schools and Apply Yourself more than they did the applicants. If those pages were supposed to be restricted, then it shouldn’t have been so easy to find one’s way to them.

In an interview, one of the Harvard applicants said that although he now sees that what he did was wrong, he wasn’t thinking about that at the time—he just followed the hacker’s posted instructions out of curiosity. He didn’t consider what he did to be “hacking,” because any novice could have done the same thing. “I’m not an IT person by any stretch of the imagination,” he said. “I’m not even a great typist.” He wrote the university a letter of apology. “I admitted that I got curious and had a lapse in judgment,” he said. “I pointed out that I wasn’t trying to harm anyone and wasn’t trying to get an advantage over anyone.” Another applicant said that he knew he had made a poor judgment but he was offended by having his ethics called into question. “I had no idea that they would have considered this a big deal.” And some of those posting messages at Businessweek Online and other MBA-related sites believe the offending applicants should be applauded. “Exploiting weaknesses is what good business is all about. Why would they ding you?” wrote one anonymous poster.

Dean Schmalensee of MIT, however, defends Harvard and MIT’s automatically rejecting everyone who peeked “because it wasn’t an impulsive mistake.” “The instructions are reason- ably elaborate,” he said. “You didn’t need a degree in compu- ter science, but this clearly involved effort. You couldn’t do this casually without knowing that you were doing something wrong. We’ve always taken ethics seriously, and this is a seri- ous matter.” To those applicants who say that they didn’t do any harm, Schmalensee replies, “Is there nothing wrong with going through files just because you can?”

To him and others, seeking unauthorized access to restricted pages is as wrong as snooping through your boss’s desk to see whether you’ve been recommended for a raise. Some commentators, however, suggest there

may be a generation gap here. Students who grew up with the Internet, they say, tend to see it as wide-open territory and don’t view this level of web snooping as indicating a character flaw.

disCussion Questions

1. Suppose that you had been one of the MBA applicants who stumbled across an opportunity to learn your results early. What would you have done, and why? Would you have considered it a moral decision? If so, on what basis would you have made it?

2. Assess the morality of what the curious applicants did from the point of view of egoism, utilitarianism, Kant’s ethics, Ross’s pluralism, and rule utilitarianism.

3. In your view, was it wrong for the MBA applicants to take an unauthorized peek at their application files? Explain why you consider what they did morally permissible or imper- missible. What obligations, ideals, and effects should the applicants have considered? Do you think, as some have suggested, that there is a generation gap on this issue?

4. Did Harvard and MIT overreact, or was it necessary for them to respond as they did in order to send a strong message about the importance of ethics? If you were a business-school admissions official, how would you have handled this situation?

5. Assess the argument that the applicants who snooped were just engaging in the type of bold and aggressive behavior that makes for business success. In your view, are these applicants likely to make good business lead- ers? What about the argument that it’s really the fault of the universities for not having more secure procedures, not the fault of the applicants who took advantage of that fact?

6. One of the applicants admits that he used poor judg- ment but believes that his ethics should not be ques- tioned. What do you think he means? If he exercised poor judgment on a question of right and wrong, isn’t that a matter of his ethics? Stanford’s Derrick Bolton distinguishes between a lapse of judgment and a lack of integrity. What do you see as the difference? Based on this episode, what, if anything, can we say about the ethics and the character of the curious applicants?

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74 part one moral philosophy aNd busiNess

tHere Was a time WHen tHe “made in japan”

label brought a predictable smirk of superiority to the face of most Americans. The quality of most Japanese products usually was as low as their price. In fact, few imports could match their domestic counterparts, the proud products of Yankee know-how. But by the late 1960s, an invasion of foreign-made goods chiseled a few worry lines into the coun- tenance of U.S. industry. In Detroit, worry was fast fading to panic as the Japanese, not to mention the Germans, began to gobble up more and more of the subcompact auto market.

Never one to take a backseat to the competition, Ford Motor Company decided to meet the threat from abroad head-on. In 1968, Ford executives decided to produce the Pinto. Known inside the company as “Lee’s car,” after Ford president Lee Iacocca, the Pinto was to weigh no more than 2,000 pounds and cost no more than $2,000.20

Eager to have its subcompact ready for the 1971 model year, Ford decided to compress the normal drafting-board-to- showroom time of about three-and-a-half years into two. The compressed schedule meant that any design changes typically made before production-line tooling would have to be made during it.

Before producing the Pinto, Ford crash-tested various prototypes, in part to learn whether they met a safety stand- ard proposed by the National Highway Traffic Safety Administration (NHTSA) to reduce fires from traffic collisions. This standard would have required that by 1972 all new autos be able to withstand a rear-end impact of 20 mph without fuel loss, and that by 1973 they be able to withstand an impact of 30 mph. The prototypes all failed the 20-mph test. In 1970 Ford crash-tested the Pinto itself, and the result

was the same: ruptured gas tanks and dangerous leaks. The only Pintos to pass the test had been modified in some way—for example, with a rubber bladder in the gas tank or a piece of steel between the tank and the rear bumper.

Thus, Ford knew that the Pinto represented a serious fire hazard when struck from the rear, even in low-speed colli- sions. Ford officials faced a decision. Should they go ahead with the existing design, thereby meeting the production timetable but possibly jeopardizing consumer safety? Or should they delay production of the Pinto by redesigning the gas tank to make it safer and thus concede another year of subcompact dominance to foreign companies? Ford not only pushed ahead with the original design but also stuck to it for the next six years.

What explains Ford’s decision? The evidence suggests that Ford relied, at least in part, on cost-benefit reasoning, which is an analysis in monetary terms of the expected costs and benefits of doing something. There were various ways of making the Pinto’s gas tank safer. Although the estimated price of these safety improvements ranged from only $5 to $8 per vehicle, Ford evidently reasoned that the increased cost outweighed the benefits of a new tank design.

How exactly did Ford reach that conclusion? We don’t know for sure, but an internal report, “Fatalities Associated with Crash-Induced Fuel Leakage and Fires,” reveals the cost-benefit reasoning that the company used in cases like this. This report was not written with the Pinto in mind; rather, it concerns fuel leakage in rollover accidents (not rear-end collisions), and its computations applied to all Ford vehicles, not just the Pinto. Nevertheless, it illustrates the type of reasoning that was probably used in the Pinto case.

Case 2.2

The ford pinto

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chapter two  Normative theories of ethics      75

In the “Fatalities” report, Ford engineers estimated the cost of technical improvements that would prevent gas tanks from leaking in rollover accidents to be $11 per vehi- cle. The authors go on to discuss various estimates of the number of people killed by fires from car rollovers before settling on the relatively low figure of 180 deaths per year. But given that number, how can the value of those individu- als’ lives be gauged? Can a dollars-and-cents figure be assigned to a human being? NHTSA thought so. In 1972, it estimated that society loses $200,725 every time a person is killed in an auto accident (adjusted for inflation, today’s figure would, of course, be considerably higher). It broke down the costs as follows:

Future productivity losses

Direct $132,000 Indirect 41,300 Medical costs Hospital 700 Other 425 Property damage 1,500 Insurance administration 4,700 Legal and court expenses 3,000 Employer losses 1,000 Victim’s pain and suffering 10,000 Funeral 900 Assets (lost consumption) 5,000 Miscellaneous accident costs 200

Total per fatality $200,725

Putting the NHTSA figures together with other statistical studies, the Ford report arrives at the following overall assess- ment of costs and benefits:

Benefits

Savings: 180 burn deaths, 180 serious burn injuries, 2,100 burned vehicles

Unit cost: $200,000 per death, $67,000 per injury, $700 per vehicle

Total benefit: (180 × $200,000) + (180 × $67,000) + (2,100 × $700) = $49.5 million

Costs

Sales: 11 million cars, 1.5 million light trucks

Unit cost: $11 per car, $11 per truck

Total cost: 12.5 million × $11 = $137.5 million

Thus, the costs of the suggested safety improvements out- weigh their benefits, and the “Fatalities” report accordingly recommends against any improvements—a recommendation that Ford followed.

Likewise in the Pinto case, Ford’s management, whatever its exact reasoning, decided to stick with the original design and not upgrade the Pinto’s fuel tank, despite the test results reported by its engineers. Here is the aftermath of Ford’s decision:

• Between 1971 and 1978, the Pinto was responsible for a number of fire-related deaths. Ford puts the figure at 23; its critics say the figure is closer to 500. According to the sworn testimony of Ford engineers, 95 percent of the fatalities would have survived if Ford had located the fuel tank over the axle (as it had done on its Capri automobiles).

• NHTSA finally adopted a 30-mph collision standard in 1976. The Pinto then acquired a rupture-proof fuel tank. In 1978 Ford was obliged to recall all 1971–1976 Pintos for fuel-tank modifications.

• Between 1971 and 1978, approximately fifty lawsuits were brought against Ford in connection with rear-end accidents in the Pinto. In the Richard Grimshaw case, in addition to award- ing over $3 million in compensatory damages to the victims of a Pinto crash, the jury awarded a landmark $125 million in punitive damages against Ford (later reduced by the judge to $3.5 million) .

• On August 10, 1978, the 1973 Ford Pinto that eighteen-year- old Judy Ulrich, her sixteen-year-old sister Lynn, and their eighteen-year-old cousin Donna were riding in was struck from the rear by a van near Elkhart, Indiana. The gas tank of the Pinto exploded on impact. In the fire that resulted, the three teenagers were burned to death. Ford was charged with criminal homicide. The judge in the case advised jurors that Ford should be convicted if it had clearly disregarded the harm that might result from its actions, and that disregard represented a substantial deviation from acceptable stand- ards of conduct. On March 13, 1980, the jury found Ford not guilty of criminal homicide.

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76 part one moral philosophy aNd busiNess

For its part, Ford has always denied that the Pinto is unsafe compared with other cars of its type and era. The company also points out that in every model year the Pinto met or surpassed the government’s own standards. But what the company doesn’t say is that successful lobbying by it and its industry associates was responsible for delaying for seven years the adoption of any NHTSA crash standard. Furthermore, Ford’s critics claim that there were more than forty European and Japanese models in the Pinto price and weight range with safer gas-tank position. “Ford made an extremely irre- sponsible decision,” concludes auto safety expert Byron Bloch, “when they placed such a weak tank in such a ridicu- lous location in such a soft rear end.”

Has the automobile industry learned a lesson from Ford’s experience with the Pinto? Some observers thought not when twenty years later an Atlanta jury held the General Motors Corporation responsible for the death of a Georgia teenager in the fiery crash of one of its pickup trucks. Finding that the company had known that its “side-saddle” gas tanks, which are mounted outside the rails of the truck’s frame, are dan- gerously prone to rupture, the jury awarded $4.2 million in actual damages and $101 million in punitive damages to the parents of the seventeen-year-old victim, Shannon Moseley.

After the verdict, General Motors said that it still stood behind the safety of its trucks and contended “that a full examination by the National Highway Traffic Safety Administration of the technical issues in this matter will bear out our contention that the . . . pickup trucks do not have a safety related defect.” Subsequently, however, the Department of Transportation determined that GM pickups of the style Shannon Moseley drove do pose a fire hazard and that they are more prone than competitors’ pickups to catch fire when struck from the side. Still, GM rejected requests to recall the pickups and repair them, and later the Georgia Court of Appeals threw out the jury’s verdict on a legal technicality—despite ruling that the evidence submit- ted in the case showed that GM was aware that the gas tanks were hazardous but, to save the expense involved, did not try to make them safer.

Expense seems to be the issue, too, when it comes to SUV rollovers. After nearly three hundred rollover deaths in Ford

Explorers equipped with Firestone tires in the late 1990s, Congress mandated NHTSA to conduct rollover road tests on all SUVs. (Previously, the agency had relied on mathematical formulas based on accident statistics to evaluate rollover resistance, rather than doing real-world tests.) In August 2004 NHTSA released its results, and they weren’t pretty—at least not for several of Detroit’s most popular models. The Chevrolet Tahoe and the Ford Explorer, in particular, have between a 26 and a 29 percent chance of rolling over in a single-vehicle crash, almost twice that of models from Honda, Nissan, and Chrysler. The Saturn Vue couldn’t even finish the test because its left-rear suspension broke, leading General Motors to recall all 250,000 Vues.

Ford and General Motors have the anti-rollover technology necessary to make their SUVs safer. The problem is that rollover sensors and electronic stability systems add about $800 to the price of a vehicle, so the companies have offered them only as options. The same is true of side-curtain airbags to protect occupants when a vehicle rolls over. They cost about $500. Improved design—wider wheel tracks, lower center of gravity, and reinforced roofs to protect passengers in a rollover— would also help. Embarrassed by the test results, the compa- nies promised to make more safety features standard equipment on new SUVs. Lawsuits by rollover victims are also prodding the companies to enhance their commitment to safety. Two months before NHTSA released its results, Ford had to pay $369 million in damages—one of the largest personal- injury awards ever against an automaker—to a San Diego couple whose Explorer flipped over four-and-a-half times when they swerved to avoid a metal object on the highway.

disCussion Questions

1. What moral issues does the Pinto case raise?

2. Suppose Ford officials were asked to justify their decision. What moral principles do you think they would invoke? Assess Ford’s handling of the Pinto from the perspective of each of the moral theories discussed in this chapter.

3. Utilitarians would say that jeopardizing motorists does not by itself make Ford’s action morally objectionable. The only morally relevant matter is whether Ford gave equal

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chapter two  Normative theories of ethics      77

consideration to the interests of each affected party. Do you think Ford did this?

4. Is cost-benefit analysis a legitimate tool? What role, if any, should it play in moral deliberation? Critically assess the example of cost-benefit analysis given in the case study. Is there anything unsatisfactory about it? Could it have been improved upon in some way?

5. Speculate about Kant’s response to the idea of placing a monetary value on a human life. Is doing so ever morally legitimate?

6. What responsibilities to its customers do you think Ford had? What are the most important moral rights, if any, operating in the Pinto case?

7. Would it have made a moral difference if the savings resulting from not improving the Pinto gas tank had been passed on to Ford’s customers? Could a rational customer have chosen to save a few dollars and risk having the more dangerous gas tank? What if Ford had told potential customers about its decision?

8. The maxim of Ford’s action might be stated thus: “When the cost of a safety improvement would hurt the bottom

line, it’s all right not to make it.” Can this maxim be universalized? Does it treat humans as ends in them- selves? Would manufacturers be willing to abide by it if the positions were reversed and they were in the role of consumers?

9. Should Ford have been found guilty of criminal homicide in the Ulrich case?

10. Was GM responsible for Shannon Moseley’s death? Compare that case with the case of Ford and the Pinto.

11. Assess Ford’s and GM’s actions with respect to SUV roll- overs. Have the auto-makers met their moral obligation to consumers, or have they acted wrongly by not doing more to increase SUV safety? Should they be held either mor- ally or legally responsible for deaths from roll-overs that would not have occurred in other vehicles? What should automakers do to increase SUV safety?

12. Is it wrong for business to sell a product that is not as safe as it could be, given current technology? Is it wrong to sell a vehicle that is less safe than competing products on the market? Are there limits to how far automakers must go in the name of safety?

soL Levin Was a suCCessfuL stoCKbroKer in

Tampa, Florida, when he recognized the potentially profitable market for safe and uncontaminated blood and, with some colleagues, founded Plasma International. Not everybody is willing to make money by selling his or her own blood, and in the beginning Plasma International bought blood from people

addicted to drugs and alcohol. Although innovative marketing increased Plasma International’s sales dramatically, several cases of hepatitis were reported in recipients. The company then began looking for new sources of blood.21

Plasma International searched worldwide and, with the advice of a qualified team of medical consultants, did extensive testing.

Case 2.3

blood for sale

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78 part one moral philosophy aNd busiNess

Eventually they found that the blood profiles of several rural West African tribes made them ideal prospective donors. After negotia- tions with the local government, Plasma International signed an agreement with several tribal chieftains to purchase blood.

Business went smoothly and profitably for Plasma International until a Tampa paper charged that Plasma was purchasing blood for as little as fifteen cents a pint and then reselling it to hospitals in the United States and South America for $25 per pint. In one recent disaster, the newspaper alleged, Plasma International had sold 10,000 pints, netting nearly a quarter of a million dollars.

The newspaper story stirred up controversy in Tampa, but the existence of commercialized blood marketing systems in the United States is nothing new. Approximately half the blood and plasma obtained in the United States is bought and sold like any other commodity. By contrast, the National Health Service in Great Britain relies entirely on a voluntary system of blood donation. Blood is neither bought nor sold. It is available to anyone who needs it without charge or obligation, and donors gain no preference over nondonors.

In an important study, economist Richard Titmuss showed that the British system works better than the American one in terms of economic and administrative efficiency, price, and blood quality. The commercialized blood market, Titmuss argued, is wasteful of blood and plagued by shortages. In the United States, bureaucratization, paperwork, and administra- tive overhead result in a cost per unit of blood that is five to fifteen times higher than in Great Britain. Hemophiliacs, in particular, are disadvantaged by the U.S. system and have enormous bills to pay. In addition, commercial markets are much more likely to distribute contaminated blood.

Titmuss also argued that the existence of a commercialized system discourages voluntary donors. People are less apt to give blood if they know that others are selling it. Psychologists have found similar conflicts between financial incentives and moral or altruistic conduct in other areas.22 Philosopher Peter Singer has elaborated on this point in the case of blood:

If blood is a commodity with a price, to give blood means merely to save someone money. Blood has a cash value of a certain number of dollars, and the importance of the gift will vary with the wealth of the recipient. If blood cannot be bought, however, the gift’s

value depends upon the need of the recipient. Often, it will be worth life itself. Under these circumstances blood becomes a very special kind of gift, and giving it means providing for strangers, without hope of reward, something they cannot buy and without which they may die. The gift relates strangers in a manner that is not possible when blood is a commodity.

This may sound like a philosopher’s abstraction, far removed from the thoughts of ordinary people. On the contrary, it is an idea spontaneously expressed by British donors in response to Titmuss’s questionnaire. As one woman, a machine operator, wrote in reply to the question why she first decided to become a blood donor: “You can’t get blood from supermarkets and chain stores. People themselves must come forward; sick people can’t get out of bed to ask you for a pint to save their life, so I came forward in hopes to help somebody who needs blood.”

The implication of this answer, and others like it, is that even if the formal right to give blood can coexist with commercialized blood banks, the respondent’s action would have lost much of its significance to her, and the blood would probably not have been given at all. When blood is a commodity, and can be purchased if it is not given, altruism becomes unnec- essary, and so loosens the bonds that can otherwise exist between strangers in a community. The exist- ence of a market in blood does not threaten the for- mal right to give blood, but it does away with the right to give blood which cannot be bought, has no cash value, and must be given freely if it is to be obtained at all. If there is such a right, it is incompatible with the right to sell blood, and we cannot avoid violating one of these rights when we grant the other.23

Both Titmuss and Singer believe that the weakening of the spirit of altruism in this sphere has important repercussions. It marks, they think, the increasing commercialization of our lives and makes similar changes in attitude, motive, and rela- tionships more likely in other fields.

update

Dr. Arthur Matas, a prominent kidney-transplant surgeon, is pushing for one change that it’s doubtful either Titmuss or Singer would like. Lately, he’s been traveling the United States making

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chapter two  Normative theories of ethics      79

the case for lifting the legal ban on kidney sales. That ban was imposed in 1984 by an outraged Congress after a Virginia physi- cian had proposed buying kidneys from poor people and selling them to the highest bidder. By contrast, Dr. Matas isn’t trying to make money. He would like the government to handle kidney sales, and the kidneys to go to whoever is at the top of the current waiting list, whether the patient is rich or poor. And that list grows longer every year as the gap continues to widen—it’s now nearly five to one—between patients in need and the number of kid- neys available from either living or deceased donors.

With eligible patients often waiting for five or six years, more and more people are taking Dr. Matas seriously, but many experts still balk at the idea of organ sales. One of them is Dr. Francis Delmonico, a professor at Harvard University and president of the network that runs the nation’s organ- distribution system. He worries that Dr. Matas’ plan would exploit the poor and vulnerable, that it would cause altruistic kidney donations to wither, and that wealthy patients would manage to find a way around a regulated market to get a kidney faster.24

disCussion Questions

1. Is Sol Levin running a business “just like any other busi- ness,” or is his company open to moral criticism? Defend your answer by appeal to moral principle.

2. Did Plasma International strike a fair bargain with the West Africans who supplied their blood to the company? Or is Plasma guilty of exploiting them in some way? Explain your answer.

3. What are the contrasting ideals of the British and U.S. blood systems? Which system, in your opinion, better promotes human freedom and respect for people? Which system better promotes the supply of blood?

4. Examine the pros and cons of commercial transactions in blood from the egoistic, the utilitarian, and the Kantian perspectives.

5. Are Titmuss and Singer correct to suggest that the buying and selling of blood reduces altruism? Does knowing that you can sell your blood (and that others are selling theirs) make you less inclined to donate your blood?

6. Singer suggests that although the right to sell blood does not threaten the formal right to give blood, it is incompat- ible with “the right to give blood, which cannot be bought, which has no cash value, and must be given freely if it is to be obtained at all.” Assess that idea. Is there such a right?

7. Many believe that commercialization is increasing in all areas of modern life. If so, is it something to be applauded or condemned? Is it wrong to treat certain things—such as human organs—as commodities?

8. Do you believe that we have a moral duty to donate blood? If so, why and under what circumstances? If not, why not?

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

80

Ch a p t er 3

Just ice a nd e conomic d istr ibut ion

It seems strange to reCall that untIl the

early years of the twentieth century, there was no federal tax on personal income. Only when the Sixteenth Amendment to the U.S. Constitution was adopted in 1913 did Congress gain the right to tax people’s income. Since then, the income tax laws have grown enormously complex. At around 70,000 pages, the federal tax code is more than two-and-a-half-times longer than it was in 1985.1 Lawyers study for years to master the intricacies of the system, and most people with middle incomes or better require professional assistance to file their annual tax forms.

Because the tax rules do so much to shape the character of our economy and the distribution of income and wealth across the country, their fair- ness is frequently a political issue— take, for example, President Barack Obama’s opposition to the tax cuts that George W. Bush pushed through during his term in office. Those tax cuts favored the well-to-do.2 By contrast, Bush’s predecessor, Bill Clinton, had raised the federal income tax on individuals with taxable incomes over $115,000. They saw their income tax rate increase from 31 percent to 36 percent. Clinton also slapped a 10 percent surcharge on those with incomes above $240,000. However, as Table 3.1 shows,3 until Ronald Reagan lowered it, the tax rate for the wealthiest individuals had been 63 percent and, until the early 1960s, it had been 91 percent.

When President Reagan reduced taxes on the wealthy, he also eliminated some important tax loopholes. But the most significant feature of his personal tax philosophy was its rejec- tion of the principle of “progressivity”—namely, that the wealthy ought to pay taxes at a higher rate than the poor. Today’s income tax system, with six different tax brackets, remains progres- sive, but some complain that in reality those who are less well-

to-do often end up paying more. One of the people making this charge is— surprisingly enough—Warren Buffett, the nation’s second richest man. Recently he says, he earned $46 million but paid only 18 percent of it in federal tax, whereas the average tax rate paid by his employ- ees, whose salaries range from $60,000 to $750,000, was 33 percent. Buffett is convinced that this is no statistical fluke.

In fact, he is willing to bet anyone $1 million (to be paid to a char- ity selected by the winner) that the average tax rate (income and payroll) paid by the four hundred wealthiest people in the country is lower than that paid by their secretaries and receptionists.4

Still, it remains true that America’s wealthier citizens pay the bulk of the nation’s income tax—for the simple reason that most of the nation’s income goes to them. The top one million households now take home more than do the 56 million house- holds at the bottom.5 And the top 0.1 percent of Americans earns 77 times the income of the bottom 90 percent. In 1979 they earned only 20 times as much.6 This is part of a trend since

IntroductIon

the top one mIllIon

households now take home more than do the 56 million households at the bottom.

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chapter three  Justice and economic distribution      81chapter three  Justice and economic distribution      81

1980 toward an increasingly unequal distribution of national income in the United States, with those who are already very well-off—the top fifth of the country—now getting a larger slice of the pie than before, as Table 3.2 shows.7

The flip side, of course, is that the bottom 80 percent now receives less. From World War II through 1980, the inflation- adjusted income of the median family more than doubled, but since then it has been relatively flat despite the fact that people work longer hours and more wives have entered the workforce.8 In fact, adjusted for inflation, wages for men remain below their 1973 peak,9 with young men in their thirties now earning 12 percent less than they did thirty years ago.10 By contrast, middle-level managers have fared much better, and top execu- tives have done spectacularly well. A Businessweek survey of the two highest-paid executives at America’s largest companies shows their average total pay (salary, bonuses, and long-term compensation) to be $9.6 million a year, while a Wall Street Journal study puts the median direct compensation of CEOs at 350 major U.S. corporations at only a little over $6 million.11

‘50 ‘55 ‘60 ‘65 ‘70 ‘75 ‘80 ‘85 ‘90 ‘95 ‘00 ‘05 ‘10 0

20

40

60

80

100%

table 3.1 top marginal income tax rate

1970 1980 1990 2000 2009

Best-off fifth 43.3% 44.1% 46.6% 49.8% 50.3%

Second fifth 24.5 24.7 24.0 23.0 23.2

Middle fifth 17.4 16.8 15.9 14.8 14.6

Fourth fifth 10.8 10.2 9.6 8.9 8.6

Poorest fifth 4.1 4.2 3.8 3.6 3.4

Top 5 percent 16.6 16.5 18.5 22.1 21.7

table 3.2 share of aggregate Household income

Either way, that dwarfs the pay of the average worker, who makes $36,140 per year.12

The United States leads the world in executive pay. Japan’s CEOs, for example, earn a salary of only $300,000 to $500,000 a year, with far fewer bonuses and stock options than their American coun- terparts.13 Since 1980 the compensation of the top American CEOs has grown from 42 times that of the average person working under them to more than 300 times greater.14 The median weekly salary for all workers is less than $700. If the average CEO works 60 hours a week, 52 weeks a year, then he or she earns that much every twenty or thirty minutes. Since 1990, CEO pay has gone up 571 percent. In com-

parison, corporate profits have grown by a relatively modest 114 percent, and the average worker’s pay by a mere 37 percent (which is just above inflation at 32 percent).15 A schoolteacher who made $31,000 in 1990 would now make $177,000 if teachers’ salaries had grown at the same rate as CEO pay.

While those on top do better than ever, life continues to be a struggle for people in the middle and lower echelons. Indeed, according to economist Larry Summers, former head of President Obama’s National Economic Council, the lack of middle-class income growth is “the defining issue of our time.”16 Although our economy has created millions of new jobs in the last two decades, most of them pay relatively low wages.17 Productivity gains have gone predominantly to investors, not to wage earners, with capitalists grabbing a larger share of the national income at the expense of work- ers.18 Whereas output per hour and real hourly compensation rose hand in hand from 1950 to 1980, U.S. Department of Labor statistics show that since then compensation has lagged behind.19 In fact, between 1973 and 2007 productivity rose by 83 percent but male median real wages by only 5 percent.20 Although the average American family works hard—twelve weeks more each year than thirty years ago21—many families have trouble coping. Most American jobs do not pay enough to support a full household or to provide what most people feel are necessities,22 and the number of people who define themselves as “have-nots” has increased.23 Many Americans struggle to pay for health care or simply do without, which is not surprising when one in five jobs pays only a poverty-level wage.24 For a variety of reasons, moreover, people’s incomes

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82 part one moral pHilosopHy and business

are more volatile, and their lives less economically secure, these days. For example, the chance that a person or family will experience a year-to-year drop in income of more than 50 percent has almost doubled since the 1970s (from one in twenty to about one in eleven).25

These trends are even more alarming when set against the background of the extremely unequal distribution of wealth in this country. The top 1 percent (about one and a half million fam- ilies) not only receives a disproportionate share of the national income but also owns nearly 40 percent of the nation’s total net worth. That’s double the share of total national wealth owned by the top 1 percent in 1976 and is more than is owned by the entire bottom 90 percent of U.S. households. This economic elite owns half of all stocks, mutual funds, financial securities, and trusts, two-thirds of all business equity, and 36 percent of nonresidential real estate.26 In contrast, the bottom 60 percent of Americans owns only 5 percent of the nation’s wealth, and the lowest 40 percent less than 1 percent.27Or to take another statistic, the 400 wealthiest Americans—the super-elite, you might call them—have a greater net worth than do the bottom 150 million Americans.28

Although the United States has always prided itself on being a land of opportunity and upward mobility, recent evi- dence suggests that the economy is becoming more rigid and class-bound. Nowadays, there is less upward economic mobility in the United States than in most English-speaking or Western European nations.29 More and more Americans are ending up stuck on the bottom rung, with less chance of getting ahead than their counterparts in other advanced countries.30 “You can’t take solace anymore in the American dream of working hard and migrating up through society,” says William J. McDonough, president of the Federal Reserve Bank of New York.31 Or as one Federal Reserve Bank econo- mist puts it, “The apple falls even closer to the tree than we thought.”32

One reason, of course, is that parents work very hard to transmit their advantages to their children, especially with respect to education, a crucial determinant of future income. These days, social class increasingly determines access to college. Three-quarters of the students at the nation’s top 146 universities hail from the richest fourth of the nation. Only 3 percent of them come from the bottom income quartile, and only 10 percent from the bottom half of the income scale. This

means that at an elite university you are twenty-five times more likely to run into a rich student than a poor one.33 Even at the better state universities, the number of students from families making more than $100,000 has increased to 40 percent. In general, qualified high school graduates from low-income families are only one-third as likely to complete a bachelor’s degree as are students from families earning $75,000 or more.34

There is nothing inevitable about declining social mobility or about large inequalities in income and wealth. They are not brute facts of nature, even in market-oriented societies. For example, the distribution of income in Germany and Japan is far more equal than in the United States, even though both are just as thoroughly capitalist, and an American is three times more likely to be poor than is someone in Italy.35 Rather, politi- cal choices determine how income and wealth are distributed and what sort of assistance is given to those who are strug- gling to get by. The United States simply chooses to spend a smaller percentage of its GDP than European countries do combating inequality and pursuing policies intended to assist the bottom half of society to advance.36 That’s why, for exam- ple, 17 percent of America’s children live in poverty but only 3 percent of Norway’s do.37 More generally, it is the reason that income inequality, according to CIA figures, is greater in the United States than it is in Europe or Russia or even coun- tries like Tunisia or Egypt that recently rebelled against their oligarchs.38 How much inequality and what sort of socioeco- nomic disparities a society is willing to accept reflect both its moral values and the relative strength of its contending social and political forces.

This chapter focuses on the subject of economic justice, which concerns the constellation of moral issues raised by a society’s distribution of wealth, income, status, and power. Ethical questions arise daily about these matters. Is it just, for example, that CEOs pull in astronomical salaries and help them- selves to enormous benefits when this reduces the profits of stockholders, who own the company? Or, to take another issue, thanks to modern technology, today’s hospitals are able to perform life-prolonging feats of medicine that were undreamed of only a couple of decades ago, but these services are often extraordinarily costly. Who, then, should have access to them? Those who can afford them? Any who need them? Those who are most likely to benefit?

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learnIng objeCtIves

Chapter 2 discussed several basic moral theories and the gen- eral principles of right and wrong associated with them. This chapter focuses on the more specific topic of justice and eco- nomic distribution—that is, on the principles that are relevant to the moral assessment of society’s distribution of economic goods and services. Although the topic is an abstract one, it is particularly relevant to the study of business ethics, because it concerns the moral standards to be used in evaluating the socioeconomic framework within which both business and

• • •

the nature of Just ice Justice is an old concept with a rich history, a concept that is fundamental to any discus- sion of how society ought to be organized. philosophical concern with justice goes back at least to ancient Greece. For plato and some of his contemporaries, justice seems to have been the paramount virtue or, more precisely, the sum of virtue with regard to our relations with others. philosophers today, however, generally distinguish justice from the whole of morality. The complaint that something is unjust is more specific than that it is bad or immoral. What, then, makes an act, policy, or institution unjust? Unfortunately, the terms just and unjust are vague, and different people use them in different ways. Still, talk of justice or injustice typically focuses on at least one of several related ideas: fairness, equality, desert, and rights.

First, justice is often used to mean fairness. Justice frequently concerns the fair treat- ment of members of groups of people or else looks backward to the fair compensation of prior injuries. exactly what fairness requires is difficult to say, and different standards may be pertinent in different cases. If corporate manager Smith commits bribery, he is justly punished under our laws. If other managers commit equally serious crimes but are allowed to escape punishment, then Smith suffers a comparative injustice because he was unfairly singled out. But Smith and other white-collar criminals are treated unfairly and thus unjustly, although this time for the opposite reason, if stiffer sentences are meted out to common criminals for less grave offenses.

one way unfairness creates injustice occurs when like cases are not treated in the same fashion. Following aristotle, most philosophers believe that we are required, as a formal principle of justice, to treat similar cases alike except where there is some relevant difference. This principle emphasizes the role of impartiality and consistency in justice, but it is a purely formal principle because it is silent about which differences are relevant and which are not. Furthermore, satisfying this formal requirement does not guarantee that justice is done. For example, a judge who treats similar cases alike can succeed in administering fairly and nonarbitrarily a law that is itself unjust (like a statute requiring racial segregation).

Questions of justice typically focus on fairness, equality, desert, or rights.

nonbusiness organizations operate. Specifically, this chapter will examine these topics:

1. The concept of justice, its relation to fairness, equality, rights, and what people deserve, and some rival principles of economic distribution

2. The utilitarian approach to justice in general and economic justice in particular

3. The libertarian theory, which places a moral priority on liberty and free exchange

4. The contractualist and egalitarian theory of John Rawls

chapter three  Justice and economic distribution      83

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84 part one moral pHilosopHy and business

related to aristotle’s fairness requirement is a second idea commonly bound up with the concept of justice: equality. Justice is frequently held to require that our treatment of people reflect their fundamental moral equality. While aristotle’s formal principle of justice does not say whether we are to assume equality of treatment until some differ- ence between cases is shown or to assume the opposite until some relevant similarities are demonstrated, a claim of injustice based on equality is meant to place the burden of proof on those who would endorse unequal treatment. Still, the premise that all persons are equal does not establish a direct relationship between justice and economic distribu- tion. We all believe that some differences in the treatment of persons are consistent with equality (punishment, for example), and neither respect for equality nor a commitment to equal treatment necessarily implies an equal distribution of economic goods.

Despite equality, then, individual circumstances—in particular, what a person has done—make a difference. We think it is unjust, for example, when a guilty person goes free or an innocent person hangs, regardless of how others have been treated. This sug- gests that in addition to equal or impartial treatment justice has a third aspect, the idea of desert. Justice requires that people get what they deserve or, as a number of ancient moralists put it, that each receive his or her due.

This is closely related to a fourth and final idea—namely, that one is treated unjustly when one’s moral rights are violated. John Stuart Mill, in fact, made this the defining characteristic of injustice. In his view, what distinguishes injustice from other types of wrongful behavior is that it involves a violation of the rights of some identifiable person:

Whether the injustice consists in depriving a person of a possession, or in breaking faith with him, or in treating him worse than he deserves, or worse than other people

summary Justice is one

important aspect of morality. Talk of justice and injustice generally involves appeals to the

related notions of fairness, equality, desert, and rights.

Economic or distributive justice

concerns the principles appropriate for

assessing society’s distribution of social

benefits and burdens, particularly wealth, income, status, and

power.

the Alderson Federal Prison camp in West

Virginia housed domestic guru

Martha Stewart. Similar to this deten-

tion center, Butner Federal correctional

Institution I, where convicted Ponzi- schemer Bernie

Madoff is serving his sentence, is the type of institution that has

come to be known as a “country-club

prison.” How is this sort of description

likely to affect some people’s notion

of just desert and equality of justice?

Fe de

ra l B

ur ea

u of

P ris

on s/

Ge tty

Im ag

es

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chapter three  Justice and economic distribution      85

who have no greater claims—in each case the supposition implies two things: a wrong done, and some assignable person who is wronged. . . . It seems to me that this feature in the case—a right in some person, correlative to the moral obligation—constitutes the specific difference between justice and generosity or beneficence. Justice implies something which it is not only right to do, and wrong not to do, but which some indi- vidual person can claim from us as a moral right.39

Rival PRinciPles of DistRibution

Justice, then, is an important subclass of morality in general, a subclass that generally involves appeals to the overlapping notions of fairness, equality, desert, and rights. turning to the topic of distributive justice—that is, to the proper distribution of social benefits and burdens (in particular, economic benefits and burdens)—we see that a number of rival principles have been proposed. among the principles most frequently recommended as a basis of distribution are these: to each an equal share, to each according to individual need, to each according to personal effort, to each according to social contribution, and to each according to merit. every one of these principles has its advocates, and each seems plausible in some circumstances. But only in some. There are problems with each. For example, if equality of income was guar- anteed, then the lazy would receive as much as the industrious; however, effort is hard to measure and compare, and what one is able to contribute to society may depend on one’s luck in being at the right place at the right time. and so on. no single principle seems to work in enough circumstances to be defended successfully as the sole princi- ple of justice in distribution.

It often seems that we simply employ different principles of distributive justice in different circumstances. For example, corporations in certain industries may be granted tax breaks because of their social contribution, welfare programs operate on the basis of need, and business firms award promotions for meritorious performance. Moreover, multiple principles may often be relevant to a single situation. Sometimes they may pull in the same direction, as when wealthy professionals such as doctors defend their high incomes simultaneously on grounds of superior effort, merit, social contribution, and even (because of the high cost of malpractice insurance) need. or the principles may pull in different directions, as when a teacher must balance effort against performance in assigning grades to pupils. Some philosophers are content to leave the situation here. as they see it, there are various equally valid, prima facie principles of just distribution— equality, need, effort, and so on—and one must try to find the principle that best applies in the given circumstances. If several principles seem to apply, then one must simply weigh them the best one can.

In his book Spheres of Justice, Michael Walzer pursues a more sophisticated version of this pluralistic approach.40 Skeptical of the assumption that justice requires us to implement (in different contexts) some basic principle or set of principles, Walzer argues

that different goods ought to be distributed for different reasons, in accordance with different procedures, by different agents; and that all these differences derive from dif- ferent understandings of the social goods themselves—the inevitable product of historical and cultural particularism.41

Some philosophers believe that there are a number of equally valid principles of just distribution. We must determine which one best applies in a given situation.

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86 part one moral pHilosopHy and business

Different norms and principles govern different distributive spheres, and these norms and principles are shaped by the implicit social meanings of the goods in ques- tion. he continues:

every social good or set of goods constitutes, as it were, a distributive sphere within which only certain criteria and arrangements are appropriate. [For example], money is inappropriate in the sphere of ecclesiastical office. . . . There is no single standard [against which all distributions are to be measured]. But there are standards (roughly knowable even when they are also controversial) for every social good and every dis- tributive sphere in every particular society.42

as Walzer sees it, distributive criteria are determined by the particular, historically shaped social meanings of the goods in question. The philosophical task is to tease out the inner logic of each type of good, thus revealing the tacit, socially shared values that govern (or should govern) its distribution.

Walzer’s historically informed discussion of topics like medical care or dirty and degrading work are rich and intriguing, but his view implies that when it comes to issues of distributive justice, the best philosophers can do is to try to unravel the implicit, socially specific norms that govern the distribution of different goods in a particular society. Many contemporary philosophers disagree. They believe that we should step far- ther back than Walzer does from existing norms and social arrangements and seek some general theory of justice in economic distribution, on the basis of which we can assess current social practices. Three such theories are the utilitarian, the libertarian, and the rawlsian (egalitarian).

• • •

the ut il i ta r ian V ie w For utilitarians, as chapter 2 explained, happiness is the overarching value. Whether one assesses the rightness and wrongness of actions in terms of how much happiness they produce, as an act utilitarian does, or uses happiness as the standard for deciding what moral principles a society should accept as the basis for determining right and wrong, as a rule utilitarian does, happiness is the only thing that is good in and of itself. on that utilitarians are agreed.

earlier we considered John Stuart Mill’s idea that injustice involves the viola- tion of the rights of some identifiable person. This is what distinguishes it from other types of immoral behavior. But if injustice involves the violation of moral rights, how does a utilitarian like Mill understand talk of rights? according to Mill, to have a right to something is to have a valid claim on society to protect me in the possession of that thing, either by the force of law or through education and opin- ion. and I have that valid claim in the first place because society’s protection of my possession of that thing is warranted on utilitarian grounds. “to have a right, then, is . . . to have something which society ought to defend me in the possession of. If the objector goes on to ask why it ought, I can give him no other reason than general utility.”43 What utilitarianism identifies as rights are certain moral rules, the observ- ance of which is of the utmost importance for the long-run, overall maximization of happiness.

summary Economic distribution

might be based on pure equality, need,

effort, social contribution, or merit.

Each of these principles is plausible

in some circumstances but not in others. In some situations, the principles pull us in different directions. Dissatisfied with a

pluralistic approach, moral philosophers

have sometimes sought to develop

more general theories of justice.

Other philosophers seek a general theory

of economic justice. The utilitarian,

libertarian, and Rawlsian theories are important examples.

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chapter three  Justice and economic distribution      87

accordingly, Mill summed up his view of justice as follows:

Justice is a name for certain classes of moral rules which concern the essentials of human well-being more nearly, and are therefore of more absolute obligation, than any other rules for the guidance of life; and the notion which we have found to be of the essence of the idea of justice—that of a right residing in an individual—implies and testifies to this more binding obligation.

The moral rules which forbid mankind to hurt one another (in which we must never forget to include wrongful interference with each other’s freedom) are more vital to human well-being than any maxims, however important, which only point out the best mode of managing some department of human affairs.44

although justice for Mill was ultimately a matter of promoting social well-being, not every issue of social utility was a matter of justice. The concept of justice identifies certain important social utilities—that is, certain rules or rights, the upholding of which is crucial for social well-being.

For utilitarians, then, justice is not an independent moral standard, distinct from their general principle. rather, the maximization of happiness ultimately determines what is just and unjust. critics of utilitarianism contend that knowing what will pro- mote happiness is always difficult. people are bound to estimate consequences differently, thus making the standard of utility an inexact and unreliable principle for determining what is just. Mill, however, did not see much merit in this criticism. For one thing, it pre- supposes that we all agree about what the principles of justice are and how to apply them. This is far from the case, Mill argued. Indeed, without utilitarianism to provide a deter- minate standard of justice, one is always left with a plethora of competing principles, all of which seem to have some plausibility but are mutually incompatible.

as an example, Mill pointed to the conflict between two principles of justice that occurs in the realm of economic distribution. Is it just or not, he asked, that more talented workers should receive a greater remuneration? There are two possible answers to this question:

on the negative side of the question it is argued that whoever does the best he can deserves equally well, and ought not in justice to be put in a position of inferiority for no fault of his own; that superior abilities have already advantages more than enough . . . without adding to these a superior share of the world’s goods; and that society is bound in justice rather to make compensation to the less favoured for this unmerited inequality of advantages than to aggravate it.

This argument sounds plausible, but then so does the alternative answer:

on the contrary side it is contended that society receives more from the more efficient labourer; that, his services being more useful, society owes him a larger return for them; that a greater share of the joint result is actually his work, and not to allow his claim to it is a kind of robbery; that, if he is only to receive as much as others, he can only be justly required to produce as much.

here we have two conflicting principles of justice. how are we to decide between them? The problem, Mill said, is that both principles seem plausible:

Justice has in this case two sides to it, which it is impossible to bring into harmony, and the two disputants have chosen opposite sides; the one looks to what it is just that the individual should receive, the other to what it is just that the community should give.45

Mill believed that justice concerns certain rules or rights that are vitally important for human well-being.

summary Utilitarianism holds that

the maximization of happiness ultimately

determines what is just and unjust. Mill

contended, more specifically, that the concept of justice

identifies certain rules or rights—the

upholding of which is crucial for promoting well-being—and that

injustice always involves violating the

rights of some identifiable individual.

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88 part one moral pHilosopHy and business

each disputant is, from his or her own point of view, unanswerable. “any choice between them, on grounds of justice,” Mill continued, “must be perfectly arbitrary.” What, then, is the solution? For Mill, the utilitarian, it was straightforward: “Social utility alone can decide the preference.”46 The utilitarian standard must be the ultimate court of appeal in such cases. only the utilitarian standard can provide an intelligent and satisfactory way of handling controversial questions of justice and of resolving conflicts between compet- ing principles of justice.

utilitaRianism anD economic DistRibution

The utilitarian theory of justice ties the question of economic distribution to the promo- tion of social well-being or happiness. Utilitarians favor whichever economic system will bring the most good for society as a whole. But what system is that? Utilitarianism itself, as a normative theory, provides no answer. The answer depends on the relevant social, economic, and political facts. a utilitarian must understand the various possibilities, determine their consequences, and assess the available options. obviously, this is not a simple task. Deciding what sort of economic arrangements would best promote human happiness requires the utilitarian to consider many things, including (1) the type of economic ownership (private, public, mixed); (2) the way of organizing production and distribution in general (pure laissez faire, markets with government planning and regula- tion, fully centralized planning); (3) the type of authority arrangements within the units of production (worker control versus managerial prerogative); (4) the range and char- acter of material incentives; and (5) the nature and extent of social security and welfare provisions.

as a matter of historical fact, utilitarians in the early nineteenth century tended to favor free trade and the laissez-faire view of adam Smith that unregulated market rela- tions and free competition best promote the total social good.47 today it is probably fair to say that few, if any, utilitarians believe happiness would be maximized by a pure nineteenth-century-style capitalism, without any welfare arrangements. however, they are not in agreement on the question of what economic arrangements would in fact max- imize happiness. nonetheless, many utilitarians would favorably view increased worker participation in industrial life and more equal distribution of income.

Worker Participation In his Principles of Political Economy, originally published in 1848, Mill argued for the desirability of breaking down the sharp and hostile division between the producers, or workers, on the one hand, and the capitalists, or owners, on the other. not only would this be a good thing, it was also, he thought, something that the advance of civilization was tending naturally to bring about: “The relation of masters and workpeople will be gradually superseded by partnership, in one or two forms: in some cases, association of the labourers with the capitalist; in others, and perhaps finally in all, association of labourers among themselves.”48 These developments would not only enhance productiv- ity but also—and more important—promote the fuller development and well-being of the people involved. The aim, Mill thought, should be to enable people “to work with or for one another in relations not involving dependence.”49

By the association of labor and capital, Mill had in mind different schemes of profit sharing. For example, “in the american ships trading to china, it has long been the

Utilitarianism doesn’t tell us which

economic system will produce the most

happiness. That question hangs on

the social, economic, and political facts.

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chapter three  Justice and economic distribution      89

custom for every sailor to have an interest in the profits of the voyage; and to this has been ascribed the general good conduct of those seamen.” This sort of association, how- ever, would eventually give way to a more complete system of worker cooperatives:

The form of association, however, which if mankind continue to improve, must be expected in the end to predominate, is not that which can exist between a capitalist as chief, and workpeople without a voice in the management, but the association of the labourers themselves on terms of equality, collectively owning the capital with which they carry on their operations, and working under managers elected and removable by themselves.50

In Principles, Mill discussed several examples of successful cooperative associations and viewed optimistically the future of the cooperative movement:

eventually, and in perhaps a less remote future than may be supposed, we may, through the cooperative principle, see our way to a change in society, which would combine the freedom and independence of the individual, with the moral, intellec- tual, and economical advantages of aggregate production; and which . . . would real- ize, at least in the industrial department, the best aspirations of the democratic spirit.51

What that transformation implied for Mill was nothing less than “the nearest approach to social justice, and the most beneficial ordering of industrial affairs for the universal good, which it is possible at present to foresee.”52

Greater equality of income Utilitarians are likely to be sympathetic to the argument that steps should be taken to reduce the great disparities in income that characterize our society today. They are likely to believe that making the distribution of income more equal is a good strategy for maximizing happiness. one reason is that inequality appears to be correlated with various social ills. More equal societies, such as Sweden and Finland, with a relatively narrow gap separating their richest and poorest citizens score higher on various indices of social well-being. In terms of infant mortality, life expectancy, malnutrition, obesity, teenage pregnancy, economic insecurity, personal anxiety, and other measures, they fare better than do societies like the United States that have greater inequality.53 There is also evidence that equality promotes economic growth.54

another reason utilitarians tend to favor greater inequality of income goes back to what economists would call the declining marginal utility of money. This phrase sim- ply means that successive additions to one’s income produce, on average, less happiness or welfare than did earlier additions.

The declining utility of money follows from the fact, as professor richard Brandt explains it, that the outcomes we want are preferentially ordered, some being more strongly wanted than others:

So a person, when deciding how to spend his resources, picks a basket of groceries which is at least as appealing as any other he can purchase with the money he has. The things he does not buy are omitted because other things are wanted more. If we double a person’s income, he will spend the extra money on items he wants less (some special cases aside), and which will give less enjoyment than will the original income. The more one’s income, the fewer preferred items one buys and the more preferred items one already has. on the whole, then, when the necessities of life have been purchased

summary Utilitarians must examine various factual issues to determine which

economic system and principles will best

promote social well-being or

happiness. Many utilitarians favor

increased worker participation and a

more equal distribution of income.

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90 part one moral pHilosopHy and business

and the individual is spending on luxury items, he is buying items which will give less enjoyment. . . . This conclusion corresponds well with commonsense reflection and practice.55

The obvious implication is that a more egalitarian allocation of income—that is, an allocation that increases the income of those who now earn less—would boost total happiness. Brandt, for one, therefore defends equality of after-tax income on utilitarian grounds, subject to the following exceptions: supplements to meet special needs, sup- plements necessary for incentives or to allocate resources efficiently, and variations to achieve other socially desirable ends, such as population control.56 Brandt states that this guiding principle of distribution is of only prima facie force and may have to be balanced against other principles and considerations. Still, it illustrates the point that utilitarians today are likely to advocate increased economic equality.

• • •

the l iberta r ian a pproach Whereas utilitarians associate justice with social utility, philosophers who endorse what is called libertarianism identify justice with an ideal of liberty. For them, liberty is the prime value, and justice consists in permitting each person to live as he or she pleases, free from the interference of others. accordingly, one libertarian asserts: “We are con- cerned with the condition of men in which coercion of some by others is reduced as much as possible in society.”57 another maintains that libertarianism is “a philosophy of personal liberty—the liberty of each person to live according to his own choices, pro- vided he does not attempt to coerce others and thus prevent them from living according to their choices.”58 Such views show clearly the libertarian’s association of justice with liberty and of liberty itself with the absence of interference by other persons.

Libertarians firmly reject utilitarianism’s concern for total social well-being. Utilitarians are willing to restrict the liberty of some, to interfere with their choices, if doing so will promote greater net happiness than not doing so. Libertarians cannot stomach that approach. as long as you are not doing something that interferes with any- one else’s liberty, then no person, group, or government should disturb you in living the life you choose—not even if its doing so would maximize social happiness.

although individual liberty is something that all of us value, it may not be the only thing we value. For the libertarian, however, liberty takes priority over other moral con- cerns. In particular, justice consists solely of respect for individual liberty. a libertarian world, with a complete commitment to individual liberty, would be a very different world from the one we now live in. consider the following: The government registers young men for military service and can, if it chooses, draft them; laws prevent adults from viewing certain kinds of pornography and from ingesting substances that the legis- lature deems harmful or immoral (such as marijuana and cocaine); and the state imposes taxes on our income to—among many other things—support needy citizens, provide loans to college students, and fund various projects for the common good. From a liber- tarian perspective, none of these policies is just.

Given the assumption that liberty means “noninterference,” libertarians gener- ally agree that liberty allows only a minimal or “night-watchman” state. Such a state is limited to the narrow functions of protecting its citizens against force, theft, and fraud;

Libertarians refuse to restrict individual

liberty even if doing so would increase overall happiness.

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chapter three  Justice and economic distribution      91

enforcing contracts; and performing other such basic maintenance functions. In this view, a more extensive state—in particular, one that taxes its better-off citizens to support the less fortunate ones—violates the liberty of individuals by forcing them to support projects, policies, or persons they have not freely chosen to support.

nozick’s theoRy of Justice

although libertarians differ in how they formulate their theory, the late harvard professor robert nozick’s Anarchy, State, and Utopia is a very influential statement of the libertarian case.59 nozick’s challenging and powerful advocacy of libertarianism has stimulated much debate, obliging philosophers of all political persuasions to take the libertarian theory seri- ously. his views are thus worth presenting in detail.

nozick begins from the premise that people have certain basic moral rights, which he calls lockean rights. By alluding to the political philosophy of John Locke (1632– 1704), nozick wishes to underscore that these rights are both negative and natural. They are negative because they require only that people forbear from acting in certain ways—in particular, that we refrain from interfering with others. Beyond this, we are not obliged to do anything positive for anyone else, nor is anyone required to do anything positive for us. We have no right, for example, to be provided with satisfying work or with any material goods that we might need. These negative rights, according to nozick, are natural in the sense that we possess them independently of any social or political institutions.

These individual rights impose firm, nearly absolute restrictions (or, in nozick’s phrase, “side constraints”) on how we may act. We cannot morally infringe on someone’s rights for any purpose. not only are we forbidden to interfere with a person’s liberty in order to promote the general good, we are prohibited from doing so even if violating that individual’s rights would somehow prevent other individuals’ rights from being violated. each individual is autonomous and responsible, and should be left to fashion his or her own life free from the interference of others—as long as doing so is compatible with the rights of others to do the same. only an acknowledgment of this almost absolute right to be free from coercion, nozick argues, fully respects the distinctiveness of individuals, each with a unique life to lead.

a belief in these rights shapes nozick’s theory of economic justice, which he calls the entitlement theory. essentially, nozick maintains that people are entitled to their holdings (that is, goods, money, and property) as long as they have acquired them fairly. Stated another way, if you have obtained your possessions without violating other people’s Lockean rights, then you are entitled to them and may dispose of them as you choose. no one else has a legitimate claim on them. If you have secured a vast fortune without injuring other people, defrauding them, or otherwise violating their rights, then you are morally permitted to do with your fortune whatever you wish—bequeath it to a relative, endow a university, or squander it in riotous living. even though other people may be going hungry, justice imposes no obligation on you to help them.

The first principle of Nozick’s entitlement theory concerns the original acquisition of holdings—that is, the appropriation of unheld goods or the creation of new goods. If a person acquires a holding in accordance with this principle, then he or she is entitled to it. If, for example, you discover and remove minerals from the wilderness or make some- thing out of materials you already legitimately possess, then you have justly acquired this

summary The libertarian theory identifies justice with

liberty, which libertarians understand as living according to our own choices, free

from the interference of others. They reject

utilitarianism’s concern for total social

well-being.

According to Nozick’s theory, you are entitled to your holdings if you have acquired them without violating other people’s rights.

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92 part one moral pHilosopHy and business

new holding. nozick does not spell out this principle or specify fully what constitutes a just original acquisition, but the basic idea is clear and reflects the thinking of John Locke.

property is a moral right, said Locke, because individuals are morally entitled to the products of their labor. When they mix their labor with the natural world, they are entitled to the resulting product. Thus, if a man works the land, then he is entitled to the land and its products because through his labor he has put something of himself into them. This investment of self through labor is the moral basis of ownership, Locke wrote, but he acknowledged limits to this right:

In the beginning . . . men had a right to appropriate, by their labour, each one of himself, as much of the things of nature, as he could use. . . . Whatsoever he tilled and reaped, laid up and made use of, before it spoiled, that was his peculiar right; whatso- ever he enclosed, and could feed, and make use of, the cattle and product was also his. But if either the grass of his inclosure rotted on the ground, or the fruit of his plant- ing perished without gathering, and laying up, this part of the earth . . . was still to be looked on as waste, and might be the possession of any other.60

In this early state of nature (the phrase is Locke’s) prior to the formation of govern- ment, property rights were limited not only by the requirement that one not waste what one claimed, but also by the restriction that “enough and as good” be left for others— that is, that one’s appropriation not make others worse off. Later, however, with the introduction of money, Locke thought that both these restrictions were overcome. You can pile up money beyond your needs without its spoiling; and if your property is used productively and the proceeds are offered for sale, then your appropriation leaves others no worse off than before.

Nozick’s second principle concerns transfers of already-owned goods from one person to another: how people may legitimately transfer holdings to others and how they may legitimately get holdings from others. If a person possesses a holding because of a legiti- mate transfer, then he or she is entitled to it. again, nozick does not work out the details, but it is clear that acquiring something by purchase, as a gift, or through exchange would constitute a legitimate acquisition. Gaining something through theft, force, or fraud would violate the principle of justice in transfer.

Nozick’s third and final principle states that one can justly acquire a holding only in accord with the two principles previously discussed. If you come by a holding in some other way, you are not entitled to it.

nozick sums up his theory this way:

1. a person who acquires a holding in accordance with the principle of justice in acqui- sition is entitled to that holding.

2. a person who acquires a holding in accordance with the principle of justice in transfer, from someone else entitled to the holding, is entitled to the holding.

3. no one is entitled to a holding except by (repeated) applications of 1 and 2.

In short, the distribution of goods in a society is just if and only if all are entitled to the holdings they possess. nozick calls his entitlement theory “historical” because what matters is how people come to have what they have. If people are entitled to their pos- sessions, then the distribution of economic holdings is just, regardless of what the actual

summary The libertarian

philosopher Robert Nozick defends the

entitlement theory. This theory holds that the distribution of goods,

money, and property is just if people are

entitled to what they have—that is, if they have acquired their

possessions without violating the rights of

anyone else.

All that matters for Nozick is how people

came to have what they have, not the

pattern or results of the distribution of

goods.

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chapter three  Justice and economic distribution      93

distribution happens to look like (for instance, how far people are above or below the average income) or what its consequences are.

nozick’s Wilt chambeRlain examPle

nozick argues that respect for liberty inescapably leads one to repudiate other concep- tions of economic justice in favor of his entitlement approach. one of his most ingenious examples features Wilt chamberlain, the late basketball star.

Suppose, nozick says, that things are distributed according to your favorite non- entitlement theory, whatever it is. (he calls this distribution D1.) now imagine that Wilt chamberlain signs a contract with a team that guarantees him $5 from the price of each ticket. Whenever people buy a ticket to a game, they drop $5 into a special box with chamberlain’s name on it. to them, seeing him play is worth $5. Imagine then that in the course of a season 1 million people attend his games and chamberlain ends up with far more than the average income—far more, indeed, than anyone else in the society earns. This result (D2) upsets the initial distributional pattern (D1). can the proponent of D1 complain? nozick thinks not:

Is [chamberlain] entitled to this income? Is this new distribution, D2, unjust? If so, why? There is no question about whether each of the people was entitled to the control over the resources they held in D1; because that was the distribution (your favorite) that (for the purposes of the argument) we assumed was acceptable. each of these per- sons chose to give [$5] of their money to chamberlain. . . . If D1 was a just distribution, and people voluntarily moved from it to D2, transferring parts of their shares they were given under D1 . . . isn’t D2 also just? If the people were entitled to dispose of the resources to which they were entitled (under D1), didn’t this include their being enti- tled to give it to, or exchange it with, Wilt chamberlain? can anyone else complain on grounds of justice?61

having defended the legitimacy of chamberlain’s new wealth, nozick pushes his case further, arguing that any effort to maintain some initial distributional arrangement like D1 will interfere with people’s liberty to use their resources as they wish. to preserve this original distribution, he writes, society would have to “forbid capitalist acts between consenting adults”:

The general point illustrated by the Wilt chamberlain example . . . is that no [non- entitlement] principle of justice can be continuously realized without continuous interference with people’s lives. any favored pattern would be transformed into one unfavored by the principle, by people choosing to act in various ways; for example, by people exchanging goods and services with other people, or giving things to other peo- ple. . . . to maintain a pattern one must either continually interfere to stop people from transferring resources as they wish to, or continually (or periodically) interfere to take from some persons resources that others for some reason chose to transfer to them.62

the libeRtaRian vieW of libeRty

Libertarianism clearly involves a commitment to leaving market relations—buying, selling, and other exchanges—totally unrestricted.* Force and fraud are forbidden, of course, but there should be no meddling with the uncoerced exchanges of consenting

*chapter 4 examines the nature of market economies in general and capitalism in particular.

summary In the Wilt Chamberlain

example, Nozick argues that other

theories of economic justice inevitably fail to

respect people’s liberty.

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94 part one moral pHilosopHy and business

individuals. not only is the market morally legitimate, but any attempt to interfere with voluntary and nonfraudulent transactions between adults will be unacceptable, even unjust. Thus, libertarians are for economic laissez faire and against any governmental economic activity that interferes with the marketplace, even if the point of the interfer- ence is to enhance the performance of the economy.

It is important to emphasize that libertarianism’s enthusiasm for the market rests on this commitment to liberty. By contrast, utilitarians who defend an unregulated market do so on the ground that it works better than either a planned, socialist economy or the sort of regulated capitalism with some welfare benefits that we in fact have in the United States. If a utilitarian defends laissez faire, he or she does so because of its consequences. If we convinced a utilitarian that some other form of economic organization would bet- ter promote human well-being, the utilitarian would advocate that instead. With liber- tarians this is definitely not the case. as a matter of fact, libertarians typically agree with adam Smith that unregulated capitalist behavior best promotes everyone’s interests. But even if, hypothetically, someone like nozick were convinced that some sort of socialism or welfare capitalism would outperform laissez-faire capitalism economically—greater productivity, shorter workday, higher standard of living—he or she would still reject this alternative as morally unacceptable. to tinker with the market, however beneficial it might be, would involve violating someone’s liberty.

Libertarians say that their commitment to an unrestricted free market reflects the priority of liberty over other values. however, libertarians do not value liberty in the mundane sense of people’s freedom to do what they want to do. rather, libertarians understand freedom in terms of their theory of rights, thus building a commitment to private property into their concept of liberty. according to them, being able to do what you want does not automatically represent an increase in your liberty. It does so only if you remain within the boundaries set by the Lockean rights of others. Likewise, one is unfree or coerced only when one’s rights are infringed.

Imagine, for example, that having purchased the forest in which I occasionally stroll, the new owner bars my access to it. It would seem that my freedom has been reduced because I can no longer ramble where I wish. But libertarians deny that this is a restric- tion of my liberty. My liberty is restricted if and only if someone violates my Lockean rights, which no one has done. Suppose that I go for a hike in the forest anyway. If the sheriff’s deputies arrest me, they prevent me from doing what I want to do. But accord- ing to libertarianism, they do not restrict my liberty, nor do they coerce me. Why not? Because my hiking in the forest violates the landowner’s rights.

here libertarians seem driven to an unusual use of familiar terminology, but they have no choice. They cannot admit that abridging the landowner’s freedom to do as he wants with his property would expand my freedom. If they did, then their theory would be in jeopardy. They would have to acknowledge that restricting the liberty or property rights of some could enhance the liberty of others. In other words, if their theory com- mitted them simply to promoting as much as possible the goal of people doing what they want to do, then libertarians would be in the position of balancing the freedom of some against the freedom of others. But this sort of balancing and trading off is exactly what libertarians dislike about utilitarianism.

If liberty means being free to do what you want, it’s not true that libertarians value it above everything else. What they value are Lockean property rights, which then set the parameters of liberty. Libertarians frequently contend that (1) private property is

Libertarians build a commitment to

private property into their concept of

liberty.

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chapter three  Justice and economic distribution      95

necessary for freedom and (2) any society that doesn’t respect private property rights is coercive. But libertarianism makes 1 true by definition, and 2 is incorrect. any system of property (whether Lockean, socialist, or something in between) necessarily puts restric- tions on people’s conduct; its rules are coercive. What one system of property permits, another forbids. Society X prevents me from hiking in your woods, whereas society Y prevents you from stopping me. Both systems of rules are coercive. Both grant some freedoms and withhold others.

maRkets anD fRee exchanGe

Libertarians defend market relations, then, as necessary to respect human liberty (as their theory understands liberty). however, in doing so, libertarians do not assert that, mor- ally speaking, people deserve what they receive from others through gift or exchange, only that they are entitled to whatever they receive. The market tends generally, libertarians believe, to reward people for skill, diligence, and successful performance. Yet luck plays a role, too. Jack makes a fortune from having been in the right place at the right time with jeggings, while Jill loses her investment because the market for bottled water collapses. The libertarian position is not that Jack deserves to be wealthy and Jill does not; rather, it is that Jack is entitled to his holdings if he has acquired them in accordance with the principles of justice.

The same point comes up with regard to gifts and inheritance. Inheritance strikes many people as patently unfair. how can it be just, they ask, that one child inherits a vast fortune, the best schooling, and social, political, and business connections that will ensure his or her future, while another child inherits indigence, inferior schooling, and connections with crime? at birth neither youngster deserves anything—a fact suggest- ing, perhaps, that an equal division of holdings and opportunities would be the only fair allocation. For his part, nozick contends that deserving has no bearing on the justice of inherited wealth; people are simply entitled to it as long as it is not ill gotten. or looking at it the other way, if one is entitled to one’s holdings, then one has a right to do with them as one wishes, including using them to benefit one’s children.

according to libertarians, a totally free market is necessary for people to exercise their fundamental rights. Sometimes, however, unregulated market transactions can lead to disastrous results. Unfortunately, this is more than just a theoretical possibility. amartya Sen, the nobel prize–winning economist, has shown how in certain circum- stances changing market entitlements have led to mass starvation. although the average person thinks of famine as caused simply by a shortage of food, Sen and other experts have established that famines are frequently accompanied by no shortfall of food in abso- lute terms. Indeed, even more food may be available during a famine than in nonfamine years—if one has the money to buy it. Famine occurs because large numbers of people lack the financial wherewithal to obtain the necessary food.63

For example, drought may cause food output in one area to decline and the peas- ants in that area to starve because they lack the means to buy food from elsewhere, even though there is no dearth of food in the country as a whole (ethiopia in 1973). or famine may result when the purchasing power of one occupational group shoots up, ruining the chances of other groups, whose nominal incomes have not changed, to buy food (Bengal in 1943). a reduction of food output because of potato blight triggered the great Irish famine of the 1840s, which killed a higher proportion of the population than any other famine in recorded history. But if one looks at the United Kingdom as a whole,

Libertarians don’t contend that people morally deserve what they get in a free market, but only that they are entitled to it.

Unregulated market transactions can sometimes lead to disastrous results as Amartya Sen has shown.

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96 part one moral pHilosopHy and business

there was no shortage of food. Food could certainly have moved from Britain to Ireland if the Irish could have afforded to purchase it. as it was, at the height of the famine, food was exported from Ireland to england because the prosperous english could pay a higher price for it.64

Libertarians would find it immoral and unjust to force people to aid the starving or to tax the affluent in order to set up programs to relieve hunger or prevent famines in the first place. nor does justice require that a wealthy merchant assist the hungry children in his community to stay alive. and it would certainly violate the merchant’s property rights for the children to help themselves to his excess food. nevertheless, although justice does not require that one assist those in need, libertarians would generally acknowledge that we have some humanitarian obligations toward others. accordingly, they would not only permit but also presumably encourage people to voluntarily assist others. Justice does not require the merchant to donate, and it forbids us from forcing him to do so, but char- ity on his part would be a good thing. This reflects the libertarian’s firm commitment to property rights: What you have legitimately acquired is yours to do with as you will.

PRoPeRty RiGhts

nozick’s theory makes property rights nearly sacrosanct. From the perspective of lib- ertarianism, property rights grow out of one’s basic moral rights, reflecting one’s initial creation or appropriation of the product, some sort of exchange or transfer between consenting persons, or a combination of these. property rights exist prior to any social arrangements and are morally antecedent to any legislative decisions that a society might make. however, nozick’s critics argue that it is a mistake to think of property as a simple, pre-social relation between a person and a physical thing.

First, property is not restricted to material objects like cars, watches, or houses. In developed societies, it may include abstract goods, interests, and claims. For instance, property may include the right to pay debts with the balance in a bank account, the right to dividends from a corporate investment, and the right to collect from a pension plan one has joined. In fact, the courts have counted as property a wide range of items

summary Libertarians operate

with a distinctive concept of liberty,

defend free exchange and laissez-faire

markets without regard to results, put a priority

on freedom over all other values, and see

property rights as existing prior to any

social arrangements. Critics contest each of

these features of libertarianism.

It is a mistake to think of property as a

simple pre-social relation between a

person and a thing.

According to the libertarian theory of justice, the people

that own the house in the background

have no obligation to assist the homeless. the wealth that they

have acquired is theirs to dispose of

entirely as they wish.

Jo el

S te

tte nh

ei m

/C or

bi s

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chapter three  Justice and economic distribution      97

such as new life forms, an original idea, pension payments, the news, or a place on the welfare rolls.65

Second, property ownership involves a bundle of different rights governing one’s ability to possess, use, manage, dispose of, or restrict others’ access to something in certain specified ways. The nature of this bundle differs among societies, as do the types of things that can be owned. In any society, property ownership is structured by the various implicit or explicit rules and regulations governing the legitimate acquisition and transfer of various types of goods, interests, and claims. not only do property rights differ between societies, but the nature of ownership can also change over time in any given society. as a general trend, the social restrictions on property ownership in the United States have increased dramatically during our history (much to the displeasure of libertarians).

For these reasons, most nonlibertarian social and political theorists view property rights as a function of the particular institutions of a given society. This is not to say that a society’s property arrangements cannot be criticized. on the contrary, their morality can be assessed just as the morality of any other institution can.

• • •

r awl s’s theory of Just ice A Theory of Justice by John rawls (1921–2002) is generally thought to be the most influ- ential work of the post–World War II period in social and political philosophy, at least in the english language.66 not only has rawls’s elegant theory touched a responsive chord in many readers, but also his book helped rejuvenate serious work in normative theory. even those who are not persuaded by rawls find themselves obliged to come to terms with his thinking. although rawls’s basic approach is not difficult to explain (and rawls himself had sketched out his key concepts in earlier articles), A Theory of Justice elaborates his ideas with such painstaking care and philosophical thoroughness that even vigorous critics of the book (such as his colleague robert nozick) pay sincere tribute to its many virtues.

By his own account, rawls presents his theory as a modern alternative to utilitarian- ism, one that he hopes will be compatible with the belief that justice must be associated with fairness and the moral equality of persons. rawls firmly wishes to avoid reducing justice to a matter of society utility. at the same time, his approach differs fundamentally from nozick’s. rawls conceives of society as a cooperative venture among its members, and he elaborates a conception of justice that is thoroughly social. he does not base his theory, as nozick does, on the postulate that individuals possess certain natural rights prior to any political or social organization.

two features of rawls’s theory are particularly important: his hypothetical-contract approach and the principles of justice that he derives with it. rawls’s strategy is to ask what we would choose as the fundamental principles to govern society if, hypotheti- cally, we were to meet for this purpose in what he calls the original position. he then elaborates the nature of this original position, the constraints on the choice facing us, and the reasoning that he thinks people in the original position would follow. In this way, rawls offers a modern variant of social contract theory, in the tradition of hobbes, Locke, rousseau, and other earlier philosophers. rawls argues that people in the original

Most nonlibertarian theorists believe that property rights are determined by social institutions.

Rawls’s strategy is to ask what principles people would choose to govern their society if they were in the “original position.”

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98 part one moral pHilosopHy and business

position would agree on two principles as the basic governing principles of their society, and that these principles are, accordingly, the principles of justice. The first is a guarantee of certain familiar and fundamental liberties to each person. The second—more con- troversial—holds in part that social and economic inequalities are justified only if those inequalities benefit the least advantaged members of society. These principles are exam- ined at some length later in this chapter.

the oRiGinal Position

Various principles of economic justice have been proposed, but an important question for philosophers is whether, and how, any such principles can be justified. Thinking of possible principles of economic distribution is not very difficult, but proving the soundness of such a principle, or at least showing it to be more plausible than its rivals, is a challenging task. after all, people seem to differ in their intuitions about what is just and unjust, and their sentiments are bound to be influenced by their social posi- tion. nozick’s entitlement theory, for example, with its priority on property rights, is bound to seem more plausible to a corporate executive than to a migrant farmworker. The justice of a world in which some children are born into wealth while other chil- dren struggle by on welfare is unlikely to seem as obvious to the poor as it may to the well-to-do.

The strategy rawls employs to identify and justify the basic principles of justice is to imagine that people come together for the purpose of deciding on the ground rules for their society, in particular on the rules governing economic distribution. although in the past groups of people have written down constitutions and similar political documents, never have the members of a society decided from scratch on the basic principles of justice that should govern them. nor is it even remotely likely that people will do this in the future. What rawls imagines is a thought experiment. The question is hypothetical: What principles would people choose in this sort of original position? If we can identify these principles, rawls contends, then we will have identified the principles of justice precisely because they are the principles that we would all have agreed to.

the nature of the choice on what basis are we to choose these principles? The most obvious answer is that we should select principles that strike us as just. But this won’t work. even if we all agreed about what is just and unjust, we would be relying on our already existing ideas about justice as a basis for choosing the principles to govern our society. philosophically, this approach doesn’t accomplish anything. We would simply be going in a circle, using our existing conception of justice to prove the principles of justice.

rawls suggests instead that we imagine people in the original position choosing solely on the basis of self-interest: each individual chooses the set of principles for gov- erning society that will be best for himself or herself (and loved ones). We don’t have to imagine that people are antagonistic or that outside of the original position they are selfish; we simply imagine that they hope to get the group to choose those principles that will, more than any other possible principles, benefit them. If people in the original position can agree on some governing principles on the basis of mutual self-interest, then these principles will be, rawls thinks, the principles of justice. Why? Because the

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chapter three  Justice and economic distribution      99

principles are agreed to under conditions of equality and free choice. By analogy, if we make up a game and all agree ahead of time, freely and equally, on how the game is to be played, nobody can later complain that the rules are unfair.

the veil of ignorance If people in the original position are supposed to choose principles on the basis of self-interest, agreement seems unlikely. If carolyn has vast real estate holdings, she will certainly want rules that guarantee her extensive property rights, whereas her tenants are likely to support rules that permit rent control. Likewise, the wealthy will tend to advocate rules rather like nozick’s entitlement theory, whereas the poor will, on the basis of their self-interest, desire a redistribution of property. conflicts of self- interest seem bound to create totally irreconcilable demands. For instance, artists may contend that they should be rewarded more than professional people, men that they should earn more than women, and laborers that they merit more than people with desk jobs.

Given that some rules would benefit one group while other rules would benefit another, it seems improbable that people in the original position would concur. as a way around this problem, rawls asks us to imagine that people in the original position do not know what social position or status they hold in society. They do not know whether they are rich or poor, nor do they know their personal talents and characteristics—whether, for example, they are athletic or sedentary, artistic or tone deaf, intelligent or not very bright, physically sound or handicapped in some way. They do not know their race or even their sex. Behind what rawls calls the veil of ignorance, people in the original posi- tion know nothing about themselves personally or about what their individual situation will be once the rules are chosen and the veil is lifted. They do, however, have a general knowledge of history, sociology, and psychology—although no specific information about the society they will be in once the veil is lifted.

Under the veil of ignorance, the people in rawls’s original position have no knowl- edge about themselves or their situation that would lead them to argue from a partial or biased point of view. no individual is likely to argue that some particular group—such as white men, property owners, star athletes, or philosophers—should receive special social and economic privileges when, for all that individual knows, he or she will be nonwhite, propertyless, unathletic, and bored by philosophy when the veil is lifted. Because indi- viduals in the original position are all equally ignorant of their personal predicaments and they are all trying to advance their self-interest, agreement is possible. The reasoning of any one person will be the same as the reasoning of each of the others, for each is in identical circumstances and each has the same motivation. as a result, no actual group has to perform rawls’s thought experiment. people who read rawls’s book can imagine that they are in the original position and then decide whether they would choose the principles rawls thinks they would.

The veil of ignorance, in effect, forces people in the original position to be objective and impartial and makes agreement possible. also, according to rawls, the fact that peo- ple have no special knowledge that would allow them to argue in a biased way accords with our sense of fairness. The circumstances of the original position are genuinely equal and fair, and because of this, the principles agreed to under these conditions have a good claim to be considered the principles of justice.

The veil of ignorance eliminates bias and makes the original position a fair way of choosing principles.

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100 part one moral pHilosopHy and business

choosinG the PRinciPles

although people in the original position are ignorant of their individual circum- stances, they know that whatever their particular goals, interests, and talents turn out to be, they will want more, rather than less, of what rawls calls primary social goods. These include not only income and wealth but also rights, liberties, opportu- nities, status, and self-respect. of course, once the veil of ignorance is lifted, people will have more specific ideas about what is good for them. For example, they may choose a life built around religion, one spent in commerce and industry, or one devoted to academic study. But whatever these particular individual goals, interests, and plans turn out to be, they will almost certainly be furthered, and definitely never limited, by the fact that people in the original position secured for themselves more rather than less in the way of primary goods.

how, then, will people in the original position choose their principles? A Theory of Justice explores in depth the reasoning that rawls thinks would guide their choice. at the heart of rawls’s argument is the contention that people in the original position will be conservative, in the sense that they will not wish to gamble with their futures. In setting up the ground rules for their society, they are determining their own fates and those of their children. This exercise is not something to be taken lightly, a game to be played and replayed. rather, with so much at stake, people will reason cautiously.

consider, for example, the possibility that people in the original position will set up a feudal society: 10 percent of the population will be nobles, living a life of incredible wealth, privilege, and leisure; the other 90 percent will be serfs, toiling away long hours to support the extravagant lifestyles of the aristocracy. perhaps some people would consider the joy of being a pampered noble so great that they would vote for such an arrangement behind the veil of ignorance, but they would be banking on a long shot. When the veil of ignorance is lifted, the odds are nine to one that they will be poor and miserable serfs, not lords. rawls thinks that people in the original position will not, in fact, gamble with their futures. they will not agree to rules that make it overwhelmingly likely that they will have to face a grim life of hardship.

rawls argues that for similar reasons people in the original position will not adopt the utilitarian standard to govern their society, because the utilitarian principle might sacrifice the well-being of some to enhance society’s total happiness. people in the original position, rawls argues, will not be willing to risk sacrificing their own happiness, once the veil of ignorance is lifted, for the greater good.

What people in the original position would actually do, rawls believes, is follow what game strategists call the maximin rule for making decisions. according to this rule, you should select the alternative under which the worst that could happen to you is better than the worst that could happen to you under any other alternative—that is, you should try to maximize the minimum that you will receive. This rule makes sense when you care much more about avoiding an unacceptable or disastrous result (such as being a serf ) than about getting the best possible result (being a noble) and when you have no real idea what odds you are facing. It is a conservative decision principle, but rawls thinks that people in the original position will find it a rational and appropriate guideline for their deliberations.

summary John Rawls’s theory of justice lies within the

social-contract tradition. He asks us to

imagine people meeting in the original position to choose the basic principles that are to govern their society. Although in this original position

people choose on the basis of self-interest,

we are to imagine that they are behind a veil of ignorance, with no personal information about themselves.

Rawls contends that any principles agreed

to under these circumstances have a

strong claim to be considered the

principles of justice.

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chapter three  Justice and economic distribution      101

RaWls’s tWo PRinciPles

rawls argues that after considering various alternatives people in the original position will eventually endorse the following two principles as the fundamental governing prin- ciples of their society:

1. each person is to have an equal right to the most extensive total system of equal basic liberties compatible with a similar system of liberty for all.67

2. Social and economic inequalities are to satisfy two conditions: First, they are to be attached to positions and offices open to all under conditions of fair equality of opportunity; and second, they are to be to the greatest expected benefit of the least- advantaged members of society.68

These principles, because they are agreed to in an initial situation of equality and fairness, will be the principles of justice. once these two principles of justice have been endorsed, people in the original position can gradually be given more information about their specific society. They can then go on to design their basic social and political institu- tions in more detail.

according to rawls, the first principle takes priority over the second, at least for societies that have attained a moderate level of affluence. The liberties rawls has in mind are the traditional democratic ones of freedom of thought, conscience, and religious wor- ship, as well as freedom of the person and political liberty. explicitly absent are “the right to own certain kinds of property (e.g., means of production), and freedom of contract as understood by the doctrine of laissez-faire.” The first principle guarantees not only equal liberty to individuals but also as much liberty to individuals as possible, compatible with others having the same amount of liberty. There is no reason why people in the original position would settle for anything less.

all regulations could be seen as infringing on personal liberty, because they limit what a person may do. The law that requires you to drive on the right-hand side of the road denies you the freedom to drive on either side whenever you wish. Some would argue that justice requires only an equal liberty. For example, as long as every motorist is required to drive on the right-hand side of the road, justice is being served; or if everyone in a dictatorial society is forbidden to criticize the leader’s decisions, then all are equal in their liberty. But rawls argues that if more extensive liberty is possible, without inhibit- ing the liberty of others, then it would be irrational to settle for a lesser degree of liberty. In the case of driving, permitting me to drive on either side of the road would only inter- fere with the liberty of others to drive efficiently to their various destinations, but intro- ducing right-turn-on-red laws enhances everyone’s liberty. In the dictatorship example, free speech could be more extensive without limiting anyone’s liberty.

The second principle concerns social and economic inequalities. regarding inequali- ties, rawls writes:

It is best to understand not any differences between offices and positions, but differ- ences in the benefits and burdens attached to them either directly or indirectly, such as prestige and wealth, or liability to taxation and compulsory services. players in a game do not protest against there being different positions, such as batter, pitcher, catcher, and the like, nor to there being various privileges and powers as specified by the rules;

Rawls believes that people in the original position would endorse his two principles.

These are the principles of justice because they would be agreed to in an initial situation of equality and fairness.

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102 part one moral pHilosopHy and business

nor do the citizens of a country object to there being the different offices of govern- ment such as president, senator, governor, judge, and so on, each with their special rights and duties.69

rather, at issue are differences in wealth and power, honors and rewards, privileges and salaries that attach to different roles in society.

rawls’s second principle states that insofar as inequalities are permitted—that is, insofar as it is compatible with justice for some jobs or positions to bring greater rewards than others—these positions must be open to all. In other words, there must be mean- ingful equality of opportunity in the competition among individuals for those positions in society that bring greater economic and social rewards. This, of course, is a familiar ideal, but what exactly a society must do to achieve not just legal but full and fair equality of opportunity will be a matter of debate.

The other part of the second principle is less familiar and more controversial. called the difference principle, it is the distinctive core of rawls’s theory. It states that inequalities are justified only if they work to the benefit of the least-advantaged members of society. By “least-advantaged,” rawls simply means those who are least well-off. But what does it mean to require that inequalities work to the benefit of this group?

Imagine that we are back in the original position. We wish to make sure that under the principles we choose, the worst that can happen to us once the veil of ignorance is lifted is still better than the worst that might have happened under some other arrange- ment. We might, therefore, choose strict social and economic equality. With an equal division of goods, there’s no risk of doing worse than anyone else, no danger of being sacrificed to increase the total happiness of society. In the case of liberty, people in the original position do insist on full equality, but with social and economic inequality, the matter is a little different.

Suppose, for instance, that as a result of dividing things up equally, people lack an incentive to undertake some of the more difficult work that society needs done. It might then be the case that allowing certain inequalities—for example, paying people more for being particularly productive or for undertaking the necessary training to perform some socially useful task—would work to everyone’s benefit, including those who would be earning less. If so, then why not permit those inequalities?

compare these two diagrams:

A B 8

each pie represents a possible social and economic distribution among eight basic groups in society (the number eight is arbitrary). In Figure a, things are divided equally;

summary Rawls argues that

people in the original position would follow the maximin rule for making decisions.

They would choose principles guaranteeing

that the worst that could happen to them is better than the worst that could happen to them under any rival

principles. Rawls argues that they would

agree on two principles: (1) Each

person has a right to the most extensive scheme of liberties

compatible with others having the same

amount of liberty. (2) To be justified, any

inequalities must be to the greatest expected

benefit of the least advantaged and open to all under conditions

of fair equality of opportunity.

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chapter three  Justice and economic distribution      103

in Figure B, unequally. Suppose, then, that because a society permits inequalities as an incentive to get people to work harder or to do work that they otherwise would not have wanted to do, the overall amount to be distributed among society’s members increases— that is, the economic pie grows in size from a to B, and the people with the thinnest slice of B are better-off than they would have been with an equal slice of a.

Which society will people in the original position prefer? obviously the one repre- sented by Figure B, because the least they could receive in B (the slice labeled 8) is bigger than any of the eight equal slices in a. people in the original position do not care about equality of distribution as a value in and of itself; they want the social and economic arrangement that will provide them with the highest minimum.

rawls is not trying to prove that the benefits received by the better-off will always, or even usually, trickle down to the least advantaged (although, of course, some people believe that). rather, his point is simply that people in the original position would not insist on social and economic equality at all costs. If permitting some people to be better- off than the average resulted in the least-well-off segment of society being better-off than it would have been under a strictly equal division, then this is what people in the original position will want. rawls’s difference principle is intended to capture this idea. rawls’s principles permit economic inequalities only if they do in fact benefit the least advantaged.

consider the recurrent proposal to lower further the income tax on capital gains (that is, on personal income from the sale of assets like stocks, bonds, and real estate). proponents claim that reducing the tax will spur trading in financial assets, which in turn will lead to growth in tax revenues, and that the cut will trigger more long-term investment, helping revitalize the economy. critics of the proposal contest both claims. Still, everyone agrees that the tax break would certainly increase the income of the rich because the wealthiest 1.4 percent of households receives 73.2 percent of all capital-gains income.70 Will lowering taxes on the rich benefit the least-advantaged members of soci- ety more in the long run than any alternative tax policy?

This question illustrates the application of rawls’s difference principle in a practi- cal context, but we must remember that rawls intends his principles to be used not as a direct guide to day-to-day policy decisions but rather as the basis for determining what form society’s primary social, political, and economic institutions should take in the first place. What will these institutions look like? More specifically, what sort of economic system will best satisfy rawls’s difference principle? rawls does not answer this question. he sees it as primarily a question for economists and other social scientists, whereas the task of philosophers like himself is the preliminary one of working out a satisfactory con- ception of justice. rawls does appear to believe, however, that a liberal form of capital- ism, with sufficient welfare provisions, would satisfy his principles, but he does not rule out the possibility that a democratic socialist system could as well.

faiRness anD the basic stRuctuRe

rawls intends his theory as a fundamental alternative to utilitarianism, which he rejects on the grounds that maximizing the total well-being of society could permit an unfair distribution of burdens and benefits. Utilitarianism, in rawls’s view, treats people’s pleasures and pains as completely interchangeable: a decrease of happiness here is justi- fied by greater happiness there. Within a person’s own life, such trade-offs are sensible.

People in the original position do not want equality at all costs. They will permit inequality if it improves the lot of the least advantaged.

Rawls rejects utilitarianism because it could permit an unfair distribution of benefits and burdens.

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104 part one moral pHilosopHy and business

an increase of pain now (as the dentist fills a cavity in my tooth) is justified in terms of greater happiness later (no painful, rotted tooth). But between individuals, as when Jack’s happiness is decreased to provide Jill with a more-than-compensating gain, such trade- offs are morally problematic.

Thus rawls stresses that, in his view,

each person possesses an inviolability founded on justice that even the welfare of soci- ety as a whole cannot override. . . . Therefore . . . the rights secured by justice are not subject to political bargaining or to the calculus of social interests.71

and he emphasizes that the difference principle

excludes, therefore, the justification of inequalities on the grounds that the disadvan- tages of those in one position are outweighed by the greater advantages of those in another position. This rather simple restriction is the main modification I wish to make in the utilitarian principle as usually understood.72

rawls, however, is equally unsympathetic to the libertarian approach adopted by nozick. contrary to the entitlement theory, he argues that the primary subject of justice is not, in the first instance, transactions between individuals but rather “the basic structure, the fundamental social institutions and their arrangement into one scheme.” Why? as rawls explains:

Suppose we begin with the initially attractive idea that the social circumstances and people’s relationships to one another should develop over time in accordance with free agreements fairly arrived at and fully honored. Straightaway we need an account of when agreements are free and the social circumstances under which they are reached are fair. In addition, while these conditions may be fair at an earlier time, the accumulated results of many separate and ostensibly fair agreements . . . are likely in the course of time to alter citizens’ relationships and opportunities so that the conditions for free and fair agreements no longer hold. The role of the institu- tions that belong to the basic structure is to secure just background conditions against which the actions of the individuals and associations take place. Unless this structure is appropriately regulated and adjusted, an initially just social process will eventually cease to be just, however free and fair particular transactions may look when viewed by themselves.73

additional considerations support taking the basic structure of society as the primary subject of justice—in particular, the fact that the basic structure shapes the wants, desires, hopes, and ambitions of individuals. Thus, rawls continues:

everyone recognizes that the institutional form of society affects its members and determines in large part the kind of person they want to be as well as the kind of per- son they are. The social structure also limits people’s ambitions and hopes in different ways. . . . So an economic regime, say, is not only an institutional scheme for satisfying existing wants but a way of fashioning desires and aspirations in the future.74

rawls stresses that because the basic structure is the proper focus of a theory of justice, we cannot expect the principles that apply to it to be simply an extension of the principles that govern everyday individual transactions:

The justice of the basic structure is, then, of predominant importance. The first prob- lem of justice is to determine the principles to regulate inequalities and to adjust the

Contrary to Nozick, Rawls believes that

social justice concerns the basic structure of society,

not transactions between individuals.

summary Rawls rejects

utilitarianism because it might permit an unfair distribution of burdens and benefits. Contrary

to the entitlement theory, he argues that the primary focus of justice should be the basic social structure,

not transactions between individuals. He contends that society is a cooperative project for mutual benefit and that justice requires us

to reduce the social and economic

consequences of arbitrary natural

differences among people.

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chapter three  Justice and economic distribution      105

profound and long-lasting effects of social, natural, and historical contingencies, par- ticularly since these contingencies combined with inequalities generate tendencies that, when left to themselves, are sharply at odds with the freedom and equality appropriate for a well-ordered society. In view of the special role of the basic struc- ture, we cannot assume that the principles suitable to it are natural applications, or even extensions, of the familiar principles governing the actions of individuals and associations in everyday life which take place within its framework. Most likely we shall have to loosen ourselves from our ordinary perspective and take a more compre- hensive viewpoint.75

benefits anD buRDens

The passages quoted here touch on a theme that is central to rawls’s theory. Inevitably, there will be natural differences among human beings—in physical prow- ess, mental agility, and so on—but there is nothing natural or inevitable about the weight attached by society to those differences. For rawls, a desirable feature of any account of justice is that it strives to minimize the social consequences of purely arbitrary, natural differences. he stresses that no one deserves his or her particular natural characteristics. We cannot say that angelina Jolie deserves to be beautiful or that albert einstein deserved to be blessed with an excellent mind any more than we can say that Fred merits his shortness or pamela her nearsightedness. Their attributes are simply the result of a genetic lottery. But rawls goes beyond this to argue that even personal characteristics like diligence and perseverance reflect the environment in which one was raised:

We do not deserve our place in the distribution of native endowments, any more than we deserve our initial starting place in society. That we deserve the superior character that enables us to make the effort to cultivate our abilities is also problem- atic; for such character depends in good part upon fortunate family and social cir- cumstances in early life for which we can claim no credit. The notion of desert does not apply here.76

accordingly, rawls thinks we cannot really claim moral credit for our special talents or even our virtuous character. In rawls’s view, then, if our personal characteristics are not something that we deserve, we have no strong claim to the economic rewards they might bring. on the contrary, justice requires that the social and economic consequences of these arbitrarily distributed assets be minimized.

the difference principle represents, in effect, an agreement to regard the distri- bution of natural talents as in some respects a common asset and to share in the greater social and economic benefits made possible by the complementarities of this distribution. those who have been favored by nature, whoever they are, may gain from their good fortune only on terms that improve the situation of those who have lost out. the naturally advantaged are not to gain merely because they are more gifted, but only to cover the costs of training and educa- tion and for using their endowments in ways that help the less fortunate as well. no one deserves his greater natural capacity nor merits a more favorable start- ing place in society. But, of course, this is no reason to ignore, much less to eliminate these distinctions. Instead, the basic structure can be arranged so that these contingencies work for the good of the least fortunate. thus we are led to the difference principle if we wish to set up the social system so that no one

Rawls believes that justice tries to minimize the social consequences of purely arbitrary, natural differences. People do not deserve the attributes they were born with or that reflect their environment and upbringing.

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106 part one moral pHilosopHy and business

s t u d y c o r n e r Key terms and ConCepts

basic structure declining marginal utility of

money difference principle distributive justice entitlement theory

free market justice libertarianism Lockean rights maximin rule original position

primary social goods property rights state of nature veil of ignorance worker participation

poInts to revIew

• distribution of income and wealth in the United States (pp. 80–82)

• four related ideas bound up with the concept of justice (pp. 83–84)

• Aristotle’s formal principle of justice (p. 83)

• John Stuart Mill’s definition of injustice (pp. 84–85)

• some different principles often used as a basis of distribution (p. 85)

• Walzer’s pluralistic approach to distributive justice (pp. 85–86)

• how a utilitarian like Mill looks at justice (pp. 86–87)

• Mill’s discussion of whether more talented workers should receive greater pay (pp. 87–88)

• Mill’s view of worker participation (pp. 88–89)

• utilitarianism and the declining marginal utility of money (pp. 89–90)

• Locke’s account of property rights (p. 92)

• three principles of Nozick’s entitlement theory (pp. 91–92)

• the point of the Wilt Chamberlain example (p. 93)

• how libertarians understand freedom in terms of rights (pp. 94–95)

• Amartya Sen’s analysis of famines (pp. 95–96)

• how libertarians and nonlibertarians differ in their view of property rights (pp. 96–97)

• the nature of the choice and the reasoning people would use in the original position (pp. 98–100)

• Rawls’s two principles of justice (p. 101)

• the point illustrated by the diagram on p. 102

• how Rawls’s theory differs from utilitarianism and libertarianism (pp. 103–104)

• why Rawls thinks we should minimize the social consequences of natural differences (pp. 105–106)

For Further reFleCtIon

1. What does the concept of justice mean to you?

2. Which theory of distributive justice do you find most convincing?

3. Is the United States an economically just society?

gains or loses from his arbitrary place in the distribution of natural assets or his initial position in society without giving or receiving compensating advantages in return.77

This important passage from A Theory of Justice reflects well rawls’s vision of society as a cooperative project for mutual benefit.

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chapter three  Justice and economic distribution      107

susette Kelo’s nondesCrIpt, pInK Clap-

board house sits above the Thames River in the Fort Trumbull area of New London, Connecticut. It’s surrounded by vacant lots, where neighbors once lived. One by one, these neighbors have left, and their homes have been razed. Their property has been taken over by the City of New London, which has used its power of eminent domain to clear the land where dozens of homes once stood in order to prepare the way for newdevelopment.78

Eminent domain is the ancient right of government to take property from an individual without consent for the common good—for example, to build a highway, an airport, a dam, or a hospital. The U.S. Constitution recognizes that right, permit- ting private property to be taken for “public use” as long as “just compensation” is paid. In this case, however, New London is taking land from one private party and giving it to another. By tearing down Susette Kelo’s old neighborhood, the city hopes to attract new development, which, in turn, will help revitalize the community and bring in more tax revenue. “This isn’t for the public good,” says Kelo, a nurse who works three jobs. “The public good is a firehouse or a school, not a hotel and a sports club.”

Connecticut officially designates New London a blighted area. When the Navy moved its Undersea Warfare Center away from New London taking 1,400 jobs with it, the city’s already high rate of unemployment only got worse. Much of its hous- ing stock is old and second-rate. The Fort Trumbull area, in particular, is—or was, anyway—a rather gritty neighborhood, where earlier generations of immigrants struggled to get a start. But New London saw a chance to turn things around when the pharmaceutical company Pfizer built a $350 million research center along the river below historic Fort Trumbull.

Since then, city and state governments have created a park around the fort, cleaned up the Navy’s old asbestos-laden site, and opened the riverfront to public access. Now the city wants to build a hotel, office buildings, and new homes to fill the riv- erfront blocks around Fort Trumbull. And it’s not talking about new homes for people like Susette Kelo.

“We need to get housing at the upper end, for people like the Pfizer employees,” says Ed O’Connell, the lawyer for the New London Development Corporation, which is in charge of the city’s redevelopment efforts. “They are the professionals, they are the ones with the expertise and the leadership quali- ties to remake the city—the young urban professionals who will invest in New London, put their kids in school, and think of this as a place to stay for 20 or 30 years.” And housing devel- opers want open space to work with; they don’t want to build around a few old properties like Ms. Kelo’s and that of her neighbors, Wilhelmina and Charles Dery.

Age 87 and 85, respectively, they live in the house Wilhelmina was born in. The city is willing to pay a fair price for their home, but it’s not an issue of money. “We get this all the time,” says their son Matt. “‘How much did they offer? What will it take?’ My parents don’t want to wake up rich tomorrow. They just want to wake up in their own home.”

Unfortunately for the Derys, in 2005 the U.S. Supreme Court upheld the city’s condemnation rights. In a close, 5-to-4 deci- sion, it ruled that compulsory purchase to foster economic devel- opment falls under “public use” and is thus constitutionally permissible. “Promoting economic development is a traditional and long accepted function of government,” Justice John Paul Stevens wrote for the majority. Intended to increase jobs and tax revenues, New London’s plan “unquestionably serves a public purpose.” In her dissenting opinion, however, Justice Sandra Day

Case 3.1

eminent domain

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108 part one moral pHilosopHy and business

O’Connor objected: “Under the ban- ner of economic development, all private property is now vulnerable to being taken and transferred to another private owner, so long as it might be upgraded. . . . Nothing is to prevent the state from replacing any Motel 6 with a Ritz-Carlton, any home with a shopping mall, or any farm with a factory.”

The Supreme Court’s decision pushes the debate over eminent domain back to the states and local communities. Although many cities have successfully used eminent domain to rebuild decayed urban areas or spark economic growth,79 resistance to it has intensified, with political and legal battles being fought far beyond Susette Kelo’s home in New London. For example, in Highland Park, New Jersey, the owners of a photog- raphy studio worry that a plan to redevelop their street will force them out of the location they’ve occupied for twenty-five years. In Port Chester, New York, a state development agency wants the site of a small furniture plant for a parking lot for Home Depot, and its owners are resisting. And in Salina, New York, twenty-nine little businesses—with names like Butch’s Automotive and Transmission, Syracuse Crank and Machine, Gianelli’s Sausage, and Petersen Plumbing—are battling local government’s use of eminent domain to pave the way for DestiNY’s proposed 325- acre, $2.67 billion research-and-development park.

Like New London, Salina desperately needs big ideas and big development, and it may not get another chance soon. But is tearing down these businesses fair? “We’re here,” says Philip Jakes-Johnson, who owns Solvents & Petroleum Service, one of the twenty-nine businesses in question. “We pay our taxes. We build companies and run them without tax breaks.” Brian Osborne, another owner, adds: “Everything I and my family have worked for over the past 25 years is at stake because of the way eminent domain is being used in this state and across the country.”

20 07

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n Ha

ra sim

ow icz

a $58 million tax subsidy was given to evergreen solar, inc., to provide green jobs in massachusetts. two years later, the company closed the doors of its plants, leaving 800 workers without jobs. What are massachusetts taxpayers likely to think of this arrangement and its aftermath?

update

In 2009, Pfizer announced that, as a cost-cutting measure, it was closing its New London facility and transferring its 1,400 employ- ees to a campus the company owns in Groton, Connecticut.

dIsCussIon QuestIons

1. Did New London treat Susette Kelo and her neighbors fairly? Assuming that the proposed development would help to revitalize New London, is it just for the city to appropriate private property around Fort Trumbull?

2. Are towns such as New London and Salina pursuing wise, beneficial, and progressive social policies, or are their actions socially harmful and biased against ordinary work- ing people and small-business owners?

3. Do you believe that eminent domain is a morally legitimate right of government? Explain why or why not.

4. “If ‘just compensation’ is paid, then by definition those who lose their property cannot claim that they have been treated unjustly.” Assess this argument. Can compen- sation be just even if one of the parties is unwilling to accept it?

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chapter three  Justice and economic distribution      109

5. Is it fair to the community if an individual refuses payment and blocks a socially useful project? Putting legal issues aside, are there situations in which it would be morally permissible for government to seize private property for the public good with less than full compensation or even with no compensation at all?

6. Assess the concept of eminent domain, in general, and the plight of Susette Kelo and her neighbors, in par- ticular, from the point of view of the different theories of justice discussed in this chapter. Is it possible to square the government’s exercise of eminent domain with a libertarian approach to justice?

water Is the lIFeblood oF the earth, but by 2025, according to the U.N., two-thirds of the world’s popula- tion could face chronic shortages of water. In fact, some countries are already importing huge supertankers of fresh- water from other countries. But one place that’s definitely not short of water is the state of Michigan, which has 11,000 lakes and is surrounded by Lakes Michigan, Huron, Superior, and Erie. So it came as a surprise to some that the Nestlé company’s new Ice Mountain bottled-water plant in Mecosta County, Michigan, dredged up so much controversy when it began pumping water from a local spring.80

Nestlé’s willingness to invest $100 million to build a new 410,000-square-foot bottling plant in Mecosta reflects the fact that bottled water is big business, with annual sales of $6 billion (up 35 percent since 1997). Many county residents, in fact, are thrilled about Nestlé’s being there. The Ice Mountain plant employs about a hundred people at $12 to $23 per hour, significantly more than many local jobs pay. And the company shells out hundreds of thousands of dollars in local taxes. Township supervisor Maxine McClellan says, “This is probably the best project we’ve ever brought into Mecosta

County.” She adds that she wants “a diversified economy where our kids don’t have to move away to find jobs.”

The problem, as some local residents see it, is that Nestlé has also built a 12-mile stainless steel pipeline from the plant to Sanctuary Spring, which sits on an 850-acre private deer-hunting ranch and is part of the headwaters of the Little Muskegon River, which flows into the Muskegon and then into Lake Michigan. The company started pump- ing 130 gallons of water every minute from the spring, with plans to increase that to 400 gallons per minute, or about 262 million gallons a year. But whose water is Nestlé pumping? That’s the question being asked by Michigan Citizens for Water Conservation (MCWC), a local Mecosta group that has filed suit contesting Nestlé’s right to the spring’s waters. Although the company has a ninety-nine- year lease on the land, MCWC contends that the water itself is a public resource. As Jim Olson, MCWC’s lawyer, explains it, under the doctrine of “reasonable use” the owners of a stream can use its water for drinking, boating, swimming, or anything else “as long as it’s in connection with their land.” But, he argues, “this does not include the right to

Case 3.2

battling over bottled water

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110 part one moral pHilosopHy and business

transport water to some distant land for [some other] use. We’re arguing that the same is true with groundwater— you can’t sever it from the estate.”

Michigan State Senator Ken Sikkema, who chaired a task force on Michigan water issues, rejects that argument: “A farmer pumps water out of the ground, waters potatoes, and sends the potatoes to Illinois—there’s no real difference. The water in those potatoes is gone.” This reasoning hasn’t assuaged the fears of three American Indian tribes who have joined the fray. Citing an 1836 treaty that protects their fish- ing and hunting rights in the Great Lakes region, they have brought a federal lawsuit against Nestlé and the state of Michigan to stop what they see as a massive water grab. “Our fear,” says a spokesperson for the Little Traverse Bay Bands of Odawa Indians, “is that the export could significantly and permanently damage the fishery.”

However, David K. Ladd, head of the Office of Great Lakes, argues that bottled water is a special case. Legally, he contends, it’s a “food,” regulated by the Food and Drug Administration. “There’s no difference between Perrier bot- tling water, Gerber making baby food, or Miller brewing beer. When you incorporate water from the basin into a product, it’s no longer water per se.” And Brendan O’Rourke, an Ice Mountain plant manager, adds that the 262 million gallons it wants to pump are less than 1 percent of the annual recharge rate of the local watershed, equivalent to just 14 minutes of evaporation from the surface of Lake Michigan.

For their part, scientists opposed to the project argue that Nestlé’s pumping has already lowered the local water table and that northern pike are having trouble spawning in a stream fed by Sanctuary Spring. Jim Olson argues that the Ice Mountain plant should reduce its water consumption to 100 gallons per minute or less, not increase it to 400 gallons. “Every gallon removed is needed for the stream to sustain itself,” he states. “The right to withdraw groundwater does not include the right to diminish . . . existing or future uses.”

To the surprise of many, Michigan state court judge Lawrence Root bought that argument and upheld the MCWC’s

lawsuit. Ruling that the environment is at risk no matter how much water Nestlé draws out, he ordered the pumps turned off. Two years later, an appellate court reversed Judge Root’s decision, and MCWC and Nestlé subsequently entered an agreement limiting Nestlé’s withdrawals from Sanctuary Spring to 250 gallons per minute—although there has been some legal skirmishing between the two antagonists since then. In the meantime, however, the political tide has turned against Nestlé. Small towns in Maine and California have opposed its building new bottled water plants in their juris- dictions; Congress has held hearings into the diversion of groundwater by bottled water companies and other busi- nesses; and Michigan has passed legislation that, among other things, makes it virtually impossible for operations such as the Ice Mountain plant to remove more than 100,000 gal- lons of groundwater per day.

dIsCussIon QuestIons

1. Should people in Michigan be concerned about how, and by whom, the state’s ground water is used? In your view, what issues of justice does this case raise?

2. Would Nestlé’s pumping 262 million gallons of water per year from Sanctuary Spring constitute “reasonable use”? Is the company treating either local residents or the Native American tribes unfairly, or would it be unfair to restrict Nestlé’s use of water from the spring?

3. Is groundwater a public resource, the use of which is appropriate for society to regulate? Or is it the property of those who own the land to use as they see fit? Who has the strongest claim on groundwater—the owners of the land from which it is pumped, the original inhabit- ants of the area (that is, the local Indian tribes), local residents, citizens of the whole Great Lakes region, or all Americans?

4. Assess this case from the perspective of the utilitarian, libertarian, and Rawlsian theories of justice. How would each address the case? Which theory’s approach do you find the most helpful or illuminating?

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chapter three  Justice and economic distribution      111

as a result oF the eConomIC CrIsIs and reces- sion of 2008–09—the most serious economic meltdown since the Great Depression of the 1930s—an additional four million Americans have fallen into poverty. Altogether, over 49 nearly million adults now live below the poverty line, officially defined as an income below $11,139 for a single adult or less than $22,314 for a family of four.81 Nearly fifty years after President Lyndon Johnson declared “war on poverty,” 15.9 percent of our fellow citizens, many of them children, con- tinue to live in penury. That’s about one out of every six peo- ple. Even before the current economic collapse, the average American adult had a 60 percent chance of living at least one year below the poverty line and a 33 percent chance of expe- riencing dire poverty.82

Poverty is particularly hard on children. Among other things, it mars their brain development. This is not just a result of poor nutrition or exposure to environmental toxins, as one might expect. Rather, researchers have found that children growing up in very poor families experience unhealthy levels of stress hormones that impair memory and language acquisi- tion.83 Still, many people think that those described as “poor” in the United States are pretty well-off by world standards. The truth is, in life expectancy, twenty-year-old U.S. males rank thirty-sixth among the world’s nations, and twenty-year-old U.S. females rank twenty-first. Our infant mortality rate is worse than that in twenty-one other Western nations. Beijing’s infant mortality rate, for instance, is lower than New York City’s. In fact, if our infant mortality rate were as good as Cuba’s, we would save an additional 2,212 babies each year. If it were as good as Singapore’s, we’d save 18,900 babies.84

Furthermore, millions of Americans endure hunger. According to the U.S. Department of Agriculture, 14.5 percent of U.S.

households lack “food security,” and in 6.4 million American households one or more persons go hungry during the year.85 In addition, one out of every four Americans lives in substand- ard housing, and in most cities a visitor is likely to see people roaming the streets in tattered clothing, picking their food out of garbage cans, and sleeping in doorways or in makeshift shacks and abandoned cars. Contrary to the popular percep- tion that the homeless consist mostly of young men with drug, alcohol, or mental-health problems, the majority are simply jobless individuals or families who cannot afford hous- ing. Reliable figures are hard to come by, but probably between 700,000 and 800,000 Americans are homeless on any given night and between 2.5 and 3.5 million people are homeless sometime during the year.86

People in different walks of life and in different circum- stances experience poverty. Many others live on the edge of poverty and are in continual danger of falling into it through illness, job loss, or other misfortune. In the United States today, the “working poor”—those who work full-time but do not earn enough to pull themselves and their families out of poverty—number 28 million.87 They represent a higher per- centage of the workforce than in the 1970s as well-paid unionized manufacturing jobs have been replaced by nonun- ion service jobs.88 At $7.25 per hour, the minimum wage is less in real terms than it was in the 1960s and 70s. Someone working 40 hours a week, every week, for that wage cannot raise his or her family out of poverty. In fact, according to an advocacy group, a minimum-wage earner can afford to pay rent and utilities on a one-bedroom apartment in only four counties in the whole country.89

Many poor people are unable to work and depend on out- side assistance, but living decently on welfare has always

Case 3.3

poverty in america

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112 part one moral pHilosopHy and business

been difficult, if not impossible. The old system of AFDC (Aid to Families with Dependent Children) was popular when it was created in 1935 and most AFDC recipients were widows. But by the 1990s, fewer than 2 percent of recipients were widows and most had never been married to their child’s other parent.90 Public support for the program ebbed as many Americans came to believe that AFDC discouraged its recipi- ents from marrying and from working. As a result, benefits grew even stingier. By the time AFDC came to an end in 1996, welfare benefits had fallen, in real terms, to 51 percent of what they had been in 1971.91 With annual cash allow- ances for a family on AFDC ranging from $1,416 in Mississippi to $6,780 in New York, even in the most generous states stipends were never enough to allow a family to escape from poverty.92

In 1996 Congress replaced AFDC with TANF (Temporary Assistance to Needy Families). Under the new system, the entitlement of poor people to support has been replaced by block grants to the states to run their own welfare programs. The grants are limited to a certain amount of money; if they run out, the states are not required to make additional expen- ditures. Welfare recipients are required to work for pay or to enroll in training programs, and financial support is limited to a lifetime maximum of five years. This shift in policy has been controversial. Since the TANF system began, the number of people receiving welfare benefits has declined, but experts disagree about the reasons: Is it a growing economy offering more opportunities, the success of the new approach in encouraging welfare recipients to make themselves employ- able, or simply people who are not able to take care of them- selves being denied support?93 Even now, with soaring unemployment and the worst economic crisis in decades, the number of people receiving assistance remains near a forty- year low.94

One thing that is clear is the large number of women liv- ing in poverty. This includes women with inadequate income following divorce, widowhood, or retirement, as well as women raising children alone. Wage discrimination against women is one factor. Women who work full-time, year-round earn only about two-thirds of what men earn. And millions of women hold full-time jobs that pay wages near or below the poverty line.

Women’s responsibilities for child rearing are another important factor. Despite many changes in recent years, women continue to have primary responsibility in this area. When marriages break up, mothers typically take custody and bear the major financial burden. Fewer than half the women raising children alone are awarded child support, and fewer than half of those entitled to it receive the full amount. Of family households headed by women, 38.4 percent have incomes below $25,000 and 21 percent have incomes below $15,000.95 Not only do households headed by women earn only half the median income of all households, but also their overall net worth is two-thirds less.96

Most poor people in our nation—about two-thirds of them—are white, but blacks are about two and a half times more likely to be poor. Whereas one out of every ten white Americans is poor, one of every four African Americans and one out of every five Hispanics live below the poverty line. Many members of these minority communities have suc- ceeded in moving up the economic ladder, but the overall picture is disheartening. African-American family income, to pick just one statistic, is only 62.8 percent that of white family income.97

Although it is doubtful that there is more social mobility in the United States than in Europe, what is certainly clear is that Americans believe that they have plenty of it. In line with that belief, 71 percent of them, but only 40 percent of Europeans, think that the poor have a good chance to escape their plight.98 Americans figure that the poor can push their way out of poverty on their own because they typically assume that one’s success or failure is largely determined by factors within one’s own control.99 Americans, even poor Americans, favor individualistic explanations of poverty (such as lack of effort or ability, deficient morals, poor work habits) over structural explanations (such as inadequate schooling, low wages, lack of jobs), whereas Europeans favor structural explanations of poverty over individualistic explanations.100 They tend to see the poor as unfortunate rather than as personally responsible for their condition. Seventy percent of Germans, for example, express the belief that people are poor because of imperfections in society, not their own laziness, whereas 70 percent of Americans hold the opposite view.101 Because of that belief and because the majority of Americans believe that redistribution favors

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chapter three  Justice and economic distribution      113

racial minorities (an idea they tend to dislike), they support the present political system, which assists those at the socioeco- nomic bottom far less than European governments do.102 As a result, you are twice as likely to be poor if you live in the United States than if you live in Western Europe.103

dIsCussIon QuestIons

1. Does the existence of poverty imply that our socioeconomic system is unjust? Does the concentration of poverty in cer- tain groups make it more unjust than it would be otherwise?

2. What are the causes of poverty? Are they structural or individual? How is one’s answer to this question likely to affect one’s view of the justice or injustice of poverty?

3. What moral obligation, if any, do we have individually and as a society to reduce poverty? What steps could be taken? What role should business play?

4. How would a utilitarian view the facts about poverty? What are the implications for our society of the concept of the declining utility of money?

5. How would a libertarian like Nozick view poverty in the United States? How plausible do you find the libertarian’s preference for private charity over public assistance?

6. How would our economy be assessed from the point of view of Rawls’s difference principle? Can it be plausibly maintained that, despite poverty, our system works to “the greatest expected benefit of the least advantaged”? Is this an appropriate standard?

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114

IntroductIon

Ch a p t er 4

The N aTure of Ca p iTa l ism

part two | american Business and its Basis

OCtOber is Often said tO be a bad mOnth fOr stocks. This was certainly true in 2008. On Friday, October 10, 2008, the Dow Jones Industrial Average capped the worst week in its 112-year history with its most volatile day ever as the index swung 1,019 points in one trading session. In the weeks that followed, the gyrating stock market calmed down. As the dust settled, however, stockholders and mutual fund investors— many of them employees diligently saving for retirement— were forced to come to terms with the cold reality that their portfolios were worth only about half of what they had been a year before. And what was true of Wall Street was also true of Hong Kong, Mumbai, Tokyo, Johannesburg, Frankfurt, and London as stock mar- kets around the world bottomed out. Capitalism is a worldwide system, and what happens on Wall Street reverber- ates around the globe, and vice versa, because the economies of all capitalist nations are intricately interconnected and their markets tightly intertwined.

In this case, it was the United States that pushed the world economic system into crisis. The collapse of the U.S. subprime mortgage market, following the bursting of the real estate bubble, had been causing financial jitters since early in 2008. But only that autumn did it become clear that a number of once rich and haughty U.S. financial institutions

were floating perilously on an ocean of debt. In an effort to maximize profit, they had underwritten loans that left them with potential liabilities thirty to forty times greater than their underlying assets. With that kind of exposure, it doesn’t take much to bring the whole house of cards down. And that’s what began happening.

When AIG, the world’s biggest insurer, began tottering, the U.S. government rushed to its assistance, fearing that its

collapse would wreak havoc through- out the financial system. The govern- ment had already facilitated the sale, first, of Bear Stearns, the investment bank and brokerage firm, and then of Washington Mutual Bank, to JPMorgan Chase because both institutions were about to go under, and it had also effec- tively nationalized the mortgage giants Fannie Mae and Freddie Mac in order to keep them afloat. Now, after rescuing AIG, the U.S. Treasury Department and

Federal Reserve Board were worried that they were sending the wrong message to the business world, namely, that they were prepared to rescue any financial firm that needed help. So, a few days after bailing out AIG, they decided to let Lehman Brothers, a global financial services firm that was in deep trouble, go bust. The rapid demise of Lehman Brothers and the government’s willingness to let it happen, however, immediately caused credit markets to panic, the movement of capital to

the COLLapse Of the U.s.

subprime mortgage market, following the bursting of the real estate bubble, had

been causing financial jitters since early in 2008.

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President George W. Bush signed into law the Troubled Asset Relief Program, or TARP, to address the financial meltdown resulting, primarily, from the subprime mortgage crisis. Under his administration and that of President Obama, TARP funds were used to bail out a number of American banks and other companies, thus help- ing to stabilize the economy. SOURCE: http://www.propublica.org/ion/bailout

TARP Outflows (in Billions of Dollars)

151

80 68

1 16

245 Fannie & Freddie

Auto Companies

AIG

Toxic Assets Purchased

Other

Banks & other Financial Institutions

freeze, investors to flee, the stock market to plunge—and the world economy to begin sliding inexorably into recession.

Governments around the world moved quickly to try to sta- bilize financial markets and free up credit by lowering interest rates and propping up their banks and other financial institutions. The United States pumped money into its financial system on an unprecedented scale—taking over bad assets, guarantee- ing debts, and pouring new capital into private capitalist firms. Anyone predicting even a few months earlier that liberals and con- servatives in Congress would rapidly unite to approve a bank bail- out of over $700 billion—that’s more than $2,000 for every man, woman, and child in the country—would have been dismissed as a lunatic. But that’s what happened. Moreover, a few months later the government bailed out General Motors and Chrysler, which were floundering, and oversaw their restructuring.

Although these emergency operations could not stave off the worst economic slump that most Americans had ever seen, they probably prevented the financial meltdown of 2008 from turning into a 1930s-style depression. After the crisis, as most of the loans it had made were repaid with interest and the assets it had acquired were sold, the government has taken in more from the banks than it gave them and overall may end up losing only $25 billion of the $700 billion it had originally been authorized to spend. But its unprec- edented economic intervention may have changed the face of capitalism forever.

But what exactly is the nature of the economic system called capitalism? What are its underlying values, principles, and eco- nomic philosophy? What has it accomplished, and what are its prospects for the future? This chapter examines these and related questions.

Looking back in history, one must credit capitalism with helping break the constraints of medieval feudalism, which had severely limited individual possibilities for improvement. In place of a stifling economic system, capitalism offered opportuni- ties for those blessed with imagination, an ability to plan, and a willingness to work. Capitalism must also be credited with enhancing the abundance and diversity of consumer goods beyond Adam Smith’s wildest dreams. It has increased material wealth and the standard of living and has converted cities from modest bazaars into treasure troves of dazzling merchandise. In the light of such accomplishments and the acculturation process that tends to glorify them, it is all too easy to overlook capitalism’s theoretical and operational problems.

Learning ObjeCtives

This chapter attempts to identify some of these problems and their moral ramifications. It provides some basic historical and conceptual categories for understanding the socioeconomic framework within which business transactions occur and moral issues arise. In particular, the following topics are addressed:

1. The definition of capitalism and its major historical stages

2. Four of the key features of capitalism: companies, profit motive, competition, and private property

3. Two classical moral justifications of capitalism— one based on the right to property, the other on Adam Smith’s concept of the invisible hand

4. Fundamental criticisms of capitalism—in particular, the persistence of inequality and poverty, capital- ism’s implicit view of human nature, the rise of economic oligarchies, the shortcomings of competition, and employees’ experience of alienation and exploitation on the job

5. The problems facing capitalism in the United States today—in particular, the decline of manufacturing, along with job outsourcing and the trade deficit; an excessive focus on the short term; and changing attitudes toward work

chapter four  ThE NATURE Of CAPiTAliSm      115

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116 part two AmERiCAN BUSiNESS ANd iTS BASiS

• • •

Ca piTal ism capitalism can be defined as an economic system that operates on the basis of profit and market exchange and in which the major means of production and distribution are in private hands. The united States, which has the world’s largest national economy, is a capitalist country. all manufacturing firms are privately owned, including those that produce military hardware for the government. almost all other businesses—small, medium, and large—are also privately owned, including banks, insurance firms, power companies, and transportation companies. although the government itself expends money on many things, no central governing body dictates to these private owners what or how much of anything will be produced. for example, officials at apple, caterpillar, or ford Motor company design their products and set their own production goals in anticipation of consumer demand.

The private ownership and market aspects of capitalism contrast with its polar oppo- site, socialism. socialism is an economic system characterized by public ownership of property and a planned economy. under socialism, a society’s productive equipment is owned not by individuals (capitalists) but by public bodies. Socialism depends primarily on centralized planning rather than on a market system for both its overall allocation of resources and its distribution of income; crucial economic decisions are made not by individuals but by government. In the former Soviet union, for example, government agencies decided the number of automobiles—including models, styles, and colors—to be produced each year. top levels of the Soviet government formulated production and cost objectives, which were then converted to specific production quotas and budgets that individual plant managers had to follow.

a hybrid economic system advocated by some socialists (and once approximated by the former Yugoslavia) is worker control socialism. Individual firms respond to a mar- ket when deciding what to produce and acquiring the necessary factors of production. however, the workforce of each enterprise controls the enterprise (although it may elect or hire managers to oversee day-to-day operations), and profits accrue to the workers as a group to divide in whatever manner they agree on. although the workers manage their factories, the capital assets of each enterprise are owned by society as a whole and not by private individuals.

Historical Background of capitalism

what we know as “capitalism” did not fully emerge until the renaissance in europe dur- ing the fifteenth and sixteenth centuries. Before the renaissance, business exchanges in medieval europe were organized through guilds, which were associations of individuals involved in the same trade.

today if you want a pair of shoes, you head for a shoe store, where you find an array of shoes. If nothing strikes your fancy, you set out for another shop, and perhaps another, until at last you find what you want. or, if still disappointed, you might ask the store clerk to order a pair in your size from the manufacturer or its distributor. You certainly wouldn’t ask the clerk to have someone make you a pair of shoes. under the guild organi- zation, shoemakers were also shoe sellers and made shoes only to fill orders. If they had no orders, they made no shoes. The shoemaker’s sole economic function was to make

sUmmary Capitalism is an

economic system in which production and

distribution are in private hands,

operating on the basis of profit and market

exchange. Socialism is an economic system

characterized by public ownership of property

and a planned economy. Worker

control socialism is a hybrid, market- oriented form of

socialism.

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chapter four  ThE NATURE Of CAPiTAliSm      117

shoes for people when they wanted them. his labor allowed him to maintain himself, not advance his station in life. when the shoemaker died, his business went with him— unless he had a son to inherit and carry on the enterprise. as for shoe quality and cost, the medieval shopper could generally count on getting a good pair of shoes at a fair price because the cobblers’ guild strictly controlled quality and price.

weaving was another big medieval trade. In fact, in the fourteenth century weaving was the leading industry in the German town of augsburg. Little wonder, then, that an enterprising young man named hans fugger became a weaver when he settled there in 1357. But young hans had ambitions that stretched far beyond the limits of the weaving trade and the handicraft guild system. and they were grandly realized, for within three short generations a family of simple weavers was transformed into a great German bank- ing dynasty.1

Not content with being a weaver, hans fugger began collecting and selling the products of other weavers. Soon he was directly employing the other weavers, pay- ing them for their labor, and selling their products as his own. his sons continued the business and expanded it in new directions, as did his grandsons, especially Jacob fugger, the foremost capitalist of the renaissance. among other things, Jacob fugger lent large sums of money to the hapsburg emperors to finance their wars. In return, he obtained monopoly rights on silver and copper ores, which he then traded. when fugger bought the mines themselves, he acquired all the components necessary to erect an extraordinary financial dynasty and to make himself one of the richest people of all time.

Like latter-day titans of american industry, fugger employed thousands of work- ers and paid them wages, controlled all his products from raw material to final market, set his own quality standards, and charged whatever the traffic would bear. In one brief century, what was once a handicraft inseparable from the craftsperson had become a company that existed outside any family members. what had once motivated hans fugger—namely, maintenance of his station in life—had given way to gain for gain’s sake, the so-called profit motive. under Jacob fugger, the company amassed profits—a novel concept—that well exceeded the needs of the fugger family. and the profits were measured not in goods or land but in money.

capitalism has undergone changes since then. The kind of capitalism that emerged in the fuggers’ time is often termed mercantile capitalism, which is capitalism that is based on mutual dependence between state and commercial interests. central to mer- cantile capitalism is the belief that the economic health of a nation is determined by the bullion (precious metals, gold, and silver) it possesses and that therefore government should regulate production and trade with the goal of encouraging exports while keep- ing out imports, thus building up the nation’s bullion reserves. a prudent nation should strive to be economically self-sufficient while using sea power, if it can, to control foreign markets and establish colonies for the benefit of the mother country.

During the eighteenth and nineteenth centuries, however, new economic ideas spread. These emphasized the importance of competition and open markets and of freeing trade and production from government oversight. trade between nations was now seen as mutually beneficial, and national wealth and prosperity were no longer identified with bullion. with the Industrial revolution, industrialists replaced merchants as the domi- nant power in a capitalist economy, and the period of industrial capitalism emerged, which is associated with large-scale industry. In the united States, the confluence of many

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118 part two AmERiCAN BUSiNESS ANd iTS BASiS

factors after the civil war—including a sound financial base, the technology for mass production, expanding markets for cheaply manufactured goods, and a large and willing labor force—produced industrial expansion. exploiting these fortuitous conditions was a group of hard-driving, visionary entrepreneurs called “robber barons” by their critics and “captains of industry” by their supporters: cornelius Vanderbilt, cyrus Mccormick, andrew carnegie, John D. rockefeller, Jay Gould, and others.

as industrialization increased, so did the size and power of business. The private fortunes of a few individuals could no longer underwrite the accelerated growth of busi- ness activity. The large sums of capital necessary could be raised only through a corporate form of business, in which risk and potential profit were distributed among numerous investors. The success—indeed, survival—of a business enterprise came to depend on its having the financial wherewithal to reduce prices while expanding production and either eliminating or absorbing competition. as various industries strove to strengthen their financing and shore up their assets, what is called financial capitalism emerged, characterized by pools, trusts, holding companies, and the interpenetration of banking, insurance, and industrial interests. hand in hand with this development, the trend con- tinued toward larger and larger corporations, controlling more and more of the country’s economic capacity.

The economic and political challenges of the Great Depression of the 1930s helped usher in still another phase of capitalism, often called state welfare capitalism, in which government plays an active role in the economy, attempting to smooth out the boom- and-bust pattern of the business cycle through its fiscal and monetary policies. In addi- tion, government programs like Social Security and unemployment insurance seek to enhance the welfare of the workforce, and legislation legitimizes the existence of trade unions. conservative politicians sometimes advocate less government control of busi- ness, but in reality the governments of all capitalist countries are deeply involved in the management of their economies.

These days, the increasingly worldwide scale of capitalism leads many contemporary commentators to see globalized capitalism as a new stage or level of capitalist develop- ment. capitalism has always involved international trade, but today—thanks to the computer, the Internet, satellites, cell phones, and other technological advances—the economies of most countries are becoming more and more integrated, a process labeled globalization. although the world is still far from constituting a single global economy, investment capital is more mobile than ever, and the currencies, stock exchanges, and economic fortunes of all capitalist countries are bound together in a single financial sys- tem. The business operations of a growing number of companies take place on a world stage. capitalist enterprises are more likely than ever before to utilize foreign components and draw on foreign labor or services, to export products or provide services abroad, and to acquire or start foreign subsidiaries or engage in joint ventures with overseas compa- nies. Many apparently national companies produce one component in one country and another component in a different country, assemble them in a third country, and market them throughout the world.

although the study of capitalism’s evolution is best left to economic historians, it is important to keep in mind capitalism’s dynamic nature. There is nothing fixed and immutable about this or any other economic system; it is as susceptible to the forces of change as any other institution. Nevertheless, the capitalism we know today does have some prominent features that were evident in the earliest capitalistic businesses.

sUmmary Capitalism has gone

through several stages: mercantile, industrial, financial, and state welfare.

Many believe we are now at a new stage, globalized capitalism.

Although capitalism will continue to

evolve, it has four characteristic

features.

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chapter four  ThE NATURE Of CAPiTAliSm      119

• • •

Ke y f e aTures of Ca p iTal ism complete coverage of capitalism’s central features and defining characteristics has filled many a book. four features of particular significance—the existence of companies, profit motive, competition, and private property—will be discussed here.

companies

chapter 2 mentioned the firestone case, in which a media misrepresentation was left uncorrected. when asked why firestone officials had not corrected the error, a firestone spokesperson said that firestone’s policy was to ask for corrections only when it was beneficial to the company to do so. expressions like “firestone’s policy” and “beneficial to the company” reflect one key feature of capitalism: the existence of companies or business firms separate from the human beings who work for and within them.

“It’s not in the company’s interests,” “The company thinks that,” “from the com- pany’s viewpoint,” “as far as the company is concerned”—all of us have heard, perhaps even used, expressions like these that treat a business organization like a person or at least like a separate and distinct entity. This way of speaking reflects a basic characteristic of capitalism: capitalism permits the creation of companies or business organizations that exist separately from the people associated with them. we take the existence of compa- nies for granted, but some experts believe that it is not church or state but the company that is “the most important organization in the world.”2

today the big companies we’re familiar with—General electric, Microsoft, Verizon, procter & Gamble—are, in fact, incorporated businesses, or corporations. chapter 5 discusses the nature of the modern corporation, including its historical evolution and its social responsibilities. here it’s enough to observe that, in the nineteenth century, chief Justice John Marshall defined a corporation as “an artificial being, invisible, intan- gible, and existing only in the contemplation of law.” although a corporation is not something that can be seen or touched, it does have prescribed rights and legal obliga- tions within the community. Like you or me, a corporation may enter into contracts and may sue or be sued in courts of law. It may even do things that the corporation’s members disapprove of. The corporations that loom large on our economic landscape hark back to a feature of capitalism evident as early as the fugger dynasty: the existence of the company.

profit motive

a second characteristic of capitalism lies in the motive of the company: to make profit. as dollar-directed and gain-motivated as our society is, most of us take for granted that the human being is by nature an acquisitive creature who, left to his or her own devices, will pursue profit with all the instinctual vigor of a cat chasing a mouse. however, as economist robert heilbroner points out, the “profit motive, as we understand it, is a very recent phenomenon. It was foreign to the lower and middle classes of egyptian, Greek, roman, and medieval cultures, only scattered throughout the renaissance times, and largely absent in most eastern civilizations.” The medieval church taught that no christian ought to be a merchant. “even to our pilgrim forefathers,” heilbroner writes,

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120 part two AmERiCAN BUSiNESS ANd iTS BASiS

“the idea that gain ought to be a tolerable—even a useful—goal in life would have appeared as nothing short of a doctrine of the devil.” heilbroner concludes: “as a ubiq- uitous characteristic of society, the profit motive is as modern an invention as printing.”3

Modern or not, profit in the form of money is the lifeblood of the capitalist system. companies and capitalists alike are motivated by a robust appetite for monetary gain. Indeed, the profit motive implies and reflects a critical assumption about human nature: that human beings are basically economic creatures, who recognize and are motivated by their own economic interests.

competition

If self-interest and an appetite for profit drive individuals and companies, then what stops them from bleeding society dry? what stops capitalists from ripping the rest of society off?

adam Smith provided an answer in his famous treatise on political economy, An Inquiry into the Nature and Causes of the Wealth of Nations (1776). free competition, said Smith, is the regulator that keeps a community activated only by self-interest from degenerating into a mob of ruthless profiteers. when traditional restraints are removed from the sale of goods and from wages and when all individuals have equal access to raw materials and markets (the doctrine of laissez faire, from the french meaning “to let [people] do [as they choose]”), we are all free to pursue our own interests. In pursuing our own interests, however, we come smack up against others similarly motivated. If any of us allow blind self-interest to dictate our actions—for example, by price gouging or employee exploitation—we will quickly find ourselves beaten out by competitors who charge less or pay better wages. competition thus regulates individual economic activity.

to sample the flavor of Smith’s argument, imagine an acquisitive young woman in a faraway place who wants to pile up as much wealth as possible. She looks about her and sees that people need and want strong twilled cotton trousers, so she takes her investment capital and sets up a jeans factory. She charges $45 for a pair of jeans and soon realizes handsome profits. The woman’s success is not lost on other business minds, especially manufacturers of formal slacks and dresses, who observe a sharp decline in those markets. wanting a piece of the jeans action, numerous enterprises start up jeans factories. Many of these start selling jeans for $40 a pair. No longer alone in the market, our hypothetical businesswoman must check her appetite for profit by lowering her price or risk folding. as the number of jeans on the market increases, their supply eventually overtakes demand, and the price of jeans declines further and further. Inefficient manu- facturers start dropping like flies. as the competition thins out, the demand for jeans slowly balances with the supply, and the price regulates itself. ultimately, an equilibrium is reached between supply and demand, and the price of jeans stabilizes, yielding a nor- mal profit to the efficient producer.

In much this way, adam Smith tried to explain how economic competition steers the individual pursuit of self-interest in a socially beneficial direction. By appealing to their self-interest, society can induce producers to provide it with what it wants—just as manufacturers of formal slacks and dresses were enticed into jeans production. But competition keeps prices for desired goods from escalating; high prices are self-correcting because they call forth an increased supply.

The profit motive is central to capitalism.

It assumes that economic self-

interest motivates human beings.

Competition makes individual pursuit of self-interest socially

beneficial.

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chapter four  ThE NATURE Of CAPiTAliSm      121

private property

In its discussion of the libertarian theory of justice, chapter 3 emphasized that property should not be identified only with physical objects like houses, cars, and DVD players because one can own things, such as stock options, that are not physical things at all. Nor should ownership be thought of as a simple relationship between the owner and the thing owned. rather, property ownership involves a complex bundle of rights and rules governing how, under what circumstances, and in what ways both the owner and others can use, possess, dispose of, and have access to the thing in question.

private property is central to capitalism. to put it another way, capitalism as a socio- economic system is a specific form of private property. what matters for capitalism is not private property simply in the sense of personal possessions, because a socialist society can permit people to own cars, television sets, and jogging shoes. rather, capitalism requires private ownership of the major means of production and distribution. The means of production and distribution include factories, warehouses, offices, machines, compu- ter systems, trucking fleets, agricultural land, and whatever else makes up the economic resources of a nation. under capitalism, private hands control these basic economic assets and productive resources. Thus, the major economic decisions are made by indi- viduals or groups acting on their own in pursuit of profit. These decisions are not directly coordinated with those of other producers, nor are they the result of some overall plan. any profits (or losses) that result from these decisions about production are those of the owners.

Capital, as an economic concept, is closely related to private property. putting it simply, capital is money that is invested for the purpose of making more money. Individuals or corporations purchase various means of production or other related assets and use them to produce goods or provide services, which are then sold. They do this not for the purpose of being nice or of helping people out but rather to make money—more money, they hope, than they spent to make the goods or provide the services in the first place. using money to make money is at the heart of the definition of capitalism.

• • •

T wo a rgumeNTs for Ca piTal ism people tend to take for granted the desirability and moral legitimacy of the political and economic system they live in. americans are no exception. we are raised in a society that encourages individual competition, praises capitalism, promotes the acquisition of mate- rial goods, and worships economic wealth. Newspapers, television, movies, and other forms of popular culture celebrate these values, and rarely are we presented with funda- mental criticisms of or possible alternatives to our socioeconomic order. It is not surpris- ing, then, that most of us blithely assume, without ever bothering to question, that our capitalist economic system is a morally justifiable one.

Yet as thinking people and moral agents, we need to reflect on the nature and justifi- ability of our social institutions. The proposition that capitalism is a morally acceptable system is open to debate. whether we decide that capitalism is morally justified will depend, at least in part, on which general theory of justice turns out to be soundest. chapter 3 explored in detail the utilitarian approach, the libertarian alternative, and the

Capitalism requires private ownership of the means of production.

sUmmary Four key features of capitalism are the

existence of companies, profit

motive, competition, and private property.

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122 part two AmERiCAN BUSiNESS ANd iTS BASiS

theory of John rawls. Now, against that background, this chapter looks at two basic ways defenders of capitalism have sought to justify their system: (1) the argument that the moral right to property guarantees the legitimacy of capitalism and (2) the utilitarian- based economic argument of adam Smith. The chapter then considers some criticisms of capitalism.

tHe natural rigHt to property

as americans, we live in a socioeconomic system that guarantees us certain property rights. although we are no longer permitted to own other people, we are certainly free to own a variety of other things, from livestock to stock certificates, from our own homes to whole blocks of apartment buildings. a common defense of capitalism is the argument that people have a fundamental, natural right to property and that our capitalist system is simply the outcome of this right.

In chapter 3, we saw how Locke attempted to base the right to property in human labor. according to Locke, when individuals mix their labor with the natural world, they are entitled to the results. This idea seems plausible in many cases. for example, if carl diligently harvests coconuts on the island he shares with adam, while adam himself idles away his days, then most of us would agree that carl has an entitlement to those coco- nuts that adam lacks. But property ownership as it actually exists in the real world today is a complex, socially shaped phenomenon. This is especially true in the case of sophisti- cated forms of corporate and financial property—for example, bonds and stock options.

one could, of course, reject the whole idea of a natural right to property as a fic- tion, as, for example, utilitarians do. In their view, although various property systems are possible, there is no natural right that things be owned privately, or collectively, or in any particular way whatsoever. The moral task, according to utilitarians, is to determine which property system, which way of organizing production and distribution, has the greatest utility.

even if one believes that there is a natural right to property at least under some cir- cumstances, one need not believe that this right leads to capitalism or that there is a right to have a system of property rules and regulations exactly like the one we now have in the united States. In other words, even if carl has a natural right to his coconuts, there may still be moral limits on how many coconuts he can rightfully amass and what he can use them for. when he takes his coconuts to the coconut bank and receives more coconuts as interest, his newly acquired coconuts are not the result of any new labor on his part. when we look at capitalistic property—that is, at socioeconomic environments in which people profit from ownership alone—then we have left Locke’s world far behind.

a defender of capitalism may reply, “certainly, there’s nothing unfair about carl’s accruing these extra coconuts through his investment; after all, he could have eaten his original coconuts instead.” and, indeed, within our system this reasoning seems perfectly correct. It is the way things work in our society. But this fact doesn’t prove that carl has some natural right to use his coconuts to earn more coconuts—that is, that it would be unfair or unjust to set up a different economic system (for example, one in which he had a right to consume coconuts but no right to use them to accrue more coconuts). The argument here is simply that the issue is not an all-or-nothing one. we may have a fundamental right to property, without that right being unlimited or guaranteeing capi- talism as we know it.

One argument for capitalism is that it

reflects people’s natural right to

property.

sUmmary One basic defense of capitalism rests on a

supposed natural moral right to property.

Utilitarians deny the existence of such rights; other critics doubt that this right

entitles one to have a system of property

rules and regulations identical to the one we now have in the

United States.

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chapter four  ThE NATURE Of CAPiTAliSm      123

adam smitH’s concept of tHe invisiBle Hand

relying on the idea of a natural right to property is not the only way and probably not the best way to defend capitalism. another, very important argument defends capitalism in terms of the many economic benefits the system brings, claiming that the free and unrestrained market system that exists under capitalism is more efficient and more productive than any other possible system and is thus to be preferred on moral grounds. essentially, this is a utilitarian argument, but one doesn’t have to be a utilitarian to take it seriously. as mentioned in chapter 2, almost every norma- tive theory puts some moral weight on the consequences of actions. Thus if capital- ism does indeed work better than other ways of organizing economic life, then this outcome will be a relevant moral fact—one that will be important, for instance, for rawlsians.

This section sketches adam Smith’s economic case for capitalism, as presented in The Wealth of Nations. Smith argues that when people are left to pursue their own interests, they will, without intending it, produce the greatest good for all. each person’s individual and private pursuit of wealth results—as if guided (in Smith’s famous words) by an invisible hand—in the most beneficial overall organization and distribution of economic resources. although the academic study of economics has developed greatly since Smith’s times, his classic arguments remain extraordinarily influential.

Smith took it for granted that human beings are, by nature, acquisitive. Self-interest and personal advantage, specifically in an economic sense, may not be all that motivate people, but they do seem to motivate most people much of the time. at any rate, they are powerful enough forces that any successful economic system must strive to harness them. we are, Smith thought, strongly inclined to act so as to acquire more and more wealth.

In addition, humans have a natural propensity for trading—“to truck, barter, and exchange.” unlike other species, we have an almost constant need for the assistance of others. Yet because people are creatures of self-interest, it is folly for us to expect others to act altruistically toward us. we can secure what we need from others only by offering them something they need from us:

whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. 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 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.4

This disposition to trade, said Smith, leads to the division of labor—dividing the labor and production process into areas of specialization, which is the prime means of increasing economic productivity.

Thus, Smith reasoned that the greatest utility will result from unfettered pursuit of self-interest. Individuals should be allowed unrestricted access to raw materials, mar- kets, and labor. Government interference in private enterprise should be eliminated, free competition encouraged, and economic self-interest made the rule of the day. Because human beings are materialistic, acquisitive creatures, we will, if left free, engage in labor and exchange goods in a way that results in the greatest benefit to society. In our efforts to

A second argument for capitalism is that it is the most efficient and productive economic system. This is basically a utilitarian consideration.

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124 part two AmERiCAN BUSiNESS ANd iTS BASiS

advance our own economic interests, we inevitably act to promote the economic well-being of society generally:

every individual is continually exerting himself to find the most advantageous employ- ment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. . . . [But] by directing that industry in such a manner as its produce may be of the greatest value, he [is] . . . 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 effectually than when he really intends to promote it.5

to explain why pursuit of self-interest necessarily leads to the greatest social benefit, Smith invoked the law of supply and demand, which was alluded to in our discussion of competition. The law of supply and demand tempers the pursuit of self-interest exactly as competition keeps the enterprising capitalist from becoming a ruthless profiteer. The law of supply and demand similarly solves the problems of adequate goods and fair prices.

Some think the law of supply and demand even solves the problem of fair wages, for labor is another commodity up for sale like shoes or jeans. Just as the price of a new prod- uct at first is high, like the jeans in our earlier hypothetical example, so, too, are the wages of labor in a new field. But as labor becomes more plentiful, wages decline. eventually they fall to a point at which inefficient laborers are eliminated and forced to seek other work, just as the inefficient manufacturers of jeans were forced out of that business and into others. and like the price of jeans, the price of labor then stabilizes at a fair level. as for the inefficient laborers, they find work and a living wage elsewhere. In seeking new fields of labor, they help maximize the majority’s opportunities to enjoy the necessities, conveniences, and trifles of human life.

Some modern defenders of capitalism claim that it operates as Smith envisioned and can be justified on the same utilitarian grounds. But not everyone agrees.

sUmmary Utilitarian defense

of capitalism is associated with the classical economic arguments of Adam

Smith. Smith believed that human beings are

acquisitive and that they have a natural

propensity for trading, and he insisted that when people are left free to pursue their

own economic interests, they will, without intending it,

produce the greatest good for all.

Quantity

Supply

Demand

P ri

ce

A traditional supply- demand curve.

the point at which supply and demand

meet is called the “equilibrium” and

determines the price.

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chapter four  ThE NATURE Of CAPiTAliSm      125

• • •

Cr iT iC isms of Ca piTal ism These two arguments for capitalism have not persuaded everyone that it is a morally jus- tifiable system, and there are both theoretical and operational objections to it that need to be considered. Theoretical criticisms challenge capitalism’s fundamental values, basic assumptions, or inherent economic tendencies. Operational criticisms focus more on capitalism’s alleged deficiencies in actual practice (as opposed to theory)—in particular, on its failure to live up to its own economic ideals.

The following criticisms are a mix of both theoretical and operational concerns. They raise political, economic, and philosophical issues that cannot be fully assessed here. The debate over capitalism is a large and important one; the presentation that fol- lows should be viewed as a stimulus to further discussion and not as the last word on the pros and cons of capitalism.

inequality

chapter 3 and case 3.3 documented the profound economic inequality that exists in our capitalist society. The disparity in personal incomes is enormous; a tiny minority of the population owns the vast majority of the country’s productive assets; and our society continues to be marred by poverty and homelessness. with divisions of social and eco- nomic class comes inequality of opportunity. a child born to a working-class family, let alone to an unwed teenager in an inner-city ghetto, has life prospects and possibilities that pale beside those of children born to wealthy, stock-owning parents. This reality challenges capitalism’s claim of fairness, and the persistence of poverty and economic misfortune provides the basis for a utilitarian objection to it.

few doubt that poverty and inequality are bad things, but defenders of capitalism make several responses to those who criticize it on these grounds:

1. a few extreme supporters of capitalism simply deny that it is responsible for poverty and inequality. rather, they say, government interference with the market causes these problems. Left to itself, the market would eliminate unemployment and pov- erty while ultimately lessening inequality. But neither theoretical economics nor the study of history supports this reply. Most economists and social theorists would agree that in the past eighty years or so activist government policies have done much, in all the western capitalist countries, to reduce poverty and (to a lesser extent) inequality.

2. More moderate defenders of capitalism concede that in its pure laissez-faire form, capitalism does nothing to prevent and may even foster inequality and poverty. however, they argue that the system can be modified or its inherent tendencies cor- rected by political action, so that inequality and poverty are reduced or even elimi- nated. critics of capitalism reply that the policies necessary to seriously reduce inequality and poverty are either impossible within a basically capitalist economic framework or unlikely to be carried out in any political system based on capitalism.

Critics argue that poverty and inequality challenge the fairness of capitalism and its claim to advance the interests of all. Defenders of capitalism respond to this in different ways.

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126 part two AmERiCAN BUSiNESS ANd iTS BASiS

3. finally, defenders of capitalism argue that the benefits of the system outweigh this weak point. Inequality is not so important if living standards are rising and if even the poor have better lives than they did in previous times. This contention rests on an implicit comparison with what things would be like if society were organized differently and is, accordingly, difficult to assess. Naturally, it seems more plausible to those who are relatively favored by, and content with, the present economic sys- tem than it does to those who feel disadvantaged by it.

Some critics of capitalism go on to maintain that, aside from inequalities of income and ownership, the inequality inherent in the worker–capitalist relationship is itself morally undesirable. John Stuart Mill found capitalism inferior in this respect to more cooperative and egalitarian economic arrangements. “to work at the bidding and for the profit of another,” he wrote, “is not . . . a satisfactory state to human beings of educated intelligence, who have ceased to think themselves inferior to those whom they serve.”6 The ideal of escaping from a system of “superiors” and “subordinates” was well expressed by the great German playwright and poet Bertolt Brecht when he wrote that “he wants no servants under him / and no boss over his head.”7

Human nature and capitalism

The theory of capitalism rests on a view of human beings as rational economic creatures, individuals who recognize and are motivated largely by their own economic self-interest. adam Smith’s defense of capitalism, for instance, assumes that consumers have full knowledge of the diverse choices available to them in the marketplace. They are sup- posed to know the price structures of similar products, to be fully aware of product dif- ferences, and to be able to make the optimal choice regarding price and quality.

But the key choices facing today’s consumers are rarely simple. from foods to drugs, automobiles to appliances, fertilizers to computers, the modern marketplace is a cornucopia of products whose nature and nuances require a high level of consumer literacy. even with government agencies and public interest groups to aid them, today’s consumers are rarely an equal match for powerful industries that can influence prices, control product quality, and create and shape markets. The effectiveness of advertising, in particular, is difficult to reconcile with the picture of consumers as the autonomous, rational, and perfectly informed economic maximizers that economics textbooks presup- pose when they attempt to demonstrate the benefits of capitalism. consumers frequently fall short of perfect rationality and often seem under the sway of social and psychological forces they are unaware of.

according to some critics of capitalism, however, what is objectionable about capi- talism’s view of human beings as essentially economic creatures is not this gap between theory and reality but rather the fact that it presents little in the way of an ideal to which either individuals or societies may aspire. as George Soros puts it, “humans are capable of transcending the pursuit of narrow self-interest. Indeed, they cannot live without some sense of morality. It is market fundamentalism, which holds that the social good is best served by allowing people to pursue their self-interest without any thought for the social good . . . that is a perversion of human nature.”8 Not only does capitalism rest on the premise that people are basically acquisitive, individualistic, and materialistic, but in practice capitalism strongly reinforces those human tendencies. capitalism, its critics

sUmmary Critics question the

basic assumptions of capitalism (theoretical

challenges) and whether it has delivered on its

promises (operational challenges). One criticism is that

capitalism produces severe inequality and is

unable to eliminate poverty. Another is that

capitalism wrongly assumes that human

beings are rational economic maximizers

and that well-being comes from ever greater material

consumption. It is also alleged that capitalism

offers us no higher sense of human

purpose.

Critics charge that capitalism reinforces

materialism and offers no higher sense of human

purpose.

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chapter four  ThE NATURE Of CAPiTAliSm      127

charge, presents no higher sense of human mission or purpose, whereas other views of society and human nature do.

christianity, for example, has long aspired to the ideal of a truly religious commu- nity united in agape, selfless love. and socialism, because it views human nature as malle- able, hopes to see people transformed from the “competitive, acquisitive beings that they are (and that they are encouraged to be) under all property-dominated, market-oriented systems.” In the more “benign environment of a propertyless, nonmarket social system,” socialists believe that more cooperative and less selfish human beings will emerge.9 Such positive ideals and aspirations are lacking in capitalism—or so its critics charge.

finally, an implicit assumption of capitalism is that human beings find increased well-being through ever greater material consumption. That’s why the avid pursuit of economic gain, as mediated through the invisible hand of the market, is supposed to make us all better-off. Moreover, contemporary capitalism needs people to keep on buy- ing and consuming goods for the system to continue running. consumer demand makes the economic wheels turn. and that, in turn, requires people in general to choose work- ing more so they can consume more rather than working less, having more leisure, and buying fewer things. however, this bias in favor of material consumption runs up against the fact, according to social psychologists, that people today—in america, europe, and Japan—are no more pleased with their lives than people were in the 1950s, despite the very substantial increase in standard of living that all these societies have enjoyed.10

competition isn’t WHat it’s cracked up to Be

as we have seen, one of the key features of capitalism is competition. unfettered com- petition supposedly serves the collective interest while offering rich opportunities for the individual. But competition is one of the targets of capitalism’s critics. They contend that capitalism breeds oligopolies that eliminate competition and concentrate economic power, that a system of corporate welfare protects many businesses from true marketplace com- petition, and finally that competition is neither generally beneficial nor desirable in itself.

capitalism Breeds oligopolies as early as the middle of the nineteenth century, the German philosopher and political economist Karl Marx (1818–1883) argued that capitalism leads to oligopolies—a con- centration of property and resources, and thus economic power, in the hands of a few. high costs, complex and expensive machinery, intense competition, and the advantages of large-scale production all work against the survival of small firms, said Marx. Many see proof of Marx’s argument in today’s economy.

Before the Industrial revolution, capitalism was characterized by comparatively free and open competition among a large number of small firms. as late as 1832, for instance, hardly any private firms in the united States had ten or more employees.11 Since then, the economy has come to be dominated by a relatively small number of enormous com- panies that, to a distressing extent, can conspire to set prices, eliminate competition, and monopolize an industry. The oil industry is a perfect example: The five biggest refiners in the united States control 56 percent of the market (up from 35 percent in 1993).12 or take the banking sector. although there are more than 8,000 banks in the united States, the four top lenders control more than 35 percent of all deposits (up from 5 percent in 1998), and the top ten financial institutions control 54 percent of all financial assets.13

Capitalism operates on the debatable assumption that human beings find increased well-being through ever greater material consumption.

Critics contend that capitalism’s supposed commitment to competition is belied by oligopoly and corporate welfare. Some also challenge the belief that competition is desirable and beneficial.

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128 part two AmERiCAN BUSiNESS ANd iTS BASiS

today, the five hundred largest u.S. firms constitute at least three-quarters of the american economy. They frequently have revenues that exceed the revenues of state gov- ernments and the gross domestic product (GDp) of many countries: The annual revenue of General Motors, for instance, is greater than the GDp of more than 148 countries, and that of wal-Mart outweighs the combined GDp of all of sub-Saharan africa.14 Increasingly multinational in character, these giant corporations do business around the globe, disavowing allegiance to any particular nation. In fact, more than a quarter of the world’s economic activity comes from the two hundred largest corporations. Since the 1980s, wave after wave of corporate takeovers and mergers has further accelerated the trend toward oligopoly and ever greater economic concentration. The latest wave crested in 2007 with a record-setting $4.74 trillion worth of merger and acquisition deals worldwide, since then receding to an annual rate of about half that.15

true, antitrust laws have sometimes fostered competition and broken up monopo- lies, as in the cases of such corporate behemoths as Standard oil and at&t. More recently, the government went after Microsoft for “exclusionary and predatory” busi- nesses practices. on the whole, however, such actions have proved ineffectual in halting the concentration of economic power. and despite calls to break-up or restrict the opera- tions of those banks and other financial institutions that are so large that the government cannot allow them to fail without endangering the whole economy (as happened in 2008), financial reform legislation passed by congress in 2010 and intended to prevent future crises did not address this problem at all.

Because of their sway over the market and their political clout, the gigantic corpora- tions that we know today have so altered the face of capitalism that adam Smith would have trouble recognizing it. as a result, in terms of competition our present-day economic system differs significantly from the textbook model of capitalism. one expert puts it this way:

In surveying the american business system it is obvious that competition still exists; however, it is not a perfect competition. often it is not price competition at all. with the possible exception of some farm markets where there are still large numbers of producers of similar and undifferentiated products (wheat, for instance), virtually every producer of goods and services has some control over price. The degree of con- trol varies from industry to industry and between firms within an industry. Nevertheless, it does exist and it amounts to an important modification in our model of a free-enterprise economy.16

These days, in fact, some of the most vigorous corporate competition occurs not in the marketplace but in washington, D.c., where companies jockey for competitive advantage by getting congress to pass laws that help them and hold back their rivals.17 More than five hundred american companies now maintain permanent offices there, employing sixty-one thousand lobbyists.18 and that doesn’t include corporate-sponsored foundations, centers, and institutes that also try to steer public policy in profitable, indus- try-friendly directions. In this respect, the pharmaceutical industry is a leader. In a recent six-year period, it spent $759 million to influence fourteen hundred congressional bills.19

corporate Welfare programs protect Businesses when the united States slapped tariffs ranging from 8 to 30 percent on imported steel in 2001, it was continuing a thirty-year tradition of cosseting the steel industry with various subsidies and protections that have cost the country a small fortune. The tariffs were held

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chapter four  ThE NATURE Of CAPiTAliSm      129

to be necessary because of a surge of imported steel, even though foreign steel imports had declined 27.5 percent in the preceding four years.20 Since then, the u.S. steel indus- try has also received $17 billion in subsidies and continues to win favorable trade deci- sions that limit foreign imports—even as the demand for steel exceeds domestic supply and the steel companies ring up strong profits. unfortunately, what’s good for one indus- try can be bad for the rest of the country. Businesses that use steel, for example, employ roughly forty times more people than do steel producers. according to the Institute for International economics, until a ruling by the world trade organization led to the steel tariffs being canceled, between 45,000 and 75,000 jobs were lost because higher steel prices made u.S. steel-using industries less competitive.21 Similarly, u.S. quotas on sugar imports in recent years have resulted in the domestic price of sugar being three-and-a-half times the world market price. as a result, to survive, american candy makers have been forced to move production to countries where sugar is cheaper at the cost of 7,500 to 10,000 jobs.22

from 1995 to 2002, u.S. taxpayers spent more than $114 billion on subsidies to farmers. congress then increased agricultural subsidies in 2002 to an estimated $180 bil- lion to $190 billion over the next ten years. In a single year, u.S. spending on farm sub- sidies exceeds the gross domestic product of more than seventy nations.23 Most of that money goes to the largest and wealthiest farmers; 10 percent of the recipients receive 65 percent of the loot.24 when it comes to cotton, the disparity is even greater. of the $19.1 billion that cotton growers received in a recent ten-year period, more than 80 percent went to only 10 percent of the recipients.25 Meanwhile, more than two hundred different kinds of subsidies support america’s ethanol program. The oil industry itself receives a 51-cent federal subsidy for each gallon of ethanol it mixes with gasoline, and there is a 54-cent per gallon tariff on imported ethanol.26 Subsidies for farmers and tariffs on steel, sugar, and ethanol are only the most blatant examples of the way corporate welfare assists business and protects it from competition. Thanks to duties, fees, and restrictions on imported products, american consumers pay far more for goods than they otherwise would. and that, of course, is in addition to what corporate subsidies cost consumers as taxpayers.

Not content with handcuffing their foreign competition, some american com- panies seek to benefit even more directly from tariffs and other trade restrictions. for instance, in recent years the commerce Department has imposed anti-dumping duties on chinese manufacturers of wooden furniture who are believed to sell their products at “less than fair value.” u.S. law allows companies hurt by competition they believe to be unfair to submit to the department every year a list of exporters that should be reviewed. The department then has eighteen months to determine whether to subject those foreign companies to tougher duties. fearing the uncertainty of the review process and a possible increase in duties, many chinese companies pay cash to the american furniture makers in return for being removed from the review list. although this appears to be legal, “ everyone in the industry in the u.S. and china understands that these payments are clever shakedowns,” says william Silverman, a lawyer representing u.S. furniture retailers who import chinese products.27

every year the federal government doles out billions of dollars to private business in direct subsidy programs. for example, the u.S. agriculture Department’s Market access program spends millions funding both generic and brand-name advertising abroad for american agricultural products,28 and the u.S. forest Service builds roads and subsidizes

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130 part two AmERiCAN BUSiNESS ANd iTS BASiS

logging in national forests for the benefit of private timber companies.29 The foreign Military financing program assists foreign countries to purchase u.S. military products— to the tune of around $3.3 billion a year. The u.S. Department of commerce’s advanced technology program supports high-tech research. In practice, this has meant payments of $14.5 million to General electric, $34 million to at&t, and a whopping $50.9 million to Boeing.30 other government-sponsored corporate welfare programs include the export enhancement program, the export-Import Bank, and the overseas private Investment corporation. The latter two agencies provide loans and financial guarantees for corporate energy projects. among the beneficiaries are unocal, which was loaned $350 million to develop an oil and gas field in Indonesia, and exxonMobil, which received $500 million in financing to build a pipeline in cameroon.31

The list goes on and on.32 precise figures are impossible to come by, but federal spending for corporate welfare is almost certainly greater than combined state and fed- eral spending on social welfare programs for the poor.33 In addition, there are the tax breaks that corporations receive. a recent u.S. government report revealed that during a seven-year period of soaring profits, 55 percent of large u.S. corporations had at least one year of paying no tax at all.34 It’s not surprising, then, that some american companies pay more in taxes to foreign governments than they do to their own government—in exxonMobil’s case five times as much.35

State governments also pamper business with subsidies and protectionist restrictions on competition. It’s impossible to put a price tag on these, but looking at the Internet alone, experts calculate that state impediments to buying and selling cost consumers $15 billion a year. for example, Georgia forbids the online sale of contact lenses, and oklahoma the online sale of caskets. and all fifty states shield their car dealers from competition by pro- hibiting manufacturers from selling directly to consumers over the Internet.36 In addition, cities and states frequently provide tax breaks to corporations to lure them to, or prevent them from leaving, the local area. These subsidies cost taxpayers $50 billion a year, but for many reasons, they rarely pay off in jobs or higher overall tax revenues.37

as staggering as corporate welfare already is, it was taken to a whole new level in 2008 by the federal government’s $700 billion troubled assets relief program (tarp). put together in response to the financial meltdown, tarp enabled the government to purchase non-liquid, difficult-to-value assets from banks and other financial institu- tions, in particular, so-called collateralized debt obligations, which had been hit hard by foreclosures caused by the real estate slump. The theory was that by authorizing the treasury Department to buy these “troubled assets”—assets, that is, that the banks couldn’t sell on the open market for the simple reason that no one was willing to buy them—tarp would increase the banks’ liquidity and improve their balance sheets, thus stabilizing the financial system. In addition to “cash for trash,” tarp provided funds for the government to purchase loans from and make direct equity investments in the banks themselves, and the treasury Department was creative in finding ways to assist the banks outside the tarp framework at a potential cost to tax payers that was greater than tarp itself. Given the crisis that the nation was facing, few doubt the necessity of something like tarp or of the treasury Department’s taking bold measures. and in the end most tarp funds were repaid. Nevertheless, with few strings attached, and with most banks choosing to shore up their bottom line by sitting on the money (or using it for executive bonuses) rather than to help stimulate the economy by lending it out, the bailout repre- sents an unprecedented commitment of taxpayer money to save what had been some of

sUmmary Critics of capitalism

also charge that competition is not

what it’s cracked up to be because (1) capitalism

breeds oligopolies, (2) corporate welfare

often shelters business from competition, and (3) competition is not a

good thing.

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chapter four  ThE NATURE Of CAPiTAliSm      131

the largest and wealthiest firms in the country, and their well-heeled managers, from the consequences of their own greed, recklessness, and mismanagement.

competition is not a good Because the profit motive governs capitalism, it should not be surprising that even those companies that preach the doctrine of free competition are willing to shelve it when collusion with other firms, or government tariffs and subsidies, make higher profits pos- sible. how else to explain the fact that the united States forbids foreign companies from owning airlines in america and prevents foreign airlines from flying routes that pick up passengers at more than one american city? In these ways, capitalism fails to live up to its own ideal. This was something that worried adam Smith, who once wrote, “people of the same trade seldom meet together, even for merriment or diversion, but the conversa- tion ends in a conspiracy against the public, or in some contrivance to raise prices.”38

unlike adam Smith, however, some critics of capitalism repudiate competition as an ideal, arguing that it is neither beneficial in general nor desirable in itself. They point to empirical studies establishing that in business there is frequently a negative correla- tion between performance and individual competitiveness.39 In other words, it is often cooperation, rather than competitiveness, that best enhances both individual and group achievement. according to alfie Kohn, the reason is simple: “trying to do well and try- ing to beat others are two different things.”40 competition is an extrinsic motivator; not only does it not produce the kinds of results that flow from enjoying the activity itself, but also the use of extrinsic motivators can undermine intrinsic motivation and thus adversely affect performance in the long run. The unpleasantness of competition can also diminish people’s performance.

The critics also contend that competition often precludes the more efficient use of resources that cooperation allows. when people work together, coordination of effort and an efficient division of labor are possible. By contrast, competition can inhibit economic coordination, cause needless duplication of services, retard the exchange of information, foster copious litigation, and lead to socially detrimental or counterproduc- tive results such as business failures, mediocre products, unsafe working conditions, and environmental neglect. when presented with examples of the beneficial results of com- petition, the critics argue that on closer inspection the supposed advantages turn out to be short-lived, illusory, or isolated instances.

exploitation and alienation

Karl Marx argued that as the means of production become concentrated in the hands of the few, the balance of power between capitalists (bourgeoisie) and laborers (proletariat) tips further in favor of the bourgeoisie. Because workers have nothing to sell but their labor, said Marx, the bourgeoisie is able to exploit them by paying them less than the true value created by their labor. In fact, Marx thought, it is only through such exploitation that capitalists are able to make a profit and increase their capital. and the more capital they accumulate, the more they can exploit workers. Marx predicted that eventually workers would revolt. unwilling to be exploited further, they would rise and overthrow their oppressors and set up an economic system that would truly benefit all.

The development of capitalist systems since Marx’s time belies his forecast. Legal, political, and economic changes have tempered many of the greedy, exploitative dispositions

Critics of competition contend that cooperation leads to better individual and group performance.

Critics also contend that cooperation is more efficient than competition.

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132 part two AmERiCAN BUSiNESS ANd iTS BASiS

of early capitalism. The twentieth century witnessed legislation curbing egregious worker abuse, guaranteeing a minimum wage, and ensuring a safer and more healthful work environment. The emergence of labor unions and their subsequent victories significantly enlarged the worker’s share of the economic pie. Indeed, many of the specific measures proposed by Marx and his collaborator friedrich engels in the Communist Manifesto (1848) have been implemented in capitalist countries: a program of graduated income tax, free education for all children in public schools, investiture of significant economic control in the state, and so on.

Still, many would say that although democratic institutions may have curbed the excesses of capitalism, they can do nothing to prevent the alienation of workers that results from having to do unfulfilling work. again, because of the unequal positions of capitalist and worker, laborers must work for someone else—they must do work imposed on them as a means of satisfying the needs of others. as a result, they inevitably come to feel exploited and debased. and this is true, critics of capitalism claim, not just of manual laborers but also of white-collar workers, many of whom identify with the cubicle dwell- ers of the cartoon strip Dilbert.

But what about workers who are paid handsomely for their efforts? They, too, said Marx, remain alienated, for as the fruits of their labor are enjoyed by someone else, their work ultimately proves meaningless to them. The following selection from Marx’s “economic and philosophic Manuscripts” (1844) summarizes his notion of aliena- tion as the separation of individuals from the objects they create, which in turn results in one’s separation from other people, from oneself, and ultimately from one’s human nature:

The worker is related to the product of his labor as to an alien object. for it is clear . . . that the more the worker expends himself in work the more powerful becomes the world of objects which he creates in face of himself, the poorer he becomes in his inner life, and the less he belongs to himself. . . . The worker puts his life into the object, and his life then belongs no longer to himself but to the object. . . . what is embodied in the product of his labor is no longer his own. The greater this product is, therefore, the more he is diminished. The alienation of the worker in his product means not only that his labor becomes an object, assumes an external existence, but that it exists inde- pendently, outside himself, and alien to him, and that it stands opposed to him as an autonomous power. . . .

what constitutes the alienation of labor? first, that the work is external to the worker, that it is not part of his nature; and that, consequently, he does not fulfill him- self in his work but denies himself. . . . his work is not voluntary but imposed, forced labor. It is not the satisfaction of a need, but only a means for satisfying other needs. Its alien character is clearly shown by the fact that as soon as there is no physical or other compulsion it is avoided like the plague. external labor, labor in which man alienates himself, is a labor of self-sacrifice. . . . finally, the external character of work for the worker is shown by the fact that it is not his own work but work for someone else, that in work he does not belong to himself but to another person. . . .

we have now considered the act of alienation of practical human activity, labor, from two aspects: (1) the relationship of the worker to the product of labor as an alien object which dominates him . . . [and] (2) the relationship of labor to the act of produc- tion within labor. This is the relationship of the worker to his own activity as some- thing alien and not belonging to him. . . . This is self-alienation as against the above-mentioned alienation of the thing.41

Marx argued that under capitalism

workers are alienated in several different

ways.

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chapter four  ThE NATURE Of CAPiTAliSm      133

In Marx’s view, when workers are alienated they cannot be truly free. They may have the political and social freedoms of speech, religion, and governance, but even with these rights, individuals still are not fully free. freedom from government interference and per- secution does not necessarily guarantee freedom from economic exploitation and aliena- tion, and it is for this kind of freedom that Marx and engels felt such passion.

Some would say that one need not wade through Marxist philosophy to get a feel for what Marx and others mean by worker alienation. Just talk to workers themselves, as writer Studs terkel did. In different ways the hundreds of workers from diverse occupa- tions whom terkel interviewed speak of the same thing: dehumanization.

Mike fitzgerald . . . is a laborer in a steel mill. “I feel like the guys who built the pyra- mids. Somebody built ’em. Somebody built the empire State Building, too. There’s hard work behind it. I would like to see a building, say the empire State, with a foot- wide strip from top to bottom and the name of every bricklayer on it, the name of every electrician. So when a guy walked by, he could take his son and say, ‘See, that’s me over there on the 45th floor. I put that steel beam in.’ . . . everybody should have something to point to.” Sharon atkins is 24 years old. She’s been to college and acidly observes, “The first myth that blew up in my face is that a college education will get you a worthwhile job.” for the last two years she’s been a receptionist at an advertising agency. “I didn’t look at myself as ‘just a dumb broad’ at the front desk, who took phone calls and mes- sages. I thought I was something else. The office taught me differently.”

. . . harry Stallings, 27, is a spot welder on the assembly line at an auto plant. “They’ll give better care to that machine than they will to you. If it breaks down, there’s somebody out there to fix it right away. If I break down, I’m just pushed over to the other side till another man takes my place. The only thing the company has in mind is to keep that machine running. a man would be more eager to do a better job if he were given proper respect and the time to do it.”42

• • •

Today’s eCoNomiC ChalleNges capitalism faces a number of important critical questions, both theoretical and opera- tional. These criticisms are a powerful challenge, especially to capitalism in its pure laissez-faire form. But, as we have seen, today’s capitalism is a long way from the laissez- faire model. corporate behemoths able to control markets and sway governments have replaced the small-scale entrepreneurs and free-wheeling competition of an earlier day. and governments in all capitalist countries actively intervene in the economic realm; they endeavor to assist or modify the so-called invisible hand; and over the years they have reformed or supplemented capitalism with programs intended to enhance the secu- rity of the workforce and increase the welfare of their citizens.

This reality complicates the debate over capitalism. Its defenders may be advocating either the pure laissez-faire ideal or the modified state welfare capitalism that we in fact have. Likewise, those who attack the laissez-faire ideal may do so on behalf of a modified, welfarist capitalism, or they may criticize both forms of capitalism and defend some kind of socialism, in which private property and the pursuit of profit are no longer governing

sUmmary Karl Marx was an

important nineteenth- century critic of

capitalism. He argued that workers are

exploited by capitalism and inevitably

experience alienation.

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134 part two AmERiCAN BUSiNESS ANd iTS BASiS

economic principles. we thus have a three-way debate over the respective strengths and weaknesses of laissez-faire capitalism, state welfare capitalism, and socialism.

The rest of this chapter leaves this fundamental debate behind. Instead of looking at criticisms of capitalism in general and at issues relevant to any capitalist society, it exam- ines some of the more specific socioeconomic challenges facing the united States today. These include (1) the decline of american manufacturing and the related problems posed by the outsourcing of jobs and the growing u.S. trade deficit; (2) business’s obses- sion with short-term results; (3) and changing attitudes toward work.

tHe decline of american manufacturing

historically, capitalists have made money by producing goods. Manufacturing was the backbone of the american economy and the basis of our prosperity. In industry after industry, however, u.S. companies have conceded manufacturing dominance to foreign competitors. today, for example, one can’t buy a television made in the united States, walmart employs more people than the Big Three automakers do, and more americans work in government than in manufacturing. whereas manufacturing accounted for 27 percent of GDp in the mid-1960s, since then it has fallen to half that,43 and for the first time since the Industrial revolution, manufacturing employs less than 10 percent of the american workforce.44

Since the 1980s, many u.S. manufacturers have been closing up shop or curtailing their operations and becoming marketing organizations for other producers, usually for- eign. The result is the evolution of a new kind of company: manufacturers that do little or no manufacturing. They may perform a host of profit-making functions—from design to distribution—but they lack their own production base. Instead, they outsource, buy- ing parts or whole products from other producers, both at home and abroad.45 The traditional vertical structure of manufacturing, in which the manufacturer makes nearly all crucial parts, is thereby replaced by a network of small operators. companies that in years past were identified with making goods of all sorts now are likely to produce only the package and the label. In contrast to traditional manufacturers, they have become, in current business jargon, hollow corporations.

Manufacturing has declined in the

United States as American companies

have conceded manufacturing

dominance to foreign competitors.

As a percentage of gross domestic prod-

uct, manufacturing in the united States

has declined by more than 50 percent since

the 1960s.

100 90 80 70 60 50 40 30 20 10 0

Manufacturing (bottom of column)

as percentage of GDP in the mid-60s

Manufacturing (bottom of column) as percentage of

GDP today

73% 88.5%

12.5% 27%

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chapter four  ThE NATURE Of CAPiTAliSm      135

proponents of the new system describe it as flexible and efficient, a logical outcome of the drive to lower the costs of doing business. But critics worry whether the united States can prosper without a strong manufacturing base. as tsutomu ohshima, a senior manufacturing director of toyota Motor corporation, puts it: “You can’t survive with just a service industry.”46 In wages, productivity, and innovation, the service sector fails to compare with basic industry. Manufacturing jobs generate significantly more goods and services from other industries than do service jobs, and three times as many additional employment opportunities.47 Because the rate of technical change is higher in manufac- turing than in other sectors, it’s hard to imagine the united States sustaining its techno- logical leadership with a withered manufacturing sector.48

outsourcing Jobs as america’s manufacturing base dwindles and u.S. firms outsource more and more of their operations, over 1.3 million manufacturing jobs have moved abroad since 1992.49 That’s not surprising when a Barbie doll that retails in america for $9.99 costs only 35 cents for a chinese factory to make, including the price of labor.50 But it’s no longer just blue-collar jobs that are disappearing. Many upscale, nonmanufacturing jobs also are migrating overseas. engineers, financial analysts, computer technicians, and other white-collar workers living in countries such as russia, India, and the philippines now handle airline reservations, design chips, edit books, draw architectural blueprints, pro- vide accounting services, process loans and insurance claims, and engage in research and development for american corporations.51 with 54 percent of the 1,000 largest u.S. companies outsourcing or planning to outsource white-collar jobs, some experts predict that at least 300,000 white-collar jobs will flow overseas every year through 2015, for a total loss of 3.4 million jobs.52 Because skilled, highly educated foreigners work for far less than do their american counterparts, outsourcing these jobs overseas makes u.S. firms leaner and more profitable. But can america lose these jobs and still prosper, especially if outsourcing also exerts downward pressure on the salaries of the jobs that remain? That’s the question that is worrying more and more people.

Most mainstream economists are upbeat. They believe that outsourcing jobs increases shareholder wealth and benefits consumers by keeping prices down and that as old jobs move overseas, the economy will create new ones at home—higher-level jobs that add greater product value than the lost jobs did. although they can’t predict the new industries and occupations that will emerge to replace the old ones, these economists are confident that it will happen. even in this optimistic scenario, however, there are genuine human costs. Sometimes economists refer to this downside as “short-term friction,” but of course that’s not how it feels to those workers whose relatively high-paying jobs are outsourced. They still have bills and mortgages to pay. and there’s no reason to suppose that they will be the ones who eventually fill the “replacement” positions that the economy will suppos- edly create. Moreover, if they remain unemployed, settle for lower-paid work, or retire early, their lowered incomes affect their families, communities, and local businesses. In this way, then, the welfare of some is being sacrificed for the greater good of society.

a minority of economists, however, are challenging the rosy assumption that, despite the costs, outsourcing benefits america overall.53 Going back to the nineteenth- century economist David ricardo, conventional economic theory has taught that a country should focus on producing for the world market those goods in which it has

sUmmary Our capitalist

socioeconomic system is facing a number of

challenges. These include the decline of

American manufacturing and the related problems of job

outsourcing and a growing trade deficit. Economists disagree

about whether outsourcing benefits America overall and

about the risks posed by our foreign indebtedness.

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136 part two AmERiCAN BUSiNESS ANd iTS BASiS

a comparative advantage—the goods that it can produce at a lower opportunity cost than other countries can (that is, that it can produce more cheaply relative to other goods than is the case in other countries).* If countries sell what they are comparatively better at producing and buy from other countries what those countries are comparatively bet- ter at producing, then free trade benefits everyone. But the situation changes, or so some economists are now arguing, if a country’s competitive edge comes solely from cheaper labor, especially in a world in which advanced telecommunication makes it possible for brainpower to zip around the world. In this case, there’s no identifiable point at which the outsourcing process should stop: even the so-called replacement jobs will move over- seas. In theory, of course, wages in countries such as china and India should eventually rise to the point where outsourcing provides no benefit to american firms. But it will be decades and decades before that happens, if it ever does, and in the meantime white- collar wages in the united States have a long way to fall. In addition, if cheaper white- collar labor slashes the prices of those exports in which the united States has a comparative advantage, that could hurt the economy overall. for these reasons, even paul Samuelson, the dean of american economists, has acknowledged that “comparative advantage cannot be counted on to create . . . net gains greater than net losses from trade.”54

the u.s. trade deficit for forty years, the united States has been steadily losing its share of both foreign and domestic markets. The nation’s huge balance-of-trade deficit is the most visible sign of this. after decades and decades of trade surpluses, the united States has posted a trade deficit every year since 1975. america currently imports twice as much merchandise as it exports. Before the recent recession slowed its growth, our trade deficit had burgeoned to over $700 billion annually, equivalent to almost 6 percent of our gross domestic product (GDp). with the country’s continuing trade deficits, its reliance on foreign borrowing has increased, and foreign creditors now provide two-thirds of america’s net domestic investment. today we owe the rest of the world around $3 trillion (one-third of it to the chinese)—twice what we owed in 2000.55

Some economists believe that it is irrelevant that the united States buys more than it sells. although we are now the world’s largest debtor nation, they reason, we are still the world’s largest and most important economy, so foreigners don’t mind lending us money. other economists, however, are worried by the country’s consumption-happy ways. They fear that the united States is creating unsustainable global imbalances—imbalances that they see as the root cause of the global economic crisis.56 In their view, unless both domestic savings and the production of tradable goods increase dramatically, these imbalances will go on causing economic pain at home and serious dislocations abroad.57 Many economists also worry that its growing trade deficit makes the united States vulnerable to economic extortion. what happens, they ask, if foreigners choose to stop financing our debt? finally, the trade deficit and our growing international debt have meant an enormous transfer of american assets into foreign hands. The rest of the world now owns significantly more of the united States than it owns of other countries— equivalent to more than 10 percent of the total combined value of the stock market and

*Comparative advantage does not mean absolute advantage. what ricardo showed was that two countries can benefit from trade even if one is better (or more efficient) than the other at producing everything.

As the United States continues to run an

enormous trade deficit, its foreign borrowing keeps increasing—with

risky consequences, according to some

economists.

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chapter four  ThE NATURE Of CAPiTAliSm      137

all residential real estate in the united States. and this gap expands every year as assets, dividends, and interest flow to foreign owners.58

exclusive focus on tHe sHort term

observers of the business scene have long charged that u.S. companies are preoccupied with short-term performance at the expense of long-term strategies. according to the critics, this short-term focus tends to make u.S. corporations unimaginative, inflex- ible, and ultimately uncompetitive. These business strategists urge u.S. companies to become more visionary—to define long-term goals and to be willing to stick to them even at the expense of short-term profit. Some businesspeople have accepted that advice, as evidenced by the willingness of amazon and other dot-com companies to lose money for years as they attempt to build market share. Yet many american companies appear less willing than foreign rivals to gamble on long-term research and development or to sacrifice current profits for benefits ten or fifteen years into the future. By comparison with countries such as Germany and Japan, established u.S. corporations continue to be obsessed with their stock market performance and to govern themselves far more by short-term indicators such as share value and quarterly profits. as a result, they often sacrifice capital improvements or fail to make strategic investments.59 Some worry that america may lose its technological edge because of this.60

an exclusive focus on the short term can also encourage dubious business prac- tices. as management consultants adrian Slywotsky and richard wise write, “Many [american] companies with apparently strong growth records in recent years have achieved them through relatively short-term, unsustainable tactics—acquisitions, inter- national expansion, price increases, or accounting gimmicks.”61 Indeed, many theorists blame the financial meltdown of 2008–09 on a short-term focus on profits that ignored long-term risks.62

Moreover, there’s no question that corporate america’s obsession with short- term performance—when coupled with what former federal reserve chairman alan Greenspan famously called “infectious greed”63—has created a high-pressure economic environment conducive to fraudulent behavior. Since the exposure of criminal conduct at enron in late 2001, a long list of companies—including adelphia communications, computer associates, Dynegy, Global crossing, Qwest, rite aid, tyco International, worldcom, Xerox, and fannie Mae, to name the best-known cases—have been found to have manipulated financial data or committed outright fraud so as to appear to meet their short-term financial goals. These and other revelations of unethical conduct, in turn, have weakened the trust necessary for the efficient functioning of our economic system. That is why president George w. Bush once stated that “america’s greatest eco- nomic need is higher ethical standards.” although it’s true, as he also said, that “in the long run, there’s no capitalism without conscience; there is no wealth without character,” Bush may have neglected the extent to which a relentless emphasis on short-term results pressures some of the nation’s most prominent business leaders to do things they nor- mally wouldn’t do.64 as one business ethicist writes:

Managing a corporation with the single measure of share price is like flying a 747 for maximum speed. You can shake the thing apart in the process. It’s like a farmer forcing more and more of a crop to grow, until the soil is depleted and nothing will grow. or like an athlete using steroids to develop muscle mass, until the body’s health is damaged.

Many observers believe that American corporations are too focused on short-term performance.

An obsession with short-term performance can lead to fraudulent behavior.

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138 part two AmERiCAN BUSiNESS ANd iTS BASiS

enron’s problem was not a lack of focus on shareholder value. The problem was a lack of accountability to anything except share value. This contributed to a mania, a detachment from reality. and it led to a culture of getting the numbers by any means necessary.65

cHanging attitudes toWard Work

Some commentators believe that the socioeconomic problems facing us today include not only a shrunken manufacturing sector, outsourced jobs, a trade deficit, and a short- term performance mentality but also the challenge of coming to grips with people’s changing attitudes toward government, social institutions, business, and work. and with regard to work in particular, there’s little question that, in recent decades, people’s ideas about its value and the role it should play in their lives have been evolving. The fabled american work ethic seems to be fading away. or is it?

at first glance the answer would seem to be no. after all, americans work a lot. In fact, per person they now work 20 percent more than they did in 1970, more than work- ers in any other highly industrialized country. By contrast, the Japanese work 17 percent and the french 24 percent less than they used to.66 But appearances can be deceptive.

The so-called work ethic values work for its own sake, seeing it as something neces- sary for every person. It also emphasizes the belief that hard work pays off in the end and is thus part and parcel of the american Dream. “If you work hard enough,” the expression goes, “you’ll make it.” today, however, only one in three people believes this, down from 60 percent in a 1960 survey.67 In addition, some experts believe that as people become less optimistic about the future and begin to doubt that their efforts will pay off, they become less interested in work than in looking out for themselves. paul Kostek, a career develop- ment expert, contends that “people more so than ever are looking out for themselves and focus on what they want out of their career as the old social contract is broken.” “I see more of a ‘me-first’ attitude,” adds management professor abigail hubbard.68

In addition, with increased education, people are rearranging their ideas about what’s important and about what they want from life. The evidence can be seen in the work- place itself. for example, it is not uncommon for operative workers to balk at doing the monotonous tasks their ancestors once accepted, albeit grudgingly. Loyalty to employers seems on the decline, and loyalty to fellow workers seems on the rise. turnover rates in many industries are enough to make discontinuity an expensive problem. organizational plans, schedules, and demands no longer carry the authoritative clout they once did; workers today often subordinate them to personal needs. Moreover, employee sabotage and violence, once unheard-of, occur frequently enough today to worry management.

according to an international survey about what matters to people in different cul- tures, americans place work eighth in importance behind values such as their children’s education and a satisfactory love life. (In Japan, by contrast, work ranks second only to good health.)69 another survey reveals that more and more americans—both men and women—are shelving job success to be with their families.70 although generalizing about people’s attitudes toward work is difficult, basically employees today seem will- ing to work hard at tasks they find interesting and rewarding as long as they have the freedom to influence the nature of their jobs and pursue their own lifestyles. They have a growing expectation that work should provide self-respect, nonmaterial rewards, and substantial opportunities for personal growth. and they have a growing willingness to demand individual rights, justice, and equality on the job.

People’s attitudes about work are

changing, and some worry that the

famous American work ethic is

disappearing.

sUmmary An exclusive focus on

short-term performance can

prevent business from pursuing long-term

goals and strategies, and it can encourage

dubious, even fraudulent, business practices. People’s changing attitudes

toward work represent another challenge

facing our socioeconomic

system, according to some experts.

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chapter four  ThE NATURE Of CAPiTAliSm      139

If industry is to improve productive capacity and be competitive, it must seriously confront these changing social attitudes. as paul Bernstein argues, it is counterproduc- tive to compare today’s worker with an idealized worker of yesteryear. rather, we must acknowledge that we have a new work ethic, which in Bernstein’s words

is part and parcel of the individual desire for meaningful and challenging labor in which some autonomy is an integral feature. an increasingly professionalized work force will not accept a golden embrace unless it is accompanied by fulfilling jobs that have been designed for a labor force that sees work in relation to family, friends, leisure and self-development. work, for most of us, continues as an important part of our lives, but only in relation to our total experience.71

s T u d y C o r N e r Key terms and COnCepts

alienation capital capitalism comparative advantage competition corporate welfare exploitation financial capitalism

globalized capitalism hollow corporations industrial capitalism invisible hand laissez faire mercantile capitalism natural right to property oligopolies

outsource profit motive short-term focus socialism state welfare capitalism work ethic worker control socialism

pOints tO review

• how capitalism, socialism, and worker control socialism differ (p. 116)

• the story of the Fugger dynasty (p. 117)

• five historical stages of capitalism and their characteristics (pp. 117–118)

• four key features of capitalism (pp. 119 – 121)

• criticisms of the natural-right-to-property argument for capitalism (p. 122)

• how the invisible hand guides self-interest in a socially beneficial direction (pp. 123–124)

• responses to criticisms of capitalism because of inequality and poverty (pp. 125–126)

• capitalism’s questionable assumptions about human nature (pp.126–127)

• oligopolies and corporate welfare under capitalism (pp. 127–131)

• why some critics reject competition as an ideal (p. 131)

• different ways workers are alienated, according to Marx (p. 132)

• the decline of American manufacturing, its manifestations and implications (pp. 134–135)

• conflicting views of outsourcing (pp. 135–136)

• why the trade deficit causes some economists to worry (pp. 136–137)

• negative consequences of an exclusive focus on the short term (p. 137)

• changes in the work ethic (pp. 138–139)

fOr fUrther refLeCtiOn

1. What do you see as the strongest moral consideration in favor of capitalism? What do you see as the strongest objection to it?

2. How capitalist is our economic system today?

3. What do you see as the major economic challenges facing our society today and, in particular, your generation?

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140 part two AmERiCAN BUSiNESS ANd iTS BASiS

inCreased stUdent LOads, myriad prOfessiOnaL

obligations, and shrinking school budgets have sent many public school teachers scurrying for teaching materials to facilitate their teaching.

They don’t have to look far. Into the breach has stepped business, which is ready, willing, and able to provide print and audiovisual materials for classroom use.72 These industry- supplied teaching aids are advertised in educational journals, distributed directly to schools, and showcased at educational conventions.

Clearasil, for example, distributes a teaching aid and color poster called “A Day in the Life of Your Skin.” Its message is hard to miss: Clearasil is the way to clear up your pimples. Domino’s Pizza supplies a handout that is supposed to help kids learn to count by tabulating the number of pepperoni wheels on one of the company’s pizzas. Chef Boyardee spon- sors a study program on sharks based on its “fun pasta,” which is shaped like sharks and pictured everywhere on its educational materials.

The list goes on. General Mills supplies educational pam- phlets on Earth’s “great geothermic ‘gushers’” along with the company’s “Gushers” snack (a candy filled with liquid). The pamphlets recommend that teachers pass the “Gushers” around and then ask the students as they bite the candy, “How does this process differ from that which produces erupting geothermic phenomena?” In an elementary school in Texas, teachers use a reading program called “Read-A- Logo.” Put out by Teacher Support Software, it encourages students to use familiar corporate names such as McDonald’s, Hi-C, Coca-Cola, or Cap’n Crunch to create elementary sen- tences, such as “I had a hamburger and a Pepsi at McDonald’s.” In other grade schools, children learn from

Exxon’s Energy Cube curriculum that fossil fuels pose few environmental problems and that alternative energy is costly and unattainable. Similarly, materials from the American Coal Foundation teach them that the “earth could benefit rather than be harmed from increased carbon dioxide.” Courtesy of literature from the Pacific Lumber Company, students in California learn about forests; they also get Pacific Lumber’s defense of its forest-clearing activities: “The Great American Forest . . . is renewable forever.” At Pembroke Lakes elemen- tary school in Broward County, Florida, ten-year-olds learned how to design a McDonald’s restaurant, and how to apply and interview for a job at McDonald’s, thanks to a seven-week company-sponsored class intended to teach them about the real world of work.

“It’s a corporate takeover of our schools,” says Nelson Canton of the National Education Association. “It has nothing to do with education and everything to do with corporations making profits and hooking kids early on their products.” “I call it the phantom curriculum,” adds Arnold Fege of the National PTA, “because the teachers are often unaware that there’s subtle product placement.” There’s nothing subtle, however, about the product placement in Mathematics Applications and Connections, a textbook used by many sixth graders. It begins its discussion of the coordinate system with an advertisement for Walt Disney: “Have you ever wanted to be the star of a movie? If you visit Walt Disney–MGM Studios Theme Park, you could become one.” Other math books are equally blatant. They use brand-name products like M&Ms, Nike shoes, and Kellogg’s Cocoa Frosted Flakes as examples when discussing surface area, fractions, decimals, and other concepts.

All this is fine with Lifetime Learning Systems, a market- ing firm that specializes in pitching to students the products

Case 4.1

hucksters in the Classroom

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chapter four  ThE NATURE Of CAPiTAliSm      141

of its corporate customers. “[Students] are ready to spend and we reach them,” the company brags, touting its “custom- made learning materials created with your [company’s] spe- cific marketing objectives in mind.” Given the buying power of schoolchildren and teenagers today, not to mention their abil- ity to influence spending by their parents, it’s not surprising that many corporations see education marketing as a cost- effective way to build brand loyalty.

Corporate America’s most dramatic venture in the class- room, however, is Channel One, a television newscast for middle and high school students, beaming into classrooms around the country. The broadcasts are twelve minutes long—ten minutes of news digest with slick graphics and two minutes of commercials for Levi’s jeans, Gillette razor blades, Head & Shoulders shampoo, Snickers candy bars, and other familiar products. Although a handful of states have banned Channel One, millions of American teens see it every school day. Alloy Media, which acquired Channel One in 2007, pro- vides cash-hungry schools with thousands of dollars worth of electronic gadgetry, including TV monitors, satellite dishes, and video recorders, if the schools agree to show the broad- casts. In return, the schools are contractually obliged to broadcast the program in its entirety to all students at a single time on 90 to 95 percent of the days that school is in session. The show cannot be interrupted, and teachers do not have the right to turn it off.

For their part, students seem to like Channel One’s fast- paced MTV-like newscasts. “It was very interesting and it appeals to our age group,” says student Angelique Williams. “One thing I really like was the reporters were our own age. They kept our attention.” But educators wonder how much students really learn. A University of Michigan study found that students who watched Channel One scored only 3.3 percent better on a thirty-question test of current events than did students in schools without Channel One. Although researchers called this gain so small as to be educationally unimportant, they noted that all the Channel One students remembered the commercials. That, of course, is good

news for Alloy Media, which charges advertisers $157,000 for a thirty-second spot. That price sounds high, but com- panies are willing to pay it because Channel One delivers a captive, narrowly targeted audience.

That captive audience is exactly what worries the critics. Peggy Charren of Action for Children’s Television calls the project a “great big, gorgeous Trojan horse. . . . You’re selling the children to the advertisers. You might as well auction off the rest of the school day to the highest bidders.” On the other hand, Principal Rex Stooksbury of Central High School in Knoxville, which receives Channel One, takes a different view. “This is something we see as very, very positive for the school,” he says. And as student Danny Diaz adds, “We’re always watching commercials” anyway.

disCUssiOn QUestiOns

1. What explains industry’s thrust into education? Is it consistent with the basic features of capitalism?

2. Have you had any personal experience with industry- sponsored educational materials? What moral issues, if any, are raised by the affiliation between education and commercial interests? Does commercial intrusion into schools change the nature of education? What values and beliefs does it instill in children?

3. Do you think students have a “moral right” to an educa- tion free of commercial indoctrination? If you were a parent of school-age children, would you be concerned about their exposure to commercials and corporate propaganda?

4. If you were a member of a school board contemplating the use of either industry-sponsored materials or Channel One, what would you recommend? Do you think that industry in general and Channel One in particular are intentionally using teachers and students as a means to profit? Or do they have a genuine concern for the educa- tion process? In either case, if teachers and students benefit from these educational materials or from viewing Channel One, is there any ground for concern?

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142 part two AmERiCAN BUSiNESS ANd iTS BASiS

the United states is a CapitaList COUntry,

and our system of medical care is, to a significant extent, organized for profit. True, many hospitals are nonprofit, but the same cannot be said of doctors, who, judged as a whole, form an extremely affluent and privileged occupational group.

Sometimes physicians themselves seem a little uncomfort- able about the business aspect of their professional lives or worry that outsiders will misinterpret their attention to eco- nomic matters. For example, the professional journal Medical Economics, which discusses such pocketbook issues as mal- practice insurance, taxes, fees, and money management (“Are You Overpaying Your Staff?” is a typical cover story), works hard at not being available to the general public. When a sub- scriber left his copy on a commercial airliner, another reader found it and sent the mailing label to the magazine; the maga- zine’s editor sent a cautionary note to the subscriber. The editor advises readers to “do your part by restricting access to your personal copies of the magazine. Don’t put them in the waiting room, don’t leave them lying about in the examination rooms, and don’t abandon them in public places.”73

Medical Economics probably suspects that even in our capitalist society many people, including probably most doc- tors, would not like to think of physicians simply as medical entrepreneurs who are in it for the money. And, indeed, many people here and many more in other countries criticize our medical system for being profit oriented. They think medical care should be based on need and that ability to pay should not affect the quality of medical treatment one receives. Interestingly, though, some people criticize medical practice in the United States as being insufficiently market oriented; prominent among them was the late Milton Friedman, a Nobel Prize–winning economist at the University of Chicago.

Friedman was a long-standing critic of occupational licen- sure in all fields. His reasoning is straightforward: Licensure— the requirement that one obtain a license from a recognized authority in order to engage in an occupation—restricts entry into the field. Licensure thus permits the occupational or pro- fessional group to enjoy a monopoly in the provision of serv- ices. In Friedman’s view, this contravenes the principles of a free market to the disadvantage of us all.

Friedman had no objection to certification—that is, to public or private agencies certifying that an individual has certain skills. But he rejected the policy of preventing people who do not have such a certificate from practicing the occu- pation of their choice. Such a policy restricts freedom and keeps the price of the services in question artificially high. When one reads the long lists of occupations for which some states require a license—librarians, tree surgeons, pest con- trollers, well diggers, barbers, carpet installers, movie projec- tionists, florists, upholsterers, makeup artists, even potato growers, among many others74—Friedman’s case gains plausibility. But Friedman pushed his argument to include all occupations and professions.

Does this mean we should let incompetent physicians practice? Friedman would say yes.75 In his view, the American Medical Association (AMA) is simply a trade union, though probably the strongest one in the United States. It keeps the wages of its members high by restricting the number of those who can practice medicine.

The AMA does this not only through licensure but also, even more effectively, through controlling the number of medical schools and the number of students admitted to them. Today, for instance, over 42,000 applicants vie every year for roughly 18,000 medical school vacancies. The medical

Case 4.2

Licensing and Laissez faire

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chapter four  ThE NATURE Of CAPiTAliSm      143

profession, Friedman charged, limits entry into the field both by turning down applicants to medical school and by making standards for admission and licensure so difficult as to dis- courage many young people from ever trying to gain admis- sion. And, in fact, fewer students apply to medical school these days than in the 1990s.

Viewed as a trade union, the AMA has been singularly effective. As recently as the 1920s, physicians were far down the list of professionals in terms of income; the average doc- tor made less than the average accountant. Today physicians constitute the profession that arguably has the highest status and the best pay in the country. The median income for pri- mary-care physicians is $157,000. For general surgeons it is $265,000. And in certain specialties, it is a great deal higher. Cardiologists, pain specialists, radiologists, hand surgeons, and others often earn over half a million dollars a year.76 American doctors earn far more than their foreign counter- parts do, even in countries where average wages are similar to those in the United States. Still, the medical establishment remains worried. It believes that there are too many doctors in the United States, and that “this surplus breeds inefficiency and drives up costs.”77

The economic logic behind this proposition is murky. An increase in the supply of barbers, plumbers, or taxi drivers does not drive up the cost of getting a haircut, having your pipes fixed, or taking a cab. Why should it be different with doctors? Critics of the medical profession believe that its real worry is the prospect of stabilizing or even declining incomes. In any case, the doctors have written two prescriptions.

The first is to reduce the number of medical students by closing some medical schools; the second is to make it more difficult for foreign doctors to practice in the United States. Although the medical establishment has often expressed concern about the quality of foreign medical training, today the worry is strictly a matter of quantity. “We’ve got to stop the pipeline of foreign medical graduates,” says Dr. Ed O’Neil of the Center for the Health Professions at the University of California, San Francisco. “They are a big chunk of physician oversupply. . . . We’re just trying to be rational.”78 As for homegrown doctors, Congress followed medical advice. To stem the supposed glut, it decided a few years ago to pay hospitals around the country hundreds of millions of dollars

to decrease the number of physicians they train. It now turns out, however, that the United States (which already has fewer doctors per 1,000 people than do almost all European coun- tries79) is predicted to have a physician shortage of at least 125,000 by 2025.80

Medical licensure restricts the freedom of people to prac- tice medicine and prevents the public from buying the medi- cal care it wants. Nonetheless, most people would probably defend the principle of licensure on the grounds that it raises the standards of competence and the quality of care. Friedman would contest this. By reducing the amount of care available, he contended, licensure also reduces the average quality of care people receive. (By analogy, suppose that auto- mobile manufacturers were forbidden to sell any car that did not have the quality of a Mercedes-Benz. As a result, people who owned cars would have cars of higher average quality than they do now. But because fewer people could afford cars and more of them would, therefore, have to walk or ride bicy- cles, such a regulation would not raise the quality of transpor- tation enjoyed by the average person.) Friedman charged, furthermore, that the monopoly created by the licensing of physicians has reduced the incentive for research, develop- ment, and experimentation, both in medicine and in the organization and provision of services.

Since Friedman initially presented his argument, some of the alternatives to traditional practice that he proposed have come to pass; prepaid services have emerged, and group and clinic-based practices are on the increase. But what about his main contention that instead of licensure we should allow the marketplace to sort out the competent from the incompetent providers of medical services?

Friedman’s critics contend that even if the licensing of professionals “involves violating a moral rule” against restricting individuals’ “freedom of opportunity,” it is still immoral to allow an unqualified person to engage in poten- tially harmful activities without having subjected the person to adequate tests of competence.81 Despite the appeal of Friedman’s arguments on behalf of free choice, the danger still remains, they say, that people will be victimized by the incompetent.

Consider, for example, the dietary supplements and bogus medications—things like “healing gels” or “iconic silver”— offered

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

144 part two AmERiCAN BUSiNESS ANd iTS BASiS

as preventions or cures for the H1N1 (swine flu) virus.82 Or the quack remedies and treatments peddled to AIDS patients here and abroad. Bottles of processed pond scum and concoctions of herbs, injections of hydrogen peroxide or of cells from the glands of unborn calves, the eating of bee pollen and garlic, $800 pills containing substances from mice inoculated with the AIDS virus, and even whacking the thymus gland of patients to stimulate the body’s immune system—all these are among the treatments that have been offered to desperate people by the unscrupulous and eccentric. Deregulation of the medical field seems most unlikely to diminish such exploitation.

disCUssiOn QUestiOns

1. What explains the fact that licenses are required for so many occupations? What do you see as the pros and cons of occupational licensure in general? Does it have benefits that Friedman overlooked?

2. Do you believe that licensure in medicine or any other field is desirable? If so, in which fields and under what circumstances? What guidelines would you use to deter- mine where licensure is needed?

3. Is occupational licensure consistent with the basic principles and values of capitalism? Is it a violation of the free-market ideal? How would you respond to the argument that licensure illegitimately restricts individual freedom to pursue a career or a trade?

4. Does licensure make the market work more or less effectively? Would you agree that as long as consum- ers are provided with accurate information, they should be permitted to make their own choices with regard to the services and products they purchase—even when it comes to medical care? Or is licensing necessary to protect them from making incorrect choices?

5. Friedman and others view the AMA as a trade union, and they believe that the high incomes of doctors are due more to artificial restrictions on the free market than to the inherent value of their services. Is this an accurate or fair picture of the medical profession?

6. Is licensing an all-or-nothing issue? Or is it possible that although only licensed professionals should be permit- ted to perform certain services, paraprofessionals and laypersons could perform less expensively but equally competently other services now monopolized by licensed professionals?

the hUge COrpOratiOns that prOdUCe OUr

cars, appliances, computers, and other products—many of them household names like Nike, Coca-Cola, and Johnson & Johnson—are a familiar feature of contemporary capitalism.

But Walmart represents something new on the economic landscape. Now the world’s largest company, Walmart has

achieved its corporate preeminence not in production but in retail. No other retailer, at any time or in any place, has ever come close to being as large and influential as Walmart has become. After years of nonstop growth, there are now more than 8,400 Walmart stores worldwide, and 140 million shop- pers visit its U.S. stores each week. And the company is

Case 4.3

One nation under walmart

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chapter four  ThE NATURE Of CAPiTAliSm      145

opening more stores all the time as it moves beyond its stronghold in the rural South and Midwest and into urban America. In fact, 82 percent of American households pur- chase at least one item from Walmart every year. As a result, the company’s marketplace clout is enormous: It controls about 30 percent of the market in household staples; it sells 15 percent of all magazines and 15–20 percent of all CDs, videos, and DVDs; and it is expected to control soon over 35 percent of U.S. food sales. For most companies selling con- sumer products, sales from Walmart represent a big chunk of their total business: 28 percent for Dial, 24 percent for Del Monte, and 23 percent for Revlon. Walmart is also responsi- ble for 10 percent of all goods imported to the United States from China.83

The good news for consumers is that Walmart has risen to retail supremacy through the bargain prices it offers them. The retail giant can afford its low prices because of the cost efficiencies it has achieved and the pressure it puts on suppli- ers to lower their prices. And the larger the store gets, the more market clout it has and the further it can push down prices for its customers.

Everyone, of course, loves low prices, but not everyone, it seems, loves Walmart. Why not? Here are some of the charges that critics level against the retail behemoth:

• Walmart’s buying power and cost-saving efficiencies force local rivals out of business, thus costing jobs, disrupting local communities, and injuring established business districts. Typically, for example, within five years after a Walmart super- center opens, two other supermarkets close. Further, Walmart often insists on tax breaks when it moves into a community, so its presence does little or nothing to increase local tax revenues.

• Walmart is staunchly anti-union and pays low wages. Its labor costs are 20 percent lower than those of unionized supermarkets; its average sales clerk earns only $8.23 an hour, and most of its 1.4 million employees must survive with- out company health insurance. Small wonder that employee turnover is 44 percent per year. Moreover, because of its size, Walmart exerts a downward pressure on retail wages and benefits throughout the country. Critics also charge that Walmart’s hard line on costs has forced many factories to

move overseas, which sacrifices American jobs and holds wages down.

• Government welfare programs subsidize Walmart’s poverty- level wages. According to one congressional report, a two- hundred-employee store costs the government $42,000 a year in housing assistance, $108,000 in children’s health care, and $125,000 in tax credits and deductions for low- income families. And internal Walmart documents, leaked to the press, confirm that 46 percent of the children of Walmart’s 1.33 million workers are uninsured or on Medicaid. The docu- ment also discusses strategies for holding down spending on health care and other benefits—for example, by hiring more part-time workers and discouraging unhealthy people from working at the store by requiring all jobs to include some physical labor.

• As Walmart grows and grows, and as its competitors fall by the wayside, consumer choices narrow, and the retail giant exerts ever greater power as a cultural censor. Walmart, for example, won’t carry music or computer games with mature ratings. As a result, the big music companies now supply the chain with sanitized versions of the explicit CDs that they provide to radio stations and that are sold elsewhere. The retailer has removed racy magazines such as Maxim and FHM from its racks, and it obscures the covers of Glamour, Redbook, and Cosmopolitan with binders. Although many locations offer inexpensive fire- arms, Walmart won’t sell Preven, a morning-after pill—the only one of the top ten drug chains to decline to do so.

For these reasons, Walmart’s expansion is frequently meeting determined local resistance, as concerned residents try to preserve their communities and their local stores and downtown shopping areas from disruption by Walmart through petitions, political pressure, and zoning restrictions. As one economist remarks, for Walmart “the biggest barrier to growth” is not competition from rivals like Target or Winn- Dixie stores but “opposition at the local level.” As a result, Walmart has begun responding to the criticism that it is a poor corporate citizen and miserly employer by improving employee health insurance coverage and adopting greener business practices. And even its usual critics applauded when the company responded rapidly to Hurricane Katrina, sending truckloads of water and food, much of it reaching residents before federal supplies did.

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146      part two  AmericAn Business And its BAsis

First Lady michelle Obama teamed up with Walmart on an initiative that will  result  in the company offering a  larger selection of healthy foods at more  affordable prices. What does such an alliance suggest about the relationship  between business and society and between business and politics?

M ar

k W ils

on /G

et ty

Im ag

es N

ew s/

Ge tty

Im ag

es

When it comes to Walmart, Professor John E. Hoopes

of Babson College encourages people to take a long-term

view: “The history of the last 150 years in retailing would

say that if you don’t like Walmart , be patient. There will be

new models eventually that will do Walmart in, and

Walmart won’t see it coming.” And, indeed, in recent

years the company’s sales growth has slipped as the

Internet has changed people’s shopping habits and as

other discounters have done a better job of attracting

affluent consumers and providing higher quality and bet-

ter service.

In the meantime, where you stand on Walmart probably

depends on where you sit, as Jeffrey Useem writes in Fortune magazine: “If you’re a consumer, Walmart is good for you. If

you’re a wage-earner, there’s a good chance it’s bad for you.

If you’re a Walmart shareholder, you want the company to

grow. If you’re a citizen, you probably don’t want it growing in

your backyard. So, which one are you?”

Discussion Questions

1. Do you like Walmart? Do you shop there? If so, how frequently? If not, why not?

2. Is there a Walmart store in your area? If so, has it had any impact on your community or on the behavior of local consumers? If there’s no store in your area, would you be in favor of Walmart opening one? Explain why or why not.

3. Is Walmart’s rapid rise to retail dominance a positive or a negative development for our society? What does it tell us about capitalism, globalization, and the plight of workers?

4. Can a retailer ever become too large and too powerful?

5. Is opposition to Walmart’s expansion a legitimate part of the political process or is it unfair interference with our market system and a violation of the company’s rights? Do opponents of Walmart have any valid concerns?

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chapter four  ThE NATURE Of CAPiTAliSm      147

yOU wOULd thinK that empLOyees wOULd

do something if they discovered that a customer had died on the premises.

But that’s not necessarily so, according to the Associated Press, which reported that police discovered the body of a trucker in a tractor trailer rig that had sat—with its engine running—in the parking lot of a fast-food restaurant for nine days. Employees swept the parking lot around the truck but ignored the situation for over a week until the stench got so bad that someone finally called the police.

That lack of response doesn’t surprise James Sheehy, a human resources manager in Houston, who spent his summer vacation working undercover at a fast-food restaurant owned by a relative.84 Introduced to coworkers as a management trainee from another franchise location who was being brought in to learn the ropes, Sheehy was initially viewed with some suspicion, but by the third day the group had accepted him as just another employee. Sheehy started out as a maintenance person and gradually rotated through various cooking and cleaning assign- ments before ending up as a cashier behind the front counter.

Most of Sheehy’s fellow employees were teenagers and col- lege students who were home for the summer and earning additional spending money. Almost half came from upper- income families and the rest from middle-income neighbor- hoods. More than half were women, and a third were minorities. What Sheehy reports is a whole generation of workers with a frightening new work ethic: contempt for customers, indiffer- ence to quality and service, unrealistic expectations about the world of work, and a get-away-with-what-you-can attitude.

Surveys show that employee theft is on the rise throughout the businessworld.85 Sheehy’s experience was in line with this. He writes that the basic work ethic at his place of employment

was a type of gamesmanship that focused on milking the place dry. Theft was rampant, and younger employees were subject to peer pressure to steal as a way of becoming part of the group. “It don’t mean nothing,” he says, was the basic rationale for dis- honesty. “Getting on with getting mine” was another common phrase, as coworkers carefully avoided hard work or dragged out tasks like sweeping to avoid additional assignments.

All that customer service meant was getting rid of people as fast as possible and with the least possible effort. Sometimes, however, service was deliberately slowed or drive-through orders intentionally switched in order to cause customers to demand to see a manager. This was called “baiting the man,” or purposely trying to provoke a response from management. In fact, the general attitude toward managers was one of disdain and contempt. In the eyes of the employees, supervisors were only paper-pushing functionaries who got in the way.

Sheehy’s coworkers rejected the very idea of hard work and long hours. “Scamming” was their ideal. Treated as a kind of art form and as an accepted way of doing business, scamming meant taking shortcuts or getting something done without much effort, usually by having someone else do it. “You only put in the time and effort for the big score” is how one fellow worker char- acterized the work ethic he shared with his peers. “You got to just cruise through the job stuff and wait to make the big score,” said another. “Then you can hustle. The office stuff is for buying time or paying for the groceries.”

By contrast, they looked forward to working “at a real job where you don’t have to put up with hassles.” “Get out of school and you can leave this to the real dummies.” “Get an office and a computer and a secretary and you can scam your way through anything.” On the other hand, these young employees believed that most jobs were like the fast-food industry: automated,

Case 4.4

a new work ethic?

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148 part two AmERiCAN BUSiNESS ANd iTS BASiS

boring, undemanding and unsatisfying, and dominated by diffi- cult people. Still, they dreamed of an action-packed business world, an image shaped by a culture of video games and action movies. The college students in particular, reports Sheehy, believed that a no-holds-barred, trample-over-anybody, get- what-you-want approach is the necessary and glamorous road to success.

disCUssiOn QUestiOns

1. How typical are the attitudes that Sheehy reports? Does his description of a new work ethic tally with your own experiences?

2. What are the implications for the future of American busi- ness of the work ethic Sheehy describes?

3. Some might discount Sheehy’s experiences either as being the product of one particular industry or as simply reflecting the immaturity of young employees. Would you agree?

4. Is it reasonable to expect workers, especially in a capitalist society, to be more devoted to their jobs, more concerned with quality and customer service, than Sheehy’s coworkers were? What explains employee theft?

5. In what ways does the culture of our capitalist society encourage attitudes like those Sheehy describes?

cdo stands for “collateralized debt obligation,” and before the financial meltdown of 2008, hardly any nonspecialists were familiar with this arcane acronym. A CDO is a collection of individual debts (for example, home mortgages) that are bundled together in one investment pool. That pool can then be divided into different sections (or “tranches”), representing different degrees of risk, and sold to investors. An individual lender, such as a credit card company, may put together a CDO, or an investment firm may create a CDO from a package of loans from different lenders. Although abused during the housing bubble, CDOs perform a useful economic function. They allow lenders to focus on loan origi- nation and investors to buy interest-earning securities.86

What serves no obvious economic function, however, are so-called synthetic CDOs, which represent a bet on the

performance of a package of loans owned by others. For exam- ple, Goldman Sachs brokered a synthetic CDO, known as Abacus-2007 AC1, based on the performance of a group of subprime loans. But unlike a normal CDO, a synthetic like Abacus contains no actual bonds or mortgage loans; it merely references assets owned by other people. As with other synthetic CDOs, one side of the option was betting the value of a bundle of assets (owned by other people) would rise; the other side of the option that it would fall. In principle, it’s no different from wager- ing on the Yankees vs. the Dodgers or on a cricket fight. “With a synthetic CDO, it’s a pure bet,” says Erik F. Gering, a former secu- rities lawyer and now a law professor at the University of New Mexico. “It is hard to see what the social value is.”

In the two years before the financial meltdown of 2008, over $100 billion in synthetic CDOs were issued, and

Case 4.5

Casino gambling on wall street

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chapter four  ThE NATURE Of CAPiTAliSm      149

everyone agrees that, by increasing the instability of the system, they were an important factor in that crisis. Moreover, their use represents a shift in the culture of investment banks from a focus on finding the most produc- tive allocation of savings to an emphasis on maximizing profit through proprietary trading and arranging casino-like wagers for market participants. For these reasons, many business writers and financial experts are critical of syn- thetic CDOs and other purely speculative derivatives, believing that they should be severely limited or even pro- hibited. However, companies like Goldman Sachs and oth- ers make $20 billion a year putting them together, and these firms lobbied strongly and successfully to see that the financial reform bill of 2010 didn’t significantly restrict them. In their defense, one industry insider says, “I believe that synthetic CDOs have a very useful purpose in facilitat- ing the management of risk. . . . Such instruments facilitate the flow of capital.”

But it is difficult for even the heartiest champion of syn- thetic CDOs to defend the Abacus-2007 AC1 deal with a straight face. Goldman Sachs put it together for hedge fund tycoon John Paulson based on a group of lousy mortgage loans that he had selected for the sole purpose of betting that their value would go down. As with any synthetic CDO, of course, Goldman Sachs needed to find investors who would take the opposite position, which it did—the two largest being ABN Amro and IKB Deutsche Industriebank—and it was paid $15 million for closing the deal. Those companies, however, were not told that Paulson was betting against them nor that he had selected the underlying subprime mortgages only because he believed they were sure to lose value. And, sure enough, Abacus-2007 AC1 soon produced a $1.5 bil- lion loss for ABN and an $840 million loss for IKB—but a $1 billion gain for Paulson.

Goldman Sachs’s defenders say that ABN and IKB were sophisticated investors who should have known what they were doing and that who is on the other side of a CDO is not something that is routinely disclosed. So perhaps ABN and IKB deserved what they got—after all, one might argue, they had no real business undertaking a synthetic CDO as opposed to underwriting or insuring actual subprime loans. But, still, it’s hard to square Goldman Sachs’s treatment of

them with the principle displayed on the company’s website: “Our client’s interests always come first.”

Goldman Sachs, of course, is not the only financial institution to manipulate its customers. The Securities and Exchange Commission has accused Citigroup, for exam- ple, of putting together a package of mortgage backed securities without telling investors that it was betting against them—that the fund was designed to fail. When it did, Citi earned $160 million while its investors lost $700 million. On the other hand, spread across the country are thousands of small community banks and not-for-profit credit unions. Believing that their job is to serve the com- munity, they often take a personal interest in their cus- tomers, making loans to local businesses, lending small sums to individuals who have fallen into financial trouble, or bending over backwards to help those who can’t keep up their mortgage payments. “They support you person- ally,” says one customer. “Customers . . . can walk in and talk to the president,” adds another, “and know he isn’t sucking in their money and betting against them on pro- prietary securities.”87

disCUssiOn QUestiOns

1. Are synthetic CDOs a legitimate business investment, or are they pure gambling? If the former, what are their benefits? If the latter, should banks and other companies be allowed to wager on whatever they want if they like the odds and think they can make money that way?

2. In your view, what does the rise of synthetic CDOs tell us about contemporary capitalism?

3. Should synthetic CDOs be regulated in some way or even banned altogether?

4. Should Goldman Sachs have disclosed Paulson’s role to IKB and ABN? In not doing so, did it act immorally? What obligations, effects, and ideals are relevant to answering these questions?

5. Did John Paulson do anything wrong? Explain why or why not.

6. As the top banks continue to get larger and larger, can small, community-oriented banks survive? Contrast the models of capitalism represented by the two types of banks. Where do you bank?

Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

150

FiFty years ago the vice president oF Ford

Motor Company described the modern business corporation as the dominant institution of American society. Today, few observers would disagree. As one of them puts it, “The modern corporation is the central institution of contemporary society.”1 As an aggregate, corporations wield awesome economic clout, and the five hundred largest U.S. companies constitute at least three-quarters of the American econ- omy. But the dominant role of corpora- tions in our society extends well beyond that. Not only do corporations produce almost all the goods and services we buy, but also they and their ethos perme- ate everything from politics and commu- nications to athletics and religion. And their influence is growing relentlessly around the world.

By any measure, the biggest corpo- rations are colossi that dominate the earth. Many of them employ tens of thousands of people, and the largest have hundreds of thousands in their ranks. PepsiCo, for example, has about 285,000 employees worldwide, General Electric approximately 304,000, and IBM 386,000—not to mention the 2.1 million people who work for Walmart, the world’s larg- est private-sector employer. And their revenues are dazzling. For example, Dell Computer takes in more than $61 billion a year, Procter & Gamble $76 billion, IBM $98 billion, AT&T $118 billion, and Ford $172 billion. Recently, Walmart topped the

list with an annual revenue of $422 billion. ExxonMobil came in second at $383 billion but earned $45.2 billion in profit—the most money ever earned by any company at any time any- where. By comparison, Austria’s gross domestic product (GDP) is approximately $361 billion, Chile’s $204 billion, and New Zealand’s $135 billion. The state of California, which has far and away the largest annual revenue of any U.S. state, makes

less than half of what General Motors does. Kansas takes in only about $4.5 billion, and Vermont about a fifth of that.

And corporations are growing larger and wealthier every year. For example, in 1989 Time Inc. merged with Warner Communications to form Time Warner. Seven years later Time Warner com- bined with Turner Broadcasting. Then in January 2001, in a move that shook up Wall Street, Time Warner and America

Online merged. At a stroke, the new company they created, initially called AOL Time Warner, then simply Time Warner, was valued at $350 billion. What does $350 billion mean? It is equivalent to the GDP of Saudi Arabia and is greater than the combined GDPs of Hungary, the Czech Republic, Bulgaria, Serbia, Bolivia, and Kenya. It is also more than the industrial output of the United Kingdom or the manufacturing output of China.

Like any other modern corporation, in principle Time Warner is a three-part organization, made up of (1) stockholders,

IntroductIon

ch a p t er 5

Corpor at ions

By any measure,

the biggest corporations are colossi that

dominate the earth.

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who provide the capital, own the corporation, and enjoy liability limited to the amount of their investments; (2) managers, who run the business operations; and (3) employees, who produce the goods and services. However, a corporate giant such as Time Warner, ExxonMobil, or Citigroup is, to quote business analyst Anthony J. Parisi, less like a single company and more like “a fabulously wealthy investment club with a lim- ited portfolio.” Such companies invest in subsidiaries, whose heads “oversee their territories like provincial governors, sov- ereigns in their own lands but with an authority stemming from the power center. . . . The management committee exacts its tribute (the affiliate’s profits from current operations) and issues doles (the money needed to sustain and expand those operations).”2 In the best-run organizations the management system is highly structured and impersonal. It provides the corporation’s overall framework, the formal chain of command,

which ensures that the company’s profit objectives are pursued.

The emergence of corporate behe- moths like Chevron or Bank of America is one of the more intriguing chapters in the evolution of capitalism. Certainly nei- ther John Locke nor Adam Smith ever imagined the huge capitalist enterprises that emerged in the nineteenth century— in their day hardly any private firms had more than a handful of employees—and that today dominate America’s, even the world’s, economic, political, and social life. This book isn’t the place to analyze why a people committed to an individualistic social philosophy and a free- competition market economy allowed vast oligopolis- tic economic entities to develop. Rather, the concern here is with the problem of applying moral standards to corporate organizations and with understanding their social responsibilities.

Learning oBjectives

More specifically, after reviewing the history of the corporation, this chapter examines the following topics:

1. The debate over whether corporations are moral agents and can be meaningfully said to have moral responsibilities

2. The controversy between the narrow view and the broader view of corporate responsibility

3. Three key arguments in this debate: the invisible-hand argument, the let-government-do-it argument, and the business-can’t-handle-it argument

4. The importance of institutionalizing ethics within corporations and how this may be done

0

50

100

150

200

250

300

350

400

450

500

Walmart Revenues

422 383

361

204

ExxonMobil Revenues

Austria’s Gross Domestic Product

Chile’s Gross Domestic Product

Comparison of the two top American corporations’ revenues with the gross domestic product of two nations. Values are in billions of dollars.

chapter five  CorporAtions      151

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152 part two AmeriCAn Business And its BAsis

• • •

the L imited -L i a b iL it y Compan y if you ask a lawyer for a definition of corporation, you will probably hear something like the following: a corporation is a thing that can endure beyond the natural lives of its members and that has incorporators who may sue and be sued as a unit and who are able to consign part of their property to the corporation for ventures of limited liability. Limited liability is a key feature of the modern corporation. The members of the corporation— unlike the members of a partnership or the proprietors of a business—are financially liable for the debts of the organization only up to the extent of their investments.

Limited-liability companies—corporations—differ from partnerships and other forms of business association in two other ways as well. First, a corporation is not formed simply by an agreement entered into among its first members. an organization becomes incorporated by being publicly registered or in some other way having its existence offi- cially acknowledged by the law. Second, unlike a partner, who is automatically entitled to his or her share of the profits of a partnership as soon as they are ascertained, the share- holder in a corporation is entitled to a dividend from the company’s profits only when it has been “declared.” Under U.S. law, dividends are usually declared by the directors of a corporation.

when we think of corporations, we naturally think of giants such as General Motors, exxonMobil, Microsoft, or walmart, which exert enormous influence over our economy and society. But the local independently owned convenience store may be a corporation, and historically the concept of a corporation has been broad enough to encompass churches, trade guilds, and local governments. corporations may be either for-profit or nonprofit organizations. princeton University, for example, is a nonprofit cor- poration. By contrast, Safeway, Lockheed Martin, McDonald’s, and many other familiar companies aim to make money for shareholders. corporations may be privately owned or owned (wholly or in part) by the government. almost all U.S. corporations are pri- vately owned; but renault of france, for example, was once a publicly owned, for-profit corporation. a small group of investors may own all the outstanding shares of a privately owned, profit-making corporation (a privately held company). Mars, Bechtel, chrysler, and enterprise rent-a-car are examples. or stock may be traded among the general public (a publicly held company). all companies whose stocks are listed on the New York and other stock exchanges are publicly held corporations.

in 1911 Nicholas Murray Butler, president of columbia University, declared that “the limited liability corporation is the single greatest discovery of modern times. . . . even steam and electricity are far less important . . . and . . . would be reduced to com- parative impotence without it.”3 Many business theorists and historians still agree with that assessment. But several stages mark the evolution of the corporation. The corporate form itself developed during the early Middle ages, and the first corporations were towns, universities, and ecclesiastical orders. They were chartered by government and regulated by public statute. as corporate bodies, they existed independently of the par- ticular individuals who constituted their membership at any given time. By the fifteenth century, the courts of england had evolved the principle of limited liability—thus set- ting limits, for example, on how much an alderman of the Liverpool corporation might be required to pay if the city went bankrupt. During the medieval period, however, the

In addition to the limited liability of their members,

corporations differ from partnerships

in two ways.

summary Corporations are legal

entities, with legal rights and

responsibilities similar but not identical to those enjoyed by

individuals. Business corporations are limited-liability

companies—that is, their owners or

stockholders are liable for corporate debts

only up to the extent of their investments.

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chapter five  CorporAtions      153

law did not grant corporate status to purely profit-making associations. in those days, something besides economic self-interest had to be seen as uniting the members of the corporation: religion, a trade, shared political responsibilities.

This state of affairs changed during the elizabethan era, as the incorporation of busi- ness enterprises began. european entrepreneurs were busy organizing trading voyages to the east and to North america. The east india company, which epitomizes the great trading companies of this period, was formed in 1600, when Queen elizabeth i granted to a group of merchants the right to be “one body corporate” and bestowed on it a trad- ing monopoly to the east indies. in the following decades, numerous other incorporated firms were granted trading monopolies and colonial charters. Much of North america’s settlement, in fact, was initially underwritten as a business venture.

although the earliest corporations typically held special trading rights from the government, their members did not pool capital. rather, they individually financed voy- ages using the corporate name and absorbed the loss individually if a vessel sank or was robbed by pirates. But as ships became larger and more expensive, no single buyer could afford to purchase and outfit one, and the loss of a ship would have been ruinous to any one individual. The solution was to pool capital and share liability. Thus emerged the prototype of today’s corporations.4

The first instance of the corporate organization of a manufacturing enterprise in the United States occurred in 1813, but only after the civil war did the movement toward the corporate organization of business gain steam.5 The loosening of government restric- tions on corporate chartering procedures in the nineteenth century marks this final stage of corporate evolution. Until the mid-1800s, prospective corporations had to apply for charters—in england to the crown, and in the United States to state government. charters were custom-crafted; each one was an individual act of legislation. charters were often burdened with precise terms or limited to specific business objectives, all in the name of promoting the public good. (for example, a corporation might be chartered for the sole purpose of shipping freight between two cities, or a charter might designate where the new corporation could begin and end its proposed railroad line.) critics of the incorporation system charged that it fostered favoritism, corruption, and unfair monopolies. Gradually, the old system of incorporation was replaced by the system we know today, in which corporate status is granted essentially to any organization that fills out the forms and pays the fees.

Lurking behind this change were two important theoretical shifts. First, under- lying the old system was the mercantilist idea that a corporation’s activities should advance some specific public purpose. But adam Smith and, following him, alexander hamilton, the first U.S. secretary of the treasury, challenged the desirability of a direct tie between business enterprise and public policy. They believed that businesspeople should be encouraged to explore their own avenues of enterprise, and that the “invisible hand” of the market would direct their activities in a socially beneficial direction more effec- tively than any public official could.

Second, when nineteenth-century reformers argued for changes in incorporation procedures, they talked not only about government favoritism and the advantages of a laissez-faire approach but also about the principle of a corporation’s right to exist.6 any petitioning body with the minimal qualifications, they asserted, has the right to receive a corporate charter. By contrast, the early crown-chartered corporations were clearly cre- ations of the state, in accordance with the legal-political doctrine that corporate status was

In the nineteenth century, government loosened restrictions on corporate charters.

Two ideas were behind this change

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154 part two AmeriCAn Business And its BAsis

a privilege bestowed by the government as it saw fit. The reformers, however, argued that incorporation is a by-product of the people’s right of association, not a gift from the state.

even though the right of association supports relaxed incorporation procedures, the state must still incorporate companies and guarantee their legal status. corporations must be recognized by the law as a single agent in order to enjoy their rights and privi- leges. to a large extent, then, the corporation remains, as chief Justice John Marshall put it in 1819, “an artificial being, invisible, intangible, and existing only in the contempla- tion of the law.”7

corporations are clearly legal agents. They can enter into contracts, own property, and sue and be sued. But are they also moral agents? corporations have definite legal responsibilities, but what, if any, social and moral responsibilities do they have?

• • •

Corpor ate mor a L agenCy in 2010, the Supreme court dropped a political bombshell. in reviewing a case that most observers thought would revolve on the technicalities of campaign finance law, the court, in a broad and unexpected ruling in Citizens United v. Federal Election Commission, struck down those provisions of the Mccain-feingold act that had prohib- ited corporations from making “electioneering communications” before a presidential primary or a general election. in a split 5-to-4 decision, it held that corporations have a basic first amendment right to participate in the political process and that the govern- ment may not prevent them from spending money to support the candidates they favor.8 writing for the majority, Justice anthony M. Kennedy argued that the constitution prohibits “restrictions distinguishing among different speakers, allowing speech by some but not others.” although Mccain-feingold had allowed corporations to set up political action committees to advocate for their causes, this exception was not enough, Kennedy wrote, because it still “does not allow corporations to speak.”

in a long and vigorous dissent, Justice John paul Stevens criticized the decision for the damage it would do to our democracy and for “the conceit that corporations must be treated identically to natural persons in the political sphere.” But Citizens United was not entirely without precedent. over the years the court has granted corporations certain first amendment protections and extended them other constitutional rights as well— for example, to due process (fourteenth amendment), against unreasonable searches and seizures (fourth amendment), to a jury trial (Seventh amendment), to freedom from double jeopardy (fifth amendment), and to compensation for government tak- ings (fifth amendment). Still, in holding that the first amendment gives corporations basically the same political rights as individual citizens, the court further blurred the distinction between real persons and artificial or legal persons. however, in doing so, it has provided a basis for claiming that if corporations enjoy the same moral and political rights as citizens, then they bear the same responsibilities that individual human beings do. in other words, if corporations have the same rights that moral agents have, then, like individuals, they can and should be held morally responsible for their actions.

The problem, of course, is that they are not human beings. or, to quote Lord Thurlow, an eighteenth-century lawyer, how can you “expect a corporation to have a conscience, when it has no soul to be damned and no body to be kicked?”9 But although

summary What we know as the

modern business corporation has

evolved over several centuries, and

incorporation is no longer the special

privilege it once was.

Cases like Citizens United have blurred

the distinction between individuals

and corporations.

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chapter five  CorporAtions      155

corporations are not people, they are collective entities that in some sense really exist, and they have an identity above and beyond the people whom they comprise at any given time. and the law recognizes them as “persons.” Do they have moral obligations just as individual human beings do? can they be held morally responsible, not just legally liable, for the things they do? The answer to these questions hangs on another question, namely: Does it make sense to view corporations as moral agents—that is, as entities capable of making moral decisions? if so, then corporations can be held morally respon- sible for their actions. They—and not just the individual human beings who make them up—can be seen as having moral obligations and as being blameworthy for failing to meet those obligations. They can, accordingly, be praised or blamed, even punished, for the decisions they make and the actions and policies they undertake.

The task of determining whether corporations can make moral decisions is anything but simple. immediately, we must ponder whether it makes sense to say that any entity other than an individual person can make decisions in the first place, moral or otherwise.

Can Corporations Make Moral DeCisions?

corporate internal decision (cid) structures amount to established procedures for accomplishing specific goals. for example, consider exxonMobil’s system, as depicted by anthony J. parisi:

all through the exxon system, checks and balances are built in. each fall, the presi- dents of the 13 affiliates take their plan for the coming year and beyond to New York for review at a meeting with the management committee and the staff vice presidents. The goal is to get a perfect corporate fit. Some imaginary examples: The committee might decide that exxon is becoming too concentrated in australia and recommend that esso eastern move more slowly on that continent. or it might conclude that if the affiliates were to build all the refineries they are proposing, they would create more capacity than the company could profitably use. one of the affiliates would be asked to hold off, even though, from its particular point of view, a new refinery was needed to serve its market.10

The implication here is that any decisions coming out of exxonMobil’s annual ses- sions are formed and shaped to effect corporate goals, “to get a perfect corporate fit.” Metaphorically, all data pass through the filter of established corporate procedures, objectives, and decision-making guidelines. The remaining distillation constitutes the decision. certainly the participants actively engage in decision making. But in addition to individual persons, the other major component of corporate decision making consists of the framework in which policies and activities are determined.

The ciD structure lays out lines of authority and stipulates under what conditions personal actions become official corporate actions. Some philosophers have compared the corporation to a machine or have argued that because of its structure it is bound to pursue its profit goals single-mindedly. as a result, they claim, it is a mistake to see a cor- poration as being morally responsible or to expect it to display such moral characteristics as honesty, considerateness, and sympathy. only the individuals within a corporation can act morally or immorally; only they can be held responsible for what it does.

others have argued in support of corporate moral agency. The ciD structure, like an individual person, collects data about the impact of its actions. it monitors work conditions, employee efficiency and productivity, and environmental impacts. professors

If corporations are moral agents, then they can be seen as having obligations and as being morally responsible for their actions, just as individuals are.

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156 part two AmeriCAn Business And its BAsis

Kenneth e. Goodpaster and John B. Matthews argue that as a result, there is no reason a corporation cannot show the same kind of rationality and respect for persons that indi- vidual human beings can. By analogy, they contend, it makes just as much sense to speak of corporate moral responsibility as it does to speak of individual moral responsibility.11 Thomas Donaldson agrees. he argues that a corporation can be a moral agent if moral reasons enter into its decision making and if its decision-making process controls not only the company’s actions but also its structure of policies and rules.12

philosopher peter french arrives at the same conclusion in a slightly different way.13 The ciD structure, says french, in effect absorbs the intentions and acts of individual persons into a “corporate decision.” perhaps no corporate official intended the course or objective charted by the ciD structure, but, french contends, the corporation did. and he believes that these corporate intentions are enough to make corporate acts “inten- tional” and thus make corporations “morally responsible.” professor of philosophy Manuel velasquez demurs. an act is intentional, says velasquez, only if the entity that formed the intention brings about the act through its bodily movements. But it is only the people who make up the corporation who carry out the acts attributed to it. velasquez concludes that only corporate members, not the corporation itself, can be held morally responsible.14

The debate over corporate moral agency bears on the question of corporate punishment. whether or not corporations are moral actors, the law can fine them, monitor and regulate their activities, and require the people who run them to do one thing or another. But one can talk in a literal sense about “punishing” corporations only if they are entities or “persons” capable of making moral decisions. and even if they are, not all the usual goals and methods of punishment make sense when applied to corpora- tions. if corporations are moral agents, then the law can deter them with the threat of punishment, and it can force them to make restitution. punishment can, perhaps, even rehabilitate a corporation, viewed as a moral agent. retribution, as a goal of punishment, however, seems to have little application to corporations. and obviously corporations cannot be jailed for breaking the law. even imposing fines on them can be problematic. financial penalties stiff enough to have an impact can easily injure innocent parties, for example, if they lead to layoffs, plant closures, or higher prices for consumers.

Vanishing inDiViDual responsibility

Some might argue that regardless of whether corporations as artificial entities can prop- erly be held morally responsible, the nature and structure of a modern corporate orga- nization allows nearly everyone in it to share moral accountability for what it does. in practice, however, this diffusion of responsibility can mean that no particular person or persons are held morally responsible. for example, does responsibility for an injury caused by a defective product fall on the shoulders of the worker who last handled the product, the foreman overseeing the running of the assembly line, the factory supervi- sor, the quality control team, the engineers who designed and tested the equipment, the regional managers who decided to produce the item, or the company’s ceo, whose office is in another city? indeed, each of these individuals may have been only follow- ing established procedures and decision-making guidelines. inside a corporation it may often be difficult, even impossible, to assign responsibility for a particular outcome to any single individual because so many different people, acting within a given ciD frame- work, contributed to it in small ways.

summary The question of corporate moral

agency is whether a corporation is the kind of entity that can make

moral decisions and bear moral

responsibility for its actions. Philosophers

disagree about whether corporate

internal decision (CID) structures make it reasonable to see corporations as

morally responsible agents.

Assigning individual responsibility for

corporate outcomes is difficult.

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chapter five  CorporAtions      157

This masking of moral accountability may not seem so surprising. after all, in situa- tions that don’t involve corporations, assigning praise and blame can also be problematic. But it raises the troubling possibility that the size and impersonal bureaucratic structure of the corporation may so envelop its members that it becomes vacuous to speak of individual moral agency. This, in turn, raises the specter of actions without actors in any moral sense—of defective products, broken laws, or flouted contracts, without any mor- ally responsible parties.

There are two ways to escape this uncomfortable conclusion. One is to attribute moral agency to corporations just as we do to individual persons. The other, not necessar- ily incompatible with the first, is to realize that these days too many people are willing, even eager, to duck personal responsibility—“it’s not my job,” “there’s nothing i can do about it,” “i was just following procedure”—by submerging it in the ciD structures of the modern corporation. perhaps until ciD structures are reconstituted to deal explic- itly with noneconomic matters, we can expect more of the same evasion of personal responsibility.

The issue of corporate moral agency undoubtedly will continue to exercise scholars. Meanwhile, the inescapable fact is that corporations are increasingly being accorded the status of biological persons, with all the rights and responsibilities implied by that status. Before it was gobbled up by another corporation, continental oil company expressed in an in-house booklet the public perception and its implica- tions as follows:

No one can deny that in the public’s mind a corporation can break the law and be guilty of unethical and amoral conduct. events . . . such as corporate violation of fed- eral laws and failure of full disclosure [have] confirmed that both our government and our citizenry expect corporations to act lawfully, ethically, and responsibly.

perhaps it is then appropriate in today’s context to think of conoco as a living corporation; a sentient being whose conduct and personality are the collective effort and responsibility of its employees, officers, directors, and shareholders.15

today many companies and many of the people inside them accept without hesita- tion the idea that corporations are moral agents with genuinely moral, not just legal, responsibilities.

This point was illustrated when colonial pipeline of atlanta published full-page advertisements in several newspapers headlined “we apologize.” The company used the ads to take responsibility for having spilled oil into the reedy river of South carolina three years before. true, the ads were part of a plea agreement with the U.S. Justice Department for having violated the clean water act (the company also agreed to pay a $7 million fine). Yet the company’s words had ethical overtones. as Laura Nash of harvard Divinity School comments, they put “moral emotion into what is essentially a legal statement” because “the word ‘apologize’ . . . admits a sense of shame and humil- ity.”16 Shame and humility were evident, too, when a few years later the world saw photographs of charles prince, the chief executive of citigroup, and Douglas petersen, citibank Japan ceo, bowing their heads at a press conference in tokyo in a public act of remorse for citigroup’s illegal actions in Japan.

if, then, it makes sense to talk about the social and moral responsibilities of corpora- tions, either in a literal sense or as a shorthand way of referring to the obligations of the individuals that make up the corporation, what are these responsibilities?

This raises the possibility of actions for which no one is responsible. There are two ways to escape this conclusion.

summary Individual responsibility

can tend to vanish inside large, impersonal

corporations. One response is to attribute

moral agency to the corporation itself.

Another is to refuse to let individuals duck

their personal responsibility.

Assuming it makes sense to talk of the moral responsibilities of corporations, what are they?

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158 part two AmeriCAn Business And its BAsis

• • •

r ivaL v ie ws of Corpor ate responsib iL i t y in 1963 tennessee iron & Steel, a subsidiary of United States Steel, was by far the larg- est employer, purchaser, and taxpayer in Birmingham, alabama. in the same city at the same time, racial tensions exploded in the bombing of an african-american church, killing four black children. The ugly incident led some to blame U.S. Steel for not doing more to improve race relations, but roger Blough, chairman of U.S. Steel, defended his company:

i do not either believe that it would be a wise thing for United States Steel to be other than a good citizen in a community, or to attempt to have its ideas of what is right for the community enforced upon the community by some sort of economic means. . . .

when we as individuals are citizens in a community we can exercise what small influence we may have as citizens, but for a corporation to attempt to exert any kind of economic compulsion to achieve a particular end in the racial area seems to me quite beyond what a corporation can do.17

Not long afterward, Sol M. Linowitz, chairman of the board of Xerox corporation, declared in an address to the National industrial conference Board: “to realize its full promise in the world of tomorrow, american business and industry—or, at least, the vast portion of it—will have to make social goals as central to its decisions as economic goals; and leadership in our corporations will increasingly recognize this responsibility and accept it.”18 Thus, the issue of business’s corporate responsibility was joined. Just what responsibilities does a corporation have? is its responsibility to be construed narrowly as merely profit making? or more broadly to include refraining from harming society and even contributing actively and directly to the public good?

the narrow View: profit MaxiMization

as it happened, the year preceding the Birmingham incident had seen the publication of Capitalism and Freedom, in which economist Milton friedman (1912–2006) force- fully advocated the narrow view of corporate responsibility, that business has no social responsibilities other than to maximize profits:

The view has been gaining widespread acceptance that corporate officials . . . have a social responsibility that goes beyond serving the interest of their stockholders. . . . This view shows a fundamental misconception of the character and nature of a free economy. in such an economy, there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud. . . . few trends could so thoroughly under- mine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.19

although from friedman’s perspective the only responsibility of business is to make money for its owners, obviously a business may not do literally anything whatsoever to increase its profits. Gangsters pursue profit maximization when they ruthlessly rub out their rivals, but such activity falls outside what friedman referred to as “the rules of the

summary Despite continuing

controversy over the concept of corporate

moral agency, the courts, the general public, and many

companies find the notion of corporate responsibility useful

and intelligible—either in a literal sense or as

shorthand for the moral obligations of

individuals in the corporation.

summary The debate over

corporate responsibility is whether it should be construed narrowly to

cover only profit maximization or more

broadly to include acting morally,

refraining from socially undesirable behavior,

and contributing actively and directly to

the public good.

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chapter five  CorporAtions      159

game.” harvard professor Theodore Levitt echoed this point when he wrote, “in the end business has only two responsibilities—to obey the elementary canons of face-to-face civility (honesty, good faith, and so on) and to seek material gain.”20

what, then, are the rules of the game? obviously, elementary morality rules out deception, force, and fraud, and the rules of the game are intended to promote open and free competition. The system of rules in which business is to pursue profit is, in friedman’s view, one that is conducive to the laissez-faire operation of adam Smith’s “invisible hand” (discussed in chapter 4). friedman, a conservative economist, believed that if the market is allowed to operate with only the minimal restrictions necessary to prevent fraud and force, society will maximize its overall economic well-being. pursuit of profit, he insisted, is what makes our system go. anything that dampens this incen- tive or inhibits its operation will weaken the ability of the “invisible hand” to deliver the economic goods. as one recent writers puts it, “corporations that simply do everything they can to boost profits will end up increasing social welfare.”21

Because the function of a business organization is to make money, the owners of corporations employ executives to accomplish that goal, thereby obligating these man- agers always to act in the interests of the owners. according to friedman, to say that executives have social responsibilities beyond the pursuit of profit means that they must sometimes subordinate owner interests to some social objective, such as controlling pol- lution or fighting inflation. They are then spending stockholder money for general social interests—in effect, taxing the owners and spending those taxes on social causes. But taxation is a function of government, not private enterprise; executives are not public employees but employees of private enterprise. The doctrine that corporations have social responsibilities beyond profit making thus transforms executives into civil servants and business corporations into government agencies, thereby diverting business from its proper function in the social system.

friedman was critical of those who would impose on business any duty other than that of making money, and he was particularly harsh with business leaders who take a broader view of their social responsibilities: They may believe that they are defending the free-enterprise system when they give speeches proclaiming that profit isn’t the only goal of business or affirming that business has a social conscience and takes seriously its responsibility to provide employment, refrain from polluting, eliminate discrimination, and so on. But these business leaders are shortsighted; they are helping to undermine capitalism by implicitly reinforcing the view that the pursuit of profit is wicked and must be regulated by external forces.22

friedman acknowledged that corporate activities are often described as an exercise of “social responsibility” when, in fact, they are intended simply to advance the com- pany’s self-interest. for example, it might be in the long-term self-interest of a corpo- ration that is a major employer in a small town to spend money to enhance the local community by helping to improve its schools, parks, roads, or social services, thereby attracting good employees to the area, reducing the company’s wage bill, or improving worker morale and productivity. By portraying its actions as dictated by a sense of social responsibility, the corporation can generate goodwill as a by-product of expenditures that are entirely justified by self-interest. friedman had no problem with a company pursuing its self-interest by these means, but he rued the fact that “the attitudes of the public make it in the self-interest [of corporations] to cloak their actions in this way.”23 friedman’s bottom line was that the bottom line is all that counts, and he firmly

summary Proponents of the

narrow view, such as Milton Friedman,

contend that diverting corporations from the pursuit of profit makes our economic system

less efficient. Business’s only social

responsibility is to make money within the

rules of the game. Private enterprise should not take on

social goals or public responsibilities; these

should be left to government.

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160 part two AmeriCAn Business And its BAsis

rejected any notion of corporate social responsibility that would hinder a corporation’s profit maximization.

the broaDer View: Corporate soCial responsibility

The rival position to that of friedman and Levitt is simply that business has obligations in addition to pursuing profits. The phrase “in addition to” is important. advocates of the broader view of corporate responsibility do not believe there is anything wrong with corporate profit. They maintain, rather, that corporations have other responsi- bilities as well—to consumers, to employees, to suppliers and contractors, to the sur- rounding community, and to society at large. They see the modern corporation as a social institution that should consider the interests of all the groups it has an impact on. Sometimes called the social entity model or the stakeholder model, this broader view maintains that a corporation has obligations not only to its stockholders but also to other constituencies that affect or are affected by its behavior—that is, to all parties that have a legitimate interest (a “stake”) in what the corporation does or doesn’t do. Years ago, the chairman of Standard oil of New Jersey expressed the basic idea this way: “The job of management is to maintain an equitable and working balance among the claims of the various directly affected interest groups . . . stockholders, employees, customers, and the public at large.”24

if the adherents of the broader view share one belief, it is that corporations have responsibilities beyond simply enhancing their profits because, as a matter of fact, they wield such great social and economic power in our society and with that power must come social responsibility. as professor of business administration Keith Davis put it:

one basic proposition is that social responsibility arises from social power. Modern busi- ness has immense social power in such areas as minority employment and environ- mental pollution. if business has the power, then a just relationship demands that business also bear responsibility for its actions in these areas. Social responsibility arises from concern about the consequences of business’s acts as they affect the inter- ests of others. Business decisions do have social consequences. Businessmen cannot make decisions that are solely economic decisions, because they are interrelated with the whole social system. This situation requires that businessmen’s thinking be broad- ened beyond the company gate to the whole social system. Systems thinking is required.

Social responsibility implies that a business decision maker in the process of serv- ing his own business interests is obliged to take actions that also protect and enhance society’s interests. The net effect is to improve the quality of life in the broadest possi- ble way, however quality of life is defined by society. in this manner, harmony is achieved between business’s actions and the larger social system. The businessman becomes concerned with social as well as economic outputs and with the total effect of his institutional actions on society.25

proponents of the broader view, such as Davis, stress that modern business is inti- mately integrated with the rest of society. Business is not some self-enclosed world, like a private poker party. rather, business activities have profound ramifications throughout society, and their influence on our lives is hard to escape. Business writer John Kay makes this point with reference to General electric: “The company’s activities are so extensive

Critics of the narrow view believe that

businesses have other obligations besides

making a profit.

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chapter five  CorporAtions      161

that you necessarily encounter them daily, often without knowing you are doing so. Ge’s business is our business even if we do not want it to be.”26

as a result, although society permits and expects corporations to pursue their eco- nomic interests, they have other responsibilities as well. Thus, for example, it is wrong for corporations to raid the pension funds of their employees, as many have done,27 or to evade taxes through creative accounting or by re-incorporating in tax havens such as Bermuda,28 even if doing so is legal and enhances the bottom line. “we reasonably expect that Ge should care that its engines are safe,” writes John Kay, “not just that they comply with faa procedures; that if there is a problem with its medical equipment the company will try to put it right, not cover it up; that Ge financial statements are true and fair and not just compliant with accounting standards.”29

Melvin anshen has cast the case for the broader view of corporate responsibility in a historical perspective.30 he maintains that there is always a kind of “social contract” between business and society. This contract is, of course, only implicit, but it represents a tacit understanding within society about the proper goals and responsibilities of busi- ness. in effect, in anshen’s view, society always structures the guidelines within which business is permitted to operate in order to derive certain benefits from business activ- ity. for instance, in the nineteenth century, society’s prime interest was rapid economic growth, which was viewed as the source of all progress, and the engine of economic growth was identified as the drive for profits by unfettered, competitive, private enter- prise. That attitude was reflected in the then-existing social contract. today, however, society has concerns and interests other than rapid economic growth—in particular, a concern for the quality of life and for the preservation of the environment. accordingly, the social contract is in the process of being modified. in particular, anshen writes, “it will no longer be acceptable for corporations to manage their affairs solely in terms of the traditional internal costs of doing business, while thrusting external costs on the public.”31

in recent years we have grown more aware of the possible deleterious side effects of business activity, or what economists call externalities: the unintended negative (or in some cases positive) consequences that an economic transaction between two parties can have on some third party. industrial pollution provides the clearest illustration. Suppose a factory makes widgets and sells them to your firm. a by-product of this economic transaction is the waste that the rains wash from the factory yard into the local river, waste that damages recreational and commercial fishing interests downstream. This dam- age to third parties is an unintended side effect of the economic transaction between the seller and the buyer of widgets.

Defenders of the new social contract, like anshen, maintain that externalities should no longer be overlooked. in the jargon of economists, externalities must be “internalized”— that is, the factory should be made to absorb the cost of its pollution, either by dispos- ing of its waste in an environmentally safe (and presumably more expensive) way or by paying for the damage the waste does downstream. on the one hand, basic fairness requires that the factory’s waste no longer be dumped onto third parties. on the other hand, from the economic point of view, requiring the factory to internalize the externali- ties makes sense, for only when it does so will the price of the widgets it sells reflect their true social cost. The real production cost of the widgets includes not only labor, raw materials, machinery, and so on, but also the damage done to the fisheries downstream. Unless the price of widgets is raised sufficiently to reimburse the fisheries for their losses

summary Defenders of the

broader view maintain that corporations have responsibilities that go beyond making money because of their great social and economic power. Business is

governed by an implicit social contract that

requires it to operate in ways that benefit

society. In particular, corporations must take

responsibility for the unintended side effects

of their business transactions

(externalities) and weigh the full social

costs of their activities.

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162 part two AmeriCAn Business And its BAsis

or to dispose of the waste in some other way, then the buyer of widgets is paying less than their true cost. part of the cost is being paid by the fishing interests downstream.

advocates of the broader view go beyond requiring business to internalize its exter- nalities in a narrow economic sense. Keith Davis, for example, maintains that in addition to considering potential profitability, a business must weigh the long-range social costs of its activities as well. only if the overall benefit to society is positive should business act:

The expectation of the social responsibility model is that a detailed cost/benefit analy- sis will be made prior to determining whether to proceed with an activity and that social costs will be given significant weight in the decision-making process. almost any business action will entail some social costs. The basic question is whether the benefits outweigh the costs so that there is a net social benefit. Many questions of judgment arise, and there are no precise mathematical measures in the social field, but rational and wise judgments can be made if the issues are first thoroughly explored.32

stoCkholDers anD the Corporation

when asked, most americans say that a corporation’s top obligation is to its employees; others say it is to the community or the nation, but only 17 percent think stockholders deserve the highest priority.33 in fact, even a majority of managers rejects a profit-only philosophy of corporate management.34 advocates of the narrow view, however, believe that those attitudes reflect a misunderstanding of the proper relationship between man- agement and stockholders. Stockholders own the company. They entrust management with their funds, and in return management undertakes to make as much money for them as it can. as a result, according to proponents of the narrow view, management has a fiduciary duty to maximize shareholder wealth, a duty that is inconsistent with any social responsibility other than the relentless pursuit of profit.

The managers of a corporation do indeed have a fiduciary responsibility to look after the interests of shareholders, a duty that is clearly violated by corporate execu- tives who take advantage of their position to enrich themselves at company expense with extravagant bonuses, stock options, and retirement packages or to waste corporate money on jets, apartments, private parties, and various personal services that lack any plausible business rationale. But it doesn’t follow from this, as proponents of the narrow view maintain, that the corporation should be run entirely for the benefit of stockhold- ers, that their interests always take priority over the interests of everyone else. to the contrary, argue critics of the narrow view, management has fiduciary responsibilities to other constituencies as well—for example, to employees, bondholders, and consumers. The duty to make money for shareholders is real, but it doesn’t trump all of a company’s other responsibilities. indeed, it’s debatable whether most shareholders believe that it does. Many of them may want the company they “own” to act in a morally responsible manner—say, by reducing its carbon footprint or by treating employees with respect— even if that means less profit.

against that point of view, however, Milton friedman argued, “The whole justifica- tion for permitting the corporate executives to be selected by the shareholders is that the executive is an agent serving the interests of his principal.”35 This justification disappears, he believed, when executives expend corporate resources in ways that don’t necessar- ily enhance the bottom line. They are then acting more like public servants than like employees of a private enterprise. But even if one agrees with friedman that stockholders

Advocates of the broader view believe

that business must internalize its

externalities and consider the social

costs of its activities.

The narrow view holds that

management’s responsibility to

maximize shareholder wealth

outweighs any other obligations.

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chapter five  CorporAtions      163

select corporate managers to act as their agents and advance their interests, this doesn’t prove that those executives are bound to act solely to increase shareholder wealth, ignor- ing all other moral considerations. Undertaking to look after other people’s interests or promising to try to make money for them creates a genuine obligation, but that obli- gation is not absolute. it doesn’t eliminate all other moral responsibilities. By analogy, promising to meet someone at a certain time and place for lunch creates an obligation, but that obligation doesn’t override one’s duty to assist someone having a heart attack. and something that it would be immoral for you to do (such as making a dangerous product) doesn’t become right just because you’re acting on behalf of someone else or promised him that you would do it.

friedman believed that if executives “impose taxes on stockholders and spend the proceeds for ‘social’ purposes, they become ‘civil servants,’ and thus should be selected through a political process.”36 he considered such a proposal absurd or, at best, social- istic. Yet others contend that corporations are too focused on profits, and they fear the damage to society when firms are willing to sacrifice all other values on the altar of the bottom line. They don’t think it absurd at all that corporations should take a broader view of their social role and responsibilities. They see nothing in the management-stock- holder relationship that would morally forbid corporations from doing so.

who Controls the Corporation? according to the narrow view of corporate responsibility, stockholders own the corpora- tion and select managers to run it for them. That model may make sense for some small firms or when venture capitalists invest in a start-up company, but it doesn’t accurately reflect modern corporate reality. to begin with, most stockholders purchase shares in a company from current stockholders, who acquired their shares the same way. very few investors put their money directly into a corporation; rather, they buy secondhand shares that were initially issued years before. They pick companies that look profitable or seem likely to grow or whose products or policies appeal to them, or they may simply be fol- lowing the advice of their broker. and they are generally prepared to resell their shares, perhaps even the same day they bought them, if it is profitable to do so. Stockholders have no legal obligation to the company. They are a far-flung, diverse, and ever-changing group. They come and go, and rarely, if ever, have direct contact with the managers of the company or even know or care who they are.

for those reasons, then, it’s implausible to see stockholders in, say, home Depot or procter & Gamble as being genuine owners or proprietors of the company. “a share of stock,” write two legal experts, “does not confer ownership of the underlying assets owned by the corporation. instead, it provides the holder with a right to share in the financial returns produced by the corporations’ business.” a share of stock is a financial instrument, more akin to a bond, than to a car or building.37

few economists or business theorists believe that stockholders are really in charge of the companies whose shares they hold or that they select the managers who run them. as long ago as 1932, adolf Berle and Gardiner Means showed that because stock ownership in large corporations is so dispersed, actual control of the corporation has passed to management.38 today, as most business observers acknowledge, management handpicks the board of directors, thus controlling the body that is supposed to police it. “The ceo puts up the candidates; no one runs against them, and management counts

summary Advocates of the

narrow view stress that management’s

fiduciary duty to the owners (stockholders) of a corporation takes priority over any other

responsibilities and obligates management

to focus on profit maximization alone. Critics challenge this argument. They also

point out that the assumption that

stockholders own or control the corporation

is dubious.

Stockholders do not really own or control the companies whose shares they hold.

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164 part two AmeriCAn Business And its BAsis

the votes,” says Nell Minow of corporate Library, a corporate watchdog website. “we wouldn’t deign to call this an election in a third-world country.”39 even in those rare cases when shareholders put up their own candidates, such proxy fights are expensive and the incumbent management has the corporate coffers at its disposal to fight them.

as a result, the board of directors typically rubber-stamps the policies and recom- mendations of management. That’s why it’s not too surprising that the directors of enron ignored shareholder interests and approved paying out $750 million in executive com- pensation—$140 million of it to its chairman—in a year when the company’s entire net income was only $975 million. The enron example is extreme, but since the 1990s the share of corporate net income going to top management has doubled; that’s money that otherwise would have ended up in shareholders’ pockets.40 and how else to explain the fat payouts to ceos when their companies do poorly or are acquired by other corpora- tions41 or the lavish retirement packages that boards bestow on former ceos? These often include a million-dollar annual pension, an expensive apartment, a car and driver, and free use of the company aircraft.42 true, in the past couple of decades, institutional investors like pension funds and large mutual funds have endeavored to increase their sway over corporate policies, and in 2011 the Securities and exchange commission (Sec) gave shareholders the right to a nonbinding vote on corporate compensation plans once every three years. But it’s still exceedingly difficult for shareholders to change policies they don’t like, because the voting rules are rigged in management’s favor.43 The upshot is simple, according to Michael Jensen, professor emeritus at harvard Business School: “The ceo has no boss.” That, he says, is “the major thing wrong with large pub- lic corporations in the United States.”44

• • •

debat ing Corpor ate responsib iL i t y we can pursue the debate over corporate responsibility further by examining three argu- ments in support of the narrow view: the invisible-hand argument, the let-government- do-it argument, and the business-can’t-handle-it argument. advocates of the broader view of corporate responsibility reject all three.

the inVisible-hanD arguMent

adam Smith claimed that when each of us acts in a free-market environment to promote our own economic interests we are led by an invisible hand to promote the general good. Like-minded contemporary thinkers such as friedman advance the same invisible-hand argument. They point out that corporations, in fact, were chartered by states precisely with utility in mind. if businesses are permitted to seek self-interest, their activities will inevitably yield the greatest good for society as a whole. to invite corporations to base their policies and activities on anything other than profit making is to politicize busi- ness’s unique economic function and to hamper its ability to satisfy our material needs. as roberto c. Goizueta, former ceo of coca-cola, argues, “businesses are created to meet economic needs.” when they “try to become all things to all people, they fail. . . . we have one job: to generate a fair return for our owners.”45 accordingly, corporations should not be invited to fight against prejudice, to combat global warming, to contribute

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chapter five  CorporAtions      165

to the local community, or to improve working conditions or enhance the lives of employees, except insofar as these activities increase profits.

Yet this argument allows that corporations may still be held accountable for their actions. to the degree that they fulfill or fail to fulfill their economic role, they can be praised or blamed. and they can rightly be criticized for breaking the law or violating the rules of the game—for example, by shady accounting practices that mislead investors about company assets. But corporations should not be held morally responsible for non- economic matters; to do so would distort the economic mission of business in society and undermine the foundations of the free-enterprise system.

The invisible-hand argument, however, runs up against the fact that modern cor- porations bear about as much resemblance to Smith’s self-sufficient farmers and crafts- people as today’s military bears to the continental militia. Given the sway they have over our economy and society, the enormous impact they have on our lives, our communi- ties, and our environment, today’s gigantic corporations are more like public enterprises than private ones. They constitute powerful economic fiefdoms, far removed from the small, competitive producers of classical economics. perhaps within a restricted area of economic activity, when the parties to the exchange are roughly equal, then each pursuing self-interest can result in the greatest net good. But in the real world of large corporations, the concept of an invisible hand orchestrating the common good often stretches credulity. for example, california deregulated its electricity market to promote competition and give the invisible hand room to operate. But the result was a disaster. instead of cheaper energy, the state got power blackouts and soaring prices as energy companies adroitly and greedily manipulated the market. each time the state tried to make the market work better, energy sellers devised new ways to exploit the system. The state government only stanched the crisis by a costly intervention that has basically put it in the power business.46

The invisible-hand argument in favor of the narrow view of corporate responsi- bility is thus open to criticism as theoretically unsound and economically unrealistic. Moreover, in practice the argument is complicated by the fact that corporations today find themselves in a social and political environment in which they are pressured by public opinion, politicians, the media, and various activist groups to act—or at least be perceived to be acting—as responsible corporate citizens, as socially conscious enterprises that acknowledge other values besides profit and that seek to make a positive contribution to our society. few if any corporations can afford to be seen as exploiters of foreign labor, as polluters of the environment, or as indifferent to consumer welfare or the prosperity of our communities. companies today religiously guard their name and their brands against the slander that they care only about prof- its. and the larger the corporation, the more susceptible it is to the demand that it behave with a developed sense of moral responsibility, and the more it needs to guard its image and to take steps to assure the public that it is striving to make the world a better place.

This explains why for several months in 2010–11 chevron ran a campaign of dramatic full-page advertisements in the Wall Street Journal, New York Times, and other newspapers, each ad featuring a slogan, such as, “oil companies should support the communities they’re part of,” “oil companies should put their profits to good use,” “it’s time for oil companies to get behind renewable energy,” or “Big oil should support small business.” Stamped in red after each statement were the words, “we agree.” The

The invisible-hand argument seems economically unrealistic. In addition, corporations today find it in their interest to acknowledge values other than profit.

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166 part two AmeriCAn Business And its BAsis

company also ran a series of television ads in the same vein. Likewise, rio-tinto alcan, the world’s largest aluminum company, proclaims that it is committed to “maximizing value for all our stakeholders, especially by making a significant contribution . . . to the economic, social and environmental well-being of the communities in which we oper- ate.”47 and hewlett-packard states that “a company has a responsibility beyond making a profit for its investors, including a commitment to enrich the business, lives and com- munities of its customers, partners and employees.”48

admittedly, some of this is merely public-relations posturing, but it’s also true that business success in today’s world requires companies to respond to society’s demand that they act as morally responsible agents. for purely self-interested reasons, even corpora- tions that take a very narrow view of their responsibilities may have to behave as if they held a broader view. for example, in a world in which 88 percent of young people believe that companies have a responsibility to support social causes and 86 percent of them say that they switch brands based on social issues, a world in which 72 percent of job seekers prefer to work for a company that supports social causes,49 corporate philanthropy pro- motes the bottom line. Moreover, almost all studies indicate that socially responsible cor- porate behavior is positively correlated with financial success and that the most profitable companies treat their consumers, employees, and business partners ethically.50 ironically, then, this gives companies a self-interested reason not merely to pretend to have a broad sense of social responsibility but, rather, to become the kind of company that really does want to make a positive mark in the world. of course, whether we are talking about individuals or about corporations, there’s no guarantee that acting morally will always pay off, and indeed if that is one’s only motivation for doing the right thing, then one can hardly be said to be acting morally. even so, there’s little reason for either individuals or companies to believe that acting selfishly or sacrificing moral values to profits will pay off for them in the long run.

the let-goVernMent-Do-it arguMent

according to the narrow view of corporate responsibility, business’s role is purely economic, and corporations should not be considered moral agents. Some adherents of this view, however, such as economist and social critic John Kenneth Galbraith (1908–2006), reject the assumption that Smith’s invisible hand will solve all social and economic problems or that market forces will moralize corporate activities. Left to their own self-serving devices, Galbraith and others warn, modern corporations will enrich themselves while impoverishing society. if they can get away with it, they will pollute, exploit workers, deceive customers, and strive to eliminate competition and keep prices high through oligopolistic practices. They will do those things, the argu- ment continues, because as economic institutions they are naturally and quite properly profit motivated.

what is profitable for corporations, however, is not necessarily useful or desirable for society. how is the corporation’s natural and insatiable appetite for profit to be con- trolled? Through government regulation, answer proponents of the let-government-do- it argument. They believe that the strong hand of government, through a system of laws and incentives, can and should bring corporations to heel. “i believe in corporations,” teddy roosevelt once proclaimed. “They are indispensable instruments of our modern civilization; but i believe that they should be so supervised and so regulated that they shall act for the interests of the community as a whole.”51

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chapter five  CorporAtions      167

“Do not blame corporations and their top executives” for things like layoffs or urge them to acknowledge obligations beyond the bottom line, writes the economist robert reich, secretary of labor under president clinton. “They are behaving exactly as they are organized to behave.” he pooh-poohs moral appeals and rejects the idea that ceos should seek to balance the interests of shareholders against those of employees and their communities. rather, reich says, “if we want corporations to take more responsibility” for the economic well-being of americans, then government “will have to provide the proper incentives.”52

This advice sounds realistic and is intended to be practical, but the let-government- do-it argument rejects the notion of broadening corporate responsibility just as firmly as the invisible-hand argument does. The latter puts the focus on the market. Galbraith’s and reich’s argument puts it on the visible hand of government. The two positions agree, however, in thinking that it is misguided to expect or demand that business firms do anything other than pursue profit.

critics of the let-government-do-it argument contend that it is a blueprint for big, intrusive government. Moreover, they doubt that government can control any but the most egregious corporate immorality. They fear that many questionable activities will be overlooked, safely hidden within the labyrinth of the corporate structure. Lacking intimate knowledge of the goals and sub-goals of specific corporations, as well as of their daily operations, government simply can’t anticipate a specific corporation’s moral chal- lenges. rather, it can prescribe behavior only for broad, cross-sectional issues, such as bribery, price fixing, and unfair competition.

Legislation can certainly address egregious corporate wrongdoing, but it cannot provide corporations with much specific guidance about how to act in socially beneficial ways. consider, for example, pepsico’s decision to buy directly from small corn farmers in Mexico (rather than through middle men) and to guarantee, before they plant their crops, the price it will pay them. This program has changed the farmers’ lives (they no longer have to trek to the United States to work odd jobs to make ends meet), increased their incomes, and strengthened their communities.53 No government legislation could have brought this about.

finally, is government a credible custodian of morality? if recent experience has taught anything, it is that government officials are not always paragons of virtue. Looked at simply as another organization, government manifests many of the same structural characteristics that test moral behavior inside the corporation. furthermore, given the awesome clout of corporate lobbyists, one wonders whether, as moral police, government officials will do anything more than impose the values and interests of their most generous financiers. can we seriously expect politicians to bite the hand that feeds them?

the business-Can’t-hanDle-it arguMent

in support of the narrow view of corporate responsibility, some maintain that it is mis- guided to encourage corporations to address nonbusiness matters. according to the business-can’t-handle-it argument, corporations are the wrong group to be entrusted with broad responsibility for promoting the well-being of society. They are not up to the job for two reasons: (1) They lack the necessary expertise. (2) in addressing noneconomic matters, they inevitably impose their own materialistic values on the rest of society.

The let-government- do-it argument rejects broadening corporate responsibility just as much as the invisible-hand argument does.

Some argue that business is the wrong group on which to place broad social responsibilities for two reasons.

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168 part two AmeriCAn Business And its BAsis

Corporations lack the expertise Those who develop the first point contend that business can’t handle the job—that it is the wrong group to rely on to promote the well-being of society—because corporate executives lack the moral and social expertise to make other-than-economic decisions. to assign them noneconomic responsibilities would be to put social welfare in the hands of inept custodians. for example, robert reich argues that corporate executives lack the moral authority to “balance profits against the public good” or “undertake any ethical balancing.” They have no “expertise in making such moral calculations.”54 in his view, corporate leaders lack the moral insight or social know-how that a broader view of corpo- rate responsibility would seem to require of them.

against that, however, one can argue that we don’t normally restrict the moral responsibilities of individuals, professional bodies, or other organizations to matters that fall within the narrow confines of their business or other expertise. we see nothing wrong, for example, with physicians advocating aiDS awareness or trying to promote the use of seat belts in automobiles, or with a teachers’ union involving itself in a cam- paign to combat the use of illegal drugs. and ordinary citizens may sometimes have a duty to educate themselves about, and do what they can to address, social issues that fall outside their usual sphere of knowledge and activity. what, if anything, asks the critic, makes the social role of the corporation unique, so that its responsibilities and those of its employees should be confined solely to profit making?

The argument that corporations aren’t up to addressing social issues because they lack the necessary expertise runs up against the fact that, often, it is only business that has the know-how, talent, experience, and organizational resources to tackle certain problems. if society, for example, wants to eradicate malaria in africa or increase longevity at home, to reduce diesel engine emissions or retard global warming, to improve agricultural pro- ductivity while lowering the risks from pesticides, or to see that inner-city youth learn entrepreneurship or that community groups have the business skills necessary for success, then society will need the assistance of business. to take a specific illustration, citibank supports microfinance programs in Mexico and india, intended to give poor rural women the tiny loans they need, say, to buy a sewing machine and start their own business. true, as a citigroup executive says, “there is not going to be a huge short-term profit” for the company.55 But who is better able to help these women than a company like citigroup?

Corporations will impose their Values on us others argue that corporations are the wrong group to address social issues, that business can’t handle the assignment, for a different reason. They fear that if permitted to stray from strictly economic matters, corporate officials will impose their materialistic values on all of society. Broadening corporate responsibility will thus “materialize” society instead of “moralizing” corporate activity. More than fifty years ago, harvard professor Theodore Levitt expressed this concern:

The danger is that all these things [resulting from having business pursue social goals other than profit making] will turn the corporation into a twentieth-century equiva- lent of the medieval church. . . . for while the corporation also transforms itself in the process, at bottom its outlook will always remain materialistic. what we have then is the frightening spectacle of a powerful economic functional group whose future and perception are shaped in a tight materialistic context of money and things but which

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chapter five  CorporAtions      169

imposes its narrow ideas about a broad spectrum of unrelated noneconomic subjects on the mass of man and society. even if its outlook were the purest kind of good will, that would not recommend the corporation as an arbiter of our lives.56

This argument seems to assume that corporations do not already exercise enormous discretionary power over us. But as Keith Davis points out, business already has immense social power. “Society has entrusted to business large amounts of society’s resources,” says Davis, “and business is expected to manage these resources as a wise trustee for society. in addition to the traditional role of economic entrepreneurship, business now has a new social role of trusteeship. as trustee for society’s resources, it serves the interests of all claimants on the organization, rather than only those of owners, or consumers, or labor.”57

as paul camenisch notes, business is already using its privileged position to propa- gate, consciously or unconsciously, a view of humanity and the good life.58 implicit in the barrage of advertisements to which we are subjected daily are assumptions about happi- ness, success, and human fulfillment. in addition, corporations or industry groups some- times speak out in unvarnished terms about social and economic issues. for example, exxonMobil disputes the notion that fossil fuels are the main cause of global warming and lobbies against capping global-warming emissions, while drug companies such as eli Lilly, procter & Gamble, and Bristol-Myers Squibb contribute to conservative think tanks that seek to reduce the regulatory powers of the U.S. food and Drug administration.

The point here is that business already promotes consumerism and materialistic values. it doesn’t hesitate to use its resources to express its views and influence our political system on issues that affect its economic interests. if corporations take a broader view of their responsi- bilities, are they really likely to have a more materialistic effect on society, as Levitt suggests, than they do now? it’s hard to believe they could. Levitt’s view implies that there is some threat to society’s values when corporations engage in philanthropy or use their economic and political muscle for other than purely self-interested ends. But society’s values are not endangered when Sara Lee donates 2 percent of its pretax profits to charitable causes, mostly cultural institutions and organizations serving disadvantaged people,59 or when General Mills gives away 3 percent of its domestic pretax earnings to community organizations, donates food to people in need, and helps inner-city companies to get up and running.60 and where is the “materialization of society” if, instead of advertising on a silly situation comedy that reaches a large audience, a corporation spends the same amount underwriting a science program with fewer viewers solely out of a sense of social responsibility?

• • •

inst itut ionaL i z ing e th iCs w ith in Corpor at ions The criticisms of these three arguments in support of the narrow view of corporate respon- sibility have led many people inside and outside business to adopt the broader view—that the obligations of the modern business corporation extend beyond simply making money for itself. Society grants corporations the right to exist and gives them legal status as sepa- rate entities. it does this not to indulge the profit appetites of owners and managers but, as camenisch says, as a way of securing the necessary “goods and services to sustain and enhance human existence.”61 in return for its sufferance of corporations, society has the right to expect corporations not to cause harm, to take into account the external effects of their activities, and whenever possible to act for the betterment of society.

summary Three arguments in favor of the narrow

view are the invisible- hand argument, the let-government-do-it argument, and the

business-can’t- handle-it argument. Finding flaws in each of these arguments,

critics maintain there is no solid basis for

restricting corporate responsibility to profit

making.

Society permits corporations to exist and, in turn, expects them to act in a socially responsible way.

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170 part two AmeriCAn Business And its BAsis

The list of corporate responsibilities goes beyond such negative injunctions as “Don’t pollute,” “Don’t misrepresent products,” and “Don’t bribe.” included also are affirmative duties like “See that your product or service makes a positive contribution to society,” “improve the skills of your employees,” “Seek to hire the disabled or other disadvantaged persons,” “contribute to the betterment of your community,” “Be as green as possible,” and “enrich working conditions.” The responsibilities of corporations are not neces- sarily limited to activities that are intrinsically related to their business operations, but may reflect social responsibilities that each of us, whether individuals or institutions, has simply by virtue of our being members of society. precisely how far each of us must go to meet these responsibilities depends largely on our capacity to fulfill them, which, of course, varies from person to person, institution to institution. But given their consider- able power and resources, large corporations seem better able to promote the common good than most individuals or small businesses.

how corporations are to promote the common good cannot be answered very spe- cifically; this will depend on the type of firm and its particular circumstances. proponents of broadening corporate responsibility would agree, though, that the first step is for cor- porations to expand their moral horizons and make ethical conduct a priority. how to do this? at least four actions seem called for. corporations should:

1. acknowledge the importance, even necessity, of conducting business morally. Their commitment to ethical behavior should be unequivocal and highly visible, from top management down.

2. Make a real effort to encourage their members to take moral responsibilities seriously. This commitment would mean ending all forms of retaliation against those who buck the system and rewarding employees for evaluating corporate decisions in their broader social and moral contexts.

3. end their defensiveness in the face of public discussion and criticism. instead, they should actively solicit the views of stockholders, managers, employees, suppliers, customers, local communities, and even society as a whole. corporations should invite outside opinions and conduct a candid ethical audit of their organizational policies, priorities, and practices.

4. recognize the pluralistic nature of the social system of which they are a part. Society consists of diverse, interlinked individuals and groups, all vying to maintain their autonomy and advance their interests. The actions of any one group invariably affect the interests of others. as part of society, corporations affect many groups, and these groups and the individuals they comprise affect corporations. failing to realize this, corporations can lose sight of the social framework that governs their relationship with the external environment.

Undoubtedly, other general directives could be added to this list. Still, if corporate respon- sibility is to be expanded, then something like the preceding approach seems basic.

liMits to what the law Can Do

critics of the let-government-do-it argument question Galbraith’s and reich’s view that society should not expect business to behave morally but rather should simply use gov- ernment to direct business’s pursuit of profit in socially acceptable directions. This issue

To make ethics a priority, corporations

should do four things.

summary To become more

socially responsible, companies need to expand their moral horizons and make ethical conduct a

priority. Doing so will require them to

acknowledge the critical importance of ethics, to encourage morally responsible

conduct by their employees, to recognize the

pluralistic nature of our social system, and to

be open to public discussion and review.

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chapter five  CorporAtions      171

is worth returning to in the present context. all defenders of the broader view of corpo- rate responsibility believe that more than laissez faire is necessary to ensure that business behavior is socially and morally acceptable. Yet there is a tendency to believe that law is a fully adequate vehicle for this purpose.

Law professor christopher Stone has argued, however, that there are limits on what the law can be expected to achieve.62 Three of his points are particularly important. First, many laws, such as controls on the disposal of toxic waste, are passed only after there is general awareness of the problem; in the meantime, damage has already been done. The proverbial barn door has been shut only after the horse has left.

Second, formulating appropriate laws and designing effective regulations are dif- ficult. it is hard to achieve consensus on the relevant facts, to determine what remedies will work, and to decide how to weigh conflicting values. in addition, our political sys- tem gives corporations and their lobbyists significant input into the writing of laws. Not only that, but the specific working regulations and day-to-day interpretation of the law require the continual input of industry experts. This is not a conspiracy but a fact of life. Government bureaus generally have limited time, staffing, and expertise, so they must rely on the cooperation and assistance of those they regulate.

Third, enforcing the law is often cumbersome. Legal actions against corporations are expensive and can drag on for years, and the judicial process is often too blunt an instru- ment to use as a way of managing complex social and business issues. in fact, recourse to the courts can be counterproductive, and Stone argues that sometimes the benefits of doing so may not be worth the costs. Legal action may simply make corporations more furtive, breeding distrust, destruction of documents, and an attitude that “i won’t do anything more than i am absolutely required to do.”

what conclusion should be drawn? Stone is not arguing that regulation of business is hopeless. rather, what he wants to stress is that the law cannot do it alone. we do not want a system in which businesspeople believe that their only obligation is to obey the law and that it is morally permissible for them to do anything not (yet) illegal. with that attitude, disaster is just around the corner. More socially responsible business behavior requires, instead, that corporations and the people within them not simply respond to the requirements of the law but also hold high moral standards—and that they them- selves monitor their own behavior.

ethiCal CoDes anD eConoMiC effiCienCy

it is, therefore, important that corporations examine their own implicit and explicit codes of conduct and the moral standards that are being propagated to their employees. as mentioned earlier in this chapter and in chapter 1, there is no necessary trade-off between profitability and ethical corporate behavior.63 indeed, the contrary appears to be true: The most morally responsible companies are consistently among the most profitable compa- nies. Yet ethical behavior in the business world is often assumed to come at the expense of economic efficiency. Defenders of the broader view, such as anshen, as well as defenders of the narrow view, such as friedman, seem to make this assumption. anshen believes that other values should take priority over economic efficiency, whereas friedman contends business should concern itself only with profit and, in this way, maximize economic well- being. in his important essay “Social responsibility and economic efficiency,” Nobel prize–winning economist Kenneth arrow has challenged this assumption.64

Stone gives three reasons why there are limits to what we can achieve through law.

People in business need to acknowledge that obeying the law is not their only obligation because the law alone cannot guarantee responsible business behavior.

summary Corporations and the

people who make them up must have

high moral standards and monitor their own conduct because there are limits to what the law can do to ensure

that business behavior is socially and morally

acceptable.

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172 part two AmeriCAn Business And its BAsis

to begin with, says arrow, any kind of settled economic life requires a certain degree of ethical behavior, some element of trust and confidence. Much business, for instance, is conducted on the basis of oral agreements. in addition, arrow points out, “there are two types of situation in which the simple rule of maximizing profits is socially inefficient: the case in which costs are not paid for, as in pollution, and the case in which the seller has considerably more knowledge about his product than the buyer.”

The first type of situation relates to the demand that corporations “internalize their externalities,” discussed earlier in this chapter. in the second situation, in which the buyer lacks the expertise and knowledge of the seller, an effective moral code, either requiring full disclosure or setting minimal standards of performance (for example, the braking abil- ity of a new automobile), enhances rather than diminishes economic efficiency. without such a code, buyers may purchase products or services they don’t need. or because they don’t trust the seller, they may refrain from purchasing products and services they do need. either way, from the economist’s point of view the situation is inefficient.

an effective professional or business moral code—as well as the public’s awareness of this code—is good for business. Most of us, for example, have little medical knowledge and are thus at the mercy of doctors. over hundreds of years, however, a firm code of ethi- cal conduct has developed in the medical profession. as a result, people generally take for granted that their physician will perform with their welfare in mind. They rarely worry that their doctor might be taking advantage of them or exploiting them with unnecessary treat- ment. By contrast, used-car dealers have historically suffered from a lack of public trust.

for a code to be effective it must be realistic, arrow argues, in the sense of connect- ing with the collective self-interest of business. and it must become part of the corpo- rate culture, “accepted by the significant operating institutions and transmitted from one generation of executives to the next through standard operating procedures [and] through education in business schools.”

for both arrow and Stone, then, the development of feasible and effective busi- ness and professional codes of ethics must be a central focus of any effort to enhance or expand corporate responsibility. The question is how to create a corporate atmosphere conducive to moral decision making.

Corporate Moral CoDes

what can be done to improve organizational climate so individuals can reasonably be expected to act ethically? if those inside the corporation are to behave morally, they need clearly stated and communicated ethical standards that are equitable and enforced. This development seems possible only if the standards of expected behavior are institutionalized— that is, only if they become a fixture in the corporate organization. to institutionalize ethics within corporations, professor Milton Snoeyenbos suggests that top management should (1) articulate the firm’s values and goals, (2) adopt a moral code applicable to all members of the company, (3) set up a high-ranking ethics committee to oversee, develop, and enforce the code, and (4) incorporate ethics training into all employee-development programs.65

The company’s code of ethics should not be window dressing or so general as to be useless. a corporate moral code should set reasonable goals and subgoals, with an eye on blunting unethical pressures on subordinates. in formulating the code, the top-level ethics committee should solicit the views of corporate members at all levels regarding goals and subgoals, so that the final product articulates “a fine-grained

Ethics and efficiency aren’t necessarily in opposition. Normal

business activity requires some

degree of ethics, and focusing only on

profit maximization is socially inefficient in

two situations.

summary All settled economic life requires trust and

confidence. The adoption of realistic

and workable codes of ethics in the business

world can actually enhance business efficiency. This is

particularly true when there is an imbalance

of knowledge between the buyer and the

seller.

There are several steps companies

should take to institutionalize ethics.

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chapter five  CorporAtions      173

ethical code that addresses ethical issues likely to arise at the level of subgoals.”66 Moreover, the committee should have full authority and responsibility to com- municate the code and decisions based on it to all corporate members, clarify and interpret the code when the need arises, facilitate the code’s use, investigate grievances and violations of the code, discipline violators and reward compliance, and review, update, and upgrade the code.

to help employees in ethically difficult situations, a good corporate ethics program must be user friendly. it should provide a support system with a variety of entry points, one that employees feel confident about using.67 in addition, part of all employee- training programs should be devoted to ethics. at a minimum, this should include study of the code, review of the company’s procedures for handling ethical problems, and discussion of employer and employee responsibilities and expectations. Snoeyenbos and others believe that institutionalizing ethics within the corporation in these ways, when supplemented by the development of industry-wide codes of ethics to address issues beyond a particular firm, will go far toward establishing a corporate climate conducive to individual moral decision making.

Corporate Culture

During the past two decades, organizational theorists and writers on business manage- ment have increasingly emphasized “corporate culture” as the factor that makes one com- pany succeed while another languishes. although intangible in comparison with things like sales revenue and profit margin, corporate culture is often the key to a firm’s success. according to one study, 30 percent of the difference in performance between companies can be attributed to differences in culture, but only 5 percent to differences in strategy.68

what is corporate culture? one writer puts it this way: “culture is the pattern of shared values and beliefs that gives members of an institution meaning and provides them with rules for behavior in their organization.”69 a fuller definition is given by another writer, who describes corporate culture as “a general constellation of beliefs, mores, customs, value systems and behavioral norms, and ways of doing business that are unique to each corporation, that set a pattern for corporate activities and actions, and that describe the implicit and emergent patterns of behavior and emotions character- izing life in the organization.”70 corporate culture may be both overt and implicit. The formal culture of a corporation, as expressed in idealized statements of principles and values, should also be distinguished from the informal culture that shapes the beliefs and behavior of individuals in the organization. in addition, there may be multiple and overlapping cultures within an organization because employees have different back- grounds, work in different divisions of the organization and even in different countries, and may be subject to different systems of rewards and sanctions.

organizational theorists emphasize the importance of monitoring and managing corporate culture—beginning with an attempt to understand each corporation’s distinc- tive culture—to prevent dysfunctional behavior and processes. as one consultant puts it, “a corporation’s culture is what determines how people behave when they are not being watched.”71 if management does not make explicit the values and behavior it desires, the culture will typically develop its own norms, usually based on the types of behavior that lead to success within the organization. Thus, the desired values must be communicated and transmitted throughout the organization. conduct congruent with them must be

summary To improve

organizational climate so we can reasonably

expect individuals to act morally,

corporations need to institutionalize ethics. Among other things,

this involves articulating their values and goals, adopting a moral code, setting up an ethics committee, and including ethics

training in their employee-

development programs. Attention to

corporate culture is also crucial to the

successful institutionalization of

ethics inside an organization.

Management must pay attention to the values and behavior reinforced by its corporate culture.

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174 part two AmeriCAn Business And its BAsis

rewarded and conduct inconsistent with them sanctioned. overlooking behavior that contradicts the desired norms can have the effect of encouraging and even rewarding it.

william Donaldson, former chairman of the U.S. Securities and exchange commission, emphasizes the importance of ethical leadership, of the example set by upper management. “The tone is set at the top,” he says. “You must have an internal code that goes beyond the letter of the law to encompass the spirit of the company. Does that concept exist in all companies? No. all you have to do is look at executive compensation to recognize that we still have a long way to go.”72

These points are crucial when it comes to corporate social responsibility. Management needs to understand the real dynamics of its own organization. at Sears, for example, new minimum work quotas and productivity incentives at its auto cen- ters created a high-pressure environment that led employees to mislead customers and sell them unnecessary parts and services, from brake jobs to front-end alignments.73 at fannie Mae, an “earnings-at-any-cost culture” led to accounting fraud.74 Thus, it is necessary for socially responsible executives to ask: how do people get ahead in the company? what conduct is actually rewarded, what values are really being instilled in employees? andrew c. Sigler, chairman of champion international, stresses this point: “Sitting up here in Stamford, there’s no way i can affect what an employee is doing today in texas, Montana, or Maine. Making speeches and sending letters just doesn’t do it. You need a culture and peer pressure that spells out what is acceptable and isn’t and why. it involves training, education, and follow-up.”75

internal or external corporate responsibility audits can help close the gap between stated values, goals, and mission, on the one hand, and reality on the other.76 another aspect of follow-up is strict enforcement. for example, chemical Bank terminates employees for violating the company’s code of ethics even if they do nothing illegal, and Xerox dismisses people for minor manipulation of records and the padding of expense accounts. (By contrast, some of the nation’s most prestigious stock brokerage firms have employed salespeople with long records of violating securities laws.77) in a recent but typical year, General electric investigated 1,338 cases in which concerns had been raised internally about employee integrity. it dismissed 125 employees and took disciplinary action against 243 others for legal or ethical violations.78 executives at both Xerox and General Mills also emphasize that civic involvement is a crucial part of corporate ethics. as one General Mills executive puts it: “it’s hard to imagine that a person who reads to the blind at night would cheat. . . . ”79

Johnson & Johnson is widely seen as a model of corporate responsibility, especially because of its decisive handling of the tylenol crisis of 1982, when seven people in the chicago area died from cyanide-laced extra-Strength tylenol capsules. The company immediately recalled 31 million bottles of tylenol from store shelves across the nation and notified 500,000 doctors and hospitals about the contaminated capsules. a toll-free consumer hotline was set up the first week of the crisis, and consumers were offered the opportunity to replace tylenol capsules with a free bottle of tylenol tablets. Johnson & Johnson was also open with the public instead of being defensive about the deaths. accurate information was promptly released, and domestic employees and retirees were kept updated on developments. The chairman of the company appeared on the talk show Donahue and on 60 Minutes to answer questions about the crisis, and other executives were interviewed by Fortune and the Wall Street Journal.

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chapter five  CorporAtions      175

Despite the setback—the recall alone cost Johnson & Johnson $50 million after taxes—tylenol rebounded within a year, in large part because the public never lost faith in Johnson & Johnson. Despite this happy ending, many companies fail to emulate Johnson & Johnson’s example. a case in point is the rc2 corporation, which makes Thomas the tank engine and other toy trains. in 2007, the public learned that many of the company’s trains were made with lead paint, which can cause brain damage if a child ingests it. rc2, however, declined to issue refunds to unhappy parents but asked them to return the affected toys—at their own expense—in order to receive replacement trains and a free bonus gift. Unbelievable as it may seem, one of the toy trains that rc2 mailed out as a gift (a gray boxcar called toad) was also made with lead paint. even worse, rc2 executives hid from public view throughout this whole sorry episode, never explaining why their safety checks had failed or why they deserved to be trusted in the future.80

in the case of Johnson & Johnson, the company credits its seventy-year-old, one- page statement of values, known as the credo, with enabling it to build the employee trust necessary for maintaining a firm corporate value system. The credo acknowledges the company’s need to make a sound profit while addressing its obligations to provide a quality product, to treat its employees fairly and with respect, and to be a good corpo- rate citizen, supporting the community of which it is a member. The credo is “the most important thing we have in this company,” says chairman ralph Larsen.

creating and maintaining a morally sound corporate culture is an ongoing task, and even Johnson & Johnson hasn’t always been able to live up to its own values. for instance, the company had to pay $7.5 million in fines and costs after admitting that wayward employees had shredded papers to hinder a federal probe into the marketing of an acne cream. “There was no excuse,” admits Larsen. “But it is a huge undertaking to spread our values around the world.”81

Maurice Hank Greenberg was the cEo of American International Group (AIG), a long-prosperous and respected insurance company, when it suddenly collapsed. AIG was said to have fostered a corporate culture that accepted excessive risk. But is corporate culture alone capable of bringing down a company like AIG?

AP P

ho to

/L ou

is La

nz an

o

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176 part two AmeriCAn Business And its BAsis

s t u d y C o r n e r Key terms and concepts

broader view of corporate responsibility

business-can’t-handle-it argument

CID structures corporate culture corporate moral agency corporate moral code

corporate punishment corporation diffusion of responsibility externalities fiduciary responsibility invisible-hand argument let-government-do-it

argument

limited liability narrow view of corporate

responsibility privately held company publicly held company social entity (stakeholder)

model stockholders

points to review

• three ways corporations differ from partnerships (p. 152)

• privately held versus publicly held companies (p. 152)

• historical evolution of the corporation (pp. 152–153)

• two theoretical shifts that led to the relaxing of incorpora- tion procedures (pp. 153–154)

• significance of the Supreme Court’s Citizens United decision (p. 154)

• whether the CID structure is compatible with, or rules out, corporate moral responsibility (pp. 155–156)

• the concept of corporate punishment (p. 156)

• problem of vanishing individual responsibility and two responses to it (pp. 156–157)

• Milton Friedman’s view of corporate responsibility (pp. 158–159)

• Melvin Anshen’s idea of a social contract between business and society (p. 161)

• how both fairness and economics support the internalizing of externalities (pp. 161–162)

• whether shareholders control the corporation (pp. 163–164)

• criticisms of the invisible-hand argument (pp. 165–166)

• difference between the let-government-do-it and the invisible-hand arguments (p. 167)

• two versions of the business-can’t-handle-it argument (pp. 167–169)

• four things companies can do to become more socially responsible (pp. 169–170)

• three limits to what we can expect the law to do (p. 171)

• two situations in which the rule of maximizing profits is socially inefficient (p. 172)

• what top management should do to institutionalize ethics inside the company (p. 172)

• the importance of creating a morally oriented corporate culture (pp. 173–175)

For Further reFLection

1. Are corporations moral agents? Do they have moral responsibilities? Or, in your view, do only human beings have moral agency and moral obligations?

2. Which view of corporate social responsibility—the narrow or the broad—do you favor, and why?

3. What do you think companies should do to make themselves more moral organizations? How can they promote a healthy moral climate inside the company?

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chapter five  CorporAtions      177

shi tao is a thirty-seven-year-oLd chinese

journalist and democracy advocate. Arrested for leaking state secrets in 2005, he was sentenced to ten years in prison. His crime? Mr. Shi had disclosed that the Communist Party’s propaganda department had ordered tight controls for handling the anniversary of the infamous June 4, 1989, crackdown on demonstrators in Beijing’s Tiananmen Square. A sad story, for sure, but it’s an all too familiar one, given China’s notoriously poor record on human rights. What makes Mr. Shi’s case stand out, however, is the fact that he was arrested and convicted only because the American com- pany Yahoo! revealed his identity to Chinese authorities.82

You see, Mr. Shi had posted his information anonymously on a Chinese-language Website called Democracy Forum, which is based in New York. Chinese journalists say that Shi’s information, which revealed only routine instructions on how officials were to dampen possible protests, was already widely circulated. Still, the Chinese government’s elite State Security Bureau wanted to put its hands on the culprit behind the anonymous posting. And for that it needed Yahoo!’s help in tracking down the Internet address from which huoyan1989@ yahoo.com.cn had accessed his e-mail. This turned out to be a computer in Mr. Shi’s workplace, Contemporary Business News in Changsha, China.

A few months after Shi’s conviction, the watchdog group “Reporters Without Borders” revealed the story of Yahoo!’s involvement and embroiled the company in a squall of controversy. After initially declining to comment on the allegation, Yahoo! eventually admitted that it had helped Chinese authorities catch Mr. Shi and that it had supplied information on other customers as well. But the company claimed that it had no choice, that the information

was provided as part of a “legal process,” and that the company is obliged to obey the laws of any country in which it operates. Yahoo! co-founder, Jerry Yang, said: “I do not like the outcome of what happens with these things . . . but we have to comply with the law. That’s what you need to do in business.”

Some critics immediately spied a technical flaw in that argument: The information on Mr. Shi was provided by Yahoo!’s subsidiary in Hong Kong, which has an independent judiciary and a legal process separate from that of mainland China. Hong Kong legislation does not spell out what e-mail service providers must do when presented with a court order by mainland authorities. Commentators pointed out, however, that even if Yahoo! was legally obliged to reveal the informa- tion, there was a deeper question of principle involved. As the Financial Times put it in an editorial: “As a general principle, companies choosing to operate in a country should be pre- pared to obey its laws. When those laws are so reprehensible that conforming to them would be unethical, they should be ready to withdraw from that market.” Congressional repre- sentative Christopher H. Smith, a New Jersey Republican and chair of a House subcommittee on human rights, was even blunter: “This is about accommodating a dictatorship. It’s outrageous to be complicit in cracking down on dissenters.” And in an open letter to Jerry Yang, the Chinese dissident Liu Xiabo, who has himself suffered censorship, imprisonment, and other indignities, wrote: “I must tell you that my indigna- tion at and contempt for you and your company are not a bit less than my indignation and contempt for the Communist regime. . . . Profit makes you dull in morality. Did it ever occur to you that it is a shame for you to be considered a traitor to your customer Shi Tao?”

case 5.1

yahoo! in china

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178 part two AmeriCAn Business And its BAsis

Whether profit is dulling their morality is an issue that must be confronted not just by Yahoo! but also by other Internet-related companies doing business in China. Microsoft, for example, recently shut down the MSN Spaces Website of a popular Beijing blogger whose postings had run afoul of censors. Google has agreed to apply the Chinese censors’ blacklist to its new Chinese search engine. And a congressional investigative committee has accused Google, Yahoo!, and Cisco of helping to maintain in China “the most sophisticated Internet control system in the world.” In their defense, the companies ask what good it would do for them to pull out of the Chinese market. They contend that if they resist the Chinese government and their operations are closed down or if they choose to leave the country for moral reasons, they would only deny to ordinary Chinese whatever fresh air the Internet, even filtered and censored, can provide in a closed society. It’s more important for them to stay there, play ball with the government, and do what they can to push for Internet freedom. As Yahoo! chairman Terry S. Semel puts it: “Part of our role in any form of media is to get whatever we can into those countries and to show and to enable people, slowly, to see the Western way and what our culture is like, and to learn.” But critics wonder what these companies, when they are complicit in political repression, are teaching the Chinese about American values.

Some tech companies are turning to the U.S. government for help. Bill Gates, for example, thinks that legislation making it illegal for American companies to assist in the violation of human rights overseas would help. A carefully crafted American anti-repression law would give Yahoo! an answer the next time Chinese officials demand evidence against cyber-dissidents. We want to obey your laws, Yahoo! officials could say, but our hands are tied; we can’t break American law. The assumption is that China would have no choice but to accept this because it does not want to forgo the advan- tages of having U.S. tech companies operating there.

Still, this doesn’t answer the underlying moral questions. At a November 2007 congressional hearing, however, a number of lawmakers made their own moral views perfectly clear. They lambasted Yahoo!, describing the company as “spineless and irresponsible” and “moral pygmies.” In response, Jerry Yang apologized to the mother of Shi Tao,

who attended the hearing. Still, Yahoo! has its defenders. Robert Reich, for instance, argues that “Yahoo! is not a moral entity” and “its executives have only one responsibility . . . to make money for their shareholders and, along the way, satisfy their consumers.” And in this case, he thinks, the key “con- sumer” is the Chinese government.

update

How to deal with China continues to confound American internet companies. In January 2010, upset by the hacking of its servers by the Chinese government, which was trying to gain information about dissidents, and uneasy about continuing its complicity in Internet censorship, Google announced that it would withdraw from China altogether if it could not operate there without censorship. Two months later, after negotiations with Chinese authorities went nowhere, Google began automatically redirecting searches on its Chinese servers to its Hong Kong affiliate. Hong Kong has an independent legal system, and mainland Chinese censorship laws do not apply there. In response the Chinese government threatened to pull Google’s Internet license. The stalemate lasted until July of that year when Google replaced its automatic redirect from Google China to Google Hong Kong with a link to the latter, and signed a new licens- ing agreement that allows it to continue to operate in China but to deliver results only for searches about products and music and for some maps. One result is that the popular Chinese search engine Baidu, which complies fully with government censorship rules, has greatly increased its market share.

discussion Questions

1. What moral issues does this controversy raise? What obli- gations should Yahoo! have weighed in this situation? Was the company a “traitor” to its customer, as Liu Xiabo says?

2. In your view, was Yahoo! right or wrong to assist Chinese authorities? What would you have done if you were in charge of Yahoo!?

3. Is Jerry Yang correct that the company had “no choice”? Assuming that Yahoo! was legally required to do what it did, does that justify its conduct morally?

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chapter five  CorporAtions      179

4. Assess the actions of Yahoo! and of Microsoft, Google, and Cisco from the point of view of both the narrow and the broader views of corporate responsibility. What view of corporate responsibility do you think these compa- nies hold? Do you think they see themselves as acting in a morally legitimate and socially responsible way?

5. In light of this case, do you think it makes sense to talk of a corporation like Yahoo! as a moral agent, or is it only the people in it who can be properly described as having moral responsibility?

6. Would American companies do more good by refusing to cooperate with Chinese authorities (and risk not being able to do business in China) or by cooperating and working gradually to spread Internet freedom? In general, under what circumstances is it permissible for a company to operate in a repressive country or do business with a dictatorial regime?

7. Assess the pros and cons of a law forbidding American high-tech companies from assisting repressive foreign governments.

everyone Knows how high the cost oF

prescription medicines is these days, and many Americans dislike having to pay significantly more than Canadians or Europeans do for the very same drugs. Many of them also resent the huge profit margins that drug companies enjoy in comparison with other U.S. corporations. Year after year, for over two decades the drug industry has been far and away the most profitable sector of our economy. However, many people are also inclined to accept high prices as the cost we must bear for drug research and the development of new medicines. But, in fact, the prices drug companies charge bear little relationship to the cost of making or developing them, and those prices could be cut dramatically without coming close to threatening their R&D budgets. Less than 15 percent of the sales revenue of the large pharmaceutical companies goes into R&D, half what they spend on “marketing and administration.”83

Moreover, the pharmaceutical industry is nowhere near as innovative as most people think. According to Marcia Angell, former editor in chief of the New England Journal of Medicine, only a handful of important drugs have been brought to the market in recent years, and they were based mostly on tax- payer-funded research. She writes, “The great majority of ‘new drugs’ are not new at all but merely variations on older drugs already on the market. These are called ‘me-too’ drugs. The idea is to grab a share of an established, lucrative market by producing something very similar to a top-selling drug.” This is made possible by the fact that the FDA will generally approve a drug if it is better than a placebo. “It needn’t be better than an older drug,” Angell says. “In fact it may be worse. There is no way of knowing, since companies do not test their drugs against older ones for the same conditions at equivalent doses.” Of the seventy-eight drugs approved by the FDA in a recent year, only seventeen contained new active ingredients, and the FDA classified only seven of those as

case 5.2

drug dilemmas

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180 part two AmeriCAn Business And its BAsis

improvements over older drugs. And none of those seven came from a major U.S. drug company.

When it comes to research and innovation, the record of the big, profitable pharmaceutical corporations contrasts poorly with that of the small biotechnology companies that are responsible for most of today’s medical advances. CV Therapeutics of Palo Alto, California, is one such company. Founded by cardiologist Louis G. Lange, it has developed a new drug, ranolazine, which promises to be the first new treatment for angina in over twenty-five years. The Journal of the American Medical Association has praised ranolazine as helping patients for whom standard therapies have failed. But this medical breakthrough has brought an ethical dilemma with it. Patients in Russia and Eastern Europe constituted 60 percent of the one thousand or so test subjects involved in the studies that enabled CV Therapeutics to develop the drug. Now that the drug is ready, does the company have a moral obligation to make its drug available to them?

Other drug companies today are struggling with the same dilemma. They frequently test experimental drugs overseas, where there is less red tape and both doctors and patients are keen to participate in the tests. In Russia, for example, doctors are eager for the money they can get as study monitors, traveling to medical offices to make sure protocols are being followed. They also receive medical equipment such as tread- mills for exercise testing. For their part, patients see it as a chance to get medications that they cannot afford to buy and that their government doesn’t pay for. Moreover, says Richard Leach, the American business manager of a company called Russian Clinical Trials, “Eastern European and Russian people tend to be very compliant. . . . They will follow the trial and they will do whatever is asked. If they have to keep a diary, they do it. If they have to make office visits, they do it.”

With at least 40 percent of drug testing now done off- shore, critics worry that drug companies are exploiting their human subjects. In the United States and other well-to-do countries, experimental subjects must be given full informa- tion about the nature of the research, and they have a right to refuse to participate without penalty or consequence for their usual health care. Not so in Africa and many poor regions, where doctors profit from enrolling their patients, and local officials sometimes encourage whole villages or provinces to

enroll in research programs. Conducting research overseas not only saves drug companies money, but it also circum- vents FDA restrictions, which require companies to gain its approval before human testing in the United States can begin. The FDA obliges companies to describe their proposed research in detail and to file plans for guaranteeing informed consent and for monitoring the progress of the study. They must set up a review board to monitor each clinical trial and to ensure that risks to human subjects are “reasonable in relation to anticipated benefits, if any, to subjects, and the importance of the knowledge that may reasonably be expected to result.” In addition, all risk must be “minimized.”

Requirements for foreign research are much looser, and there is very little oversight. “Companies can conduct prelimi- nary studies of drugs in poorer countries before formal test- ing even begins,” writes Marcia Angell. “Quite literally, the participants are used as guinea pigs, subjects of research that really should be done on experimental animals.” And when it comes to formal testing, the FDA may not learn about it until the company applies for final approval of its new drug.

These moral issues, however, are not the concern of com- panies like Russian Clinical Trials. Nor do they see it as their business to ask what happens when the studies end. Dr. Alan Wood, general manager of Covance, another American firm that conducts medical trials in Eastern Europe, says quite plainly, “What our clients do is not our affair.”

But what about the drug companies themselves? What, if anything, do they owe overseas test subjects when their new drugs pan out? Some companies never even sell their drugs in the poor countries where they were developed. Others do, but often there are few patients who can afford them. “This is something that the biotech industry, as it devel- ops more and more drugs, will have to come to grips with,” says Carl B. Feldbaum, president of the Biotechnology Industry Organization. “It’s not that we are lacking compassion, but the economics are tough.”

“Do we have an obligation to everyone in the trial or to everyone in the community, the province, the nation, the region, or the world?” asks Dr. Ruth Faden, director of the Berman Bioethics Institute at Johns Hopkins University. “We  really haven’t figured this out.” She acknowledges, though, that “many physician investigators feel uncomfortable

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chapter five  CorporAtions      181

with the idea of using patients in studies and then not being able to continue to help them when the trial ends.” We seem “to have hit a wall of moral unease,” she says. “I’m not sure exactly where we ought to end up.”

Dr. Lawrence O. Goskin, director of the Center for Law and the Public’s Health at Georgetown and Johns Hopkins Universities, is also troubled. Drug companies, he says, should not be seen as “the deep pocket that helps every- one,” yet there is something disturbing about “parachute research,” in which a company drops into a country, con- ducts its drug research, and then leaves. “It raises the ques- tion of what ethical obligation, if any, there might be to give back and make sure there is access to the drug after the tri- als are over.”

Drug companies are businesses, of course, and they have to decide whether they can earn enough money in a foreign country to justify applying for approval to market a new drug there, then setting up a business office, and hiring a sales force. Even if they decide to provide the drug to patients free of charge—so-called compassionate use—things are not so simple. They still have to set up a distribution system, train doctors to administer the drug, and monitor the patients who take it. In the case of life-saving drugs, such as those for combating AIDS, many companies do, in fact, provide them for free or at low cost in poor countries, especially to patients who were involved in their development. But with a drug like ranolazine it’s more complicated. Angina can cause terrible, crushing chest pains, and it can make the lives of chronic suffers miserable. Ranolazine can cut in half the number of angina attacks a patient suffers, but it’s not a life-saving drug. It improves the quality of patients’ lives, but it doesn’t extend them.

Dr. Lange, meanwhile, is torn. His company is not a char- ity, and because CV Therapeutics is small, it can’t afford to market ranolazine in countries where few people have

enough money to buy it or to set up the distribution systems necessary to give it away. “We’re not Merck,” he says. “But we’re concerned.”

discussion Questions

1. What explains the high price of prescription medicines in the United States? What if anything should be done about it? Do you believe that in the United States drug prices reflect the operation of a fair and competitive market?

2. Given the nature of their product, do pharmaceutical companies have ethical responsibilities that other corpo- rations don’t have? In your view, are the large U.S. drug companies good corporate citizens?

3. Are the large drug companies guilty of price gouging or of charging an unfair or exploitative price for their products? Should Americans be permitted to import drugs from Canada or other countries?

4. Assess the motivations of drug companies that do their testing overseas. Do you think test subjects are being exploited or taken advantage of? Under what circumstances, if any, are companies morally justified in testing overseas?

5. Do drug companies have an obligation to make new drugs available to patients who were involved in their develop- ment, either here or overseas? Does the size of the com- pany make a difference? What would you do if you were Dr. Lange? What obligations, ideals, and consequences should he take into account?

6. Is it ethical for companies to decline to sell a useful drug like ranolazine in a poor country because they can make more money marketing it elsewhere?

7. When it comes to life-saving drugs, do pharmaceutical companies have a moral obligation to make them avail- able in poor countries at little or no cost? Explain why or why not. What about effective but non-life-saving drugs like ranolazine?

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182 part two AmeriCAn Business And its BAsis

juveniLe manuFacturing oF san antonio, Texas, began making infants’ and children’s garments in a plant on South Zarzamora Street in 1923; in the 1930s, the company switched to boys’ and men’s clothing and changed its name to Santone Industries. During the 1970s, Santone manufactured sports jackets for Levi Strauss & Co., which eventually decided to buy out the company. In 1981, Levi Strauss paid $10 million and took over operations on South Zarzamora Street.84

Although the garment industry had been struggling in some parts of the country, it had prospered in San Antonio— not least on South Zarzamora Street. One of three Levi’s plants in the city, the plant was slowly converted in the late 1980s from making sports jackets to manufacturing the company’s popular Dockers trousers, which had surpassed Levi’s 501 jeans as the firm’s top-selling line. And despite the sweatshop image that the industry brings to people’s minds, many of San Antonio’s semiskilled workers were happy to be employed at Levi Strauss. They thought that pay at the plant was good. Benefits were respectable, too: paid maternity leave for qualified employees, health insurance, and ten days of paid vacation at Christmas and ten during the summer.

Then in 1990, Levi Strauss decided to close the plant— the largest layoff in San Antonio’s history—and move its operations to Costa Rica and the Dominican Republic. This was the course of action that had been recommended the previous year by Bruce Stallworth, the firm’s operations con- troller. Closing the plant would cost $13.5 million, Stallworth calculated, but transferring its production abroad would “achieve significant cost savings,” enabling the company to recover its closing costs within two years. In 1989, it cost $6.70 to make a pair of Dockers at the South Zarzamora

plant. Plant management had hoped to reduce that to $6.39 per unit in 1990, but even that would be significantly higher than the per unit cost of $5.88 at the Dockers plant in Powell, Tennessee—not to mention the $3.76 per unit cost Levi Strauss could get by using third-world contractors.

Stallworth attributed the San Antonio plant’s high costs to workers’ compensation expenses, to less-than-full-capacity plant operation, and to the fact that “conversion from sports coats to Dockers has not been totally successful.” Retraining workers who have spent years sewing jackets to sew trou- sers, it seems, is not very easy. Furthermore, running the San Antonio plant efficiently would mean running it at full capacity, but operating at full capacity on South Zarzamora Street with 1,115 workers—compared with 366 and 746 employees, respectively, at the company’s other two U.S. Dockers plants—meant too many pairs of trousers produced by high- priced American labor. Workers at San Antonio averaged $6 an hour, which was about a day’s pay in the Caribbean and Central America for workers with the same level of skill.

Bob Dunn, Levi Strauss vice president of community affairs and corporate communications, denies that the com- pany did anything it shouldn’t have done with regard to clos- ing the plant. “We didn’t see any way to bring costs in line.” And he adds: “As much as people like Dockers, our research shows people are not willing to pay $5 or $10 more for a pair of pants just because the label says ‘Made in the U.S.A.’”

Closing plants is nothing new for Levi Strauss. Before closing South Zarzamora Street, it had already closed twenty-five plants and shifted the work overseas, either to its foreign production plants or to overseas contractors. Using overseas contractors saves the firm even more money, because in addition to paying lower wages, the

case 5.3

Levi strauss at home and abroad

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chapter five  CorporAtions      183

company avoids paying directly for benefits like health insurance and workers’ compensation. This time, though, the company’s decision to close a domestic plant and move its production abroad prompted local labor activists to fight back. They filed a class-action lawsuit and organ- ized a boycott of Levi’s products.

The boycott, however, gained little publicity outside San Antonio, and the lawsuit fizzled out. Neither seems to have dampened sales, but they embarrassed the company, which donated nearly $100,000 to help local agencies retrain its former employees and gave San Antonio an additional $340,000 to provide them with extra job counseling and training services.

Most politicians kept a low profile on the issue, praising Levi Strauss for offering its workers more than was legally required and promising to try to recruit a new company to use the empty factory. U.S. Representative Henry B. Gonzales, however, spoke out harshly: “When a company is so irresponsible—a company that has been making money and then willy-nilly removes a plant to get further

profit based on greed and cheaper labor costs in the Caribbean—I say you have a bad citizen for a company.”

To this, Bob Dunn responded, “Our sense is we do more than anyone in our industry and more than almost anyone in American industry.” He was proud of the way Levi Strauss treated people when it closed plants. “We try to stress the right values,” he said. “It’s not easy. There isn’t always one right answer.”

Levi strauss in china

Dunn’s emphasis on values reflects the thinking of Levi Strauss’s Robert D. Haas, CEO until 1999, now chairman of its board. Ever since he organized a successful leveraged buyout of the company, Haas has tried to create a more val- ues-centered management at Levi Strauss by emphasizing social responsibility and employee rights. A year after the closure on South Zarzamora Street, the company’s values- centered management received a second blow when a con- tractor in the U.S. territory of Saipan was accused of virtually enslaving some of its Chinese workers. When the company learned the contractor was not paying the island’s legal

outsourcing has been increasing rapidly. Although American workers worry that it could affect their jobs, it seems to be an accepted business practice. is outsourcing likely to continue to spread or to level off and eventually decrease?

Da vid

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/A la

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184 part two AmeriCAn Business And its BAsis

minimum wage, it fired him and formed a top-management committee to monitor its overseas contractors. Levi Strauss then went on to become the first multinational to adopt guide- lines for its hired factories. The first part of its “Global Sourcing Guidelines” covers the treatment of workers and the environmental impact of production; the second part sets out the company’s standards for choosing the countries in which it will do business.

As a result of its guidelines, Levi Strauss stopped all pro- duction in China because of human rights abuses and sys- temic mistreatment of labor. For instance, in a factory in Shenzhen, women sew for twelve hours a day plus overtime and receive only two days off a month. They have no health care and no compensation for injury (although Chinese legis- lation requires this). Their pay is often below the legal mini- mum of 12 cents an hour. Back home in San Francisco, the decision to pull out of China caused a fiery debate within the company. Because Chinese labor is so cheap, a committee had recommended that the company stay in China and work to make things better, but Haas decided to withdraw from China altogether. With an annual revenue of $ 6.5 billion, Levi Strauss is the largest clothing company in the world, and because it has no direct investment in China, it could afford to pull out. But some business analysts worried that in the long run the company would be sacrificing a great deal by leaving China. China is the world’s fastest-growing economy, and some predict that it will be the world’s largest economy in twenty years.

Many people praised Levi Strauss’s decision, but it dumb- founded some companies. At Nike, one executive said, “I can’t figure it out. I have no idea what Levi’s is doing.” Nike was still having trouble figuring it out when the cartoon strip Doonesbury began pummeling the athletic footwear company for having its products made in sweatshops in Vietnam. Cheap Asian labor is a high priority for Nike’s top executive Philip Knight, and his company has long favored places like Indonesia and China, where pay is poor and labor unions are suppressed. In Indonesia, the women who work at the sweat- shops of Nike contractors make $2.20 a day, and it took four years of violent struggle to get the minimum wage raised that

high. Now Nike has moved into Vietnam, where labor costs are cheaper yet. At one Nike plant in Vietnam, investigators found that employees worked sixty-five hours a week—more than Vietnamese law allows—for a weekly wage of $10 and that 77 percent of them suffered respiratory problems from breathing chemical fumes at work.

By contrast, Levi Strauss believes that a growing number of its customers shun products made in sweatshops. Consumers “don’t want to buy a shirt made by children in Bangladesh or forced labor in China,” says one industry observer. The firm’s top management also believes that Levi Strauss is emblematic of American culture and that its mildly anti-establishment image must be guarded. “Anyone seeking to protect their brand and company reputation will realize these policies make sense,” says Bob Dunn, who helped design the company’s overseas guidelines. For this reason, some critics do not charge that Levi Strauss was foolish to leave China, but rather that its decision was dictated only by bottom-line profitability—that it was a publicity stunt aimed at attracting more customers.

But the team of inspectors that Levi Strauss has moni- toring its contractors is a reality, not a publicity stunt. They regularly visit factories and are prepared to fire violators of the company’s guidelines—such as the factory operator who was strip-searching female workers to determine whether they were, as they claimed, menstruating and thus, according to local Muslim law, entitled to a day off with pay. The firm has also pulled out of Myanmar because of human rights abuses in that country. The company is sensitive to local mores, however, and its first goal is not to boycott countries or cancel contracts. In Bangladesh, its inspectors discovered that a contractor was employing children under the age of fourteen—something that is legal there but contrary to Levi Strauss guidelines. The company didn’t want the children discharged, which would have hurt the families who were dependent on their income, but it didn’t want the children working, either. So Levi Strauss devised a solution: Younger children would be paid while attending school and would be offered full-time jobs when they turned fourteen.

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chapter five  CorporAtions      185

six years Later

Six years after withdrawing from China because of human rights violations, Levi Strauss reported in April 1998 that it would resume manufacturing its clothing there. The com- pany denied that its decision was related to its having just closed several U.S. plants, but the reversal of its China policy provoked an outcry among human rights groups, who accused Levi Strauss of putting profits before its self-pro- claimed concern for workers. The company’s critics pointed to a National Labor Committee report that found gross labor violations in twenty-one Chinese factories. These include forced overtime (sometimes amounting to a workweek of ninety-six hours), wages as low as 13 cents per hour, and restrictions on workers’ freedom to assemble. And the U.S. State Department declared that it had not detected any “appreciable” improvement in China’s human rights record during that period. Executives at Levi Strauss responded, however, that it is now possible for the company to operate in China while adhering to its corporate code of conduct. Unlike before, it now has contracting partners who are willing and able to adhere to its code, and improvements in the compa- ny’s monitoring system enable it to prevent abuses at its own factories.

For its part, Nike has begun to see the light of social responsibility. Bowing to pressure from its critics, the com- pany has now pledged to root out underage workers and to require overseas manufacturers of its wares to meet strict U.S. health and safety standards. It also agreed to allow out- siders from labor and human rights groups to join the auditors who inspect Nike’s Asian factories—a demand the company had long resisted. Nike CEO Knight acknowledged the public- relations problem facing his company, which stood accused, he said, of having “single-handedly lowered the human rights standard for the sole purpose of maximizing profits.” Nike had “become synonymous with slave wages, forced overtime and arbitrary abuse.” But, Knight continued, “I believe that the American consumer does not want to buy products made in abusive conditions.” He did not, however, pledge to increase wages.

meanwhile, Back home . . .

Levi Strauss, which in the early 1980s had fifty U.S. plants, has now abandoned all American production. In 2003, it shut the historic ninety-six-year-old San Francisco factory that made its 501 jeans, and in 2004 it stopped production at its only remaining North American operations: three man- ufacturing plants in Canada and two sewing and finishing plants in San Antonio. The company still owns eight manu- facturing plants outside the United States, but it is expected to close those eventually as well. “The closures are an absolutely necessary part of ensuring the long-term com- petitiveness of our business,” said Julie Klee, a Levi Strauss general manager. “Moving away from owned-and-operated manufacturing to a broader sourcing base will strengthen our business by giving us much more flexibility.” Levi’s Robert Haas added that the closures were inevitable. The company had invested tens of millions of dollars in auto- mated equipment, training, and incentives to keep domestic plants competitive enough to offset the overseas wage dif- ferential, but it was not enough, he said. “We’ve resisted all of the pressures that have been on us to close plants. As you know, we are one of the very last major companies that has any kind of manufacturing presence in North America anymore. . . . Belatedly and reluctantly, we’re having to fol- low in the footsteps of other apparel manufacturers” and shift work overseas.

However, to help its displaced workers, Levi Strauss gave them eight months’ notice of the layoff, instead of the two months required by law, and provided them with three weeks’ severance pay per year of service. Levi Strauss also offered displaced workers up to $6,000 each to help them make the transition into new fields. The money was to be used for job training, community college education, English-language les- sons, moving expenses, or setting up a small business. “We can’