Transcript The Context of Business Ethics:Economies and

The Context of Business Ethics:
Economies and
Organizations
Conditions of Capitalism
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Property is privately owned, protected by law.
Investors earn rewards (profit) for placing their
capital at risk.
There is free and fair competition among suppliers
of goods and services in pursuit of profit.
There is free and full information so that both
investors and customers can make informed
market decisions.
Prices fully reflect costs + profit and are also highly
responsive to supply and demand.
Sources of Social Control
(Types of Power)
How are people persuaded?
 Coercive power – use or threat of use of
force
 Economic power – use of material incentives,
rewards, punishments
 Normative or symbolic power – use of
symbols, arguments, language
Levels of Social Control
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Institutional (e.g., government, education,
economy, religion, family)
Inter-organizational (e.g., voluntary industry
self-regulation)
Organizational (e.g., policies & procedures)
Group (e.g., praise, blame, acceptance…)
Individual (e.g., conscience, values, reason)
Is There Room for Ethics in
Capitalism?
In The Theory of Moral Sentiments, Adam
Smith wrote: "How selfish soever man may
be supposed, there are evidently some
principles in his nature which interest him in
the fortune of others and render their
happiness necessary to him though he
derives nothing from it except the pleasure of
seeing it."
What’s your translation of this? What is Smith
talking about?
Some Economists Say: That’s Not the
Right Question!
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Kenneth J. Arrow – the price system can’t
work for all values.
Oliver Williamson – contracts are easier and
less costly if there’s trust and honesty in the
system.
Amartya Sen – only a fool would live in an
economy without trust and honesty!
Kenneth Arrow:
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tension between individual and societal
wants/needs.
tension between desired ends (values) and
available means (opportunities).
Tensions require rational balancing.
Societies must have a system for resolving
conflict over wants and needs, and over
resource distribution.
(Otherwise, force always wins.)
Does Price Help?
As a regulatory and conflict resolution
device, the price system has benefits:
 it allocates resources efficiently
 it requires little knowledge of people.
 it yields a sense of individual freedom.
Price Has Drawbacks
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makes a virtue of selfishness.
fails with things that cannot be priced.
cannot define what particular allocation is
"better."
Efficient allocation creates conflict among
individuals.
it doesn't work in government, or inside large
firms.
So, what else
do economies need?
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Distributive justice principles. Principles of
ethics are "invisible institutions" -agreements to supply mutual benefits and to
distribute them fairly.
Sympathy --ability to feel oneself to be in the
other one's place.
Core values: trust, loyalty, and truth-telling.
How does this happen?
These things are not commodities. If you have to buy
trust, do you really have it? Some other mechanism
is needed:
 Government? (has a monopoly on coercive power)
 Organizational structure/culture?
 Interpersonal pressures?
 Individual motivations and desires?
 Internal ethical values?
(Do these look like levels of social control??)
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Internalized ethical values tend to be the
most efficient means of "social control.“
• Cooperation is necessary to achieve
specialization of function.
• Ethical principles lead to compromises
between individual & societal needs & wants,
ensure that cooperation will happen, and
ensure that people will be in general
agreement about "the rules of the game."
OLIVER WILLIAMSON
ON THE CONTRACTING DIMENSIONS
OF TRUST AND INFORMATION
IN THE ECONOMY
Transactions costs economics
approach to ethics in business:
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The principal
The agent
The contract
The problem: how do principals make sure
that agents are meeting principals' interests,
and not just agents' interests?
Opportunism ….
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There tends to be opportunism, or moral
hazard, in the principal-agent relationship.
When there is little or no trust between agent
and principal, moral hazard leads to costly
comprehensive contracting as each tries to
pin down every possible way that one could
cheat the other.
Monitoring agents' behavior is cumbersome
and expensive, and tends to be ineffective.
Trust changes this picture
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When there is trust, agent and principal are
more likely to have general clause
contracting, relying on a few core principles
of behavior and trusting that each will abide
by them.
Trust and honesty in the system make
transactions easier, less costly.
Thus, the economy works better--more
efficiently-- if there is trust and honesty in the
system.
Here are Williamson’s variables:
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Bounded rationality -- decision making with
limited knowledge, and
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Opportunism or moral hazard -- the chance
to get away with breaking the rules and
gaining from it.
Bounded Rationality is
ABSENT
(We know everything ...
or think we do.)
Bounded Rationality is
PRESENT
(We don't and/or can't
know everything.)
Opportunism is
ABSENT
(we can't get away
with anything)
"BLISS"
(wouldn't it be heaven?)
GENERAL CLAUSE
CONTRACTING
(it's enough to have a core set
of values, because
everybody enforces
them)
Opportunism is
PRESENT
(we can benefit by breaking
rules & not get caught)
COMPREHENSIVE
CONTRACTING
(let's try to anticipate every
possible loophole and
plug it . . . darn; missed
again.)
CONTRACTUAL
CONFUSION
(nobody enforces the rules, so
people get away with
stuff.)
Amartya Sen:
No one but a fool would cooperate in a
system where there was no trust, loyalty, or
honesty!
Williamson concludes:
Trust is always a more efficient and less
costly way to enforce contracts.