Ethics-Quiz 2 - Notes from lectures for second quiz PDF

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Notes from lectures for second quiz...

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Ethics-Quiz 2 Lecture Notes:

● Mercantilism: built around exports and trade, maximum exports and minimum imports ● Capitalism: built around competition and productivity Morality and the Capitalist Market Theory Adam Smith theorizes capitalism ● The social form in which private capital is organized in an ad hoc fashion by the exchange relationships between desire-satisfying consumers and wealth-seeking producers Adam Smith ● Original theorist ● 18th-century Scottish thinker ● Moral philosopher Milton Friedman ● Theorizes free-market capitalism: version of capitalism that emphasizes the minimal government intervention, a light regulatory framework, and individual decision making Big Question they are answering: ● How can we produce most efficiently the stuff that people want? ○ This is a model that begins with scarcity and asks: how can we make the most of the limited goods that we have? ○ Doing this, with ever greater efficiency, is the key to creating wealth, which improves human welfare ○ Key ingredients to this answer ★ Self-interested competition ★ The division of labor ★ Transparent, demand-based pricing Adam Smith ● The wealth of nations (most well known for) ● Written to outline a new approach to economic thinking in the declining era of mercantilism, an economic theory focused on maximizing a nation’s exports in order to maximize the ‘trade imbalance’ between one’s own nation and others ● As many goods as possible going out; as much gold and silver going back ● Assumed a static level of wealth in the economy which has actually been, up until roughly around the time of Adam Smith, and accurate economic assumption ● We take economic growth for granted today, so it’s easy to imagine that it’s a ‘natural law of society’: economies tend to grow ● Except, for the vast majority of human history, economies have not grown

● According to Thomas Piketty, the average annual economic growth worldwide from 0 CE-1700CE was 0. Zero. Nada. ● For most of human history, growth of 2-7% a year would have seemed completely outrageous; incoherent Interdependent but complementary domains: ● Interdependent because the government depends on taxes, but the marketplace depends on the enforcement of rights Domain of market (private, free, open) ● Invisible hand: Factors of productions should be distributed in accordance with market forces Domain of rights (public, constrained by law) ● National Defence ● Justice system to enforce contracts and property rights ● Public education ● Public goods (transportation and infrastructure) ● Government protections: ○ Universal entitlements (rights)-> Free, Universal, Non-transferable Adam Smith’s Main Ingredients ● Self Interest ○ Individual pursuing his own self-interest is led by… “an invisible hand to promote an end which was no part of his intention ○ Self-interest+competition=invisible hand ○ Un-self aware ○ Adam Smith wants us to do business in a way that intends to help others unintentionally. ● Competition ○ Evolutionary rule of business ○ Obstructing competition is one of the ‘big sins’ of capitalism (ex. monopolies) ○ Laissez-faire: a policy or attitude of letting things take their own course, without interfering. ○ The capitalist ideal: multiple sellers meeting multiple buyers in free, transparent exchange ○ Price fixing-huge No-No because it obstructs competition, thus interfering with the market and natural pricing ● Efficiency

○ Market Mechanism: The buying and selling of goods in a market tends to optimize the distribution of those goods and services ○ Market mechanism of capitalism tends to promote internal corporate efficiency, and also supports high external efficiency ○ Minimal government intervention and light regulatory frameworks ● Division of Labor ○ The division of labor is the separation of tasks in any system so that participants may specialize. Individuals, organizations, and nations are endowed with or acquire specialized capabilities and either form combinations or trade to take advantage of the capabilities of others in addition to their own ○ The division of labor is the motive for trade and the source of economic interdependence. ○ Benefits: Efficiency, specialization, increased production ○ Limitations: ■ [the worker]… has no occasion to exert his understanding, or to exercise his invention… He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and as ignorant as it is possible for a human creature to become ● Pricing ○ It’s all about matching what customers want with what producers are willing to supply ○ Quantity and price are inversely related in most cases ○ The less scarce something is, the less valuable it is ○ The greater the demand, at a fixed supply, the greater the price ○ When the demand at a given supply point is much higher than the cost of producing more, someone will produce more to make a profit. ○ This will increase the supply and lower the price. ○ This process will tend to continue until an equilibrium is reached between the demand and supply, where the demand is set by consumer desire and the supply is set by the market incentive to produce more of a given good at a set price, given the profit available at that price. ○ Natural Price ■ Covers rent, wages and profit ■ Land/resources, labor, stock/capital ■ Minimum sustainable price ■ Adam made two points about natural price: ● 1. It is “precisely . . . what it is worth, or . . . what [a commodity] really costs the person who brings it to market” (I.viii.5) ● 2. It “is not always the lowest at which a dealer may sometimes sell his goods, it is the lowest at which he is likely to sell them for any considerable time”

○ Market Pricing limitations ■ Trade Secrets ■ Monopolies ■ Restraint of Trade ■ Market ■ Fluctuates ■ Supply and Demand ■ Assumes information ■ What does this ignore? Self Interest (Consumers and Producers) + Transparent Competition in a High-Efficiency Environment (internal and external) characterized by the Division of Labor à Market Pricing à Growth of social wealth = Becoming better together Adam Smith – Myths and Misconceptions ● Anti-government? ○ Adam Smith believed that "Government should limit its activities to administer justice, enforcing private property rights, and defending the nation against aggression” ● Pro-business? ○ Smith wanted to tear down the mercantilist system—a system of laws and regulations that were "pro-business," but that benefited only a privileged few—and replace it with a system of free and open markets that would redound to the benefit of all Milton Friedman ● ● ● ●

Offered a version of capitalism known as free-market, laissez-faire capitalism We are free to decide what we, as individuals, buy and sell from one another We—not the government—get to decide what we own and what we do with it. Emphasizes Two Conditions ○ Transparent Information ○ Voluntary Exchange ● Builds on Adam Smith’s domain of market and domain of rights

Milton Friedman Values ● Freedom From

○ Examples: government interference, poverty, warfare, coercion ● Freedom to ○ Examples: flourish, become wealthy, sacrifice for others, enter an exchange ● Famously, he claims: ○ Societies that place freedom over equality get a fair measure of both; societies that place equality over freedom get neither. ● Key Ideas ○ Friedman’s focus: freedom from (deception, fraud, coercion, regulation, collective decision making, etc.) ○ He seems to think that a society which maximizes freedom from will also maximize freedom to (decide for yourself, grow rich, be well, etc.) ● Agrees with Smith’s role for government ○ Explains the need for a limited government, whose role is to ■ Modify rules ■ Be a mediator ■ Be an enforcer Friedman – Free Market Transactions ● Must be LIVE ○ Legal – Must comply with the law; can’t be illegal ○ Information – Materially relevant information on both sides of a transaction; no misleading, deceptive, or fraudulent info ○ Voluntary Exchange – Both parties must be able to exercise freedom; no Illegal, monopolistic, or anti-competitive behavior Milton Friedman – Role of Government ● ● ● ● ●

The Market should promote Individual Values Should NOT be coercive and force collectivism Price system requires no central direction The government should promote Social Values In exceptional circumstances, it may need to force conformity to contribute to a general social purpose ● Examples of the role of government ○ Protecting the marketplace from the threat of terrorism/violence ○ Punishing corporate malfeasance (Deep Horizon accountability) Milton Friedman – Pros of Free Market ● Pros of the Free Market ○ Checks government power ○ Facilitates innovation ○ Protects from coercion & discrimination ○ Reduces societal strains

Milton Friedman – Corporate Social Responsibility (CSR) ● Corporate Social Responsibility is “subversive.” ● Corporate executives should not be able to “tax” stockholders for social programming. ● Social decisions are the domain of government, and social benefits ought to be conferred by the government through democratic means, not by corporations. ● It’s stealing; and, therefore, it’s taking away the freedom of owners to dispose of what is theirs ● Corporations are taking on the role of government: deciding how we collectively ought to allocate our shared wealth—but doing it undemocratically

Isaiah Berlin (Liberal Philosopher) ● Two Concepts of Liberty ○ If I had just one good choice, I don’t have options. Therefore, I may lack freedom from ‘coercion,’—if I really need the thing I’m buying—I have to pick a good choice. ○ Yet, if my choice is really the best one for me, does having any more choices increase my freedom to get exactly what I want and need? Aren’t I just as free to do what I want with one choice, which is exactly what I need, than I would with many? Equality vs Efficiency ● ●

Efficiency (domain of market) vs. Equality (the domain of rights/government) Individualism (market) vs Paternalism (Government)

Should the market determine morality? ● Market Efficiency & Economics: ○ This IS a philosophical approach ○ It places a premium on efficiency over other values ● Market Morality: Assumes that the activity of buying and selling does not diminish the value of the things being bought and sold.

● Intrinsic motivation can actually be undermined (or mocked) by offering extrinsic—monetary—compensation ● When people are engaged in an activity they consider intrinsically worthwhile, offering them money may weaken their motivation by depreciating or "crowding out" their intrinsic interest or commitment. ● The "crowding out" phenomenon has far-reaching implications for economics. It calls into question the use of market mechanisms and market reasoning in many aspects of social life, including the use of financial incentives to motivate performance in education, health care, the workplace, voluntary associations, civic life, and other settings in which intrinsic motivations or moral commitments matter ● Sometimes, ‘markets’ actually work better when they’re free (UK vs. US blood banks) ● Mazar: People are more motivated by Intrinsic vs. External motivation ● Sandel: extrinsic motivations (money) will corrode intrinsic behavior (altruism) Corporate Governance ● Corporate governance board and management: ○ Focuses on generating long-term shareholder value with highest integrity ○ No regulation can be a substitute for the voluntary adherence to these principles by corporate directors ● The formal system of accountability, oversight, and control, which helps to ensure ethically and socially responsible behavior within business organizations ● The “How” of ethical organizational culture ● The structural means for bringing and keeping a company in line with its own commitments—and the responsibilities it has towards those inside and outside of it. Three facets ○ Accountability ■ How closely workplace decisions align with a firm’s strategic direction ■ Alignment, checking the integrity ● Wells Fargo example: ensuring that whistleblowers were protected and their complaints seriously investigated (rather than having whistleblowers fired and their complaints swept under the rug) ○ Oversight ■ A system of checks and balances to minimize opportunities for misconduct ■ Maintenance, maintaining the integrity ■ Wells Fargo example: ensuring that cross-selling goals were set at a realistic level and running audits to ensure that people are hitting those goals using above-board sales tactics ○ Control ■ The process of auditing and improving organizational decisions and actions ■ Enforcement, enforcing integrity ■ In the aftermath of ethical breakdown, don’t simply scapegoat the front-line people: hold branch managers and higher up employees

accountable for failing to report and setting up perverse incentive structures ● Shareholder approach: Founded in free-market economic concepts, maximizing wealth for investors and owners ○ Stakeholder approach to responsibility: takes Smith’s capitalism and insists that we’re better off if we’re intentional about recognizing the self-interest of other selves through our own self interest

● Stakeholder approach: A broader view of the purpose of business and stakeholder management, includes satisfying concerns of primary stakeholders including employees, suppliers, regulators, communities, and special interest groups ● Flipping corporate responsibility: ○ Maybe we have responsibilities to organizations not just vice versa (because they are like machines or networks) ● Reciprocal corporate responsibility: Organizations don’t serve us and we don’t serve them, rather we collaborate with them and in them ○ Both we and the corporation discover our purpose this way ○ Companies are most like networks ○ Merck’s decision to develop Mectican: corporate responsibility and corporate irresponsibility ● Question for corporate responsibility: ○ Should companies be free to do things that probably will not contribute to the long term value returned by the company to shareholders? ■ Friedman: no ■ Freeman: yes (but there are good and bad ways of doing so) ○

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What do businesses owe to society? ■ Friedman- Competitively valued products, produced and delivered legally (without harm), transparently and freely ■ Freeman- Value for everyone (stakeholders), this value should reflect how the stakeholders interface with the company, always aims for the “win-win” in the who deserves what question What is the problem with CSR? ■ Friedman ● Its stealing from owners, its redistributing wealth non-democratically ● Corporation’s primary goal should be to maximize long-term shareholder value ● Self interest does not equal greed ■ Freeman ● It separates a business’ social responsibility from its economic one ● Businesses have a much larger responsibility to society than empowering individual owners

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Corps exercise their social responsibility through core business ops (not auxiliary philanthropy) The civil corporation: “good citizen”, build social and environmental objectives into its core business (even if it puts a company at a competitive disadvantage), leave something positive behind, eyeing future stakeholders as a priority The triple bottom line corporation: people profit planet, new accounting methods and standards Social enterprise: profit then reinvest profit into a social mission or cause, not a non-profit, applies traditional business approaches towards a social mission/cause Stakeholder approaches ○ Common attributes: current/future stakeholder needs addressed, go beyond narrowly defined profit maximization ○ Common critiques: measurement, evaluation, not the best means of economic growth

Readings:

“Market Reasoning as Moral Reasoning: Why Economists Should Re-engage with Political Philosophy” ● “Morality represents the way we would like the world to work and economics represents how it actually works” ● “Atkinson has recently observed that economics is a moral science” and that “efficiency only matters insofar as it makes society better off” ● “Atkinson calls for a revival of welfare economics that acknowledges the defects of utilitarianism and considers a broad range of distribution principles” ● The second reason to doubt that economics can be a value-free science of social choice is debated about commodification ○ Should sex be up for sale? Should we allow a free market for babies up for adoption? Etc. ○ Some of the uses of the market from the examples above would improve efficiency by enabling mutually advantageous exchanges ● One objection: severe inequality can undermine the voluntary character of an exchange ○ “In order to know whether a market choice is a free choice, we have to ask what inequalities in the background of society undermine meaningful consent” ● Second moral objection: the tendency of market practices to corrupt or crowd out non-market values worth caring about ● Waldfogel-->questions the rationality of gift-giving, he calculates the utility loss that results from people giving gifts rather than the cash equivalent ● Alvin Roth---> “repugnance as a constraint on markets” ● Charging admission to congressional hearings (line standing) ● Market Reasoning ○ Seems to offer a non-judgemental way of allocating goods ● “Fines register moral disapproval, whereas fees are simply prices that imply no moral judgment” ● Crowding out non-market norms

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○ “Financial incentives and other market mechanisms can backfire by crowding out nonmarket norms Gneezy and Rustichini-->research concluded that “if you are going to use financial incentives to motivate people you should pay enough or don’t pay at all” ○ The introduction of market norms displaced their moral and civic commitment Fred Hirsch---> “Commercialization effect” ○ Introduction of market incentives and mechanisms can change people’s attitudes and crowd out nonmarket values ○ Intrinsic motivations (such as moral conviction or interest in the task at hand) and external ones (such as money or other tangible rewards) ○ When people are engaged in an activity they consider intrinsically worthwhile, offering them money may weaken their motivation by depreciating or “crowding out” their intrinsic interest or commitment Titmus--->Blood donations example ○ Turning blood into an economic commodity eroded people’s sense of obligation to donate blood, diminished the spirit of altruism and undermined the “gift relationship” as an active feature of social life The assumption that subjecting a good to market exchange does not alter its meaning’ the other is the claim that virtue is a commodity that is depleted with use

“A Stakeholder Approach to Strategic Management” ● Derives from the idea of separation theory: that business and ethics/society are separate from each other ● Takes the idea of the stakeholder approach and combines the two sectors into one ● Stakeholder management: understanding the ideas of stakeholders best interest to operate as opposed to strictly profit motivated ● Need to take into account the interests of all shareholders, employees, customers, suppliers, lenders, and society ● Rejects the idea of maximizing on only one objective ● Uses the predicted effects on stakeholders to help create the future environment ● Difficult to establish this approach but in future will be the most successful “Company stakeholder Responsibility” (Freeman) ● If a company is already enriching the lives of its stakeholders, asking the question of if they’re socially responsible is meaningless ○ Companies should focus on satisfying the stakeholders and if they are not it is partially the stakeholders fault ○ Stakeholders should help the company be better

● Problem with CSR: it reinforces “separation thesis” (the idea that we can separate business from ethics/society ● Social responsibility becomes an “add-on” because of capitalism and it shouldn’t be ● Rejects the idea that the underlying structure of business is not good/moral ● Supports creating value in the basic business proposition ● Four levels of commitment to the stakeholder approach ○ Level 1- basi...