class: middle, title-slide # Business Ethics — Ethics and Economics ## Why Ethics Matters ### Dennis A. V. Dittrich ### 2022 --- layout: true <div class="my-footer"> <span><img src="img/tcb-logo.png" height="40px"></span> </div> --- # Economics .row[.col-7[ Economics is a “way of thinking” to help us understand the ramifications of actions. It is a tool to help us make more informed judgments. One of the most powerful concepts in economics is **thinking at the margin** when evaluating costs and benefits. ]] --- # Chevrolet Malibu .row[ .col-7[ ![](pic/1979-chevrolet-malibu.jpeg) ] .col-5[ But a jury fined General Motors $4.9 billion in punitive damages (July 1999) ...for thinking at the margin! ]] --- # GM’s private calculation: .row[.col-7[ * MC to fix the faulty fuel tank: $8.59 per car. * MB to fix the faulty fuel tank: $2.40 per car (savings from wrongful death and disfigurement lawsuits @ $200,000 on average) The “efficient” solution was chosen not to fix the faulty fuel tank. .footnote[ Source: http://www.safetyforum.com/gmft/. The punitive damages against GM were later lowered by a judge to $1 billion. ]] .col-5[ Business managers have extolled short-run profit maximizing---in a moral vacuum. ] ] --- # Is our commercial system based on ... .row[.col-6[ ### Economics or > Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. > > _Lionel Robins, 1932, An Essay on the Nature & Significance of Economic Science_ ] .col-6[ ### ...Greedonomics? > Free markets, private property rights, voluntary exchange, and **greed** produce preferable outcome most times and under most conditions. > > _Walter Williams (Former chair, Dept. of Economics, George Mason University), 1999, ``The Virtue of Greed in Promoting Public Good,'' Richmond Times-Dispatch_ ] ] --- ### Greedonomics .row[.col-6[ > **[G]reed** is healthy. You can be **greedy** and still feel good about yourself. > > _Ivan Boesky, 1986, Commencement address, School of Business Administration, University of. California, Berkeley._ Six months later Boesky was convicted of insider trading ...and received a sentence of three years in prison and $100 million fine. ] .col-6[ > **[G]reed** is good.... Greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit... > > _Gordon Gekko in Wall Street (1987)_ ![](pic/greedgood.webp) ] ] --- # Is Adam Smith to Blame? .row[.col-7[ The Wealth of Nations (1776), explores the workings of markets under the assumption that people are motived by self-interest. Admam Smith notes: > ...man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. > ...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 advantage. ]] --- # Moral Sentiments .row[.col-7[ Adam Smith's first book, The Theory of Moral Sentiments (1759), shows how **moral norms** would arise to **constrain selfish instincts**. People are **social creatures** with strong instincts for sociability. Even the “greatest ruffian, the most hardened violator of the laws of society” is not altogether without social feelings. **Feelings**, rather than rational calculations, are the mechanism through which nature adapts humans for **successful cooperation** in society, according to Smith. ]] --- ## Ethical people generate the social capital that lubricates the wheels of commerce and society. .row[.col-7[ > ``When the happiness or misery of others depends in any respect upon our conduct, we dare not, as self-love might suggest to us, prefer the interest of one to that of many.” > > TMS, 1759, pp. 137-8 >``[B]y acting according to the dictates of our moral faculties, we necessarily pursue the most effectual means for promoting the happiness of mankind….” > > TMS, 1759, p. 166 ]] --- # The Invisible Hand .row[.col-6[ Self-interest is a tremendous force for individual self-betterment. In “many” cases, self-interest also advances the interests of society The example Smith gives is of a businessman who prefers to keep his investments domestically because, “He can know better the character and situation of the persons whom he **trusts**...” (Wealth of Nations, 1981, 454). **Social capital** thus creates a bias in favor of domestic investments. This strengthens the domestic economy and creates spill-over benefits for society at large. ] .col-6[ > ``By preferring the support of domestic to that of foreign industry, [the entrepreneur] intends only his own security; and by directing that industry in such a manner as its produce 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.” ] ] --- # Smith’s bottom line: Enlightened Self-Interest .row[.col-7[ It is appropriate to be self-interested. But **moral** considerations generate **self-restraint**, and beyond that, a concern for **justice**. Greed is self-interest... without the moral restraint. **Sociability** and **trust** --- along with competitive markets and a system of justice --- create conditions in which self interest promotes the broader interests of society. ]] --- class: middle # Let's play a game --- # The Ultimatum Game .row[.col-7[ Self-interest may lead people to make aggressive offers, but greed can often lead to earning nothing. In the Ultimatum Game and in life, people dislike unfairness and will incur costs to punish it. Human nature includes the instincts for social cooperation and justice. ]] --- # Ethics Defined .row[.col-7[ Ethics is the study of one’s proper interactions with others: It is the analysis of **right** and **wrong**. ]] --- # Positive and Normative Ethics .row[.col-7[ The study of how people actually reach ethical decisions is called **positive ethics**. Proposing a preferred method of how people ought to make ethical decisions is called **normative ethics**. ]] --- # Positive and Normative Economics .row[ .col-6[ The **positive analysis** uses theories and models to predict the consequences of a decision / change: 'What if ...?' * How does a quota on imports for foreign cars will impact on the sales of domestic cars? * What would be the effects of an increase in the gasoline tax? ] .col-6[ The **normative analysis** is devoted to questions concerning 'what ought to be?' * Should the government reduce the tax for diesel vehicles with particulate filters? * Should the government tax the consumption of fossil fuels more? ]] .row[.col-7[ Positive economic models become more powerful when we consider that human beings are partially motivated by sociability and morals. Ethical norms and judgments are pervasive --- including in economics! ] .col-5[ Examples * Highway tips * Doctor and patients * Auto mechanics and customers * Employees and fiduciary duties ] ] --- # Three ethical frameworks .row[.col-7[ 1. Virtue-Based (or Character) Ethics 2. Duty- and Rule-Based Ethics 3. Outcome-Based Ethics (Consequentialism) The three approaches are related: ]] .large[(1) Economic Agent → (2) Action → (3) Outcomes] --- # Outcome-Based Ethics (Consequentialism) .row[.col-7[ * The GM case is an example of **corporate ethical egoism** * Market failure because of asymmetric information * This creates a **moral hazard** because one party to the transaction has an incentive to do the wrong thing The most famous version of **consequentialism** is Jeremy Bentham’s **classical utilitarianism** * welfare should be measured by the calculation of costs and benefits, but these should not be denominated in dollars and cents but in psychological pleasures and pains ] .col-5[ #### The moral smell test Minimal increase in pleasure (shareholder's gains) vs dramatic pain (death and burns of customers) ]] --- # Duty- and Rule-Based Ethics .row[.col-6[ ...asks whether the action itself is moral An action has **intrinsic value** if it is valuable for its own sake and not in regard to the outcomes produced * one’s decisions ought to reflect one’s duty * Kant, * Higher Power A basic moral rule in many religions is, “Do unto others as you would have them do unto you.” ] .col-6[ > Few trends could so thoroughly undermine 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. > > _Milton Friedman, 1962, Capitalism and Freedom, University of Chicago Press_ Yet, Friedman asserts, managers ought to maximize profits “while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. ]] --- # Virtue-Based (or Character) Ethics .row[.col-7[ The third approach starts with the person in Stage 1 and examines the **motives** for action. ] .col-5[ #### The moral smell test GM fails the smell test simply because of commonplace notions of what a good person should do if confronted with a similar choice ]] --- # Ethical Pluralism .row[.col-6[ **Descriptively**, different moral values or principles are sometimes involved in people’s decision making. These cannot be reduced to a single set such as Bentham’s utilitarianism, Kant’s categorical imperative, or Aristotle’s virtue theory. **Normatively**, seemingly different principles are at times necessary for the operation of another. ] .col-6[ ### Different moral theories Corporate profits, to Friedman, are an instrument for promoting the **consequentialist** goal of efficient resource allocations; they serve the ultimate interests of consumers. But this consequentialist aim cannot be realized unless business managers are **virtuous** in adhering to their fiduciary **duties** to shareholders and to wider duties in society. Let's focus not so much on how and whether different moral theories compete with each other but on how they complete each other! ]]