Why Economics Needs Ethics

Since the 1970s business schools have recognized that something was missing from the training they were giving their students, namely an ethical foundation. Consequently, they began to offer courses in business ethics. Today, nearly every business school has such courses. However, there is a fundamental problem with the way business ethics is taught. Ethics are often taught as something “external” or “added-to” economics, rather than something which lies at the core of our economic and business relationships. Ethics are regarded as belonging to one realm, and business to another; the world is divided into the realms of "ought" and "is," and the former is not supposed to interfere with the latter. But such teaching cannot challenge the central—and incorrect—view of man that is at the heart of standard economic theory. This view states that man is naught but a “self-interest maximizer,” who always acts to increase his personal advantage, even at the expense of others.

This theory was famously put forward in 1712 in a long poem, The Fable of the Bees: Private Vices, Publick Benefits, by Bernard de Mandeville. Mandeville claimed that if people would only and always look out for their own self-interest, then the public good would take care of itself. We need never worry, Mandeville believed, about the moral universe; the economic engine, freed from morals, would provide riches enough for everyone.

However, this theory simply doesn't work. The reason that self-interest cannot add up to a public good is that it cannot even add up to a private good. In truth, our good is not something known in advance, but something discovered in the process of living out our choices, and life is the process of this discovery. All of us have had the experience of living through something they thought was a disaster, only to discover that it was the best thing that could have happened, or of receiving exactly what we wanted, only to discover that it was a disaster. What we really need to do is reverse Mandeville's law. Only by acting for a higher good can we discover our own particular set of goods; only through a certain regard for others can we learn to have respect for ourselves.

And this is important because what people really seek in their actions is not self-interest, but self-respect. Self-respect includes self-interest, because no self-respecting person allows himself or his family to fall below a certain level or to go on charity or into bankruptcy, if it is in his or her power to prevent it. But self-respect also allows us to go further and pursue higher-order needs, needs such as virtue, love, professional competence, and the pursuit of truth, knowledge, and beauty for their own sakes.

This is not just a personal matter, for the economy as a whole requires these same qualities to function properly. Some level of justice, some rough equity in the distribution of rewards, is necessary or it is difficult, if not impossible, to achieve equilibrium, the more or less stable balance of supply and demand. When there are great disparities in wealth and poverty—when, for example, the CEO makes 500 times what the average worker makes—then there will be insufficient purchasing power among the workers to clear the markets. This lack of purchasing power will have to be made up either by government tax and redistribution policies, or by consumer credit, that is, having those few at the top with too much money lend it to everybody else in order to prop up demand. But running an economy on usury is surely just a stopgap, a way-station on the road to ruin.

But another problem arises. For while an economy without ethics is on the road to ruin, any particular business person who lacks moral principles may be on the road to riches. A businessman who acts dishonestly may gain a competitive advantage, while the CEO who fires all his workers and outsources his factory to a country that pays starvation wages will be able to undersell his rivals. However, when everybody does this, then not only will the advantage disappear, but the CEO will discover that in firing his workers he has also fired his customers; they are the same persons. And unless his former workers can find jobs as good as the ones they lost, the economic balance will be broken. While credit cards may, for a time, restore the balance, they can be but a stopgap. But in the end, you cannot, as G. K. Chesterton noted, "pay a man like a pauper and expect him to spend like a prince."

Self-interest may make a man rich, but can never make him a man; only the virtues can do that. In receiving a business education, students must learn both the tools of business—finance, operations, marketing, and so forth—and the connections between their actions and the world in which they live. Students must be shown how their actions shape not just their businesses, but themselves and their communities. They must be reconnected with the values that no man or woman should be without, and no economy either. This is the approach that we take at the Business Leadership Program at the University of Dallas, where I am privileged to teach a course in Social Justice for business students. We aim to give students not only the best tools, but the best values. The truth is that in our commercial civilization the world is largely shaped by business decisions. If we continue to mis-educate our business students, we need not complain about the world they build.


Nancy Reyes Tuesday, August 7, 2007 at 10:00:00 PM CDT  

I agree.
But if you were a worker who could earn $5 a day working at a sweatshop instead of $2 a day working and sweating in a rice paddy, you would say the guys who "outsourced" the job were lifesavers.

John Médaille Thursday, August 9, 2007 at 7:43:00 PM CDT  

Boinky, this has indeed been the "justification." However, it presumes that these places did not have flourishing economies for thousands of years before the coming of colonialism. It presumes, in other words, that "jobs" are something brought by the beneficent white man.

The problem with that view is that it is largely true. In many places, the people did not have "jobs" in our sense, but a place in a community and its work. In order to provide our kind of "jobs," it was necessary to destroy the indigenous economies.

But in any case, the current system is self-destructive. Economics (if understood) presumes a balance between supply and demand; the proceeds of production are used to purchase the output of production. If wages are too low, they can't purchase the output and the markets cannot be cleared.

We buy the output of the sweatshop, but the sweatshop worker can't afford anything we make, and so the balance is broken. So-called "trade" which is not balanced in this sense in not really trade at all, but the mere arbitrage of labor rates, that is to say, exploitation.


John C. Friday, August 10, 2007 at 10:44:00 AM CDT  

What you say is true, but I'm not sure that the argument will hold up as exploitation (I've heard arguments for sweatshop labor at low rates because it keep the workers working harder). The argument could be that with $5 over $2 a day, even though the worker can't buy what he's making, he can buy more of other things in his country. If he's making soccer balls, he probably won't want to buy them anyhow. But we do, so what's the harm in hiring them out to make them at what they consider to be luxurious rates? Everybody wins, right?

I don't agree with this line of argument, but I'd like to be able to refute it, and don't have anything concrete. What would you say to such an argument?

Anonymous,  Tuesday, September 25, 2007 at 3:13:00 AM CDT  

Change Leaders has a site at Corporate Governance, with 600+ Corporate Governance and Boards Resources. Pretty well organized site. Easy to get around. Nice to have everything in one place.

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