We often here the phrase, “that’s the nature of business.” What a quaint phrase. It’s almost pejorative, as it suggests there is something inherently bad and distinct going on. (I.e., it’s behavior distinct from that of human’s, and it’s also a necessary evil that we must live with.) But if we think about it for a moment, we should realize business and corporations do not have a nature. These are not natural entities. They’re social constructs. They are a product of man and his laws. If we really think something is wrong with “business as usual,” we should realize that this formulation of the corporation is just as easily changed as it was created. There should be no reason that how we think corporations ought to behave should be any different than how they actually do.

Knowing this, we should ask what moral principles and theories the corporation and the market are based on. This is not really a question we often ask ourselves, but it’s relevant if we are to understand business behavior and markets, and why they exist as they do. My hypothesis is that the classically liberal free market economy is based largely on the moral theory of ethical egoism, a morally bankrupt and vacuous theory. (Note that I do not say free markets are bad, but merely the moral principle upon which it is formulated is.) This argument assumes moral realism, which I say is open for debate. From there, we should try to figure out what the implications of this are.

The free market is a form of economic liberalism, whose principle champion throughout the 20th century was Milton Friedman, one of the most famous American economists and a Nobel laureate. An important essay written by Friedman in 1970 that outlines his beliefs in the free market is “The Social Responsibility of Business is to Increase its Profits” (PDF), which will be the basis for this post. In it, he makes many nuanced arguments in favor of the unregulated market, wherein the corporation’s sole responsibility, moral or otherwise, is to maximize shareholder profits.

So, to understand this economic principle, it’s helpful to understand the moral principle upon which it is based, ethical egoism. This moral theory says that individuals (including corporations—see my post “Are corporations individuals?“) should act only so as to maximize self-interests. For corporations, this means act so as to maximize profits. This is in direct conflict with theories based on altruism, which suggest we should act so as to consider and help others. Many egoists—people that include the likes of Ayn Rand or Friedman—would argue that altruism is immoral. Note that this theory does not say that agents should act based on what they prefer, but only what actually maximizes self-interest, therefore it’s a consequentialist theory. In all, the ethical egoistic principle of value states that only the acting agent has intrinsic moral value; others merely have extrinsic moral value, which simply means that other people besides the acting agent are means or tools to help the agent. It’s saying the only person who counts is the agent, while other people are just tools or fodder for that agent.

Automatically we are beginning to sense some weaknesses in this moral theory, but it’s largely the basis for the classically free market economic model. There are all sorts of arguments in defense of ethical egoism (e.g. psychological egoism), which are usually very easily shot down. However, these arguments are still used to justify Friedman’s free market model. The central idea is that if corporations act so that their only obligation is to their shareholders, they’re satisfying ethical egoism and their self-interests (i.e. shareholder profits) are maximized. As one commenter named Roark noted on this blog, a corporation’s obligation should be to the shareholders within the bounds of the law. Friedman makes this argument too, but it’s not quite true. The reason is because following the law doesn’t necessarily maximize profits. So, instead, corporations are supposed to follow the law only when it maximizes profits; there’s supposed to be a cost-benefit analysis of following the law. And this is indeed what we see happen (see, in particular, the documentary called The Corporation, which I referenced and linked to in my previous post on corporate personhood). If a corporation thinks they can successfully break a law without getting caught or where the benefits of doing so outweigh the costs, they will do so. In most cases, though, staying within the law does help maximize their profits, lest they end up bankrupt like Enron. In the end, when we inspect Friedman’s arguments and those of ethical egoism, the principle is that we maximize our own profits and we use others as a means to do that, which means we do not and should not have any obligation to others except ourselves (or shareholders, in the case of corporations). One argument to support this view is that it ultimately helps everyone. This capitalist structure, it is argued, benefits society, helps poor people, grows economies, is fair to others, etc. This argument, even if true, however, is incongruent with ethical egoism, because in ethical egoism the only person with intrinsic moral value is the agent him or herself—what happens to others is irrelevant, so long as it maximizes the agent’s profits. That’s what they call the moral economy.

However, as we can easily see, ethical egoism is a completely vacuous and bankrupt moral theory. Yet, this is the theory that has been used to justify and defend the classically liberal free market economy that Friedman argues for. We find the theory is morally inconsistent (some acts can be both wrong and right, depending on whose perspective it’s from), has poor applicability (like all consequentialist theories), has poor external support (psychological egoism, for example, is very unlikely true), and has very little internal support (i.e. ethical egoism is not aligned with our intrinsic or core moral beliefs).

There’s actually a pretty good example of how little internal support there is for this theory. Let’s take a blog post by Dave Switzer, an economics professor at SCSU, as an example. He argues that price discrimination is economically justifiable when it does not hurt other groups (“Economically … I would argue that the practice would be good”), but he makes a distinction that this practice may not be morally justifiable (“When I concluded the initial post by saying that if giving group A a lower price is not causing you to give group B a higher price, then price discrimination is not a bad thing, I was talking about this in an economic context. When I said gender-based preferences are wrong in my comment, I was talking about it in a moral context.”) What may actually help maximize profits may not actually be aligned with our moral beliefs of what’s right and wrong.

Does this all mean the free market model is necessarily unjustifiable? Does it mean it’s necessarily immoral to have a free market? My answer is “no.” It means we have to come up with a better moral justification than ethical egoism. Indeed, there are plenty of moral arguments to support free markets by utilitarians or deontologists (like supporters of Kantian ethics). However, it may mean we need to slightly modify Friedman’s view of the corporation. It may not be sufficient to say the only obligation a corporation has is to its shareholders. From this idea comes stakeholder theory. This theory states that every stakeholder’s interests should be considered, including the society’s and environment’s, employee’s, shareholder’s, customer’s, etc. Indeed, we generally agree that corporations should follow laws, even if doing so doesn’t maximize their profits, because they have this obligation to society (which writes these laws). We also generally agree corporations have a duty to treat employees so as to satisfy their interests, we want product safety, don’t want corporations to dump in rivers, etc. In this case, I think we ultimately can conclude a corporation’s obligations are much broader than we generally see in the free market argument. There is a new and younger generation of businesspeople who are beginning to take into account these considerations, like stakeholder theory, where it is no longer implied that shareholder profits are the only obligation corporations have, and I think this will be reflected in future corporate decisions.

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