Business Ethics, Economic Theory and Business Practice
Dr C Chendroyaperumal Professor and Head
[email protected] Megala, J Associate Professor
[email protected] Saveetha Management School Saveetha Engineering College
Key words:
Ethics, Business ethics, Business Practice, Economic Theory.
Abstract In essence the survival of the mankind depends on the economic activities or business activities of a country. The quality of life in a country, in turn, depends on the ethical practices in business. Hence business ethics is being given increasing scholarly attention these days. Business practices are primarily guided by the economic and management theories.
This paper attempts to show that economic theory lays the foundation for
justification for unethical business policies and practices.
1
Business, Management and Ethics
The series of scandals and scams in the 20th century, with the recent 2G Scam notoriously smiling at the economic system, has brought the renewed sharp focus and raging discussion on ethics in business and management. For, in essence, the survival of the mankind depends on the economic activities or business activities of a country. The quality of life in a country, in turn, depends on the ethical practices in business. Business practices are primarily guided
Electronic copy available at: http://ssrn.com/abstract=1768955
by the economic and management theories. This paper attempts to show that economic theory lays the foundation for justification for unethical business policies and practices.
2
Ethics – Modern View
The scholarly discussion on ethics, professional ethics, business ethics is galore in the literature. There are numerous definitions for ethics, professional ethics, business or corporate ethics and morality. The word 'ethics' is "commonly used interchangeably with 'morality'. Hence, let us first understand clearly the meaning of these concepts and see whether there is any common idea present in all these concepts. ―Ethics, also known as moral philosophy is a branch of philosophy that addresses questions about morality—that is, concepts such as good and evil, right and wrong, virtue and vice, justice, etc. Major branches of ethics include: Meta-ethics, about the theoretical meaning and reference of moral propositions and how their truth-values (if any) may be determined; Normative ethics, about the practical means of determining a moral course of action; Applied ethics, about how moral outcomes can be achieved in specific situations; Moral psychology, about how moral capacity or moral agency develops and what its nature is; Descriptive ethics, about what moral values people actually abide by‖ (http://en.wikipedia.org/wiki/Ethics). Whereas ―Professional ethics concerns the moral issues that arise because of the specialist knowledge that professionals attain, and how the use of this knowledge should be governed when providing a service to the public‖ (http://en.wikipedia.org/wiki/Professional_ethics). ―Business ethics (also known as corporate ethics) is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and business organizations as a whole. Applied ethics is a field of ethics that deals with ethical questions in many fields such as medical, technical, legal and environmental ethics. Business ethics can be both a normative
Electronic copy available at: http://ssrn.com/abstract=1768955
and a descriptive discipline‖ (http://en.wikipedia.org/wiki/Business_ethics). ―Morality (from the Latin moralitas "manner, character, proper behavior") is a sense of behavioral conduct that differentiates intentions, decisions, and actions between those that are good (or right) and bad (or wrong). A moral code is a system of morality (for example, according to a particular philosophy, religion, culture, etc.)‖ (http://en.wikipedia.org/wiki/Morality). It is also worth understanding the relationship between law and ethics. ―A relationship exists between law and ethics. In some instances, law and ethics overlap and what is perceived as unethical is also illegal. In other situations, they do not overlap. In some cases, what is perceived as unethical is still legal, and in others, what is illegal is perceived as ethical. A behavior may be perceived as ethical to one person or group but might not be perceived as ethical by another. Further complicating this dichotomy of behavior, laws may have been legislated, effectively stating the government‘s position, and presumably the majority opinion, on the behavior. As a result, in today‘s diverse business environment, one must consider that law and ethics are not necessarily the same thing.‖ (Anstead, Susan M., 1999). Sometimes the modern view holds that ‗Business is one thing, Ethics is another‘ (Bragues, George, 2003).
3
Ethics – Indian View
A more than 5000 year old Indian work on management ‗The Panchatantra‘ not only dealt with the importance of ethics for mankind and prescribes ethical living (normative ethics in the modern parlance) but also clearly defined ethics in the simplest terms that shows the common idea running in concepts like ethics, professional ethics, corporate ethics, morality in the following words. The Panchatantra goes to the extent of saying that only ethical living is living as in “Each transitory day, o man To moral living give; Else, like the blacksmith’s bellows, you Suck air, but do not live.” (Ryder, p-253)
Hence the Panchatantra emphasised the moral learning as of primary importance and treated non-moral learning as a curse and useless as in “Non-moral learning is a curse, A dog’s tail, nothing less, That does not save from flies and fleas, Nor cover nakedness.” (Ryder, p -253) The Panchatantra goes to the extent of calling those people who practice unethical or nonmoral conduct as capable of rotting the society and are reduced to the merest living tiny creature, as in “A rotten ear among the wheat, Among the birds a bat, Is he who spurns the moral law The merest living gnat.” (Ryder, p -254) The Panchatantra regards that the best of the useful output from the mortal mankind is ‗morality‘, and that there hurdles in its practice, as in “The flowers and fruits are better than the tree; Better than curd is butter said to be; Better than oil-cake, oil that trickles free; Better than mortal man, morality. (Ryder, p -254) The praise of constant steadfastness Some wise professor sing; But moral earnestness is swift, Though many fetters cling. (Ryder, p-254) The Panchatantra defines the moral law or ethics briefly as harmlessness to anyone and unethical behaviour is harming another, as in
Forget your prosings manifold; The moral law is briefly hold; To help your neighbor this is good; To injure him is devilhood.” (Ryder, p-524)
The Panchatantra also holds that the scholars and the wise hold that harmlessness or not harming anyone is ‗right‘ and harmfulness or harming anyone is ‗wrong‘; ‗right‘ is always right and ‗wrong‘ is always wrong and never ‗right‘ and hence the Panchatantra prescribes the practice of right, i.e. ethics, in need and deed, as in
The saint, however deep his need, Still shuns the guilt of evil deed; Still does the deeds that brings no shame To honourable name and fame. (Ryder, p-160) The wise in need still does the deed That keeps his honor bright: The shell a peacock ate and dropped, Remains a pearly white. (Ryder, p-160) Wrong is wrong; the wise man never Wrong as right will treat; None would drink, however thirsty, Water in the street. (Ryder, p-160) In the modern era, the ethical practice by the corporates seems to be ‗optional‘ if the practice is not illegal! However the Panchatantra categorically prescribes to do the right, i.e. ethical, as if it is the life, as in “Do the right, the right, the right, Till the breath of death; Shun the wrong, although the right Lead to death of breath.” (Ryder, pp-160-161) According to another Indian work on management ‗Thirukkural‘, which is more than 2000 years old, there is nothing most profitable to the living beings (especially the mankind) than ethics since it not only yields wealth but also yields growth! as in kural-31 and there is nothing more profitable than ethics but also there is nothing more destructive than ethics when forgotten, as in Kural-32.
(Kural-31)
Siruappu eenum chelvamum eenum arathinoongu Aakkam yevanoh vuyirku (Kural-31)
(Kural-32) Arathinoongu aakkamum illai adhanai Marathalin oongillai kedu. (Kural-32)
Thus from the above discussion, it can be seen that though it is called by various names such as ethics, morality, professional ethics, corporate ethics, etc., the basic and common idea inherent in all these concepts is ‗being harmless‘ or not causing harm to anyone either at the individual level or as a specialist professional or in business or in corporate governance or management. It seems that all Laws or legislations focus either directly or indirectly on protecting or preventing one or many from the harm or injury (of any type – thought (psychological) or word (verbal) or deed (action or physical) or monetary) by one or many. Therefore the relationship between Law and ethics is that ethics is the ‗end‘ and Law is the ‗means‘ (whether effective or not). That is, ethics for the ‗basis‘ for all Laws.
4
Market-System Pricing, Macroeconomic Policies and Ethics
The capitalist system of the economy, practiced in most parts of the globe, is based on the belief that the forces of market demand and market supply, or the invisible hands, determine the price and all economic activities leading to the achievement of the macroeconomic objectives including the welfare of the people. An economy is said to be economically efficient when one can be made better-off without making anyone worse-off.
In economics, demand refers to not one variable as such, but a set of three variables namely the need, the willingness, and the ability to buy or purchasing power. Now for the consumers‘ demand to be positive, all the three variables (or the components of demand) namely the need, the willingness, the ability to buy must be present, positive and sufficient. In other
words even if one of the three variables is absent in an individual then the demand for the product does not occur. In other words when the individual needs a product and is willing to buy without purchasing power to buy does not constitute the demand. There is any number of cases where the individuals have sufficient or huge money, both in the past and in the present, but they do not spend it and hence mere presence of ability-to-buy alone does not cause demand. An interesting implication of this definition of demand is that the Western concept of demand, through the absence of the ability-to-buy component of demand, straight away excludes all those human beings without purchasing power from the 'market' and thus ignores unemployment and poverty. Then how will the ‗market system‘ achieve the welfare of all the people? Thus when governments are formulating policies to alleviate poverty and to achieve public welfare based on the ‗market system‘ as prescribed by the economic theory is causing harm to the people by not taking care of them by ignoring them. Thus it becomes unethical to that extent since economic theory prescribes market-system to achieve the welfare of the people.
5
Economic Theory, Corporate Pricing Methods and Ethics
The economic theory prescribes various methods or techniques for pricing good and services such as full cost pricing, average cost pricing, marginal cost pricing, mark-up pricing, market pricing, administrated pricing, monopoly pricing, penetration pricing, what the traffic can bear pricing, price skimming, cost-plus pricing, demand based or value-based pricing, rate of return pricing, or competitor indexing, zone pricing, price skimming, penetration pricing, psychological pricing, real-time pricing , price discrimination, transfer pricing, joint product pricing, price gouging, etc. Of these pricing methods, methods such as monopoly pricing, market skimming pricing, what-the-traffic-can-bear pricing are basically unethical in nature since these methods attempt to use the ‗opportunity‘ to exploit and fleece more-than-just price from the consumers and thus they are harming the consumer and hence they are
unethical in the sense they are harmful. Moreover the method of highly pricing based on the price-inelasticity of demand is also highly ‗unethical‘ since it uses the ‗opportunity‘ to exploit and fleece more-than-just price from the consumers because of their vulnerability and thus they are harming the consumer. Perhaps these pricing methods prescribed by the economic theory and practiced by the corporates is not illegal but they are unethical in nature and impact! ―Price gouging occurs when, in the wake of an emergency, sellers of a certain necessary goods sharply raise their prices beyond the level needed to cover increased costs. Most people think that price gouging is immoral, and most states have laws rendering the practice a civil or criminal offense‖ (Matt Zwolinski). Another Indian work on management ‗The Arthasastra‘ declares that ―Whoever doubles the revenue eats into the vitality of the country. If he brings in double the amount to the king, he shall, if the offence is small, be warned not to repeat the same; but if the offence be grave he should proportionally be punished‖ (Shama Sastry, p-70). This implies that charging a price that is double the cost is also not ethical and thus suggests that the price charged should be less than 200% of the total costs. From this view point of the Arthasastra, any firm pricing more-than-just price are eating into the vitality of the country! This is also consistent with the views of Thirukkural that there is nothing most profitable to the living beings (especially the mankind) than ethics since it not only yields wealth but also yields growth! as in kural-31 and there is nothing more profitable than ethics but also there is nothing more destructive than ethics when forgotten, as in Kural-32.
6
Concluding remarks
The question of business or corporate ethics and professional ethics has been getting increasing attention these days since the eruption of a spate of corporate and government scandals and scams. It has been widely reported that unethical business practices are widely prevalent these days. This paper has argued that economic theory through the prescription of
market-based pricing system and pricing methods such as monopoly pricing and pricing based on the price-inelasticity (demand-based) themselves prescribe and thus not only lay the theoretical foundation for unethical business practices but also make them sound justified and legal! But then the consequences of these unethical business practices are quite obviously detrimental to the whole mankind!
Reference Anstead, Susan M., Law Versus Ethics in Management (July 6, 1999). Available at SSRN: http://ssrn.com/abstract=255298 or doi:10.2139/ssrn.255298.
Bragues, George, Business is one thing, Ethics is another: Revisiting Bernard Mandeville's Fable of the Bees (March 2003). Humber LAS Working Paper No. 2003-01. Available at SSRN: http://ssrn.com/abstract=386520 or doi:10.2139/ssrn.386520.
Ryder, Arthur.W, Panchatantra, Jaico Publishing House, Mumbai, (2003). Shamasastry, R., Kautilya‘s Arthasastra, Mysore Printing and Publishing House, Mysore, 8th Edn. (1967). Zwolinski, Matt, The Ethics of Price Gouging. Business Ethics Quarterly, Vol. 18, No. 3, pp. 347-378, July 2008. Available at SSRN: http://ssrn.com/abstract=1099567.
http://en.wikipedia.org/wiki/Ethics http://en.wikipedia.org/wiki/Professional_ethics http://en.wikipedia.org/wiki/Business_ethics http://en.wikipedia.org/wiki/Morality
