Business Ethics and Moral Market Conduct
By Richard Ebeling - March 17, 2015
A recently released report on the degree of confidence that Americans have in the country's leading political and economic institutions showed that few of these institutions are held in high regard by the public.
The survey was conducted by NORC, a respected research organization at the University of Chicago. It was found that only 11 percent of those asked expressed significant confidence in the institution of the presidency of the United States. About 23 percent of the citizenry expressed positive confidence in the Supreme Court. But, seemingly, no one has confidence in the United States Congress. Only 7 percent of Democrats and 5 percent of Republicans expressed any great deal of confidence in the legislative branch of the Federal government.
The only governmental institution possessing a high degree of confidence in the eyes of the American people is the military, with a confidence level of about 50 percent among those surveyed.
Confidence in private sector institutions fairs a bit better, but not by much. The NORC survey found that 15 percent of the population has confidence in the country's financial and banking institutions (down from 42 percent in 1977). And just 18 percent have a great deal of confidence in America's leading companies and corporations (down from 31 percent in 1984).
It may not be too surprising that these governmental institutions do not earn higher confidence marks in the minds of Americans. After all, politics often seems to be little more than an arena of corruption, power lusting, hypocrisy and confusion. Scandals of a financial or personal nature affecting those in political office or in the government bureaucracies constantly fill the pages of newspapers and airtime on the television news programs.
Ethics and politics do not seem to go hand-in-hand very much in modern America or, indeed, anywhere else in the world.
The Ethical Quality of Business in a Free Market
The low estimation in which business enterprises are held in the eyes of Americans is more troublesome. The reason I say this is that businessmen operating in a free market function on a totally different plain than those who make their living in politics.
Indeed, I would suggest that there is no more honorable and moral way of earning a living than as enterpriser and entrepreneur in the competitive arena of the free marketplace.
To use a biblical phrase, many are called but few are chosen to take on the leadership role of enterpriser and entrepreneur. Voters do not enter a voting booth to appoint the businessman to his position as head of an enterprise.
His is a self-selecting appointment to his position. I mean by this that a businessman sees himself as running a business of his own or as a senior executive in a company or corporation. He wins his position not through promises to voters but by deeds performed for consumers.
In the market economy, those who imagine, design, implement and direct enterprises and businesses do not need to initially gain the agreement, approval, or consent from large numbers of coalitions of individuals or groups, as politicians must do in the electoral process
The Leadership Qualities of Market Entrepreneurs
The market entrepreneur is self-selecting and self-establishing. Indeed, the idea or ideas on the basis of which he is led to start up, organize and implement his activities leading to the production of some goods or services may be neither understood nor believed in by the vast number of others in the society – that is, before the product is finished and offered to the consumers, who may or may not reject it, resulting in the enterpriser earning profits or suffering losses.
The taking on the task of entrepreneurial leadership, therefore, requires drive, vision, determination, discipline and the financial support from his own savings or from those who he is able to persuade to lend him the needed funds or to partner with him to bring his idea to market. He is, therefore, a risk-taker as well as a profit pursuer.
Success is not measured in voter ballots as in a political election, but by the degree to which the entrepreneurial leader succeeds in winning customers for his product or service as reflected in total revenues that exceed the total costs that have been incurred in bringing the product to market.
Can he more successfully anticipate the direction of future consumer demand than his rivals in the market? Is he alert to profitable opportunities that others have missed by introducing new products, better and improved products, or less costly products that gain the "votes" of consumers through the dollars they spend on his product in comparison to his competitors in his own and other markets?
Indeed, the Princeton University economist, Frank A. Fetter, once referred to "the market as a democracy where every penny gives a right to vote." With their dollar "votes" consumers determine who shall retain their entrepreneurial position in the market, and who may lose it.
While the entrepreneur initially selects himself and undertakes his enterprise without the prior approval or agreement or financial support from the general consuming public, it is the consumers who ultimately determine whether or not he shall maintain his entrepreneurial position in the market system of division of labor.
The business leader must be distinctly single-minded and passionately devoted to his role in the division of labor. Others in the enterprise may show up at nine in the morning and leave at five in the afternoon. But he does not. He is at work "24/7," even when he is far from his office desk.
Is the company's supply-chain operating efficiently? Are the executives and managers who report to him seeing that their divisions and departments are functioning properly? What are his competitors planning and doing? What's his own company planning next in terms of advertising campaigns, product improvements, technological innovations and the changing patterns of consumer demands?
The burden of meeting the payroll of salaried employees for which he is responsible, as well as the obligations he has entered into to "deliver the goods" to customers and clients means as a leader of his business his mind cannot just shut off when the official business day comes to an end.
A good part of the ethics of enterprise, therefore, is reflected in the integrity, discipline and quality of character that must enter into those individuals who choose the role of entrepreneurial leadership.
The Ethical Principles of the Free Market
The hallmark of a truly free market is that all associations and relationships are based on voluntary agreement and mutual consent. Another way of saying this is that in the free-market society, people are morally and legally viewed as sovereign individuals possessing rights to their life, liberty and honestly acquired property, who may not be coerced into any transaction that they do not consider to their personal betterment and advantage.
The rules of the free market are really very simple: You don't kill, you don't steal and you don't cheat though fraud or misrepresentation. You can only improve your own position by improving the circumstances of others. Your talents, abilities and efforts must all be focused on one thing: What will others take in trade from you for the revenues you want to earn as the source of your own income and profits?
Long ago, in the 1760s, the famous Scottish economist and moral philosopher, Adam Smith, argued that among the benefits from commerce and trade was not only the material improvements in man's condition. It also served as a method for civilizing people, if by civilization is meant, at least partly, courtesy and respect for others, and an allegiance to honesty and fulfillment of promises.
When men deal with each other on a daily and regular basis, Adam Smith said, they soon learn that their own wellbeing requires of them sensitivity for those with whom they trade. Losing the confidence or the trust of one's trading partners can result in social and economic injury to oneself.
The self-interest that guides a man to demonstrate courtesy and thoughtfulness for his customers, under the fear of losing their business to some rival with superior manners or etiquette to his own, tends over time to be internalized as habituated "proper behavior" to others in general and in most circumstances.
And through this, the other-orientedness that voluntary exchange requires of each individual in his own self-interest, if he is to attain his own ends, fosters the institutionalization of interpersonal conduct that is usually considered essential to a well-mannered society and cultured civilization.
If all that I've said is true, why, then, are businessmen and business in general held in so low esteem and confidence, even though ranking higher than citizen confidence in political institutions?
The Misguided Disapproval of Business and Businessmen
First of all, there is the intellectual climate that has dominated discussions concerning business and businessmen in society for a century and a half. The anti-business and anti-capitalist attitude that prevails in America and many other parts of the world are all part of the original socialist critique against private property, profit-oriented enterprise and the employer-employee relationship.
Let me just say that private property is the most beneficial institution ever developed by man. It has created incentives for work, savings and investment, since private property in the means of production enables those who generate wealth through their personal efforts and investments to have the right to reap the rewards of their own productive activities.
The profit motive acts as the stimulus for individuals to devote their energy in productive ways. Profits are the "rewards" for having successfully brought to market what consumers want and for managing production in ways that revenues are greater than expenditures. In other words, successful profit seeking creates valued-added for both the seller and the buyer.
In the free market, the employer must, at the end of the day, treat those who work for him in an honest, well-mannered way. If not, over time, he runs the risk of losing the better employees who eventually decide to look for alternative employment where workplace conditions are friendlier and more respectful as well as, perhaps, better paying.
So part of the suspicions and lack of confidence in business by many in the general society is due to a distorted, incorrect and twisted view of how business and businessmen really act and potentially earn profits in a free market.
Unfortunately, this false imagery of business and businessmen pervades the media, the movie industry, the educational establishment and through them our common everyday culture.
Government Intervention and Unethical Business Practices
But there is another dimension to the belief on the part of many in society that businessmen are not to be trusted, and therefore not fully deserving of the citizenry's confidence.
A long time ago, back in the late 1960s, a Wisconsin businessman named William Law, who owned the Cudahy tannery company, published an opinion piece in The Wall Street Journal. He said that some of his American competitors in the tannery industry were lobbying the government to impose an import tariff on foreign leather goods that were successfully capturing more of the U.S. market.
Mr. Law admitted that such an import duty would raise the costs of his foreign rivals and make it more likely that he could maintain his market share and his profit margins. But he went on to say that he opposed the call for such anti-competitive restrictions on market entry of the foreign leather suppliers. He declared that he would rather face going out of business than stay in business by using government to rig the market to his advantage at the unjust expense of both American consumers and his foreign rivals.
Many years after Mr. Law wrote this op-ed, I had the opportunity to meet and talk with him, so I think I understand the premise underlying his argument. You see, he considered that such an import tariff would be an act of theft at the expense of the American consuming public, which would make him an accomplice receiving ill-gotten gains.
He would be using the force of government to impose a penalty fee on the foreign competitor wanting to bring his leather goods into the United States, for no other crime than that foreign rival's ability to make a desirable product at a lower cost than his American competitors. The foreign rival would be punished for wanting to share the benefits from his cost-efficiencies with the American public by offering his product to them at a lower price.
At the same time, the American consumer is denied the opportunity of buying the foreign version of the product at a price mutually agreeable to him and the seller. As a result, that American consumer might have less to choose from, and would pay a higher price for leather goods than if the tariff was not there. The difference between the lower price the consumer would pay under free trade and the higher price he pays under the protectionist wall of the tariff is the stolen sum out of the consumer's pocket, Mr. Law said, and into the domestic tannery manufactures revenues.
Using Government to Plunder Some at Others' Expense
Take the logic of this example and apply it to government subsidies covering part of a manufacturer's costs of production at taxpayers' expense; or paying farmers not to grow crops or guaranteeing them a minimum farm price support that is paid for through tax dollars and higher prices for consumers of agricultural goods; or to domestic business regulations that limit entry into various professions and occupations, which, again, limits consumer choice, prevents potential rivals from earning a living in those corners of the market and make the product or service more expensive for the buying public by using government intervention to limit the supply.
The financial and banking sector has taken the form of "too big to fail," which meant that those who made bad investment and lending decisions were not required to fully bear the responsibility and the cost of their poor or misguided decisions. Instead, taxpayer money was made available to wash away part of their bad decision-making sins.
In everyday life, we presume that the ethical thing to do if we see that someone has dropped their wallet is to return it them. We take it for granted that if we see that someone has left their car unlocked with the key in the ignition, we should not take advantage of this to drive away and steal the car.
If someone does take the dropped wallet or speeds off in the car we label them a thief, a bandit, a crook. That's because we take for granted an individual's right to his private property and the income he has honestly earned.
Business ethics, I would argue, calls upon every businessman to follow the rules of the game of the free marketplace: you don't kill, you don't steal and you don't defraud. This includes neither accepting nor lobbying to receive favors, privileges, or other special interest benefits through the powers of government to tax and regulate, all at taxpayers' and consumers' expense.
Many people sense that some businesses and businessmen are not playing by the rules when they obtain such favors, privileges and benefits through political power. The deeper problem is that the reasonable suspicion and disapproval of government special favors for various businesses easily spills over, over time, into a willingness to assume the worst about all business and businessmen in general.
This opens the door to those more ideologically driven by an anti-capitalist agenda to win the argument that it is business and businessmen as a group who cannot be trusted and who need to be watched, regulated, and controlled – if not just taken over – by government in the name of "fairness" and "social justice."
The Ethics of Personal Life Should Be No Different Than Business
Even if a man is hungry, the honest and right thing for him to do if he sees that someone has dropped his or her wallet is to return it to the owner, content intact. And likewise, even if profits are down or even turning into the loss column, the unfortunate competitor should not pick the pockets of consumers or taxpayers by lobbying government for anti-competitive regulations or redistributions of wealth through subsidies or price guarantees.
The ethics of enterprise and the morality of the market require both a preaching and a practicing of a respect for others' individual rights to their property and to the rule of voluntary agreement in all transactions, even when market outcomes are not always favorable to oneself.
(This text is based on remarks made at the Principled Leadership Symposium held at The Citadel in Charleston, South Carolina, March 12, 2015.)
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