Business ethics: concepts and cases van Velasquez & Manuel (7th edition)
Business ethics is about how a company incorporates ethics into its operations. There are many firms that choose profits over ethics; they profited through unethical behaviour. Even though there are many firms that at one time have engaged in unethical behaviour, it is not a good long-term business strategy for a company.
Unethical behaviour of a company may change its reputation. Employees are more likely to loyally serve a company with a good reputation. Therefore, many argue that ethical behaviour is the best long-term business strategy. However, doing what is ethical may be very costly to a company.
Ethical behaviour is not always rewarded and unethical behaviour is not always punished. But ethical behaviour can give a company significant competitive advantages over companies that are unethical.
Consumers and employees do not like and support unethical behaviour. This leads to the fact that unethical behaviour of companies leads to a loss of consumer and employee support.
Ethics may be the best policy in the long run, but the ethical course of actions is not always clear to the managers of a company. Everyone in business has to deal with ethical choices. For instance; if you found out that a friend of you is stealing from the company and have to decide whether you turn him in or not.
The nature of business ethics
Ethics can have several different meanings. The dictionary gives two meanings:
It is the principles of conduct governing an individual group. Personal ethics refers to the rules of an individual and accounting ethics is used to refer to the rules that accountants use.
It is the study of morality. Ethics can be seen as a kind of investigation that investigates morality.
Morality can be defined as the standards that an individual or group has about what is right or wrong or good and evil.
Moral standards are the norms about the kinds of actions believed to be morally right and wrong as well as the values placed on what we believe to be morally good and morally bad. These moral standards can be seen as general rules about our actions.
Moral standards are learned as a child from his family, friends, school, television etc. Later, when one experiences intellectual development, these standards are revised. With the new knowledge one decides whether he judges them reasonable or unreasonable.
In the maturing process one may discard some standards and may adopt new standards that suite more with the life of an adult. But we do not always live up to our moral standards. One does not always what is morally right.
In contrast to moral standards we have nonmoral standards and norms. These are the standards by which we judge what is good or bad and right or wrong in a nonmoral way. These include the standards of etiquette, rules of teachers and parents, the law, the standards of language, rules in sports etc. These nonmoral standards are often called conventional standards.
All our judgments are based on some kind of standards and norms, moral and/or nonmoral. Sometimes we choose nonmoral standards over moral standards. The ability to distinguish between moral and nonmoral norms emerges at a very early stage in life and will remain throughout the entire life.
Elliot Turiel found that at the age of three, a child is able to tell the difference between moral and conventional norms. This is an ability that every human being in every culture develops. However, there are differences between cultures in the field of which norms are moral and which norms are conventional.
Even though three year olds seem to know the difference between moral and conventional norms, this is not an easy question to answer. Philosophers have found six characteristics that help to show the nature of moral standards.
Moral standards deal with matters that are standards. Things that can matter or benefit human beings. Like moral standards against theft.
Moral standards should be preferred to other values including self-interest. The moral standards should always be maintained even if they conflict with self-interest.
Moral standards are not established or changed by the decisions of the authority.
Moral standards are felt to be universal. We want that everyone lives up to these standards and feel upset when someone else does not live up to it.
Moral standards are based on impartial considerations. Moral standards are not based on interest of a particular individual or group but are about whether something is morally wrong.
Moral standards are associated with special emotions and a special vocabulary. When someone does not live up to the standards he will feel guilty and wrong. The same happens when someone else does not live up to the standards, others may feel disgust toward this person.
In this book ethics is defined as the discipline that examines one’s moral standards or the moral standards of a society to evaluate their reasonableness and their implications for one’s life. Ethics is about how moral standards you have absorbed apply in situations in life.
In some situations one can apply various moral standards. When this is the case one has to decide which moral standard is more important. The ultimate aim of ethics is to develop a body of moral standards that you feel are reasonable for you to hold.
Ethics is a normative study of morality; an investigation that attempt to reach conclusions about what things are good or bad or about what actions are right or wrong.
Another way to study morality is with social sciences; sociology, thropology, psychology. These studies are descriptive studies; an investigation that attempts to describe or explain the world without reaching any conclusions about whether the world is as it should be.
Business ethics is defined as a specialized study of moral right and wrong that concentrates on moral standards as they apply to business institutions, organizations and behaviour. It is a form of applied ethics.
Business ethics is about a wide range of topics. We divide these into three different kinds of issues:
Systematic issues: ethical issues about economic, political, legal and other institutions.
Corporate issues: ethical questions about morality of activities, policies, practices and organizational structure about a particular organization.
Individual issues: ethical questions about particular individuals within a company and their behaviour and decisions.
When one analyses an ethical issue it is helpful to first determine whether the issue is systemic, corporate or individual. The three different issues each have different solutions so therefore it is important to determine which issue you deal with. A systematic issue must be solved on systematic level while and individual issue needs to be solves through individual decisions.
The question is: can we say that acts of organizations are moral or immoral in the same way that actions of human individuals are? Can moral notions be applied to groups such as corporations, or are individuals the only moral agents? In response to these questions two views have emerged.
Those who argue that if we can say that something acted and acted intentionally, then we can say it is a moral agent. In that case it is morally responsible for its actions just like humans. The major problem with this view is that organizations do not seem to act or intend in the same sense as human individuals do.
Those who argue that it makes no sense to say that companies are morally responsible or have moral duties. These people say that companies must be seen as machines which members must blindly conform to formal rules. The problem with this view is that at least some members of organizations usually do know what they are doing and are free to choose whether to follow the rules or not.
Perhaps neither view is correct. Both views face some difficulties and are struggling with the following: although organizations exist and act like individuals, they are obviously not the same as human individuals. We can see through this by noticing that organizations and their acts depend on human individuals. Corporate actions result from behaviour and decisions of individuals.
An organization has a moral duty in a secondary or derivative sense. It has a moral duty to do something only if some of its members have the moral duty to make sure it is done. The human individuals are the primary carriers of the moral duties and responsibilities that we attribute in a secondary sense to the corporation.
Many people object the view that ethical standards should be applied to the behaviour of individuals in business organizations. Individuals involved in business should pursue the financial interest of the firm and ignore ethical considerations. There are three arguments in favour of objection.
Some argue that in perfectly competitive free markets profit will ensure that members of a society are served in the most socially beneficial ways. The benefit for the members will be highest when they devote to the goal of profit and produce efficiently. However, this argument has some questionable assumptions.
Most industrial markets are not perfectly competitive.
It assumes that increases in profit will necessarily be socially beneficial. However, some increases in profit actually harm society.
It assumes that by producing what the buying public wants, a firm produces what society wants. However, this is not always true in practice.
The argument makes a normative judgment on the basis of some unspoken and unproved moral standard. (People should do whatever will benefit those who participate in markets).
The second argument is called the loyal agent’s argument. It can be paraphrased as follows:
A manager has the duty to serve the employer as the employer wants to be served.
An employer wants to be served in a way that advances his interests.
As a loyal agent of the employer, the manager has a duty to serve the employer in whatever way that will advance the interests of the employer.
Often this argument was used by unethical managers to justify unethical conduct. This argument, again, rests on questionable assumptions.
The law of agency is a law that specifies the duties of persons who agree to act on behalf of another party and who are authorized by an agreement so to act. When signing the agreement an agent accepts the legal duty to serve his client loyally. This law also states that the agent has not the duty to perform in activities that are illegal or unethical.
For business people to be ethical it is enough to follow the law. If something is legal than it is also ethical. However, this is wrong because ethics is more than just the law. Many moral standards are incorporate into the law but these laws alone are not enough.
Most ethics find that all citizens must obey the law as long as the law does not require unjust behaviour. It would be immoral to break the law according to them. A conflict can arise when the law is in conflict with the moral standards of a business person.
So far we looked at objections of ethics into business. However, there are also arguments in favour. Ethics should be brought into business because it governs all voluntary human activities and business is a voluntary human activity.
For a business to exist it is necessary that the people involved in the business have some sort of minimal standards of ethics. A business would fail if all members think that it is normal and acceptable to steal, lie to and break agreements. Besides that a business also needs a stable society in which it carries out its business. The stability of a business depends on some standards of ethics.
So a business cannot survive without some standards of ethics. Therefore it is in the best interests of business to promote ethical behaviour among their members and society. It can also be said that good ethics is good business. When two people have to deal with each other repeatedly it makes no sense to get in conflict with each other. Good interactions make the business better. Ethical behaviour can set the stage for such beneficial interactions.
Several studies show that unethical behaviour may be harmful to a company while ethical behaviour tends to produce cooperative behaviour.
Moral standards are used in social situations when someone has done injustice. The moral anger motives someone to restore the justice by punishing the one that has done the injustice. When a company has done injustice in the eyes of a customer, the customer will turn against the company.
Many studies have found that there is a positive relationship between socially responsible behaviour and profitability. Other studies have found no relationship and there is not one study that has found a negative relationship. These results together suggest that ethics seems to contribute to profits.
Business ethics is sometimes confused with corporate social responsibility (CSR); a corporation’s responsibilities or obligations toward society. Is it responsible for money to charities or give their employees higher wages? There is a disagreement about what these obligations are.
Friedman argues that corporate executives work for the owners, which are nowadays the shareholders. As their employee, the executive has the responsibility to run the company in accordance with the desires of the owners embodied in law and in ethical form.
Friedman says that the only responsibility of the company is to legally and ethically make as much as money possible for its owners. His theory of CSR is known as the shareholder theory.
He also argues that the manager has no right to give company money to social causes when this leads to a reduction in profits for the shareholders. However, a manager can pay higher wages to employees etc. when it does lead to more profits for the shareholders.
He thinks that companies provide benefits to society. Profit maximization should lead to higher competition leading the fact that firms will increase efficiency, increase wages, make better products and provide better working conditions. These actions are a gain to society.
There are people who criticize the theory of Friedman. They do not agree with his claim that the manager or executive is the employee of shareholders. According to them, the executive is the employee of the corporation and severs its interests.
These others say that shareholders only hold stock and have some rights but that they do not have all the rights that a true owner of a company has.
There is also critique on Friedman’s statement that profit maximization will benefit society. Competitive forces may fail to let the society benefit and instead lead to harm to society, like pollution.
A stakeholder is any identifiable group or individual who can affect the achievement of an organization’s objectives or who is affected by the achievement of and organization’s objectives. It is someone who can influence the corporation; he has a stake in the company.
Edward Freeman and David Reed had a different view of CSR than Friedman did. Their view is called the stakeholder theory and is based on the definition of a stakeholder as described above. This theory states that when making decisions, a manager should take into account all stakeholder interests.
In this theory the manager has the responsibility to run the company in a way that will best serve the interests of all stakeholders. Managers should not try to maximize profits but they may make some profits. The manager should give the stockholders a fair share of the profits but in a way that allows other stakeholders to get also their fair share.
There are two main arguments that support the stakeholder theory:
Instrumental arguments: these arguments claim that being responsive to the interests of all stakeholders is in the best interest of the corporation even though it is not in the best interests of the shareholders.
Normative arguments: these arguments claim that the company has an ethical and moral obligation to be responsive to all its stakeholders. Everyone that contributes his share into something should advantage from the benefits of it.
The question is what theory is correct; the stakeholder theory or the shareholder theory. In the business world we see that many businesses accept the stakeholder theory.
Many argue that being ethical as a company is an obligation they owe to society. In this sense, business ethics is a part of corporate social responsibility.
Ethical issues in business
Businesses and societies are continuously changed and transformed by the rapid evolution of new technologies. These new technologies lead to new ethical issues in business. These changes have had an impact on businesses and society in several decades.
In the agricultural revolution humans developed farming technologies. Because of these new technologies they did not had to rely on foraging and hunt anymore. The new farming technologies provided them with a constant supply of food.
In this revolution there was also the invention of irrigation, wind power, levers, wedges, and hoist. All the new technologies increased the trade. With this trade came the first issues related to business ethics. They had to make rules and agreements for fair trade.
There was another transformation during the Industrial Revolution with the introduction of electromechanical machines. To manage the enormous amount of people that were needed for these machines large organizations were founded. These large corporations dominated the society and led to new issues related to business ethics.
In the end of the twentieth and begin of the twenty-first century there have again been transformations in society and business due to technology changes. The most of these technology changes are developments in information technology.
Information technology is the use of extremely powerful and compact computers, the internet, wireless communications, digitalization and numerous other technologies that have enabled us to capture, manipulate and move information in new and creative ways.
Information technology raises new ethical issues related to risk, privacy and property rights. Computers enable us to collect detailed information about individuals which reduced out privacy. To deal with these rapid changes in technology, business organizations have to become smaller, flatter and more nimble.
Cyberspace: a term used to denote the existence of information on an electronic network of liked computer systems.
The development of computers also helped the development of nanotechnology. This is a new field that encompasses the development off tiny artificial structures only nanometers (billionths of a meter) in size. Critics have raised questions about the potential harms of nanotechnology to the environment.
Another ethical issue is created by biotechnology: genetic engineering. Genetic engineering refers to a large variety of new techniques that allows change in the genes of the cells of humans, animals and plants.
Nanotechnology and biotechnology both raise new ethical issues related to risk and the spread of dangerous products.
The ethical issues we discussed so far arise within the national borders of a single country. We will now turn to ethic issues that occur in the international area. Most of the issues in business ethics in this area are related to globalization.
Globalization is the worldwide process by which the economic and social systems of nations have become connected, facilitating between them the flow of goods, money, culture and people.
The amount of goods traded and moved across national boundaries has increased significantly since World War II. Products that one uses at home can be found everywhere in the world because of globalization.
At the heart of the globalization process we find multinational corporations. A multinational corporation is a company that maintains manufacturing, marketing, service or administrative operations in several host countries. These corporations are responsible for a large part of the international transactions.
Two huge benefits of globalization:
It enabled multinationals to build factories and start operations in countries with low labor costs. They bring jobs, skills, income and technology to regions of the world that were formerly underdeveloped. These actions made it possible to offer the products at a lower price.
It enabled nations to specialize in producing and exporting the goods and services that they produce most efficiently. These specialized goods then could be traded for goods that the nation does not make. This specialization has increased the overall productivity of the world.
However, there are also negative effects of globalization:
It brings significant harms on the world. Poor nations with only cheap agricultural products to trade have been left behind. Inequality between and within nations has increased because of the globalizations. The Western culture has been spread to many parts of the world driving out local cultures and traditions.
It is charged with paying the way for multinationals to have a kind of mobility that critics say has had adverse effects. When a company moves its operation to another country the factories in the home country shut down leading to enormous job losses.
Some critics say that multinationals import technologies or products into a developing country that is not ready to deal with the risks of the new technologies and products.
When a multinational moves to another country it has to deal with other laws, regulations, cultures, practices or even an entire other government than it faces in its home country. This leads to dilemmas for the managers of the company.
Managers may be in countries that are very underdeveloped. When this is the case then the actions of a manager could have a different effect on the people there than on the people in developed countries. The question then is how should the manager act? Scholars have suggested that managers should stick to the higher standards that are typical in their home country.
If the cultures of the home and host country differ a lot than it could happen that there is a misunderstanding or misinterpreting between managers and the people in the host country. Managers often find it very difficult to deal with the differences in moral standards.
Ethical (or moral) relativism is the theory that there are not ethical standards that are absolutely true and that apply or should be applied to the companies and people of all societies. According to this theory, the actions of a person are morally right if they are in line with the ethical standards accepted in the culture of that person. So in each society with its own moral beliefs there is another way of determining whether the actions of a person are morally right.
In the world we find that some practices are judged very differently in different societies. Examples of such practices are polygamy, abortion, homosexuality and slavery. However, critics point out that there are some moral standards that are binding for everyone.
Many moral standards that seem to be different among societies turn out to have underlying similarities when one takes a closer look. When people have different moral beliefs about something that does not mean that there is no absolute truth or that all the different belies are equally acceptable.
The most important criticism of ethical relativism is that it has incoherent consequences. According to them; if ethical relativism would be true than it would make no sense to criticize the practices of other societies. Then it would also make no sense to criticize the moral standards accepted by your own society.
Another critique is that ethical relativism privileges whatever moral standards are widely accepted in a society. The standards in the society are the only standards by which actions in that society can be judged. The moral standards had a privileged place in society.
From all the critics we can say that the theory of ethical relativism seems to be incorrect. However, it does teach us that there are differences in moral beliefs between societies and that we should not easily dismiss the moral beliefs of another culture than our own.
We can distinguish between two kinds of moral standards:
Those that differ from one society to another
Those that should be applied in all societies
These two kinds of moral standards are adopted in a framework called Integrative Social Contracts Theory (ISCT). This theory calls the first type of moral standards microsocial norms and the second type of moral standards hypernorms.
This framework says that hypernorms are part of a social contract that everyone has accepted. Microsocial norms are part of a social contract that the members of a specific community have accepted.
ISTC argues that hypernorms are more important than microsocial norms and that microsocial norms should not contradict hypernorms. When it does contradict then the microsocial norm is unethical and should be rejected.
People in a community ought to follow the microsocial norms in their society but must be free to leave the community whenever they disagree with these microsocial norms. A manager should follow the microsocial norms as long as they do not violate the hypernorms. There are many critics that reject this ISCT framework.
A person develops its ability to use moral standards in practice during his life. Personal experience as we mature changes the moral standards that are learned to us as a child. When we grow up we will look more critical to the moral standards learned.
The psychologist Lawrence Kohlberg has done research on the development of the moral view and found that there is a sequence of six stages. The six stages can be categorized into three levels and are summarized as follows:
Level one: Preconventional stages. In these levels the child can label things as good, bad, right or wrong. His motivations are primary self-centred.
Punishment and obedience orientation
The actions and punishments of the authority figure determine what is right and wrong.
Instrumental and relative orientation
The child is now aware that other people also have needs and sees right actions as the actions that satisfy his own needs.
Level two: Conventional stages. The child learns moral right and wrong from the conventional norms of his family, group or society.
Interpersonal concordance orientation
The young adolescent wants to be liked by his family and friends etc. Therefore he lives up to the expectations of those persons.
Law and order orientation
In this stage is learned that right and wrong are based on loyalty to one’s nation or society.
Level three: Postconventional stages. In these two levels the person will not simply accept standards but will criticize and evaluate them.
Social contract orientation
The adult starts to see that people can have different beliefs and that all these different beliefs should be tolerated.
Universal moral principles orientation
The adult chooses his moral principles based on reasonableness, universality and consistency. He sees these principles as the criteria for evaluating all society accepted norms and values.
According to this theory, the moral reasoning of people improves as the individual reaches later stages. Individuals in later stages are more able to see things from a wider perspective and are more able to justify their decisions to others.
However, there are some that criticize his theory. They criticize the claim of Kohlberg that higher stages are morally preferable to lower stages. These critics are right; higher levels may be broader but that does not mean that they are morally better.
A second criticism is pointed out by Carol Gilligan. He argues that the stages are correctly identified but that the theory fails to trace the development path of women’s morality. According to them, there are different approaches in morality between male and female.
It is important to notice that both Kohlberg and Gilligan agree about the fact that there are stages of growth in our moral development.
Ethics is about developing the ability to deal with moral issues. A central aim of the study of ethics is the stimulation of the moral development. When reasoning about moral judgements that you make you develop habits and a way of thinking that you can use for your own moral decisions.
Moral principles in a later stage of development are better because they have undergone reasoned examination and discussion with others. The discussion tends to improve as one develops as their knowledge increases during life.
William Damon found with his research that morality is not a dominant characteristic of someone until the middle adolescence. So before that age we do not see morality as an important part of who we are. As we age and morality becomes more important for our character, we tend to have a stronger motivation to do what is morally right.
Moral decisions are not only based on logic, reasoning and cognition. Also emotions play an important role in moral decisions. Moral standards are connected to certain emotions and feelings. Sometimes emotions make it harder to think clear but we cannot engage in moral reasoning without any emotions.
People who have lost their ability to have emotions also have lost the ability to engage in moral reasoning. This is because there is a strong link between emotions and moral reasoning. Many studies confirmed the presence of this link.
Because of this link emotions and feelings can give us some information about what is going on around us. An example is empathy; it allows us to know that the victim is feeling. Emotions let us know that we are facing a situation which raises ethical issues.
Moral reasoning is defined as the reasoning process by which human behaviours, institutions or policies are judged to be in accordance with or in violation of moral standards. Moral reasoning involves three components:
An understanding of the moral standard on which the judgment is based.
Factual information: Evidence or information about the particular person, policy, institution or behaviour under consideration.
A conclusion or moral judgement whether the person, policy, institution or behaviour is right or wrong, just or unjust. The moral judgement is drawn from 1 and 2.
The moral standards and factual information are crucial for a conclusion or moral judgement. Without these, one cannot make a logical conclusion. We often assume that moral standards are obvious and therefore we put most effort in looking for factual information.
The unspoken moral standards are not examined a lot. Because the judgement is also based on these unspoken and spoken moral standards it is very important to explicitly state these.
To evaluate whether a piece of moral reasoning is good ethicists use various criteria.
The moral reasoning must be logical.
The factual evidence that the person uses for his moral judgement must be accurate, relevant and complete.
The moral standards involved in the moral reasoning must be consistent with each other and with the other standards and beliefs of the person.
Consistency is very important in ethical reasoning. Moral standards must be consistently applied to all persons in similar circumstances. One should accept the consequences of applying the same standard to similar hypothetical cases. Whether a principle is acceptable or not can be tested with a hypothetical example.
According to James Rest, there are four steps leading to ethical behaviour:
Recognizing that a situation is an ethical situation.
Before one can think about how to deal with ethical issues one first has to recognize a situation in which ethical reasoning is needed. We can see a situation as a business, legal or family situation. Each type of situation needs its own type of thinking to deal with it.
There are six criteria to determine whether a situation is an ethical situation or not:
Does it harm or inflict one or more people?
Is the harm concentrated on its victims so that each victim sustained a significant amount of harm?
Is it likely that the harm will occur?
Are the victims close or accessible to us?
Will the harm occur fairly soon or has it already occurred?
Is there a possibility that the infliction violates moral standards that most people accept?
When one tries to determine whether a situation requires ethical reasoning, one can encounter several impediments that can get in the way. The main moral disengagements that function as impediments are:
By using euphemisms we change how we see a situation and instead of framing it as an ethical situation we frame it as something else.
Rationalizing our actions
One can tell himself that his harmful actions are justified because one is punishing a moral cause. One does not look at its own actions through an ethical frame.
One can see the situation in comparison to other large evils. Then the wrongdoing of ourselves diminishes and we think that it is not necessary to see the situation through an ethical framework.
Displacement of responsibility
When we do a job that harms others we argue that the harm is inflicted by the one who told us to do the job. Mentally we find then that we are not responsible for the harm.
Diffusion of responsibility
When a large group is responsible for the harm than one can see itself as only a small part of the group playing only a small role in the harm.
Disregarding or distorting the harm
One can deny, disregard or distort the harm resulting from his actions.
Dehumanizing the victim
One can see the victims as not real or not full human beings. Then these victims have no feelings and concerns and one cannot harm these people.
One can blame the adversary or the circumstances so that one is seen as an innocent victim provoked by others or by the circumstances.
Judging what the ethical course of action is.
As we have recognized the situation we have to look for information about the situation. There are several biased that can prevent us from getting the information we need. A bias is an assumption that distorts our beliefs, perceptions and understanding of a situation.
There are several forms of biases that have been studied and which have been put into three groups:
Biased theories about the world
These theories are about the beliefs we have about how the world works. How our actions have an effect on the world and what causes things to happen. The information that the world presents us is very complicated and to understand it we have to simplify the information. One way to simplify it is to limit the amount of information we allow ourselves to think about. This may lead us to ignore critically important information about the ethical situations we face.
Biased theories about others
These theories include beliefs we have about how we differ from others or what the members of certain groups are like.
One important class of this belief is ethnocentrism. Ethnocentrism is the belief that what our nation, group or culture does seems normal, ordinary and good while what others do seems foreign, strange and less good. This leads to unintentional discrimination
Stereotypes are beliefs we have about the members of any group, not just groups that are culturally or ethnically different from us. We believe that all or most members of the group live up to a certain image/look. Stereotypes may result in unethical decisions in business.
Biased theories about oneself
Our views of ourselves tend to be flawed. We believe that we are more capable, insightful, honest, ethical and fair than others. We have high confidence that we are able to control random events and are very optimistic about our future.
Deciding to do or not to do what we judge is right.
Although we have determined what is a morally right action it does not mean that we always will decide to do what is right. People often decide to do unethical behaviour even though they know that their actions are unethical.
Deciding to do what is ethical can be influenced by:
The culture of an organization
Decisions are influenced by peoples’ surroundings, especially their organizational surroundings like the ethical climate and ethical culture of an organization.
Ethical climate refers to the beliefs an organization’s members have about how they are expected to behave. In some organizations people are egoistic while in others people are expected to do what is best for various stakeholders.
Ethical culture refers to the kind of behaviour an organization encourages or discourages by repeated use of examples of appropriate behaviour, incentives for ethical behaviour etc.
Moral seduction can lead an ethical person into decisions that he knows are wrong. An organization that accepts unethical actions may lead a person to accept these unethical practices which he might had rejected before based on his own moral standards.
Carrying out the decision.
A good intention does not always lead to good behaviour because we often fail to do what we had intended to do. When the time comes we may lack to do what we intended to do. Carrying out the decision made can be influenced by:
One’s strength or weakness of will.
Strength of will refers to our ability to regulate our actions so that we resolutely do what we know is right, even when powerful emotions or social pressures urge us not to.
Weakness of will refers to the inability to regulate our actions so that we fail to do what we know is right when emotions, desires or social pressures tempt us.
One’s belief about the locus of control of one’s actions.
Locus of control refers to whether a person believes what happens to him or her is primarily within his or her control, or the result of external forces such as other powerful people, luck or circumstances.
One’s willingness to obey authority figures.
Research has shown that many people obey authority figures even when they know or suspect that they are doing something wrong.
Moral responsibility and blame
We also have to determine whether a person is morally responsible for an injury or for a wrong. When we say that someone is morally responsible we judge that the person acted intentionally and should be blamed or punished.
When we know who is moral responsible for something allows us to:
Identify who should fix the wrong.
Ensure that we do not mistakenly punish or blame an innocent person.
Ensure that you do not end up feeling shame or guilt when you are innocent and should not feel these emotions.
May help keep us from wrongly trying to rationalize our conduct.
A person is morally responsible for an injury if:
The person caused or helped cause it, or failed to prevent it when he or she could and should have prevented it. -> causality
The person did so knowing what he or she was doing. The person must be aware that his or her actions will injure someone else. The person can either be ignorant of the relevant facts or the relevant moral standards. -> knowledge
The person did so of his or her own free will. Someone is not responsible when he or she is physically forced or his actions are driven by an uncontrollable mental impulse. -> freedom
When one of the three requirements is absent then the person is not morally responsible. There are also several mitigating factors that can lessen the moral responsibility of a person. Such factors include:
Circumstances that minimize but do not completely remove a person’s involvement in an act. The degree to which the person caused the wrong is diminished by these circumstances.
Circumstances that leave a person somewhat uncertain about what he or she is doing. The person may be uncertain about how seriously wrong the action is.
Circumstances that make it difficult but not impossible for the person to avoid doing what he or she did. A person can be subjected to threats and the action would have imposed heavy costs on the person.
The seriousness of the wrong. The other three factors depend on this factor. The extents to which these three circumstances can diminish a person’s responsibility depend on how serious the wrong was.
The moral responsibility of a person is not removed nor mitigated by:
The cooperation of others. When an injury is done by more than one person this does not mean that the moral responsibility of each person diminishes.
Following orders. Someone is responsible for his injuries as long as he knows what he is doing and did it on free will even when it is an order from someone else.
This chapter will take a closer look at ethical principles and ethical issues that arise in the business world.
Judgements about justice are based on moral principles which identify fair ways of distributing benefits and burdens among everyone in a society. Judgements about moral rights are based on moral principles that advocate respect for people’s freedom and well-being.
Judgements about the importance of human relationships can be based on ethic of care. Ethic of care is an ethic that emphasizes caring for the concrete well-being of those near to us.
Ethic of virtue is an ethic based on evaluations of the moral character of persons or groups.
Utilitarianism: weighing social costs and benefits
When a business decides to use a utilitarian approach this can have a dramatic impact on lives of many people.
Utilitarianism is the moral view that in any situation the right course of action is the one that will provide people with the greatest amount of benefits while minimizing harms. Actions and policies should be evaluated on the basis of the benefits and the costs they will impose on society.
Companies make a cost-benefit analysis of each action they want to undertake. When this analysis is made, the company decides whether they will exercise the action or not. Business analysts argue that the best way to evaluate the ethicalness of a business decision is to rely on utilitarian cost-benefit analysis.
Benefits and cost can be in terms of economic costs and benefits. However, benefits can also be health, pleasure, lives, satisfactions, happiness, knowledge. Other costs can be pain, sickness, death, dissatisfaction, ignorance, unhappiness.
Utility is the inclusive term used to refer to any net benefits produced by an action. So utilitarianism is a theory that searches for an action or policy that maximizes utility.
Jeremy Bentham and John Stuart Mill are seen as the founders of traditional utilitarianism. They developed this so that one would have an acceptable norm for determining what the best social policy and legislation is.
The right action or policy from an ethical point of view would be the one that would provide more utility than any other possible action. So the action that produces the greatest net benefits or the lowest net costs.
When utilitarianism is used there are three important mistakes that are often made:
The utilitarianism principle does not mean that the right action is the one that produces the most utility for the person performing the action. It is about whether the action produces the most utility for all persons that are affected by the action.
Some think that we should only look at the direct and immediate consequences of our actions. However, we should also look at all foreseeable future costs and benefits.
The utilitarian principle does not say that an action is right as long as its own benefits outweigh its own costs. The combined benefits and costs should outweigh the combined costs and benefits of any other action.
To determine how one should act in a particular situation, according to utilitarianism, one should do four things:
Determine what alternative actions or policies are available in that situation.
For each alternative action you must estimate all costs and benefits to everybody affected by the action.
For each action you must subtract costs from benefits to determine the net utility of each action.
The action that creates the most utility is the ethically appropriate action and should be chosen.
This utilitarianism theory is an attractive ethical theory and most people agree with this view. The theory is attractive in several ways:
Advocates maximizing utility.
Matches well with moral evaluations of public choices.
Appears intuitive to many people.
Helps explain why some actions are generally morally wrong and others are generally morally right. The theory can say that lying is morally wrong because the costly effects of lying on people.
Highly influenced economics. Economists argued that the human economic behaviour could be explained by assuming that humans attempt to maximize their utility.
The book defines a cost-benefit analysis as a type of analysis used to determine the desirability of investing in a project by calculating whether its present and future economic benefits outweigh its present and future economic costs.
Utilitarianism matches with efficiency, something that many people strive for. Efficiency means operating in such a way that one produces desired output with the lowest resource input. Utilitarianism implies then that the right course of action is the one that is most efficient.
One major problem with the utilitarianism theory is that it is very difficult to measure utility. How can we measure the different levels of utility for the different parties involved. When we cannot determine which actions will give us the greatest amount of utility, then we cannot apply the utilitarianism principle.
Another problem is that some benefits or costs seem impossible to measure. How can we measure the value of health or life? When we cannot predict all the future benefits and costs we cannot measure the action.
Some other problem that can arise is that it may be unclear whether we should count something as a cost or as a benefit. Different people place different values on things. A cost to one can be seen as a benefit to another.
Finally, all benefits are measurable and this should imply that all benefits could be traded for equivalents of each other. However, this is not true since we do not place an equal value on all goods.
There are also noneconomic goods; goods such as life, love, freedom, equality, health and beauty whose value is such that it cannot be measured in economic terms. We are not willing to trade these goods for any amount of economic goods because noneconomic goods cannot be measured in economic terms.
Defenders of utilitarianism have a reply to these problems pointed out by critics.
Although utilitarianism requires accurate quantifiable measurements of all costs and benefits, this requirement can be relaxed when such measurements are not possible.
There are several common-sense criteria that can be used to determine relative values of categories of goods. One such criterion depends on the distinction between instrumental and intrinsic goods.
Instrumental goods are things that are considered valuable because they lead to other good things.
Intrinsic goods are things that are desirable independent of any other benefits they may produce.
Another common-sense criterion is used to weigh goods turns on the distinction between needs and wants. There are goods that we need to survive, basic needs like food, and there are goods that we want, desires like luxury goods. These luxury goods are called mere wants. Some things that we want are also the things that we need.
The best quantitative measure for the costs and benefits is in terms of their monetary equivalents. The value of a thing to a person is measured by the price. When we know how much everyone is willing to pay for several goods we can determine the average values items have in a group.
Using monetary values is also beneficial when taking into account uncertainty and the effects of time. However, there are also people against using monetary values because some things cannot be priced, such as health and life.
The utilitarian say that when market prices cannot provide quantitative data for decisions, other sorts of quantitative measures are available.
According to some critics the major difficulty of utilitarianism is that it is unable to deal with moral issues related to rights and related to justice. Utilitarianism ignores the importance of these two aspects of ethics.
Rights: utilitarianism may let us approve an act that is morally wrong and is a violation of a person’s right. Right is defined as individual entitlements to freedom of choice and well-being.
Justice: utilitarianism can lead to harm when it is applied to situations that involve justice. Justice is defined as distributing benefits and burdens fairly among people.
To deal with some of the problems of traditional utilitarianism critics have proposed an alternative version called rule-utilitarianism. This is a form of utilitarianism that limits utilitarian analysis to evaluations of moral rules.
For this we need the correct moral rules. These correct rules are those that would produce the greatest amount of utility if everyone were to follow them.
This rule-utilitarianism theory can be summarized into two principles:
An action is right from an ethical point of view if and only if the action would be required by those moral rules that are correct.
A moral rule is correct if and only if the sum of total utilities produced if everyone were to follow that rule is greater than the sum of total utilities produced if everyone were to follow some alternative rule.
So according to this theory, the fact that an action maximizes utility does not mean that the action is right. First we must find out what the correct moral rule is and then evaluate the actions involved.
Some critics argue that rule-utilitarianism is traditional utilitarianism in disguise. They argue that rules that allow exceptions will produce more utility than rules that do not allow any exceptions.
Rule-utilitarians do not agree with this critique of course. They say that humans would take advantage of these exceptions and that it would leave everyone worse off instead of better off.
Rights and duties
In business ethics the concept of right is crucial in many of the moral arguments and claims. For example, employees find that they have the right to equal pay for equal work.
The U.S. Constitution enshrines a long Bill of Rights in which the duties of the federal government to not to interfere in certain areas of its citizens’ lives are stated.
In 1948, the United Nations adopted a Universal Declaration of Human Rights. In this declaration all human beings were entitled to several rights.
A legal right is an entitlement that derives from a legal system that permits or empowers a person to act in a specified way or that requires others to act in certain ways toward that person. These rights are limited to the particular jurisdiction within which the legal system is.
Moral rights or human rights are rights that all human beings everywhere possess to an equal extent simply by virtue of being human beings. These are seen as universal rights and are not limited to a particular jurisdiction.
A right enables a person to freely choose whether he will pursue an interest or activity and to protect his choices about it.
When someone’s right is violated it is often the case that there is an infliction on the person. However, it could also be the case that a person’s rights are violated without being hurt. In this aspect rights are different from wrongdoing in utilitarianism. Wrongdoing in utilitarianism always involves injuries.
The most important moral rights are the ones that impose prohibitions or requirements on others and allow or empower individuals to pursue certain interests or activities. These rights have three important characteristics:
They are correlated with duties others have toward the person with the right.
They provide individuals with autonomy and equality in the free pursuit of their interests.
They provide a basis for justifying one’s actions and for invoking the protection or aid of others.
Because of these characteristics moral rights form the basis for moral judgements. Moral rights focus on securing the interests of an individual while utilitarianism standards focus on securing the utility of everyone in society.
If someone has a right to do something then it is wrong for anyone to interfere even if many people would gain much utility from it.
Negative rights are duties others have to not interfere in certain activities of the person who holds the right. An example is the right to privacy.
Positive rights are duties of other agents (it is not always clear who) to provide the holder of the right with whatever he or she needs to freely pursue his or her interests. Examples are the right to education, the right to work and the right to social security.
There is a debate about whether we should give priority to negative or positive rights. The ones that argue that negative rights should be more important are called conservative thinkers. The ones that argue that priority should be given to positive rights are called liberals.
Contractual rights and duties are the limited rights and duties that arise when a person enters an agreement with someone else. These rights are attached to specific individuals involved in the agreement.
These contractual rights arise from a specific transaction between specific individuals. Someone cannot have any contractual rights over you without an actual promise or agreement.
The contractual rights depend on a publicly accepted system of rules. Both parties must agree and recognize the same system of conventions. By taking the agreement, one person has the obligation to do what the other person agrees to do. Without these rights modern business societies could not operate.
These contractual rights also contain special rights and duties one faces when accepting a position or role in an organization or institution. Doctors have for instance the special duty to care for the health of their patients.
There are four basis conditions for moral rights:
The parties know what they are agreeing to.
There may be no misrepresentation.
No duress of coercion.
It must be no agreement to an immoral act.
Immanuel Kant has provided a foundation for moral rights based on a moral principle called the categorical imperative. This is a moral principle that obligates everyone regardless of their desires and that is based on the idea that everyone should be treated as a free person equal to everyone else.
Kant defines a maxim as the reason a person in a certain situation has for doing something he or she plans to do. When everyone chooses to do the same thing in the same situation it would become a universal law.
However, sometimes it is not possible or preferable that everyone should act the same in a similar situation.
Universalizability: the reasons for acting of a person must be reasons that, in principle, should be possible to do for everyone. An action is wrong if it does not pass the test of universalizability.
Reversibility: the reasons for acting of a person must be reasons that the person would be willing to have all others use, even as a basis of how they treat him or her.
According to Kent an action is morally wrong when the person only does the action out of self-interest because it gives him or her pleasure. To be motivated to undertake a duty is to be motivated by reasons that you believe everyone should act on when they are in a similar situation.
Kant gives another, second, formulation of the categorical imperative; act in such a way that you always treat humanity. Never use people only as means to your ends but always respect their freedom. One should also help the person to pursue his chosen ends. This second formulation is based on the idea that humans have a dignity that makes them different from mere objects.
He argues that it is wrong to make fraudulent contracts to deceive others or to intentionally not help others when they need help.
Many authors see that the theory of Kant, the categorical imperative, explains why people have moral rights. Moral rights identify the areas in which we as free and rational persons deal with each other.
An interest is important enough to become a right when:
We would not be willing to have everyone deprived of the freedom to pursue that interest.
The freedom to pursue that interest is needed to live as free and rational beings.
Human beings have interest in:
Being provided with food, work, clothing, housing and medical care when they cannot provide it themselves.
Being free from fraud and being able to think freely, have privacy and associate with whoever they want.
Preserving the institution of contracts.
Even though many people are in favour of Kent’s theory, there are also people that criticize him. The objections of critics are:
Both versions of the categorical imperative are not clear enough to always be used. The theory is too vague according to them.
There is a disagreement about what the limits of each right are. The rights can conflict with each other and Kant’s theory cannot resolve such conflicts.
There are counterexamples that prove that the theory sometimes is wrong. Kant’s theory implies moral judgements that are mistaken.
There are some philosophers that have proposed important views that are different than the theories we have discussed so far. Some of these philosophers are libertarian philosophers. They believe that freedom from human constraint is necessarily good and that all constraints imposed by others are necessarily evil, except when needed to prevent the imposition of greater human constraints.
One such a libertarian philosopher is Robert Nozick. He claimed the following things:
The only basic right that every person possesses is the negative right to freedom. This implies that restrictions on freedom are unjustified except when they prevent greater restrictions on freedom.
The right to freedom requires private property, freedom of contact, free markets and the elimination of taxes to pay for social welfare programs.
Nozick ignores the fact that freedom of one person puts constraints on the freedom of others. Since Nozick claims that restrictions on freedom are unjustified, freedom itself then would be unjustified.
Justice and fairness
In business people often refer to terms as justice and fairness. This is especially used when someone is accused of unjustly discriminating or acting unfairly. Justice is to some extent based on individual moral rights.
Issues of justice can be divided into three categories:
Distributive justice: requires distributing society’s benefits and burdens fairly.
Retributive justice: requires fairness when blaming or punishing persons for doing wrong.
Compensatory justice: requires restoring to a person what the person lost when he or she was wronged by someone.
1. Distribute justice
Issues of distributive justice arise when there is a scarcity of benefits such as work, food, income, medical care and health or when there are too many burdens. A fundamental principle of this is that equals should be treated equally and unequals should be treated unequally. One must be consistent in the way we treat people in similar situations.
There are different views that provide a principle of distributive justice. We will discuss some of them:
Justice as equality: Egalitarianism
Egalitarianism implies that there are no relevant differences among people that can justify unequal treatment. Everyone in a society should receive exactly equal shares of the benefits and burdens. Goods should be allocated to people in exactly equal proportions.
This principle of egalitarianism is not only applied in society but also in smaller groups or organizations. Many people view equality as a social ideal. However, there are also people that criticize this principle. These critics claim that there is no quality that all humans possess and therefore it is not possible that all human beings are equal.
Other critics argue that this principle ignores need, ability and effort in the distribution of goods. When everyone in society is given exactly the same goods then there is no incentive to put more effort in work.
Egalitarians have made a distinction between two different kinds of equality:
Political equality: equal participation in and treatment by the political system.
Economic equality: equality of income, wealth and opportunity.
The critics that others have had on egalitarians are against economic equality and not against political equality.
Justice based on contribution: Capitalist justice
This view argues that each individual should receive benefits in proportion to its contribution to the society, group, task or exchange. The more a person contributes the more benefits he should receive. This principle is the most widely used principle of fairness to establish salaries and wages.
To determine what each individual gets we have to determine what the value of contribution of each individual is. This can be measured in terms of work effort. The more effort people put in their work, the greater the share of benefits they receive will be.
Puritan ethic: the view that every individual has a religious obligation to work hard at his or her calling and that God rewards hard work with wealth and success and punishes laziness.
Work ethic: the view that places a high value on individual effort and believes that hard work does and should lead to success.
Another way to measure the value of contribution is in terms of productivity. Productivity is the amount an individual produces or that a group produced per person. The greater the productivity of an individual, the greater the benefits received.
There are also some authors that argue that the value of contribution can be measured by the market forces of supply and demand. The value of a product then depends on the extent to which it is scarce or not. However, this method ignores people’s needs. Therefore this method with market prices is by many seen as unjust.
Justice based on needs and abilities: Socialism
According to the socialist principle work burdens should be distributed based on people’s abilities and benefits should be distributed based on people’s needs. Work should be redistributed so that each person can be as productive as possible. Benefits are used to promote human happiness and well-being.
It seems logical that we should take needs and abilities into account when distributing benefits and burdens. People should work in a company that fits their ability and people that are less healthy should receive more contributions.
However, there are opponents to this socialist principle. One critique they have is that the according to the principle there would be no relation between the effort of a worker and the remuneration the worker receives. They argue that workers would have no incentive to work harder if there is no relation between effort and remuneration.
Another objection is that if the socialist principle would hold then it would destroy freedom. The occupation that a person would enter would depend on his ability according to his principle, and not on free choice. Also the goods the individual receives are not determined by free choice.
Justice as freedom: Libertarianism
According to this view there is no specific way of distributing goods that can said to be just or unjust apart from the free choices individuals make. A distribution is just as it is the result of individuals that can freely choose and trade the goods they want. This principle argues that the right to freedom from coercion is the most important right a person has.
Opponents of this view argue that also other forms of freedom must be secured. They also claim that the libertarianism principle will generate unjust treatment of the disadvantaged.
Justice as fairness: John Rawls
The principles that John Rawls proposes can be summarized by saying that a distribution of benefits and burdens is just if:
Each person’s liberties must be protected from invasion by others and must be equal to those of others. This is called the principle of equal liberty.
Social and economic inequalities are arranged so that they improve the position of the least advantaged person. This is called the difference principle. And everyone should be given an equal opportunity to qualify for the more privileged positions in society’s institutions. This is called the principle of fair equality and opportunity.
The principles of John Rawls bring the approaches of justice discussed so far together. With his principle he provides us with a general method for evaluating the adequacy of moral principles.
Rawls defines an original position as an imaginary meeting of rational self-interested persons who must choose the principles of justice by which their society will be governed.
The veil of ignorance is defined as the requirement that persons in the original position must not know particulars about themselves which might bias their choices such as their sex, race, religion, income, social status etc.
Rawls says that the principles that the imaginary parties to the original position accept will turn out to be morally justified. The parties to the original position would choose the principles that he states. With these two claims it follows that his principles are morally justified to serve as our own principles of justice.
Critics argue that the original position is not a good method for choosing moral principles. Others argue that the parties to the original position would not choose the principles of Rawls.
The defenders of the theory of Rawls use the following arguments:
The theory preserves the basic values embedded in our moral beliefs: freedom, equality of opportunity and concern for the disadvantaged.
It matches well with the basic economic institutions of Western societies.
It incorporates the communitarian and individualistic strains of the Western culture.
It takes into account the criteria of need, ability, effort and contribution.
2. Retributive justice
There are several conditions that determine whether a punishment is just or not:
Ignorance and inability are two important things in determining whether a person is morally responsible for something and in determining whether the punishment is just. When people do not know or cannot freely choose what they are doing, they cannot justly be punished for the action.
One must be confident and certain that the person being punished actually did wrong.
The punishment must be consistent and proportioned to the wrong.
3. Compensatory justice
There are no specific rules for determining how much compensation a victim should receive from the wrongdoer. The compensation should leave the victim as well of as before the injury. But it is very hard to measure what the exact losses of a victim are. There are also injuries that do not deserve compensation.
Traditional moralists argue that a person only has the obligation to compensate the injured party if the following three conditions are met:
The action that inflicted the injury was wrong or negligent.
The person’s action was the real cause of the injury.
The person inflicted the injury voluntary.
The ethics of care
The ethics of care states that ethics need not to be impartial, unlike the traditional ethical theories which assume that ethics has to be impartial.
Ethic of care is defined as an ethic that requires caring for the concrete well-being of those particular persons with whom we have valuable close relationships, particularly those dependent on us. This ethics emphasizes two moral things:
Every person exists in a web of relationships and should preserve and nurture these concrete valuable relationships.
Each person should exercise special care for those dependent and related to us.
An ethic of care can be seen as encompassing the obligations that a communitarian ethic advocates. A communitarian ethic is an ethic that sees concrete communities and communal relationships as having a fundamental value that should be preserved and maintained.
The community, in which individuals develop and discover who they are, is very important. The broad relationship of the community is just as important as the interpersonal relationships between individuals.
We can distinguish between caring about something, caring after someone and caring for someone. With ethic of care we mean caring for someone. It is based on the well-being of other persons and not on things.
There are two important issues with ethic of care:
Not all relationships are valuable. A relationship is not valuable when it is characterized by domination, oppression, harm, hatred, violence, disrespect, viciousness, injustice or exploitation.
The demands of caring can be in conflict with the demands of justice. Such conflicts should be resolved in ways that do not betray our voluntary commitments to others and relationships with them.
The development of ethics of care is primarily leaded by feminist ethics. This is because women approach moral issues from a view based on relationships and caring.
There are several objections to the ethics of care. We will discuss two of them including the response of ethics of care on these objections.
The first objection is that an ethic of care can degenerate into favouritism. Proponents of ethics of care response that conflicting moral demands are an inherent characteristic of moral choices.
The second objection is that an ethic of care can lead to a burnout. Proponents of ethics of care reply to this with the argument that adequate understanding of ethic of care will acknowledge the need of the caregiver to care for him or herself.
Integrating utility, rights, justice and caring
Utilitarian moral judgement should be based on:
Maximizing the net utility of our actions. It is important that we do not waste the resources that we have.
Respecting the moral rights of individuals and treat them proper.
Ensuring a just distribution of benefits and burdens among the members of a group.
Caring for those in special concrete and valuable relationships.
Our morality consists of these four basic moral considerations. Moral standards related to justice are more important than moral standards of utilitarian considerations and moral standards of caring are more important than moral standards of impartiality. The criteria for which moral standards are most important remain rough and intuitive.
When the moral standards are determined you have to search for the factual information concerning the party involved. When this is done you can make a moral judgment.
An alternative to moral principles: Virtue ethics
When we make a judgement we look at the morality of people’s character as well as at their actions. The approaches we discussed so far all focused on the action. Virtue ethics looks at moral issues from another point of view than the action-based ethics.
A moral virtue is an acquired disposition that is valued as part of the character of a morally good human being and that is exhibited in the person’s habitual behaviour. An example of a moral virtue is honesty. A moral virtue is a characteristic that is not just natural but that one must acquire.
Aristotle defined a moral virtue as a habit that enables a human being to live according to reason by habitually choosing the mean between extremes in action and emotions. Courage is the virtue of feeling fear and recklessness is the virtue of feeling less fear than one should have. Justice is the virtue of giving people exactly what they deserve. Virtues can be acquired through repetition.
Aquinas defined moral virtue as habits that enable a person to live reasonably in this world and be united with God in the next. The purpose of a person would not be the happiness in this life but the happiness in the next life.
The American philosopher Alasdair MacIntyre defined moral virtues as dispositions that enable a person to achieve the good at which human practices aim. However, many have argued that his approach is not correct. Pincoffs argues that it is incorrect because he claims that virtues include only those traits required by our social practices.
Pincoffs says that moral virtues are dispositions we use when choosing between persons or potential future selves. One should look at virtues based on the role they play in human life. It seems to be that the theory of Pincoffs is more adequate that the theory of MacIntyre.
A question we have not answered yet is how this moral virtue helps us decide what to do. Virtue theory argues that the aim of the moral life is to develop those general dispositions called moral virtues, and to exercise and exhibit them in the many situations that human life sets before us.
A key implication of this theory is that an action is morally right if the agent exercises, exhibits or develops a morally virtuous character when carrying out the action. An action is morally wrong if the agent exercises, exhibits or develops a morally vicious character.
The virtue theory also helps us to evaluate our social institutions and practices. Institutions should instill virtues and not vices.
There are some philosophers that do not agree with the virtue theory. The theory would not be consistent with the findings of modern psychology in the Milgram and Princeton studies. These Milgram and Princeton studies showed that behaviour is determined by the external situation and not by the moral character.
The proponents of the virtue theory argue that the moral character determines behaviour in a person’s familiar environment. Also recent psychology has been supportive of the virtue theory. Recent work shows that a person’s behaviour is determined by its moral identity which includes its virtues and vices.
Now that we have discussed theories of ethics and theories of virtues we need to look at the relationship between those two. Moral virtues support or facilitate adherence to moral principles. Moral virtues make it possible for people to do what their moral principles require.
Even though there are differences between the theories of ethics and theories of virtues there are no conflicts between those two. Both identify where moral life is about. In ethics of principles actions are primary while in theories of virtue dispositions are primary.
Unconscious moral decisions
Every day we go to a process of moral reasoning; applying our moral principles to a situation and making a judgement of the situation. Many of these ethical decisions throughout the day are unconscious. People often tell the truth without the need to think it over for example.
Psychological studies of the brain have suggested that there are two ways of making ethical decisions:
Through conscious reasoning.
Through unconscious reasoning.
It seems to be that the majority of our moral decisions are unconscious decisions. These unconscious processes are automatic and therefore they are unrelated to the conscious and logical reasoning processes we have studies so far.
Scott Reynolds calls the unconscious process the X-system and the conscious process the C-system. The X-system is based on the use of schemas or prototypes to automatically and unconsciously identify what it perceives and what it should do.
The brain uses stored information to identify what kind of behaviour is appropriate in the situation. Our brain matches the information with the current situation and when this has happened we become aware and recognize the kind of situation we are in.
With every situation and through life experience new information is added into our brain and the prototypes in our brain change. Because we have very many prototypes in our brain we are able to know how to behave without thinking about it consciously.
Once we are aware of the situation we come into the C-system of the process. Someone can for instance during a conversation with a friend decide to consciously not tell the truth. The processes in the C-system are more complicated than the simple processes in the X-system.
If we are in a new, strange and unusual situation we cannot rely on our information in the X-system but we rely on or C-system. The C-system then tries to gather information and trying to find out what is going on.
The prototype system of our brain saves us from being continuously jam in the hard processes of conscious moral reasoning. This use of prototypes is similar to the use of paradigms in casuistry or to the use of precedents in common law which are both rational processes. This similar characteristic implies that the brain’s use of prototypes is a rational process.
Prototypes in our brain can be changed and corrected by conscious reasoning. But not all the prototypes result from conscious reasoning. Our moral beliefs about how to act in certain situations are also influenced by culture. Also sheer intuition has a great influence on our prototypes. Finally, they can also be influenced by hardwired moral institutions.
Hardwired moral institutions seem to include:
Incest is wrong.
Harming by action is worse than harming by omission (Action principle)
Harming as a means to a goal is worse than harming as a foreseen side effect
Harming by physical contact is worse than harming without physical contact
According to the psychologist Marc Hauser most people accept these three principles when they make moral judgements about harming people.
Globalization is the process by which the economic and social systems of nations are connected together so that goods, services, capital and knowledge move freely between nations. These flows are facilitated by free trade agreements and international institutions like the World Trade Organization and the World Bank.
Globalization forces companies to compete with companies in other parts of the world. Because of this high competition many companies were forced to quit. When a company relocates its company to another country with lower wages this leads to enormous job losses in the home country.
There are many people that criticize global free trade because it harms the people who live in poor countries. It only benefits global business. This negative side of global free trade has led to a worldwide moral debate that has been present for many centuries. The debate is about whether governments should impose restrictions on business activities and economic exchanges or let them trade freely.
An economic system is the system a society uses to provide the goods and services it needs to survive and flourish. This system has two basic economic tasks:
Actually producing the goods and services and determining what must be produced, who will produce it and how it will be produced.
Distributing the goods and services among the members of the society and determining who will get what and how much each member will receive.
Tradition-based societies are societies that rely on traditional communal rules and customs to carry out basic economic tasks. The resources of the society are in this case often owned in common.
Modern societies carry out the economic tasks in two very distinctive ways of organizing themselves:
Systems primarily based on commands. In a command economy the government authority makes the decisions about what is to be produced, who will produce it and who will get it.
Systems primarily based on markets. In a market economy private individuals make the main decisions about what they will produce and who will get it.
Nowadays there are many economies that contain elements of all the three: traditions, commands and markets. An economy based completely based on one of the three would we undesirable. There is a heated debate about whether economies should focus more on commands or on markets. In this debate the term free markets crosses often.
Free markets are markets in which each individual is able to voluntarily exchange goods with others and to decide what will be done with what he or she owns without interference from government.
The debate takes place on two levels:
Whether a nation’s own internal economy should be organized as a free market economy.
Whether exchanges between nations should be based on free trade principles.
Ideology is a system of normative beliefs shared by member of some social group. This expresses the view of a group about human nature, the purpose of social institutions and how they work.
Free markets are supposed to protect the two natural rights; right to freedom and right to private property. John Locke has developed an idea that is in line with this claim. He says that is there were no governments then people would be in a state of nature. In this state everyone is free and political equal. He also argues that each person owns his own body, its labor and the products of its labor.
Lockean rights are rights to life, liberty and property. These lockean rights are unsafe and insecure and therefore people agree to form a government to protect and preserve their right to life, liberty and property. The existence of lockean rights implies that societies should incorporate private property institutions and free markets.
Criticisms of the Lockean view have focused on four major weaknesses:
The assumption that individuals have natural rights.
Neither Locke nor other followers of him have been able to prove that humans have such natural rights.
The conflict between these negative rights and positive rights.
The right to liberty and property are negative rights which can conflict people’s positive rights. Critics see no reason why we should believe Locke’s claim that the negative rights have priority to the positive rights.
The conflict between these Lockean rights and the principles of justice.
Free markets create unjust inequalities which are in conflict with the principles of justice. Globalization has increased inequality on a global level and enables companies to move their operations leading to countries that keep getting poorer.
The individualistic assumptions Locke makes and their conflicts with the demands of caring.
Critics claim that the individualistic assumptions of Locke are completely false because they ignore the key role of caring relationships in societies.
Adam Smith greatly supports free markets and private property. He argues that when individuals have to seek their own interests in free markets, they will be led to further the public welfare by an invisible hand.
Invisible hand: According to Adam Smith, the market competition that drives self-interested individuals to act in ways that serves society. The invisible hand is market competition.
He also argues that government interference in markets lowers the public’s welfare by creating shortages or surpluses. Therefore the best government policy to achieve public welfare is to do nothing.
Hayek and von Mises agreed with this argument because they say that governments cannot have enough information to allocate resources as efficiently as free markets do.
Adam Smith argues that there is a system of private property. Private ownership would lead to better care and better use of resources than common ownership.
Critics argue that Smith’s argument rests on unrealistic assumptions. One such an unrealistic assumption is that there are no monopoly companies. Many people say that patents are a form of monopoly.
A second critique is that he falsely assumes that all the resources used to produce are paid by the manufacturer, which ignores the costs of pollution. This assumption does not hold when manufacturers consume resources which they do not try to economize.
Another critique is that Smith falsely assumes that human beings are motivated only by a self-interested desire for profit. According to critics people are born with natural tendency to care for other member of their species.
Finally, critics argue that Smith, Hayek and von Mises are wrong when saying that governments should not intervene in the market. They say that some government planning and regulation of markets is possible and desirable.
The most influential critique on the theory of Adam Smith comes from John Maynard Keynes.
Say’s law: In an economy, all available resources are used and demand always expands to absorb the supply of commodities made from them.
Economists argue that without government intervention, the demand for goods may not be high enough to absorb the supply. This would lead to unemployment and an economic depression.
Keynes defines the aggregate demand as the sum of the demand of three sectors of the economy: households, business and government. It may happen that aggregate supply is less than the aggregate demand. This can happen when households decide to save their money instead of spending it on goods and services.
Keynesian economics is the theory of Keynes that free markets alone are not necessarily the most efficient means for coordinating the use of society’s resources. A government can influence the propensity to save through its influence on interest rates.
The government can also affect the amount of money households have available through taxes. Finally, the government can use its spending to close the gap between aggregate demand and aggregate supply.
The post-Keynesian school consists of economists who have sought to challenge and modify Keynesian economics. Some of these have suggested that in many industries today prices and wages are no longer determined by competitive market forces as Keynes assumed.
These post-Keynesians focus more on the oligopolistic nature of most modern industries and unionized labor markets. They also look at the role of social conventions and agreements in these markets.
Social Darwinism is the belief that economic competition produces human progress. Charles Darwin has also developed the idea of survival of the fittest: the term for the process of natural selection.
The philosopher Herbert Spencer suggests that the evolution theory of Darwin can also be applied to human societies. The theory of survival of the fittest applied to free competition in the economic world means that only the most capable individuals survive and rise to the top.
The individuals that have aggressive business are more likely to succeed and are seen as the fittest. Free competition will make people richer or less poor leading to an improvement of the human race.
Spencer also suggests that if a government intervenes in the economy to shield people from competition, the unfit survive and the human race declines. Thus he concludes that governments should not intervene.
There are several people that have critique on Spencer’s view. They claim that the skills that help individuals survive in business are not the ones that help humanity survive on the planet.
Another critique is towards the assumption that survival of the fittest means survival of the best. This mistake of Spencer is called the naturalistic fallacy; the assumption that what happens naturally is always what is good.
Despite the critics many business people today believe in some sort of social Darwinism. They believe that only the strong will survive in the economic environment.
Proponents of the utilitarian view suggest that free trade between nations is beneficial. Adam Smith said that countries differ in their ability to produce certain goods. He describes the term absolute advantage.
Absolute advantage is the situation where the production costs (costs in terms of the resources consumed in producing the good) of making a commodity are lower for one country than for another.
The differences in production costs between two countries may result from differences in labor cost, climate, technology, workers’ skills, equipment, land or natural resources. It can be that a country has an absolute advantage for every product it produces. David Ricardo argues that even when this is the case it is better for the country to specialize and trade.
Comparative advantage is the situation where the opportunity costs (in terms of other goods given up) of making a commodity are lower for one country than for another. This is the most important concept in international trade theory today.
When two countries specialize and then trade with each other they will have more of both products after trade than without specialization. The arguments of specialization and trade of Smith and Ricardo provide support for globalization.
Although there is much support for the theory of Ricardo, there are also economists who have critique. Several objections to Ricardo’s theory are:
His argument ignores the easy movement of capital by companies.
He falsely assumes that a country’s production costs are constant.
He falsely assumes that workers can easily and without costs move from one industry to another.
He ignores the influence of international rule-setters. This is the most important objection critics make.
Marx and justice
Karl Marx is the most well-known critic of private property institutions, free trade, free markets and the inequalities they create. He argues that a capitalist system offers two sources of income:
Sale of own labor
Ownership of the means of production; the buildings, machinery, land and raw materials used in the production of goods and services.
Workers are not able to produce anything without access to the means or production and therefore they need to sell their labor to the owner in return for a wage. The owner is then able to exploit the workers.
Alienation: In Marx’s view, the condition of being separated or estranged from one’s true nature or true human self. He argues that it is in the nature of humans to self-determine and satisfy its needs. When the person loses control and is controlled by an external power then this person is alienated from his own nature.
Marx says that capitalist economies can alienate workers in four ways:
It alienates workers from their own productive work.
It alienates workers from the products of their work/labor.
It alienates workers from their relationships with each other.
It alienates workers from themselves by making them believe in false views of what their real human needs are.
Marx claims that human interactions have commercialized over time and have now turned into commodities so that everyone and everything has its price.
The source of the worker’s loss of control over work, products, relationships and itself can be found in private ownership of the means of production. Productive property should be seen as having a social purpose; it must serve the needs of all and should be owned by everyone and not be privately owned.
Marx says that we can analyse every society in terms of two components:
Economic substructure: The materials and social controls that society uses to produce its economic goods.
He calls these materials to produce goods (land, labor, natural resources, machinery, energy, technology) the forces of production.
He calls the social controls used in production (the social controls by which society organizes and controls it workers) relations of production.
The relations of production depend on the forces of production.
Social superstructure: A society’s government and its popular ideologies.
The ruling class created by the economic substructure will control the superstructure. This ruling class uses it political power to control the government and to dominate the lower class. The government of a society and its ideologies are designed to support the ruling economic class.
Historical materialism is the Marxist view that history is determined by changes in the economic methods by which humanity produces the materials on which it must live. Some ideas of this view are:
The methods that a society uses to produce its goods determine how that society organizes its workers.
The way a society organizes it workers will determine the social classes in the society.
The ruling social class in the society controls society’s government and ideologies and uses these to advance its own interest and to control the working, lower class.
Marx argues that if production depends on private ownership and unregulated free markets this would lead to a series of crises that would harm the working class of a society. Some of the problems that will arise are:
Capitalism will concentrate global industrial power in the hands of few. These powerful people will organize workers for mass production.
The mass production in the hands of few will lead to surplus which causes a repeated circle of economic downturns. The economy will come in an economic depression.
The position of the worker will worsen in capitalist societies. The above effects lead to immiseration of workers. Immiseration of workers is defined as the combined effects of increased concentration, cyclic rises, rising unemployment and declining relative compensation.
The solution to all these problems would be collective ownership of the productive assets of a society and the use of rational planning to replace unregulated markets.
There are economists that have critique on Marx’s injustices that free markets and private property would impose on society. They have the following critics:
The claims of Marx that capitalism is unjust are unprovable.
They claim that justice requires free markets.
Critics argue that the benefits of private property and free markets are more important than equality.
Marx says that free market cause alienation but critics say instead that free markets encourage the community.
A final critique is that they argue that immiseration of workers has not occurred. Instead their condition has been improved.
The mixed economy, the new property and the end of Marxism
A mixed economy is an economy that retains a market and private property system but relies heavily on government policies to remedy their deficiencies. Such a mixed economy may have some advantages.
Governments in a mixed economy make transfers to get rid of the worst aspects of inequality. They do this by drawing money from the rich ones in the form of taxes and then distributing this money to the poor in the form of welfare payments or social services.
The debate about property systems has nowadays moved toward a debate about the new forms of intellectual property. Intellectual property is nonphysical property that consists of knowledge or information such as formulas, plans, music, stories, texts, software etc.
Intellectual property is nonexclusive; one’s use does not exclude other people from use. The debate is about what kind of property system a society should adopt to determine the ownership rights for intellectual property.
The Lockean view argues that intellectual property should be treated as private property of the person that for instance made the software.
The Marx view argues that intellectual property should be seen as a collective or common ownership. Especially property than can be used to produce additional value must be seen as collective ownership.
Copyright is a grant that indicates that a particular expression of an idea is the private property of an individual or a company. Any tangible text or expression can be copyrighted. With a copyright one can create property rights for intellectual property.
Another way of creating property rights for intellectual property is through a patent. There are many people that criticize the system of patents and copyrights because they would prevent other people from developing improved versions of the software.
The Marx’s view is nowadays almost abandoned. The whole world now agrees that the best system is capitalism. However, there are still some that do not completely abandon Marx.
Smith and Locke continue to say that government intervention does more harm than good. However, mixed economies with some government intervention may come closest to a combination of utilitarian benefits of free markets with respect for human rights, justice, caring and the strengths of government regulation.
There are three economic models describing the three degrees of competition in a market:
Perfect competition: A free market in which no buyer or seller has the power to significantly affect the prices at which goods are being exchanged
Pure monopoly: A market in which a single firm is the only seller in the market and in which new sellers are barred from entering.
Oligopoly: A market shared by a relatively small number of large firms that together can exercise some influence in prices.
To understand the ethics of market behaviours one first has to fully understand the basic models of economics. We will see that markets that depart from perfect competition tend to diminish utility, violate moral rights and be unjust.
A market is a forum in which people come together to exchange ownership of goods; a place where goods or services are bought and sold.
A perfectly competitive market is characterized by the following things:
There are many buyers and sellers, all have only a small share of the market.
There is free entry and exit of markets.
Everyone has full and perfect knowledge of what everyone is doing, including knowledge of prices, quantities and quality of goods.
The goods sold in the market are similar to each other and no one cares from which each buys or sells.
The costs and benefits of producing or using are born entirely by those buying or selling the goods and not by any other external party.
All buyers and sellers maximize utility.
There are no external parties that regulate prices, quantity or quality of goods in the market.
Another thing that free competitive markets need is an enforceable private property system, an underlying system of contracts and an underlying system of production. In a perfectly competitive market prices and quantities always move towards the equilibrium point.
The equilibrium point in a market is the point at which the quantity buyers want to buy equals the quantity sellers want to sell, and at which the highest price buyers are willing to pay equals the lowest price sellers are willing to take.
Perfectly competitive markets thus lead to the equilibrium point where three moral criteria are satisfied: justice, utility and rights.
A demand curve is a line on a graph representing the quantity of a product that buyers would purchase at each price. It shows the highest price buyers on average would be willing to pay for a given amount of the product. The demand curve slopes downward to the right and works on the principle of diminishing marginal utility.
The principle of diminishing marginal utility is the principle that generally each additional unit of a good a person consumes is less satisfying than each of the earlier units the person consumed. So the demand curve represents the value consumers place on each unit of a product as they purchase more units.
The supply curve is a line on a graph representing the quantity of a product that sellers would provide at each price. It shows the price sellers must charge to cover the average costs of supplying a given amount of a product. The supply curve slopes upward to the right and works on the principle of increasing marginal costs.
The principle of increasing marginal costs is the principle that after a certain point, each additional unit a seller produces costs more to produce than earlier units. So the supply curve indicates what sellers must charge per unit to cover the costs of supplying a given amount to the market.
When we put the demand curve and the supply curve in a graph we will get:
The point of equilibrium is found where supply and demand curves meet. In this graph that point is found at E. In a perfectly competitive free market, prices and quantity move towards this equilibrium point.
If the price rises above the equilibrium price, a surplus appears and this drives prices down to the equilibrium.
If the price falls below the equilibrium price, a shortage appears and this drives prices up to the equilibrium.
If the quantity is less than in equilibrium, profits arise and this will attract sellers who increase the quantity until the equilibrium is reached.
If quantity is more than in equilibrium, prices fall and lead to losses which drives out sellers. This lowers the quantity to the equilibrium.
As states before perfectly competitive markets achieve three moral values:
They lead buyers and sellers to exchange goods in a way that is just.
The buyer finds that only prices on the demand curve are just and sellers find that only prices on the supply curve are just.
A perfectly competitive market moves the price to the equilibrium point which lays both on the demand and supply curve. This means that the equilibrium price is just for both buyers and sellers.
They maximize the utility of buyers and sellers.
The price in a market attracts resources if demand is high and drives resources away when demand is low. This leads to an efficient allocation of resources.
Perfectly competitive markets encourage forms to use their resources as efficient as possible to keep their costs low and profits high. These markets also make consumers buy the bundle of goods that satisfies them the most. This distributing of goods is done such that utility is maximized.
They make buyers and sellers allocate and distribute their goods with perfect efficiency.
In a perfectly competitive market one can freely choose which business to enter. All exchanges are voluntary so the market respects the right of free choice. In such a market no sellers exert coercion by dictating prices, quantities or kinds of goods consumers must buy.
However, when we interpret these three moral features we have to take into account several cautions:
The justice we discussed is the only form of justice that a perfectly competitive market establishes.
The individual’s utility is maximized but society’s total utility is not necessarily maximized.
The market may establish certain negative moral rights but may diminish positive rights.
Free competitive markets ignore and conflict with the demands of caring and ignore the value of human relationships.
Free competitive markets can have malign effect on people’s moral character. It may encourage vices of greed and self-seeking and may discourage virtues of kindness and caring.
Capitalist justice, utility and negative rights are only produced if they embody the seven conditions of perfect competition.
In a monopoly two of the seven conditions of perfectly competitive markets are not present. The two differences are:
A monopoly market has one dominant seller instead of numerous sellers. This one dominant seller has a substantial share of the market. The one company has control over the price and can determine who can get some of the product.
It is not possible for other companies to enter the market. There exist barriers to entry that keep companies out, like patents and copyrights.
Two examples of monopoly markets are the worldwide market for operating systems for personnel computers and the market for office suite software.
Network effect: this is a barrier in which the value of a product increases as the number of users increases. Consumers prefer big operating systems because there are more software programs available for these.
The more programs available result from the fact that software developers are more likely to design for operating systems with more users. This makes it hard for small operating systems to compete with very large operating systems.
Monopoly companies choose the price at which they want to sell. They may choose to set the price above the equilibrium price. This situation can be seen in the graph on the next page. At the monopoly price, demand is higher than supply. This leads to profits for the monopoly.
If the market where a free market this profit would have attracted other companies to enter the market. However, there are barriers to entry that make this impossible. There is a limited to the price that a monopolist can charge. Some say that even when a monopoly can make profits, they actually do not try to make monopoly profits.
A monopoly violates capitalist justice, utilitarianism and negative rights:
It violates justice because the company charges more for products than they know the products are worth.
It violates utilitarianism because it keeps resources out of the market while there are shortages in supply. These resources are diverted to markets without such shortages. This removes the incentive to use the resources efficiently.
It violates negative rights because a monopoly keeps other companies from entering the market and it forces buyers to purchase goods they not want. A monopoly also forces consumers to accept the price and quantity it charges.
Most markets in practice are an oligopoly. These markets are also called imperfectly competitive markets. Such markets are defined as markets that lie somewhere between the two extremes of the perfectly competitive market with many sellers and the monopoly market with one dominant seller.
Some oligopoly markets are dominated by a few large firms. These markets are said to be highly concentrated. Many large manufacturing industries are highly concentrated oligopolies.
Most oligopolies are formed via horizontal mergers. A horizontal merger is the unification of two or more companies that were formerly competing in the same line of business. Of several companies in an industry merge then the market can become an oligopoly.
The companies in an oligopoly can easily join forces to act as a unit to affect consumers. They can all agree to charge the same price and to restrict their output. This may lead to unfair prices, a decline in social utility and may violate the basic economic freedoms.
Companies compete in markets by offering products and service that are cheaper or better than the products of competitors. This is often done by lowering their costs or make higher profits than competitors. This is seen as an honest way of competing.
However, there are also other ways of competing that aim at destroying competition itself. Several ways in which firms can use their market power to harm consumers and competitors:
Explicit agreements and other anticompetitive tactics
Companies can make explicit agreements that set the price at a level that gives them profits. Companies can act like a unit by charging the same price. This makes the oligopoly market into a monopoly market. It is morally wrong that the companies unite together in a collusive agreement.
Price-fixing is a secret agreement between firms to set their prices at artificially high levels. This would lead to the same effects as a high price in a monopoly.
Manipulation of supply
Manipulation of supply occurs when firms in an oligopoly industry agree to limit their production so that prices rise to levels higher than those that would result from free competition.
Market allocation is when companies in an oligopoly divide the market up among themselves and agree to sell only to customers in their part of the market.
Bid rigging is a prior agreement that a specific party will get a contract even though all other parties will submit bids for the contract. Bid rigging eliminates competition and the buyer unknowingly faces a monopoly and will get unfairly overcharged.
Exclusive dealing arrangements
This occurs when a firm sells to a retailer on condition that the retailer will not purchase any products from other companies and will not sell outside of a certain geographical area. These arrangements tend to eliminate price competition between retailers and thus reduce competition.
This is when a firm sells a buyer a certain good only on condition that the buyer agrees to purchase certain other goods from the firm.
Retail price maintenance agreements
Retail price maintenance agreements occur when a manufacturer sells to a retailer only on condition that the retailer agrees to charge the same set retail prices for its goods. This would reduce competition between retailers and removes the manufacturer’s competitive pressure to lower prices and cut costs.
Predatory price discrimination
Someone engages in price discrimination when it charges different prices to different buyers for identical goods or services. This may lead to predatory price discrimination; price discrimination aimed at running a competitor out of business.
A company can bribe the government to make a sale. This reduces the competition in a market because the company does not have to compete with other sellers anymore.
The question is why do managers risk going to jail and destroying their families? Donald Cressey argues that people tend to engage in white collar crimes when the fraud triangle is present. The fraud triangle with some important factors that tend to lead to price-fixing:
They have strong incentives or are pressured to engage in wrongdoing.
They see an opportunity
The job-order nature of the business
Decentralized pricing decisions
Industry or trade associations
They can rationalize their actions
Inactive corporate legal of H.R. staff
Organizational culture of the business
The agreements we discussed so fare are mostly forms of explicit market agreements. However, there can also be tacit agreements.
The price leader is the firm recognized as the industry leader in oligopoly industries. The firms in the market will set their prices based on the level announced by the price leader.
Oligopolies and public policy
In the end of the19th century many businessmen use anticompetitive practices. These practices will eventually create enormous trusts. A trust is an alliance of previously competitive oligopolists formed to take advantage of monopoly powers.
Some argued that the power of the trusts was dangerous for society and would give these businesses unfair political influence. As a response to these movement of trusts, the U.S. Congress passed in 1890 an antitrust legislation; the Sherman Antitrust Act.
The Sherman Antitrust Act is a federal law that prohibits competitors from getting together to reduce competition or using monopoly power to keep or expand a monopoly.
In 1914 these laws were expanded by the Clayton Act which prohibits price discrimination, exclusive dealing contracts, tying arrangements and mergers between companies.
Nowadays there is still a great debate about what governments should do about the power of oligopolies and monopolies. Some say that there power is so small that it cannot affect society while others argue that their power dominates modern economies.
This debate has given rise to three views on the power of an oligopoly:
The do-nothing view
This view argues that the government should do nothing because power of oligopolies is limited by competition between industries and by countervailing power of large groups. This view also says that oligopolies are competitive and big U.S. companies are good international competitors.
The antitrust view
The basic propositions of this view are:
If an industry is not atomistic with many small competitors, it is likely that there is administrative discretion over prices.
Concentration leads to interdependence among companies, with no price competition in concentrated industries.
A high degree of concentration is unnecessary.
This view argues that large monopolies and oligopolies are anticompetitive and should be broken up into small companies.
The regulation view
This view argues that big companies are beneficial but need to be restrained by government regulation. This government regulation is needed because economic power of the big firms allows them to fix prices and engage in other behaviour that is not in public’s interest.
Markets and consumer protection
A consumer faces several problems in markets:
Dangerous and risky products
Deceptive selling practices
Poorly constructed products
Failure to honour warranties
Deceptive and unpleasant advertising
The market approach to consumer protection says that safety to consumers can be provided efficiently through the free market. This is because sellers must respond to the demand of consumers if they want to make profits.
Consumer markets will respond efficiently and fairly to consumer preferences if the buyers:
Have adequate information
Are rational utility maximizers: persons who have a well-defined and consistent set of preferences, and know how personal choices will affect those preferences.
Have the other characteristics of the perfectly competitive market.
The price of safety and the amount sellers will provide is determined by the costs of providing it and the value consumers place on it. Government intervention in consumer markets makes these markets unfair, inefficient and coercive.
There are some objections about the market approach to consumer protection. The problems with this approach arise because it assumes that markets are competitive. However, this is not the case since:
Consumers do not have adequate information about products when the products are complex and information is costly and hard to find.
Buyers are irrational and inconsistent when making purchase decisions. They are not rational about the product risk or probabilities.
Most consumer markets are not competitive but are instead monopolies or oligopolies.
A part of the responsibility for injuries on consumers lies on consumers. There is also a part of responsibility for the manufacturer. There are three different theories about the ethical duties of manufacturers.
These three views are:
The contract view
The due care view
The social costs view
The contract view
The contract view of the business firm’s duties to its customers is the view that the relationship between a business firm and its customers is essentially a contractual relationship. The firm’s moral duties to the customer are those created by this contractual relationship.
The contractual agreement is a free agreement that imposes duties on both parties in the agreement. Traditional moralists have argued that entering into a contract is subject to several secondary moral constraints:
Both parties must have full knowledge of the nature of the agreement.
Neither party must intentionally misrepresent the facts of the contractual situation to the other party.
Neither party must be forced to enter the contract under duress or undue influence.
So the moral duties of a business to its customers are: the basic duty of
Complying with the terms of the sales contract and secondary duties.
The firm owes its customers the duty to provide them with a product that lives up to the claims that the firm makes about the product. The product must live up to the claims of quality and safety made by the firm.
The claims that a seller can make about the qualities of the product range over a variety of areas. The product quality is defined as the degree to which product performance meets predetermined expectations with respect to:
Reliability: The probability that a product will function as the consumer is led to expect that it will function.
Service life: The period of time during which the product will function as effectively as the consumer is led to expect it to function.
Maintainability: The ease with which the product can be repaired and kept in operating condition.
Product safety: The degree of risk associated with using the product.
So the seller can make claims on ground of these four product qualities. It must live up to these claims to fulfil its duty to its customers.
Disclosing the nature of the product.
Both parties of the agreement must know what they are doing and freely choose do to it. The seller has the duty to disclose exactly what the consumer is buying and what the terms of the sale are.
There are some that criticize the view that sellers should provide great information to buyers because information is costly and should therefore be treated as a product for which consumers must pay.
Free choice is an essential part of a contract between seller and buyer. Since misrepresentation is coercive it is ethically wrong to do. Misrepresentation happens when a seller lets the buyer believe something about the product that the seller knows is false.
Avoiding the use of coercion; duress and undue influence.
When people are under the influence of fear or emotional stress they tend to act irrationally. The seller can take advantage of the fear or stress of a buyer to consent an agreement. When this is the case the seller is using duress or undue influence to coerce.
There are some objections about the assumptions of this contractual theory:
The theory assumes that makers of products deal directly with consumers, but they do not. However, advertisements of manufacturers do form a kind of direct promise to consumers.
This objection focuses on the fact that a contract is two-edged sword. If a consumer can freely agree to buy a product with certain qualities he can also freely agree to buy a product without these qualities. Sellers can remove all their duties to buyers by getting them to agree to disclaimers of responsibility.
The theory assumes that consumer and seller meet as equals but critics say that the seller has more knowledge so the consumer must rely on the seller. The consumer who purchases hundreds of different goods cannot have as much knowledge as the manufacturer who specializes in a single product.
The due care theory
The due care theory of the manufacturer’s duties to consumers is the view that because manufacturers are in a more advantaged position and consumers must rely on them, they have a duty to take special care to ensure that consumers’ interests are not harmed by the products that they offer them.
In this view the doctrine of caveat emptor is replaced with the doctrine of caveat vendor.
Caveat emptor: let the buyer take care.
Caveat vendor: let the seller take care.
The manufacturer has not only the duty to deliver a product that lives up to the claims but has also the duty to exercise care to prevent customers from being injured by the products. This due care is inserted in the design of the product. Like the choice of reliable materials, the quality control to test the product, warnings, labels and instructions attached to the product.
This due care view implies that agents have a moral duty not to harm other parties by their acts, especially when the other parties are vulnerable. This principle can be supported by the requirements of an ethic of care.
The duty to exercise due care imposes specific responsibilities on the producer. These responsibilities of the producer extend to three areas:
When the producer designs a product he must research its risks in the conditions of use. These product risks must be minimized and the producer must take the capacities of the users into account.
The manager should control the manufacturing process to eliminate defects and ensure that materials and manufacturing do not add defects or risk.
The manufacturer should attach labels, notices or instructions on the product to warn and protect consumers for the dangers involved in using the product.
There are some problems with the due care view:
It does not provide a clear method for determining when one has exercised enough due care. The theory does not say what the producer must spend to eliminate risk.
The theory does not indicate who should pay for product injuries that cannot be foreseen.
It falsely assumes that the manufacturer should be the one that makes the important decisions for the consumer.
The social cost view
The social cost view of the manufacturer’s duties to consumer is the view that a manufacturer should pay the costs of any injuries caused by defects in the product. He should even pay if the manufacturer exercised all due care in designing, making and marketing, and the injury could not have been foreseen.
This theory is a strong version of the doctrine of caveat vendor; let the seller take care.
This theory has also formed the bases for the doctrine of strict liability. This is a legal doctrine that holds that manufacturers must bear the costs of injuries resulting from product defects regardless of fault.
Because the manufacturer bears all the external costs from the injury and the internal costs, all costs are internalized and added as one part of the price of the product. This internalizing leads to a more efficient use of society’s resources. It would also lead to a more fair distribution of costs and maximizes utility.
There are three major criticisms on the social cost view:
The theory is unjust because it violates the basic point of compensatory justice that one should compensate injured parties only if the injury was foreseeable and preventable.
The theory falsely assumes that passing the costs of all injuries on to manufacturers will reduce the number of accidents. Instead of preventing accidents it encourages consumer carelessness by relieving them of the responsibility for their injuries.
It has increased the number of successful consumer lawsuits which imposes heavily losses on insurance companies and makes insurance too expensive for many firms. However, studies show that there is only a small increase in lawsuits and insurance firms remain profitable.
Advertising is a public communication tool aimed at a large social group intended to induce members of this audience to buy the seller’s products. The seller creates a desire for the product or a belief that the product will satisfy the desires.
Commercial advertising is a communication between a seller and potential buyers that is publicly addressed to a mass audience and is intended to induce members of this audience to buy the seller’s products.
Critics claim that advertising has several negative effects on society.
Psychological effects of advertising: it degrades people’s tastes.
Advertising lowers the taste of consumers by inculcating materialistic values and ideas about how happiness is achieved.
Advertising and waste: it wastes valuable resources and therefore violates utilitarian principles.
Economists distinguish between two costs
Production costs: the costs of the resources consumed in producing or improving a product.
Selling costs: the additional costs of resources that do not go into changing the product but are invested instead in getting people to buy the product.
The costs of resources consumed by advertising are selling costs. Critics argue that these costs are a waste because they do not add to consumer utility.
However, this criticism ignores how advertising can increase consumption which is good. But there are several studies that show that this is not the case and that a consumption increase is not necessarily good.
Advertising and market power: it creates monopoly power
Big firms use advertising to create brand loyalties which let them become monopolies or oligopolies. However, this criticism ignores the fact that there are studies that show that big monopoly or oligopoly firms do not advertise more than little firms.
John K. Galbraith argues that advertising is manipulative: it creates psychic desires which, unlike physical desires, are pliable and unlimited.
Physic desires are created so that firms can use us to absorb their output; ensuring that people buy what is produced. In this way, we are treated as means instead of ends and thus this is unethical.
It is unclear whether all the effects of advertising of Galbraith are correct but we can say that some advertisements are intended to manipulate. Advertisements can violate consumer’s right to be treated as a free and equal rational being.
The criticism of advertising that we see often concerns its effect on the consumer’s belief. Most of these criticisms focus on the deceptive aspects of modern advertising.
Deceptive advertising involves three elements:
The authors who originates the communication
There are three necessary conditions for deception of the author:
The author must have the intention to make the audience belief something that is false.
The author must know that what he tells is false.
The author must intentionally utter or do something that leads the audience to believe this false thing.
The advertiser cannot be held morally responsible for misinterpretations of an advertisement when these are unforeseen and unintended.
The medium that carries the communication
The truth in advertising also partly rests on the media or intermediaries that carry or transmit the message of the advertisements. These media can communicate false messages of the advertisement and are therefore also responsible for the deceptive effects.
The audience who receives the communication
Whether the advertisement is deceptive also depends on the capacities of the audience that receives the message. An audience that has knowledge is probable able to correctly interpret and advertisement that may be misleading.
In contrast, vulnerable audiences may not be able to recognize the deceptive nature of the advertisement.
When one wants to determine the ethical nature of an advertisement ne should take the following factors into consideration:
What is the intended effect of the advertiser?
What are the actual effects of the advertisement on individuals and on society?
Effects on desire
Does the advertisement only inform or does it also seek to persuade?
If it is persuasive, does it try to create an irrational and injurious desire?
Effects on belief
Is the content of the advertisement truthful?
Does the advertisement have a tendency to mislead?
Technological improvement has given us the power to collect, manipulate and disseminate personal information about consumers. This power has enabled us to invade the privacy of consumers and may lead to harm.
The right to privacy is the right of a person to determine what, to whom and how much information about themselves will be disclosed to other parties.
There are two basic types of privacy:
Psychological privacy: Privacy with respect to a person’s inner life. These include thoughts, plans, personal beliefs, feelings, wants etc. of a person.
Physical privacy: Privacy with respect to a person’s physical activities. Physical privacy is important because it protects psychological privacy.
Privacy is very important because it protects individuals from disclosures that can lead to shame, can encourage interference in someone’s private life, hurt loved ones and lead to self-incrimination.
It is also important because it enables some things:
It enables the person to develop ties of friendship, love and trust.
It enables the development of professional relationships.
It enables a person to distinct social roles.
It gives us the ability to determine how others will see us.
It is beneficial for a consumer to have life insurance. So businesses can provide consumers with great benefits. There are several considerations to balance the legitimate business needs with the right to privacy:
The purpose of the information being collected must be a legitimate business need. It is legitimate when it leads to benefits for the person from who the information is collected.
Databases may only include information that is directly relevant to the purpose for which the database is being compiled.
When information from consumers is collected one should inform the consumers that this is done. One should also inform the consumers about the purpose for which the information is collected.
A business may only collect information if the person has consented to provide information to that business and only if the information is used for the purpose for which the person has consented to have it used.
The information that is collected by the business must be accurate.
Security and recipients
Agents that collect information must be sure that information is secure and not revealed to parties that do not have the consensus of the individual to receive the information.
The nature of job discrimination
Discrimination is defined as the wrongful act of distinguishing illicitly among people not on the basis of individual merit, but on the basis of prejudice or some other invidious or morally reprehensible attitude.
Discrimination in employment must involve three basic elements:
A decision against employees that is not based on individual merit.
The decision derives from a morally unjustified attitude, like race or sex, against members of the class to which the employee belongs.
The decision has a harmful or negative impact on the interest of the employees against who the decision is made. Examples of such interests are hiring, wage, promotion.
We can make a distinction between different forms of discrimination by looking at the extent to which the discrimination is intentional or unintentional and whether it is individual or institutional. This leads to the following four forms:
Intentional discrimination: is conscious and deliberate discrimination.
Unintentional discrimination: is not consciously or deliberately sought but is the result of stereotypes or processes with unintended outcomes.
Individual discrimination: is the discrimination of one or a few individuals acting on their own.
Institutional discrimination: is discrimination that is the result of the actions of all or many people in an institution and of their routine processes and policies.
During the last century there has been a shift from primarily intentional and individual discrimination (in the 1960s) to institutional and unintentional discrimination (in the 1970s).
In 1970 there was a lot of discrimination towards minority groups. To remedy this discrimination companies were asked to use affirmative action programs.
An affirmative action program is a program that is designed to ensure that minorities, women or other members of some group, are adequately represented within an organization and its various levels. This is done by taking positive steps to increase their number when underrepresented.
What is an adequate representation depends on the objectives of the program. Some programs aim at having the same proportion of women or minorities as exists in the pool from which members are drawn. Others aim at achieving the diversity needed to meet organizational objectives.
The Civil Rights Act of 1964 made it illegal to base hiring, firing or compensation decisions on race, colour, religion, sex or national origin.
In 1972 the Equal Employment Opportunity Commission got more power to reduce the job discrimination and to require affirmative action programs to correct deficiencies. They were created to administer the Civil Rights Act.
Most people argue that discrimination in the 1980s was only individual and intentional but that discrimination in the 1990s could be individual and intentional or institutional and unintentional.
Policies like programs of affirmative action are aimed at remedying discrimination after it has already occurred. There are also policies that aim at preventing discrimination before it happens.
In the last few years women and other minorities have fought for a reduction of discrimination in our institutions. However, discrimination is not totally eliminated.
The extent of discrimination
To determine whether an institution is discriminating against a certain group one must look at several prime indicators:
Average income comparisons
Average benefits women and minorities receive compared to others. Income comparisons reveal the most about whether there is some kind of sexual and racial discrimination in the society.
When we compare the incomes of with and non-white families we find that white family incomes are substantially higher than the incomes of non-white families. Over the years this gap has remained present.
Also individual comparisons of incomes reveal much about inequalities based on sex and race.
Studies show than women receive a wage that is lower than the wage that men receive. In the U.S. men receive on average 40 percent more than women.
These differences in earning between men and women arise as soon as they graduate from college. The earnings of women compared to men decline even further as women age. These differences in earnings between men and women are found in all occupations.
There is also evidence that earnings of blacks and Hispanics are much lower than earnings of whites. Besides the gap between male and female there is also a gap between earnings of whites and minorities that education does not eradicate.
Lowest income group comparisons
Comparisons of proportions of minorities and women at the lowest economic levels. This group consists of the people with an income level below the poverty level. In the U.S. the poverty level among minorities has been 2 to 3 times higher than among whites.
Studies also show that families with a single mother on the head face greater poverty than families headed by single men. The gap between those two has decreased since the 1980s but is still persistent today.
Research proves that black and Hispanic individuals are two to three times as likely to fall into poverty as white individuals. There is a strong correlation between bottom income groups and race and sex.
Desirable occupation comparisons
Comparisons of proportions of minorities and women at the highest economic levels.
Many decades several jobs were seen as women’s jobs because they were dominated by women. Such jobs were secretaries, receptionists, dental assistants, child care workers and hairdressers. In these jobs more than 90 percent consisted of women.
Other jobs were seen as men’s jobs because they were dominated by men. Such jobs were mechanics, electrical power-line workers and crane operators.
The wages for women were substantially lower than the wages for men. The well-paying occupations tend to be the men’s jobs while the lower-paying occupations tend to be the women’s jobs.
Studies show that there is a negative correlation between the proportion of women in an occupation and the earnings level of that occupation. The more women in the occupation, the lower its earnings.
The proportion of women in top-management positions is still low because they face a glass ceiling. This is an invisible but impenetrable barrier to further promotion. Women and other minorities may face this ceiling.
Women and minorities ending up in positions that earn less cannot be explained in terms of lower educational levels of women and minorities.
Studies show that in the United States, the earnings gaps cannot be explained by education, career choices, preferences, work history, training or absenteeism. These factors may only explain a small portion of the gap.
Women and minorities at the end of the twentieth century are facing more and more difficulties in job markets.
Most of the new workers consist of women and minorities. These groups face significant disadvantages and a large part of women is pushes into traditional female’s jobs that pay less.
When women try to advance in their careers, trying to reach the top-management, they face a glass ceiling and sexual harassment.
Women also face disadvantages when they want to have children. A married woman that wants children faces major difficulties in her career advancement.
The large minorities have a disadvantage because they lack skills and education, which are needed in the labor market.
To determine whether a firm of organization is discriminating one must make comparisons among the various employment levels. In the U.S., employers are required to report to the government the number of women and minorities in each of the nine categories:
Officials and managers
Office and clerical workers
Utility, rights and justice
The arguments against discrimination are generally divided into three groups:
These arguments claim that discrimination leads to an inefficient use of human resources.
Different jobs need different skills and personality traits that must we filled in as productive as possible. Also people have different skills and personality traits. To be as productive as possible, the jobs must be assigned to those individuals whose skills and personality traits match with the job
However, opponents reply that some forms of sexual discrimination may actually benefit society.
These arguments claim that discrimination violates basic human rights.
Women and other minorities are hold as inferior, assigning them lower social and economic positions. This violates the basic human right to be treated as a free and equal person.
Some other arguments of this kind say that discrimination is wrong because the person who discriminates would not want to see his behaviour universalized.
These arguments claim that discrimination results in an unjust distribution of society’s benefits and burdens. This claim is made by John Rawls.
Another approach to this argument is based on the principle of equality. This means that individuals who are equal in all respects relevant to the kind of treatment in question should be treated equally even if they are dissimilar in other, nonrelevant respects.
Discrimination would violate this principle of equality since it differentiates between people on basis of characteristics that are not relevant to job performance.
Even though some of the arguments against discrimination face some problems, it is clear that we should believe that discrimination is wrong. Our laws have been changed to conform to these moral requirements.
There are several practices that are widely recognized as having discriminatory outcomes:
Firms that rely on word-of-mouth referrals to recruit new workers tend to recruit only people from the racial and sexual groups that are already in their labor force. When for instance a firm’s labor force is composed of only white males, the recruitment is discriminatory against women and minorities.
There is discrimination when the firm searches for job qualifications in a person that are not relevant to the job performed.
Promotion, job progression and transfer practices lead to discriminatory outcomes when employers place white males on job tracks separate from those open to women and minorities. A seniority system is discriminatory if discrimination has moved women and minorities away from the higher, more senior positions.
Conditions of employment
There is discrimination when people who do the same work are not given equal wages and salaries.
It is obvious that there is discrimination when an employee is fired on the basis of race or ex.
As we saw before, women may become victims of sexual harassment. Sexual harassment is defined as unwelcome sexual advances, requests for sexual favours and other verbal or physical contact of a sexual nature.
Guidelines state that an employer is responsible for all sexual harassments engaged in by his employees. This is regardless of whether the employer knew about the harassment or not and regardless of whether it was forbidden by the employer.
Most aspects of these guidelines are morally justified. However, there are also several parts that need further discussion.
The guidelines prohibit more than particular acts of harassment. Besides harassment it prohibits conduct that creates an intimidating, hostile or offensive working environment.
This raises some difficulties because some argue that the situations are intentionally created while others say they were unintentionally created. So it is hard to distinguish these situations from male rudeness not intended to degrade women.
The guidelines prohibit verbal or physical contact of a sexual nature when it has the effect of unreasonably interfering with an individual’s work performance. But this seems to mean that what counts for harassment depends on purely subjective judgements.
Guidelines prohibit verbal conduct that creates an intimidating, hostile or offensive working environment but this can conflict with the right to free speech.
The guideline says that the employer is guilty even when he did not know about the harassment and had forbidden it to his employers. This violates the moral norm that people cannot be held responsible for something of which they had no knowledge and which they had tried to prevent.
However, some say that eradicating sexual harassment justifies forcing the employer to be responsible for preventing it and it is an external cost employers should internalize.
Since 1990, the disabled are protected by the Americans with Disabilities Act of 1990. This act bars discrimination on the basis of disability and requires that employers make a reasonable accommodation for their disabled employees and customers.
Disabled and older workers are protected with this act but there are also workers, with for instance unusual sexual preferences, that are not protected against discrimination.
Besides race and sex, discrimination can also be based on:
Workers are protected against discrimination based on age by the Age Discrimination Employment Act.
People have few protections against discrimination based on sexual orientation.
There is almost no protection for discrimination based on transsexual status.
People are protected against this form of discrimination by the Americans with Disabilities Act.
There is no law or anything else that protects humans from being discriminated based on their weight.
To correct effects of past discrimination, many employers have introduced affirmative action programs to improve the distribution of minorities and women within the firm. They try to improve this distribution by giving some degree of preference to women and minorities.
Usually the firm appoints an officer to administer and lead the affirmative action program. There are also many firms that put special effort in increasing the recruitment of women and minorities.
Affirmative action programs can be used to achieve educational diversity and broadcast diversity. The action program cannot make use of inflexible quotas and must be narrowly tailored to their objectives.
However, in 1984 the Court ruled that a company may not set the seniority of white workers aside because it hires women and minorities as long as the seniority system is adopted. So affirmative action programs cannot be used when they overrule seniority.
Affirmative action programs can also not be used in government set-aside programs, except as a last resort in an extreme case involving previous racial bias by the government.
There are arguments in favour of affirmative action programs that are based on the concept of compensatory justice. One such a compensation argument is that affirmative action programs compensate groups for past discrimination.
However, critics argue that these programs are unfair because those who benefit were not harmed and those who pay did not injure, which are requirements of compensatory justice.
Proponents of affirmative action programs reply to this by saying that discrimination has harmed all women and minorities and has benefited whites and males. However, it is hard to say whether really all women and minorities have been harmed and whether all whites and males have benefited.
There are also psychologists that use and utilitarian argument in favour of affirmative action programs. This argument claims that the affirmative action programs reduce the need of women and minorities by benefiting women and minorities in need. This would increase utility.
This argument is criticized by several that claim that the costs of the program outweigh the benefits of the program and that other ways of reducing the need will lead to greater utility.
A third group of arguments in favour of affirmative action programs are based in equal justice. These arguments claim that affirmative action will secure equal opportunity by a fairer job distribution. This is done by:
Neutralizing the effects of unconscious prejudices that affect judgements about minorities and women.
Placing women and minorities in better competitive positions in the competition with whites and males.
These arguments also claim that affirmative action is morally legitimate for securing equal opportunity. They argue that these programs do not harm women and minorities and if there would be any harm this would be less harm than inflicted by discrimination.
Critics argue that affirmative action programs harm women and minorities because such programs imply that these groups need a special treatment and help to be able to compete with others. Critics also say that this preferential treatment violates the principle of equality.
Another critique is that affirmative action programs discriminate against whites and males because they only offer a special treatment for women and minorities.
Opponents of the affirmative action programs argue that besides sex and race also other criteria should be used in hiring decisions. The use of these action programs would lead to a more racially and sexually conscious nation.
A comparable worth program is a program that is designed to ensure that jobs of equal value to an organization are paid the same regardless of external labor markets.