Explore Freedom

Explore Freedom » Book Review: Business Ethics

FFF Articles

Book Review: Business Ethics

by

Business Ethics
by Norman Barry (West Lafayette, Ind.: Purdue University Press, 2000); 191 pages; $14.95.

It is rarely appreciated how much the market economy has contributed to the growth of civilization and rules of good behavior among the members of society. For example, Adam Smith pointed out more than 200 hundred years ago:

“When commerce is introduced into any country, probity and punctuality always accompany it…. It is … reducible to self-interest, that general principle which regulates the actions of every man, and which leads men to act in a certain manner from views of advantage. A dealer is afraid of losing his character, and is scrupulous in observing every engagement. When a person makes perhaps twenty contracts a day, he cannot gain so much by endeavoring to impose on his neighbors as the very appearance of a cheat would make him lose. [A] prudent dealer, who is sensible of his real interest, would choose to lose what he has a right to, than to give any ground for suspicion.”

When men deal with each other on a daily and regular basis, they soon learn that their own well-being requires them to be sensitive to those with whom they trade. Losing the confidence or trust of one’s trading partners can result in social and economic injury to oneself. The self-interest that guides a man to demonstrate courtesy and thoughtfulness for his customers, under the fear of losing their business to some rival with superior manners or etiquette, tends over time to be internalized, under most circumstances, as habituated “proper behavior” to others. Over time such behavior becomes a part of the institutionalized interpersonal conduct that is usually considered essential to a well-mannered society and cultured civilization.

The Industrial Revolution

And it is well to recall, as the British economist J. Shield Nicholson did in 1890s, that the industrial capitalism of the 19th century “abolished slavery and serfdom, put a curb on pestilence, and turned famine into a glut of food.” Furthermore, Nicholson pointed out, “Industrial liberty has advanced side by side with the destruction of political inequality, or religious intolerance, and of all kinds of antiquated laws and customs founded on privilege and prejudice.”

Considering the market economy’s contribution to human progress, it would be expected that free-market capitalism would be considered the lodestar of ethical conduct. Instead, the market is reviled as base, immoral, and inhumane. A useful antidote to these charges is Norman Barry’s recent book, Business Ethics. Clearly designed for university courses on business and market ethics, it presents an excellent summary of the popular and modern charges made against the morality of the market and offers insightful refutations of all of them.

Two defenses of the market

Barry explains that the market must be defended from two perspectives: the inherent morality of free-market relationships and the market’s positive and socially beneficial outcomes. The two perspectives are complementary to each other and are essential if the critics of capitalism are to be defeated. The morality of the market comes from its foundation of individual freedom and the insistence that all market transactions be based on voluntary agreement. The consequentialist defense of the market comes from its demonstrable superiority in efficiently coordinating the activities of multitudes of market participants in comparison with either central planning or government regulation.

Corporations and the market

In defending the market against its accusers, Barry devotes special attention to the nature of the corporation and the claim that corporations must take on various “social responsibilities.” He argues that the corporate structure is one of the spontaneous outgrowths of market development, in which individuals found it economically advantageous to pool their financial resources, hire managerial and entrepreneurial specialists to direct the use of those financial assets, and arrange their affairs on the basis of limited liability. He explains that limited liability and the treating of the corporation as a “legal person” did not have its origin in governmental legislative privilege. These were and could have remained simple matters of mutual agreement among contractual parties, if not for various layers of government regulation and legislative favoritism.

He points out the dangers from imposing “social responsibilities” on corporations. First, it undermines the rights of the shareholders to decide the management of their own property. Second, it threatens to politicize the use and allocation of corporate assets, with no rational way to determine the “correct” use of a corporation’s resources other than the battleground of special-interest politics. And third, it weakens the idea of individual responsibility and the sense of duty natural to a free society. The same applies to the recent proposals for “stakeholder rights” over corporate decision-making, under which workers, local governments, and community advocacy groups insist upon an equal say in determining how and where the corporation invests its assets.

Insider trading laws

Another charge that Barry analyzes is “insider trading.” A primary function of markets, he explains, is the rapid dissemination and efficient use of information. Thus, anyone who has new information about a changed market situation and who trades on the basis of that knowledge immediately starts the process of spreading that information to all other interested market participants. Thus, the “insider” who finds out or knows something before others performs a social service by using and disseminating that information as quickly as possible. The ethical question, he argues, is whether the use of that information before any public announcement morally harms others. Barry basically suggests that the ethical question depends upon the contractual obligations a potential inside trader has agreed to with his employer regarding the use of information that may come his way before others in the market.

Corporate takeovers

Barry also considers the issue of corporate takeovers. In the 1930s an argument was made that the corporate structure resulted in a separation between ownership and control, with corporate managers able to ignore the wishes of stockholders. He explains that selling and buying shares are essential tools for shareholders to control and direct the conduct of corporate managers. A “takeover” occurs when some shareholders decide to sell to others in the market who are convinced that they could run the company better with more profitable results. Frequently, all that makes a takeover “hostile” is the resistance of the existing management, who are afraid that the new majority shareholders will decide to replace them with new corporate managers.

Finally, Barry discusses environmental issues. He shows that environmentalists, whether they realize it or not, are often proponents of a form of socialism, in that they desire to shift business decision-making on environmental topics to the government, which will then plan and enforce a chosen ecological balance between man and nature. A small number are outright anti-human, believing that man is the species that must be eliminated, since he is considered the one creature that is a mortal threat to all other forms of life on earth.

Barry responds to these various critics by showing that practically all environmental problems have their origin in a failure to either define or enforce property rights, through which the harm to others would be either prevented or paid for through contracts among property owners. He also argues that it is the morally superior method, since it involves the voluntary agreement of the property owners instead of the blunt-edged weapon of government command and control.

At a time when the anti-capitalistic mentality still dominates political philosophy and economic policy, Barry’s book provides a valuable counterweight in defense of the market and its morality.

  • Categories
  • This post was written by:

    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).