Economics,
Friend or
Foe of
Ethics
Norman E Bowie
University of Minnesota
Foe: Adherence to
Psychological Egoism
Problems with Psychological Egoism include
1.
Many counterexamples
2.
Response to counterexamples makes theory
vacuous
3.
If psychological egoism were true, ethics would be
pointless
Foe: Assumptions of
Agency Theory
 Agency Theory accepts Psychological Egoism
 In one respect agency theorists are not cynical
enough-the evidence from executive compensation
Transaction Cost
Economics
 Assumes transaction costs
 Bounded rationality replaces perfect rationality-Rise of
Behavioral Economics
Transition from Foe to
Friend
 Distinction between High Asset Specificity and Low
Asset Specificity
 High Asset Specificity: Assets are dedicated to one
firm or transaction. Cannot be transferred easily
 Low Asset Specificity- Assets are common to industryAre not dedicated
Asset Specificity and Ethics
 The hold-up problem (Unethical)
 Why codes of ethics alone do not tell us much about
the ethics of the firm
 Why ethical climate tells us a lot about the ethics of
the firm and makes good business sense as well
 Why multinational corporations adopt universal moral
standards
The Argument for
Universal Ethical Values
1.
Certain ethical values are believed by the management of a MNC
to provide the MNC with a competitive advantage.
2.
Those ethical values which provide a durable competitive
advantage abroad will tend to be knowledge based, be embodied
in individual employees or firm routines and be characterized by
high asset specificity.
3.
Highly specific assets associated with high return should not be
diluted.
4.
If ethical values are such assets they should not be diluted.
5.
If ethical values vary among subsidiaries, these assets will be
diluted due to the phenomenon of cognitive dissonance.
6.
Therefore a MNC should have common ethical values in all its
subsidiaries.
An Argument for Truly
Universal Standards of Business
Ethics
1.
Certain ethical values are either necessary for the MNC’s economic
success or provide it with a competitive advantage.
2.
Thus, other things being equal, MNC’s will be driven by market forces to
adopt those ethical values which are necessary for economic success or
provide competitive advantage.
3.
Thus other things being equal, market forces will favor the development of
at least a common core of ethical standards. Thus all MNC’s will ultimately
tend to adopt nearly identical standards whatever their beliefs of the
competitive advantage of ethical commitments.
Two Hypotheses for
Universal Standards
H1: If MNC’s that do not bribe have a competitive
advantage, then there will be a tendency for all
MNC’s to accept norms against bribery.
H2: If MNC’s that do not discriminate on the basis of sex
or race have a competition advantage, then there will
be a tendency for all MNC’s to accept norms against
discrimination.
A Complication to the
Analysis
 Saudi Arabia as an example
 The mistake of emphasizing difference
 Both economics and enlightenment ethics emphasize
the essential sameness of human being rather than
difference.
 A look at the world should convince anyone that a
focus on sameness is better for peace and prosperity
than a focus on difference.
Fairness as an Explanatory
Variable Robert Frank Passions Within Reason
 People tip in restaurants to which they will not return
 Restaurants and barber shops do not charge more on
weekends
 Compensation is a function of both productivity and
status. High status people accept lower wages if
measured solely by productivity.
 More profitable firms in the same industry pay more
than less profitable firms in the same industry.
Frank’s Definition of
Fairness
 A fair transaction is one in which the surplus is divided
(approximately) equally. The transaction becomes
increasingly unfair as the division increasingly deviates
from equality.
Further Thoughts on
Fairness
 Universal phenomenon. SARs and the price of vinegar
in China
 Practical implications: Coca-Cola and the soft drink
dispenser that adjusts price to temperature
Questions for future
research
What factors might explain popular judgments of
fairness?
1. How important is the fact that a person has no choice
but to purchase an item in question?
2. Are the circumstances created by an “Act of God?”
Conclusion
 By challenging some of the assumptions of equilibrium
economic analysis and by building on concepts from
behavior economics and even transaction cost
economics, we can change economics from a foe to a
friend of ethics.