BUSINESS ETHICS AND THE THEORY OF GAMES Ph.D., Professor Dan Craciun ASE Bucharest

1. BUSINESS ETHICS AND THE THEORY OF GAMES Ph.D., Professor Dan Craciun ASE Bucharest

2. BUSINESS ETHICS AND THE THEORY OF GAMES Ph.D., Professor Dan Craciun – ASE Bucharest Why dowe need a special ethics for business activities? Some theorists claim that such an ethic is useless, because the moral norms are universal. Still most theorists claim that business activities are more or less specific, as long as they face certain particular and complicated dilemmas, which ordinary moral conscience cannot solve by itself, in the absence of certain special moral standards. One more radical objection does not hesitate to claim that business ethics is not only superfluous; it is impossible as a solidly grounded theory. Even though it appears as a purely technical notion, the very concept of business is hiding in its standard, textbook definition certain ideological commitments, impossible to support or dismantle with strictly rational, scientific arguments.

3. BUSINESS ETHICS AND THE THEORY OF GAMES Ph.D., Professor Dan Craciun – ASE Bucharest Profit and social utility It is difficult if not merely impossible to deny that the defining characteristic of business is profit. There is no agreement on at least two fundamental questions: 1 Is profit the sole or, at least, ultimate end of any business or, on the contrary, the highest purpose of business is to ensure the most efficient satisfaction of certain human needs? We think that both ways to understand the essence of business are valid, depending on the scope of our approach. micro economic level(one single business): profit =the intrinsic, natural end of any business; society = an economic environment, offering opportunities and resources. macro economiclevel: the social function of business = the most efficient satisfaction of the social needs and wants; profit = the deserved reward of those investors who manage, better than their competitors, to make the best offer on the market, attracting the consumers’ choice.

4. BUSINESS ETHICS AND THE THEORY OF GAMES Ph.D., Professor Dan Craciun – ASE Bucharest 2 How large should bethe profit? micro economic analysis: any business should not be content if it makes some profit, large or small, but business is supposed to seek, by any legal means, the maximum profit it can make. macro economic approach: since business’s primary end is to satisfy social needs, a socially responsible management should not seek for a maximum profit – it should be content with a “reasonable” profit. Leaving aside their ideological commitment, these two conflicting theories lead to similar practical consequences. Business optimally satisfies its social function insofar it manages to provide the best satisfaction of human needs and wants. the conservatives see this task as a means to maximize profit, theliberals consider it as the ultimate end of business activities, regarding profit as a variable dependent on how well or bad a company responds to the expectations of the people.

5. BUSINESS ETHICS AND THE THEORY OF GAMES Ph.D., Professor Dan Craciun – ASE Bucharest Competition and cooperation The crucial factor that motivates the investors and managers to do their job the best they can is competition – the second defining component of business activities, no less controversial than profit. It is hard to underestimate the importance of competition in capitalist economy, but its moral evaluation divides, once again, people with different ideologies. Positive aspectsof competition – the engine of economic growth, giving people a constantly increased variety of goods and services, of a higher quality, safety, and reliability, at constantly lower prices. Negative aspects competition: periodical crisis, irrational waste of resources – spent to satisfy the superficial and eccentric wants of a crowd blinded by the consumerist ideology – the unfair distribution of income, which very often ignores the social utility of different occupations, tragic bankruptcies, unemployment, and social instability. This kind of quarrels, driven by ideological motives, makes very difficult the mission of those who strive to build business ethics as a rational, demonstrative discourse. An additional factor of confusion: cultural and ethical relativism.

6. BUSINESS ETHICS AND THE THEORY OF GAMES Ph.D., Professor Dan Craciun – ASE Bucharest GAME THEORY Trying to stay apart from these complications, a group of theorists tried to found the basic ethical principles on rational arguments, which ignore the cultural specificity or irrational ideological commitments, appealing only to logical demonstrations, which could claim to be universally valid, like scientific theories. One of the possible ways to support the ethical behaviour in business with solid, rational arguments is the so-called game theory. Prisoner’s Dilemma Almost without exception, the beginning (and quite often the end) of the demonstration appeals to the famous Prisoner’s Dilemma. Introduced by Luce and Raiffa (1957), and thoroughly analyzed by Rapoport (1976), the Prisoner’s Dilemma is the most widely researched game.

7. BUSINESS ETHICS AND THE THEORY OF GAMES Ph.D., Professor Dan Craciun – ASE Bucharest PRISONER A No confession Confession A gets 1 year A walks No confession B gets 1 year B gets 10 years PRISONER B A gets 10 years A gets 5 years Confession B walks B gets 5 years The dilemma proves that when each of us individually chooses what is in his own interest, we can each turn out to be worse off than we would each have been if we had both made a choice that is in our collective interest.

8. BUSINESS ETHICS AND THE THEORY OF GAMES Ph.D., Professor Dan Craciun – ASE Bucharest Peasant’s Dilemma Frequently quoted and analyzed, Prisoner’s Dilemma is not, however, an adequate description of competition and cooperation in business. Whereas the two criminals have to solve a one-off situation, business partners find themselves in repetitive situations, planning to play the same game indefinitely. This fact radically changes the logic that should guide the rational decisions of each player. Grasping very clearly the essence of this change of rational analysis, Peter Singer invents another story, which he names “Peasant’s Dilemma.” Two neighbours, living in a small village, Max and Lynn, are also in the situation of choosing between competition or cooperation. Playing the game several times puts each player in a new situation: they both know the previous moves of the other player, making decisions based on that knowledge. Of course, surprises are never excluded and any decision involves a certain degree of chance, but this can be estimated with more precision.

9. Tit for Tat BUSINESS ETHICS AND THE THEORY OF GAMES Ph.D., Professor Dan Craciun – ASE Bucharest Looking for a better understanding of different strategies to play repeatedly Prisoner’s Dilemma, Robert Axelrod set up two tournaments, in which first 14, then 52 computer simulated strategies competed. Each strategy was supposed to play against all the other strategies, including itself, 200 times. PLAYER A cooperate defect Fairly good REWARD for mutual cooperation 3 points Very bad SUCKER’S PAYOFF 0 points cooperate PLAYER B Very good TEMPTATION to defect 5 points Fairly bad PUNISHMENT for mutual defection 1 point defect Both tournaments have been won by the simplest and almost childish strategy, invented by Anatol Rapoport and called by its creator Tit for Tat. It was built on only two rules: 1. on the first move, always cooperate; 2. then repeat the previous move of the other player.

10. BUSINESS ETHICS AND THE THEORY OF GAMES Ph.D., Professor Dan Craciun – ASE Bucharest Enlightened Self-Interest A long term winning strategy cannot be based on a permanent aggressive attitude, ready to squeeze out of any situation maximum of benefits, causing extreme damages to the other competitors; it consists of a clever combination between readiness to cooperate for mutual benefit and the ability to retaliate when the competitors decide to play rough. Narrow minded egoism: a constantly aggressive strategy, seeking to get as often as possible a win-lose situation, may be occasionally and on short term a winning strategy; yet over the long run it leads inevitably to failure. Therefore, narrow minded egoism can and should be rejected not only because it is unethical,buras a stupid and irrational strategy, that on long term turns out to be always self-destructive. Enlightened self-interest seeks to get and keep as long as possible a win-win situation, making all the players to obtain something, and this strategy consolidates stable relations of cooperation, more or less profitable for everybody.

11. BUSINESS ETHICS AND THE THEORY OF GAMES Ph.D., Professor Dan Craciun – ASE Bucharest Applying these strategic principles, derived from the analysis of certain logical games in the realm of business, most of the authors emphasize the requirement of ethical behaviour in economic relationships. The legitimate interests and rights of different categories of players of the economic game should be respected, since both abstract theory and real life practice prove that over the long run this fair treatment of the others promises to bring forth the best results. Plenty of normative consequences can be easily extracted from these premises. It is not good to disregard your consumers, misleading them by dirty tricks to pay a lot of money for a lousy, hazardous, and unreliable product. The employees should be well treated, fairly paid, offered a safe and friendly work environment, and stimulated to find a full meaning and an intrinsic satisfaction in their activities. The same line of reason applies to the fair treatment of serious suppliers, local communities, natural environment, etc.

12. BUSINESS ETHICS AND THE THEORY OF GAMES Ph.D., Professor Dan Craciun – ASE Bucharest In short, ethical treatment of all categories of stakeholders works over the long run for the benefit of a competitive company, and the apparent losses that ethical behaviour in business can bring forth are, in effect, real investments in good reputation and positive public image – factors that become more and more competitive advantages. It may be helpful and even essential to observe certain ethical standards, but doing so is merely a means to the end of profit making. (Boatright, 2009, p. 12) Apparently, we got a rigorous and objective proof of the basic principle of business ethics: “Good ethics is good business”. On second thought, we might find out that the whole argument is inconclusive. Caring about the interests and rights of the stakeholders is not, in effect, the logical conclusion of the premises established by game theory. Most ethical theories would deny that enlightened self-interest could stand as a valid pattern of ethical behaviour. 1 2

13. BUSINESS ETHICS AND THE THEORY OF GAMES Ph.D., Professor Dan Craciun – ASE Bucharest The paradoxical cooperation between the competitors Surprisingly enough, those who appeal to the game theory to prove the rationality of ethical behaviour in business fail to see that all these logical calculations of enlightened self-interest lead to one main conclusion: the best strategy for shrewd competitors on the market is to cooperate for mutual benefits instead of trying to destroy each other. Instead of competing against the other players, trying to attract the consumers through better offers, the companies would make larger and safer profits over the long run by secretly sharing the market and making an agreement to control costs, prices, and production, so that to keep a favourable ratio between offer and demand. Taking this viewpoint, the common enemy of all companies are the consumers, the employees, the suppliers, local communities, the state – in a word, different categories of stakeholders. “We believe the competitor is our friend and the customer is our enemy. […] We should be trusting, and have competitive friendliness among the companies.”

14. BUSINESS ETHICS AND THE THEORY OF GAMES Ph.D., Professor Dan Craciun – ASE Bucharest Is “enlightened self-interest” really a moral approach of business? Not all of the major ethical theories agree that doing good to your neighbour motivated by self-interest is a morally valid behavior. On the contrary, most of the ethical theories deny this notion with strong arguments.

15. BUSINESS ETHICS AND THE THEORY OF GAMES Ph.D., Professor Dan Craciun – ASE Bucharest

16. BUSINESS ETHICS AND THE THEORY OF GAMES Ph.D., Professor Dan Craciun – ASE Bucharest Conclusion: a failed project Even though it claims to be ideologically neutral and above ethical debates, game theory is not and cannot be a good guide for morality in business. On the contrary, the selfish calculations approaching market economy as a non-zero sum game suggest rather unethical strategies, meant to compromise the fundamental trust that should be the foundation of free enterprise system, since it recommends cooperation between competitors, allied against the stakeholder groups. On the other hand, most of the major ethical theories claim that self-interest is incompatible with morality. Respect for the interests and rights of other people not because they were recognized as intrinsic values, but only as means to magnify personal benefits over the long run might be called an effective management, not ethical business. It is widely believed that acting morally is in the interest of business, and thus prudence seems to be one strong motive – perhaps the main motive – for acting ethically. However . . . prudence often dictates a different business decision than does morality. (Beauchamp et al., 2008, p. 4)

17. BUSINESS ETHICS AND THE THEORY OF GAMES Ph.D., Professor Dan Craciun – ASE Bucharest As long as we stick to this vision, we must take a legalist approach of right and wrong in business environment, legal regulations being the only guide of decision making in a free enterprise system, since they establish for every one the rules of the game. Therefore, the “referee” of the game is the state, representing democratically the interests of different social groups, the only authority entitled to sanction dirty play. That means a confirmation that the only duty of business leaders is to keep strictly the law, good or bad as it is; as long as the rules of the game are not broken, everything should be done to rich the final goal – profit maximization and annihilation of the weaker players. If we adopt this legalist approach, here we are again at the starting point: in the worst case, business ethics is a left-wing fancy, that diminishes companies’ competitiveness and hinders profit; at the best, business ethics counts as a clever PR strategy, with the mission to bring forth a competitive advantage, increasing one company’s reputation and embellishing its public image. No doubt, this is a minimalist ethics, not very demanding, but quite comfortable.

18. BUSINESS ETHICS AND THE THEORY OF GAMES Ph.D., Professor Dan Craciun – ASE Bucharest Fortunately, this is not the sole viewpoint, not even the dominant perspective today. More and more companies understand and submit that business is not a game – it is an essential part of social life, whose legitimacy is based on a “social contract” between profitable investments and a large variety of stakeholder groups, that are entitled to claim respect for their legitimate interests and rights. Beyond the legal expression of this social contract, there are a lot of unwritten commitments and expectations, of a moral nature, whose validity is irrelevant in the logical analysis of some game winning strategies.