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Economics, Friend or Foe of Ethics

Norman E Bowie University of Minnesota. Economics, Friend or Foe of Ethics. Foe: Adherence to Psychological Egoism. Problems with Psychological Egoism include Many counterexamples Response to counterexamples makes theory vacuous If psychological egoism were true, ethics would be pointless.

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Economics, Friend or Foe of Ethics

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  1. Norman E Bowie University of Minnesota Economics, Friend or Foe of Ethics

  2. Foe: Adherence to Psychological Egoism Problems with Psychological Egoism include • Many counterexamples • Response to counterexamples makes theory vacuous • If psychological egoism were true, ethics would be pointless

  3. Foe: Assumptions of Agency Theory • Agency Theory accepts Psychological Egoism • In one respect agency theorists are not cynical enough-the evidence from executive compensation

  4. Transaction Cost Economics • Assumes transaction costs • Bounded rationality replaces perfect rationality-Rise of Behavioral Economics

  5. 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 industry- Are not dedicated

  6. 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

  7. The Argument for Universal Ethical Values • Certain ethical values are believed by the management of a MNC to provide the MNC with a competitive advantage. • 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. • Highly specific assets associated with high return should not be diluted. • If ethical values are such assets they should not be diluted. • If ethical values vary among subsidiaries, these assets will be diluted due to the phenomenon of cognitive dissonance. • Therefore a MNC should have common ethical values in all its subsidiaries.

  8. An Argument for Truly Universal Standards of Business Ethics • Certain ethical values are either necessary for the MNC’s economic success or provide it with a competitive advantage. • 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. • 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.

  9. 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.

  10. 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.

  11. 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.

  12. 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.

  13. 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

  14. Questions for future research What factors might explain popular judgments of fairness? • How important is the fact that a person has no choice but to purchase an item in question? • Are the circumstances created by an “Act of God?”

  15. 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.

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