Bidhan L. Parmar & Y R. Edward Freeman published an article in the MIT Sloan magazine titled
The false choice between Business & Ethics.
Sadly there is a real choice between maximising profit and doing what you consider ethical. The more ethical you are, the more you feel you ought not to be in Business. You should be a priest or work for a Charity.
If this were not the case, all priests and people working in Charity, should be running businesses concurrently with doing what they consider is ethical.
Should there be an imperative — moral or otherwise — to consider what’s fair when making a business transaction?
There is such a thing as business ethics or moral imperatives in particular types of trade and industry. People may conform to them for purely selfish motives- e.g. to preserve their reputation or to avoid ostracism or legal action.
Consider this situation — let’s call it Case A. You’re at a yard sale and pick up a violin. The tag says $50. Let’s imagine you actually know quite a bit about violins, and you know that this particular violin, if it were auctioned, could yield close to $1 million.
Buy it. If you dispose of it at a profit you are welcome to share some of your gains with its previous owner. Alternatively you can donate your profit to some worthy cause.
Should you tell the current owners they’re making a terrible mistake by pricing it at $50?
If you wish- do so by all means. The owner may ask you to sell it for him and give you a commission. Word may get around that you are the man to see if you are selling antique musical instruments.
Or should you simply buy the violin and profit from a lucrative resale?
By all means. The truth is you can't be certain it is what you think it is. You are taking a risk just as the Yard Sale owner is taking a risk. What is important is that the violin is preserved if it really is a rare Stradivarius.
Over our years of teaching executives and business students, we’ve heard arguments on both sides. Some contend that the price reflects the worth to the seller, that buyers often have additional information, and that it is perfectly ethical to profit from this asymmetry of information. Some say that if the yard sale was at a friend’s house, it would be wrong to profit at that person’s expense — that business is about relationships, and a good relationship requires not taking advantage of each other. Others maintain that they would buy the violin but feel guilty for taking advantage of the seller, while others say that guilt over such a transaction would prevent them from buying the violin for such a low price.
What people actually do diverges considerably from they say they will do.
Now consider another situation. We’ll call it Case B. In this case, the transaction is in a music store. This time you don’t know anything about violins, but you want to buy one to learn to play. The store owner brings you one with a $500 price tag and says, “this one will do just what you want it to do.” Unknown to you, this violin is cheaply made and not worth anywhere near $500. You buy the violin.
Has the store owner done something wrong?
That depends on the law or the customary norms. If he has sold you a violin not of merchanisable quality, you have an action against him. The same may apply to material misrepresentation. This is a justiciable rather than ethical matter.
Again, we’ve heard many conflicting arguments about this case. Some say it’s a case of caveat emptor, let the buyer beware — the hallmark, they say, of both capitalism and the legal system.
It may be, it may not. Ask a lawyer in case of doubt.
Others argue that the store owner is committing fraud by overpricing the violin.
Again, this is a matter for lawyers or the office of fair trading.
Still others retort that the price paid reflects the value perceived by the buyer. The buyer in Case B is in the same position as the sellers in Case A: In both instances, there is information asymmetry.
But, in the latter case, there may be a professional duty to give appropriate advise to customers.
Given more buyers and sellers, over time such asymmetry can be minimized. Buyers and sellers become more market-savvy, and others start to provide missing information to market participants. Some even move in and change how a particular good is offered, with more options and price points.
Market-makers aren't just arbitrageurs. They can actively create markets and supply liquidity and create 'buffer stocks' to smooth out price fluctuations.
However, before markets can work out all of these issues, what is to be done in these particular transactions?
Do what is customary or what is required by law.
While it’s nice to know that markets will work these things out in the long run and on average, we live our lives in the here and now — not in the long run or on average.
Our life is made easier by a knowledge of what is customary or required by law.
The Separation Fallacy
Cases A and B are examples of what business ethicists call the separation fallacy. This is the tendency in business theory — and in business ethics theory — to separate the business case from the ethics case.
Because the two are different things.
In Case A, the business case says, “buy the violin for $50.” In Case B, the business case says, “sell the violin for whatever the customer is willing to pay.” In both Case A and Case B, the ethics case says, “don’t take advantage of others.”
No. In case A, it says nothing at all. The guy running the yard-sale may have hired an appraiser in which case he may have an action against the appraiser. Otherwise, he is happy enough to get some cash for his junk. An ethical person who purchases and then resells the violin may give the profit to some cause- e.g. victims of floods- which everybody approves of.
In case B, there may be a law or local norm which says 'don't scam customers'. Otherwise you will face penalties.
In reality, though, many people want to know how to integrate the business case and the ethics case
they may also want to integrate getting sexual gratification into any and every case. But sexual gratification is separate from ethics which is separate from business. So is getting high at the office and running around naked with a radish up your bum.
Why? Because decisions in these kinds of transactions don’t have just financial outcomes — they have social and psychological outcomes, too.
This is also the case with farting. If you fart a lot, people may avoid you. Thus, you will transact less business and suffer financially. Also, your social life will be impacted as will your psychological well-being because everybody keeps pointing at you and holding their nose.
Certainly, there is a prominent view of business that says the only rule is to try to maximize one’s own self-interest. But that defines self-interest extremely narrowly, considering only the consequences that accrue to the self alone and that can be measured in financial value.
No. Nobody knows what is in their self-interest. If they did, they would only buy winning lottery tickets. Also they won't marry a spendthrift slut. Yet these things happen. Knightian Uncertainty is pervasive. That is why, instead of 'profit maximization' you should go in for 'regret minimization'.
No less a philosopher than economist Adam Smith had a very different view of self-interest. Smith understood even back in the 18th century that we are social creatures at heart. Indeed, the opening sentence of his Theory of Moral Sentiments of 1759 says: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.”
He wasn't writing as an economist in that book. He was trying to give a non Theistic theory which tended to the same conclusions as the Religious theory. He replaced 'synderesis' with 'sympathy'. But, he failed. If there is a God, morality is different from if there isn't.
The division that many people make between the business case and the ethics case of a transaction should not be a given in business.
Yes it should. Also the height of a person should be differentiated from his weight. It is foolish to lump things which are dissimilar together. True, you may have a swindler who says he is serving a high ethical purpose by encouraging people to be less gullible and trusting of others. This is just as silly as a businessman who pretends he has devoted his life to ethical behaviour or a Saint who thinks his charity is actually some type of business sharp practice.
Integrating these concerns, though, will require rethinking the most basic ideas of both business and ethics.
And turning them into nonsense.
The Relational View of Business
Seeing the self in relation to others has evolutionary roots. Michael Tomasello (Max Planck Institute for Evolutionary Anthropology, Leipzig, Germany) and Amrisha Vaish (University of Virginia) have argued that humans became “ultra-social” because of how they hunted, working together to track large game as early as 400,000 years ago.
Humans still hunt with dogs or falcons. Does this mean business ethics involves keeping a seat on the board for animals and birds?
By joining together, human beings increased their odds of survival.
By competing with each other, they have increased it yet further.
But collaboration to gather food was just the beginning.
It is when people started killing each other, that technology really took off. War is the mother of invention.
Working together allowed human beings to see themselves in relation to others, as a part of a group.
And led to one group killing and enslaving other groups. That's how civilization got off the ground.
Tomasello and Vaish term this collective intentionality — the idea that two minds are paying attention to the same thing and working toward the same goals.
e.g. killing the other before the other can kill you.
Collective intentionality is also a basis for morality, business, and capitalism.
Not to mention nuclear war.
More companies today are having conversations about ethics
like they had conversations about DEI? It's a fad and will pass.
and adopting Smith’s point of view, rejecting the narrow, transactional view of business in favor of a more relationship-oriented approach. Companies such as Unilever,
Five years after this was written Unilever cut back on its environmental and social aims.
The Container Store,
which filed for bankruptcy in 2024
and Salesforce
which hasn't yet transitioned from 'growth' to 'value' stock. This makes it vulnerable as its AI product 'Agentforce' may be crushed by more agile, easier to implement, Cloud based solutions. It is piping small about ethics because it didn't meet its Revenue forecast.
have all taken actions that show an intention to see business as a set of relationships that are interconnected over time and over all those stakeholders who will be affected by the business or who can impact it themselves.
But it is a recession or a competitor's superior product which can cause you to go bankrupt.
This approach says that if you’re a buyer, you treat sellers like you will be doing business with them for a long period.
Sadly, there is no guarantee of this. You may go bankrupt.
If you’re a seller, you treat the customer as a lifetime client who should not be taken advantage of in a particular transaction.
That doesn't mean you have to go crazy doing 'woke' shite.
Relationships require investment and work. Business relationships are similar to family relationships, marriages, and the collaborations of teachers and students.
They really aren't. Consideration must pass for a relationship to count as commercial- i.e. be contractual in nature. This is not essential for other types of relationship.
None of these connections are reducible to a set of transactions, because relationships shape us as much as we shape them.
No. In business, an incomplete contract gives rise to a 'relationship' such that the terms of the contract can be adjusted as unforeseen events arise. This follows from Knightian uncertainty.
Of course self-interest plays a role but so does our ability to care for others. We can do things that are simultaneously other-regarding and self-interested. Human beings are complicated and have multiple motives, in life and in business.
But such motives can be 'factorized' easily enough. One might speak not just of trade-offs but the capitalized value of 'good will'.
Let’s go back to the cases we raised at the beginning of this column. In both violin situations, we could imagine crafting solutions where both parties could be made better off. In Case A, the buyer could act as an agent for the sellers, who clearly don’t know much about violins.
This is more especially the case if the buyer doesn't have enough cash on him or if the seller's identity (e.g. he is the nephew of a great violinist) will help in authentication.
In Case B, the seller could decide to work with the customer over time, selling an inexpensive violin initially, but also pointing the customer to lessons and, eventually, a more expensive, but worthwhile, violin.
Unless he goes bankrupt first.
Capitalism is the greatest system of social cooperation we have ever invented.
Yet we don't use 'capitalist' means when fighting a total war.
It is about how we create value for others and trade with them. Competition and self-interest play a role, but so, too, does collaboration. Seeing business as a set of relationships that exist for a long period is one of the most important elements in thinking about building a successful company.
It really isn't. Cash-flow matters. Leveraging matters. Dreams of doing good don't matter. As for announcing your 'social and environmental aims', people are right to be sceptical. You are either lying or will have to backtrack sooner or later.
While it can be tempting to take shortcuts to benefit only ourselves, when we do so, we risk destroying the system of cooperation that makes us distinctly human.
You will turn into a monkey if you don't attend the lectures given by these two shitheads.
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