Abstract
Joseph Heath defends competitive markets and conceptualizes business ethics with reference to Pareto efficiency, which he takes to be the “implicit morality of the market.” His justification for markets is that they generate Pareto efficient outcomes, meaning that markets optimally satisfy consumer preferences. And, for Heath, business ethics is the set of normative constraints—regulation and beyond-compliance norms—needed to preserve that outcome. The present paper accepts Heath’s claim that the economic justification for markets is ethical, in that satisfying consumer preferences is a good. But, contra Heath, the ethical consideration at work is a consequentialist one; and acknowledging this consequentialism exposes limitations of Heath’s “market failures” approach to business ethics. We suggest two limitations, and we expect many will accept our argument that Heath’s conception of business ethics is too narrow. The present paper outlines two broader implications. First, acknowledging that the justification for markets is ethical eliminates the apparent—and false—conflict between purportedly amoral economic activity on one hand and ethical considerations on the other; instead, business ethics is a matter of weighing the consequentialist ethical benefit of economic activity and markets against other moral arguments/other ethical considerations. Second, Heath restricts business ethics to the constraints needed to protect the market’s ability to efficiently satisfy consumer preferences, constraints he calls “efficiency imperatives”; this restriction (inadvertently, perhaps) supports the widespread tendency to think that all social problems are economic; and, a business ethics so-conceived diminishes the perceived importance of noneconomic values—this attitude is dangerous.
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Notes
Heath uses the terms “market failures approach” and “Paretian approach” as labels for his conception of business ethics, and throughout this paper we follow Heath and use the two terms as synonyms. But there is an important difference between the two terms within economic theory. Pareto optimality or, equivalently, Pareto efficient outcomes are addressed in that part of economic theory concerned with general equilibrium, where the goal is to simultaneously model all markets for a society; a competitive and complete set of markets optimizes consumer preference satisfaction in the Pareto sense, meaning that no one person can be made better off without harming another. But the concept of market failure, with its emphasis on deadweight loss, is part of partial equilibrium theory, where the focus is on a single market, on a single good or service—and where the market mechanism maximizes the combination of consumer and supplier surplus. This distinction is relevant here because economic theory moves back and forth between concern with optimizing consumer preference satisfaction (in general equilibrium theory) and maximizing the combination of consumer and supplier surplus (in partial equilibrium theory). Given a set of standard assumptions, which enable the movement from the partial to the general equilibrium context, these two approaches are equivalent—and this underscores and supports our claim that concern with Pareto optimality is fundamentally consequentialist, because optimizing in one context is equivalent to maximizing in another.
As noted later in the main text, Heath rejects the conception of the human person used in economic theory (2014, p. 9). Heath says that, in doing so, he rejects economism. But, nevertheless, Heath’s rationale for state regulatory action and beyond-compliance norms is grounded solely on efficiency concerns—and it seems reasonable to us to worry that, when Heath writes, “‘efficiency imperatives’ are pretty much all there is to business ethics” (2014, p. 174)—this encourages economism in the sense that concerns us, the reduction of social policy to economic concerns.
Heath allows that some firms are explicitly organized as markets, at (2007, p. 368), so competitive behavior could also be appropriate within some firms or within some parts of firms.
To be clear, a system of perfectly competitive and complete markets produces a Pareto optimum, which is efficient in three ways: with respect to the allocation of resources, with respect to the production of goods and services, and with respect to the distribution of these goods and services. When markets are not competitive and complete, one or more of these efficiency properties does not hold—and that is defined as market failure. Throughout this discussion, economists would note that the Paretian optimum is constrained by existing resources and technology; we use the term ‘optimal’ in this way even though we do not state these constraints or the standard assumptions each time.
To explain this point further, and to show that there are no normative considerations about distribution introduced by reference to Pareto optimization, consider the following example—which, contra economic theory, assumes that we can measure welfare, and which assumes that we can compare welfare across persons, can calculate sums, and can maximize aggregate welfare. As a starting point, consider an over-simplified market with two persons specified as A:(5, 6), where the numbers represent welfare for the two market participants, participant one has welfare of 5, participant two has welfare of 6. Now, consider two possible transactions, one produces outcome B:(4, 16) and another produces outcome C:(7, 8). Say, to get from A to C, the first person sells his or her car to the second; the first person prefers the money, the second person prefers the car, so the transaction improves both from a welfare perspective. To get from A to B, the first person could sell the car for less than he or she values it, B pays much less than he or she was willing. A consequentialist concerned with maximizing aggregate welfare would prefer outcome B because aggregate welfare (20) is higher than C (15). But, instead, this hypothetical market interaction (with two participants and two possible transactions), produces an outcome that is a Pareto improvement, moving from A:(5, 6) to C:(7, 8). This is where it could seem that economic theory is imposing a normative preference against transactions that benefit some at the expense of another, with that normative preference ruling out B:(4,16) in favor of C:(7,8). But, instead, as noted in the main text, economic theory assumes that individuals act to improve their welfare and so only transact when it is in their benefit (this is the assumption about consumer rationality)—so the transaction that generates outcome B:(4,16) could not occur in the market. The condition, without making another worse off, is, for this reason, a product of the rationality assumption, not a normative preference.
This example proceeded with a conception of consequentialism concerned with maximizing welfare. Introducing the rationality assumption doesn’t change or compromise the consequentialism, because maximization subject to that assumption is still thoroughly consequentialist. Then, given the assumption in economic theory regarding the inability to measure or to aggregate preference satisfaction, economic theory requires a further step—optimizing consumer preference satisfaction in a way that does not require adding across persons. So, we can move from maximizing an outcome to optimizing that outcome, assuming a specific notion of rationality, within the space of consequentialist thinking.
Within economic theory, the “no waste” condition is a shorthand for Pareto optimality with respect to production. Production is efficient when increased production of any one good is only possible by reducing production of one or more other goods. And production is inefficient when resources are either underutilized or misallocated, or both—where underutilization and/or misallocation results in reduced levels of output, and therefore results in reduced consumer satisfaction measured against higher possible levels of consumer satisfaction achieved with more efficient production.
At the same time, Heath allows that managers might not be able to act on these constraints; see his (2004, p. 84), where he allows that market conditions might provide an excuse for abandoning his own constraints.
To further emphasize the point about the implicit consequentialism, note that in his (2013) comment Heath describes his project as follows: “I put forward a list of these intermediate-level principles [his efficiency imperatives], as examples of what I had in mind (Heath 2004). Some of these principles would have come as no surprise, because they were just the Arrow conditions for perfect competition translated into a deontic [mode] (prohibiting the exploitation of externalities, information asymmetries, and market power)” (p. 51). But, as noted in the main text, even when consequentialist principles are presented as and followed as deontological rules for managers and followed in a deontological way, that is consistent with those rules being derived from consequentialist considerations.
Norman (2014) himself offers an ambiguous alternative. Describing the market failures approach, he writes “Roughly speaking, and allowing for plenty of ongoing disagreement about details and scope, partisans of [the market failures] approach believe… that our grounding for a broad range of obligations and rights in business ethics… should be closely related to our most basic justifications for markets and the regulation of markets” (p. 23, Norman’s emphasis). The phrase “broad range” is rough in the sense of imprecise, but Norman does seem to allow space for other normative considerations in business ethics, beyond efficiency—which seems to expose Norman to the criticisms Heath directs at stakeholder theory. Heath could only describe Norman’s proposal as anticapitalist. And, even though some such obligations and rights in business ethics are derived from the “most basic justification for markets,” it is not at all clear to the present authors that the important obligations and rights are derived in that way. In our example below, the deontological constraints protecting worker safety are not at all related to our basic justification for markets.
A recent Seattle Times article (Young 2016) profiled an investor in the newly-legal marijuana industry in Seattle: Seattle’s “Pot King” “didn’t aspire to be an astronaut or ballplayer. ‘I’ve always wanted to be in small business,’ he said. He first made a name for himself, according to a 1997 Wired magazine story, in the phone-sex business where his father was considered a pioneer.”
The problem outlined in this section is one component of the more general critique of an efficiency-based notion of ethics from within economics and also directed at economics from the outside. See Hausman and McPherson (1996), chapter six and also Part III more generally—which investigates moral concerns other than welfare, including rights, equality, and justice. And see Sen (1987), which discusses the forces that lead to the “modest” ethical content of welfare economics and the means by which the Pareto principle can be enhanced.
This is Wittgenstein’s point in a different context: “For the crystalline purity of logic was, of course, not a result of investigation: it was a requirement”—one imposed form the outside (2001, Section 107).
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Acknowledgments
The authors thank the editor and two anonymous referees for very helpful questions, comments, and suggestions. And we are grateful to our colleague Brian Kelly for many discussions of economic theory.
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Cohen, M.A., Peterson, D. The Implicit Morality of the Market and Joseph Heath’s Market Failures Approach to Business Ethics. J Bus Ethics 159, 75–88 (2019). https://doi.org/10.1007/s10551-017-3761-6
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DOI: https://doi.org/10.1007/s10551-017-3761-6