Business ethics need to move beyond what’s illegal

By Felix Salmon
July 18, 2012
Luigi Zingales, with the full agreement of fellow business-school professor Justin Wolfers, has an important op-ed under a provocative headline: "Do Business Schools Incubate Criminals?"

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Business school professor Luigi Zingales, with the full agreement of fellow business-school professor Justin Wolfers, has an important op-ed under a provocative headline: “Do Business Schools Incubate Criminals?”

Zingales’s point is a good one: that the way business-school students study ethics is much like the way that entomologists study ants. Quite aside from the fact that ethics courses are generally taught by relatively junior professors, they also tend to shy away from actually telling students to be ethical:

Most business schools do offer ethics classes. Yet these classes are generally divided into two categories. Some simply illustrate ethical dilemmas without taking a position on how people are expected to act. It is as if students were presented with the pros and cons of racial segregation, leaving them to decide which side they wanted to take.

Others hide behind the concept of corporate social responsibility, suggesting that social obligations rest on firms, not on individuals…

My colleague Gary Becker pioneered the economic study of crime. Employing a basic utilitarian approach, he compared the benefits of a crime with the expected cost of punishment (that is, the cost of punishment times the probability of receiving that punishment). While very insightful, Becker’s model, which had no intention of telling people how they should behave, had some unintended consequences. A former student of Becker’s told me that he found many of his classmates to be remarkably amoral, a fact he took as a sign that they interpreted Becker’s descriptive model of crime as prescriptive. They perceived any failure to commit a high-benefit crime with a low expected cost as a failure to act rationally, almost a proof of stupidity.

At business school, there are lots of classes where students try to maximize profits; that’s nearly always considered to be the way to win in business. It’s easy to see, then, how Becker’s framing of unethical behavior as something with costs and benefits essentially strips the ethics away, leaving only a simple decision of whether the actor wants to take the risk of punishment.

And frankly the headline on Zingales’s piece makes a similar error. What it implies is that we should be worried about criminal behavior, rather than unethical behavior more generally. But I’m with Zingales: we need to go further than that.

When the economist Milton Friedman famously said the one and only responsibility of business is to increase its profits, he added “so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” That’s a very big caveat, and one that is not stressed nearly enough in our business schools.

Lobbying to secure a competitive advantage from the government certainly does not represent “open and free competition.” Similarly, preying on customers’ addictions or cognitive limitations constitutes deception, if not outright fraud.

There are interesting ethical debates to be had as to where to draw the line: for instance, all those “free offers” which require you to hand over your credit-card details and then bill you regularly unless you cancel. They prey on cognitive limitations, I’d say, and are less ethical than companies which don’t do that. Should business-school professors tell their students that they should avoid implementing such schemes? I don’t know. But I do think that acting ethically, even if such actions are legal and don’t maximize profits, is something that many more business-school students should be encouraged to consider.

This is a very large step, of course, from the kind of discourse which excuses illegal bribes by Walmex on the grounds that, hey, everybody does it. And in a way it’s closer to what I’m urging in a journalistic context: less emphasis on bright lines, such as what’s legal and what’s illegal, and more emphasis on acting as ethically as possible on a day-to-day basis. Treating your employees well, for instance, is sometimes good for the bottom line and sometimes bad for the bottom line. But I’m uncomfortable with arguments that urge companies to treat their employees well on the grounds that doing so will increase profits: the implication is that if it doesn’t increase profits, then the reason to do it goes away.

Zingales says that business-school professors actively foster a culture of amorality; that’s right. But the real problem isn’t business school; it’s the idea that there’s something ethically dubious about doing anything other than maximizing profits for shareholders. Which is one reason why I’m such a fan of b-corps.

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