Review Sheet for Midterm #1

The Invisible Hand of the Market – unintended good repercussions of acting in self interest in a market economy

o Adam Smith, Wealth of Nations By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.

o The Invisible Hand by Jan Narveson defense of the market economy

Externalities, Positive and Negative – unintentionally benefitting a third person after an exchange between A and B; unintentionally hurting a third person or party after an exchange between A and B

o The primary mechanism [to promote the desired outcome] is what are called Positive Externalities.

Jan Narveson’s Views about Government – “…desirable social outcomes will be promoted by people who are not acting intentionally to promote what they would describe as ‘social outcomes’ at all.”

The Difference Between Law and Ethics

o Law restricts some actions and encourages performing other actions; law affects corporation ethics; sometimes law permits actors to do things that are unethical or encourage them to do things that are unethical

o Being ethical requires engaging in certain actions and forgoing others; following the law may not be enough to make a person or business ethical.

Kent Greenfield’s View of What Cause Failures of Corporate Ethics

o Corporate Ethics in a Devilish System

o “… failures of corporate ethics are not matters of bad people acting within and through business. Rather they are failures of the system itself.”

o “I believe we ought to impose more rather than fewer responsibilities on management and use the law to make our ethical norms real and impactful.”

Limited Liability – “the very cornerstone of corporate law, is inconsistent with the ethical norm of taking responsibility for one’s own actions since it shields people from liability from their wrongful conduct. Limited liability is fundamental and indeed is a principal reason that businesses choose to incorporate.”

o Protects managers/ investors from risks/ liabilities

o “Few directors or managers have the incentive to push their firm to take what must seem a huge short-term risk—reallocating more decision-making power to non-equity investors—for gains that seem abstract or beyond the time horizon for investors.”

Corporations (their structure and general features)

Capitalism – means of productions is privately held and controlled

o People work for wages from people who hold the means of production

Stockholders vs. Stakeholders

o Stockholders - management (CEO, CFO, Investors etc.)

o Stakeholders - consumers, employees, part of society that is influenced/ affected by the corporation and its dealings

Distributive Justice—J.J.C. Smart, “Distributive Justice and Utilitarianism”

o Distributive justice is about who gets what and why they get it

o It is different from generosity in that it is an obligation to give up goods while generosity is a decision made out of free will and benevolence

Process vs. Outcome Theories of Distributive Justice

Utilitarianism (especially it’s three main claims, core definition)

o Consequentialism: the goodness of an act’s consequences is what we should judge the act according to; all actions should aim to maximize goodness

o Pleasure is the only good thing; Pain is the only bad thing (hedonism)

o Equality of interest – “Greatest good for greatest number”

The maximization of overall goodness (which utilitarianism interprets as pleasure) is what matters; no one individual’s good

(their pleasure) matters more than any other person’s; i.e. overall in aggregate more pleasure is good

J.J.C. Smart’s view of what Utilitarianism says about Distributive Justice

o Utilitarians are concerned with “the maximization of happiness and not with the distribution of it”

o We should try to create the greatest happiness for the greatest number of people (Utilitarianism)

o If some people have most of the goods, then they will be somewhat happy, but there won’t be as much overall happiness as if goods were more evenly distributed (Principle of Diminishing Marginal Utility)

o Therefore, we should distribute goods in egalitarian ways in most circumstances

Diminishing Marginal Utility – states that for many goods, a particular further increment has less value to someone who already possesses a significant amount of the good than to someone who has less”

Egalitarian – “…It is of course likely to produce the greatest happiness if I divide the money equally. For this reason utilitarianism can often emerge as a theory with egalitarian consequences.”

o Dictionary – asserting, resulting from, or characterized by belief in the equality of all people, especially in political, economic, or social life.

Robert Nozick’s critique of the idea of distributive justice

o Robert Nozick, “Distributive Justice” – Nozick often associated with libertarians or classical liberals

o “…There is no central distribution, no person or group entitled to control all the resources, jointly deciding how they are to be doled out. What each person gets, he gets from others who give to him in exchange for something or as a gift. In a free society, diverse person control different resources and new holdings arise out of voluntary exchanges and actions of persons.”

o Liberty upsets patterns

Justice in Holdings; justice in acquisition, transfer, and rectification

o Justice in acquisition: what is the just way to acquire something, to become entitled to someone else so that they are entitled to it?

o Justice in transfer of holdings: what is the just way to transfer something to someone else so that they are entitled to it?

o Justice in rectification: if violations of acquisition and transfer occur, how can they be made right?

o “Most people do not accept current time-slice principles constituting the whole story about distributive shares. They think it relevant in assessing the justice of a situation to consider not the distribution it embodies, but also how the distribution came about.”

The Historical Process View (avoid force and fraud; entitlement; etc.)

o “whether a distribution is just depends on how it came about.”

o “Whomever makes something, having bought or contracted for all other held resources used in the process (transferring some of his holdings for these cooperating factors), is entitled to it. The situation is not one of something’s getting made, and there being an open question of who is to get it. Things come into the world already attached to people having entitlements over them. From the point of view of the historical entitlement conception of justice in holdings, those who start afresh to complete ‘to each according to his ---,’ treat objects as if they appeared from nowhere, out of nothing. A complete theory of justice might cover this limit case as well; here perhaps is a use for the usual conceptions of distributive justice.”

Nozick’s critique of patterned views of justice; the Wilt Chamberlain case

o Liberty upsets patterns

o “The general point illustrated by the Wilt Chamberlain example of the entrepreneur is a socialist society is that no end-state principle of distributional patterned principle of justice can be continuously realized without continuous interference with people’s lives.”

John Rawls’s idea of Justice as Fairness (2 Principles of Justice)

o Basic liberties—each person is to have an equal right to the most extensive scheme of equal basic liberties compatible with a similar scheme of liberties for others

o Fair equality of opportunity—difference principle; “social and economic inequalities are to be arranged so that they are both reasonably expected to be to everyone’s advantage, and attached to positions and offices open to all…”

The Original Position – “the essential feature of this situation are that no one knows his place in society, his class position or social status, nor does anyone know his fortune in the distribution of natural assets and abilities, his intelligence, strength, and the like. I shall even assume that the parties do not know their conceptions of the good or their special psychological propensities.”

The Veil of Ignorance—“the principle of justice chosen behind a veil of ignorance ensures that no one is advantaged in the choice of principles by the outcome of natural chance or the contingency of social circumstances.”

The Difference Principle—“social and economic inequalities are to be arranged so that they are both reasonably expected to be to everyone’s advantage, and attached to positions and offices open to all…”

o In the best society person that is worst off should be in the best position possible

o According to Rawls’s, the wellbeing of the person at the bottom of the society is the measure of how good a society is.

Goodpaster and Matthews’ view of why corporations can be held responsible

o Kenneth Goodpaster and John Matthews Jr., “Can a Corporation Have a Conscience?”

o “Organizational agents should be no more and no less responsible (rational, self-interested, altruistic) than ordinary persons.”

o “…corporations that monitor their employment practices and the effects of their production processes and products on the environment and human health show the same kind of rationality and respect that morally responsible individuals do. Thus, attributing actions, strategies, decisions, and moral responsibilities to corporations as entities distinguishable from those who hold offices in them poses no problem. […] Some corporations have built features into their management incentive systems, board structures, internal control systems, and research agendas that in a person we call self-control, integrity and conscientiousness. Some have institutionalized awareness and concern for consumers, employees, and the rest of the public in ways that clearly others have not.”

Responsibility as rationality and respect

o Responsibility Answerability; social role responsibility; decision-making responsibility

o Decision-making responsibility rationality: “lack of impulsiveness, care in mapping out alternatives and consequences, clarity about goals and purposes, attention to details of implementation”;

o respect: “special awareness of and concern for the effects of one’s decisions and policies on others”; treating people as an end to themselves and not seeing them as objects to be manipulated and used as a resource

Different views of what corporations can be held responsible for: Invisible Hand of the Market View, Government’s Hands View, Management’s Hands View

o Invisible Hand of the Market View – profit; MINIMAL legality

o Government’s Hands View—profit; NOT minimal legality

o Management’s Hands View –profit; legality; morality

The objections to Goodpaster and Matthews’ views that we discussed in lecture

o The opposing view (rejected by Goodpaster and Matthews): “Persons […] ought to care not only about themselves but also about the dignity and wellbeing of those around them—ought not to care but also act. Organizations, he evidently thought, are creatures of, and to a degree prisoners of, the system of economic incentive and political sanction that give them reality and therefore should not be expected to display the same moral attributes we expect of persons.”

o Objections related to Management’s Hands View:

Freeman’s definition of stakeholders (who counts as stakeholders, including examples)

o R. Edward Freeman, “Stakeholder Theory of Modern Corporation”

o Replace “the notion that managers have a duty to stockholders with the concept that managers bear fiduciary responsibility to stakeholders”

o “Stakeholders are those groups who have a stake in or claim on the firm. Specifically…suppliers, customers, employees, stockholders, and the local community, as well as management in its role as agent for these groups.”; “those groups who are vital to the survival and success of corporation.”

o “Each of these stakeholder groups has a right not to be treated as a means to some end, and therefore must participate in determining the future direction of the firm in which they have a stake.”

Freeman’s critique of the invisible hand view

o The invisible hand view “contends that it creates the greatest good for the greatest number, and therefore government need not intervene. However, we know that externalities, moral hazards, and monopoly power exist in fact, whether or not they exist in theory. Further, some of the legal apparatus has evolved to deal with just these issues.”

o Freeman thinks that the law seems to support more the stakeholder theory rather than the invisible hand view

o Tragedy of the commons –“problem that pervades the concept of public goods such as water and air. No one has an incentive to incur the cost of clean-up or the cost of nonpollution, since the marginal gain of one firm’s action is small. Since the Industrial Revolution, firms have sought to internalize the benefits and externalize the costs of their actions.”

Friedman’s critique of corporate social responsibility

o Milton Friedman, “The Social Responsibility of Business is to Increase its Profits”

o “What does it mean to say that the corporate executive has a ‘social responsibility’ in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers. For example, if he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though the price increase would be in the best interests of the corporation. Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment.

o “In each of these cases, the corporate executive would be spending someone else’s money for a general social interest. Insofar as his actions in accord with his ‘social responsibility’ reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customer’s money. Insofar as his actions lower wages of some employees, he is spending their money.”