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Making capitalism more ethical: Dynamism with decency

When I tell people I teach business ethics, they often ask: “isn’t that an oxymoron?” Their response is not unwarranted. Much of my course is about the clever ways businesses have found to exploit their workers, sidestep regulations, and foist external costs onto others. Businesspeople are brilliant at finding opportunities and some of those opportunities are exploitative.

Yet the great majority of businesses (in developed nations with low corruption) run quite ethically and survive only because they provide a good or service that makes other people’s lives better. When you take the big picture and see those hockey-stick graphs of rising prosperity in the West since 1800, and in Asia since 1980, I think you’ve got to start with the proposition that business is fundamentally good. Creating value for other people (and keeping some for yourself) is virtuous. When people are free to create value, it unleashes the tidal wave of human dynamism. Poverty plummets. When people are not free, you get torpor, North Korea, and Cuba.

So how do you put together these two perspectives? I’ve been wrestling with this since I joined the NYU-Stern School of Business in 2011, just as the Occupy protests were breaking out.  I’ve come to believe that there are two utterly contradictory stories about capitalism circulating in Western society. One sees capitalism as exploitation, and therefore demands strong government controls. It prizes human decency, and is willing to sacrifice some dynamism to protect innocent victims.

The other story sees capitalism as liberation, and therefore demands that government step back and let markets and entrepreneurs work their magic with only minimal interference. This view prizes dynamism, and is willing to tolerate some exploitation rather than attempt to protect everyone in ways that would reduce dynamism.

I recently produced two short video montages illustrating these two stories, and I embedded them in a talk I delivered at the Zurich Minds festival. The 22-minute talk is shown below. The last third of the presentation is about business ethics where I explain my conclusion that both of the stories have some truth to them, although the “liberation” story is closer to the truth in countries with solid rule of law.

 

[or click here to watch on YouTube]

So capitalism is indeed best understood as a form of liberation, which unleashes humanity’s awesome powers of innovation, but some people will always use their innovative abilities to find new forms of exploitation. Societies and governments must therefore be vigilant, and must do all they can to promote a stakeholder view of business relationships. When leaders take a stakeholder view, they take the long view and try to cultivate their relationships with all relevant parties. When this view is widespread, the exploitation story becomes irrelevant.

However, since the 1970s, with the spread of the “shareholder primacy” view in the USA, there has been a movement away from the stakeholder view. I illustrate the conflict between these two views and show how the shareholder primacy perspective can encourage businesses to squeeze (or exploit) their workers, their customers, the local communities where they are sited, and above all the people and environments that make up their increasingly far-flung supply chains. When many businesses take the shareholder primacy view, the exploitation story becomes more true, and the demand for tighter regulation grows stronger.

I suggest a few ways that an EthicalSystems perspective can be used to push back. I think the best forms of pushback are those in which non-governmental actors find ways to raise the cost of bad behavior. The site Glassdoor.com is one example – employers who treat their employees badly will find it harder to hire good employees, because candid reviews will repel future applicants.

Academic institutions and NGOs can also play a big role as illustrated by the NYU-Stern Center for Business and Human Rights, which helped the Bangladeshi garment industry raise its safety standards after the collapse of Rana Plaza killed 1100 workers. By helping to raise the cost of vice and the rewards of virtue, organizations such as Center for Business and Human Rights change the ecosystem within which companies operate, making it more rewarding for them to improve their own internal ethical systems.

My three years at NYU-Stern has given me a much more positive view of business, while forcing me to read about scandal after scandal in the business pages. I co-founded EthicalSystems.org in part to reconcile those two conflicting perspectives. Our goal is to help businesses maximize both dynamism and decency. Our hope is that in 10 years, nobody will ask us whether business ethics is an oxymoron.

 


I have also made the two montages available as separate files, in the hope that teachers and professors will find them useful for showing in classes that discuss morality, history, politics, or economics.

 

You can also download the two separate stories at: www.ethicalsystems.org/capitalism  

 

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Are Benefit Corporations the solution? Or can we make every corporation want to function like a Benefit Corporation? http://en.m.wikipedia.org/wiki/Benefit_corporation