The False Choice Between Business and Ethics

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Should there be an imperative — moral or otherwise — to consider what’s fair when making a business transaction?

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.

Should you tell the current owners they’re making a terrible mistake by pricing it at $50? Or should you simply buy the violin and profit from a lucrative resale?

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.

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?

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. Others argue that the store owner is committing fraud by overpricing the violin. 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.

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.

However, before markets can work out all of these issues, what is to be done in these particular transactions? 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.

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. 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.”

In reality, though, many people want to know how to integrate the business case and the ethics case.

Why? Because decisions in these kinds of transactions don’t have just financial outcomes — they have social and psychological outcomes, too. 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 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.”

The division that many people make between the business case and the ethics case of a transaction should not be a given in business. Integrating these concerns, though, will require rethinking the most basic ideas of both business and ethics.

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. By joining together, human beings increased their odds of survival. But collaboration to gather food was just the beginning. Working together allowed human beings to see themselves in relation to others, as a part of a group. 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. Collective intentionality is also a basis for morality, business, and capitalism.

More companies today are having conversations about ethics 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, The Container Store, and Salesforce 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. This approach says that if you’re a buyer, you treat sellers like you will be doing business with them for a long period. If you’re a seller, you treat the customer as a lifetime client who should not be taken advantage of in a particular transaction.

Relationships require investment and work. Business relationships are similar to family relationships, marriages, and the collaborations of teachers and students. None of these connections are reducible to a set of transactions, because relationships shape us as much as we shape them. 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.

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. 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.

Capitalism is the greatest system of social cooperation we have ever invented. 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. 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.



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Comments (4)
Matheus Dall\'Agnol
Edward and Bidan, thank you for the article

As compelling as some of the arguments might be, I really believe that some key issues are not fully addressed, not even accounted for. For instance, the examples used are based on individuals (sellers, buyers) and the properties of these exchange transactions. i'm afraid that the same analogy would be applied when replacing the sellers and buyers from both cases by multinational corporations, for instance?

However, should the analogy hold? Aren't corporations structured in slightly different manners, one which the objective function might not be as clear as in the sellers and buyers case from this article? We know that there is an extensive literature on corporate framing (e.g. Fiction, Aggregate and Reality Theory), but not many of these concepts are considered whenever such individual-corporation analysis is performed.

Also, how would the outcomes change when we think about the different ethical decision-making approaches (e.g. deontological, value-based, utilitarian etc.) of individuals (and even in corporations, if one stretches far enough). Would the suggested courses of action change? 

I guess the field is indeed extremely rich, with enormous contributions to be done from a theoretical and empirical manner. The business ethics concept, as exemplified, is here to come. Now it is time to make a better use out of it.
David Sterling
RE:  Asymmetry of Information

Query.  And, what if the "asymmetry of information" exists between the knowledge required to properly present and implement the product sold or services rendered and the knowledge and expertise of the purveyor of the product and/or service?  I submit that "blissful ignorance" is on the rise.   -- David F. Sterling, Esq., Consultant
Pat Nichols
Some very instructive thoughts, Edward and Bidan. Thanks.

I'm troubled, too, by the narrow view that many defenders of markets take of self-interest. I've reflected (with less brevity than you guys managed, I'm afraid!) on the social character of markets and Smith's clear recognition of that:  (

You may know that Steven Pearlstein of the Washington Post is very interested in the  moral implications of markets.  A philosopher friend of mine, Buddy Karelis (once of Colgate and of Williams) has rich thoughts on these matters. 

One pitfall of this line of thought, which you guys dodge here, is to conflate good business decisions with good ethical decisions, rather than illustrating how to integrate them--as you appear to be attempting.  I'm regularly frustrated with management writing on exactly this point.  Jim Collins and others smuggle their moral biases and choices, with which I usually agree, into definitions of what good management is.  This risks cheating us the opportunity to confront the hard cases by realizing that sometimes the best thing to do for business is NOT the best thing to do ethically.  And, it can persuade us that the most obvious moral choices (e.g. "this would produce great organizational and personal gains but at great moral cost") can be finessed or rationalize, ethically.  Leaders/managers need to recognize that sometimes we must make choices that do real damage to our organizational or personal interests.  

Again, thanks very much for your reflections.
Steven Mintz
But, how do we account for one's intention in ethics discussions? Does it matter what a person/business thinks is the right thing to do if they are not motivated to act that way? Shouldn't we start our ethics discussions with intent? Absent the intent to do things the right way, not wrong; act for the good of others, not harm them, ethical behavior comes down to reasoning skills (moral skill) but doesn't hit the most important point, which is having the desire to carry out ethical intent with ethical action (moral will).