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BUSINESS ETHICS: HOW MUCH CAN BE LEFT TO THE NARKET?

Almarin P h i l l i p s

INTRODUCTION

When I was a boy, we had a favori te swimming hole on the Neversink River behind my grandmother's house near the southern border of New York state. I t was our favor i te, but there were many warm summer days when we couldn't swim in i t . Al l too frequently, a s i l k mil l a few hundred yards upstream spewed dye into the r iver , ruining i t for swimming there and for miles downstream.

I t d idn ' t occur to us that anyone--least of a l l a bunch of kids-- could negotiate with the s i l k mil l owner to get him to stop or decrease the pol lut ing. The idea that he might pay us so that we would w i l l i ng l y tolerate the dye would have been u t t e r l y alien. The insights of Ronald Coase on social costs were yet to be revealed. Even i f we had known, none of us had any money to pay for reduced pol lut ion. Further, organizing al l the people adversely affected by the mi l l ' s eff luents would have been d i f f i c u l t . We d idn ' t even know who the owner was, except for a vague sense that he l ived in Paterson, New Jersey.

We didn' t think about suing the mil l owner for public nuisance, ei ther. While i t would have been easy to convince him that having the water turn red or v io le t was a big intrusion on our fun, many obstacles would have existed to a successful sui t . F i rs t , i t would s t i l l be necessary to f ind the people damaged by the mi l l ' s discharges and to value those damages. Then there would have been the complexi- t ies created by the fact that, while we were in New York, the owner was in New Jersey and the r i ver becomes the boundary between New Jersey and Pennsylvania only a mile downstream. We could hardly have paid an attorney and there would have been l i t t l e about the case to a t t rac t even the hungriest of lawyers on a contingent fee basis.

Legal actions also would have been impeded by other less obvious but no less important factors. The parents and sibl ings of some of my swimming companions worked in the mi l l . In 1935, a threat to f i r e these workers would have stopped any ef for ts on our part to pressure the owner to clean up the r iver . And, most important, the legal stan- dards that would have been used quite probably would have favored the mi l l . Where industrial use was concerned, some "modifications of [swimmers'] r ights [would] be submitted to in order that the greater good of the public [coming from the mi l l ' s operations] be conserved and promoted. "1

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In shor t , the legal system re f lec ted the values inherent in the economic system of the day; our i n te res ts in swimming in reasonably clean water would have been suberceded by the m i l l ' s need fo r an inex- pensive way to discharge used dyes. Even had the mi l l owner f e l t e th ica l compunctions to keep our r i ve r pure, the operat ions of the market would surely have tempered his good in ten t ions . Low cost operat ions were essent ia l to the m i l l ' s combet i t ive surv iva l .

OTHER PERSPECTIVES

Environmental concerns were one--but only one--of the many governmental incursions in to the marketplace in recent decades. Now we are being to ld that t h i s is a11 wrong, that we should "get governments o f f our backs and l e t the market work." We are to ld that the u l t imate social mora l i ty l i es in the egoism that makes cap i ta l ism work. Al t ru ism and "do-goodism," i t is said, r e f l e c t the value system underlying social ism and communism, the great ev i l s to be avoided at a l l costs. And there is the view, too, that there is no a l t ru ism anyway, and that government o f f i c i a l s - - b o t h e lected and appointed--are motivated by personal greed as much as those in the p r iva te sector .

This l ine of thought makes one wonder. Is i t possible that the market would eventua l ly attend in a soc i a l l y acceptable way to problems of t r u t h f u l d isc losure in packaging and advert is ing? To san i ta t ion and adu l te ra t ion problems in the food industry? To the use of possibly dangerous chemical addi t ives in foods? To the safety and ef f icaciousness of drugs? To construct ion standards fo r res iden t ia l bui ldings? To sa fe ty in commercial av ia t ion? To fraud in the issuance of and t rad ing in secur i t ies? To the disposal of trash and garbage? To the const ruct ion of highways, por t f a c i l i t i e s and a i r - ports? To the education of the general publ ic? To epidemiologic and other publ ic medical and health services? I th ink not. Exp l i c i t government in te r fe rence through l e g i s l a t i v e act ions and, usual ly, the creat ion of a bureaucracy are essen t ia l .

In th i s regard, look b r i e f l y at the h i s t o r y of labor re la t ions and, p a r t i c u l a r l y , i n j u r i e s a r is ing in the workplace. Before l eg l s l a - t i ve in te rven t ion , employers could t y p i c a l l y escape l i a b i l i t y fo r such i n j u r i es . By accepting employment, an employee "assumed the usual r i sks and pe r i l s of the serv ice. ''2 The employer was also re l ieved of the general l i a b i l i t y " to indemnify one servant fo r an in ju ry caused by the negligence of another. ''3 And, where the employee was found to have accepted the r i s k , the employer could avoid l i a b i l i t y fo r i n ju r i es caused by even his own negligence. 4 J u s t i f i c a t i o n fo r these doctr ines was found in the "sanc t i t y of con t rac ts " and, wi th more can- dor, by the recogni t ion that "great enterpr ises which require the ser- vices of a large number of men would [otherwise] be ser ious ly retarded. ''5 The idea was not that the market would cor rec t abuses but rather that any ru les to remedy the abuses would disadvantage c a p i t a l i s t industry .

Much the same t h i n g was t r u e o f o t h e r c o n d i t i o n s o f employment b e f o r e l e g i s l a t i v e changes were made. The market showed no s igns o f improv ing the s o c i a l l y i n t o l e r a b l e work ing c o n d i t i o n s in f a c t o r i e s and mines. I t d id no th ing toward l i m i t i n g the terms o f employment f o r women, c h i l d r e n o r f o r workers in p a r t i c u l a r l y hazardous occupa t ions . Co r respond ing l y , the law was harsh w i t h respect to a c t i o n s on the p a r t o f employees to s t r eng then t h e i r ba rga in i ng p o s i t i o n s .

F i n a l l y , what o f d i s c r i m i n a t i o n a g a i n s t b ] acks , members o f o t h e r m i n o r i t y groups and women? The e t h i c a l concern, i t seems t o me, is more than w i t h d i s c r i m i n a t i o n in the wo rkp lace - -wh i ch some economists a re con ten t s imp ly to a s c r i b e to i nna te d i f f e r e n c e s in p r o d u c t i v i t y - - bu t a l so w i t h d i s c r i m i n a t i o n in educa t ion , hous ing, r e c r e a t i o n a l oppor - t u n i t i e s and, r e a l l y , to d i s c r i m i n a t i o n in c i t i z e n s h i p i t s e l f . There i s no t h e o r e t i c a l or e m p i r i c a l ev idence to suggest t h a t markets in any way tend to c o r r e c t f o r r u l e s t ha t f o r c e some c i t i z e n s l i t e r a l l y and f i g u r a t i v e l y to " r i d e in the back o f the bus . "

LIMITS OF THE NARKET

The market mechanism, as I have understood i t , i s not an a r b i t e r o f va l ues . To the c o n t r a r y , under r a t h e r c i r cumsc r i bed c o n d i t i o n s , i t i s a dev ice f o r ach iev i ng e f f i c i e n c y , w i t h the l a t t e r de f i ned in an e t h i c a l l y neu t ra l way. U n t i l q u i t e r e c e n t l y no o n e - - c e r t a i n l y not the c l a s s i c a l economists on whose t h e o r i e s we have b u i l t - - h a s suggested t h a t the market w i l l e f f i c i e n t l y a l l o c a t e resources in a l l c i r cums tan - ces o r t h a t the outcomes o f market processes w i l l comport w i t h pa r - t i c u l a r e t h i c a l s tandards .

He have learned, o f course , t ha t the c o r r e c t i o n o f e x t e r n a l i t i e s need not depend on governmenta l i n t e r v e n t i o n . When t r a n s a c t i o n s cos ts among the affected p a r t i e s a re low, Coasian s ide payments may become a s e l f - c o r r e c t i n g market response. But the s i t u a t i o n s in which t r ansac - t i o n s cos ts are so low t h a t a Coasian s o l u t i o n works are l i m i t e d . Moreover , even i f e x t e r n a l i t i e s cou ld be l a r g e l y i n t e r n a l i z e d by c o n t r a c t i n g , problems o f e t h i c a l va lues would remain.

I t i s sa id , " M o r a l i t y cannot be l e g i s l a t e d , " a s ta tement t h a t i s i n some sense t r u e bu t i s a t once e s s e n t i a l l y devo id o f wisdom. Each o f us, I suspect , has had the exper ience o f compromising h i s or her va lues because o f peer p ressures or personal exped ienc ies . Hope s i g n i f i c a n t l y , few o f us are capable o f d e l i n e a t i n g the e x t e n t to which our va lues have been warped by peer group p a r t i c i p a t i o n . Here Ne e a s i l y develop b l i ndness concern ing the e f f e c t s o f our behav io r on o t h e r s because, w i t h i n the group, "an odor common t o a l l i s o f f e n s i v e to none. " Our a b i l i t y to r a t i o n a l i z e and to j u s t i f y our own behav io r i s e x t r a o r d i n a r y . In some c i r c l e s , I am t o l d , pay ing a l l o f one 's t axes i s regarded as a b e r r a n t behav io r .

I see no o b j e c t i o n - - a n d , in f a c t , no a l t e r n a t i v e - - t o l e g i s l a t i o n des igned to make s o c i a l l y r espons ib l e behav io r more a t t r a c t i v e . The employer who might h i r e a woman, the r e s t a u r a t e u r who might serve a b l a c k , the brokerage f i r m t h a t might h i r e a Jew c e r t a i n l y has b e t t e r grounds f o r b reach ing peer group ru l es t h a t j u s t i f y d i s c r i m i n a t i o n when the law comes down f i r m l y in t h a t d i r e c t i o n . And the same i s t r u e f o r many o t h e r aspec ts o f market and non-market conduct .

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NEW DIMENSIONS OF NARKET FAILURE

Things are d i f fe rent now from when I was a boy. Problems ere not epitomized by a few kids swimming in a r iver polluted by dye from a mil l owned by someone 60 miles distant. Now a single chemical discharge can tox i f y the Rhine from Switzerland to Rotterdam. The accidental release of an industrial gas can k i l l tens of thousands of Indians, and leave many times that number with l i fe - long health problems. The combined effects of consumer aerosols, industrial wastes and internal combustion engines may be i r revers ib ly puncturing the earth's protective layer of ozone. A single plane crash could k i l l more than 1,000 passengers and many more at the s i te of the acci- dent. The legal and i l l ega l transportation of tox ic and other hazar- dous m a t e r i a l s by r a i l and t r u c k poses u n t h i n k a b l e t h r e a t s to the genera l c i t i z e n r y . Hazardous was tes - -nuc l ea r and n o n - n u c l e a r - - a r e s c a t t e r e d over the c o u n t r y s i d e in amounts, a t p l aces , and w i t h con- sequences f r i g h t e n i n g l y unknown. Ne i t he r market f o r ces nor non- lega l soc i a l r e s t r a i n t s w i l l p r o p e r l y address such prob lems.

At the same t ime , e lements o f the soc i a l i n f r a s t r u c t u r e are c rumb l ing ; the d i s t r i b u t i o n o f income i s becoming more unequal even as the p r o v i s i o n o f p u b l i c goods is be ing r e s t r i c t e d . Na t iona l s t r a t e - g ies focus on arming t he wor ld to make mutual s e l f - d e s t r u c t i o n a l l but i n e v i t a b l e wh i l e our pa rks , l i b r a r i e s , museums, highways and educa- t i o n a l i n s t i t u t i o n s c r y f o r added resources. One f i n d s t h a t the cham- p ions o f an u n f e t t e r e d market system are to a l a r g e e x t e n t the champions o f new means t o a n n i h i l a t e a l l human l i f e . The e t h i c s o f t he marketp lace f i n d a l l too easy t r a n s f e r e n c e t o o t h e r p o l i c y areas.

CONCLUSION

I t can be counted on w i t h c e r t a i n t y t h a t governments and t h e i r agencies w i l l " bung le " a good number o f t h e i r p r o j e c t s . Too, the bureaucracy w i l l be occup ied by persons who are t o a cons ide rab le degree a c t i n g in s e l f - s e r v i n g ways. There w i l l be d i shones ty and, on occas ion , even c r i m i n a l conduct . Some o f t h i s w i l l occur where governmental agencies and businesses ge t " t oo c l o s e . " Maybe i t i s c o r r e c t t h a t t he re i s no a l t r u i s m . Maybe o l d bureaucracies are d i f - f i c u l t t o k i l l o f f . Nonethe less , t he re can and must be non-market , gove rnmen ta l l y e s t a b l i s h e d i n s t i t u t i o n s i f we are even to a d d r e s s - - l e t a lone so l ve e f f i c i e n t l y - - s o m e problems o f monumental p r o p o r t i o n s .

I t was Jeremy Bentham who sa id :

" I have not, I never had, nor ever s h a l l have, any horror, sentimental or anarchical, of the hand of government. I leave i t to Adam Smith, and the champions of the rights of man ( for confusion of ideas w i l l jumble together the best subjects and the worst c i t izens upon the same ground) to ta lk of invasions of natural l iber ty , and to give as a special argument against this or that law, an argument the ef fect of which would be to be �9 negative upon a l l laws. The interference of

government . . . is an event I witness wi th a l together as much s a t i s f a c t i o n as I should i t s forebearance, and with much Bore than I should i t s negl igence". 6

The Neversink River is a good deal cleaner now, not because of market responses, but mostly because of governmental in tervent ions. And the s i l k mi l l is gone now, not because of those in tervent ions but ra ther because of the discovery of nylon. There is nothing wrong wi th recognizing a cont inuing, post ive and perhaps expanding ro le fo r government in modern soc ie ty . The market, important though i t may be, is not the answer to a l l of our problems.

NOTES

IThe quote, without case c i ta t ion , is from W.H. Spencer, A Textbook_o ~ Law and Business (2nd ed.), (New York: McGraw-Hill Book Co., 1938), p. 407.

2Gibson v. Erie R~.L_Co t 63 N.Y. 449 (1875).

3McCror~ v. Ultima_Thule, 90 Ark. 210 (1909).

4McCormack M~chj~ C ~ , v : _ Z a k ~ w s k i , 220 1 ] 1. 522 (I 906).

5Schaub v. Hannibal Ry• Co• 106 Mo. 91 (1891).

6W. Stark, J_erem~B.entham'sEcg~qomicW.ritings (New York: Burr Franklin, 1954), Vol. 3, pp. 25?-58, as quoted by W.J. Samuels, The Classical Theor~ of Economic Policy (New York: World Publishing Co., 1966), p. 191. The Samuels book is s t reasure f o r i t s treatment of po l i cy issues by the c lass ica l economists.

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