by Jurgen Brauer, November 2006
Copyright: J. Brauer. No reproduction without permission.

Corporate scandals! Almost everyone has heard of Enron, the now defunct Houston-based energy-trading company. Many will have heard of WorldCom, Tyco International, Adelphia Communications, HealthSouth, and others, and of the associated shortcomings of its corporate leaders. The ongoing stock-options backdating affair has embroiled hundreds of executives and led to a number of high-profile resignations. Responding to corporate scandals, Congress passes more stringent legislation, corporations spew out mind-numbing, but voluminous ethics codes – merely to have them provides some legal protection! – and business schools integrate “ethics” into their undergraduate and graduate offerings.

Something bothers me about this ethics bandwagon, and it is not merely that “ethics” is taught in b-school.

But something bothers me about this ethics bandwagon, and it is not merely that “ethics” is taught in b-school. (If I had my druthers, students would take a full-bore ethics course from the philosophy department, with a qualified PhD philosopher at the head of the class.) No, what bothers me is that business and the lack of ethics appear conflated in the public mind. What good can one expect of business? They – “they”! – are all out to get rich at customers’, vendors’, shareholders’, and taxpayers’ expense. But this is nonsense (most business people behave ethically) and amounts to looking at ethics through a curiously distorted monocle.

Ethics lapses are in fact widespread. The mid-term election in November 2006 was, in part, a vote on the unethical conduct of a large number of U.S. politicians. The Wall Street Journal recently reported on pastors plagiarizing each others’ sermons. Since “truth is truth, there’s no sense reinventing the wheel,” argues one pastor. On that logic, it would not matter if I copied someone else’s scientific work and published it as my own or read a textbook to my students without adding my own thoughts. I would just be spreading the truth. Scientists and scholars of course are not immune to ethics challenges: data manufacturing is, sadly, part of our line of business. One only need read Science regularly to keep up with the fraudulent behavior in the sciences. In a word, every profession has its potential to run into ethics troubles. Ethics, or the lack thereof, is not a monopoly of business.

Ethics is the study of standards of conduct and moral judgment. Economics can study how the standards come about. One economist proposes that ethics standards "evolve" just like the rest of life evolved.

Ethics is a fundamental issue of human behavior, and of the societies we form. This is where economics enters. In contrast to ethics as an academic discipline (“the study of standards of conduct and moral judgment,” my dictionary says), economics is about actual behavior, not standards of behavior. But a question that does interest economists is why standards – any standards – are formed, how and why standards become standards, and why people engage in standard-conforming or standard-violating behavior. Economist and mathematician Ken Binmore, in this excellent book Natural Justice (Oxford University Press, 2005), suggests that ethical standards or norms, rather than being deducible from reason alone as certain philosophical traditions would have it, evolve. He proposes to examine the development of ethical standards the way scientists examine natural phenomena. Binmore is looking for natural laws, not supernatural ones – physics, not metaphysics – that would explain the evolution of norms in social species such as ours. In particular, he avers that norms of fairness (“justice”) evolved to select from among the “infinity of efficient equilibria of the repeated game of life played by our prehuman ancestors.” Now there is a thesis to titillate one’s synapses!

Put crudely, codes of ethics are “efficient” inasmuch as they permit societies of adherents to prosper, successfully reproduce, and obtain a growing share of the overall population. And they are relative inasmuch as there are an “infinity” of workable norms from among which to choose. Once chosen, they acquire – within any chosen code – an absolutist bent. Thus, if we understand just how norms emerge and evolve, we might be able to direct norms as well. We might be able to experimentally change the conditions under which they arise and thus observe the evolution of different norms under different conditions. Instead of ethics by reference to (religious or other) authority, we may get ethics by experimental design and, ultimately, by social policy. Anthropologists, behavioral economists, psychologists, sociologists, and others should find none of this surprising.

The engrossing challenge to engage Binmore has already begun. If some people have their doubts about ethics in business, it is certainly alive, fun, and well in economics. This is the sort of ethics I wish we would teach, in business school as elsewhere. Not the flaccid fluff of positing “dilemmas,” the “correct” answer to which is supposed to socialize the student into proper future (business) behavior, but the deeply critical-thinking oriented version that asks fundamental questions about (human) nature and the constitution of our societies. Who cares that Enron’s executives defrauded folks by the billions; much more important to figure out why we care in the first place and to teach that to our students! Once students understand why we care, they most likely will care, about Enron and about their own future actions. To appropriate a line from Erich Fromm, what’s important is not to have (ethics), but to be (ethics), not just to have rules but to understand why there are rules, not just to follow but to internalize them, and to appreciate why they liberate even as they constrain. Why, all this harkens back to Adam Smith. Not he of The Wealth of Nations but he of The Theory of Moral Sentiments.

It can pay to cheat on standards. Most people find this unfair and punish the offender to enforce the norm, the rules by which to play the game.

Economists have a tradition of studying standards. Why do societies have a standard language, a standardized form of money, and standardized electric outlets? The answers are obvious. And so it is with ethical norms. Once norms are established it is, as a rule, cheaper to conform than to rebel! Yet rebellion (“cheating”) can be profitable for the cheater, hence the temptation. Hence, too, the urge to punish cheaters, as numerous laboratory experiments have confirmed. On occasion, however, rebellion can usefully set in motion a transition by which norms are deleted, amended, or added. Business, likewise, has a tradition of studying, setting, and modifying standards. For example, the “American system of manufacture,” starting in the early 1800s, was all about making mass production possible with interchangeable, i.e., standardized, parts. Accreditation of schools, colleges, and hospitals is all about standards, and punishment for failure to meet them. Perhaps businesses and their leaders would do better by replacing the (for them) nebulous terms “ethics” with the (for them) more common phrase “industrial standards.” They, or industry observers, would then strive to measure ethics compliance and publish the results the way stock quotes are published. Just a thought. After all, the corporate social responsibility movement and social investing folks have already made progress in this direction.