All Commentary
Monday, January 1, 1996

The Business-Ethics Quagmire

It Is Silly and Misleading to Present the Business World as Devoid of Morality

Karol Boudreaux teaches Business Law and Business Ethics at Clemson University.

Under pressure from accreditation agencies, business schools have begun requiring a class in “business ethics” for undergraduate business majors and MBA students. The ostensible purpose is to familiarize students with potential ethical dilemmas common in the business world.

Is the course necessary? Some critics of professional ethics classes bemoan the fact that schools require such courses. “What does this say about the moral fiber of our society?” they ask. Well, perhaps it says that young people receive less training in ethical standards from their families, places of worship, and peers than they received in the past.

Acceptance of the premise that students typically receive insufficient exposure to moral ideas outside the classroom may diminish one’s aversion to business-ethics classes. Some ethics training is preferable to no ethics training; thus, schools arguably should offer such courses. But an important caveat must be added: training in business ethics is preferable to no training only if what students learn is (a) cost effective, and (b) rational.

I accept for purposes of this essay that instruction in business ethics is at least potentially cost effective. That is, I assume that the benefits to students of taking an ethics course are potentially greater than the benefits available from other ways they have to spend this time—such as taking an additional class in statistics or managerial economics. Whether or not this potential benefit is realized depends, ultimately, on the quality of instruction. And the quality of instruction in a business-ethics class depends largely on the quality of the business- ethics textbooks available to instructors.

Unfortunately, virtually all business-ethics textbooks are commonly driven by a virulently anti-business agenda. These textbooks are inherently irrational and even downright harmful.

Business Ethics: Into the Quagmire

The concept underlying most business-ethics textbooks is straightforward: self-interested behavior leads business people to do the wrong thing. Moral rules, in contrast, require individuals to voluntarily restrain their self-interested behavior, promote cooperation, and make society better off. Therefore, if students are exposed to the evils of greed and told how to behave unselfishly by textbook authors, students will supposedly be better equipped to resolve the countless ethical dilemmas they will face in the business world.

Here’s where the trouble begins. Notice that the holder of the keys for unlocking the mysteries of right and wrong are business-ethics “experts,” in particular, the people who write business-ethics textbooks. Oftentimes these authors say very sensible (if obvious) things, such as cautioning students against lying and theft on the job, and advocating decent treatment of employees and co-workers. Too often, though, these textbook authors say things that are much less sensible.

An examination of one popular business-ethics textbook helps illustrate the sad state of these books. In discussing the nature of moral rules, Manuel Velasquez, the author of Business Ethics: Concepts and Cases, claims that:

[moral standards] are concerned with behavior that can seriously injure or seriously benefit human beings. The moral norm prohibiting price-fixing, for example, rests on the belief that price-fixing imposes serious injuries upon consumers; whereas the moral principle that employees have a moral right to collective bargaining rests on the belief that this right protects a critical interest of employees.[1]

Mr. Velasquez makes the seemingly inconsistent assertion that price-fixing by employers is immoral, while employee price- fixing through collective bargaining is moral. Accept for argument’s sake that price-fixing by producers harms consumers; Velasquez is oblivious to the fact that legally protected price-fixing by workers has the same effect. Velasquez’s assertion displays a bias in favor of unions and against producers. Further, it is built on the unsubstantiated Marxist belief in the irreconcilably opposed interests of employees and employers.

Unfortunately, this assertion is not an anomaly. Consider Velasquez’s discussion of multinational firms: “Environmental laws, for example, which can ensure that domestic companies operate in the responsible manner that a country deems right for its people, may not be effective constraints on a multinational that can simply move—or threaten to move—to a country without such laws.” (p. 21)

There are serious problems with this idea. Put aside the question of whether or not environmental laws really reflect majoritarian desires. Mr. Velasquez is worried that multinationals will relocate to countries where people value environmental protection less highly than do people in the United States. Is this really a moral or economic problem? Suppose Nigeria “deems right for its people” a level of environmental protection lower than that mandated by U.S. standards in order to encourage economic growth and reduce poverty. Can U.S. citizens ethically question Nigeria’s decision? Is condemning more Nigerians to dire poverty really moral?

Furthermore, what right do some citizens have to restrict other citizens’ ability to move to a “dirtier” country to take advantage of whatever benefits may be derived from being there? Velasquez is apparently unaware that environmental protection is costly, that poor countries must inevitably make trade-offs between some types of environmental protection and development, that private foreign investment might actually help poorer countries by giving their citizens greater access to wealth, and that wealthier countries can better afford to clean up their environments. Apparently, when ethics is involved, problems of scarcity and the necessity of tradeoffs disappear.

By implying that moving to “dirtier” countries is unethical, Velasquez suggests that companies should not make decisions that lower costs. Thus, it is not surprising that Velasquez also questions the morality of multinationals that relocate to take advantage of lower wage rates abroad. Yet he fails to ask an obvious question: if Sally works for Joe and earns $20,000, and if Lisa offers Sally $30,000 to do the same work, is Sally violating her ethical duties to Joe by changing jobs? How many people would answer “yes” to this question? Probably not very many. If companies can’t shop for labor, why should labor be able to shop for better employers?

Similarly, Velasquez would probably not object to a consumer shopping for the best deal when buying a TV. The consumer might go to a no-frills discount dealer to get her TV, or, if the consumer chose, she might instead go to a store that provides great customer service—for a price. Would Velasquez favor limiting the ability of the consumer to go to the cheap store, where the “environment” is less pleasant? After all, consumers who choose the discount dealer may harm workers in the fancy store.

Here are a few other examples of the illogical, anti-market “thinking” common in Velasquez’s Business Ethics:

[P]erfectly competitive free markets impose no restrictions on how much wealth each participant accumulates relative to others, so they ignore egalitarian justice and may incorporate large inequalities. . . . People who have the money to participate in markets may consume goods (such as food or educational resources) that people outside the market, or those with very little money, need in order to develop and exercise their own freedom and rationality. (p. 183)

Presumably, wealth redistribution is the solution to this problem. However, such redistribution necessarily involves infringing the freedom of the person who has the wealth. Why is the freedom of the wealthy less valuable than the freedom of others?

The implication in the quotation above, and in many other parts of this book, is the Marxist notion that business wealth (and much personal wealth) is created only by exploiting the working class. Velasquez gets even worse:

Minimum wage laws, safety laws, union laws, and other forms of labor legislation are used to protect workers from exploitation. (p. 160)

Velasquez does not mention that minimum-wage statutes reduce employment opportunities for young and unskilled workers, or that labor-union support for minimum-wage laws may be prompted by an interest in decreasing the amount of cheap competition union workers face. Contrary to Velasquez’s claim, it is legislation such as minimum-wage statutes that exploits the most vulnerable members of society. Who’s more ethical: politicians who support laws that harm the poor, or employers who provide jobs for unskilled workers?

As suggested above, the level of understanding displayed by authors of ethics textbooks concerning environmental issues can only be described as simple-minded. Consider the following assertion by Velasquez:

[P]ollution always imposes “external” costs—that is, costs for which the person who produces the pollution does not have to pay. (p. 239)

This statement would certainly be news to Exxon Corporation, which has paid hundreds of millions of dollars in compensation for the Valdez accident, or to Union Carbide, which likewise has paid hundreds of millions of dollars to compensate victims of the Bhopal incident in India which, as it turns out, was probably caused by regulatory snafus.

The candidate for the “most misleading” statement of the book must be the following:

In a pure free market system, there would be no constraints on the property one could own and what one could do with the property one owns. . . [s]lavery would be entirely legal, as would prostitution. (p. 141)

Of course, slavery is a denial of property rights, whereas the free market extends and promotes property rights. Furthermore, the slave is thrust into his (or her) position involuntarily. Slavery is not the same thing as indentured servitude. In the latter case, someone agrees to give up personal freedom temporarily, presumably in exchange for something (money or goods) that the indentured servant values more highly. It is perhaps true that a free market would allow people, if they made this decision of their own free will, to become the temporary servants of others. But no one could force another person to become a servant or slave.[2] The basis of the market is voluntary, consensual transactions; slavery is inherently nonconsensual. Velasquez’s use of this crude scare tactic is disingenuous.

I could go on but you probably get the point by now. Such textbooks as Business Ethics portray the free market as an evil, scary place full of evil people who will do anything to make a buck. In Velasquez’s world these evil exploiters suffer no ill consequences, such as loss of business, as a result of their wicked actions. Most importantly, Velasquez and other authors of these texts believe that the best way to overcome the forces of evil present in the market is through government regulation. Arguments that the market itself can police against companies that act maliciously are brushed aside as naive:

Market failures, characterized by inadequate consumer information and by irrationality in the choices of consumers, undercut arguments that try to show that markets alone can provide adequate consumer protection. (p. 277)

Instead, consumers must be protected through the legal structures of government and through the voluntary initiatives of responsible businesspeople. (id.)

It is silly and misleading to present the business world as devoid of morality. Business people have tremendous incentives to “do good”: cheating and lying ruin reputations, treating workers poorly leads to reduced productivity, disregarding safety may result in product-liability claims, and abusing suppliers wrecks profitable relationships. Velasquez recognizes none of this.


Of course, some business people make mistakes and commit breaches of morality. It is valuable for students to investigate these mistakes and to discuss the best ways to avoid them. To argue that a free-market system would lead to perfect morality is foolish. But to argue that the government is able to prevent selfish behavior, through legislation and regulation, is even more foolish. After all, government is full of the same kinds of self-interested people as those who populate the market. Advocates of the free market do not claim that the system is perfect. Rather, they argue that the market does a far better job of promoting human happiness, morality, and justice than do alternative political systems.

The problem with many classes in business ethics is not the ethics per se. Rather, the problem is that most business-ethics textbooks espouse a naive socialism: those with “sufficient” resources should share these resources; egalitarianism is always the more important end than justice, freedom, and prosperity. Velasquez and his fellow business-ethics authors believe that self-interest inevitably leads to awful outcomes, and that government officials, who have only pure motives, are best able to constrain this behavior. Given the growing importance of business-ethics courses in business schools, there is a dire need for new textbooks written by authors who are in touch with economic and political reality.

1. Manuel Velasquez, Business Ethics: Concepts and Cases, 3rd ed. (New York: Prentice-Hall: 1992), p. 12. Subsequent page references are noted parenthetically.

2. Richard Posner, in his 1995 book Overcoming Law (Cambridge, Mass.: Harvard University Press), notes that in the Netherlands it is illegal for any firm to fire a worker (except under exceptional circumstances). Further, it is illegal for workers to quit! Is this desirable job security or slavery?