Business Ethics and The Morality of the Free Market

by | Dec 9, 2019

The ethics of private enterprise and the morality of the market require both a preaching and a practicing of a respect for others’ individual rights to their property and to the rule of voluntary agreement in all transactions, even when market outcomes are not always favorable to oneself.

Who do people consider to be less ethical or honest than either telemarketers or used car salesman? If you said Washington politicians, you’d be right on the button. According to Gallup News Services, members of Congress are right at the bottom of perceived ethical behavior and honesty.

Every year Gallup issues the results of a public opinion survey concerning people’s views about the degree of honesty and ethical behavior in a variety of professions and occupations in the United States. Its last such survey was released in December 2018.

According to Gallup’s questioning of adults over 18 years of age, living in all 50 states and the District of Columbia, 58 percent of respondents held low or very low opinions of Congressmen’s ethics and honesty. Only 8 percent held high or very high positive views concerning the honesty and ethics of those holding a Congressional office.

Indeed, the only occupations with negative ratings near that of Congressmen were telemarketers, with 56 percent of those in the survey saying they held low or very low opinions of those calling and annoying them over the phone, and car salesmen who were viewed low or very low by 44 percent of those responding to the questions; like the view of Congressmen, only 8 percent of those surveyed considered car salesmen as highly or very highly honest and ethical. .

Journalists were ranked low or very low in honesty and ethics by 34 percent of those in the survey. Stockbrokers were viewed negatively by 32 percent, labor union leaders were viewed as low or very low by 31 percent, while only 28 percent felt that way about the ethics and honesty of lawyers.

Businessmen Not Held in the Highest Esteem

So, who were held in relatively high or very high esteem in terms of honesty and ethical conduct? In descending order: nurses (84 percent), military officers (71 percent), medical doctors (67 percent), pharmacists (66 percent), high school teachers (60 percent), and police (54 percent)

What about those commonly considered in the “business sectors” of the economy? Business executives were considered high or very high in honesty and ethics by only 17 percent of those in the survey. This compared to accountants viewed highly or very highly at 42 percent, followed by funeral directors at 39 percent, building contractors at 29 percent, bankers with 27 percent, real estate agents with 25 percent, stockbrokers with 14 percent, and advertising practitioners at 13 percent.

Clergy were viewed positively in this way by 37 percent, while journalists were viewed highly or very highly by 33 percent in the survey.

Not long after the release of this Gallup poll, the Deloitte International Consulting firm, headquartered in London, UK, released its February 2019 global survey of almost 10,500 “millennials” (those between the ages of 25 and 36) with higher education in professional jobs in the private sector in 36 different countries.

Only 48 percent said that corporations in general operate ethically, and a majority were critical of such businesses focusing, primarily, on earning and maximizing profits instead of giving a higher priority to pursuing “socially useful” goals and objectives. However, those in the political arena are seen in a much worse light. More than 71 percent considered that political leaders have a negative effect on society and social problems. Business leaders, on the other hand, were viewed as generally having a positive impact on society by 44 percent of the respondents.

It may not be too surprising that those in government earn such low marks in the minds of Americans or many others around the world. After all, politics often seems to be little more than an arena of corruption, power lusting, hypocrisy, and confusion. Scandals of a financial or personal nature affecting those in political office or in the government bureaucracies constantly fill the pages of newspapers and airtime on the television news programs.

Ethics and politics do not seem to go hand-in-hand very much in modern America or, indeed, anywhere else in the world.

The Ethical Quality of Business in a Free Market

The mixed estimation in which private enterprisers are held in the eyes of Americans and others is more troublesome. The reason I say this is that businessmen operating in a free market function on a totally different plane than those who make their living in politics.

Indeed, There is no more honorable and moral way of earning a living than as a private enterpriser and entrepreneur in the competitive arena of the free marketplace.

To use a Biblical phrase, many are called but few are chosen to take on the leadership role of enterpriser and entrepreneur. Voters do not enter a voting booth to appoint the businessman to his position as head of an enterprise.

His is a self-selecting appointment to his position. I mean by this that a businessman sees himself as running an enterprise of his own or as a senior executive in a company or corporation. He wins his position not through promises to voters but by deeds performed for consumers and stockholders.

In the market economy, those who imagine, design, implement, and direct enterprises and businesses do not need to initially gain the agreement, approval, or consent from large numbers of coalitions of individuals or groups, as politicians must do in the electoral process.

The Leadership Qualities of Market Entrepreneurs

Indeed, the idea or ideas on the basis of which the private enterpriser is led to start up, organize, and implement his activities leading to the production of some goods or services may be neither understood nor believed in by the vast number of others in the society – that is, before the product is finished and offered to the consumers, who may or may not reject it, resulting in the enterpriser earning profits or suffering losses.

The taking on the task of entrepreneurial leadership, therefore, requires drive, vision, determination, discipline, and the financial support from his own savings or from those who he is able to persuade to lend him the needed funds or to partner with him to bring his idea to market. He is, therefore, a risk-taker as well as a profit pursuer.

Success is not measured in voter ballots as in a political election, but by the degree to which the entrepreneurial leader succeeds in winning customers for his product or service as reflected in total revenues that exceed the total costs that have been incurred in bringing the product to market.

Can he more successfully anticipate the direction of future consumer demand than his rivals in the market? Is he alert to profitable opportunities that others have missed by introducing new products, better and improved products, or less costly products that gain the “votes” of consumers through the dollars they spend on his product in comparison to his competitors in his own and other markets?

Indeed, the Princeton University economist, Frank A. Fetter (1863-1949), once referred to “the market as a democracy where every penny gives a right to vote.” With their dollar “votes,” consumers determine who shall gain and retain their entrepreneurial position in the market, and who may lose it.

While the entrepreneur initially selects himself and undertakes his enterprise without the prior approval or agreement or financial support from the general consuming public, it is the consumers who ultimately determine whether or not he shall maintain his entrepreneurial position in the market system of division of labor.

The business leader must be distinctly single-minded and passionately devoted to his role in that division of labor. Others employed in the enterprise may show up at nine in the morning and leave at five in the afternoon. But he does not. He is at work “24/7,” even when he is far from his office desk.

Are the company’s supply chains operating efficiently? Are the executives and managers who report to him seeing that their divisions and departments are functioning properly? What are his competitors planning and doing? What’s his own company planning next in terms of advertising campaigns, product improvements, technological innovations, and anticipating the changing patterns of consumer demands?

The burden of meeting the payroll of salaried employees for which he is responsible, as well as the obligations he has entered into to “deliver the goods” to customers and clients means as a leader of his business his mind cannot just shut off when the official business day comes to an end.

A good part of the ethics of private enterprise, therefore, is reflected in the integrity, discipline and quality of character that must enter into those individuals who choose the role of entrepreneurial leadership.

The Ethical Principles of the Free Market

The hallmark of a truly free market is that all associations and relationships are based on voluntary agreement and mutual consent. Another way of saying this is that in the free market society, people are morally and legally viewed as sovereign individuals possessing rights to their life, liberty, and honestly acquired property, who may not be coerced into any transaction that they do not consider being to their personal betterment and advantage.

The rules of the free market are really very simple: You don’t kill, you don’t steal, and you don’t cheat through fraud or misrepresentation. You can only improve your own position by improving the circumstances of others. Your talents, abilities, and efforts must all be focused on one thing: what will others take in trade from you for the revenues you want to earn as the source of your own income and profits?

Long ago, in the 1760s, the famous Scottish economist and moral philosopher, Adam Smith (1723-1790), argued that among the benefits from commerce and trade was not only the material improvements in man’s condition. It also served as a method for civilizing people, if by civilization is meant, at least partly, courtesy, and respect for others, and an allegiance to honesty and fulfillment of promises.

When men deal with each other on a daily and regular basis, Adam Smith said, they soon learn that their own well-being requires of them sensitivity for those with whom they trade. Losing the confidence or trust of one’s trading partners can result in social and economic injury to oneself.

The self-interest that guides a man to demonstrate courtesy and thoughtfulness for his customers, under the fear of losing their business to some rival with superior manners or etiquette to his own, tends over time to be internalized as habituated “proper behavior” to others in general and in most circumstances.

And through this, the other-orientedness that voluntary exchange requires of each individual in his own self-interest, if he is to attain his own ends, fosters the institutionalization of interpersonal conduct that is usually considered essential to a well-mannered society and cultured civilization.

If all that I’ve said is true, why, then, are businessmen and business in general held in such low esteem and confidence, even though ranking higher than citizen confidence in politicians?

The Misguided Disapproval of Business and Businessmen

First of all, there is the intellectual climate that has dominated discussions concerning business and businessmen in society for a century and a half. The anti-business and anti-capitalist attitude that prevails in America and many other parts of the world are all part of the original socialist critique against private property, profit-oriented enterprise, and the employer-employee relationship.

Private property is the most beneficial institution ever developed by man. It has created incentives for work, savings, and investment, since private property in the means of production enables those who generate wealth through their personal efforts and investments to have the right to reap the rewards of their own productive activities.

The profit motive acts as the stimulus for individuals to devote their energy in productive ways. Profits are the “rewards” for having successfully brought to market what consumers want and for managing production in such a manner that revenues are greater than expenditures. In other words, successful profit seeking creates value-added for both the seller and the buyer.

In the free market, the employer must, at the end of the day, treat those who work for him in an honest, well-mannered way. If not, over time, he runs the risk of losing the better employees who eventually decide to look for alternative employment where workplace conditions are friendlier and more respectful as well as, perhaps, better paying.

So part of the suspicions and lack of confidence in business by many in the general society is due to a distorted, incorrect, and twisted view of how business and businessmen really act and potentially earn profits in a free market.

Unfortunately, this false imagery of business and businessmen pervades the media, the movie industry, the educational establishment, and through them our common everyday culture.

Government Intervention and Unethical Business Practices

But there is another dimension to the belief on the part of many in society that businessmen are not to be trusted, and therefore not fully deserving of the citizenry’s confidence.

Back in the late 1960s, a Wisconsin businessman named William Law, who owned the Cudahy tannery company, published an opinion piece in The Wall Street Journal. He said that some of his American competitors in the tannery industry were lobbying the government to impose an import tariff on foreign leather goods that were successfully capturing more of the U.S. market.

Mr. Law admitted that such an import duty would raise the costs of his foreign rivals and make it more likely that he could maintain his market share and his profit margins. But he went on to say that he opposed the call for such anti-competitive restrictions on market entry of the foreign leather suppliers. He declared that he would rather face going out of business than stay in business by using government to rig the market to his advantage at the unjust expense of both American consumers and his foreign rivals.

Many years after Mr. Law wrote this op-ed, I had the opportunity to meet and talk with him, so I think I understand the premise underlying his argument. He considered that such an import tariff would be an act of theft at the expense of the American consuming public, which would make him an accomplice receiving ill-gotten gains.

He would be using the force of government to impose a penalty on the foreign competitor as well as the American import wholesaler and retailer, all of whom were wanting to bring the foreign-made leather goods into the United States, for no other crime than the foreign rival’s ability to make a desirable product at a lower cost than his American competitors. The foreign rival and his American supply-side collaborators would be punished for wanting to share the benefits from his cost-efficiencies with the American public by offering his product to them at a lower price.

At the same time, the American consumer is denied the opportunity of buying the foreign version of the product at a price mutually agreeable to him and the seller. As a result, the American consumer might have less to choose from, and would pay a higher price for leather goods than if the tariff was not there. The difference between the lower price the consumer would pay under free trade and the higher price he pays under the protectionist wall of the tariff is the stolen sum out of the consumer’s pocket, Mr. Law said, and into the domestic tannery manufacturer’s revenues.

Using Government to Plunder Some at Others’ Expense

Take the logic of this example and apply it to government subsidies covering part of a manufacturer’s costs of production at taxpayers’ expense; or paying farmers not to grow crops or guaranteeing them a minimum farm price support that is paid for through tax dollars and higher prices for consumers of agricultural goods; or to domestic business regulations that limit entry into various professions and occupations, which, again, limits consumer choice, prevents potential rivals from earning a living in those corners of the market, and make the product or service more expensive for the buying public by using government intervention to limit the supply.

In the financial and banking sector this has taken the form of “too big to fail,” which means that some of those who made bad investment and lending decisions are not required to fully bear the responsibility and the cost of their poor or misguided decisions. Instead, taxpayer money had been made available to wash away part of their bad decision-making sins.

In everyday life, we presume that the ethical thing to do if we see that someone has dropped their wallet is to return it to them. We take it for granted that if we see that someone has left their car unlocked with the ignition key on the seat, we should not take advantage of this to drive away and steal the car.

If someone does take the dropped wallet or speeds off in the car we label them a thief, a bandit, a crook. That’s because we take for granted an individual’s right to his private property and the income he has honestly earned.

Business ethics, calls upon every businessman to follow the rules of the game of the free marketplace: you don’t kill, you don’t steal, and you don’t defraud. This includes neither accepting nor lobbying to receive favors, privileges, or other special interest benefits through the powers of government to tax and regulate, all at taxpayers’ and consumers’ expense.

Many people sense that some businesses and businessmen are not playing by the rules when they obtain such favors, privileges and benefits through political power. The deeper problem is that the reasonable suspicion and disapproval of government special favors for various businesses easily spills over, over time, into a willingness to assume the worst about all business and businessmen in general.

This opens the door to those more ideologically driven by an anti-capitalist agenda to win the argument that it is business and businessmen as a group who cannot be trusted and who need to be watched, regulated, and controlled – if not just taken over – by government in the name of “fairness” and “social justice.”

The Ethics of Personal Life Should be No Different in Business

Even if a man is hungry, the honest and right thing for him to do if he sees that someone has dropped his or her wallet is to return it to the owner, content intact. And likewise, even if profits are down or even turning into the loss column, the unfortunate competitor should not pick the pockets of consumers or taxpayers by lobbying government for anti-competitive regulations or redistributions of wealth through subsidies or price guarantees.

The ethics of private enterprise and the morality of the market require both a preaching and a practicing of a respect for others’ individual rights to their property and to the rule of voluntary agreement in all transactions, even when market outcomes are not always favorable to oneself.

Made available by the American Institute for Economic Research.

Recommended Reading: How to be Profitable and Moral: A Rational Egoist Approach to Business by Jaana Woiceshyn
“According to conventional morality, either a business manager maximizes profits and necessarily compromises on ethics, or necessarily sacrifices profits in order to be moral. Woiceshyn explains why this is a false dichotomy and offers rational egoism as an alternative moral code to businesspeople who want to maximize profits ethically.”

Dr. Richard M. Ebeling is the recently appointed BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel. He was formerly professor of Economics at Northwood University, president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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