Thursday, April 10, 2008

What Is 'Business Ethics'?

Copyright © 2008, Barry L. Linetsky, All Rights Reserved

There is a lot of confusion amongst those who write about business ethics about what the topic subsumes beyond the obvious fact that business ethics has to do with business and ethics. Given how many people speak and write about the topic, you’d think that there would be clarity about what it is they are talking about. Yet it is rare to find a definition of business ethics by those who talk about it and even write books about it! They just assume that when they talk about business ethics, everybody knows what they are talking about. Authors that provide a definition of business ethics are rare. I contend that this is because most of them aren’t really talking about business ethics in the first place.

So, what then is business ethics? Let me put my stake in the ground.

What Is Business?

“Business” can be one of two things, depending on whether it is used as a noun or a verb. It can be an entity or an activity.

As an entity, a business is an organization of people and resources organized to engage in commerce or trade through buying and selling or providing a service or services as an ongoing concern to derive a profit. As an activity, it is the engagement in commerce or trade by means of organized people and resources buying and selling or providing a service or services as an ongoing concern to derive a profit.

Thus, whether “business” refers to the organization or to the actions performed by its people, each is inherent in and inseparable from the other. (See my earlier blog “What Is Business? It’s Not Obvious To Many” .)

If an organization does not fit this definition, then it’s unlikely to be a business. By this definition, hobbies, not-for-profits, and governments and their agencies are not businesses, although they may engage in and manage very delineated operations using the methodologies of business. Organizations under private ownership but operating under government protection from competition (airlines or media companies in Canada, for example) or under regulation that ensures profitability (most utilities) would fit the definition.

A business serves a specific purpose; it has a specific function. Its purpose is to create something that is perceived by consumers to be of value for which they will pay a price that exceeds its cost. In a free market, businesses compete with each other to win sales from customers. As a general rule, they compete to provide the most value at the lowest production cost to achieve that value, and to sell at a price that achieves a desired level of total profit.

So, this is what a business is and what a business does.

There are two ways to judge business: from outside or from inside this context.

To reject business from the outside is to assert that the institution of business is illegitimate or evil. As irrational as it is, this viewpoint is very common today. Karl Marx is alive and well amongst business critics who proclaim that all profits are illegitimate; that profit by definition entails exploitation of consumers by charging them more than is justified. Others criticize profit not from an ideological perspective or from ignorance of economic laws, but rather from a particular perspective on human nature and man’s natural proclivity for greed, power-lust, and stupidity. These people hold that producers have unlimited power over consumers and thereby scheme to bamboozle and rip people off so as to get rich quick by any means possible. The only way to intervene against this proclivity of human nature is to remove the profit motive. And the only way to do this is through government intervention in the economy and the elimination of the free market. Under these kinds of schemes, the government will regulate all industry through a planned economy. This demand for governmental (political) control over the means of production and the peaceful voluntary trade between people is known by various names, including the mixed economy, market socialism, central planning, or just plain socialism or communism. This is primarily a political rather than an ethical perspective, having to do more with the proper role of government and the use of political means to guide social behaviour.

To judge business from the inside is first and foremost to accept the function of business as legitimate, and then ask whether businesses are being managed in ways consistent with their function. It is this concern with normative judgments of individuals that leads us to the issue of ethics. Ethics asks how man should act and seeks universal answers that apply to everybody.

What Is Ethics?

Ethics doesn’t consist of the opinions of what people like and don’t like about human behaviour. Ethics is the branch of philosophy that studies and defines a code of values to guide the choices and actions of people in the pursuit of life. Ethics seeks to identify and clarify the proper principles of conduct to guide the actions of man towards the good and away from evil. (See my earlier blog, “What Is Ethics? It’s Not Obvious To Most” .)

Ethics begins with observations of reality combined with logical reasoning to provide prescriptive guidance for sovereign man to achieve goals and ends appropriate to his nature as man. In essence, ethics or morality provides us as individuals with an intellectual roadmap or compass to help us determine, at the highest level, what’s for us and against us as living beings in our perpetual struggle with nature to live our lives successfully. That which can be shown in principle to support successful and prosperous human life is ‘the good’ and that which can be demonstrated to be harmful to human life represents ‘evil.’

The standard of value in ethics needs to be defined and defended. If ethics is to be meaningful at all, the standard of ethical value can be neither arbitrary nor subjective. Man’s life as the standard of value provides an objective basis for ethics that is reality-based. It is objective because it is defined by the nature of human life and verifiable facts about the world we live in.

(For a more detailed discussion about why human beings require ethics and how and why ethics is objectively grounded in reality, see my two earlier blogs on Ayn Rand’s Revolutionary Ethics, Part 1 and Part 2.)

What Is Business Ethics?

With this background, we can now gain some clarity on what business ethics is. When you put the prefix “business” in front of “ethics” the standard of ethical value doesn’t change. It remains man’s life. What changes is the context within which one considers the application of ethical principles. The context narrows from man’s actions in all realms, to consideration of a specific subset of human behaviour, namely that pertaining to the realm of business.

If business is the process of organizing people and resources to create value through voluntary exchange as an ongoing concern to derive a profit, and ethics is the identification of moral principles and a proper code of conduct to guide human action in the pursuit of life and individual happiness and well-being, then business ethics can refer to nothing more than the identification and application of ethical principles to promote and achieve the proper purpose of business.

Business ethics, then, pertains to discovering and defining the proper application of general ethical principles to guide the choices and actions of individuals engaged in business and the creation of value through voluntary trade and commerce. It is through this gateway that ethics melds with and shapes all aspects of business.

Because ethical human behaviour is ethical in all contexts, including business, it follows that there is not one valid code of conduct that excludes business and another that applies to business. In this way, the notion of a “business ethics” is misleading. Business ethics is not a distinctive, delineated code of guiding behaviour that exists apart from the wider and more general principles of morality. Rather, the notion of business ethics is a means of identifying a narrower context in which to discuss and study the application of the same universal ethic.