Executive Summary: Without ethics in some form, many,
if not most, business deals fall apart
Why study ethics? This is a very important question to ask. It must be remembered that the School of Business’ task is to prepare students for the business world. If ethics do not matter, then time spent teaching ethics is better spent elsewhere.
After business debacles such as Enron, Adelphia, and Worldcom and many others it may be easy to conclude that business is a cut-throat world where ethics go out the door. Business need not be that way and in fact business suffers when business people think and act is such a defeatist way.
To understand why business ethics do matter let us consider the issue through the eyes of a Game Theorist, that most rational of economist who cares not for religious rights or wrongs but only to maximize one’s own well being.
Game Theory is a field of economics that uses strategic thinking to make decisions involving multiple parties. These decisions are made only after considering the likely actions of the counter party. Variations of game theory are used throughout business (specifically in finance, management, and marketing), as well as in sports, and even in war planning.
A gross simplification of game theory is that your decision making process your actions are based on your preferences as well as what you think the other party will do. (Sort of a “she knows that you know, that she knows, that you know” game.) There are two broad categories of games (I’ll use the term game for any dealing): single time games and repetitive games. Business is almost always a repetitive game. Optimal behavior in repetitive games is often vastly different than one-time games where reputation is less important. In a repetitive game the value of one’s reputation (which will be lost if you behave unethically) disciplines behavior and generally leads to more ethical actions.
The differences between repetitive and single-time transactions are well known in business and have shaped the way business is done.
Consider the following two scenarios
Person X is 500 miles from home and his car breaks down. After sitting on the side of the road, a tow truck comes along with a mechanic who promises to fix the car.Person Y is a wealthy civic leader whose car will not start one morning. Y calls a local mechanic.
If you were forced to predict Who will get better service?
And who will have to pay more? What would you say?
If you said person Y will get better service and pay less you are probably correct Why?
Traveler X will probably have to pay more for the repair because the mechanic realizes that the customer is desperate (X has few options and a high opportunity cost). Moreover, X will likely never come back to the same mechanic again no matter how well or cheaply the car is repaired. This is an example of a one-time game. Reputation is not important. The traveler essentially has no choice in who will fix the car and will probably never need the mechanic to fix another car.
Civic leader Y on the other hand is playing a different game. Because Y’s car broke down at home, Y was in a better bargaining position (he was able to shop around) and he may need a car repaired in the future and very well may give the mechanic future business if Y is happy with the price and performance this time.
Business people are very smart and over the course of time, the business environment has evolved in multiple ways to lessen the problems associated with single-time games. For example, the problems of the traveler above are partially alleviated through nationwide auto repair services (such as AAA). By insuring many drivers, these service have the ability to turn a single-time game into a repetitive play game where reputation is important and the mechanic has less of an incentive to behave unethically because while the individual traveler may never need a mechanic in that town again, another member of the travel service will.
Another way this problem is solved is by having chains of auto-repair shops. Here the idea is that while you may not do business with that exact repair shop, you will with another in the same chain. Again the incentive to take advantage of the customer is reduced because if you are treated unfairly once you are less likely to return to anther location of the same chain.
In other one-time games (where reputation can not police the actions of the players) capitalism has fallen back on rules and regulations. For example, in IPOs where there is a great chance for unethical behavior since any given firm has an incentive to lie because it is a one-time game. To solve these types of problems, we have created regulations and rules that try to force correct behavior. However these are only partially successful and are costly ways to ensure ethical behavior. This is one reason that investors demand higher returns and more rigorous audit procedures for IPO firms.
Why is it so important that the players act ethically? Because if they do not, then the other players in the game will rightly assume that the other side is out to “get them” and either quit playing or demand a high risk premium. If either of these events occurs many deals will not get done and both sides (and by extension the economy as a whole) will suffer.
Or as Hausman and McPherson (1993, p.673) state: “the morality of economic agents influences their behavior and hence influences economic outcomes…….Without honesty, trust, and goodwill, economic life would grind to a halt”. (as quoted in Cushing’s Journal of Accounting and Public Policy Winter 1999)
It should be stated that there is also a feel “good factor” idea that has been proposed in the economics literature. It suggests that utility is upward sloping in both money and good deeds. Thus, one does good deeds for good deed’s sake. While there is no doubt that this does exist, it is not as easy to model and more subjective, and will be left out for now.
Francis did not know about game-theory. He had never heard about
franchises or the SEC. But in some ways the lesson he taught--be
kind to one and all and treat others justly--is effective advice for most
situations in business and leads to more ethical actions than the complex
rules and regulations that we have in place today. Of course unsaid
in Francis’ teachings is a final “settling up” at death, but we will leave
that for theologians. :-)
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