The Business of Ethics vs. The Ethics of Business

THE OPEN MIND
Host: Richard D. Heffner
Guest: John Hasnas
Title: “The Business of Ethics vs. the Ethics of Business”
VTR: 7/7/93

I’m Richard Heffner, your host on THE OPEN MIND. And I’m quick to admit that my guest today didn’t laugh even just a bit on the telephone (probably didn’t even smile, for he must have heard my bromide so many times before) as I asked when affirming John Hasnas’ title at Georgetown University – Assistant Professor Business Ethics – whether it isn’t something of an oxymoron.

Which is not an attack on business per se. Indeed, more and more businesses in America seem to have elevated the consideration of ethics in their day-to-day activities to a level never before contemplated in the world of dollars and cents.

But if the business of business is, after all, first and foremost to do well, how can it really do good, too?

Well, that thought occurred to me with particular force some months back when I first read an intriguing column by my guest that appeared in The Los Angeles Times. It dealt with what in a 1968 article environmentalist Garrett Hardin had called “The Tragedy of the Commons”: What happens, that is, when the common interest is left to the tender mercies of unbridled individual interests?

Indeed, that’s when I determined to ask lawyer, philosopher, academic John Hasnas just how much sense it does make in the light of a long dominant business ethic to talk about, let alone teach business ethics. And that’s the question I would put to you first.

Hasnas: Well, first I’d have to disagree with you about when you called me up…I did smile.

Heffner: (Laughter) Okay, I’m glad to know that.

Hasnas: But you’re right, just about everyone who hears the term “business ethics” says one of two things…they don’t necessarily say “Isn’t that an oxymoron?”. Sometimes they say “Isn’t that a short course?” And it’s the same kind of comment. In fact, when I took the position at Georgetown I had been teaching law in law school, and as soon as I told my colleagues that I had accepted a position as Professor of Business Ethics, I heard that comment over and over and over again. And after a while, I developed sort of a self defense which was to make a joke about it myself, and say, “Well, there’s nothing illogical about this. Only a business school would hire a lawyer to teach ethics”.

Heffner: (Laughter)

Hasnas: But because you hear that comment so much, I mean, it does a wonderful job of focusing you mind on the subject that you’re going to teach. And I think the conclusion I have come to now that I’ve been dealing with business ethics for two years, is the comment is a very telling one. But what it tells us is something more about the common cultural attitude towards ethics than anything about business. And in your introduction you mentioned if the job of business is to do well, how can it also do good? And what that reflects is what I think is a common view that regards trying to do well for yourself as somehow antithetical with ethically proper behavior. It’s an assumption we make. But I think it’s not a very good assumption. And I think that it’s due in large part to our inability to separate domains of discussion. Let me see if I can put that in a little more simple terms. When we don’t act in a self-interested way, it’s usually because we’re dealing with people that we know very well, in our own family relationships, people that we know very well and trust and love. You certainly don’t engage in any of the kind of activities that you do in the business world. And that’s because as you become more familiar with someone and you know them better and you develop trust relationships, trading relationships are completely out of place. But there’s only so many people that you can know. You know your family. You know your friends. And even today you know a limited number of people. But there are millions of people in the country and billions of people in the world. And all human beings are really resources for each other. How can you deal with people that you don’t know enough to trust, that you don’t know anything about, that you have no knowledge or understanding of? Well the only way to deal effectively with people that you don’t know is by trade. Trading with each other allows us to extend the number of people that we can deal with. It allows us to extend the social order to ever larger and larger realms. And there’s nothing inappropriate about trading in an impersonal way with people that you don’t know in order to gain something you want as long as what you’re doing is also providing the other person with something that he or she wants. And when you look at the extended social order, it’s perfectly logical to try to do well for yourself, and you also are doing good because what you’re doing is allowing the large masses of people to utilize each other as resources to advance everyone’s good.

Heffner: Yes, but there has to be some reciprocity, and when you first used the, the, the metaphor about trading relationship…you said “in the family there’s no trading relationship”. Well, then your assumption is that you create a trading relationship with more and more people. But what makes for the reciprocity?

Hasnas: Well, there always has to be…the less you know about someone, the greater the need for reciprocity, and the greater…there is for a trade right on the spot. Even inside the family it takes a long time to develop trust. You need to…you can just think about…

Heffner: I thought it was the other way around…it took a long time to develop mistrust in the family.

Hasnas: (Laughter) Well, that could be. But just think about the way siblings deal with each other. At first it’s very, very selfish, but as people grown and grow together more and more informal relationships take place. There’s more and more functioning simply on the basis of an understanding of what the other person’s going to do. There’s less and less need for formality. As we talk about people who are less related, are further away from us, there is no basis for informality, there’s no basis for saying “Sure, I’ll do this for you now, and you’ll get me some time later on in the future”. That’s when you need a more formal relationship, you need a contractual relationship. Many small business people, as they get to know their customers or suppliers very well really don’t deal on a contractual relationship. The old idea of a hand shake still functions…you function on the basis of reach other’s words because you know the person long enough to engage in trust.

Heffner: Now let me ask you whether that phenomenon is as widespread as before, more widespread, less so.

Hasnas: It’s certainly less widespread, but the reason is because the markets that we’re talking about are much larger. It’s a global market today. It’s impossible to know all of your customers or all of your suppliers very well on a personal basis. And the larger the market, and the larger the realm of people that you deal with, the more need there is for a formalized relationship. If you’ve dealt with someone repeatedly for ten years, you probably don’t deal on a very formalized relationship anymore. Anyone who’s practiced contract law knows that most of commercial enterprises don’t really function on the basis of the written contracts very much. It couldn’t be…function effectively commercially in that way. It’s…most things are completely informal and it’s only when things break down terribly that you start worrying about what the contract actually says.

Heffner: Yeah, but now let’s talk about that breaking down. The, the, the point you made about your colleagues teaching law, when you said you would teach business…

Hasnas: Sure.

Heffner: …ethics…isn’t your profession…the legal profession based upon an antagonistic relationship with others? That an adversarial relationship, that by definition splits us apart instead of bringing us together.

Hasnas: That’s a…that’s absolutely correct. The legal enterprise as we now know it is an adversarial one. And if you get into a court of law, somebody’s a plaintiff and somebody’s a defendant. If it’s criminal law somebody is the…there’s a prosecutor and defendant. But it’s always one party against another. It is an adversarial relationship. And that’s the best reason for avoiding the legal process, if at all possible. That’s why commercial interactions couldn’t function well if they had to do it always on the basis of law. Think about the adversarial relationship. You have all of the incentives towards…all of the incentives are against compromise, are against settling the dispute in a way that’s mutually agreeable. Law is always a “winner take all” enterprise. The plaintiff wins, gets full recovery, the defendant gets nothing. Or the defendant wins and doesn’t have to pay any damages, and the plaintiff gets nothing. That’s a very poor way of settling disputes among human beings and that’s why there’s always a dissatisfied party. That’s why you end up with appeals. It’s actually quite a modern phenomenon that the legal system is so adversarial because in the Anglo-American system, our history is one in which…the system was originally one of composition, of composing disputes, of getting parties to disagree…if you go back far enough in history, the reason why you even had what were the early precursors of courts or trials, was to avoid violence. If one person had a grievance against another they usually took off after him with a sword. And people didn’t like that kind of violence. As a way to avoid it, the community would put pressure on people to settle the dispute. And by settle the dispute, that means work out an agreement that both parties could subscribe to, that would end the dispute and bring back peace. That…

Heffner: But you…you say in contemporary life we’ve moved away from that.

Hasnas: We have moved away from that. That was the original basis for order in England, and of course our system is an outgrowth of the English system. And, as a matter of fact, throughout medieval Europe that was the way in which most disputes were composed. But we have moved away from it, and we’ve moved away from it for reasons that have nothing to do with providing order in society, or providing peaceful relationships among human beings.

Heffner: What are those reasons?

Hasnas: It has mostly to do with the threat of…it seems…this seems as though this is irrelevant, but it has mostly to do with the threat of foreign invasion. In Great…in England. The Vikings kept coming over and raiding the coast and everybody looked to the King for national defense, but the King needed money to protect the country, and at that time there’s no way to arise revenue…there are no taxes, and one way of raising revenue was by the King dispensing justice. He could collect money for settling disputes as a third party intervener. And it was a great revenue enhancement, and a great way of creating power in the central government, in the Kingship as opposed to all of the feudal barons, to dispense justice. But of course, in order to raise money, in order to get revenue there’s got to be disputes, there’s got to be winners and losers. There’s got to be somebody who’s breached the King’s peace and the King who can recover. It became in the interest of the central government for there to be disputes to be settled by a third party. If people who had disputes just let them settle things on their own there’s no need for the Kind to dispense justice.

Heffner: Well, not the King has a hell of a lot of ways…

Hasnas: Oh, yeah.

Heffner: …of raising money. And now might be the time to…and maybe the Alternate Dispute Resolution push is a recognition of…it’s time already, it’s enough already…the, the, the antagonism created by the adversarial procedures…it’s time to go. It that…

Hasnas: I think that that’s true in part. I think that we…there is a lot more of the alternative dispute resolution…I’d like to say that it’s because the central government has plenty of means of raising revenue so that we don’t need to have so much centralized dispensing of justice anymore. I don’t think that accounts for it. I think it’s something very different. I think what’s happened is in our system the criminal courts, the number of crimes and especially the number of “victimless’…well, especially the number of drug offenses has so clogged the court system that the court system the way it is now is not an effective means of settling disputes among parties. Especially not commercial parties.

Heffner: Because there’s no room to.

Hasnas: Yeah.

Heffner: You have to wait.

Hasnas: The delays are too long. The…there’s just too much hassle and you can’t transact business in that way. And the result is people are looking for an alternative, and arbitration and other alternative dispute resolutions mechanisms are popular for that reason. It’s because of the clogging of the court system with drug offenses, typically, and the long back log. On the other hand, it never really was the case that in commercial transactions, the courts were ever the main mechanism for settling disputes. Business just wouldn’t work commercially if you had to drag things into court all the time. What we call commercial law…we have the UCC which governs commercial relationships in all 50 states now. Well, the UCC is an outgrowth of…

Heffner: Stands for what? Uniform…

Hasnas: Uniform Commercial Code…Uniform Commercial Code. It’s an outgrowth of what used to be called the Law of Merchant. And the Law of Merchant was laws…not really law, it was a system created by merchants throughout England and the continent, to settle their disputes quickly and effectively so they could get on to their business in the next fair or the next market. They didn’t have time to wait for royal justices to come around and hear the dispute and settle it on the basis of some rules made by the King, rather than…or would be effective for the merchants. Merchants created their own way of settling disputes and conducting business in an effective, efficient way, and when we come to the 19th and especially the 20th century, what you find is the State codifying this and legislating it into law so that it now governs our commercial relationships.

Heffner: Okay.

Hasnas: But it’s the result of a natural evolutionary process.

Heffner: If that evolution has taken place, let’s get back to the, the hee-haw…that you got from me as well as others about ethics in business…teaching business ethics. What, what is the essential thrust that dealing with people in an ethical way, whatever that may mean, brings people together in talking your, your, your metaphor of the family. Brings people together, makes it possible for familiarity to breed, not contempt, but content, as Anna Quindlen has said. And that you profit from the closer, more familial, relationship in business. Is it that basic to ethical procedures is greater profit? Or some higher ethical consideration? Profit more or not…

Hasnas: Well…

Heffner: …this is the right way to behave in a civilized society.

Hasnas: …yeah. I’m sure there’s no short answer to that question. I’m also sure that there’s probably a long answer…I’ll try to avoid not being too lengthy. What I was talking about a moment ago was really an answer to the idea that there’s something self-contradictory about business ethics.

Heffner: MmmHmm.

Hasnas: I’m saying there’s not because dealing with people by trade who you don’t know is perfectly appropriate and in trying to do well for yourself, you’re also serving the interests of everyone else because that person’s receiving the outcome of the trade.

Heffner: Well, wait a minute…let, let, let me interrupt a moment. This business of “having it all”…presumably there is so much of a pie and in our business relationship…you’re shaking your head “no”, but, but in a business relationship, or any kind of relationship, I’m going to get 90% of the pie, or 10%…or 100%, but there’s no way for me to get 90% and you to get 90%. There’s no way for us to be equals in this when I get what I want and for you to get what you want.

Hasnas: Well, you see, I was shaking my head “no” because I disagree with the premise. This would be a very unhappy world to live in if the world really was as zero sum game where there’s 100% of something, and it has to be portioned out, and what we have to do is struggle to get a larger share. The nice thing about commercial relationships, the nice thing about markets, is that markets are productive. By…I can produce so much of a good myself, and that’s all. But by interacting with you, by trading with you, by getting you to help me out, giving you something you want if you give me something I want…the two of us can produce more than either of us could produce individually.

Heffner: We produce more, and I want more of that more.

Hasnas: And each of us wants the…as much as we can get. But by being able to utilize other human beings as resources we continually produce more and more material…material benefits for everyone. So the pie keeps on growing. Now the fact that I’m trying to get as much as I can…may…looked at in isolation is usually frowned upon because people aren’t supposed to be simply self-interested. But don’t look on it in isolation. We can say, “He has terrible moral motivations. We don’t really like him. We wish he was more selfless”. But if his…if the results of his activity are to make the world a better place to live in, the activity is not immoral.

Heffner: When did you become a disciple of Adam Smith?

Hasnas: Well, I…I would…the answer to that question probably is “last week”. Because keep in mind my background, my background is in law and philosophy and it wasn’t until after accepting my present position that I realized I’d better start reading some economics. So, I’ve…I am now familiarizing myself with Adam Smith in order to be able to “talk the talk”.

Heffner: But it’s the argument of “Wealth of Nations”, right?

Hasnas: It may be. But I don’t think that the argument is something that needs Adam Smith to back it up. I think the argument is common sense. Adam Smith recognized it, so we can attribute it to him, but it’s really…everyone knows it. The reason why ask for help from somebody else is because you realize that with someone else’s help you’ll be able to do better, to do more, to produce more things than you can alone. Division of labor is a natural process that people engage in because we know that we’re all limited.

Heffner: But let me ask this…if this is true, and there have been very, very wise and very successful men in…and women…in the business enterprise…why is it we so frequently think of the “devil take the hindmost” as the characterizing ethic of, of business?

Hasnas: Let’s see…I…

Heffner: Just a mistake on our part? And a false reading of, of economics? Of the business process.

Hasnas: I probably have only half an answer…I probably have…I have some thoughts on it…I’m not going to be able to give you a full answer to that. Because a lot of it has to do not with the way things work, but about the way we characterize things. About our impressions of things. About the way we view things as a matter of our common cultural attitude.

Heffner: MmmHmm.

Hasnas: And I’m not going to be able to account for that very well. There are a lot of terrible things that go on in the commercial world. And there always will be because human beings aren’t perfect. There’s a lot of corruption, there’s no more corruption in the business world than anywhere else. But much of it is a matter of the system within which we function. Now, when I talk about markets and trading, I’m taking about you and I making an agreement to benefit the both of us. That doesn’t reflect anything like the situation in contemporary society. We, we are to a very limited extent a market society now. There are government regulations and interventions of all types that change the incentives. If I am General Motors now, I can benefit not by serving the consumer, but by getting the government to create barriers to low cost competition to keep other cars out. I can gain at the expense of another group in society. I can gain at the expense of the consumer by simply getting the government to favor my interest. Now for more than 100 years that’s been going on. It’s not the case that we live in a capitalist country, we live in a country in which the government favors politically powerful special interests. It may have been big business sixty years ago, it’s probably not big business now. There are other powerful interests which get favors. But when you are able to circumvent the market process, there’s a way to gain other than by creating more goods for, for society as a whole. There’s a way to gain at the expense of others. We then get into a zero-sum game. And in situations like that, the incentive really is to do well for yourself by harming others, instead of to do well for yourself by benefiting others.

Heffner: Have we come full circle? In your description? Would you describe what I suggested to, to start with?

Hasnas: Yeah, I, I, I would say that the situation really is this. Given certain systems, and certain incentives, we can create an environment in which in order for people to do well for themselves, which is very natural for people to want to do, they have to hurt other people in society. Those…

Heffner: And we’ve done that.

Hasnas: We’ve done that. And those are kind systems, that’s the kind of environment that we would like to avoid, if possible. Another possibility is, and, and you know, in saying this I’m saying it in a way that’s really inappropriate, because I’m using…I’m saying “we”…we can do this and we can do that…but the word “we” is a weasel word in some sense because “we” don’t do anything, there’s no “we” out there. When you talk about the government and you use the word “we” you’re making it seem as though the government is representing everyone, but of course if that were the case, we wouldn’t have any of the problems I’m trying to describe now. The government represents the people who have the political influence. It may even be the majority. But the majority is not “we”. The majority is part of the members of society…those who don’t agree, those who are outvoted are the ones who don’t win in the distribution of benefits.

Heffner: But that’s because the battle for survival was one…the fittest, politically, economically…

Hasnas: Ah, yes.

Heffner: …etc. won that battle.

Hasnas: Well see, now we will agree because if you would like to characterize the political process in terms of the survival of the fittest, I think that’s appropriate. When you’re talking about the political process, you are talking about the survival of the fittest because in the political process there will be an authoritative decision that binds all. There’s going to be winners and losers.

Heffner: Then winners and losers…where is the ethic?

Hasnas: Okay…government ethics…if people want to say to me that government ethics is a contradiction in terms, or is oxymoronic, I’m probably going to be a lot more sympathetic to that. It may be the case that there’s no way to organize governmental processes which are truly ethical in the sense of employing only proper means.

Heffner: That’s very interesting. Is that because of the absolute, absolute or near absolute power of government?

Hasnas: I think the answer is something more along the lines that the government functions without a price structure, you know. In this…when we’re talking about government or business or anything else, people need villains, they need to see villains, they need to see people who are acting badly, and we want to identify it. Ross Perot sees foreign lobbyists destroying the entire system. I think Bill Clinton sees 1980 extravaganza of wealthy millionaires running around destroying the process. There’s always some villains. I happen to live in Washington, DC now…

Heffner: So you see all the villains.

Hasnas: There aren’t that many villains there. People who work for the government are usually extremely dedicated, sincere, committed people who are making less money than they otherwise could in order to do something they believe in. They’re not villains. The problem is not the lack of individual morality, whether you’re talking about business or government. The problem is the incentives in the system and what it encourages people to do. If I am a committed environmentalist working for the government and I believe what I can do is save the environment I can see what needs to be done. I can see how to do it. And if I just had a little bit more money, I could do a better job of doing it. And, the reason why I don’t have more money, of course, is because the Reagan Administration is made up of greedy villains who won’t give it out. What no sincerely motivated government bureaucratic person can see is in order for me to get more money someone else doesn’t have it. The price structure of a market under which business people function curtails our…their activity. I can’t…if I’m making shoes, I can see how to make a better shoe, but I don’t. I stop…

Heffner: In 15 seconds.

Hasnas: I’ll top in 15 seconds…but I stop because it would cost too much and I couldn’t sell it. Without that restraint on government, the government will always do too much, even though the individuals are not ill-motivated.

Heffner: Gotta get you back here to talk about your, your statement that if I, if I snorted…in talking about the ethics of government…you’d go along. That’s a fascinating point and the only question I have…and our time is up…but I gotta ask…isn’t there a market place every two years or every four years?

Hasnas: There’s an extremely inefficient market place.

Heffner: The voting booth.

Hasnas: Yes.

Heffner: Thank you so much for joining me today, Professor Hasnas.

Hasnas: Thank you.

Heffner: And thanks, too, to you in the audience. I hope you’ll join us again next time. And if you care to share your thoughts about our program today, please write to THE OPEN MIND, P.O. Box 7977, FDR Station, New York, NY 10150. For transcripts send $2.00 in check or money order. In the meanwhile, as an old friend used to say, “Good night and good luck”.

Continuing production of this series has generously been made possible by grants from: The Rosalind P. Walter Foundation; The M. Weiner Foundation of New Jersey; The Thomas and Theresa Mullarkey Foundation; The New York Times Company Foundation; and, from the corporate community, Mutual of America.

Produced by THIRTEEN    ©2014 WNET, All Rights Reserved.