Part Two

Applications to

Economic Life

and Business




6.1. How ethics is applied

The moral obligation, then, which is either a total waste of time or by far the most serious obligation we have, tells us that we must not deliberately act inconsistently with what we know or suspect we really are. And if we refuse to find out what we are, then we guarantee that we are being immoral.

It follows that it is a good idea to find out what our reality in fact is, so that we will be acting consistently with it. I should point out that it is really a good idea in this life as well as the next one, because if you are inadvertently acting inconsistently with your actual reality, then (even though you won't be eternally frustrated for your mistake) you are in fact at cross-purposes with yourself, trying to do something that your own reality will not allow you to do as you intend.

Reality has a habit of catching up with us, in other words. If you simply dump your waste into the river, then the river gets polluted; if you mortgage your house to the hilt at the peak of a housing boom, then you lose everything when property values plummet in the coming depression. If you contract to become a surrogate mother, you discover halfway through the pregnancy that this child is yours, not that of the wife of the man who impregnated you, and you can't give him up, and yet you have to according to your contract. And so on.

The reason for saying that there is a life after death is that (a) reality doesn't always catch up with us like this. Many people do things that ought to blow up in their faces and luck out. People do sometimes play Russian roulette and win. Also (b) we can be acting at cross-purposes with ourselves without the slightest hint that we are doing so; and we can be suffering reverses from what we think of as luck when in fact if we knew what will not be known until three hundred years from now, we would have realized that it was our own ignorant behavior that was doing it. But life doesn't make sense if we have to suffer for something that we couldn't have prevented.

Still, it is obviously better to know as much as we can about what we are, so that we can avoid the pitfalls of acting inconsistently with ourselves. And it is necessary for our eternal life not to try to avoid knowing what is relevant to our conduct on the grounds that "we're comfortable with our opinion."

So what we're going to do here is take a look at human reality in its economic dimension. There are a lot of other aspects of human reality that should be examined; but this is one important phase of human life, which affects a great many other aspects of human existence, and in which it is quite easy to be at cross-purposes with your own intentions.

This is why this is not really a book of just business ethics. Business is one small aspect of human economic life; and even in business, it turns out that answers to moral dilemmas (to the extent that they exist) involve much more fundamental aspects of human economic reality, which apply to all sorts of things besides business. Rights in the workplace are obviously one application of the morality of rights in general; and if you don't have a clear notion of what rights are based on, then you'll mess up your conclusions about what workplace rights entail. What Government should be doing about economic problems rests on what the function of government (civil society) is and what kind of relationship it implies that we have with one another when we form a society--and so on.

We will discuss business, but we are going to approach it slowly, taking the more general aspects of human life which are relevant to economic activity and social activity first, and then getting into things like ownership, transactions, value, service, entrepreneurship, employment, and finally the complex firm. That way, when intricate questions come up, we will have under our belts the more general principles which will allow us to thread our way to a solution.

6.2. The Seven Great Myths

[This topic is also discussed in Modes of the Finite, Part 6 Section 2, Chapter 2]

But before beginning let me warn you that this book tries to show that seven things that are simply taken for granted as "self-evident truths" are in fact myths that, far from being self-evident, are false. I will try to show why when I come to them in the text; but it is as well to put them here at the outset, if only to show what a mess economic theory can get into when it bases itself on them.

It is not widely known that Adam Smith, the founder of modern economics, was really a philosopher--and a moral philosopher at that. He built his ethics on the foundation David Hume had laid: that of Moral Sentiments, which was basically the idea that reason couldn't get you anywhere in morality (because the will wasn't motivated by reasons); and so the only thing that you could base motivation on was how you felt about things.

Needless to say, I think this view of his was false. It turns out that a number of other of the views his economic theory rested on were also false; and even though his theory (which of course doesn't work as he expounded it) has been superseded, the subsequent theories have taken for granted many of the things that he held as obviously true, with the result that those theories are also on very shaky ground.

I am, as I say, going to discuss these truisms that turn out to be false as I try to show what our human reality in its economic dimension is really like based on the evidence at our disposal today. But I think it would be good to put them here together at the outset, because you doubtless also think that they are obviously facts, and it would be good to bring them out into the open right away so that you'll be able at least to look at them and consider them and not simply be shocked into not giving what I say later a hearing.

6.2.1. First myth: we are autonomous

The First Great Myth, then, is that we have one basic way of relating to each other: as autonomous individuals. I respect your autonomy and freedom, and I expect you to respect mine. I don't, in other words, violate your rights; and if I want you to do something for me, I recognize that I have to compensate you for your loss of time and effort. And since we are both autonomous, I expect you to do the same for me.

Now I have no problem saying that we do have this kind of relationship with each other; in fact, it is the economic relationship, whose negative side is that of rights, and whose positive side is compensation for services rendered.

But we use that relationship as if it were what explained social interactions, like what goes on in a family or a team or a country; and it simply won't work. If children did not get uncompensated service from their parents, they would die. That is, parents can't count on having their children do as much for them when they get old as they're doing for the kids when they're young, because (a) the kids didn't enter into the contract in the first place, (b) the kids were after all caused by the parents, and in that sense are the consequences of the parents own actions, and (c) no one knows how much service the parents will require when they get old. And if the parents need enormous service (if they get sick, for instance), can their children then say, "Well, I've paid you back what you gave me; now you're on your own"?

So the way we relate to others when we are in a family or on a team (which loses if each player is putting out only what he will get back) is an entirely different kind of way from the way we relate in the economic realm; instead of compensation for services rendered, we get threats of punishment if we don't do what is expected of us as members, and instead of respecting of rights, we have the satisfaction of knowing that we as a team are doing something that the individuals, and even the sum of the individuals can't do.

Needless to say, there are all sorts of economic implications of this. If, for instance, a marriage is looked on as an economic arrangement ("I'll do such-and-so for you if you do this-or-that for me), then its essence is falsified, and it will fail. If your participation in society is looked on as an economic arrangement, then you will not be able to cooperate correctly with others for the preservation of the rights of everyone, and the society will fall apart--with the result that people's rights, including your own, will be violated.

So we will have to examine how these two ways of relating to others differ from each other, how they complement each other, and how they interact in our complete life.

6.2.2. Second myth: we are all equal

The Second Great Myth is that "all men are created equal." This flies in the face of the manifest evidence that we differ so markedly from each other in abilities. If we are "the same," it is qualitatively, not quantitatively so. Just think about this for a minute: In what sense could we be considered "equal"? By what measure? Is a person lying in a coma, who can do nothing but breathe and take in nourishment intravenously, human to the same degree as an Olympic athlete or as an Einstein?

If you say he's "just as much human" as the athlete or the genius, aren't you saying that you're either human or you aren't, and there's no such thing as degrees of humanity. But that's qualitative sameness, not equality. In that sense, heat of a hundred degrees is "just as much heat" as heat of two degrees, because both of them are heat and nothing but heat. But that doesn't mean they're equal as heat.

The problem is that we want to base rights on equality, and we don't want any human being to be claiming any more rights than any other one. But clearly some human beings can do a lot more human things than other human beings, and if that isn't inequality, then what is? We only know what a human being is by what he can do, after all. Granted, all that any of us ever does is a human act; but some have command over a great many more human acts than others have, and no amount of "equality of opportunity" is going to change that, because we don't have the same human talent.

And the absurd economic consequences of this myth of equality are, among other things, that of "equal pay for equal work," which logically results in its being morally wrong to pay someone more because he's worked at the job twice as many years as the newcomer, not to mention that it would also be wrong to reward hard work and merit.

So we are going to have to investigate the basis of rights, and find out why we can make rights claims, even when we are not the equal of those we claim rights against.

6.2.3. Third myth: perpetual dissatisfaction

The Third Great Myth is that we are never satisfied. "You have made us for Yourself, O Lord, and our hearts are restless until they rest in You," says St. Augustine. In other words, people are always seeking more. This, of course, is what has made greed the foundation of economics, so that in economic theory, moral behavior is considered bad economic behavior.

This myth originally had a Theological origin. St. Augustine's idea was that the possession of God is the purpose of human life; and our wills, which are automatically attracted to what is good, depend on the intellect with its abstract knowledge; and so what attracts the will is "the good" in the abstract, and consequently the possession of a finite good cannot satisfy it. Only absolute, unlimited goodness (God) can satisfy the will. Hence, we covertly desire the possession of God whenever we desire the possession of anything, and so nothing in this world can satisfy us.

I discussed this view in Section 3.4.1. when we were talking about the life after death, and tried to show briefly where it is fallacious.

There is also the notion that we are congenitally desiring more and more because of our biological nature, because "life is growth, and constant striving after what is greater." But, as I showed in Living Bodies, life is essentially equilibrium (activity that is stable and unchanging), not growth, after the initial period where we reach our mature condition. So there is not in fact and drive within us to become greater and greater, or to have more and more.

In fact, as free, self-determining beings, we choose our own goals in life, making these the only real goal that our life has; and these goals, in general, are finite and often quite modest.

Hence, it is not the case that economic activity is "the allocation of scarce resources to meet unlimited needs." It is quite possible that we will have enough resources to allow everyone to fulfill his goal. Allocating resources to achieve your goals is actually practical activity, not economic activity, no matter what the economics textbooks tell you. Economic activity is a kind of relationship between people, where transactions are involved (each party giving up something and getting something else in return).

Needless to say, this myth that no matter what we do, we will always be unsatisfied has all kinds of economic and public-policy implications (such as that the rich are "stealing from the poor" by the mere fact of being rich); and if it isn't true, then neither are the conclusions that are drawn from it.

6.2.4. Fourth myth: price reflects value

The Fourth Great Myth is that the market price (the equilibrium price) of something reflects its "real value."

We will discuss this at considerable length in what is to come. But if "value" means "utility," as the economists say (and they are right, at least in part), then what that means is that something is valuable insofar as it is a means to a goal. But if each of us freely chooses his goals, then obviously this means that what is valuable to you might have no value whatever to me, because it leads to a goal that I simply am not interested in. If I don't have as part of my image of the "real true me" listening to Wagnerian opera, then not only won't I pay any money for a ticket to Die Walküre, you couldn't drag me into the theater.

Then what does the price of the ticket represent? We will see that, far from reflecting its "real" or "objective" value, it reflects no value at all; and those who hold that it does actually represent what something is "objectively worth" make enormous injustices the economically correct results, and price fixing or tinkering with the markets becomes somehow immoral. But the other side then wants to scrap free enterprise altogether; and the result is a system that has demonstrated that it is even worse.

6.2.5. Fifth myth: economics is mathematical

The Fifth Great Myth is that economics is susceptible of mathematical analysis. This mathematical myth is actually a corollary of two of the myths above: that people are in fact infinitely greedy, and that the value of something is objective.

If people are never satisfied, then obviously no matter how much you have, you want more, and so the goal of economic activity is supposed to be the "maximization of one's own interests." And if value is something objective (and not just what is a means toward the goal you happen to have chosen), then of course, you can, if you're clever enough, figure out what the "true" value of things are. If it is further assumed (as it is in economics) that people are rational, then they will choose what seems to them most economically advantageous (what gives them the most return on their investment); and so you can predict economic behavior based on these premises.

The dismal record of economics professors in predicting economic trends should tell people that there's something wrong with these assumptions; but it doesn't. What it tells them is that the variables are so many that, like predicting the weather, we don't know all of them, and so can only do a fair job most of the time. But let's face it; weather forecasters are a lot better at predicting than economic forecasters.

Why? Because, first of all, people's goals are not infinitely great, and so it doesn't follow that, faced with a choice of doing something which gives a greater return, they'll take that option. In fact, when people are more or less at their goals, what motivates them mainly is avoiding trouble, not advancing into a land beyond their own territory.

The second reason this doesn't work is that there isn't any "real" value for anything; what "the market" is willing to pay for something is just a summation of subjective judgments based on subjective choices of goals, and ten tons of subjectivity doesn't amount to an ounce of objectivity, no matter how many numbers you can put on it.

And because these goals are freely chosen, they can be given up, either rationally or capriciously. So we have fads in which some object, like Cabbage Patch Dolls, becomes enormously popular and then suddenly no one wants one. This is also true in the adult world. A given vacation resort can charge high prices one year and has to turn away people, and the next year all the hotels are empty--for no discernible reason except that it's not "in" any more.

The third reason mathematical analysis doesn't work in economics is that, as I said in the fourth chapter of the first part of this book, people's behavior is caused by emotion as well as reason. Emotion, however, does not base itself on the self-interest of the person as a whole, but is interested in gratifying only one aspect of the person, even to the detriment of the whole. And this is as true of economic choices as it is of any other aspect of life.

To give you an example, a man I know told me he was pricing sports cars, and had just about settled on a Mitsubishi Eclipse; but when he priced it with all the turbochargers and other bells and whistles he wanted, he found that it was just a couple thousand dollars cheaper than the base version of the Mitsubishi 3000, the super-duper sports car of the Mitsubishi line. So he decided he'd get the more expensive car. But then he found that the base model was "vaporware," existing only on paper; and in order to get an actual car, you had to spend four or five thousand more.

"So I told myself," he said, "'Am I going to spend seven thousand dollars more just to get a car that's really no better than the Eclipse? Of course not!' So I bought it."

Economic analysis is actually mob psychology; and the ones that are good at it (the Gettys and the Perots and their ilk) are the ones who can read crowd behavior well--as Ross Perot showed in his bid for the Presidency, where he had, before he withdrew, a third of the electorate wanting him to be President without his saying Word One about what he was going to do about the problems that allegedly he had identified (which were, of course, the problems that everybody had been complaining about for years).

6.2.6. Sixth myth: necessities are very valuable

The Sixth Great Myth is something I have uncovered, and its unmasking is, I think, one of my major contributions to economic theory: it is that a necessity is just something "extremely valuable," and can be treated like any other value. Thus, people on the one hand say that it's wrong to hold a gun to a person's head and threaten him with death unless he pays you the contents of his wallet, and at the same time hold that it's perfectly okay to tell a heart patient that he can't have his heart transplant unless he pays you eighty thousand dollars--and if he doesn't get the transplant, he dies. Ask him if this is a threat or not.

We will discuss this at some length later also, but just consider it this way: Goals are freely chosen and can be freely given up without doing any damage to the person you are at the moment. But if I cut off your arm, then I have lessened, not what you will be, but what you now are. Since we are given our basic human nature, and we have a moral obligation not to act contrary to our given nature, then obviously we can't, as we saw in the first part, do any harm to any aspect of ourselves in order to fulfill any goal that we might have; the end never justifies the means.

Hence, not having something necessary for the functioning of some part of ourselves (such as breathable air or drinkable water) means that we cannot morally refuse to get it, no matter how many valuable things (that lead to free goals) we have to give up in the process.

This is at least a prima facie case that values don't behave economically the same way necessities do; and we will see the implications of this as the analysis goes on.

6.2.7.Seventh myth: economics is amoral, not normative

Finally, there is the myth that economics amoral and not "normative." The idea is that economists are supposed to be just analyzing what people actually do in their economic activity, and not prescribing what people ought to do (which, they say, involves other considerations than just economic ones).

The trouble with this is that, when they make their economic analysis of things, they are assuming, as I said above, that (a) a person engaged in "pure" economic activity (that is, without the other considerations like morality) is trying to maximize his own interests, and (b) that he will act rationally to do so.

But you see, what this does is make any action that deviates from rationally attempting to maximize your own interests bad economic practice. However good it may be morally, that's what it is economically. That is, a person who gives away his money may, say these people, be a good person, but economically what he's doing is silly.

Now people do give away their money (because in fact we aren't infinitely greedy); and so this "descriptive" economics is not in fact describing what people actually do; it is describing what people would be doing if they were engaging in "pure" economic activity.

"Pure" economic activity, then, is an ideal, not a description of the real world; and as an ideal, (a) it doesn't exist, and (b) it is a model which is presumably useful in the real world. Useful for what? For "describing" real economic behavior, presumably. But this is circular reasoning; because economic behavior is "true" on this showing insofar as it actually illustrates the predictions based on the theory.

Let me give you an example. An employer hires an employee for, say, $100.00 a day. The employee goes to work, and profits go up $150.00 per day. Obviously, it makes economic sense to hire that employee. The employer hires another at the same wage, and his profit goes up another $125.00 per day. Still a good idea, economically. The third employee, however, costs another $100.00 per day and the profits only go up $100.00. It now becomes (according to traditional economic analysis) a tossup whether you hire him or not, because "the point of diminishing returns" has been reached.

The next employee hired costs $100.00 a day, and profits go up only $75.00 a day. Economic analysis tells you that it is economic folly to hire him.

But consider. Suppose the profits you're making are bringing in so much money that you've achieved all your goals (you have all you want) and all that extra money is going to be doing for you is to be put in the bank or in bonds--and bring you in extra money. What do you want the extra money for? And if you hire the person, you give him a job, and enable him to achieve his goals. True, your profits are less (percentagewise) than they would have been if you didn't hire him (though of course, they have gone up, but not as much as the expense of hiring the person); but how are you suffering economically if your profits are greater than enough to enable you to achieve your goals?

What I am saying is that it doesn't automatically follow that hiring workers beyond the point of diminishing returns is bad economics. It is only bad economic practice if the only goal of any business is making the most profit possible for the entrepreneur.

But when economics say, "Well that's what the goal of business is," then what do they do with all the people who start little businesses like bookstores because they love books and are simply interested in making a decent living, not a killing, at it? What they're doing is establishing what "true economic practice" is, and so setting up a norm for what "sensible" or "good" economic practice is--and so their supposed "description" of what we are doing is actually normative for what ought to be done if the practice is to make sense economically.

Since this "good economic practice" is based on the six earlier myths, all of which are false to one degree or another, the hidden normativeness of contemporary economic theory is turning out people from business schools who, in the name of "good economic practice" are doing things that not only are immoral, but which contradict the very foundations on which economic activity is based. In the name of "good economic practice" they are doing nonsense economic practice.

And that is why the rest of this book can't simply be case studies in business ethics. What is going on in business is an economic mess because the economists themselves are telling people to do things that are at cross-purposes with the foundations of economics; and the result is on the one hand capitalism that expresses itself in heartless greed, and on the other communism that redistributes poverty to everybody.

So we have to look at what we are as persons and how we relate to others economically before we can find out what actions are or are not consistent with the economic dimension of our lives; and it will turn out that if we act morally, we will also be acting sensibly in economic terms.

Capitalism as practiced consistently with its foundations, is not a cloak for infinite greed; it has already a human face. The problem is that a mask has been put on it by economists who were poor philosophers. It is time to take the mask off.

Summary of Chapter 6

The moral obligation tells us not to choose to act inconsistently with what we really are. We must therefore find out what we really are in order to avoid inconsistencies; and since acting inconsistently means being at cross-purposes with yourself, this can be useful in this life as well as the next one.

What we will be doing will be analyzing various aspects of our reality in its economic dimension, not solely in "business," because there is more to economic life than business, and business ethics presupposes the more fundamental economic ethics.

There are Seven Great Myths about economic activity: things taken for granted as obviously true, but which in fact are false. Economic conclusions based on these are therefore fallacious.

First, we do not simply relate to others only in economic terms of respecting rights and expecting compensation for services rendered. The social relationship involves doing things for which there is no compensation; and there is no injustice in this.

Second, we are not all "created equal." Human beings are all qualitatively the same, but no human being is the equal of any other. Rights are not based on equality, but on personhood.

Third, we do not, in fact, always want more and more. We have finite goals for ourselves, and are satisfied when we achieve them. So economic activity is not the allocation of scarce resources to meet unlimited needs.

Fourth, it is not true that the market price of something has any relation to what it is really worth; in fact, there is no objective meaning to what something is worth, because an object's value depends on its being a means to a freely chosen goal.

Fifth, because goals are subjective and freely chosen, and because people aren't infinitely greedy, and also because people act from emotions as well as reason, economic activity is not really susceptible of meaningful mathematical analysis. The economic activity of large numbers of people is actually analogous to mob psychology.

Sixth, necessities are not, as is universally held, very valuable. Necessities keep us from being harmed; values lead to freely chosen goals; and so they do not behave the same way economically.

Seventh, there is no such thing, actually, as "descriptive" economics (as opposed to "normative" economics). Since economics doesn't describe what people are actually doing (since presumably they act for other than merely economic motives) it sets up an ideal of what "pure" economic activity is (i.e. what economic activity ought to be as such) and therefore actual practices are judged in relation to this ideal. But the ideal in economic theory suffers from these seven myths; and so it in fact is prescribing things as ideal which in fact are not only bad morals but inconsistent economic behavior.

Exercises and questions for discussion

1. How can anyone say what "human nature" really is? It is one thing to give general norms (don't choose to act inconsistently); but each person has to decide for himself what his reality is, doesn't he? And if that's the case, how can a book prescribe what specifically is right and wrong?

2. How arrogant can a philosopher be, if he stands up against people with Ph. D.'s in economics and tells them that their theories are just false, and that people should be following the philosopher's theories? Don't economists know more about economics than philosophers?

3. If we're not actually equal, then what are rights based on? Do some people have more rights than others? Hint: Do you have a driver's license?

4. Granted that we might not want an infinite amount of stuff, isn't it still true that if I am going to act, then I have to have a motive for acting (why should I be doing this?) and won't that motive always be my own self-interest? Why else should I do anything, if I don't gain by it?

5. If values aren't the same as necessities, why do we pay finite amounts of money for necessities, such as health care? Doesn't the fact that we reach a point where we won't pay for a given procedure say that we value the procedure less than the other use we put the money to?

6. What would true descriptive economics be? A branch of sociology?