Key issue analysis on the article by Primeaux, When MR=MC: Ethical efficiencies in valuing and pricing

Patrick Primeaux, SM and John Stieber believe that good ethics and good business are synonymous. But in my opinion Primeaux and Stieber’s argument (MR =MC) contains several mistakes. After arguing that it is unethical for a firm to produce at a point where marginal revenue exceeds marginal cost, because the community will have fewer goods and services than if the firm maximized its profit, they claim that if the firm produces at a point where marginal revenue is less than marginal cost (MR < MC), it is choosing a level of output that is greater than the profit-maximizing output, and the community has more goods and services. The authors offer in support of their position an analogy between business and football: The individual athlete approaches a game of football with his or her own personal sensibility to a certain philosophical perspective, religious commitment, and adherence to the law. That sensibility may even define the individual athlete and his or her relationships with others. In practice, however, that sensibility is “bracketed” or suspended as the rules of the game assume precedence. Of course, the individual can make a prior choice to play or not to play, and perhaps philosophical, religious or legal commitments may inspire that choice. But once that choice has been made the rules of football dictate a certain behavior. One weakness of this analogy is that playing football is an optional activity, while business is the primary means of earning a living wage in industrialized countries. Hundreds of millions of people have few alternatives other than to “play” business. Second, there is more than one set of business rules, as Michel Albert implies in the title and argues in the text of Capitalisme contre capitalisme. As a matter of fact Primeaux and Stieber do not have an ethical theory at all; they simply call a particular economic theory their theory of business ethics. They belong to the tradition of economism, which attempts to apply economic theory beyond the boundaries of its relevance. One of the key issues of the essay is the idea of a poor managerial skills and their affect on a company’s policy (including ethical aspects). Two of the authors believe that a manager whose personal ethics conflicts with his or her firm’s profit maximization, but who is able to reconcile the conflict and stay with the firm, has “sold all or part of his or her ethics for another set of ethics”. They explain that one of the major postulates of economics is that personal attributes and talents such as self-respect, decency and ethics are also economic goods as are food, shelter and health care. Like all economic goods, they also are bought and sold… According to the authors, “Like other people, managers barter with their ethics. They trade, as everyone does, their childhood ethics for adult ethics. If they didn’t, they wouldn’t mature. They also sell their ethics for a money price, even putting aside/reconciling their personal ethics for a good-paying job”. One of the reasons Primeaux and Stieber are able to reconcile business ethics and profit maximization is that they avoid (and believe managers should avoid) the responsibility of judging whether a firm’s products are good. They believe that the role of business within society is to “provide the goods and services the consumer wants”. When business men and women profit maximize, i.e., allocate resources efficiently, people have more of the things they want, and that is good. When they do not profit maximize, i.e., allocate scarce resources inefficiently, people have less of the things they want, and that is bad... Since ethics is basically a study of good and bad activity, then the decision to profit maximize or not to profit maximize becomes a question of applied or practical ethics. Social effect of such a possible solution is that when business men and women profit maximize, i.e., allocate resources efficiently, people have more of the things they want, and that is good. When they do not profit maximize, i.e., allocate scarce resources inefficiently, people have less of the things they want, and that is bad... Since ethics is basically a study of good and bad activity, then the decision to profit maximize or not to profit maximize becomes a question of applied or practical ethics. The problem with this position, however, is that it is not good to produce whatever people want when what people want is not good. Business managers are responsible for exercising judgment, including judgment about personal and social needs. Whether the behavior of buying and selling one’s personal ethics is right or wrong is the realm of the philosophical or religious moralist. We know that people do it and that the discipline of economics describes how they do it. It is also the realm of the philosopher to identify the boundaries of other academic realms. Primeaux and Stieber’s attempt to include the “buying and selling” of ethics within economics is a case of academic imperialism, an attempt to include within its empire territory that belongs to other academic disciplines. And their attempt to demonstrate that good ethics and good business are synonymous is unsuccessful, because it includes no ethical theory. It merely reduces business ethics to economics and then shows that economics and economics are synonymous. As Primeaux and Stieber understand it, ethics plays two roles in relation to business management: one internal and one external to the firm. Internally, ethics is by definition equivalent to producing whatever consumers want to buy at the point where marginal cost equals marginal revenue. There is no other role for ethics to play within the firm. Externally, since the ethics of consumers influences what they wish to buy, the ethics of society must be taken into account by managers when deciding what to produce, so they can maximize profit. Interestingly, however, business ethics and consumer ethics are quite different in nature. Within the firm, ethics is absolute and nonindividualistic. If managers believe that their firms’ profit-maximizing actions are unethical, they are obligated either to alter their personal ethics or to resign. It opens the doors for violating another rule of good business and good business ethics – allowing one’s individual concerns and personal ethics to enter into and direct decision-making for the firm. This discussion of the Value of the Marginal Physical Product of the factors of production adds an important dimension to our previous discussions of economic efficiency and the behavioral, ethical dimensions of profit maximization. It also serves to define principles governing opportunity-opportunity-cost decision making in a more precise manner. Accordingly, the role of the Value of Marginal Physical Product can be more readily appreciated as contributing to a better appreciation of business ethics. Profit maximization, and its emphasis on opportunity costs, especially with respect to the factors of production, provides an integrated context for business ethics. The singlemost advantage to this kind of proposal is its paradigmatic quality. It encompasses and incorporates all of the constituent parts of the whole, relates theory to practice, thought to behavior, and offers a context in which to direct the parts as well as the whole. Moreover, the paradigm of profit maximization recommends a basic ethical premise to which all can agree: any kind of individualistic self-aggrandizement is antithetical to business. This is a basic tenet to which religious, philosophical, and legal ethics can ascribe. Because it recognizes profit as the principle objective of business, the paradigm of profit maximization fulfills the ethical mandate for business better than any other. It provides, both mathematically and behaviorally, economically and practically, that, of its very nature, business is a communal undertaking which cannot tolerate greed, at least not in the long run. Rather, profit maximization seeks the personal and social well-being of all its stakeholders, and demands consideration of economic resources, people as well as things, as fine, scarce, and limited. It also demands consideration of these economic resources as interdependent. Perhaps more than anywhere else, this communal, social interdependence is reflected in a common theoretical and practical attention to the costs and payments to the factors of production according to the respective contribution of each to total revenue. References Lee, D, R., Opportunities and costs. The Freeman, 49(3) March, 1999, pp. 52-53. Michel Albert, Capitalisme contre capitalisme, Paris: Editions du Seuil, 1991; trans. Paul Haviland, Capitalism against Capitalism, London: Whurr Publishers, 1993; Capitalism vs. Capitalism, New York: Four Walls, Eight Windows, 1993. Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits”, New York Times Magazine, 13 September 1970. Nowark, M.A. Sigmund,K, & Leibowitz, M.L. Cooperation versus Competition. Financial Analysis Journal, 56(4) July/August, 2000, pp. 13-22. Patrick Primeaux and John Stieber, “Profit Maximization: The Ethical Mandate of Business”, Journal of Business Ethics, XIII (1994), pp. 287-94. Primeaux, P, & Stieber, J, When MR=MC: Ethical efficiencies in valuing and pricing. Journal of Business ethics, 18(2) January, 1999, pp. 201-211.