Business Ethics

In the crossfire between a code of conduct and black sheep

 

Copyright: Eugen-Maria Schulak
English version of a lecture
Delivered on the occasion of the inaugural meeting of the Society for Austrian Economic Thought
7 July 2008, Hotel Imperial, Wien
Translation by Ciaràn Cassidy

 

Business ethics is a topic which is currently very much in fashion and which confronts us at every turn. This leads us to ask, why this should be so; what the reason for this might be; and who, or what, could lie behind this development? But before we can hope to answer these questions we must be quite clear as to what we mean by the expression "business ethics" and what we hope to obtain from its use. We must go deeper and ask, who was it that brought up the expression and introduced it into the discussion; who has the most to benefit from its application; and who is it directed against, or has most to lose?

One of the most important insights of Ludwig Wittgenstein was that the meaning of a word depended on the context in which it was used. The meaning of a word can only be evaluated and understood when we know the purpose to which the word is used. It is especially important to understand the meaning of words which are fashionable. Such words are used primarily because other people also use them. Fashionable words are governed by a certain dynamic which is more emotional than rational; they depend on their emotional impact much more than on a careful consideration of what one actually wishes to say.

Allow me a brief excursio into the realm of applied psychology. When some people speak of business ethics, their expression assumes a solemn, almost priestly characteristic. Some are so overcome with moralistic wrath that they come across as Commissioners from the Politbüro. Others, again, radiate with hypocrisy; one gets the impression that they feel obliged to discuss business ethics – and they invariably end up grinning self-consciously. With others it is quite obvious that they have no idea what they are talking about. These are the people who always slavishly follow whatever ideas are "in" and will regurgitate whatever is deemed politically correct. And, yet again, there are those who know very well why they use this term, but who cleverly mask their true intentions. And finally, there are those who make no attempt to conceal their intentions and use this opportunity to speak once more about "capitalist pigs" and so-called "social necessity".

For more than a decade the topic of business ethics has been a matter of intensive discussion. This trend is still rising. The reasons for this discussion are in no sense new. We can trace similar episodes back to the 19th century when the German economist, Gustav Schmoller, who founded the Verein für Socialpolitik, compared the role of his profession to that of the chorus in a classical Greek tragedy. The role of the professional economist, like that of the chorus, was to evaluate and comment on political and economic events which took place on the world stage; it was not, however, allowed to participate actively on this stage. The economist, just like the choir, performed the role of an expert authority. In the modern era, the ethics of the economist has thus come to be based on concepts such as "the people", "social justice", "development", "progress", "equality" or "social compensation", which were consequently adopted into the programmes of national governments.

Such conceptual developments were precursors of state Socialism as well as of National Socialism. That such concepts could be developed with relative ease, in dictatorships of the right as well as of the left, and continue to be so developed to this day, provides ample food for thought. Both Socialism and National Socialism had this much in common, that they utilised every conceivable force to manipulate and regulate every business movement. Dictatorship and business regulation always go hand in hand.

Modern dictatorships invariably describe themselves as "peoples’ democracies", or they have evolved from democracies which have gradually begun to manipulate the population by means of new moral precepts. In addition, they have begun to control the economy. In this way they manage to implement and finance their political goals without fear of hindrance.

In the final analysis, political freedom and economic freedom amount to one and the same thing. Politics is financed exclusively by means of compulsory payments; in other words, from taxation. The more ambitious are political intentions, and the more far-reaching the required policy measures, the larger the administration that is needed and the more everything costs.

The revenue that is needed can only be obtained from those who create wealth, i.e. from those who produce goods and services, or who are involved in the production of goods and services. These people either produce goods and services which others are prepared to pay for, or they trade in merchandise which others are prepared to purchase voluntarily. Such people, and these alone, create wealth. Politics cannot create wealth. For this reason, Politics is continually seeking to acquire as much wealth as possible from others through the medium of their monopoly of force.

The fact is that it is hardly possible to levy any more taxes in Austria today than are currently being collected. Any increase in the real tax burden would cause companies to leave the country in droves and induce private persons to flee to the black economy. In other words, we have reached the ceiling of what is possible, or acceptable. In contrast to this, our state bureaucracy requires ever more revenue. More and more people are living off the state. Our public health system is bankrupt. The public pension funds are bankrupt. The public debt is rising continuously. We still shy away from public expropriations. But more and more privately-held wealth will have to be expropriated if we are to continue to finance our so-called socialist state.

They who would gladly dispossess us are busy spreading the opinion that we live in an era of neo-liberalism. Apart from the fact that very few have any idea what this is supposed to mean, it is quite inappropriate to consider the present age worthy of the designation "liberal". For one, the government’s share of GDP is currently about 40%. At the zenith of Austrian liberalism, the taxation of income had just been introduced, with a top marginal tax rate of 5%.

They who would dispossess us continuously, step by step, never tire of pointing out that we are, apparently, a rich country. This can only be regarded as a fallacy, considering that anyone, in receipt of a net monthly income of €2,000 or more, belongs to the top 10% of income-earners in Austria. In truth, we live in a paternalistic socialist regime which has succeeded in steering our views and our behaviour, and which has thus managed to produce an extraordinary uniformity of thought and consensual behaviour. Slowly but inexorably, we are heading towards a new form of communism. At the moment we cannot say exactly where this is leading to.

*

Let us now turn to the numerous debates on business ethics which are conducted in Austria. With regard to those varied discussion groups it is possible to make an extraordinary observation: Amongst those who are active in business, we observe a deeply-rooted conviction that the economy can only prosper in the long run if it is driven by ethical considerations. Those who belong to professions far removed from daily business, tend to regard the expressions, ‘business success’ and ‘ethical attitudes’, as mutually exclusive.

If we analyse these two groups more closely, we see that both participate in the economy – if only as consumers. However, it is noticeable that these groups are completely different as regards how they earn their livelihoods; while one group is active in economic enterprises, the other is dependent on income arising in the public sector.

Looking at these two groups in terms of their relationship to the state, we can designate them, in the interest of simplicity, as ‘net recipients’ or ‘net payers’. In public finance we describe ‘net recipients’ as ‘transfer payments recipients’, which makes it quite clear that each recipient is being subsidised by someone who is paying. Transfer-payment recipients would include all those who work in the public sector, such as civil servants, teachers, the police, politicians, professors, scientists, employees of various trade guilds, government employees of both the federal and regional governments including associated tradesmen and manual workers. Quite clearly, pensioners and retirees belong to this group also. What is significant about ‘recipients’ is that their tax liabilities, as well as their net incomes, are a burden on public budgets, which means that they must be met by the ‘net payer’.

Transfer payments are payments of state institutions to private persons. They have to be financed either from a redistribution of state income, or through public borrowing. Transfer payment recipients are private persons who receive more from the state than they contribute to the finances of the state and who depend on the state, either wholly or in part, for their livelihood.

Let us pursue the question further as to how the number of transfer payment recipients in Austria compares to that of contributors.

 

Register of electors for the parliamentary elections (2002): 5,912,592

Net transfer-payment recipients (2004)

Pensioners: 1,842,538
Public administration and social insurance employees: 450,300
Employment in education 1: 143,532
Employment in health, veterinary medicine, and social services 2: 171,667
Unemployed/recipients of unemployment assistance 3: 306,236
Leave of absence (with pay): 110,489
________________________________________

Total (2004): 3,024,770

1: A minute proportion of those engaged in education, are remunerated by means of fees, contributions, or are privately employed (e.g. in private schools).
2: The financing of the health system, services of veterinary medicine and social services occurs mainly by means of transfer payments. The available statistics cover only part of those employed in this sector.
3: The data on unemployed and on unemployment assistance includes 42,645 "unemployed" undergoing retraining, 27,033 recipients of advance payments on pensions, and 2,166 recipients of "temporary payments".

(Statistics by Herbert Unterköfler)

 

In 2004, there were about three million net recipients of transfer payments in Austria. Persons for whom transfer payments constituted only a part of their income are not included. Thus, for example, we find groups such as recipients of children’s allowances, agricultural subsidies, or supplementary (state) pensions are not included in the statistics. In consequence, we can easily imagine that the number of net recipients constitutes a clear majority of the electorate. It is not too difficult to imagine what implications this might contain for democracy.

Pensioners make up about two thirds of transfer-payment recipients. For all of their working lives they were obliged to make regular contributions to state pension funds. The normal practice of such pension funds was, and still is, to squander this money, rather than invest it carefully. These people were, to put it bluntly, dispossessed. Their wealth was confiscated, bit by bit, over the years. Today they are dependents – dependents of the state and at the mercy of political developments – and are confronted by an uncertain fate.

This system, which we call an "inter-generational contract" in Austria, is nothing more than a pyramid game. Can you imagine an insurance agent coming into your house and presenting you with the following proposition: "I have a fantastic offer to make to you. Every month, you will pay me €1,000. This money I will transfer to Mr. X as he is now old and needs the money. And, when you are old I will find a Ms. Y to whom I will sell a similar contract to that which I now offer you. The money I will receive from Ms. Y I will then pay to you when you are old."

I think we can agree that whoever signs such a contract is a complete idiot. Thus, the Austrian state does not offer us such contracts for our voluntary signatures, but enforces them with the threat of force. Basically, we are dealing with nothing less than a pyramid game which, incidentally, the state itself has banned. Pyramid games are illegal; compulsory state insurance, not so.

*

Let us return to the many discussions and debates which now take place on the subject of business ethics. And let us focus on certain observations one can make, when we analyse what is happening in these debates.

First of all it is readily apparent, that the vast majority of that group of persons we might generally describe as the business ethics "moralists", belongs to the category of net recipients of social transfers. It is typical of this group that they do not see themselves as part of the economy. Nevertheless, they claim the right to make the relevant rules. The overriding tenor of this discussion is that one cannot simply accept that trade alone can organise the world, or dictate how the world is run. Their views must also be taken on board. In the absence of detailed guidelines and regulations, which they formulate and which may need to be enforced by law if necessary, the economic system would spiral out of control.

Capitalism alone, driven as it supposedly is by naked greed and its narrow focus on self interest, lacks the overview to know what it is doing. Self-regulation is a complete non-starter. For this reason, it is necessary to guide the thought processes of the economically productive. And, the best way to achieve this is through "voluntary restrictions", preferably backed by state regulation. Thus, the spirit of the times as well as the public interest demands, that they who pursue the profit motive should require an official stamp of legitimisation as, by definition, they are not guided by business ethics.

Basically, it is quite obvious what this group of "moralists" wishes to achieve. Their objective is to perform an usher’s role in society, allocating positions and rights on the basis of official certificates and seals of approval.

The "moralists’" contribution to the debate often displays significant shortcomings, both in terms of their personalities as well as their professional credibility. And, it reminds one a little of the forceful pronouncements on sexuality from a clergy living a life of celibacy. In principle, one is seeking to make authoritative statements about something one has rejected, if not indeed despises. Their opponents may justifiably ask what right they have to make such proposals, on what moral authority is their claim based, and what professional or specialist qualification can they produce to add credibility to their views? Perhaps their claim is based on the view that in order to observe and comment on something objectively, one must, in some sense, be an "outsider". However, it is obvious to all that their claims are little more than a striving for monopolistic power.

Taking a charitable view of the matter, claiming a right of co-determination in a context where one has no experience and, in particular, no responsibility can only be regarded as being rather forward, and more than a little embarrassing. Strictly speaking, we are confronted with a rather blatant case of chutzpah. Because, those who are most likely to argue in favour of economic regulation are precisely the same people who obtain their income from the tax payments of the persons they regulate. Pretty much all scientific civil servants and intellectuals, all politicians and officials live off donations from the state. Those "business ethics moralists" are not at all overjoyed to be reminded that their remuneration is obtained from tax revenues, which are extracted from taxpayers by means of the coercive monopolistic power of the state.

The "ethics moralists" are often to be found in vehement opposition to any suggestion that the state should disengage, either wholly or in part, from various economic activities and sectors. And it doesn’t really help to point to the proven inefficiencies in the administration and the large-scale destruction of resources during the 1970s and 80s in the so-called "welfare states". The "moralists" will defend the inflated size of the government with all their might – much as a hunter would watch its prey.

It will be very interesting when the "moralists" are asked about their own ethical standards. Then, it is very noticeable that they who drive the business ethics debate forward almost never consider discussing the ethics of civil servants, or of the public sector of the economy. This is all the more surprising when one considers that the state, through taxation, accounts for almost half of the total economic activity of the country. How, then, can the "moralists" so resolutely ignore that the high rates of VAT drive by-no-means-insignificant groups of the population under the poverty limit? And why is it never questioned that almost all major scandals of recent decades have occurred in the state sector, or sectors closely associated with the state?

Basically it is perfectly obvious that the "moralists" are guided primarily by their own self interest, just like everyone else, and as net-recipients of social transfer payments are simply concerned to safeguard their incomes. That this must be couched in terms of ethics is simply an indication that their productive performance on the open market would probably attract no more than a fraction of what they currently earn. Their instinctive reaction is to cloak in moralistic terms what is, in reality, begging for their salaries.

It is obvious that this questionable motivation is strong enough to ensure that the "moralists" dominate just about every debate concerned with business ethics. However, the result contains many contradictions. Thus, one rejects economic growth as being destructive and unethical, but insists upon automatic wage increases as a matter of course, however they may have to be financed. One demands security of supply in the fields of energy and food supply, but of course rejects the concomitant construction projects as being detrimental. And, one fulminates against globalisation while looking forward with pleasure to the next long-distance journey. Perhaps it is just not possible to build a better world without being active in the construction project.

*

Let us be in no doubt about one thing - a business ethic is an integrative force. The basic ethical principles, or virtues of corporate behaviour, are strenuousness (i.e. a willingness to make greater effort), trust in yourself and in others, ambition, curiosity, responsibility for capital and employees, uprightness in financial matters, frugality, loyalty, being a man of your word, honouring contracts, the prudence of a correct businessman, punctuality, a strong presence and honourable behaviour, clarity of speech, a strong sense of vision and entrepreneurship.

The fact is that businessmen and businesswomen must possess many of these qualities if they are to persevere and succeed in the marketplace. They can be regarded as ethical, per se. They make profit or, in other words, they create value. They supply people with goods which they need, or want. They alone create genuine jobs. And they, along with their employees, are the only ones who pay taxes.

There is one clear conclusion we can draw from all of this. It is not business, and business people, who must prove that they adhere to adequate ethical standards. Rather, this burden of proof rests with the net recipients of transfer payments, as it is they who live off the compulsory deductions which are paid by businesses and their employees. The net recipients of these payments, from whom we naturally deduct pensioners, are the ones who are obliged to justify their incomes and the money they receive.

Commercial enterprises, and their employees, have already proven their case in that they have produced goods and services for sale which customers have been willing to buy. That means that they have been beneficial, or provided benefit, for other people. The same cannot be said for transfer recipients, or at least their case is not quite so clear. For this reason they ought to be obliged to try much harder to justify their entitlement to what they acquire from the economy. Nor should they be allowed to use the business ethics of others as a smoke screen to distract attention from the need to justify their own rent-seeking activities.

It is disgraceful how the business ethic moralists of today succeed in keeping the business community on the run. All those who would like to regulate business are, themselves, "on the make" and extracting economic rent from their activities. The means of imposing such regulation is political power, through the medium of public law. In the case of NGOs, justification is based on a certain morality, which is frequently rather dubious. In this way, business enterprises are paraded in public, and pilloried, in a manner formerly employed for political enemies in Stalinist show-trials.

Many enterprises play along in this ethical charade. The motives for this are varied; some cooperate from a precipitative sense of obedience; others do so out of fear; others from downright stupidity. Rarely does this arise from a sense of conviction. There are about 250,000 SMEs in Austria. It is high time that these enterprises begin to reflect on what they really are, and what they actually do. Without this first step of reflection, they will never succeed in creating a spirit of solidarity to cast off their yoke.

Ultimately it will depend on us, friends of the Vienna School, to perform the task of opening eyes and raising awareness. This pedagogic task lies before us.