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Critical Perspectives on Accounting 18 (2007) 159188

Smith versus Friedman: Markets and ethics

A. Craig Keller
School of Accountancy, College of Business Administration, Missouri State University,
901 South National Avenue, Springeld, MO 65897, United States
Received 1 November 2004; received in revised form 12 November 2005; accepted 15 December 2005

This paper addresses the issue of ethics in modern business thought from the perspective of the
father of modern economics Adam Smith using both An Inquiry Into the Nature and Causes of the
Wealth of Nations and The Theory of Moral Sentiments. The foundation of modern business thought
is represented by the Chicago/Austrian School of economic thought using Milton Friedman as a basis
and examples from the popular business press and from the work of accounting scholars to illustrate
the pervasiveness of this idea of market solutions to ethical problems.
It is contended that modern business theory, as represented by this neoclassical economic paradigm,
has established a moral code for business based on efficiency of outcome and the assumed link of
efficiency to self-interested behavior. The result is markets as the arbitrators of ethical outcomes, and
profit maximization as the ultimate moral code.
2005 Elsevier Ltd. All rights reserved.
Keywords: Adam Smith; Milton Friedman; Markets; Accounting; Ethics; Accounting education; Economics;
Profit maximization; Baumal, W.J.; Business ethics

1. Introduction
On October 21st, 2003, the incoming chairman of the AICPA gave a speech on integrity
and stated that the basis for the other two core values (competence and objectivity) is
integrity (Voynich, 2003). Without integrity, competence is dangerous and without integrity,
objectivity will always be questioned. An objective expert system that becomes a legal

Tel.: +1 417 836 8470; fax: +1 417 836 5164.

E-mail address: CraigKeller@missouristate.edu.

1045-2354/$ see front matter 2005 Elsevier Ltd. All rights reserved.


A.C. Keller / Critical Perspectives on Accounting 18 (2007) 159188

shield to avoid the consequences of poor decisions displays both a lack of competence and
a lack of integrity. On the other hand, competence without integrity is a successful fraud
waiting to happen. Ultimately integrity is destroyed by a weak moral code or by uncertainty
about standards of conduct. A lack of integrity may lead to unethical behavior but more
importantly a lack of ethical understanding may lead to a lack of integrity. This completes
the circle because there are levels of competence for ethics as well, and Voynichs approach
to integrity, presented in his October 2003 speech, highlighted the competence aspect of
integrity because the code of behavior appears as an integral part of the definition.
When I speak about our core values, I always put competence in the
middleintegrity, competence, and objectivity. I do this because I believe integrity
and objectivity are the strengths that hold up and give life to our competence. In other
words, our value is not given to us because of our technical abilities. Our value is
attributed to us by the way we practice our profession and live by the code of ethics
in all aspects of our daily lives.
Integrity, by definition, is key to our profession. Integrity: a rigid adherence to a code
of behavior. We are expected to live by a code of ethics which serves as the North
Star for all of our activities. (Voynich, 2003, p. 3)
In short, integrity does not stand alone, nor is it fully supported by competence and
objectivity because integrity demands an underlying moral code.1 Moral integrity demands
competence in morality but few business students will find ethics in the school curriculum.
Very few business students will take ethics classes outside of the business curriculum, and
many will not take a separate business ethics course, but every business major will take a
macro and microeconomics sequence.
In this sequence, the student will be presented with the rational utility maximizing view
of human behavior. The ethical content of these economics classes is ignored because
we present the economic ideas as positive social science and therefore value free. In the
neoclassical economic view of the world a set of behaviors is assumed that is taught will
result in the best outcome for society. The calculus of pleasure and pain is displayed with
graphs and mathematical formulas with the assumptions underpinning the efficient solutions
presented to imply that any deviation from these behaviors is antithetical to capitalism. The
behaviors presented include utility maximization and profit maximization as necessary
ingredients to the market solution. This is all presented as a science, as a world of positive
ideas and ultimately serves as the basis for positive accounting theory.
The standard for behavior presented as the foundation for neoclassical economic models
is often referred to as Social Darwinism, a standard not far removed from survival of the
fittest, and any violation of these strict requirements is considered antithetical to the ultimate goal of markets: efficiency. In the economics of the Chicago School (of which Milton
Friedman is a leading light) and the Austrian School, all human motivation is limited to
rational utility maximization and all decisions are exchanges based on utility maximization.
This has the effect of turning everything, into a commodity, including sex and the decision
1 In the extreme the defense in the Nuremburg trials was integrity because in the end just following orders when
the line of command is clear is just integrity when the code calls for unblinking obedience to a cause.

A.C. Keller / Critical Perspectives on Accounting 18 (2007) 159188


to have children. The extreme individualism of the conservative model has become a hallmark of the US economy and, when mixed with the Ricardian model of trade, the call to
globalization. Ultimately the behavioral model is based on Jeremy Benthems calculus of
pleasure and pain. People avoid pain and seek pleasure, and by freeing people to behave in
this way with the least restriction, the results are the best outcome, economically speaking.
A key question for this paper is: can this economic philosophy have an impact on how
accountants view ethics, and how they behave in times when there is an ethical decision to
be made in business?
Another lesson taught in these early economics classes is that economics is amoral and
that it cannot be used to answer normative questions like the fairness of the distribution of
income, or questions of ethics. The statement that economics is amoral is a way of placing
economics on a par with science. Assumptions are made about behavior, and results obtained
analytically, that prove efficient outcomes for markets given the assumptions.2 The violation
of the assumptions of this model of perfect competition by the true relationships that exist
in the economy do not mean the model is wrong, it means the economy is flawed because
it falls short of the models standards for economic efficiency. In essence, the neoclassical
economic ideal presents us with an ethic by placing economic efficiency before us as the
highest end, and utility/profit maximization as the only means to that end.
It amounts to an ethic taught to every accounting student in the United States and the
power of the message of the ultimate justice of the market system is reasserted daily on the
pages of business publications. Profit maximization, greed and self-interest are the ethical
standards presented as the driving force for the greatest good for the greatest number. The
founding father for this ethic is often cited as Adam Smith. It is the goal of this paper to
support the claim that economics, as it is currently taught, does express an ethic and that
the ethic is a part of the problem we face as accountants. Additionally, evidence will be
presented to detach Adam Smith from this negative ethic and to reintroduce Adam Smiths
standards for moral sentiments.
The plan for the paper is as follows. Section one examines conservative neoclassical
economic social theory through the statements of Milton Friedman and others as well as
examples from the current business press and develops the idea of profit maximization and
self-interest as neoclassical ethical standards. Section two presents the ideas of Adam Smith
using extensive quotes from The Wealth of Nations and The Theory of Moral Sentiments to
support the separation of his teachings from the neoclassical model. Section three directly
addresses the problems with using markets as arbiters of ethical solutions with examples
from accounting research. Section four concludes the paper with suggestions for accountants
and accounting educators.

2. Adam Smith versus Milton Friedman

Adam Smith left us with an amazing document recording what he thought were the benefits and the potential problems of a market economy, The Nature and Causes of the Wealth of
2 Many buyers and sellers, homogeneous products, perfect information about prices and no barriers to entry or
exit in the long run. All parties are price takers.


A.C. Keller / Critical Perspectives on Accounting 18 (2007) 159188

Nations. Smith is credited with recognizing the benefits to be derived from allowing people
to follow their enlightened self-interest (Smith, 1776, p. 14). The benefits have been cited
countless times in support of unfettered free markets and market solutions for all kinds of
problems, while the problems he witnessed are often ignored. The statement of problems
contained in The Wealth of Nations and the prescriptions for an ethical society contained in
his earlier work, The Theory of Moral Sentiments, form the foundation for this paper.
Friedmans ideas are presented as examples of the moral code at work in the economy
today. For Friedman markets are the basis of a free society because in a market economy,
economic power stands against government power (Friedman, 1962, 1970). The ultimate,
almost utopian, vision is the market replacing the government in all things. In this utopia, all
roads are toll roads, doctors are not licensed, monetary policy is made by rule, and regulation
does not exist (Friedman, 1962). Libertarians often cite Adam Smith as their foundation, but
(The) Chicago (School) is their Mecca and Milton Friedman the true founder. Adam Smith
has no problem with some role for government, even a regulatory role. On the other hand,
Friedman labels any manager averting his gaze from profit-maximization a subversive, and
the government is at best inefficient at worst an evil entity overcome by the market. The
Soviet Union is the specter in the background.
Underlying Friedmans unwavering support of unregulated markets is a belief that the
economic conditions demanded by Coases theorem are both desirable and in some measure
achievable. From this belief we are confronted with a science of positive economics that
has been used as an analytical replacement for empirical testing bringing us to the point
where blackboard economics (Coase, 1988, p. 28) sets policies, while the negative results
and failures of policies designed to achieve these results are ignored, or the failures blamed
on our societys failure to achieve the utopian dream. In the end, the conservative schools
of economic thought leave us with an analytical framework based on, what economists
admit, are unrealistic assumptions, but still provide prescriptive advice on issues deserving
more pragmatic solutions. From these scientific models come societal norms (behavioral
assumptions) that lead to prescriptions for behavior that leave society with a negative ethical
base, greed. This ethical foundation has been used to force the consideration of market
solutions for a broad range of social problems including ethical problems. It is this ethical
base that is at issue for this paper.

3. Dening ethics
The utility/profit-maximizing mantra is at the center of the current ethical dilemmas
facing business and accounting. But this mantra is not really ethics, is it? If it were ethics it
would indicate that it is a general pattern or way of life or a set of rules of conduct or
moral code or an inquiry about ways of life and rules of conduct (Abelson and Nielsen,
1967, p. 81). To Socrates the beginning of ethics was a simple a question of, How should
one live. This simple and very general question started ethical history for the west at a time
when society was changing dramatically . . . from agrarian monarchy to commercial and
industrial democracy (Abelson and Nielsen, 1967, p. 82). Social changes had not only
made certain types of conduct, once socially accepted, problematic, but had also rendered
problematic, the concepts which had defined the moral framework of an earlier world

A.C. Keller / Critical Perspectives on Accounting 18 (2007) 159188


(MacIntyre, 1966, p. 5). The seeming relativity of ethical codes of conduct is a function of
this connectedness of ethics to social life. The universality of ethics is not in the details as
much as in the subject matter. Codes may change but the types of questions asked which
can be labeled as questions of ethics revolve around what is just, what is good, what is fair,
what is ones duty, and what is virtue among others. The answers to these questions may
change with the change in social life but the questions tend to stay the same.
All of these ethics questions relate back to the larger question of How one should live.
and the general answer to that question, offered by early philosophers, is focused on living
a life of reason. The unexamined life is not worth living is a lesson also attributed to
Socrates indicating that reason was the key to how one should live. As democracy emerged
in a society long ruled by tradition and the codes of a monarchy, the importance of the
role of reason increased. Justice is easy when it is decided for you. Rejecting the easy
solutions to ethical questions (Justice is the rule of the stronger Sophists) Socrates initiated the discussion we still trouble over. Plato and Aristotle offered answers to some
of Socrates questions but the answers open the door to more questions. Platos Form of
Good is a universal in which all good things participate. Not understanding, or a lack of
reason, are the only causes of evil to Plato. Aristotle divides goods into categories like
medical arts, shipbuilding, strategy and economics based on the ends of each. His category
politics aims at the highest good socially, subsuming all the others listed above, because
the others are used in the pursuit of the highest good in politics. For the individual the
highest good falls under the heading of ethics. Happiness is the aim of ethics, and the
general welfare or the good of man the aim of politics (Aristotle, 1980; Abelson and
Nielsen, 1967). Happiness is an end in itself, a final cause of seeking the good in other
Certain economic concepts were the subject of discourse among the early scholars of
the Catholic Church known as the scholastics. The scholastics asked questions and used
categories, which current neoclassical economic writers reject as non-scientific, such as
usury, and the concept of the just price. A Catholic textbook on Political Economics from
the early 20th century defined ethics as . . . the science that directs human actions according
to the principles of right reason (Burke, 1913, p. 4). Under this definition the author
concluded that political economics . . . is subject to the laws of Ethics (Burke, 1913, p. 4).
The reasoning behind this inclusion is rooted in the idea that ethics is a higher science than
political economics with immutable laws and these laws of Ethics cannot be superseded by
laws formulated by political economics. When Political Economy . . . attempts to lay down
principles that run counter to the acknowledged principles of Ethics, it so far ceases to be a
science (Burke, 1913, p. 5). Burke acknowledges those schools of Political Economics that
do not consider Ethics, but he determines that, (E)very volitional act of man is imputable
to man, is deserving of either praise or blame, and comes within the domain of morality
(Burke, 1913, p. 5). Burke even subsumes Political Economy to Political Science which he
defines in much the same way as Aristotle did in the Nicomachean Ethics. The persistence
of the Catholic Churchs view of political economy, as subsumed to ethics, into the 20th
century serves as a reminder of the foundation of such ethically charged economic terms as
the just price and even usury. It was the disembeddedness with this social structure created
by religion that was seen by Karl Polanyi as the beginning of the transformation from
feudalism to capitalism.


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Ultimately, Immanuel Kants ideas came to have a powerful influence on ethics that
continues to this day. Kant listed ethics as one of two philosophical sciences (the other
being physics) and defined ethics as the philosophical science that . . . deals with the laws
of free moral action (Kant, 1964, p. 13). Kant is especially important in reference to the
subject at hand because some accounting scholars have listed the school of deontology,
into which Kant fits, as the preferred basis of ethics in accounting (Epstein and Spalding,
1993). Kants theories on ethics are grounded in the idea of free will, which he states makes
ought a possibility for human beings. Described as existing in a dual world of nature, with
immutable laws, and a world of intelligence and reason, the human being is capable of
actions reflecting reason as opposed to being hostage to the laws of nature.
His elaboration of this point has important implications for the basis of neoclassical value
theory, utility theory or the hedonistic calculus, because the utility maximizing concepts
form the limits for human action in neoclassical economics and are therefore presented as
natural law. It is precisely the possibility that human beings can stand above such cause
and effect relations with nature that make ethics a possibility. In an interesting turn of
phrase, Kant implies that it is the, ought to, that follows an action known to be against
reason that exemplifies the free will side of our internal dialectic. Kant included the idea
of duty in constructing a categorical imperative that he felt captured the essential character
of ethics. That imperative, . . . I ought never to act except in such a way that I can also
will that my maxim should become a natural law (Kant, 1964, p. 70). Kant saw this as
a duty. Kant also rejected the basis of the limits that are often placed on business ethics,
laws, as necessarily incomplete. No set of laws can possibly cover all circumstances but
the categorical imperative when applied with reason can bridge the gaps. The shortcoming
for Kants method is that there is no guidance as to what these universal laws are, therefore
we are left with the possibility of a community prescribed reason that is developed in the
society that leaves the individual with a basis of reason devoid of ethical content.
If Kants concept of duty is a valid way to define ethics then Milton Friedman, has placed
the goal of profit maximization on a footing with ethics, Few trends could so thoroughly
undermine the very foundations of our free society as the acceptance by corporate officials
of a responsibility other than to make as much money for their stockholders as possible
(Friedman, 1962, p. 133). Friedman considered other motives subversive. If we substitute
the word duty for responsibility then Friedmans statement takes on the form of an
imperative but it is not a categorical imperative, like Kants, because it has a purpose.

4. Friedman and the ethics of value free economics or why economics is not
The statement that acting out of a motive of social responsibility is a subversive act is
born out of the belief that: competitive capitalism . . . promotes political freedom because
it separates economic power from political power and in this way enables the one to offset
the other (Friedman, 1962, p. 9). Friedman believed as part of this, competitive capitalism
provides freedom directly (Canterbery, 1987, p. 16). It needs to be noted that it is political
power, and more specifically the political mechanism, as opposed to the market mechanism that represents the danger of managers acting out of social responsibility (Friedman,

A.C. Keller / Critical Perspectives on Accounting 18 (2007) 159188


1970, p. 46). If managers or the owners pursue goals that do not have profit maximization as
the only end, the efficient outcome theorized as the outcome of profit maximizing behavior
of the owner/manager is not obtainable. The foundation of the efficiency criteria of maximization of profit is the maximization of utility so this motive, and the freedom to pursue
this motive, provide the foundation for the efficiency criteria of competitive capitalism. It
is not the efficiency that concerns Friedman instead it is the ideal of the free market with its
lack of coercion, voluntary cooperation and extreme individualism (Friedman, 1970).
When this mechanism is replaced with the political mechanism conformity is demanded
as is service to . . . a more general social interest (Friedman, 1970, p. 46). An intense
distrust of government action is displayed in Friedmans writings on this subject. It might be
countered that Friedmans ideas on this subject are a function of the form they are presented,
i.e. popular works of non-fiction and a NY Times article but other notable economists,
and Friedmans own writing on more technical economic subjects, speak to power of the
neoclassical economic belief in unfettered free markets as mechanisms of immense ethical
Baumal (1991, pp. 501) presents a similar argument based on this pure economics when
he describes the prospects of management engaging in volunteer social responsibility as
. . . a rather frightening proposition and a . . . threat to effective democracy . . . . This
argument is constructed on what Baumal labels (Almost) Perfect Competition (Contestability) (Baumal, 1991, p. 1). This label is a reference to Baumals own model of perfect
contestability which made the case that the efficiency outcomes predicted for the model
of perfect competition could still be obtained even if the key assumption of many sellers
was relaxed. The foundation in the model of contestable markets is the credible threat of
competition because of low barriers to entry. The efficiency argument does not change in
this modification of the market model because it is the threat of competition that forces the
firm to minimize costs or face elimination.
Baumal presents three attributes that are representative of demands from non-economists
on business people to behave virtuously and not just cleave to the goal of allocative efficiency: . . . maintenance in integrity of product quality . . ., . . . voluntary pursuit of social
goals . . . and . . . avoidance of any taint of discrimination in employment by race, sex,
or religious affiliation . . . (Baumal, 1991, p. 2). Baumal rejects the idea that economics is
neutral with regard to these virtuous goals:
Under perfect competition or perfect contestability, morality of each of the three types
on our list is removed almost entirely from the discretion of the business decision
maker. Instead, at least so far as the first two of the three virtues are concerned,
business firms are condemned to behave exactly as they do, (almost) regardless of
personal preference . . . In particular, . . . perfection in competition or contestability
precludes all genuine business voluntarism, including care for the environment beyond
that imposed by law, or voluntary donations to beneficent eleemosynary institutions.
Thus, in this arena, these perfect market forms impose vice rather than virtue.
(Baumal, 1991, p. 3)3
3 The third virtue of non-discrimination is thought to be aided by the perfect markets forms because discrimination, on the bases listed above, is considered less efficient than non-discrimination.


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The more competitive (or contestable) the market, the more necessary it is for social
virtues to be uniformly required across all firms in an industry. Therefore, we might expect
to find that those firms faced with greater pressures to live up to standards of social responsibility engaged in seeking regulations to force the standards on all its competitors. In the
current era of globalization, all of its competitors, increasingly refers to global competitors, but global standards for the three virtues are weak, or non-existent, therefore it is often
left to the management of individual firms to address social issues with reference to social
justice in individual countries. Baumals comments on this brings him closer to Friedman:
(C)ertainly we do not want management to use the capital we have entrusted to it
to impose its notions of international morality upon the world. One can be equally
suspicious of the proposal that the business executive be empowered to decide on the
allocation of other peoples money under their control among the competing claims
of hospitals, educational institutions, arts organizations, and environmental causes.
Why should the businessperson be entrusted with the power to set such priorities for
all of society?
An increase in corporate power is probably the last thing that those who call for
greater corporate responsibility would want. (Baumal, 1991, pp. 512)
In Baumals assessment, we can see more than the shadow of Adam Smiths distrust
of decisions made by the merchants and manufacturers. Baumals solutions differ from
Friedmans. His role for government is supported by quotes from Adam Smith but that role
still centers on a price-based solution using the same tools as markets to make free goods
into commodities but couched in very pragmatic terms that challenge economists to step
clear of purely theoretical solutions.
Koslowski (1996, p. 40) views this approach as an, . . . irrational passion for dispassionate rationality . . . that he says is common to economic theory. By this approach economic
theorist can discount any non-market-based solutions to moral problems because the nonmarket solution will destroy the system. He contends that the, (C)ritique of ideology adopts
an ideological character itself when it denies the intrinsic value of moral action or constructs
an opposition between morality and advantage, which ethical theory has always doubted.
(Koslowski, 1996, pp. 401) Business ethics from Koslowskis perspective allows that businesses are not operating on the edge so that there is room for business owners and managers
to address social issues without necessarily failing in the process.
In addition, Koslowski points to the research evidence of many noted scholars of advantages to ethical behavior in business including reduced bargaining costs, reduced needs
for control of large groups, solution of the isolation paradox, lower transactions costs and
improvements in economic growth. But a curious problem surfaces in the analysis that
severs the link between the purely competitive (or contestable) model of the neoclassical
economist, of Baumal and Friedman, and the conclusions of the benefits of business ethics.
There is an almost imperceptible shift of the model from neoclassical to New Institionalist
economics. The examples presented of the benefits of business ethics are a combination
of the two with the reduced transactions costs and bargaining costs of the Institutionalists,
interspersed with the need for trust caused by violations of the perfect information model
of the neoclassical school. The focus of the morality question is still economic efficiency

A.C. Keller / Critical Perspectives on Accounting 18 (2007) 159188


but underlying all of the benefits of ethical behavior are basic violations of the model of
perfect competition: a lack of perfect information and the existence of the firm.
Even the mechanistic model of general equilibrium theory of neo-classical economics does not render ethics as the trans-economic evaluation of alternative actions
superfluous. To decrease transaction costs, moral rules ought to be made generally
binding and be internalized by market participants. Micro-economic theory shows the
need for a business ethics and for reembedding business, the market and the economic
motivation into ethical and social norms. Thus, the structural characteristics of capitalism should be reembedded in the ethics and the culture of a society. (Koslowski,
1996, p. 42)
In the quote above, we see a curious juxtaposition of ethics and economics with the moral
code idea being used to insure a more efficient outcome by minimizing transactions costs,
but then the causation is reversed because it is the structural characteristics of capitalism
that need to be embedded into ethics and culture. The structural characteristics of capitalism
are listed as:
1. private property-of means of production as well;
2. prot and utility maximization as economic purposes; and
3. coordination of economic activities by markets and prices. (Koslowski, 1996, p. 11)
The idea of disembeddedness of markets from the context of a societys network of
other relations and institutions is attributed to Karl Polanyi. In viewing market relations as
somehow apart from other social relations, Polanyi was presenting a picture very different
from the neoclassical economist who views the motives and interactions, that they see as
characteristic of market exchanges, as universal laws of human behavior. Polanyi rejected
this idea of universality at its core by pointing to research that suggested that primitive
people had an aversion to barter and that trade was only engaged in between communities
not within communities (Polanyi, 1944, p. 274). Markets for Polanyi are formal structures,
representing one among many forms of exchange, characterized by impersonal relations
between individuals.
The importance of this re-embeddedness is highlighted by Koslowskis belief that, . . .
the moral neutralization of profit maximization as a respectable motive and driving force
of the economy is the event that . . . signifies the advent of capitalism . . . (Koslowski,
1996, p. 12). The same moral neutralization and social disembeddedness of the other two
characteristics of capitalism, along with that of profit maximization, form the basis for questioning the morality of capitalism (Koslowski, 1996, p. 13). The idea of embeddedness
and of re-emmbedding capitalist structures into the . . . ethics and culture of a society is
key to understanding the seriousness of Friedmans claims about the subversive nature of
managers acting in other than profit maximizing ways.
Consider the significance placed on profit maximization as a motive in Koslowskis
quote and to Friedman the advent of capitalism is considered the foundation of all of our
political freedoms. Friedman is merely defending in popular terms what Koslowski believes
to be the basis for a society structured on free markets, where free markets are the basis for
overcoming the past evils of feudalism and slavery, and what Friedman believed would save
us from the future evils of communism and socialism. In a sense, Friedmans statements


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about profit maximization and subversion can be seen as an attempt at re-embeddedness

because the criteria that provides the basis for judging the support for the social structure of
capitalism, profit maximization, is held up against a basis for judgment, social responsibility,
that is considered inferior because it asks the manager to act on ideas of social justice that
will lead to a less efficient outcome and socialism. In presenting profit maximization as a
primary duty, the violation of which would undermine the very foundation of capitalism,
Friedman embeds profit maximization in the social and cultural norms and in the process
morally de-neutralizes his model of capitalism.
Sen (1988) presents the argument that neoclassical economics emerged from one branch
of economics which he labels the engineering approach and contends that economics has
been impoverished by the decision to distance economics from ethics. The resulting very
narrowly defined human motivations make the model mechanically eloquent but limited.
The welfare of a society depends, in the broadest sense, upon the satisfaction levels of all
its consumers (Henderson and Quandt, 1980, p. 285). A footnote appended to this sentence
clearly states the authors assessment of this statement as non-scientific, Statements of this
kind are based on ethical beliefs or value judgments and cannot be proved (Henderson and
Quandt, 1980, p. 285n).
The standard method of judgment used in welfare economics is Pareto Optimality, which
focuses on . . . the economic efficiency of allocations . . . (Henderson and Quandt, 1980,
p. 286) but this method cannot be used to judge questions of distribution. For example, an
economy that has the vast majority of its resources in the hands of a single individual can
be judged as Pareto optimal but to make judgments about redistribution of the resources
from the individual to be more fair is outside of the scope of welfare economics because
that would involve . . . explicit value judgments (Henderson and Quandt, 1980, p. 286).
Even a Pareto superior allocation must not leave any individual with lower utility than in
the previous allocation.
Reiter examines storytelling in Financial Economics and argues that by connecting claims
of efficiency to natural law in Financial Economics claims are made of a system, ethically
in balance (Reiter, 1997, p. 14). Reiter claims that the issues . . . at the heart of the
ethics of financial economics . . . include (T)he efficiency of the securities markets, the
meaning of market prices, and the source and disposition of the gains from acquisition
activity . . . (Reiter, 1997, p. 2). This way of viewing the story has as its underpinning the
assumption that maximization of shareholder value is a moral claim (because it brings about
beneficial social consequences). In the stories told by financial economists, the question is
not morality, rather of a self-regulating system. It is central to the neoclassical argument
that there is no claim to morality associated with equilibrium merely a claim to economic
efficiency. Reiters point is that the stories reveal an ethical foundation that remains mostly
hidden from accountants but that accountants tacitly accept this ethical foundation as they
go about their work of providing support for the system of profit maximization.
The claim that the only duty that the manager has is to maximize shareholder value, based
on a basic violation of the neoclassical assumptions, separation of ownership and control
(also presented in Reiter, 1997 and Sen, 1988) is basic to the claims to morality made in this
article, but the ethical issues are not the claims to equilibrium, rather they are the claims that
other systems, socialism or communism, are in some way evil. To the extent that socialism is
perceived as universally bad, any attempt to act out of social responsibility by the manager,

A.C. Keller / Critical Perspectives on Accounting 18 (2007) 159188


in his role as an agent is a violation of the morally superior means of overcoming the
ownership and control problem so that the foundational connection between the motivation
of profit maximization, action and efficiency can be maintained. It is not that capitalism
leads to some ethical outcome such as an ethical equilibrium rather that the alternative is
evil, the opposite of a free society.
Of course the real violation of the utopian story of capitalism is the firm itself. The
most interesting aspect of the models put forth is that they emerge from Ronald Coases
attempt to explain the existence of firms. His fictional story of perfect markets was his
attempt to describe a set of conditions that would have to exist for firms to not exist. Now
the same perfect market models are used to try and justify market solutions for enormous
firms. The takeovers described are of one enormous market gobbling entity being taken
over by another market gobbling entity, but efficiently regulated by a perfect market for
the best outcome for society. So that these two huge planning entities that exist because
they can organize millions of transactions more efficiently than markets somehow are held
hostage to a market transaction as powerless price takers. Coase derisively referred to this
as blackboard economics.
The major problem with the Reiter argument is revealed in her conclusion when she
asks (W)hat is the true point of Financial Economic story building if not to understand
real-world phenomena? (Reiter, 1997, p. 29). It is to predict. The real world is not the issue.
The issue is science and scientific method. As Kenneth Arrow pointed out, An economist
by training thinks of himself as the guardian of rationality, the ascriber of rationality to
others, and the prescriber of rationality to the social world (Williamson, 1997, p. 2). Note
that the term used is prescriber of rationality not describer of reality.
What could be wrong with this after all to be rational is to be human so it seems but
when the rationality is extreme and is really a way of developing a system that can be
placed neatly into mathematical formulas then the power can be seen. It is the assumption
of rational behavior by individuals that is a foundation for the profit prescription/prediction
so that the underlying goal is clearly stated and clearly a normative prescription for action.
This is not to say that irrationality in general would be better but it is to say that what is then
defined as rational behavior by economists becomes the Holy Grail, or rather the method for
obtaining the Holy Grail, so violation of the prescription is subversive to the higher order.
If we factor in all the other rational ideas that society might consider as equally rational but
somehow have become normative in the economic literature we might lose the parsimony
and we might explain but not predict. In fact if we question the profit motive at its root we are
questioning not capitalism instead we are questioning the existence of the corporation, just
as Coase questioned the existence of the firm, because profit maximization in corporations
proxies for the utility maximization of the owner operated firm in the absence of ownership
This is a crucial point because if it is possible to step back from Baumals assertions
about vice not because of Koslowskis slack, rather it is because the individual owner
can maximize utility without maximizing economic profit. The basic model of perfect
competition assumes that economic profit will be zero but that the owner will cover their
opportunity cost which would include income but would also include less tangible returns
like the positive utility gained from self-employment or even the positive utility gained
from knowing you are providing a high quality product or from a sense of duty to the local


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community of providing jobs, even though lower cost workers may be available in other
communities. This is not excluded in the model that recognizes the full breath of utility
maximization for individuals. On the other hand, neither the manager, the economist nor
the accountant can measure this psychic income, so the measure of maximization becomes
limited to profit as money profit. Profit as it is recognized in the sphere of circulation and
therefore as it is measured by the accountant.
In this way the separation of ownership from control becomes the nexus for the separation
of ethics from business ethics, but when the profit motive becomes the overawing motive
in the society at large, the business ethic becomes the ethic for the society. The illusion
that business ethics can be separated from ethics at large is born out of the idea that the
firms exists as an aberration, a bastard born of imperfection, as if imperfection were not the
condition that we normally face.
Milton Friedmans positive science of economics is considered amoral (Hollis and Nell,
1975, p. 9), but in his statements about the subversive nature of social responsibility as a
motive, an ethic is clearly stated. The subversive nature of acting out of social responsibility
can be made to look scientific by economists because, its presumed opposite, profit maximization, is accepted as an unquestionable objective goal in the pursuit of efficiency. The
pursuit of efficiency is an end in itself measured by profitability which ignores the original
reason the efficiency end came to be valued. Treating these economic ideas as scientific
assumes the accuracy of utility maximization as descriptive of all behavior, and has moved
us beyond the idea that utility theory is merely useful in predictive modeling, to a point
where any solution for ethical problems must pass through the utility criteria before being
acceptable. Put another way, if an ethical act is a socially responsible act, but is not at the
same time profit maximizing, then acting ethically becomes an act of subversion. This is the
ethical model implied by Friedmans calculus. So a question needs to be asked: if a profit
maximizing action is unethical, but not illegal, is it subversive to not to pursue it? Is it even
possible for the action to be Business unethical if it is not illegal?
In addition, when the utility maximization model is accepted as descriptive of all action,
any act of ethical behavior must be the result of an act of rational utility maximization. The
logic in this argument is that all actions are taken to maximize utility prior to considering
the ethical content of the action or the result, because people have no tendency to be ethical
unless motivated by utility. This solution assumes that all people are engaging in the rational
utility maximizing calculus all the time (McKinzie and Tullock, 1975, p. 28), and that a
result that implies ethical intent means that being ethical increases the utility of the individual
behaving ethically. Acting any other way implies irrationality.
The Austrians and the Chicago School contend that their economic model is a unified
theory of human behavior and economics not unlike the same quest for a unified theory of
physics. While it is true that a firms owners and managers can behave ethically to maintain
a reputation, which in the long run may be profit maximizing, their ethical behavior is still
of a type that ignores an independent grounding for ethical action. Ethical action becomes
just a means to a self-interested end. Is this ethics?
Adopting this neoclassical framework of egoistic maximization is problematic because
no system of incentives is complete, and to insure the best outcome for society, controls, in
the form of laws, contracts or regulations must be in place to make the negative utility (pain)
of engaging in an unethical act greater than the positive utility to be gained by what may be

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the profit maximizing action. An incomplete system (which is guaranteed because no system
is complete) in the absence of the basic ethical foundation of the honest person is inviting
disaster. Even in the absence of Friedmans warnings about subversion, the dishonest person
is likely to take unethical actions when an unethical but profitable opportunity presents itself.
Add Friedmans statements about social responsibility and there is an added social stricture
which may make a socially responsible ethical act an act of subversion. In this case, ethics
become accidental, the result of the accidental confluence of ethics and profit.
Far from being amoral, neoclassical economics is highly moralistic in its support of an
ethic of acquisitiveness. As ethics go, we may not see the connection of this formulation
with earlier ethical forms but we can even find authors twisting the language so dear to
the ethicist vocabulary into forms so grotesque that a person reading it with grounding in
previous ethical models is torn between nervous laughter and rage.4

5. Co-opting altruism or popularizing the ethic of prot maximization

The moral core of capitalism is the essential altruism of enterprise (Gilder, 1998)
At least one writer in the popular business press has defined the process of supply as
an altruistic act where the entrepreneur who maximizes her profit is really the person who
maximizes her altruism (Gilder, 1998). Having found this connection between altruism and
profit maximization, Profit is an index of the altruism of a product . . . (Gilder, 1998),
the circle is complete. There is no need to even be conscious of the needs of others except
as it relates to supplying their desires in the marketplace. Uncertainty, defined as risk in
neoclassical economics, is redefined as the attribute that makes an investment a gift. So the
hero of the story becomes the entrepreneur, painted by Gilder as an individual driven by
altruism and even a visionary in the service of others. Underlying his argument is the ultimate
moral superiority of the system of capitalism and the morality of profit maximization. The
myth presented by Gilder is of the sturdy but hapless entrepreneur speaking haltingly in
broken English and only wanting what is best for others which leads to profit maximization.
Supply becomes an act of altruism.
The importance of this use of altruism to glorify the actions of entrepreneurs is that
altruism enjoys a special place in ethics, because an act that is altruistic is the one done out
of regard for others rather than for self-interest. In its purest form, the needs of the self are
completely ignored such as the soldier who throws herself on top of a hand grenade to save
her buddies. Facing certain death the motive is selfless. In a way, altruism is the highest
form of ethics and the debate about the possibility of altruism as a prime mover of actions
4 Take the neoclassical model to its logical conclusion for scholars. What can an individual with years of
intellectual offerings, and a career based on this line of thought, gain from opening the door to alternative views,
whether he genuinely believes its prescriptions or not. The self-interested person has no need for truth other than
in a way that it might serve his self-interest. This is an extension of logic contradictory of the all scientific method,
yet even with reality screaming NO in his face, the self-interested scientist must still defend the YES of his selfinterest. This logic may make you feel torn between nervous laughter and rage. I do not assert that this is what is
happening, merely that this is the logical extension of the model as it applies to scientific reasoning.


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is common to debates about ethics. By appropriating this word, altruism, and defining it in
the way that Gilder did, a signal is broadcast that mirrors Friedmans statements about the
subversive nature of acting out of social responsibility. When Gilders argument is added
to the mix, the maximization of profits becomes the ultimate ethical act replacing even the
conscience with the market. It is a claim to moral superiority for one form of income, profit,
over others.
In Gilders essay on the spirit of enterprise there is an attack on Adam Smith for his
distrust of businessmen and Gilder even states that Adam Smith is where (T)he problem
began . . . (Gilder, 1998). The problem is . . . a vision of capitalism without capitalists
(Gilder, 1998). It is unfortunate that Gilder in writing his essay ignored Adam Smith the
moral philosopher. Borrowing freely from Thorstein Veblen and the Institutionalists, Gilder
constructs a moral system that places the entrepreneur in an almost Christlike stature, . . .
continually giving back their earnings in the practical cause of human betterment, and thus
doing the work of God (Gilder, 1998).
Gilder just assumes the gift impulse and transforms the capitalist into the ultimate
altruistic ethicist. While Gilder does not possess the credentials of Milton Friedman or
Adam Smith his readership in the popular business press (Forbes Magazine) may still
derive comfort from believing that they are doing the work of God.

6. Adam Smith and the employer class

What has been lost of Adam Smith in the translation to neoclassical economics is the
basis of morality and control that Smith envisioned would go hand-in-hand with market
efficiency and that the goal of an economy must be the greater economic welfare of the
society. In short, efficiency is not an end in itself. Gilders criticism of Adam Smith is
based on Smiths conviction that the employer class interests are not aligned with the best
interests of society, a conviction rooted in the idea that as profit as an income share grows,
the welfare of the society at large declines:
But the rate of profit does not, like rent and wages, rise with the prosperity, and fall
with the declension, of the society. On the contrary, it is naturally low in rich, and
high in poor countries, and it is always highest in countries which are going fastest
to ruin. The interest of this third order, therefore, has not the same connexion (sic)
with the general interest of the society as that of the other two. Merchants and master
manufacturers are, in this order, the two classes of people who commonly employ the
largest capitals, and who by their wealth draw to themselves the greatest share of the
public consideration. (Smith, 1776, pp. 24950)
Adam Smiths basic premise is that the rational maximizing owner of capital, in attempting to maximize profit, is performing an action that is only accidentally of benefit to society
at large.
The act of maximizing profit is not in and of itself a good thing as Gilder would assert.
As Smith put it: (T)he consideration of his own private profit, is the sole motive which
determines the owner of any capital to employ it either in agriculture, in manufacture, or
in some particular branch of the wholesale or retail trade (1776, p. 355). He goes on to

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say that the owner of capital is unconcerned with how the capital is used, and implies that
its use may or may not be the most advantageous for the society. The different quantities
of productive labour which it may put into motion, and the different values which it may
add to the annual produce of the land and labour of the society, according as it is employed
in one or the other of these different ways, never enter into his thoughts (Smith, 1776, p.
Adam Smith has been interpreted as providing the foundation for Friedmans claims.
After all, it was Smith who presented us with a picture of a society whose productive power
was maximized by an invisible handthe market, with self-interested suppliers on one
side and self-interested buyers on the other. His statement about the best motivation for
a fair price and good quality was self-love (Smith, 1776, p. 14). Despite this Smith was
particularly weary of the employer class as he called them.
What Smith considered advantageous for the society, what was revolutionary in his
economics, was the recognition that the putting into motion of productive labor led to the
most productive society. So it is not profit by itself that insures the growth and prosperity of a
nation, but the return of revenue, earned by the sale of goods that are produced by productive
labor (in the form of wages, rent, and profit) to its use as capital. The wage earners will return
their portionalmost all of itto capital by consuming goods that are produced by other
productive workers. These workers include those employed in manufactures, agriculture,
and the owners, the merchants and retailers (Smith, 1776).
While it is true that Adam Smith provided much of the intellectual foundation for what
has come to be called capitalism, he was not blind to its potential faults. The primary
problems he saw were not with workers seeking too high a wage (Smith, 1776, p. 98), as
Wall Street seems to be focused on, or the landlords famous love of reaping where he has
not sown (Smith, 1776, p. 49) instead it is with the employer class, and with the potential
problems caused by both their knowledge and ability to convince those in power that the
interests of his class was the same as the public interest.5 How strongly did Smith hold this
The proposal of any new law or regulation of commerce which comes from this
order (the employers), ought always to be listened to with great precaution, and ought
5 As during their (the employers) whole lives they are engaged in plans and projects, they have frequently more
acuteness of understanding than the greater part of country gentlemen. As their thoughts, however, are commonly
exercised rather about the interest of their own particular branch of business, than about that of the society, their
judgment, even when given with the greatest candour (sic) (which it has not been on every occasion), is much
more to be depended upon with regard to the former of those two objects, than with regard to the latter. Their
superiority over the country gentleman is, not so much in their knowledge of the public interest, as in their having
a better knowledge of their own interest than he has of his. It is by this superior knowledge of their own interest
that they have frequently imposed upon his generosity, and persuaded him to give up both his own interest and
that of the public, from a very simple but honest conviction, that their interest, and not his, was the interest of the
public. The interest of the dealers, however, in any particular branch of trade or manufacturers, is always in some
respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition
is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of
the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by
raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest
of their fellow-citizens. (Smith, 1776, p. 250)


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never to be adopted till after having been long and carefully examined, not only with
the most scrupulous, but with the most suspicious attention. It comes from an order
of men, whose interest is never exactly the same with that of the public, who have
generally an interest to deceive and even to oppress the public, and who accordingly
have, upon many occasions, both deceived and oppressed it. (Smith, 1776, p. 250)
The Wealth of Nations is littered with equally clear warnings about the employers true
motivations and the problems that we might face if we allow the employer to make judgments
for us. Adam Smiths warnings include the dulling effects of specialization, the employers
conspiring to push wages below subsistence (Smith, 1776, p. 67) and their concern for
wages that are too high, while extraordinary profits receive little attention (Smith, 1776, p.
565). Do we recognize any of these concerns as hallmarks of our current social problems?
If we do not, does that mean they are not problems, or that the alignment of interests is
Power was also an issue for Smith, with the concern being that employers would use their
power to abuse workers. The power he spoke of was conditioned on the ability of employers
and others with wealth, or capital, to be able to sustain themselves for a longer period without
the services of workers. Workers who need the access to capital to earn their wages generally
cannot last for long without the use of the capital controlled by the employers (Smith, 1776, p.
66). Implicit in this is the idea that the two (workers and employers) groups are dependent on
each other but the workers dependence is more immediate. Modern Neoclassical economics
assumes such situations away with the phrase, assume no wealth effects. By doing so
neoclassical economics ignores power derived from wealth and therefore assumes that the
choices that wage earners make in the job market are equivalent to the choices one makes
in the market for stocks or consumer goods. Did Smith distrust government and prescribe
the least government? Yes he did. Would he support the version of the least government
that has the employers interest as its foundation? He would trust it even less.

7. Adam Smith moral philosopher

The key to understanding Adam Smith is the recognition that he was a moral philosopher
and was best known in his life time as the author of The Theory of Moral Sentiments, which
describes an altruistic theory of ethics based on human happiness and well-being which
extends beyond the individual to the family, his social group, the state and all of mankind
(Canterbery, 1987, p. 17). A premise basic to Smiths ideas on morality is that people behave
well because of a sense of empathy. Empathy is the ultimate foundation of Adam Smiths
hoped for just society. Yet it is the limits of empathy that explains the excesses we witness
in todays business world. It cannot be assumed that ethics will extend beyond social and
political boundaries to include groups not considered within the sphere of the business
persons limits of empathy.
Adam Smith is honest about the limitations inherent in his approach to morality. As
an individual is both geographically and socially further removed from the object of his
potential empathy the less likely is he to be empathetic, claiming that a man would ultimately
have more real distress over the loss of a finger than hearing of the loss of millions of lives

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in some distant land (Smith, 1759, p. 192). Even with these limits we find a very different
picture from Friedmans amoral calculus, When the happiness or misery of others depends
in any respect upon our conduct, we dare not, as self-love might suggest to us, prefer the
interest of the one to that of the many. (Smith, 1759, p. 194) doing otherwise would open
us to being the . . . proper object of contempt and indignation of our brethren (Smith,
1759, p. 194). Smith does not mean that the interests of the welfare of all society should
make us blind to our own self-interest but that the welfare of society should be the highest
in an ordering of motives (Smith, 1759, p. 446).
Adam Smith allows us self-interested action as a motive that can lead to moral behavior
but then states that doing what is good, and just, and right for self-interested motives is
not to be held in as high esteem, as the same acts done selflessly (Smith, 1759, p. 442).
What will make us do what is right and good and do our duty: an internalization of our
judgment of others acts (Smith, 1759, p. xxx). When we see that a person does an evil thing
our judgment that it is evil, will set up in us a form of judgment of ourselves in the same
circumstance, and ultimately a sense of duty, even authority (Smith, 1759, p. xxi). A sort of
tension builds in us. The same is true of good acts. In this case we approbate that morality
as our own, but only as we feel an empathy with that individual (Smith, 1759, p. 161).
Ultimately the actions of the just person should be worthy of approbation by other people
as just and proper (Smith, 1759, p. xxvii). Again a tension is present which identifies the
individual conscious with the societal judgment, so that the judgment is internalized. There
are pitfalls to be avoided that are worth mentioning because they are salient to our question:
This disposition to admire, and almost worship, the rich and the powerful, and to
despise, or, at least, to neglect, persons of poor and mean condition, though necessary
both to establish and to maintain the distinction of ranks and the order of society,
is, at the same time, the great and most universal cause of the corruption of our
moral sentiments. That wealth and greatness are often regarded with the respect and
admiration which are due only to wisdom and virtue . . . has been the complaint of
moralists of all ages. (Smith, 1759, p. 84)
Smith then goes on to complain about those who gain wealth by abandoning the virtue
only to try and make up for their lack of virtue by latter more virtuous conduct. We have
seen this working in our own society with inside traders who then rehabilitated themselves
with good acts. Even custom and fashion can influence moral sentiment making the vices
of those admired seem as virtues (Smith, 1759, p. 290). In short, we are beset by many
influences that will form our ethic. More now than in Smiths time it seems.
Smiths prescription for morality requires us to be connected to each other in a societal
moral code. That we witness the acts of others and judge those actions as good or bad acts
is the basis of our moral code. We are limited in our own actions by the need to be accepted
and, having judged others for their behavior, must realize the constant judgments formed
about us. This does not eliminate the neoclassical idea of self-interest as a motive rather it
offers a broader set of motives for ethical action and judges the self-interested motive as an
inferior reason for acting ethically. Compare this with the Chicago/Austrian School where
all human activity is exchange, where gains and loses are calculated, . . . to maximize the
excess of the utility of the gain over the disutility of the cost (Hunt, 1979, p. 435) therefore
no other motive is recognized.


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A thread that has run through this paper is the limit of self-interest as a tool for taking
ethical action and as a tool for people to use when deciding what is ethical. Ultimately, unless
the ethical end is the end that gives you the greatest happiness (utility), self-interest will not
lead you to an ethical end. So we have these ethical choices for which self-interested behavior
will only be of accidental use, therefore we prescribe incentives to shape self-interest to meet
the ethical needs of the incentivizer. In this way accountants function to identify incentives
and goals that, when met, trigger the incentives. Under the Chicago/Austrian economic
system this is all the accountants can do.
Should we reject this model as too limited, the question still remains: what ethical needs
will be met and to what degree? Even Smith points out that empathy can lead to admiration
of outcomes and behaviors that are not in the best interest of society, therefore merely saying
that empathy is a means of acquiring a moral code does not solve the problem. If we are to
use Smiths moral code we need to find objects of empathy that reflect the ethical values
that work for the best outcome for society.
The model of perfect self-interest is such a model for Friedman and Gilder. For Smith
it is a model for economic behavior that needs the foundation of a society of otherwise
ethical people. Where Friedman is admonishing managers to . . . follow the rules . . .
(Friedman, 1962, p. 133), Smith is admonishing us to be careful who makes the rules.
Friedman tells us that even with monopoly power the market works (Friedman, 1962, p.
121; Hunt, 1979, p. 431); Coase tells us that the existence of even the smallest firm means
the market mechanism is flawed (Coase, 1988, p. 38). Smith finds a whole list of evils to
associate with monopolies including the distortion of the distribution of stocks from what
they would have been had competition been in place (Smith, 1776, p. 595). Gilder offers
us the solution of the businessperson as the paragon of ethical virtue. Would that ethical
behavior could be accomplished so effortlessly, but ethics is more than changing the rules
to meet the requirements of your preconceived notions. Gilders ideas represent the worst
nightmare of Adam Smith born of his concern with employers as policymakers.
Combine Adam Smiths warnings about the motives of employers, with our societys
propensity to worship material success, and with the fact that moral codes are human
constructs born of societal influences, and the result is a moral code that has built virtues
out of greed and acquisitiveness leaving the ethical questions to be answered with reference
to efficiency rather than what is good and right and just.

8. Accounting and the efcient solution to ethical problems

One of the first lessons an accountant learns is the importance of presenting a picture
of the firm that will allow the reader of the financial statements to take actions that they
would have taken had they been a witness to the day to day operations of the business. The
need for this function is created by the separation of ownership from control of business.
The separation of ownership from control creates difficulties for neoclassical economists
because of the assumption that the profit maximizing business owner is functioning as
an efficiency mechanism in the market. When control of the business is in the hands of
(utility maximizing) managers they have incentives to engage in activities that do not mimic
the actions of the profit maximizing business owner making the efficiency claim suspect.

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Accountants play key roles in overcoming this (and other) violation(s) of the efficiency
criteria. One of the roles is to keep the absentee owner informed.
When looking at the neoclassical model of markets we are captured by the self-enforcing
nature of the model. We use terms like invisible hand, price taker, and Marginal Cost equals
Marginal Revenue to describe an unforgiving system of market relationships that ignore
power. We are left with the task of measuring the outcome of these seemingly benign
relationships. We are bean counters with the task of keeping score. The importance of our
task is supported by an enormous literature on Capital Markets and the central focus of
that task has been reinforced by the passage of the Sarbanes Oxley Act. The focus of this
act is on insuring that capital markets receive the information they need to more closely
approximate perfectly competitive markets.
In the context of Adam Smiths description of owners as a class, this task is too narrow
because even if the goals of the owners and the managers are perfectly aligned, we will
confront owners and managers whose interests are not aligned with the rest of society. This
makes the task of the auditor a social one in a broader sense. Admittedly the ownership
of corporations is broader than the ownership of businesses in Adam Smiths time, but the
basic economic issues are still the same to widen the market (globalization) and narrow the
competition (M&A).
Yet the focus of the education of the accountant is on the audit in a narrow sense, to
the exclusion of the broader social task which falls to us by reason of our place as definers
and primary interpreters of the language of business. Even beyond this we are tasked with
giving an account, using that business language, and by doing so setting a moral tone for
the corporation (Schweiker, 1993). This role is hermeneutics. We interpret and decide the
true face of the corporation. As auditors, it is not our task to help the corporation to meet
some earnings target or maximize value for its shareholders. If we participate in that task
we lose our objectivity, a fact recognized by Sarbanes Oxley, to a limit.

9. The accountants expanded role in Smiths world view

Smith saw that the appropriation of values required a watchful eye to ensure that ethical
values do not deteriorate, which creates a unique need for information. The importance of
this need for information is presented by Smith:
The propriety of our moral sentiments is never so apt to be corrupted as when the
indulgent and partial spectator is at hand, while the indifferent and impartial one is at
a great distance. (Smith, 1759, p. 217)
This statement speaks volumes about our duty as accountants. The accountant is the
impartial (objective) spectator who must not be indulgent so that she can maintain her
At least some of the business ethics problems we have faced in the first decade of the
21st century appear to be linked to violations of this warning. For example a quote in
the Wall Street Journal reported that in 2000 Anderson considered itself a committed
member of [WorldComs] team and saw the company as a flagship client and a crown
jewel of the firm (Weil, 2004, p. A14). The terms indulgent and partial seem appropriate


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as adjectives for Anderson from this quote. Objectivity seems a remote possibility but in the
case of WorldCom and even HealthSouth the functions of objectivity, and to some extent
competence, were turned over to a practice known as a risk-based audit (Weil, 2004,
p. A1). Again efficiency has become the goal rather than the audit. The internal control
certifications required by Sarbanes Oxley are an attempt to enable the risk-based audit to
continue with a more objective measure of risk in hand.
If we accept Smiths critique of the employer class and his theories on moral sentiment,
our task is more social. We are tasked with being the observer of the principle and the agent,
and we are tasked with providing the information necessary for the owners and agents to
be the proper objects of approbation or scorn. Our need for integrity is not a personal need;
it is a societal need just as our needs for objectivity and competence are social needs. The
audit function is a great social responsibility, even if we do accept the neoclassical model
as descriptive. It is more so when we realize that the societal need for accounting service is
the result of violations of the perfect market model. Add to this the fact that the basic moral
code we face may be as much the result of attendance at business school and economics
classes, as it is from attendance at church, and our social role broadens to include the role of
the indifferent impartial spectator tasked with aligning the moral sentiments of the employer
class with the larger society.
How likely is it that accountants schooled in the same buildings and in the same economics lectures and having heard what is right is what is right for business for so long will
be able to play this role. Have we lost our objectivity because we have been schooled in
the same economic ethic? The ethic usually says no solution is really necessary; just tweak
the incentive structure and let the market take care of the problem. The broader statement
made by the economic ethic is, if the market solution is not working, it is not a problem
with the market solution, it is a problem with society not meeting the requirements of the
market solution. Society is expected to bend to the market, to meet the markets needs or
to construct market solutions in places where markets do not yet exist.
Even in the accounting literature on ethics, we can find the market being used to enable
an efficient outcome for ethical questions.
Although ethical behavior and value-maximizing behavior obviously are not equivalent, economic theory suggests one special case in which ethical problems are
efficiently resolved. Consider as a benchmark case the frictionless economy that
Ronald Cozse[sic]6 (1960) imagined and further presume that there are no wealth
effects. In such a setting, unregulated private markets will exhaust all available gains
from trade and the resulting set of actions by individuals within the economy and
the associated allocation of resources will be efficient. This resource allocation will
reflect accurately societys opportunities and preferences.
Note that within this setting, individuals still may disagree on ethical standards. (As
we argued above, there appears to be no universal standard as to what constitutes
ethical behavior.) Thus, it would not be difficult to find specific individuals who
might charge that a broad array of valuemaximizing corporate policies violate their
6 It is assumed that the authors are referring to Ronald Coases 1960 article The Problem of Social Coast.
(Coase 1960)

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individual notions of ethical behavior. But within this setting, such disagreements
could be addressed using the same basic mechanisms through which externalities
are internalizedside payments from those who want to undertake a given action to
those who might have their notions of ethics offended by such actions. (Brickley et
al., 2000, p. 20)
It is submitted that the market for ethics presented in this case has been in operation for
some time. The side payments in question have come in the form of audit and consulting
contracts or bonuses. Other contracts both, implicit and explicit, have served to enforce the
agreements. What has come under scrutiny in the recent cases of fraud is the efficiency of
the outcome.
The question can be asked, by what measure is what outcome efficient? The measure is
the market. That it is unethical implies that it could negatively impact the lives of some other
people besides the individual paid so the ethical externality may still exist. The fact that the
unethical act still takes place is not the issue because the market criteria have been preserved.
The implication is that the ethical problem is not a problem of ethics rather it is a problem of
ethics getting in the way of efficiency. To eliminate the problem you eliminate the person(s)
who has an ethical code that may be able to stand in your way. In this case, the individual must
be paid a price for their conscience. The authors admit that this solution contains a high level
of abstraction but that the abstraction is used speaks volumes about the desire of business academics to find economic answers to any question. Are we witnessing some of Koslowskis
. . . irrational passion for dispassionate rationality . . . (Koslowski, 1996, p. 40)?
When economists and accounting scholars assume that utility maximization is the only
motive that people live by, and that business people are adept at focusing their utility maximizing efforts on profit, they do more than describe a prescriptive formulation rather they
make a bold statement of a superior way to organize society with self-interested behavior
as its foundation. Even Gilder states his disagreement with this organizational motive, but
quickly replaces it with a semantic equivalent. The assumptions of the neoclassical model
have become an ethic. Brickley et al. (2000) say that ethics appears to be relative. In fact,
if the self-interested motive is accepted as descriptive, we should expect ethical standards
to appear to be perfectly relative. Add to this the admonition that people behaving in a
perfectly self-interested way results in some form of economically and politically superior
society, and the limits to ethical questions have been set.
One defense of the market solution to ethics problems has become that the market
provides fiduciary incentives to behave ethically. A wealth of anecdotal evidence makes
it clear that the markets also provide fiduciary incentives to behave unethically. When the
punishments for unethical behavior are low, relative to the material rewards, as they have
been in corporate America, the ethical standards of the individuals involved must be very
high if people are to behave ethically. In neoclassical terms the opportunity cost of unethical
behavior rises as an individuals ethical standards increase. More importantly, if the moral
code of the community condones the unethical behavior, under the same conditions, the
opportunity cost of the unethical act is lowered and may even create a new moral code.
A recent interview of a prominent business person related this story from the 1980s: John
McArthur, the former dean of Harvard Business School . . . interviewed students about what
they thought about the corruption within corporations, the students were horrifiednot


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about the corruption, but because the corporations were stupid enough to get caught!
(Shinn, 2004, p. 26). The attitude that the interviewee says he is witnessing in many students
today is: I want to work for one of these companies where I can move high up and make
millions of dollars and get away with something (Shinn, 2004, p. 26). The most striking
feature of these quotes is that the students of the 1980s were so shameless in their statements.
Shame is considered a quasi-virtue by Aristotle but only in the young because acting on
the passion of youth they are restrained by shame (Aristotle, 1980, pp. 1045). The
sentiments expressed by the students of the 1980s and today reveal a moral code guided by
greed and indicate an empathy with business people who are successful committing frauds.
The lack of shame at displayed by making such a statement to your Dean is at the very least
troubling from an ethical standpoint.
It might be said that this greed driven behavior does not constitute a moral code; that
it is just unethical behavior but it is important to understand if the students considered the
actions of the corporate officers unethical and did not care, or if they considered the actions
ethical or to have no ethical content. If the individual is taught that maximizing his utility is
what is best for him and for the society, and his utility is maximized by wealth and power,
because that is what the society glorifies as the highest goal, then to behave otherwise is
to behave against the best interests of society. In this logic there is an identity between the
utility maximizing interests of the individual and what is best for society. In the extreme, not
committing fraud when it would maximize your utility is against the best interest of society.
The forgoing logic seems absurd, not because the logic is flawed, but because the result
is shocking. The absurdity of the outcome is matched by the absurdity of clinging to a
model of atomistic consumers and producers in the face of the world of massive and very
powerful corporate giants. If there appears to be no universal ethical standard (Brickley et
al., 2000), it is because the logic of the system which connects the good of the society, to the
actions of the individual is perfectly relative. In a society structured around a market-based
ethic, a system of incentives varied and complete enough to provide ethical outcomes may
be neither very efficient nor ethical.
Some types of market solutions are rejected by business scholars and the rejection raises
questions about the foundation of the analysis.
Our analysis suggests that a board of directors concerned with the ethical conduct of
the firms employees should spend less time exhorting the human resource manager
to search for honest employees (like Diogenes search for an honest man). They should
identify potential incentive problems between the firm and its customers, creditors, or
employees. Once identified, attention can be focused on the constructive resolution
of the incentive problems. (Brickley et al., 2000, p. 21)
Why is the labor market treated as though it cannot help meet ethical standards? The
cynicism apparent in this quote stems from a basic belief that the applicant pool is tainted.
Unfortunately, the applicant pool is tainted by the assumed motivations used as a foundation
of the economic analysis.
Additional proof of this is evident in Buckley et al.s contention that the addition of
academic and religious leaders to boards of directors make the boards promise to focus on
value-maximizing polices credible when the board meets in private (Brickley et al., 2000,
p. 18). This is because this board members . . . career choices indicate that maximizing

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income is not that individuals most important goal . . . (Brickley et al., 2000, p. 18).
This is an interesting statement that the CEO, and even the owners of firms, are suspect
when setting value-maximizing policies because they want to maximize their income? It
appears that the motivation income maximization automatically makes a person suspect of
unethical intentions.
By abandoning the market in the critical area of human resources, by giving up on the
possibility of the ethical person, ethical problems are relegated to the realm of externalities
requiring a system of incentives or side payments (Brickley et al., 2000, p. 20) to ensure
ethical behavior. Faced with an incomplete structure of incentives to behave ethically, unethical managers, employees and owners present an invitation to disaster and a legal system
so clogged with cases it cannot function.
The ethical person is the foundation of any program designed to maximize the possibility
of an ethical outcome at the lowest cost, in any system, but the question still remains, what
constitutes ethics in a market system designed for efficiency, when efficiency is expected
to result from self-interested behavior and efficiency is a goal with the status of an ethic.
The government official tasked with the solution to the problem is not trusted to act in the
interest of the public because of self-interest. The manager behaves unethically because
of self-interest and the owner manager behaves unethically out of self-interest, but each of
these individuals will be living up to the expectations of the economically efficient model.
For Baumal, not living up to the expectations will lead to business failure and to Friedman
it will mean devolution into a socialist system.
Where does this leave the accountant? In Adams Smiths world the self-interested person
is operating in a social sphere that includes an explicit moral code. The code makes the
individual responsible to a traditional view of altruism: a view that leads the individual to
value others, to recognize the needs of others and the opinions of others. Empathy is the key
(not Gilders version of empathy). For empathy to work, as Smith would have it, means that
the models to emulate are truly models of ethical behavior. What this means, for a society
where unethical behavior in the pursuit of wealth and income maximization has become
the object of positive emulation, is that there is a need to divorce the idea of the value of
ethics from the idea of economic value.
Ethics stands on its own as an end-in-itself. This is an idea that we have trouble communicating to children because the faculty of reason is not fully developed. At the same
time college students are just reaching the age when they can see the needs of others as
valid to their decision making process. So when we could have the most positive impact on
young minds we have given up. We say ethics cannot be taught. Ethics is always taught.
People are not born with an innate sense of ethics. Children are the least likely candidates to
truly understand the value of ethics because they are driven by pure ego, pure self-interest.
It is what frustrates us the most about children, their seeming inability to see past their
own selfish desires. If we are honest we should admit that it is also what frustrates us the
most about adults as well. We consider those individuals who are wholly self-possessed
as stunted social beings. But in economics we have taken this most base of all desires
and elevated it to the only motive for action. Perfect self-interest does not preclude ethical
action under all ethical systems but it forces an almost perfect relativity onto the concept
of ethical standards. In addition, the moral code of self-interest is just as likely to mean
that individuals build their catalog of empathetic judgments on a code of acquisitiveness


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and actualized greed as it will be on what is good and proper and just. When we have the
chance to have the greatest impact on helping individuals to develop as ethical being we
are teaching our students the value of greed. Even if we have not given up on ethics, we do
not seem to recognize the real business ethic we are teaching.
If the ethical person is at least the start of the solution to our problems, it is fair to ask
how do we as accountants deal with the task of educating ethical persons? This subject
has attracted a great deal of attention in accounting journals. Most solutions presented
to the ethical dilemmas we face are calls to incorporate more business ethics and some
helpful advice on materials to help students understand the major cases, like ENRON and
WorldCom that finally brought on the crisis of confidence that stirred accounting educators
to action. One mainstream article offers a simple solution of the addition of standalone
ethics courses which are still surprisingly absent from business schools (Swanson, 2005).
A special issue of Issues in Accounting Education (2004) was devoted to professionalism
and ethics in accounting education and included cases and lists of resources for educators.
The list of resources is telling in this approach because out of 53 listed books and articles
only three were outside the field of business ethics (Thomas, 2004).
Another article in the same issue seems to fault the focus of business ethics courses
on social responsibility to the exclusion of the impact of . . . honesty, fairness or even
false impressions in financial disclosures (Jennings, 2004, pp. 134). Citing the high level
of social responsibility undertaken by several Enron executives her example points to the
misguided efforts of business schools to help students to recognize the broader impact of
corporations on society and the environment to the exclusion of a focus on making sure
that the profit they were maximizing had substance. The descriptions were of a social group
generous in its praise of the philanthropic efforts of an ENRON corporate officer may hold a
clue to the true motivations of the individual involved. Gaining recognition for good works
can be as much a business strategy as it is true philanthropy. To condemn efforts at presenting
a broader social context for the activities of corporations as the cause of the ENRON debacle
is far too narrow. To validate the claim, the true motives of the corporate officers would
have to be known both for their philanthropy, as well as their income smoothing. On the
other hand, Jennings does present some excellent ideas and tools to help students to break
out of the narrow code-based ethical decision making.
One accounting scholar suggests a profoundly different way to better educate accountants to address the issue of corporate responsibility and power by being more aware of
general ethical models and ideas including an amazingly stirring case for a more holistic approach to decision making and a shift from corporate-centric to society-centric
or even nature-centric approach in the classroom so that the accountants of the future
will recognize the profound implications of their decisions (Waddock, 2005). Included
in these profound implications is the recognition that as accountants they will be making
value-based judgments when construction financial statements and that, (A) narrow focus
on shareholder wealth and a blind faith in market forces must broaden to a more nuanced and
intelligent focus that encompasses many stakeholders, including the natural world. We must
strive for a world in balance-for a world in which society takes precedence over economy
(Waddock, 2005, p. 150).
The contrast between the approach by Jennings and Waddock in the same journal seems
to announce the beginnings of a more open debate among accounting scholars in the main-

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stream, a debate that is mirrored by the debate among standard setting bodies over RulesBased versus Principles-Based accounting standards, and one that seems to signal the recognition of the need for a different kind of accounting professional. But before the accounting
professional can be expected to change the role of business in society, more specifically the
role of the corporation in society and the role of the corporate manager in society, must be
addressed at the most fundamental level. Without this examination of corporate citizenship
the accountant is powerless to reinvent herself. Jennings and Waddock, and all the other
accounting scholars can argue what accountants need to be but what an accountant becomes
is as much a function of the environment into which she is born, the corporate world, as the
school that gives her birth. Both are right. Jennings is right to say that accountants need to
focus on the business of business and to communicate with owners, and Waddock is right
to say that accountants make value-based judgments and need to broaden their focus.
And they are both wrong because Jennings bought into the neoclassical economic ethic
and Waddocks is wrong because the profound implications she speaks of are mostly not
a function of an accountants decision. It seems that way because we think we make the
rules. Only the rules we make are based on the value judgments, of which Reiter speaks,
that are accepted by accountants as part of the underlying structure of justification for the
business system. The values we accept are loosely based on Adam Smiths desire to better
understand the changes that were coming in his class ridden society. A change equally as
dramatic as that faced by Socrates as he debated what ethics would be in a society where
power did not rule every decision. Smith dreamed of a similar world of powerless individuals
bound to each other by the common need born of extended market relations. The common
need is extended to the extreme by globalization, but the powerlessness is only a dream
much the same as Platos rulers without gold were a dream. Utopias die hard especially
when the status quo is served by the utopian fiction. We service that utopian fiction with
seemingly precise measures, the preciseness also being a useful fiction. The question that
needs answering: are the benefits of organizing an entire society around this increasingly
inaccurate fiction worth the cost borne by the groups who suffer from its excesses?
It is not uncommon, as we have seen with the use of Adam Smiths ideas by neoclassical
economists, that business theorists will pick those themes that support the business friendly
version of economic ideas while ignoring the part that is not so friendly. Yet there are
stirrings even in the halls of the business press and in the business schools that suggest the
recognition of a broader social responsibility.
. . . the cheap-labor model turns out to be costly in many ways. It can fuel poverty and
related social ills and dump costs on other companies and taxpayers, who indirectly
pick up the health-care tab for all the workers not insured by their parsimonious
employers. Whats more, the low-wage approach cuts into consumer spending and,
potentially, economic growth. You cant have every company adopt a Wal-Mart
strategy. It isnt sustainable, says Rutgers University management professor Eileen
Appelbaum . . . (Holmes and Zellner, 2004)
This quote illustrates Adams Smiths point about the employer class very well that is the
contradiction in the self-interested actions of the Wall Street version of society and the needs
of society in general. It also raises a question about rationality. Costco uses a model of hiring


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and employee retention that makes the company more profitable by many measures7 than
its close rival Wal-Mart, yet many analysts continue to recommend Wal-Marts business
model (Zimmerman, 2004). In this is the real way The Street sets the rules of the game.
A key point that Milton Friedman made prior to his warnings about social responsibility
was about following rules:
. . . there is one and only one social responsibility of businessto use its resources
and engage in activities designed to increase its profits so long as it stays within the
rules of the game, which is to say, engage in open and free competition, without
deception or fraud. (Friedman, 1962, p. 133)
The key phrase in this statement for this paper is stays within the rules of the game. It
is a key phrase because there is a further question that needs to be asked: who makes the
rules of the game? The importance of this question was raised earlier when Adam Smith
was quoted to say:
The proposal of any new law or regulation of commerce which comes from this
order (the employers), ought always to be listened to with great precaution, and ought
never to be adopted till after having been long and carefully examined, not only with
the most scrupulous, but with the most suspicious attention (Smith, 1776, p. 250).
Because the laws and regulations are the rules of the game Smith would seem to be
saying that Friedmans rules would be better made by people other than those with a direct
interest in business.
Yet any attempt to regulate business is treated with a knee-jerk reaction by the business
press and the halls of congress are packed with business friendly lobbyists. We are seeing
the Friedman test of social responsibility at work controlling the rules but without the
separation of political power from economic power that Friedman requires for his vision
of freedom. We must remember Friedmans statement of warning about capitalism as well
as his positive statements: History suggests only that capitalism is a necessary condition
for political freedom. Clearly it is not a sufficient condition. (Friedman, 1962, p. 10)
Friedmans examples of insufficient conditions included both Fascist Italy and Spain, both
political systems where the government acted in concert with business interests to suppress
freedom and deny rights to groups seeking social justice.
It is important to recognize that self-interest combined with power presents ethical problems. Even without power markets may be efficient, but that efficiency is not necessarily
fair, therefore for a society to benefit from the efficiency of markets we need to remember
that an efficient productive economy is not an end in itself, nor is profit an end in itself for
society. Society has the right to desire other ends, and require corporations to include those
ends in their plans. There is, for want of a better word, an ethnocentrism about corporation
leaders that leads them to believe that solutions that do not meet their needs are against
what is best for society. As Adam Smith pointed out, the opposite is probably closer to the
truth. This does not mean that markets are all wrong and should be abolished, rather that
7 Costco pulled in $13,647 in US operating profit per hourly employee last year, versus $11,039 at Sams. Over
the past five years, Costcos operating income grew at an average of 10.1% annually, slightly besting Sams 9.8%.
(Holmes and Zellner, 2004)

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markets are models of one way to view the world and that the priorities to make the world
safe for markets and corporations may not always make society better off. This is part of
Waddocks and Reiters messages.

10. Conclusion
Ethics is not just the construction of incentives or laws that help make unethical people
behave ethically. It is as Adam Smith said empathy, a connectedness to the community of
humans and other sentient beings. It is the recognition of the needs of your employees and
your grandchildren and the ducks on the pond outside your factory. It is this connectedness,
especially when there is nothing in it for you, that defines an ethical way of being. As Ralph
Waldo Emerson put it The only reward to virtue is virtue. If you are looking for rewards
and incentives for ethical behavior and the benefits of that behavior in monetary terms then
I am sorry to say you are not trying to be ethical. You are looking for a way to continue to
ignore ethics, while using ethics as a marketing tool.
As accountants we are the scorekeepers, devising the method of scoring, tallying the
outcome and insuring the accuracy of the measures we devise for corporate earning then
proclaiming the success or failure of businesses by our efficiency measures of profit or
net income. This proclamation has been the defining moment in the accountants job for a
long time. Our integrity in remaining objective and competent is the extent of accountings
ethical role in the neoclassical economic/ethics model. We are also tasked with insuring
that stockholders are not the victims of fraud that ultimately reduces the money that some
unlucky stockholders make. But fraud is not the issue for Friedman, rather it is the business
manager acting out of, social responsibility that is his subversive act. It might be argued
that acting ethically is acting out of social responsibility.
We are also, with our rules for GAAP and our precise measures of profit devoid of any
socially responsible content, keepers of The Number (earnings per share) (Berenson,
2004). We must keep The Number pure so that the market reaction reflects what it would
have been had separation of owner from management not been a problem. The need for
The Number to reflect Economic reality is a quest made more urgent by the intrusion
of international standards. The debate about economic reality has brought the FASB and
the IASB to invoke the wisdom of the great economic thinker John Hicks in an attempt
to answer the question, What is income? In answering this question Hicks presents an
interesting proposition that the need for a measure of profit is purely a function of the
development of the corporation (Hicks, 1983, p. 191). The need to know is born of the
promise to shareholders of a share of the profits, therefore, . . . the prospective shareholder
has the right to enquire: what profits? This simple question has become the focus of an
entire society.
Smith is known as the father of modern economics with many neoclassical economists
(including Milton Friedman), claiming a direct link between their ideas and those of Smith.
Given this admiration of Smiths foresight in the sphere of economics, it is striking how
few of his ethical thoughts have made it into modern economics. Neoclassical economics
has freely used the prescriptions that mandate the least regulation of business, but has
studiously ignored the parts of Smith that would restrict the actions of businesspeople with


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the claim that the science of economics requires that all individuals be free to pursue their
self-interest. When applied to businesses, managers are expected to act in the best interests
of the owners of the business which has been translated as the maximization of profit. This
societal requirement amounts to a neoclassical business ethic for capitalism.
The combination of this ethic and the rejection of Smiths warnings about the employers
have brought us to the situation where the interests of corporations (the employer) often
take precedence over the interests of society. This is Adam Smiths worst nightmare.
The goal of this paper was to offer a point of departure for further discussion about how
to deal with the current crisis in business ethics. It is hoped that by presenting some controversial (in business circles at least) ideas regarding the foundations of the market model the
current dialogue about business ethics can be nudged from its comfortable business-centric
focus towards a broader social focus and therefore begin to address issues like the role of
power in markets, the business bias of government, the role of corporations in democracy,
and all of these issues as they impact the accountants role in a corporate society.

11. Some modest suggestions for the profession

For accountants addressing the issues involves a return to the issues first addressed
with the movement to force CPAs to earn 150 hours of credit prior to sitting for the CPA
exam in most states. The idea born out of the frustration with accountants who could not
communicate or think outside of the box has deteriorated into the 4-year accounting degree
with an MBA tacked on the end. This is value added for the student. For the society it is
more of the same, at best. Using the 150 wisely we can claim the professions place as more
than just scorekeepers.
A start would be to study what non-business scholars have to say about ethics. To do this
we need to step out of the world of business and engage in a serious study of philosophy. It is
important to drop our preconceived notions about markets before we begin this study. Just as
Smiths version of self-interest presupposed the individual bound by moral sentiments, this
suggestion presupposes an open dialogue unrestrained by stereotypes based on economics
or religion or political view. The seriousness of this effort is compounded by the size and the
frequency of the instances of unethical behavior we are witnessing in business and in our
schools. The goal should be to find an independent grounding for ethical action which does
not always have to meet the test of efficiency. The suggestion is not to abandon efficiency
as an economic goal, but to recognize that it is purely an economic goal that can inform us
in the selection of alternative means of reaching ethical goals, but that the need to meet the
efficiency criteria is a secondary goal in questions of ethics.
Students need to be engaged in this process, because the ethical dialogue that takes
place on campuses across the world will impact the possibilities for a more ethical future.
A sincere dialogue of business students with non-business students will enable business
students to step out of the narrow constraints of business thought. It is not necessary to
embrace other cultures but it is important to recognize that individuals with alternative
plans make decisions based on other motives than income maximization and that these
motives are valid and useful for a balanced world view. The cross campus dialogue can
also help non-business students to see the possibilities of a business career by recognizing

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tools for solving problems and ways of thinking that they may have rejected through a lack
of knowledge or negative stereotype. In some cases the negative stereotype may include
the assumption of unethical behavior by business people which may cause many with high
ethical standards to reject the possibility of a business career.
Third, accounting students should be exposed to more in depth discussions of the processes involved in the selection and implementation of accounting standards. One way of
doing this is to be aware of the process involved in moving from exposure draft to final
standard. Another way of broadening this process is to encourage the use of a capstone
course specific to accounting. A strong choice for a capstone course that would address this
issue, and meeting the other criteria for capstone courses, is International Accounting (Ewer
& Williams). Ideas like the True and Fair View, and Concept versus Rule-based systems,
social responsibility reporting and sustainability are often first introduced to students in this
class, and ideas like these force the students to address issues with no necessarily right or
wrong answer. Ethics is like this in many cases so exposing students to the tension created
by uncertainty with consequences prepares them for a future of making ethical decisions
when there is no code or law to guide them.
The broad focus of the international accounting course also opens the eyes of future
accountants to cultural and globalization issues that often have a strong ethical component.
In addition, the variety of GAAPs in use is often a surprise to students. Acquainting the
students with the different values and concepts used to construct accounting standards in
other countries, trading blocs or in the effort towards harmonization is revealing of a broader
social focus sometimes found wanting in our market dominated culture. In addition the focus
on other cultures has a tendency to lower the level of ethnocentrism when presented in the
right light.

I would like to thank the discussant and the participants at the 2005 CPA Conference and
the reviewers for Critical Perspective on Accounting for many helpful suggestions and my
colleague at MSU, Sid Ewer for his many insightful comments. I would also like to thank
my wife Angie Keller for asking the right questions and listening and waiting. All mistakes
and omissions are of course my own.

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