MODULE II ETHICAL ISSUES IN CAPITALISM AND MARKET Capitalism also called free market economy, dominant in the Western

world since the breakup of feudalism, in which most of the means of production are privately owned and production is guided and income distributed largely through the operation of markets. Capitalism can be defined as an economic system in which the major portion of production and distribution is in private hands, operating under what is termed a profit or market system. KEY FEATURES OF CAPITALISM 1. The Existence of Companies

In capitalism business organisations are treated like a person or at least like a separate and distinct entity. (Ex: Expressions like the company thinks that, From the companys viewpoint, As far as the company is concerned). Capitalism permits the creation of companies or business organisations that exists separately from the people associated with them. Today the big companies we are familiar with IBM, Ford, AT&T, General Electric are, in fact, corporations. Like you or me, a corporation may enter into contracts and may sue or be sued in courts of law. It may even do things that the corporations members disapprove of. 2. Profit Motive

Those commodities and services produced under capitalism are expected to yield maximum profit. Hence, what to produce and how much to produce are determined by individual profit rather than by social benefit. It is the profit motive which induces businessmen to make the optimum use of the factors of production. Thus, profit motive is the mainspring of all economic activity under capitalism. 3. Competition

The producers compete with one another to get the consumers choice or in selling the commodity as much as they can through advertisement. They may cut the price or improve the quality of the product or offer other concessions to the purchasers. There is competition among the workers for jobs. It may also be pointed out that perfect competition is rare in capitalism. In the real world there is monopolist competition. The producers generally combine to form monopolies or oligopolies to maximize their profits by charging the maximum price they can.

4.

Freedom of Enterprise

A very outstanding feature of the capitalistic order of the society is economic freedom. This freedom implies three things: a) freedom of enterprise, b) freedom of contract, and c) freedom to use ones property. Everybody is free to take up any occupation that he likes or start any business he likes and to enter into contracts or agreements with his fellow citizens in a manner most profitable to him. 5. Right of Private Property

Private property is central to capitalism. Capitalism requires private ownership of the major means of production and distribution. The means of production and distribution include factories, warehouses, offices, machines, computer systems, agricultural land and whatever else makes up the economic resources of a nation. Under capitalism private hands control these basic economic assets and productive resources. Thus the major economic decisions are made by individuals or groups acting on their own in pursuit of profit. These decisions are not directly coordinated with those of other producers, nor are they the result of some overall plan. Any profit or losses that result from these decisions about production are those of the owners. 6. Class Conflict (Economic Inequalities)

An important feature of capitalist countries is the glaring inequalities of wealth and income. A few are very rich indulging in all sorts of conceivable luxuries, where as the masses are not able to get even two square meals a day. What is more painful is that the gulf between the rich and poor is ever widening. The inequalities arise from unearned incomes which are due to uneven distribution of wealth. Larger wealth yields higher income. Thus, under capitalism the society has been divided into two classes, the haves and the have-nots which are constantly at war with each other. 7. Importance of Price System

It is the price mechanism which facilitates the functioning of capitalism. It is the price which equates the demand and supply of commodities and factors of production. A higher price is also a warning to the consumers to cut down their consumption.

8.

Sovereignty of the Consumer

Under capitalism the consumer has been compared to a king. His whims, prejudices and desires seem to rule the world of production. The rationale of all economic activity is the satisfaction of the consumers wants. MORAL JUSTIFICATION OF CAPITALISM The proposition that capitalism is a morally acceptable system is very much open to debate. Whether we decide that capitalism is morally justified will depend, at least in part, on which general theory of justice turns out to be the soundest. The defenders of capitalism have sought to justify their system based on the following theories: 1. the argument that the moral right to property guarantees the legitimacy of capitalism, and 2. the utilitarian-based economic argument of Adam Smith. 1. The Natural Right to Property A common defense of capitalism is the argument that people have a fundamental moral right to property and that capitalist system is simply the outcome of this natural right. 2. The Utilitarian Argument Another, very important argument defends capitalism in terms of the many economic benefits the system brings, claiming that a free and unrestrained market system, which exists under capitalism, is more efficient and more productive than any other possible system and is thus to be preferred on moral grounds. Adam Smith in the The Wealth of Nations argues that when people are left to pursue their own interests, they will produce the greatest good for all. MERITS OF CAPITALISM 1. Automatic Working

It does not require any central directing authority for its functioning. It functions automatically through the price-mechanism. 2. Higher Efficiency and Incentive to Hard Work

Under capitalism the entire manpower resources of the country (labour and entrepreneur) work the hardest and most efficiently. In this way, the national output increases and economic development is accelerated.

3.

Higher Rate of Capital Formation

People under capitalism have the right to hold property and pass it on in inheritance to their heirs. Owing to this right, people save a part of their income so that it can be invested to earn more income. The rate of capital formation increases when savings are invested. This accelerates economic growth. 4. Economic Development and Prosperity

Capitalism encourages innovation and technological progress and the optimum use of resources. It is thus conducive to economic growth and prosperity. 5. Optimum Utilization of Resources In capitalism every producer and entrepreneur tries to use the productive resources at his disposal in the most economical manner in order to make maximum profit. 6. Just System

The richest reward under capitalism goes to the ablest, the most daring as well as the most prudent entrepreneur. A man who takes the initiative and shows extraordinary resourcefulness make the highest profits. 7. Democratic

The consumers control gives the system a democratic touch. Nobody likes that his consumption should be dictated by some superior authority. In the capitalist economy the consumers consume what they like and not what is supplied to them. CRITICISM OF CAPITALISM The major defenses and merits of capitalism have not persuaded critics that it is a morally justifiable system. Their objections to capitalism are both theoretical and operational. Theoretical criticisms challenge capitalisms fundamental values, basic assumptions, or inherent economic tendencies. Operational criticisms focus more on capitalisms alleged deficiencies in actual practice, in particular, on its failure to live up to its own economic ideals. The following criticisms are a mix of both theoretical and operational concerns: 1. Inequality

Economic inequality exists in capitalist society. The disparity in personal incomes is enormous; a tiny minority of the population owns the vast majority of the countrys productive assets and the

vast majority of the society continues to be married by poverty and homelessness. With divisions of social and economic class comes inequality of opportunity. Some critics of capitalism go on to maintain that aside from inequalities of income and ownership, the inequality inherent in the worker-capitalist relationship is itself morally undesirable. 2. Capitalism Breeds Oligopolies

Critics of capitalism contend that capitalism breeds oligopolies that eliminate competition and concentrate economic power in the hands of a few. As early as the middle of the 19th century, the German philosopher and political economist Karl Marx (1818-1883) argued that capitalism leads to a concentration of property and resources and thus economic power in the hands of a few. High costs, complex and expensive machinery, intense competition, and the advantages of large scale production all work against the survival of small farms, said Marx. Many see proof of Marxs argument in todays economy. Since the industrial revolution the economy has come to be dominated by a relatively small number of enormous companies that can conspire to set prices, eliminate competition and monopolize an industry. The food industry is a perfect example, with four or fewer firms controlling the vast majority of sales of almost any given product. Increasingly multinational in character the giant corporations like Microsoft frequently do business around the globe, disavowing allegiance to any particular nation. Today more than a quarter of the worlds economic activity comes from the 200 largest corporations. 3. Exploitation and Alienation

Marx argued that as the means of production become concentrated in the hands of the few, the balance of power between capitalists (Bourgeoisie) and labourers (Proletariat) tips further in favour of the bourgeoisie. Because workers have nothing to sell but their labour, said Marx, the bourgeoisie is able to exploit them by paying them less than the true value created by their labour. In fact, Marx thought, it is only through such an exploitative arrangement that capitalists make a profit and increase their capital. And the more capital they accumulate, the more they can exploit workers. Again because of the unequal positions of capitalist and worker, labourers must work for someone they must do work imposed on them as a means of satisfying the needs of others. As a result, they must eventually feel exploited and debased.

4.

Wasteful Competition

Colossal expenditure is incurred on advertisement and salesmanship simply to defeat a rival. Resources employed by those who are defeated in the race, go to waste. 5. Human Welfare Ignored

The economic decisions made by individual entrepreneurs and producers under capitalism are based on their self interest and not from the point of view of good of the society. The producers produce those commodities and in such quantities that the difference between price and cost is the maximum so that their profit is maximized. However necessary and useful the commodity may be the producers will not produce it if price does not exceed the cost. Social welfare is ignored altogether. 6. Economic Instability and Unemployment

The recurrence of the trade cycles, due to over-competition and over-saving resulting in over production, must be considered one of the bitterest fruits of capitalism. Booms are followed by slumps and when there is depression there is large scale unemployment. 7. Property Rights take Precedence over Human Rights

Capitalism lays undue emphasis on property rights as against human rights. Money, not man, rules the world and debases humanity.

8.

Malpractices

The malpractices of big industrialists and businessmen include payment of handsome salaries to influential directors, the large scale evasion of fiscal laws, luxurious living at nations cost and persistent generation of black money through secret deals and stealthy transactions. The unpleasant side of capitalism has been thoroughly exposed by the scandals circulating about the big business personalities. 9. Emergence of Monopolies and Concentration of Economic Power

It also happens under capitalism that perfect and free competition ceases to prevail and instead big combinations of powerful producers and monopolies emerge against whom it becomes difficult for an ordinary entrepreneur to compete. These big monopolies come to control the market on account of the huge resources that they command and small producers are squeezed out. Also the big businesses control many types of businesses and industrial concerns at the same time. Hence there is lot of concentration of economic power in a few hands.

10. Social Injustices and Economic Inequality The extreme inequality of wealth distribution which is being accentuated as time goes on is the most irritating outcome of capitalism. On the one hand, there are a few rich people and on the other the vast masses fabulously steeped in miserable poverty. The former are enjoying a luxurious life even without working, whereas the latter cannot get two square meals a day even after putting in hard labour. They are clothed in rags and live in hovels and their children often die from lack of milk and medicine. Where as even the rich mens dogs are better fed. A system which results in such social injustice and economic inequalities deserves to be condemned.

SOCIALLY RESPONSIBLE BUSINESS BEHAVIOUR

By Social Responsibility, we mean the intelligent and objective concern for the welfare of society that restrains individual and corporate behaviour from ultimately destructive activities, no matter how immediately profitable, and leads in the direction of positive contribution to human betterment, variously as the latter may be defined.

WHY BUSINESS MUST BE SOCIALLY RESPONSIBLE Both business and society interact with each other and are mutually dependent on each other. A business exists and operates within a social framework and thus requires social sanction. Society, on the other hand, requires business to fulfill its needs and for its economic and social well-being. A business receives inputs from the society. It offers its outputs to the society in terms of products and social service. Its outputs, its products and activities must be beneficial and acceptable to the society. All businesses need societys approval in order to function. INTERACTION BETWEEN BUSINESS AND SOCIETY 1. Growth-responsibility Expectation

Business must realise that the best way to survive and grow in the long run is to operate profitably by serving customers responsibly. The social expectation is that the bigger the organisation grows, greater are the responsibilities it is expected to assume. 2. Long Term Orientation

If an organisation expects to conduct its business in the long term, it will require a loyal brand of customers, repeat customers, customers with goodwill. This goodwill cannot be bought, begged or

borrowed it has to be earned. And it can be earned only when organisations behave responsibly; when they discharge social responsibility. 3. Reputation of the Company

To build up a reputation of a good, friendly company they should engage in socially approved activities like giving away scholarships to deserving students and donating products to the weaker sections of the society. 4. Give-Take relationship

Since business exists and operates within the society, take so much from the society, it also owes something to the society. To keep the balance even, it needs to give back something to the society, to do something for its benefit. MAJOR SOCIAL RESPONSIBILITIES OF BUSINESS 1. Optimum Utilisation of Scarce National Resources All business firms have the moral obligation to utilize the scarce national resources of the country in an optimum way and not to waste, misutilise, damage or cause to deteriorate the resources at its disposal. Since many uses can be made of the same natural resources, hence options must be carefully chosen to find out which uses will serve the country better and result in social welfare. Moreover what proportion of the wood should be used for what purpose must also be ascertained. Because, whatever wood is used in one industry, that amount of wood is denied to other industries. Hence the industry to which the scarce natural resource is being made available, must make a moral commitment to utilise this scarce resource to its optimum level, and not to waste or misutilise it in any way. It must remember at all times that what is made available to it, is being denied to others. 2. Responsibility Not to Make Losses Economic performance and social performance are both necessary to become a socially responsible company. A loss making organisation cannot generate revenue for its shareholders, cannot keep its welfare commitments to its employees and ultimately drives its workforce into the unemployment market. If organisations did not make profits and went out of business, thousands of people as well as the economy would suffer drastically. Thus organisations have a social responsibility to make profits. A company has to work out a method for integrating profits and social good. It cannot make money at any cost, neither can it be a caring company, but unprofitable.

3. Improved Quality of life Improvement of the quality of work life of employees is a special area of focus for the company. Moreover its products and services can be targeted to improving the quality of live of the people of the society. 4. Responsibility of Employment and Income Every business should make provisions for the payment of fair wages, satisfactory working conditions, steady employment and job security, prospects of promotion, growth and development of workers and also take adequate measures for employee welfare. Thus a business must be just and humane and must provide for fair opportunities to all workers for their advancements. 5. Offering Quality Products at Fair Price Providing quality products at fair prices is a major social responsibility of business organisations. 6. Environmental Protection Business organisations also have the social responsibility of taking serious steps to protect the environment from industrial pollution and destruction. Business does so much irreparable harm to the environment that it becomes an obligation for them, not only morally, but also legally to undo the damage by taking serious and responsible steps to protect the environment and keep it in a healthy condition. Planting of trees, avoiding polluting the atmosphere, water and greenery of the community as well as of the country and also taking active steps to protect the environment from further harms is what business organisations must do to conduct themselves as responsible corporate citizens. 7. Fair Trade Practices Fair Trade Practices of business firms constitutes of: i) ii) iii) iv) Avoidance of monopolistic and restrictive trade practices, by entering into secret combination agreements; Charging fair and reasonable price from customers and not engaging in, or leading the entire market into a price war; Offering products and services of quality consistent with their claims and expectations; Making goods and services easily available in the marketplace and not resorting to artificial scarcities;

v) vi) vii) viii) ix) x) xi) xii) xiii) xiv) xv) xvi) xvii)

Not indulging in hoarding or black-marketing and thereby swindling the public; Not making false, misleading and exaggerated claims in its advertisements; Providing accurate and relevant and timely information to creditors and suppliers; Making prompt repayment of loans and other borrowings; Abiding by the rules, regulations and the laws of the country; Paying corporate taxes, duties and other dues honestly, promptly without any cover-ups or cheatings; Not bribing public servants and corrupting the democratic structure of the country; Not buying political favours to sway decisions in its favour; Maintaining fair business policies, decisions and activities; Not selling secondhand or used products as new; Not resorting to planned obsolescence of products and spare parts, in order to gain a continuous market for its products; Not procuring business or trade secrets of competitors through espionage, bribery or in any other way; Not deliberately make the organisation sick so as to avoid many of its obligations and escape from its responsibilities.

8. Fulfill All National Obligations under Various National Laws Business organisations are considered to be corporate citizens of the country in which they operate and conduct their business. As citizens, they are required to fulfill certain obligations under various national laws and to perform certain duties towards the nation. Firstly, it has to fulfill its civic duties like avoiding pollution and keeping the environment clean. Then they must regularly and honestly pay all their taxes and duties to the concerned governments. They must make sure that they obey all the provisions of the various business and labour laws of the country in letter and spirit. Above-all, they must have the national interest of the country in which they operate, at heart and uppermost in their mind, at all times. They must make an attempt to ensure national prosperity and reduce some of the countrys national problems, like unemployment, corruption, black-marketing etc. 9. Safeguard the Health and Well-Being of Consumers One of the vital social responsibilities of business is to safeguard the health and physical safety of consumers using the products of the company. Many pharmaceutical as well as cosmetic manufacturers neglect to take enough protection to uphold consumers health. Let us take some

examples in point: Most of the liquid medicines are deteriorating even though they are well within the date of expiry due to poor quality of the product, seal (caps or closures), packaging and storage conditions. Many cosmetics and toiletries contain a cocktail of chemicals which cause irreversible damage to the skin, nails, hair and eyes and sometimes cause skin diseases and even cancer. Deodorants contain aluminum, zinc, zirconium salts, formaldehyde and alcohol and these may cause rashes and infection of the sweat glands by blocking them by trapping bacteria deep in the fat layers under the skin surface. Strong shampoos damage hair and causes hair loses. It erodes hair, causing each strand to become thinner and weaker. LIMITS OF SOCIAL RESPONSIBILITY The social responsibility actions of businesses are limited by cost, efficiency, relevance and scope. As a result of these constraints, actions fall short of public expectations. 1. Cost Social responsibility costs money. Whether a company desires to adopt a village, donate to a college or school, build hospital, maintain parks or undertake relief operations in times of calamity, it costs money.

2.

Efficiency

Social responsibility affects efficiency adversely. Being obliged to the employees, say a company runs its plant, even if it is incurring losses every year. Its efficiency goes down and its ability to compete is lost. 3. Relevance

According to several critics, business has no obligation to society. The only obligation is to run the business successfully. Social responsibility is irrelevant. 4. Scope and Complexity

Societys problems are too massive, too complex, and too deep seated to be solved by even the most socially conscientious company or even by all companies acting together. CONCLUSION In conclusion, it must be again stated that business is an indispensable part of society. It is that organ of the society which creates wealth for the community. Business cannot exist on altruistic ideals alone. It needs to make profits. Business today can play an important role to

enable the people of the nation to lead a life of dignity and self-respect inspired by humanistic values of civic morality.

ETHICAL BUSINESS COUNTRIES

PRACTICES

IN

DIFFERENT

Each nation has different cultural norms and practices. Each culture of the world has its own ethical practices. The basic values of a society constitute the core of its culture. Ethics, thus, has an intimate relationship with the culture of a place. It is quite natural that like legal standards, ethical standards also differ among nations. For example, in many countries, it is permissible for privately owned companies to make political contribution to political parties and candidates, during election time. In many other countries, like Brazil, payments to government officials and other civil servants and bureaucratic personnel with political influence to get business done i.e., to assure expedited or favourable handing of a business transaction, are not regarded as unethical bribes, but as proper payment for services rendered. In order to acquire a business contract from the government in many countries, the foreign company is expected to pay up, and payment of such commission is regarded as a perfectly normal and acceptable way of doing business. People from Brazil believe that it is morally acceptable to pay small bribes to get things done. People from United States, on the other hand, find the practice of payment of petty bribes morally unacceptable. BUSINESS ETHICS IN USA In an effort to codify the expectations of the American markets, the US Department of Commerce (DOC) issued its Model Business Principles in 1995 as guidelines for business conduct in the United States and abroad. While the principles comprise a voluntary code of conduct, the DOC hopes that they will encourage appropriate behaviour. Recognising the positive role of U.S. business in upholding and promoting adherence to universal standards of human rights, the Administration encourages all businesses to adopt and implement voluntary codes of conduct for doing business around the world that cover at least the following areas: 1. 2. Provision of a safe and healthy workplace. Fair employment practices, including avoidance of child and forced labour and avoidance of discrimination based on race, gender, national origin or religious beliefs and respect for the right of association and the right to organise and bargain collectively. Responsible environmental protection and environmental practices.

3.

4. 5.

Compliance with U.S. and local laws promoting good business practices, including laws prohibiting illicit payments and ensuring fair competition. Maintenance, through leadership at all levels, of a corporate culture that respects free expression consistent with legitimate business concerns, and does not condone political coercion in the workplace; that encourages good corporate citizenship and makes a positive contribution to the communities in which the company operates; and where ethical conduct is recognised, valued and exemplified by all employees.

In adopting voluntary codes of conduct that reflect these principles, US companies should serve as models, encouraging similar behaviour by their partners, suppliers and subcontractors. BUSINESS ETHICS IN THE MIDDLE EAST There are many negative stereotypes of the level of Business Ethics in Middle East. According to the people of Middle East business does not go with ethics and the western norms of Business Ethics do not apply in the Middle East. To them business and ethics are contradictory terms. Business Ethics is not institutionalized in the Academia in the Middle East. There are no Business Ethics initiatives in the private sector. None of the local companies have ethical codes although there are some beginnings among firms involved in multinational business. There are no business initiatives against corruption even though, with the growth of business, white collar crime is on the increase in all countries. With few exceptions, there are also no business initiatives in the training of employees or managers on Business Ethics. Most governments in the Middle East have agencies whose specific purpose is to combat corruption among government officials. For example: the central Audit agency and Administration Control Agency in Egypt, the State Comptroller and Ombudsman and special police units to combat white collar crime in Israel. These agencies which focus on corruption in government administration have direct relations to Business Ethics in so far as business is sometimes involved as culprits in the use of corruption for promoting its interests. The Berlin-based Transparency International Organisation and Gottingen University recently published the results of an international poll, conducted in 54 countries using its corruption Perception index. The 54 countries were rated on corruption defined as the misuse of public power for private benefits. These misuses include bribing public officials, taking kickbacks in public procurement or misusing public funds. The 54 countries were ranked according to their corruption index score from 1 (most corrupt) to 54 (least corrupt). The scores ranged from 0 (highest level of corruption) to 10 (lowest level). The scores and rank order for the five countries of the Middle East included in the survey are listed below: Country Score Rank

Kuwait Egypt Turkey Jordan Israel

2.58 2.86 3.54 4.89 7.71

8 14 22 25 41

In Arab countries favouritism, nepotism and personal connections have a significant impact on managers decisions. This is usually explained in terms of cultural factors such as strong kinship ties and obligations that expect individuals to give preference to family. In Israel political patronage is fairly widespread. The close ties between the various elites including economic and political elites also result in favouritism. The subordinate position of women in the workforce and in business organisations is another cultural issue where normative standards of equality prevalent in most industrialised countries are not accepted in many Arab countries. BUSINESS ETHICS IN CHINA As the investigation of the Centre for Applied Ethics on Ethical Perceptions of Business people in East China, reveals, the enterprises which recognise the importance of business ethics are at a low percentage. Only a few companies realise that they should pay attention to the moral dimension of management. The prevailing view in China is that, at present, the development of the economy be the most urgent objective. So most factories and districts strive for beneficial economic results. In contrast, ethics in business is not considered urgent to them. In China the two aspects of management and corporate life technical and human resources are not handled in a balanced way. In fact, technical considerations prevail in most enterprises which seek to increase their utility. Before the reform and opening in China, social life was predominantly political. Over thousands of years the political social life has become a strong and pervasive tradition that covered all aspects and levels of social life while civil society did not flourish at all. Against this historical backdrop, the support by the government to launch and foster the process of contractual relations is necessary. At the same time, however, the very idea of the contract economy requires to reduce as far as possible the control and interference of government. Hence, it demands a great amount of care to deal with the relationship between the government that tends to interfere and business that claims more autonomy. INDIA In India more and more companies are emerging with formal statements of values or beliefs. Some of the stated values are:

1. 2. 3. 4. 5. 6. 7. 8.

Competitive ability Clear objectives Taking advantage of change Simple organisation Committed people Openness Responsibility Quality

ENGLAND The following conceptual beliefs are attached with the ethics of British business organisations: 1. 2. 3. 4. 5. 6. Ensure customer satisfaction Set high standard of ethics Foster creativity and innovation Avoid all discrimination Contribute to the benefit of the society Respect the dignity of each individual

SIMILARITY OF ETHICAL VALUES IN DIFFERENT CULTURES Moral standards and values differ between different cultures, different societies, and different ages and sometimes between different groups within the same culture. However, there are certain principles that govern the foundation of all ethical systems in all cultures, and through all the ages. One such principle is that it is unethical and even downright immoral to cause other members of the society some harm in the pursuit of ones own happiness and material success. (Ex: If a particular industry emits lethal gases and industrial fumes into the air and water of the society, and causes poisonous pollution, it is considered an unethical and immoral, apart from being an illegal act, irrespective of the culture and irrespective of the country.) We are all free to pursue our own happiness and success, but, it is also our duty to see and ensure that our individual pursuit of happiness and success does not result in collective harm for the society. The second principle underlying all cultures, even the most primitive is that people do not act solely for their own self interest and there lies a responsibility on each member of the group for the welfare of the other members of the group. Cooperation among group members is considered to be essential to ensure the welfare of the group. The third principle, found common among all cultures, is that just as man takes from society, so also is man indebted to society in the same measure.

The fourth principle is the principle of fairness. This principle is the foundation of the concept of equality and justice in a culture. The fifth principle is the principle of integrity and honesty. The sixth principle is the principle of human dignity. These principles are a part of every major religion, social philosophies and ethical systems. These principles are almost like natural laws of human survival and development; and they are a part of the human consciousness.