Homo Economicus and Dethonement of the Profit Principle

THE HOMO ECONOMICUS

A SPECIES DIES OUT

By Ulrich Thielemann

[This article published in 2007 is translated from the German on the Internet, http://www.gazette.de/Archiv2/Gazette14/Thielemann.html. Ulrich Thielemann, formerly a professor of economic ethics at the University of St. Gallen, Switzerland, now directs an economic ethics think tank MeM in Berlin.}

According to a survey on the “Valuable Future,” only 13 percent of Germans judge “the economic system in Germany6” as just. 44 percent regard it as unjust. Only eleven percent of the interviewed had “trust” in the big economic enterprises that these businesses would not use their possibilities irresponsibly. 77 percent are convinced “most economic leaders are only focused on increasing their stock price even at the expense of the co-workers.”

Whoever defends the old economistic thesis as circulated by Milton Friedman in the 1960s that the “social responsibility” of businesses consists in “increasing or maximizing profits” has a hard time. The experiences of citizens are obviously different. The appeal to the “invisible hand” of the market (Adam Smith) through the strict pursuit of self-interest of the hominess oeconomici leads automatically to public interest and fairness loses plausibility. This core thesis of economism sets out an ethic without morality. It implies that responsible things happen (ethics) without anyone having to act responsibly (morality). This thesis can be rated as metaphysical, that is as irrational and pre-enlightened since it assumes a super-human quasi-divine authority as the subject of morality. A heteronomous, not an autonomous moral concept corresponds to it. Friedrich August von Hayek actually demanded “humility” before the market.

Economism or “neoliberalism” is now breaking down empirically in the experiences of citizens, not only theoretically or conceptually.

This is also the reason why the German EU Council presidency wanted to set a sign against a purely neoliberal Europe in its Berlin Declaration (with a special summit on the 50th anniversary of the Roman treaty). “Taking away the fears that the EU is only a community bringing relief for businesses is central,” Europe’s state minister Gunter Gloser said. “We must emphasize Europe’s social dimension.” The big question is obviously whether the “social dimension” is automatically considered. Is the EU an attractive location for investment-seeking capital or does a genuine (not merely “short-term) conflict exist here?

The failed EU constitutional draft which Susan George, co-founder of Attac France, called the “most completely neoliberal guideline ever developed” speaks a clear language. In reading the draft, one has the impression that the striving of the Union, its member states and all its citizens is oriented in the ability “to react to the demands of economic change” and is not only9 limited to “employees” (we citizens) gaining “adaptability,” “flexibility” and “usability.” The underlying assumption helps “raise the living standard,” promoting the well-being of everyone. That is why a constitutional rank is ascribed to “open markets” and “free unadulterated competition.” The constitution is a part (or a means) of the Lisbon strategy whose goal is to make the Union “the most competitive and most dynamic knowledge-based economic zone of the world.” That this “economic zone” as such will offer “better jobs,” not only8 more jobs and promote a “greater social cohesion and a sustainable environment” is interpreted here as an automatic consequence of a greater competitiveness of the European Union. The EU should be established as a kind of giant corporation against its “main rivals” (EU Commission president Barroso) in the Far East and America. How else should it be explained that possible conflicts between strengthening competitiveness and other elements of the good life and just cooperation are not made subjects of discussion?

The public interest promises of the “free” market that is already “social” in itself to create “prosperity for everyone” (Ludwig Erhard) are obviously not fulfilled. Replacing “competitiveness” with the nebulous term of a so-called “future-friendliness” does not help. Except for the hardly measurable personal circumstances (the well-being of citizens) which point to a massive increase of job-related stress, all income statistics refer to growing disparities: away from work income (exception: financial service provider, business advisor, manager) to capital and investors. A study of Citibank describes the US economy as a “plutonomy” – it is oriented to the little group of the so-called “super-rich,” the richest one percent of Americans who consume 20 percent of the gross domestic product and to whom flowed the greater part of the considerable growth of the last years. Prosperity for all is over… However Germany is not one of the “plutonomies”…

The high unemployment (including the fear of it) continuing for years is the striking experience of the “free” market’s unfulfilled promise of prosperity. Most of the attempts at explanations and solutions amount to ascribing the cause and the responsibility to the afflicted themselves. They are the ones who systematically weakened the “demand of businesses for workers” through inadequate “pay flexibility” according to the economist Horst Siebert. Or it is the politics that failed to make “the necessary adjustments to maintain competitiveness” by burdening businesses with “excessive tax burdens” reducing the “investment readiness” of businesses and their readiness to “create jobs”… That is called priority for work. “What ensures and creates jobs has priority before everything else however desirable,” German president Horst Kohler demanded. Whoever thinks supports and relief for employees or persons who are no longer employees are meant is mistaken. Businesses or investors “create” jobs, not employees. Strictly speaking, “priority for work” means “priority for capital.” When “profit possibilities” do not appear “attractive” enough to them, the attractiveness must be raised even higher – even if something else is desirable.”

The “tax burden” was clearly reduced for businesses and investors and is in free fall in the international “location”- and “tax-competition.” In Switzerland, 50 percent of the annual dividend profit of shareholders who own more than 10 percent of the shares of a business will be taxed in the future. With amazement, one rubs one’s eyes about the regressive taxation. With lower taxation of dividends, the incentive should be raised not to accumulate resources in businesses but to pour out funds to shareholders so these invest and create new jobs. Wealthy shareholders will probably invest and not simply consume their profits. The greater the share of value creation that flows to the super-rich, the better for everyone. That is obviously the underlying abstruse theory.

Jurgen Ruttgens, CDU Prime minister of Nordrhein-Westfalen refused to follow this explanation and the underlying market faith. It is a “grand delusion” to assume “lower taxes automatically lead to more investments and thus new jobs.” Ruttgens only refers to the empirical evidence and does not present any theoretical counter-drafts (which cannot be expected from a Prime minister). Unemployment in North Rhine-Westphalia has increased today and has not fallen even though the business tax rates continually fell since 1998. If Ruttgens is right, the problem goes deeper. In general, the “creation of jobs” or opening new income sources generally leads to competitive pressure and thus to the “destruction” of income sources and to employment in other locations. Competition is a “process of creative destruction,” as the Austrian economist Josef A. Schumpeter knew, not a stable area of high pressure. But the majority of contemporary economists has forgotten this and argues like MBA graduates in business administration. Instead of showing genuine political-economic understanding, they only dictate to the people the conditions under which capital and investors are ready to create jobs. In up-and-coming growing political economies, the connection between “creation” (advantages for exchange partners) and “destruction” (pressure on rivals) can be overcome. Therefore they grow and we observe and experience what is called “social market economy,” an economic miracle bringing prosperity for everyone. However this is different with developed national economies that reach the economic limits of growth as far-reaching service economies (since the exchange of simple person-oriented serve s does not allow any appreciable real economic exchange advantages). In addition, there is economic globalization. Its problematic is that jobs are created not here but in China or other up-and-coming national economies that are subject to different political systems. Then we buy all the trendy low-price goods and thus maneuver ourselves in unemployment or contribute to the “destruction” of our own jobs. There is no simple solution, only a “global domestic policy” solution for this problem that is not discussed under universalist fairness points of view (and not merely under a particular “national economy”). Still Ruttgers’ objection can be understood more directly. He touches the discussion that Franz Muntefering initiated some time ago. Muntefering compared “active” investors and Private Equity funds figuratively with “grasshoppers” that attack businesses with their “internationally-forced profit-maximization strategies.” Capital uses its power in increasingly “unrestrained” way and thus contributes to the “total economization” of living conditions.

The present dislocations are the results of a new unexpected economic radicalism on the side of management and investors, business advisors and capital service e providers outdoing one another. They are not only the result of anonymous, practical constraints forces of global competition for which a responsible addressant cannot be found (which is why an authority must be created)…

EXPERIENTIAL BUSINESS ETHICS – DETHRONEMENT OF THE PROFIT PRINCIPLE

On the Indispensability of the Integrity of Management

By Ulrich Thielemann

[This article is translated abridged from the German on the Internet, http://www.kiwi-ag.de/uploads/media/Thielemann.pdf Gelebte Unternehmensethik – Entthronung des Gewinnprinzips. Zur Unverzichtbarkeit der Integrität des Managements, in: Meier, U./Sill, B. (Hrsg.), Führung.Macht.Sinn: Ethos und Ethik für Entscheider in Wirtschaft, Gesellschaft und Kirche, Regensburg 2010, S. 282–292. ]

1 RESPONSIBLE BUSINESS LEADERSHIP BETWEEN BUSINESS-ORIENTED DECLARATION AND PUBLIC DENIAL

For several years, practically every large business has professed its “responsibility” largely unnoticed by a broad public and academia. Under slogans like “Corporate Social Responsibility,” “Social Responsibility,” “Corporate Citizenship” or “Sustainability” made their claim of operating their businesses in a legitimate and ethically responsible way. The high importance of this claim is underlined in that these catchwords referring to ethical commitments are usually prominently placed on the web pages of the businesses.

These commitments have not reduced the unease of wide population circles about the conduct of some, many or typical decision-makers of the economy. Thus 94 percent of Germans have a limited or no trust in top managers guiding banks and big businesses In Germany according to a Spiegel poll from October 25, 2008. “Trust” obviously meant that people on the whole expected decision-makers to exercise their possibilities in an ethically responsible manner. In another survey in the spring of 2009, only 15 percent of Germans said they “had at least some trust in top managers.” This represented an all-time low. [1]

Most from the circle of the 73 percent of Germans who “feel the economic conditions in Germany are unjust” also doubt the ethical seriousness of the self-declarations of business ethics. Economic fairness or justice is expressed in the dismissals of such economic decision-makers despite high profits (or for the sake of those profits) and is not only indirectly manifest in the social security systems. Only 13 percent of the surveyed judged the economic conditions as just. This was an all-time low in the ratings by the Institute for Demoscopy in Allensbach since 1998. [2] According to a survey of the Wablen research group from February 2008, 80 percent of Germans thought “managers did not do justice to their moral standards.” [3] In this connection, manager salaries are presently much too high in the opinion of 90 percent of the citizens. [4]

Despite many initiatives under the rubric “ethics,” the reputation of businesses and their decision-makers is as bad as ever. Citizens may have doubts in the ethical seriousness of the declared claim of the businesses of responsible conduct. This is formulated explicitly by the professionals of civil society, the NGOs. From their view, glossing over the facts, fraudulent labeling and mere “lip service” for the purpose of “image-cultivation” largely occur which prevent more than promote “real contributions to social justice, sustainability and environmental protection. [5] According to the view of the “Declaration of Bern,” an NGO with developmental orientation, sophisticated communication departments “hide behind flowery Anglicisms like Sustainability Affairs, Public Policy or Corporate Social Responsibility (CSR) whose main task is analysis of general image-risks and playing down the concrete demands of civil society.” [6] The British magazine “Ethical Corporation” chooses the “Greenwasher” business of the month.

Instead of businesses denying the ethical seriousness as a whole which happens at least occasionally, the thesis is also defended that the discrepancy described above between the growing extent of ethical declarations by businesses on one side, the all-time low in reputation, what businesses enjoy among citizens on the other side refers back to the diffusion of a false conception of business ethics. This is the only proper methodological approach from the view of an integrative economic and business ethics. [7]

2 BUSINESS ETHICS ACCORDING TO THE STYLE OF ECONOMISM

The above described discrepancy is not between “words and deeds” where the words are “beautiful” but the deeds are missing. Rather the “words” and the underly8ing ethical arguments are critically illumined and their ethical viability is checked. Thus the “dirty hands” are not unmasked to join the formulation of the Declaration of Bern. The “great sayings” that are only “great” when ethically established are not self-evident for all businesses. However trends or general ethical situations exist that were prescribed in the businesses in the last years and decades. The dominant general ethical situation is economism, unquestioning market faith. Managers believe anything that brings profit is allowed. “Values” are created and that must be good for everyone. During the Mannesmann trial, Josef Ackermann realized the absurdity of “putting on trial those creating value” while society repudiates awarding bonuses in the millions.

Max Frisch summarized economism in the most concise formula: “What brings profit is rational.” [8] That is the hidden message given on the way to management in the study of economics so the only instruments mediated to the rising generation focus on how profits can be increased. This assumes they should be raised and can be raised in the long-term since short-term profits were lower than they could be.

Economism is a business ethics conception, namely a justification theory for profit maximization. Two versions can be distinguished. The name Milton Friedman who gave the slogan “The social responsibility of business is to increase its profits” [9} stands for the older version. Horst Albach, a dean of German economic theory, recently tried to revitalize this conception and declared business ethics as “superfluous.” “Economic theory” which according to Albach shows nothing but ways and instruments for “maximizing the capital value of the business” “is (already) business ethics.” [10]

According to this interpretation, business integrity, classically expressed the good will, the earnest grappling with ethical questions is ethically superfluous. The “invisible hand” (Adam Smith) of the market replaces the integrity of management. This invisible hand already ensures everything is ethically right as long as only the highest possible profits are consistently sought. “Ethics” here becomes a function of the market (functionalism) in that its mode of operation assumes a higher superhuman being. This conception is hopelessly pre-enlightened and morally incapacitating. A metaphysic of the market corresponds to this conception, market trustfulness in the literal sense. This is found in Adam Smith as a “partial substitute” for “ethical feelings” regarded as too weak. [11]

3 WHY PROFIT MAXIMIZATION CANNOT BE JUSTIFIED

The standard of a business leadership that declares itself ethically correct can be clearly rejected. This standard is increased profit (or capital income of the business owner in whatever form this may arise) without setting a limit. The last measure of “good” business leadership is maximization of profit.

Profit-maximization means doing everything in one’s power so the profits turn out as high as possible. This includes thinking in opportunity costs. If 25 percent capital profits are “feasible” on principle by whatever measures and one “only” reaches 20 percent , “value” (capital value) is “destroyed” or “poured in the Rhine” [12}

Profit maximization cannot be justified under any circumstances. This has more to do with maximization than with profit. First of all, two misunderstandings should be cleared away. Often it is suggested that a “long-term orientation in profit and nothing else is ethically tolerable" since no “short-term profit maximization” is pursued. Profit-maximization in itself is already long-term. “Long-term profit maximization is a Pleonasm or tautology. “Short-term profit-maximization” is a contradiction in itself. Whoever realizes high profits tomorrow leading to even higher losses the day after tomorrow acts short-sighted, not “short-term.” If he would have exercised more reserve, the profits altogether would have turned out higher.

The second misunderstanding concerns the beneficiary of the profit… What happens when half of the employees are outsourced and all business areas sold off that were under the benchmark profit of 25 percent?... “Grasshoppers” is not an entirely misguided metaphor for this investment subject. This is profit maximization. When investors cling to a business although more could be gained elsewhere, they would miss their maximization goal. The discussion around so-called Private Equity funds has shown that shattering of “filleting” a business occasionally pays for “active” investors.

Maximization of a single particular interest (like profit) is ethically unjustifiable because the “profit principle” then replaces the moral principle. Clarification of the legitimacy of one’s conduct must then occur according to the standard of profitability. Therefore profit cannot be the ultimate measure of entrepreneurial conduct. Rather profit is one aspect alongside others, perhaps the “most important” but certainly not the ultimately decisive aspect if one wants to justify one’s conduct. No conduct can be legitimated without acknowledgment of the primary of ethics.

When the Siemens Corporation holds to its “vision,” a business “with a demanding code of values with the values humanity, equal opportunities, strict ethical standards in business life and emphasizes in the same place creating the “greatest possible value” for shareholders, both cannot be true – not beyond an irrational market metaphysic.

4 DOES “ETHICS PAY IN THE LONG-TERM”?

The “business case for CSR” could offer an escape for anyone clinging to the principle of profit maximization. Nearly the whole “CSR” or business ethics discussion is determined by the assumption that everything about business activity could be argued “economically” with ethics. So “ethics” or what passes for ethics becomes another building block or instrument of profit maximization.

“Ethics pays in the long-term.” That is the message of instrumentalism. One only needs to think in the long-term. Whoever pursues his profit interests “in the long-term” instead of merely in the short-term cannot do anything ethically wrong. “Success in the long-term is impossible without ethics.” “Sustainable (realizable in the long-term) success can only be reached when the legitimate interests of all stakeholders are considered.” [13}

Are the legitimate interests of all stakeholders considered? Philosophers argue in politics and life praxis about the “legitimate interests” of participants and concerned… “Success” means sustainably increasing profit or shareholder value. “Sustainable” is used in the sense of long-term or permanent realization of one’s success goals, not in the sense of higher ethical principles (as proposed by the Rio conference of 1992).

Thus we can renounce on the integrity of entrepreneurial actors as in the case of functionalism. They only need to pursue their own (profit-) interests, the more consistently or “long-term” oriented the better. Ultimately this is an ethic without morality, a justification theory that declares morality or integrity as superfluous. The only distinction to functionalism is in the assumption about the receptor how the highest possible profits can be achieved. “Ethics” is not used “because immoral conduct is not rewarding.” [14]

The opinion that “ethics” pays in the long-term has become a kind of popular wisdom. “Everyone knows that it pays for a business when it is well-positioned in the long-term,” that is moves “to a modern economic ethic.” [15] This thesis may seem plausible. However the appearance deceives. It is one of those statements that are easily propounded but can be refuted with some argumentative expense. Its proponents usually do not make clear how pretentious is their assertion. Four objections can be made. [16]

4.1 ETHICS IS NOT MEASURABLE

How the “business case for ethics” can be argued is completely unclear when no other orientation than business success is expected of management. Association with stakeholders deserving the label “legitimate” cannot be declared a priori. There is no catalog of norms that only needs to be “applied” (that this “application” pays is assumed). Rather the clarification of responsible conduct – and the respective moral rights and duties – is systematically controversial in a modern pluralist society. Therefore the attempt at identifying the supposed congruence of profit-maximization and “ethics” fails for principled epistemological reasons. It is not clear or can be explained situatively again and again that observance of moral norms is ethically commanded or (supposedly) should pay.

Nowhere is it prescribed what fair relations with co-workers are or what measure of ecological sustainability can still be expected of businesses. To clarify such questions, critical discernment is necessary. Argumentative honesty and integrity on all sides: civil society critics and management. “Ethics” is not measurable. Thus an ethic with morality or a business leadership from integrity is necessary.

4.2 PROFITS CAN BE VERY HIGH

Secondly, the “business case” that claims a positive correlation between “ethics” and profit assumes that the amount of profit is ethically neutral or legitimate across the board. The “business case” can also be summarized: “with good conscience for sumptuous profits.” [17] But can profits be too “sumptuous” if everything should be done ethically correctly? One can hardly come to a different conclusion for the last years. Growth flowed essentially to capital. [18] A growing number of employees work under “precarious” conditions and a higher stressful work commitment can still be poorly paid. [19] As a result, the middle class shrivels [20] and –after the bursting of the speculation bubble – tax payers must still subsidize capital with their incomes gained with hard work. [21]

The “business case” also runs aground for logical reasons. “Ethics” and profits are not independent of one another. Profits themselves and not only the means and ways of gaining profits should be illumined critically under ethnical points of view, namely under aspects of distribution justice or fairness and not merely “redistribution.” [21]

4.3 THE CONFUSION OF LEGITIMACY AND ACCEPTANCE

Why should “ethics” pay? Representatives of the “business case” usually refer to the “diverse expectations” of different interest groups. Therefore Corporate Responsibility is part of the business model of UBS. [22] If these expectations did not exist, “corporate responsibility” would not be needed. Thus if the “interest groups” do not know what the business does (which is the normal case) and consequently could not form any specific ethical “expectations,” no need for action would arise since the “reputation risk” would then be trifling.

In this view, the “social responsibility” of businesses consists in “adjusting to continually new realities,” [23] to the more or less informed “expectations” of stakeholders. One could also say one acts opportunistically. The “business case” confounds acceptance with legitimation (ethical correctness) and therefore (thirdly) runs aground.

4.4 INSTRUMENTALIZATION AS “ETHICS” OF THE RIGHT OF THE STRONGER

The fulfillment of all “expectations” would be a completely absurd option. The “expectations” of stakeholders conflict and not all are justified under profitability viewpoints. This would be too expensive. Therefore instrumentalism speaks of “relevant” stakeholders, “relevant” obviously for gaining profits.

Why should “ethics” pay “in the long-term” and not already “in the short-term”? Astonishingly this question was not raised for a long while by representatives of the “business case,” much less answered. The stakeholder theory of R. Edward Freeman gives an answer according to which “stakeholders” are those who are or can be influenced by entrepreneurial conduct. [24] This is not an inconsistent definition hat changes between right and power. Rather it is completely power based. It starts from the assumption that those whom one “influences” (negatively) and who feel treated unjustly resist sooner or later and become those who “can influence” businesses. Obviously it is in their own interest to take into account their power in the form of withdrawn purchasing power and dismissals.

“Long-term” is simply the time until resistance forms. Conversely this means: “expectations” remain unfulfilled and claims remain unconsidered for whoever cannot gain the means of enforcing power to disturb the business on its profit maximization efforts. Instrumentalism amounts to an “ethic” of the right of the stronger. “Ethics pays in the long-term” must be translated “we follow that `ethic’ that pays in the long-term.” With that, the “business case” is refuted at least in its general or sweeping quality. The standard of considering the claims of stakeholders is profitability or power to influence profitability, not legitimacy as claimed.

5 THE IDEA OF WELL-EARNED REPUTATION

Does this mean businesses have to post profit losses to the extent that they act responsibly? Does the rejection of instrumentalism amount to an “ethic of red numbers” (Thomas Kuhn)?

This is by no means inevitable. Firstly, stakeholders do not expect that businesses will orient themselves in their manifest “expectations.” They expect businesses integrity, not opportunism. They expect businesses to act responsibly. Businesses that are earnest about “our responsibility” and do not confuse ethics with profit can expect the support of stakeholders. People like to shop and work where business is fair and responsible.

Business integrity can be the basis of business success. Instead of ethics being dependent on profitability as in instrumentalism, the pursuit of gain can be dependent on its legitimacy… There is a positive (but only partial and heuristic!) correlation between “ethics” and profit in the concept of earned reputation (different from the reputation of instrumentalism gained by devious means). However the causality is reversed. The principle is now: “We are successful because we have an integrated economy” instead of following the motto “We are `integrated’ so far as it pays” which would be a contradiction in itself.

A corridor of earned reputation is hardly exhausted. One thinks of the “fair trade” – movement or the new teamwork between civil society and businesses in the area “Business and Human Rights.” There is a kind of ethics competition, a competition that is argued out ethically. Businesses formally outdo each other in who practices the ‘more sustainable” or ethically responsible business policy – in Switzerland for example between the retail businesses Migros and Coop and between the two and the other somewhat “dirty” discounters.

False illusions are devotedly cherished here. We are warned. The chances of true business integrity can and should be expanded. That a “human market economy” (Angela Merkel), an economy that runs fairly and responsibly, could be geared to business ethics would be a completely naïve assumption. Competition, especially the competition on the ultimative market of all marks, is the “market for corporate control” (i.e. the capital market).

In this competition, the responsible business is quickly the dumb and finds itself on loser’s street – since everything was not set on the highest possible profit. “Earned reputation” merely means the chance of “respectably” overshooting dead loss or complete washout on the basis of true integrity.

Therefore business ethics must be supplemented and supported by system ethics. Its systematic task ultimately consists only in ensuring that responsible actors are not the dumb in competition. That politics seems to increasingly recognize that a corresponding framing order in the globalized world can only be a transnational system may be regarded as a progress and paradigm change. On the background of the real reality, this option, no business can talk its way out any more that doing what is right is unfortunately “impossible” in the global competition. The previously “silent” consumers gaining critical discernment cannot be swindled any longer by such practical constraints rhetoric. Unsuspected profiling chances result for all those businesses that never hold integrity as a cost-factor…
RELATED LINKS

Robert Kuttner, The Libertarian Delusion, February 27, 2015
http://billmoyers.com/2015/02/27/libertarian-delusion/

Ulrich Thielemann, Profit Making is Different than Profit-Maximizing, Wikipedia, 2014
http://portland.indymedia.org/en/2015/02/429238.shtml


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