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Newspapers, the media, cinema, and the pulpit are filled with claims about the immorality and corruption inherent in market economies. Since the end of the Cold War, American businessmen have displaced the Russians as the primary "bad guys" in action films (Formaini 2001). Beliefs hostile to capitalism are troubling because they threaten the moral foundations of market economies and, in so doing, often distort the truth about market outcomes.
Market economies are supported by ethical presuppositions, and these basic presuppositions, such as the "right to self-ownership" principle, play an essential role in the overall workings of the entire system. The simple principles of a market economy help to maintain the universal order of the system, and they guide policymakers and judges when disputes must be resolved. Economists and many philosophers understand and recognize the important role ethics and morality play in the market economy. Interest in the interaction between ethics and markets goes back at least to Adam Smith (1759, : 215) when, in The Theory of Moral Sentiments he discussed the "impartial spectator" and said,
He cannot therefore but approve, and even applaud, that proper exertion of self-command, which enables them to act as if their present and their future situation affected them nearly in the same manner in which they affect him.
Smith's impartial spectator carries over to the capitalistic market. Good ethical behavior is not only encouraged and rewarded, but according to Smith, it is part of human nature to act just, and humans are encouraged by sentiment to do so rather than act on what benefits solely their own accord.
Even though ethical parameters are placed on people's behavior in capitalist systems, many critics of capitalism describe free societies as societies where "anything goes" (Hill, 1998). Rather than encourage ethical behavior, free societies are said to encourage vice and the abandonment of an ethical standard, and capitalism doesn't discriminate when it comes to the types of goods and services being produced. If life-saving medicines are profitable, markets will provide them; if land mines and prostitution services are valuable, markets will provide these goods and service too. Since markets do not discern between desirable and undesirable products, they can be thought of as either amoral or immoral.
While there is considerable truth to the criticism of capitalism raised above, claiming that markets are amoral or immoral is excessive. In this paper, we will argue against the amorality/immorality of markets. Rather than encouraging cheating to act out of one's own self image, the free market economy gives an incentive for ethical behavior. While the market economy will sometimes produce goods and services offensive to some people, there are also strong forms of social ostracism and persuasion, which help to discourage consumption of undesirable goods. Ultimately, though, for a business to be prosperous in the long-run, they must maintain general standards in their business, such as trust, stewardship, investment, and attention to consumer satisfaction (Wilson 1990).
The only way to make a profit in a free market is by providing a product people value enough to pay a price higher than the opportunity cost of the resources used to produce the goods. The threat of competition and availability of substitutes makes it necessary for firms to constantly evaluate whether their product or service is more appealing than the competition. Sometimes the firm must push down the costs of production while keeping the product quality the same; other times, they must increase quality while keeping costs constant; or, they can pursue combination of cost reductions and quality improvements. Without instilling a sense of value in their product, a business will not be successful in the long run.
The way in which a business goes about demonstrating to customers the value of their product or service is important. Businesses can convey information to customers and potential customers in either an ethical or unethical manner. For example, a company could lie about the quality of its product. While such a strategy might work in the short run, in the long run unethical behavior typically gets punished and does not pay off. Take Enron, for example. In the short-run, Enron executives and shareholders enjoyed enormous rates of return. However, once their accounting irregularities were discovered, Enron's stock quickly crashed and executives were eventually fined and imprisoned. When defrauded consumers and shareholders begin to discover the unethical actions of a business, they eventually stop buying from them because of their personal moral code, concern about the products overall reliability, or fear of legal action. In economies with greater competition, consumer wants are more likely to be satisfied by the abundance of alternatives available, and the healthy competition of the marketplace requires businesses to maintain a solid reputation if long-run success is desired.
In this paper, we proceed as follows. In Section 2 we provide further discussion of why markets reward virtuous behavior and punish unethical behavior and the role of "ethical entrepreneurs". Sections 3, 4, and 5 illustrate our discussion with examples from three successful companies. Each of the companies selected prospered because their managers believed in one important idea: ethical behavior is good for long run profitability. The three case studies are, respectively, Barnum & Bailey's Circus, Whole Foods, and BB&T Bank. We use the aforementioned cases to illustrate how the market rewards virtuous behavior even without individual consumers consciously trying to do so. Section 6 concludes.
2 Ethical Entrepreneurs
What does it take to be a successful entrepreneur in the ethical realm? In the next few sections we offer some cases of entrepreneurs, such as Barnum & Bailey, John Mackey, and John Allison, who have made profit for their companies while also promoting virtue. As entrepreneurs, Barnum & Bailey, Mackey, and Allison recognized the value of running their companies ethically at a time when most people saw the marketplace as an environment in which quick, short-term profits could be made. Both Mackey and Allison saw the importance of linking ethics to entrepreneurship, knowing full well the pitfalls and potential criticism awaiting them for linking ethics and profits together.
Ethical entrepreneurs who differentiate their goods and services in the marketplace by first figuring out ways in which current markets are frustrating consumers and then finding ways to respond to customer dissatisfaction by "selling" honesty, virtue, and quality in the market. Ethical entrepreneurs use business tools to help customers make decisions consistent with the customer's best long-term interest, and the ethical entrepreneur helps to improve the overall business environment.
The ethical entrepreneurs are meeting the growing demand for honesty in the marketplace. To provide honesty and integrity, they have to invent new products, differentiate their products, and market the ethical aspects of their business. In serving the market for honest information, ethical entrepreneurs are not engaging in altruistic activity, but, rather, are helping to better serve and coordinate the market economy.
The stories in the next three sections support the growing conviction among many social scientists and philosophers that markets can be a powerful force for good in the realm of morality. Ethical entrepreneurship should not be thought of as a magical cure-all for every business problem, but, rather, as an approach; in the absence of the stick of government regulation, ethical entrepreneurship solves some of the trickier problems confronting businesses and consumers in the marketplace. Depending on their mission and the reason for their existence, businesses can be like any other social organization and provide goods that markets do not provide. Through their success, businesses like the three we discuss here, improve the lives of not only their customers and employees, but also the greater community.
With rising incomes and technological advancements, the demand for ethical behavior in the marketplace will continue to grow. One possible promoter of ethical behavior is government. Time and again, however, we have seen government efforts aiming to establish minimal standards of decency act as blunt instruments, which stifle creativity and discourage ethical behavior. Ethical entrepreneurship stands as an alternative to government managed business decency, and it goes about promoting the good by harnessing the incentives of the marketplace.
3 Barnum & Bailey's Circus
The notion that virtue is its own reward and leads to long term business success is not a recent or isolated phenomenon. For example, political scientist John Mueller details in his 1999 book Capitalism, Democracy and Ralph's Pretty Good Grocery how the link between ethical behavior by businessmen became widespread in the United States over a century ago. According to Mueller, ethical and virtuous treatment of customers and employees gave honest companies a competitive advantage, and the practice of being honest to customers was quickly copied by others in the economy. His primary example of an ethical entrepreneurial innovation is the Barnum & Bailey Circus.
Prior to the formation of the "Greatest Show on Earth" (as the Barnum & Bailey circus billed itself), circuses were primarily run in an underhanded manner. From the moment a customer entered the circus until his or her return home, they ran a high risk of being cheated. Ticket takers would short-change customers when they were entering the events; pick pockets were paid on commission to roam the grounds; shows were tacky; and games were impossible to win (Mueller 1999). So-called "Monday Men" stole from nearby clothes lines and houses while homeowners attended the shows and circus parades (Tully 1927 ). Longtime Hollywood columnist Jim Tully relates from first- hand experience how circuses pretend to be honest in order to take advantage of "rubes" in his 1927 book Circus Parade (2005 : 44-5):
Whenever a large group of rustics would assemble the spieler would say, 'Now Ladies and Gentlemen, we aim to run an honest show-but as you perhaps know there are thieves in high and low places-and dishonest people may follow us-just as you may have dishonest people right here in your own fair city. Hence and therefore-I warn you to watch out for your valuables.'
Immediately rustic hands would feel for purses. The pickpockets would watch where the hands went and follow after.
The deception, lying, and theft embraced by circus managers led to quick short-term profits, but the dishonest firms did not survive in the long-run because of competition and innovation in the circus industry. Eventually, customers stopped attending the circus because they were disappointed with their experience. With customers disappointed with circuses, the Barnum & Bailey Circus emerged in the 1880s and set in motion a variety of changes to the circus industry. Unlike earlier circus shows, Barnum & Bailey ran a successful circus by creating value for the customer. To overcome the bad impression people had about circuses, Barnum & Bailey had to work extra hard for customers and market the circus as an honest source of entertainment for families. In addition to promising honest ticket takers, Barnum & Bailey had to monitor their workers' behavior and make it costly to be dishonest. They also hired private detectives to catch and scare off the pickpockets.
Barnum & Bailey made their business a more ethical and honest one because it was the right thing to do and because it was profitable to do so. Whether they achieved their goal of creating "The Greatest Show on Earth" is debatable, but they were able to convince crowds about the value and enjoyment of attending the circus (Mueller 2001).
By 1910 Barnum & Bailey, as well as other "clean" circuses such as the Ringling Brothers, had moved to the top of the industry and continued to profit from their honest business methods. More importantly, because their more honest and virtuous behavior was more profitable, their business practices began to dominate the industry. While a few circuses continued to try to operate using the old methods of taking advantage of the "rubes," the dominant business model became the so-called "Sunday School" approach of Barnum & Bailey (Mueller 2001).
The case of Barnum & Bailey illustrates a key point about how markets reward firms when the firms try to "do the right thing." While some customers attended Barnum & Bailey circuses because of their desire to reward a company for trying to be honest in what was a dishonest and unethical business, many customers did not know or care about the business strategy of Barnum & Bailey. All they needed to know to reward P.T. Barnum and his successors for their behavior was that attending the circus was more valuable to them than the expected cost (which includes prices paid for entry, shows, etc. and possible costs from theft). Based on their experiences and word of mouth about the good experience being had at circuses, customers expected circuses to be worth the money. The reputation of ethical circuses continued to improve and so too did firm profits. Thus, it is typically not out of conscious action on the part of consumers that ethical and virtuous companies are rewarded. Instead, companies focused on creating long-term relationships with customers are most likely to engage in honest and ethical behavior.
In some sense, the emergence of virtue in the marketplace can be thought of as a beneficial spontaneous order (Hayek 1973). It was not the original intention of P.T. Barnum and James Bailey to reform the circus industry and get everyone to adopt the "Sunday School" approach to circuses. Their intent was to be profitable in the long-term. In order to do so, they had to create value for the customer in what was, essentially, a repeated game. The unintended beneficial result of their actions is that other individuals ended up having to copy their behavior in order to be successful. As we can see from the evolution in the way customers were treated at the circus, unethical behavior in the free market tends not hold up in the long run when customers care about unethical behavior and competitive alternative exist. When the unethical business is trying to prosper in a market where good ethics is the norm it becomes nearly impossible for such businesses to be successful.
4 Whole Foods
As we saw in the previous section, people are attracted to ethical business practices and moral behavior. Some of the most successful businesses in the market today put the consumer first, and they subscribe to the theory that if the customer is happy, then the business will be more profitable (Friedman, Mackey, and Rodgers 2005).
Whole Foods Market is a recent example of a company committed to the "customer first" model. Whole Foods was founded in 1980 as a single store in Austin, Texas. Today, with more than 270 stores in North America and the United Kingdom, it is the world's largest retailer of both natural and organic foods. John Mackey (Friedman, Mackey, and Rodgers 2005), the founder and current CEO of Whole Foods explain his corporate philosophy when he says:
We want to improve the health and well-being of everyone on the planet through higher-quality foods and better nutrition, and we can't fulfill this mission unless we are highly profitable. High profits are necessary to fuel our growth across the United States and the world. Just as people cannot live without eating, so a business cannot live without profits. But most people don't live to eat, and neither must a business live to just make profits.
Whole Foods Market is a prime example of a large business committed to high ethical standards. The motto of the company is "Whole Foods, Whole People, Whole Planet," and the management encourages doing more than just selling food. They encourage employees to strive for customer satisfaction by supplying high-quality products in a manner that creates value for third-parties in the community and worldwide (Whole Foods 1997).
While the idea of consumer surplus is not new, what is unique is how the company explicitly commits creating consumer surplus and positive external effects through its entire approach to business. Along with the company motto, Whole Foods Market embraces a set of core values through which the structure of the business is based (Whole Foods 2009d). These are
Selling the Highest Quality Natural and Organic Products Available
Satisfying and Delighting Our Customers
Supporting Team Member Happiness and Excellence
Creating Wealth Through Profits & Growth
Caring About our Communities & Our Environment
Creating Ongoing Win-Win Partnerships With Our Suppliers
While each value has its own meaning, it is through an understanding of these principles that no matter how large the business grows, it will be able to preserve what has helped them become what they are today. The company feels as if they have a responsibility to provide the highest quality product possible to all involved and associated with the business; shareholders and customers, as well as the Team Members (employees), suppliers, local communities and the environment, are all considered in decisions (Whole Foods 2009d).
To cite but one example, in an effort to become more in touch with the local community, Whole Foods has created what they call the Whole Trade Guarantee. These are products which when purchased, provide more money to the producers, ensure better wages and working conditions for the workers, and assure that environmentally sound practices are being carried out. When a purchase is made of these products, one percent of the retail value goes to the Whole Planet Foundation, a foundation which has worked to create an economic partnership with developing communities that supply the stores with their products. The Whole Planet Foundation also provides micro-lending in rural communities around the world, funding for loans and underwrite the administrative costs so that every dollar donated goes directly to those in need. The various support projects relate directly to organics and environmentally friendly production methods, animal welfare, sustainable seafood, and healthy families and nutrition.
In addition to the Whole Trade Guarantee and the Whole Planet Foundation, each store donates food to local food banks and shelters. During community giving days, what they call "5% Days," five percent of the days net sales are donated to a local nonprofit educational organization. The Local Producer Loan Program (LPLP) is a program which provides up to $10 million in low-interest loans to small local producers. The program allows them to more easily grow their business and in tern, bring more locally grown products to the Whole Foods Market. The loans given out range in price from $1,000 to $100,000 and can be put towards various things such as purchasing more animals, investing in new up-to-date equipment or converting to organic production. Various businesses are eligible for these loans, including rangers, beekeepers, ice cream makers and bakers. Each year, overall community giving exceeds 5 percent of the total net profits (Whole Foods 2009c).
In debates over the social responsibility of businesses, free-market economists sometimes argue that the only responsibility of business should be to shareholders (Friedman 1970). John Mackey feels otherwise and argues that "I believe the entrepreneurs, not the current investors in a company's stock, have the right and responsibility to define the purpose of the company" (Friedman, Mackey and Rodgers 2009). Allowing entrepreneurs to define company vision is important because it is the purpose and mission of an organization that drives the type of change we are discussing. While Milton Friedman is correct to note that there exists a principal-agent problem when corporate executives engage in socially responsible behavior, because that behavior might not be consistent with the goals of all the shareholders.
What Friedman does not emphasize, however, however, is that the principal-agent problem exists in all organizations. For example, an astronomy club president that votes to donate some of the club's dues to help pay for an Earth Day rally might be acting against the wishes of some of her principals, but organizations set up internal rules and procedures for dealing with such behavior. And if a majority of members agree with the president's actions, then the troubled members can always leave and form another organization. The fact that corporations are voluntary is an important one, because it is voluntary organizations that fill in the gaps in civil society. Traditionally civic organizations have been understood to encompass solely social organizations such as the Red Cross, or fraternal order societies, but we suggest that businesses can also play that role, to the extent that their pursuit of profit also advances social change. Whole Foods is clearly an example of a company that advances social change while earning a significant profit.
5 BB&T Bank
Throughout history, money and banking practices have been a constant source of scrutiny and skepticism. The Bible and much of Shakespeare's work paint a dark picture of lenders. According to Thomas Jefferson (1816), "banking establishments are more dangerous than standing armies." More recently, the US financial and housing crises of 2008 have spawned another round of vitriolic rhetoric against bankers and calls for greater regulation of banking are a recurring theme of the crisis.
The hostility towards bankers ultimately comes from a belief that bankers do not have the self-interest of their clients in mind. Instead, bankers aim to maximize short-run profits, and, in so doing, they often leave their clients worse off in the long-run. To some extent, the argument has a certain amount of plausibility and appeal. In the pursuit of quick profits, bankers overextended credit to questionable borrowers during the housing crisis, knowing (1) borrowers were often confused about the product being sold; and (2) the mortgage would be sold and soon become someone else's problem.
Like our previous examples, when the market seems to be filled with dishonesty and uncertainty, there's an opportunity for a firm to enter and provide honesty. BB&T Corporation of Winston-Salem has been one of the firms providing honesty to its banking clients. The company focuses on what's best for the client long-term and emphasizes the importance of individualism and responsibility in its mission statement. As the company's information page states (BB&T 2007),
At BB&T we recognize that you're an individual, with a unique set of financial goals and ambitions. We also know that what you need from us will change as you go through your life. That's why we believe in building strong relationships, and that complete financial security comes from making one good decision at a time. We can offer solutions to all your financial needs, and the accounts, tools, and services to help you meet your goals.
For BB&T, the mission statement and discussions of the company's core values matter. The company wants all workers to embrace the culture of always asking, "What's in my client's long-term interest?" They emphasize the importance of establishing "win-win" relationships with their clients. And, if they make their client's lives better, they believe they are making both the company and the world better.
The desire to improve client well-being can be clearly seen in their mission statement, which focuses on how making sure customers, employees, and the greater community are better off, ultimately maximizes the long-run return for shareholders (BB&T 2007). Their purpose statement provides perhaps the clearest statement of why a focus on creating long-term value for all stakeholders is in everyone's best interest.
Our ultimate purpose is to create superior long-term economic rewards for our shareholders.
However, our purpose, to create superior long-term economic rewards for our shareholders, can only be accomplished by providing excellent service to our clients, as our Clients are our source of revenues.
To have excellent client relations, we must have outstanding Employees to serve our clients. To attract and retain outstanding employees, we must reward them financially and create an environment where they can learn and grow.
Our economic results are significantly impacted by the success of our Communities. The community's "quality of life" impacts its ability to attract industry for growth.
Therefore, we manage our business in a long-term context, as an integrated whole, with the ultimate objective of rewarding the Shareholders for their investment, while realizing that the cause of this result is quality client service.
BB&T's emphasis on values and long-run thinking has resulted in consistently high levels of customer satisfaction (J.D. Power and Associates, 2008). In addition, the company was able to avoid many of the "subprime" problems plaguing many other large U.S. banks during the current crisis. The company viewed many of the teaser and zero interest rate mortgage offerings of the housing boom as financial products not beneficial to their client's long-term interest and therefore avoided them. By being honest and encouraging their clients to avoid confusing products to a far greater extent than their rivals' clients, BB&T weathered the financial crisis far more effectively than as peers. When "stress tests" of banks were recently performed, BB&T emerged as one of the healthiest banks among the 19 largest financial institutions in the country (Craver 2009). BB&T's CEO through 2008, John A. Allison, was also named runner-up to Warren Buffet for CEO of the Year in 2008 by independent research provider Morningstar. As the press release announcing the finalists noted (Morningstar 2009):
It may seem odd to nominate a bank CEO after all the trouble that imprudent lending has caused to our financial system, but John Allison, BB&T's retiring CEO, is a worthy candidate. During his tenure, he has used the combination of conservative underwriting with timely expansion to create a Southeast banking giant. With an intense focus on culture, Allison's personality and ethics are ingrained throughout the organization.
The bank's resilience has largely come from Allison's ability to portray BB&T as a safe haven for its customers, helping the bank to soak up deposits and profitable small and mid-sized business clients from its troubled peers at a rapid rateâ€¦Most important of all, Allison's focus on the company's culture and his close relationship with his fellow managers have assured us that even though he will retire at the end of the year, BB&T's conservatism will remain its backbone and, we believe, will help reward shareholders for years to come.
It remains to be seen if BB&T's approach to the business of banking will be adopted as a model by other banks, in the way that Barnum & Bailey's circus became the standard by which other circuses would be judged. It is important to note, however, that many of the sub-prime mortgage lenders such as Fremont General Corporation that were not focused on creating long-term value for their customers have gone out of business (Fu and Hall Forthcoming). So even if BB&T's actions do not directly influence other financial institutions to adopt more ethical behaviors, the relationship between ethical behavior and long-term success makes it more likely that ethical behavior will thrive in the industry.
6 Concluding Remarks
The three examples discussed illustrate how ethical entrepreneurs can improve their own businesses and make the overall capitalist system a more moral one. In each case, an ethical entrepreneur recognized the value in doing something differently. As circus show producers, Barnum & Bailey made their shows a form of weekend fun by making their employees and managers an asset instead of a liability. Changes in the way employees were monitored; changes in incentives; and an emphasis on honesty all led to a superior circus show. To bring back jaded customers, Barnum & Bailey had to market their product as an honest one, form new relationships with customers, and wait for word of mouth to spread. Their task was greatly complicated by the nature of the circus industry, which is an industry constantly changing location, but their efforts in providing a superior circus show paid off and helped them maintain their image as "the greatest show on earth" until the Great Depression. In short, Barnum & Bailey took existing resources and combined them in a new way to produce a better product, which is the essence of entrepreneurship.
In the case of Whole Foods, the desire for profit and the desire to do good go hand in hand, recognizing that profit will come when people see that what is being done can benefit themselves and their communities. Those behind Whole Foods understand that large companies can greatly impact the environment, in either a positive or negative way. Whole Foods was the first major retailer, worldwide, to offset 100 percent of their energy uses with wind energy credits. Other environmental steps they have taken are the use of solar power, company-wide recycling programs, green buildings and a strong support for organic products (Whole Foods 2009b). It is because Whole Foods is focused on creating value for all stakeholders that has made the world a better place while remaining profitable.
Making money as a banker always requires risk, but taking on risk and also serving clients in an honest way is something BB&T and John Allison have been doing for more than 30 years. BB&T's commitment to constantly asking the question, "Does this product benefit my client in the long-run?" has, from time to time, constrained them from making a quick buck. But, their integrity has led to long-run growth in the company and satisfaction for consumers. Their prudent and long-term approach has analysts considering them poised for considerable growth in the future (Boye 2008).
Entrepreneurial approaches where profits come, in part, from running a business ethically present an important alternative for producing good and ethical outcomes in a world where rancor about business and talk of social justice dominates. By harnessing consumer demands for integrity and by contracting with their workers to meet those demands, ethical entrepreneurs can supplement and, perhaps, substitute for government solutions. While we rely on markets for many goods, a rich and complex network of voluntary organizations (including corporations) helps us provide for the rest.