Economist Tyler Cowen on Business Ethics

Economist Tyler Cowen, of Georgetown University, co-writes an excellent blog called Marginal Revolution.

Last week, Tyler offered to post a personalized podcast for anyone who bought an advance copy of his new book, Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist.

It’s not every day a star economist offers to answer any question you pose, so I ordered the book (which I had wanted to read anyway) and emailed Tyler my question. Now, I’m often more intrigued by what smart people think about what counts as an “interesting question,” than by their answers to those questions. So my question for Tyler was this:

What do YOU think is the most interesting challenge or problem associated with ethics in commerce, and why?

Here’s Tyler Cowen’s response. [4 minute audio clip]

Roughly: Tyler’s answer is about the doctrine of fiduciary obligation and its application to CEO’s. He notes that a fiduciary obligation to maximize profits (subject to legal constraints) is on one hand pragmatically necessary, but on the other hand philosophically hard to defend. He also makes an interesting comparison to the case of national leaders, and their fiduciary duties to their citizens.

I now have a transcription of Tyler’s podcast. It should be a fairly accurate transcription, but no guarantees. Apologies to Tyler for any errors:

Hi, this is Tyler Cowen. Thanks so much for pre-ordering my book “Discover Your Inner Economist” and thanks for reading the blog. First let’s have a statement of your question.

Q. I’m often more intrigued by what smart people think about what counts as an interesting question than by their answers to those questions. I’m a philosopher who specializes in business ethics. So, my question: What do you think is the most interesting challenge or problem associated with ethics in commerce and why?

A. Thanks. That’s a very good question. I suppose the one I tend to worry about the most relates to issues of fiduciary responsibility. It seems to me quite obvious that at the practical level we need something like a doctrine of fiduciary responsibility. That is, if someone is appointed as CEO of a corporation it’s entirely reasonable on one hand to expect that person to maximize the corporation’s profits, at least subject to a legal constraint, and that if this sort of contract were not allowed the whole corporate structure would seem entirely unworkable, we would all be quite poor, people would die early, civilization would more or less collapse, and so on. But on the other hand, when one looks at the doctrine of fiduciary responsibility more philosophically, I think it’s really quite difficult to defend.

What is it that would give one person the right, obligation, whatever we’re going to call it, to do something other than that which is best for the world as a whole? So if you take Parties A, B, and C. Lets say Party A is the CEO, Party B the contracting shareholders, and Party C is someone else; the consumer, citizen, person in another country affected by the corporate actions. Party C may well feel that Party C ought to have some voice in what Party A does because party C is affected by Party A. And if you tell Party C, well, the actions of Party A are entirely just because Party A wrote a contract with Party B to do it, there is really no reason why this should carry much weight for Party C. Party C says, look I’ve never been part of this contract, what Party A really has is an obligation to somehow do what is best or take my welfare into account. And philosophically that argument, to me, seems to be strong. So we have this clash of perspectives that at the rule-based level we need something like fiduciary responsibility, but in particular cases when looked at critically I think the doctrine collapses almost immediately. And finding some kind of reasonable rapprochement between these perspectives – I know there’s a lot written on this issue but I’ve never seen much that I find very convincing.

And you find a lot of issues come up at the level of the nation state also. So libertarians for instance will say, well we should be cosmopolitans. But then if you ask them, take a national government: should it maximize just the welfare of its citizens or the welfare of the world as a whole, there’s a bit of stumbling. It seems hard to imagine how we could arrange things that national governments look after the whole world, but on the other hand we don’t think a national government can just do whatever it wants to the citizens of other countries. And if you ask Milton Friedman, who’s been a free-trade cosmopolitan when he was alive, ‘well Milton you say a CEO can maximize profit, does that mean a politician is justified in maximizing votes or that a national government can use protections to enrich itself at the expense of other countries?’ Milton would probably stumble a bit and be critical but exactly what’s the difference between these two cases? Again I come back to wanting to see a lot more good work on that issue.

Anyway, thanks a lot for the question. I will think about it some more in my spare time, as they say on Monty Python. And I hope you enjoy the book. Bye!

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