“Theories of the Firm” and Business Ethics

This morning I attended a workshop on the relationship between business ethics and “the theory of the firm,” put on by the Kenan Institute for Ethics at Duke.

“The theory of the firm” is the name given to the contentious set of questions about why business firms exist in the first place, what their boundaries are, and why they tend to be structured as they are. Most people don’t give the question much thought, but stop and think for a minute about why companies exist, and why so many of them exist in roughly the form they do. From the point of view of ideal market theory, the fact that firms exist at all needs explaining: they’re lumps, aggregations of people working together within what would otherwise be a homogenous field of buyers and sellers of goods and services. (For a pretty decent summary of the topic, see the Wikipedia page on Theory of the Firm.)

The basic idea of the workshop was that our theory of the firm — our understanding of what business firms are — ought to influence how we think corporations should behave. Or thinking about it from the opposite direction, before you can say something significant about how businesses ought to behave, you need to have some understanding of what kind of beast the firm is, its role within the market and within society, and so on. The alternative is to start more or less from scratch, assume that people working within complex organizations are for all purposes “just people,” and arrive at behavioural prescriptions based either on simple moral intuitions, or, for scholars, based on philosophical ethical theories. But doing it that way tends to be less that satisfactory. As one of the participants in this morning’s sessions put it, “When you simply try to apply standard philosophical theories, you end up saying trivial things, or hitting dead-ends.”

(FYI, the view (which I share) that says theories of the firm matter in business ethics owes a great deal to the work of John Boatright, and we were lucky enough to have John with us at the session this morning. His seminal paper on the topic was “Business Ethics and the Theory of the Firm,” American Business Law Journal, vol 34 1996.)

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