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June 1, 2012

Business Ethics, Sharpened

Kurt R. Leube on Business Ethics and the Austrian Tradition in Economics by Hardy Bouillon

Hardy Bouillon. Business Ethics and the Austrian Tradition in Economics. Routledge. 192 Pages. $60.00.

It is somewhat unfortunate that the English title of this book does not immediately attract the interest of the large readership it definitely deserves. Hardy Bouillon’s Business Ethics and the Austrian Tradition in Economics is a hugely rewarding read and arguably ranks among the most important contributions to the field of business ethics in recent years. It is demanding, and a long overdue and serious challenge to a subject that not only suffers from the slippery vagueness of its customary terminology but is also still firmly in the grip of self-appointed ethicists and moralists. Apparently a deliberate ambiguity and the prevailing zeitgeist pay off politically as well as in academic circles. The book was originally published in German as volume IX of the ecaef book series “ Studien zur Wirtschafts- und Gesellschaftsor-dnung” and is now available in this splendid translation. Bouillon is one of Germany’s leading social philosophers and currently professor of philosophy at the University of Trier (an old, midsized town in the triangle of France, Luxembourg, and Germany). He also serves as director for institutional research at smc University, Vienna, and as academic deputy director for the New Direction Foundation, a new think tank based in Brussels. His numerous books and essays have been translated into several languages, including Chinese.

This book is not politically correct and thus will almost certainly provoke some heated debates. In the course of four chapters, with short concluding remarks in the fifth, Bouillon offers here quite a few original insights and explanations to the understanding of business ethics and its decisive central part, namely the definition of a morally just economic action.

After all, can such vaguely defined slogans as “corporate social responsibility,” the ubiquitous word “sustainability,” or the equally insuppressible phrase “social justice” really provide for a productive discussion in business ethics? Unlike the majority of authors in the field, Bouillon takes a firm stand and confronts the current semantic and intellectual confusion by contesting the most decisive part of business ethics: justice in moral economic actions. He leaves no doubt that business ethics as an academic discipline presents itself mostly as politically biased and only on rare occasions as a science grounded in logic following clear definitions.

Thus, through detailed examinations of the basic assumptions of the body of current business ethics, right from the start Bouillon unrelentingly points out the various shortcomings within the subject, which are due to the sloppy and unconvincing language used by most contemporary ethicists. The philosophically untrained reader will be grateful not only for Bouillon’s gentle and clear step by step introduction to the world of precise philosophic thinking but also his reminder of the implication compliance rule, which is increasingly ignored. According to this principle, a logical conclusion may never have an implication that is not already implied in the subject. Or as he puts it: “a logical conclusion may not smuggle in new information and claim validity at the same time.” This is especially important for his discussion of the distinction between the empirical and normative aspects of business ethics. In order to follow his arguments it is also important to understand his newly introduced term “methodological individualist ethics,” which he describes as an ethics that corresponds with one of the main methodological pillars of the Austrian School of economics, namely its methodological individualism (a term coined in 1908 by Joseph A. Schumpeter). Unlike established business ethics, which asserts that there is a moral connection within enterprises, or nations, or any other entity, Bouillon argues that only human beings and their deeds can be categorized as moral. This assumption is important, as firms or other organizations are not “actors” within Bouillon’s methodological individualist ethics. It follows that “social responsibility” or “value to society,” among other popular and widely used phrases, can only be interpreted as a composite of many individual actions. The precise operational definitions of his terms and concepts — which he offers along with some elucidations to commonly used words and phrases such as “economic goods,” “property,” or “markets” — pave the way for a very useful, step-by-step guide taking readers from a “definition of economic action to the definition of moral economic action.”

In order to lead us to the proper understanding of what he labels “moral economic actions,” Bouillon provides an interesting and so far ignored correlation to Carl Menger’s (the founder of the Austrian School of economics) eminent four prerequisites of an economic good. A thing can become an economic good only, Menger wrote, if the following prerequisites are

simultaneously present: 1) A human need. 2) Such properties as render the thing capable of being brought into a causal connection with the satisfaction of this need. 3) Human knowledge of this causal connection. 4) Command of the thing sufficient to direct it to the satisfaction of the need. Only when all four of these prerequisites are present simultaneously can a thing become a good.

Bouillon, in good Austrian tradition, argues that we always utilize economic goods according to our subjective preference rankings. It is for this reason that he concludes that in order to be identified as an economic action such an action must be performed under the condition of scarcity and must also be subjectively useful. This statement is important for the understanding of his innovative definition of a moral economic action, because “inasmuch as the characterization of moral action . . . is accepted, we can conclude that economic action must be compatible with this characterization for being entitled to use the label moral economic action” (his italics). In other words, the decisive part of the academic field of business ethics is the moral economic action, or at least, as Bouillon puts it, moral economic action “should form it.”

In the third chapter Bouillon helps us grasp and follow his arguments for a workable definition of a morally economic justice. This chapter is arguably the most important. Especially with today’s “confusion of language in political thought” (as Friedrich von Hayek wrote), and in the face of the ongoing controversies, and with the muddle surrounding the ambiguous concept of social justice right from the onset, Bouillon makes it clear that “there are no ‘more’ or ‘less’ just actions, as there are more or less courageous, generous, and moderate acts. He who suggests a norm that is not entirely compatible with justice, willy-nilly recommends injustice — a cause most people try to avoid, for instance by ways of redefining ‘justice.’” At the end of the day, should we try to adapt the concept of justice to existing social norms (which we will never fully comprehend)? Or should we rather use these mostly intuitively felt social norms to test whether they can stand up against what Bouillon calls “formal justice”?

By and large, in following Hayek’s theory of social evolution, Bouillon argues that any social order grows up because individuals unintentionally act within general rules of universal application. The emergence of a social order thus is only possible because individuals act in a certain predictable way with respect to one another. Those groups which have the most effective sets of personal rules of conduct will survive and expand more easily than others. However, the overall effect of observing these rules cannot be known in advance, just like the winners of a game cannot be deduced from looking at or analyzing the rules. In other words, men did not simply design a set of social norms or rules and impose them upon the environment. Social norms may evolve over time from voluntary conventions, from contracts, or even loose agreements between people. These social standards are a sort of structure of interrelated parts that display some predictability and regularity due to the rules that govern their behavior. Our mind is itself a system that undergoes permanent changes as a result of our efforts to adapt to new situations. It is a sort of process of continuous and simultaneous classification, and constant reclassification, on many levels of impulses proceeding in it in any moment. This arrangement is applied in the first instance to all sensory perception but in principle to all the kinds of mental entities, such as emotions, concepts, images, drives, etc. that we find to occur in the mental universe. It seems that the whole order of sensory qualities, all the differences in the effects of their occurrence, could be exhaustively accounted for by a complete explanation of all their effects in different combinations and circumstances.

We can go along with Bouillon’s argument concerning economic moral actions and label them as just so long as they do not interfere with the liberty of others (he thoroughly describes liberty in his second chapter). However, the real question about the politically popular concept of social justice still remains to be investigated. Is his understanding of formal or commutative justice (always demanding a restitution of injustices and only indicating what one person is due from another under generally accepted conditions) weakened or seriously damaged by the introduction of that omnipresent phrase “social justice”?

Over the past 150 years, it seems the concept of social justice has successfully replaced the clear meaning of distributive justice and has inspired generations of social policymakers. Although the model of distributive justice can easily be traced back to Aristotle, according to Hayek the synonymous use of distributive justice and social justice was introduced by John Stuart Mill; the usage has since avoided any serious discussion. It is worthwhile to recall Mill’s own language of 150 years ago:

Society should treat all equally well who have deserved equally well of it, that is, who have deserved equally well absolutely. This is the highest abstract standard of social and distributive justice; towards which all institutions, and the efforts of all virtuous citizens, should be made in the utmost degree to converge.

Very importantly, however, Bouillon points out that social justice differs from the Aristotelian use of distributive justice, insofar as it seems to intentionally discard the decisive aspects of individual success and accomplishment. Among the most important reasons why the term is so popular, according to Bouillon, is that it appeals to those deeply rooted natural instincts that were appropriate in small tribal societies and equally small organizations. But over the span of hundreds of thousands of years, we have gradually developed into a modern mass society that is radically different from its forebears, and we function now on the principles of equal treatment and free cooperation. And still, most arguments in favor of social justice assume that there is a certain set quantity of goods or services — like a cake that can be sliced and then distributed according to abstract moral principles such as need or merit, rather than according to the principles by which the goods or services were produced in the first place.

In markets, however, there is no such distinction. Income is distributed according to the anticipated marginal productivity of factors. A person’s income in a market economy, therefore, is a function of the value of his or her services to others. It is thus inappropriate to assume that there is any merit in a moral sense in his or her actions. The notion of social justice becomes meaningless in a society of free people because only a mixture of an individual’s skills and luck determines the outcome. In other words, the term social justice is mostly used to imply that a particular distribution of wealth or income between various members of a society is fairer or more just. The never-ending trust in the concept of social justice seems to have emerged among other erroneous beliefs from a misconception of a “society.” However, we must clearly distinguish between two types of a society: one which is the result of the spontaneous interaction of a multitude of people with different purposes and goals, like markets; and another which is a result of a deliberate design, determined by a shared purpose and goal, such as a club, a corporation, or an organization. To repeat, the notion of social justice is meaningless in a society of free people in which only a mixture of skills and luck determines the outcome.

The final chapter is a highly instructive summary in which Bouillon not only reiterates the countless logical contradictions of diverse concepts and the consequences of these inconsistencies for the contemporary intellectual misconceptions in business ethics. He also applies the definitions and insights provided in the previous chapters to politically sensitive and fiercely contested topics such as “organ trade and abortion,” “insider trading and data protection,” or the politically most-appropriate cases of “bribery and corruption.” In light of current debates about market failures, dazzling bonuses for bankers or ceos, special taxation for the rich, or the famous but vacuous phrase “fair share,” the topic of business ethics is discussed almost everywhere. These debates are regrettably argued either with sloppy terminology or without any deeper understanding of the complex subject. Hardy Bouillon’s slim book is an important and illuminating contribution, a must-read in business ethics.


Kurt R. Leube is professor of economics emeritus and research fellow at the Hoover Institution, Stanford University. He also serves as academic director of the European Center of Austrian Economics, based in the Principality of Liechtenstein.