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Economic Ethics and Business Ethics

Economic ethics involves economic policy and fairness and goes beyond business ethics, profit maximization and shareholder value. We face an inept and corrupt political-economic system that converts private losses into public losses, represses alternatives, normalizes speculative fraud, bank bailouts, endless wars and turns education from a right to a privilege.

Christoph Blocher vs. Ulrich tHIELEMANN

[Swiss Bundesrat Christoph Blocher wanted to be a professor at St. Gallen like the ethicist Ulrich Thielemann. This discussion published in 2009 in the Swiss economics magazine Bilanz is translated from the German on the Internet,  link to www.bilanz.ch.]

BILANZ: Mr. Blocher, y8ou regard economic ethics as useless.

Christoph Blocher: On the contrary, economics is ethical. Otherwise there is no economics. The chairs are superfluous. Ethics is not a discipline or science.

Why did you want to become an ethics professor in St. Gallen?

Blocher: The chair exists now. I wanted to give a praxis-friendly ethics to economics students. Otherwise only professors lecture who have no presentiment of everyday competition.

Mr. Thielemann, are you part of a circle that hardly improves life?

Ulrich Thielemann: Who is hardly improved? An economic ethics can certainly not be biased toward the interests of "the economy," which you like Blocher obviously describe as the unquenchable profit-desires of investors. They are glad when critical ethical questioning of their conduct is declared unnecessary since the economy is already ethically correct as long as the economy is as profitable as possible. That would be sheer economism, libertarian market fundamentalism.

The problem is: you hold the market economy as unethical on principle.

Thielemann: I would not say unethical but perhaps illegitimate or irresponsible. The "market economy" as a whole is obviously not an illegitimate undertaking. Rather the question is what status should be given market logic, the pursuit of self-interest. This is not directed against themarket but against an exaggeration of the market logic.

Where do you see exaggerations?

Thielemann: I see an exaggeration in profit maximization which is different from pursuit of profit. Risks are taken and everything is done so the profits are as high as possible. This is not consistent with the moral principle because all actors and impacted persons would be degraded to instruments for increased profit.

Blocher: How is this illegitimate or irresponsible? The opposite is true. The market economy is a high ethical principle. I have learned about the state economies of this world, the Soviet Union and the DDR. I was in China early on and returned from North Korea, the supposed ly last command socialist country. How incredible that the free market economy can be described as illegitimate and irresponsible.

Thielemann: We should stop discussing market versus state. This is a discussion from the last century.

Blocher: Whoever rejects the market economy lands in the planned state economy. This is a very ethical economic form that involves distribution, justice, equality, fairness and annulment of competition. This system went bankrupt = not to mention he millions of dead, victims of the violent enforcement of this "ethic al principle."

Thielemann: Once again the alternative to the exaggerated market principle is not some form of socialism but a moderate market economy. The law-and-ordcer liberal Wilhelm Roepke called this "moderation and harmony." He knew that too much competition devours us. Therefore a specific discipline, economic ethics, is necessary. Economic ethics needs a certain distance to praxis so it can reflect rfreely and independently and show malformations.

Where do you see malformations?

Thielemann: A responsible economics is vital todfay, an economics that emphasizes fairness in dealing with one another. This is not simply the so-called free market economy. Only the freedom of powerful market actors is meant who free themselves from all responsibility. This cannot be justified. The market logicf should be given space but must be embedded in over-arching values. Good managers and entrepreneurs take into account other aspects like the environmental- and social friendliness of their conduct.

What is immoral about profit maximization, a concept of neoclassicism, assuming the entrtepreneur holds to laws?

Thielemann: The entrepreneur also walks over corpses. He treats all his interaction- and busness partners as a means to this end. Whoever wants to realize profits and this obviously includes businesses need not seek a maximization.

Mr. Blocher, did you walk over corpses as a businessman?

Blocher: Whoever walks over corpses ill never have a suc cessful business! I don't know a successful entrepreneur who only thought of his maximum profit. But I know businesses that perished because they did not think of the profit, particularly the long-term. Profit, as I taught my co-workers to say, is the blood of the business. No organism can survive with blood alone - or without blooid.

Thielemann: Yes, an organism needs "blood."Otherwise it goes bust. But they don't need to become vampires that are only intent on "blood."

Blocher: Entrepreneurs must strive to be better and differtent than the competition. Otherwise they cannot survive. I can read the viability, the competitiveness of the business in the height of the profit over the year. Only incompetent managers are against a long-term profit maximization. They make a virtue out of their distress.

Whoever generates profit is suc cessful. This helps pay higher wages and to produce eco logically.

Thielemann: Being successful mdoesn't mean being as successful as possible. One can be successful without risking everything or doing everything in one's power to earn more. Here is a concrete example. If wages are forced down, the profit increases. One can understand a fair distribution of value creation as a good economics or one can see one's business model as exerting pressure on employees through threats of dismissal. Fair association and fair distribution of value creation are part of fair economics.

What is an ethically correct product? What is an ethically just wage of a manager? Who should define it: the state, shareholders or economic ethicists?

Thielemann: Certainly not the ethicist. But if economics explains to us how profit is increased, it silently assumes this profiut maximization is legitimate. I do not claim that realizing profit is not necessary as compensation for the sponsor. But profit may not be the final standard...

The incentive systems in the financial sector - the maximization of income - contributed their share to the financial crisis...

Controls by shareholder4s and governing boardcs obviously failed...

Is the Novartis chief Vasella worth 40 million francs a year?

Blocher: Obama finds $500,000 a year plus a bonus to be enough. The most consistent ethicist, the Apostle Paul, wrote in the Letter to the Corinthians: Whoever proclaism the gospel should earn nothing. At least he spoke of things about which he understood something...

Mr. Thielemann, how high should the top salary be?

Thielemann: An ethically reflective economic theory should be modest. Factor 25 was the difference between the lowest and highest wage in a firm before the explosion of manager salaries in large corporations. Genuine political questions are involved.

Blocher: The amount is a social-political question.

Thielemann: The amount is not only a social-political question, Mr. Blocher. Parties, the church and citizens may and should have opinions about this. The task of economic ethics is to point out that the wage relation is a question of fairness in the distribution of profit or value creation. The CEO does not generate the value creation alone. However many chiefs see themselves todfay as masters of value creation and co-workers as only exchangeable production actors. Correspondingly these cvo-workers feel treated as a maneuverable mass. Incomes are always shares in a social product, a common value creation. Then the question of fair income distribution to all actors is raised. Therefore this is not only a question concerning shareholders. As a second aspect, since high compensation is often poaid out as bonuses, they stand in conflict with integrity. People are encouraged to do something that is not responsible.

Do you think there is a causality between high bonuses and lacking integrity?

Thielemann: Tis is obviously not an absolute causality but is also not merely an accidental tension between incentives and responsible conduct...

I don't know what "moralism" means. Presumably you want to resist the concrete clarification of the fairness of business conduct. You said: maximization of the total profit is crucial. Thus a business becomes the instrument of shareholders and nothing else. Consequently co-workers may be guided by financial incentives for sharerholder value. Unfortunately this is not an ethically viable position.

Blocher: Where does this nonsense come from? A business that loses its value comes to an end. Should managers only concedntrate more strongly on shareholder value than on their own bonus?

Thielemann: Co-workers are enticed through incentives. Without return favors, they wont sacrifice themselves for capiotal which you would like to see.

Isn't there sacrifice for wages and pleasure, not for capital?

Thielemann: Co-workers are commodified or objectified with incentives. They become a means to an end and are treated like Pavlovian dogs. Some may not like to join in because they could be very rich. But such an incentive ultimately violates the moral principle.

A bonus is a form of reward for fulfilling a goal.

Thielemann: I do not object to rewards. Butr rewards as recognition for good work in a business culture are different than incentive systems to bring someonetop do something. With the bonus, one is only interested in the effective qualities of a person. Co-workers always have room for manoever. A pro uses these possibilities. But the bonus makes it hard to feel free in different discretionary questions. Whoever decides differently here than the incentives earmark quic kly ends up on loser street.

That is again a general statement.

Thielemann: Take the subprime crisis. Banks granted real estate credits to people who could not afford a house. Older bankers knew this practice was irresponsible from an ethical-financial perspectivbe. However they did this be cause otherwise they would risk their job or bonus. Not submitting demands much under such an incentive system. In my opinion, limit5ing the share of variable compensation is the political order of the hour. Then co-workers could again work professionally and responsibly.

Mr. Blocher, do you train your co-workers at Ems chemical to be Pavlovian dogs?

Blocher: No, but to be co-workers with a high sense of responsibility. We always knew that we had to realize profit and increase the value of the business to survive. We co-workers are personnel resources in a business and a means for successfully organizing the enterprise. If we don't do this - if the business leaders fail - we sink or drown. On yur remark about the subprimed crisis, the basic problem was that people received mortgages they could not afford. Under the Clinton administration, politics resolved for ethical and social reasons that everyone should have a house and a mortgage even if he or she could not afford them. The state encouraged this with advantages and helped banks join in. No ethicist criticized this conduct at that time. On the other hand, neoliberal economists supported this for economic reasons.

Thielemann: Only some hard-as-rock market liberals believe the financial bubble arose through too much social policy and not that increasingly greedy investors found no profitable investment possibilities any more in the already squeezed-out real economy. But they also address an important theme, competitive pressure. Economic ethics is not only business ethics. Its addressant is economic policy and not only the entrepreneur. Economic ethics has the task of forming a framing order that encourages responsible economics. Ultimately it seeks to ensure that the responsible actor is not the dumb one.

Mr. Blocher, you want to keep a tight rein on the big banks. You obviously fear the consequences of greed.

Blocher: We know the free market economy can produce the most well-being. However one consequence is that businesses go down in failure. The entrepreneur loses everything. This fear of destruction is also the incentive for the entrepreneur to be successful. Now we have big banks whose existence the state guarantees in an emergency. This is intolerable.

Therefore you want to cap the wages of the bosses? Do you believe they would work for lower salaries?

Blocher: When the state gives a state guarantee to big banks, a salary at the level of the CEO of the Zurich canton bank is in order. That is the price that must be paid for a state guarantee. Economic ethicists or the SP want to limit wages.

Blocher: When a firm is independent of the state, the state guarantee is inapplicable. Then the state has nothing to limit.

UBS and CS will also stand under a state guarantee in ten years.

Blocher: Why is that? The British HSBC, the fourth largest bank in the world, has implemented a structure in which the individual parts of the bank can go bankrupt. Astonishingly the HSBC survived the financial crisis without state support.

If politics does not solve the "Too Big to Fail" problem, would you launch a popular initiativewith the theme of breaking up the big banks?

Blocher: This remedy should be used if necessary.

Thielemann: Shareholders and bankers have an interest that their business falls into the "Too big to fail" category. Then they never take high risks and profit from high profits. When the bubble bursts, the state bails them out.

Ulrich Thielemann

The 48-year old is co-director of the Institute for Economic Ethics at the University of St. Gallen, Switzerland. In the summer, the economist provoked a controversy when he criticized banking secrecy in Berlin and lamented that a "consciousness of injustice" was lacking in Switzerland. He competed - in vain - for an open ethics professorship in St. Gallen. His most recent book is: "System Error: Why the Free Market Leads to Unfreedom."

Christoph Blocher

The 69-year old directs the financial institute Robinvest. In 1983, the lawyer took over Ems chemical and developed it into a flourishing industrial enterprise. For 14 years, he sat in the Swiss National Assembly for the SVP. In 2003 he was elected to the Swiss Bundesrat where he supervised the justice and police departments. In December 2007 he was voted out of office. He competed - in vain - for an ethics professorship in St. Gallen.

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