Ethics in Economics

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As might be suspected, early writings on ethics were centered not on economics or business, but personal beliefs and actions. It becomes readily apparent from early discussions of ethics that philosophers and writers viewed ethics as a matter of choice. Individuals must make choices in their lives. This is important to notebusinesses do not make choices. Choices are made and/or implemented by individuals within the economic enterprise. People in government make choices, people in educational institutions make choices, people in businesses make choices, people with churches make choices; everyone is forced to make choices, and even the choice not to choose is a decision.


Velasquez (2002) illustrated some important points regarding organizations and their acts relative to individuals in the organization. He stated:

  1. A corporate organization exists only if (1) there exist certain human individuals placed in certain circumstances and (2) our linguistic rules lay down that when those kinds of individuals exist in those kinds of circumstances, they shall count as a corporate organization.
  2. A corporate organization acts only if (1) certain human individuals in the organization performed certain actions in certain circumstances and (2) our linguistic rules lay down that when those kinds of individuals perform those kinds of actions in those kinds of circumstances, this shall count as an act of their corporate organization. (p. 16)

Linguistic rules are the rules of either written or spoken language. In the above quote, it is pointed out that individuals make up the corporation or business and that the corporation acts when these individuals carry out their assigned duties within the scope of the corporate authority. However, since it is human individuals on whom the corporation depends, it is these individuals who are seen to be responsible for moral duties and issues.

Businesses are the most significant institution in the economic structure. As such, businesses are expected to produce goods and services that are demanded by members of society, and once produced, these goods and services must be distributed to the numerous societal groups. Decisions are made within the business structure about who will produce, how much will be produced, how production will be implemented, how the work will be organized, and how the finished good or service will be made available to the consuming members of society. All these decisions are necessary in the day-to-day operation of an economic institution, and all these choices are made by people. It could be argued that computer models are used to make decisions, but it can be further counter-argued that computer models are developed by people and people are the ones who implement recommendations made by computer modeling.

In order for people in all institutions to make choices, there must be some guidelines or principles upon which the choices are based. These guidelines are often referred to as values. Everyone develops a set of values, or preferences, beginning in early childhoodor perhaps even immediately from birth. These values stem from how people are raised, where they live, their ancestry, and all the other factors that influence everyone's lives. If everyone has a value system, everyone must have an ethical system upon which to base judgments and choices. Stemming from this personal set of values will come policies and procedures that will guide all organizations within the economic structure.

Boulding (1968) argued that individuals have a real personal ethic, which can be deduced from a person's actual behavior, and a verbal ethic, which can be deduced from a person's statements. Boulding found that it is basically a universal phenomenon that a person will talk about one set of ethical principles but act according to another. The old statement "Do as I say, not as I do" seems to reflect an accurate perception of reality.

Ethics, from an economist's perspective, is a matter of choice. Economics is a matter of choice. There are several alternatives from which a choice must be made. A business owner or manager might have to decide between producing weapons for military use or firearms for use by private individuals who pursue the sport of wild game hunting. These decisions are not always easy, especially when guided by the need for the organization to make a profit. The choice that is ultimately made is based on a value system that influences policies and procedures in the organization. In an economic environment, the decision is often made based on values that have been determined to be most important or that are ranked on a scale of best to worst.

A dilemma that faces all decision makers, especially when group decision making is used, is the different value systems that are held by individuals. While organizations have policies and procedures, not every option from which to choose is necessarily easily defined or clearly understood. Many organizations have mechanisms through which those affected by the decision can appeal it for further consideration. In the case of a university student who receives a failing grade but thinks the grade was undeserved because of a conflict with the professor, an appeal by the student might be heard and a decision could be made to overturn the professor's decision. Or the decision might be made in favor of the professor and the student's appeal denied. Such a decision is based on value systems that guide ethical behaviors.

Decisions made by economic institutions do not always match what the general populace thinks is correct. When this happens, the result can be new laws or rules that are passed to try to contain those who are perceived as violating the public trust. For example, many laws have been passed to curb problems with pollution. Antipollution laws are designed to reduce the harmful effects of pollution; when a business does not follow the laws, it can be severely penalized. In some cases, the new laws force the closure of business enterprises because conformity to the laws is cost-prohibitive. This was the case when laws went into effect requiring underground gasoline tanks at service stations to meet Environmental Protection Agency requirements. Many businesses could not meet the requirements because of the expenses involved and they closed their doors.

At other times, businesses choose to violate the laws in order to save money. In the long run, this can cost more than the business would have had to pay had the changes been made to comply with the laws. This occurred when a chemical manufacturing company was caught dumping hazardous waste into an Illinois River. The company was told to stop the dumping and was fined a large sum of money. However, during the time the environmental inspectors were on the premises, the company chose to dump more waste into the river, saying that if they had not done it, there could have been a fatal accident in the plant. They were fined an additional sum. These examples illustrate choices that must be madenot by businesses in economic systems, but by individuals in the businesses.

Whereas businesses are the most significant institution within the economic structure, it should also be noted that businesses are not the only institutions within an economic structure. There are many other important groups, such as the family, government, churches, and schools. All these institutions play an important role in developing value systems and the moral influences on individuals in businesses.

Because many other institutions influence the thinking of individuals in organizations, different value systems are developed. Some value systems are inconsistent with what is necessary for successful business operations and become a threat to a business and economic system. An example of that is honesty. An individual whose value system does not include complete honesty becomes a threat to successful business operations. Because of threats like these to economic entities, rules are established to deal with those who have different value systems. The rules are called laws, and the government is the largest enforcer of laws.

Governments are important to successful business and economic operations. Governments help to assure fair trade and commerce within a country and internationally. A good example of this is when the U.S. government ordered the breakup of the Bell Telephone System several years ago. It was felt that the system had grown too large and that fair competition was not possible. When companies become monopolies, they can set prices and control supplies of goods and services in ways that might not be fair to consumers. A government can intervene to assure fair trade practices. Many laws have been written to influence fair economic trade.


Businesses make decisions that influence consumers, employees, and society in general. It is people who make up the businesses, and it is people who must set the standards for ethical conduct. The process for setting standards needs to be a top-down approachmanagement must develop and support an ethical code. Employees must understand what is expected of them in order to follow the codes. Managers and employees must be trained to interpret and consider alternatives relative to established ethical codes. In larger businesses, compliance offices are often established to assure that ethical codes are followed.

People outside the business must also know what ethical standards are being followed, and they must know that individuals within the company who do not follow the prescribed ethical codes will be dealt with in a manner appropriate to the violation. This illustrates the need to enforce the ethical codes. If a business establishes an ethical code but does not enforce it, the code will not be followed.


Closely related to ethical codes are responsibilities that economic enterprises have to society. This is known as social responsibility. This is a difficult element of business operations because it normally means additional costs to the business. Social responsibility could mean making contributions to charitable organizations. An example might be a corporation donating land it is not using to a conservation group for the development of a nature preserve.

Social responsibility also includes internal considerations, such as hiring minorities, establishing on-site child-care facilities, controlling pollution, ensuring safe working conditions, providing substance-abuse programs for employees, and manufacturing safe products. These are all economic decisions that have social effects both within and outside the business.

Businesses that are concerned about social responsibility will conduct social audits. This is a systematic evaluation of the organization's progress toward implementing socially responsible programs. This is not a precise science and depends on interpretations of what is socially responsive behavior. Again, these decisions must be made by individuals within the business. Social audits do illustrate that a business is at least concerned about the social impact it has.


Ethics is not easy for any business, and there will always be individuals and/or groups who question the behaviors of institutions in our economic system. Our discussion has focused on businesses in the economic system, but other systems such as churches, schools, and governmental agencies are also subjected to critical ethical scrutiny. Ethics and social responsibility are the concern of everyone, and it is up to individuals to establish ethical codes and to follow them.

see also Economics


Baylis, Charles A. (1958). Ethics: The Principles of Wise Choice. New York: Holt.

Boulding, Kenneth E. (1968). Beyond Economics: Essays on Society, Religion, and Ethics. Ann Arbor: University of Michigan Press.

Bowne, Borden P. (1979). The Principles of Ethics. New York: AMS Press.

Brandt, Richard B. (1998). A Theory of the Good and the Right. Amherst, NY: Prometheus Books.

Facione, Peter A., Scherer, Donald, and Attig, Thomas. (1991). Ethics and Society. Englewood Cliffs, NJ: Prentice Hall.

Velasquez, Manuel G. (2002). Business Ethics: Concepts and Cases. Upper Saddle River, NJ: Prentice Hall.

Roger L. Luft

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Ethics in Economics

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