Morality, Competition, and the Firm: The Market Failures Approach to Business Ethics by Joseph Heath (review)

Until Joseph Heath came along, philosophical business ethics was in a bad way. To the extent it’s still in a bad way, perhaps it’s because Heath has had insufficient influence.

Before Heath, much of the debate in the field was between two major theories—stockholder and stakeholder theory. Both of these theories are either false, or vacuous and empty, depending on the interpretation. Heath has to some degree rescued the field by providing what is perhaps the only good general theory of business ethics, which Heath calls the Market Failures Approach. (To be clear, there is some good casuistical work in business ethics, but the Market Failures Approach is perhaps the only good general theory of business ethics.) Morality, Competition, and the Firm contains updated versions of ten of Heath’s previously published essays on the Market Failures Approach, along with three new essays.

To see the value of Heath’s work, one needs to understand what came before it. Stockholder theory claims that since a corporation’s capital belongs to the stockholders, managers in a corporation have a fiduciary duty to promote stockholders’ expressed interests. Many people, both defenders and critics of the theory, misunderstood this as meaning that managers should do whatever it takes to maximize profit, so long as they don’t break the law. On this misinterpretation, stockholder theory seems false. But, more accurately, stockholder theory says that managers should pursue stockholder interests, provided they do not violate their other, pre-existing obligations, whatever those might be. Just as my lawyer does not lose her pre-existing duties when I become her client—she cannot, for instance, dump toxins in the ocean in order to keep me out of jail—so stockholder theory says that manager must pursue stockholder interests, but only after first observing whatever duties people have. The problem—the reason stockholder theory is empty—is that it offers no account of what these prior duties are. But that’s what we need a theory of business ethics to do.

Stakeholder theory—perhaps the dominant theory of business ethics—is worse. Stakeholder theory claims that when making decisions, managers [End Page E-1] should take into account and properly balance the interests of all affected parties affected by their decisions, i.e., all “stakeholders”. This includes employees, suppliers, customers, local and national governments, and, well, everybody. The question, of course, is what counts as “properly balancing” all “legitimate interests,” in particular, how one ought to balance conflicts of interest both between and within stakeholder groups. Rather than trying to put meat on stakeholder theory’s bones, R. Edward Freeman and other stakeholder theorists instead assured everyone that the theory really is vacuous. In a recent book outlining the “state of the art” of stakeholder theory, Freeman and his co-authors explain that all stakeholder theory says is that we should “pay attention” to affected interests (Freeman et al. 2010, 9), and, further, even stockholder theory turns out simply to be an instance of stakeholder theory (Freeman et al. 2010, 24). (After all, it’s a theory about how to properly balance legitimate interests.) Instead, the point of stakeholder theory is to “creat[e] compelling stories” or “tell better stories” that help managers create value (Freeman et al. 2010, 216). In Freeman’s defense, at least the final theory cannot possibly admit of any counterexamples, since it does not say anything.

Heath’s Market Failures Approach begins by reflecting on what markets are for. Consider that interpersonal morality is highly demanding. People are wary of businesses and capitalism in part because it seems that many of the norms of the market are lax or less demanding than those of normal interpersonal morality. As Heath puts it, this is a feature, not a bug, of capitalism. Markets are a kind of “staged competition” among firms, producers, suppliers, workers, and consumers (4). In market institutions, it’s reasonable to relax the normal interpersonal rules—including norms about fairness...