Magazine article European Business Forum

Why Capitalism Badly Needs Ethics: It Is Not Enough to Change or Re-Regulate the Rules of Corporate Capitalism. the Present Crisis Requires a More Substantive Transformation of Business

Magazine article European Business Forum

Why Capitalism Badly Needs Ethics: It Is Not Enough to Change or Re-Regulate the Rules of Corporate Capitalism. the Present Crisis Requires a More Substantive Transformation of Business

Article excerpt

The moral foundation of capitalism needs to be re-considered and renewed. With the collapse of communism and the accelerated trend of globalisation a new stage of capitalism has arrived. Street protests in recent years in Seattle, Washington, Milan and Prague clearly demonstrate that many people question the legitimacy of the free market system. The recent scandals involving major American companies and the audit firm Arthur Andersen suggest something fundamental is wrong with the present structure and functioning of capitalism.

Market Fundamentalism

One of the main underlying causes of the crisis is what George Soros calls market fundamentalism. With this term Soros describes the widely held view that all kinds of human values can be reduced to market values and that the free market is the only efficient mechanism for the rational allocation of resources.


Laissez-faire capitalism, however, is dangerous since it can undermine the very values on which open and democratic societies depend. Soros has warned that the instabilities and inequalities of the capitalist system can feed into nationalistic, ethnic and religious fundamentalism, the most tragic illustration of which was the 2001 September 11 terrorist attacks on the World Trade Center in New York.

The market as an evaluation mechanism has inherent deficiencies. First of all, there are stakeholders that are simply not represented in the market, such as the natural environment and future generations. Secondly, the preferences of human individuals count rather unequally in proportion to their purchasing power, the interests of the poor and disadvantaged being inevitably under-represented in free market settings. Thirdly, the chosen preferences of those players who dominate the market tend to be self-centred and myopic; economic agents make their own decisions regarding short-term consequences only.

Such deficiencies imply that free markets cannot always be relied on to produce socially optimal, or even acceptable, outcomes. In many cases market evaluation is misleading from a social or environmental point of view--it may be a necessary form of evaluating economic activities, but it is not sufficient. Alternative evaluation of economic activities by the techniques of environmental and social reporting, accounting, and auditing is also needed. Only the combination of conventional, market-based and alternative evaluations will provide a fair and accurate picture of economic activities.

Dis-embeddedness of Capitalism

A capitalist economy can show individuals and organisations relative prices and profitable ways of resource allocation--but it cannot relieve them of the choice between goals and values. From the perspective of ethics the questioning of goals is as important as how these goals are to be achieved. One must ask about the reasonableness of the goals in the first place, as well as the rational allocation of resources for those goals. Ethics requires considering and balancing all relevant aspects (environmental, economic, and social) and not making decisions or evaluations based solely on individual preferences or profit criteria.

The introduction of laissez-faire capitalism in Eastern and Central Europe has demonstrated that lack of respect for cultural norms and institutional settings of society leads to great inefficiency and enormous social losses. In transitional economies the trade-off between speed of institutional change and the emerging business ethics and legal and economic order is crucial. Rapid institutional change can destabilise society and the development of the economy, endanger order, and undermine moral standards in business. Czech-style capitalism, which sacrificed ethical considerations in order to achieve economic rationalisation and efficiency, was doomed to fail. The point is that business ethics is not just a luxury for advanced economies, it is a source of wealth of all nations. …

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