The strategic management of any company is based on decision making. All business related decisions must be consistent with the financial goals of the organization. Ethical issues arise when leaders make decisions to achieve personal goals for the good of the company, but with negative consequences for people and the environment. Clearly, personal interests and relationships should not harm or interfere with the interests of the business. However, on the other hand, these same words can be understood as a complete rejection of any moral restrictions in business for the sake of striving for profit. The businessman himself might have nothing against a person, but the circumstances could develop in such a way that he would be forced to act against this person for the sake of his business. According to Heath (2004), “since morality is widely regarded as a type of constraint on the pursuit of individual self-interest, it seems to follow quite naturally that business is fundamentally amoral, if not immoral” (p. 1). The issues that business ethics experiences affect not only the moral side of it, but also the whole market as well.
Heath’s market failure theory is widely regarded as “Paretian approach” due to its heavy dependence on the principle of Pareto efficiency. At first glance, social welfare can be interpreted as the sum of the individual benefits of all members of society. Accordingly, the criterion of efficiency will be the size of this amount: the larger it is, the more effective the state providing it will be. However, such a purely mathematical approach is not always convincing. For example, can there be an increase in social welfare when the situation of a smaller part of society improves due to the worsening of the situation of another, larger part of society? Even though the amount of the minority’s gain exceeds the amount of the majority’s loss, this is still an imbalanced position.
According to the theory of the Italian economist Pareto, social welfare is maximum in such a state of the economy, when no one can improve his situation without worsening the situation of the other. Blunden (2021) states that “competitive markets are good at promoting Pareto-efficient exchanges because when market actors compete for profit they push prices towards market-clearing levels” (p. 2). Thus, Heath’s theory is based on this statement: the market is, essentially, a staged competition which strives to achieve the Pareto efficiency. However, Heath (2004) claims that “while perfect competition generates a perfectly efficient outcome, a situation that is as close as possible to perfect competition will not generate an outcome that is as close as possible to perfect efficiency” (p. 22). From this point of view, the marker failure approach to business ethics issue implies that the management lead should always work within the framework of the law and the values of the stakeholder. This applies to the moral issue of information asymmetry that remains one of the main factors which contribute to the market failure.
Achieving Pareto efficiency implies absolute awareness of buyers and sellers about the properties of the purchased goods. But in practice, such awareness is unattainable, thus creating an information asymmetry. Considering the Heath’s model of perfect competition, the market should proceed from the symmetric distribution of information, and a full awareness of market participants about the opportunity costs of a particular economic good being sold. The availability of accurate information does not guarantee success, but it greatly facilitates the potential of achieving it, contributing to an increase in the efficiency of coordination and the optimal distribution of available resources. However, Heath’s theory is not quite applicable in reality for this particular issue. As it usually turns out, market prices contain more than a reflection of the supply and demand curves intersection. Potential salesmen often hide the true purposes of their market behavior and use various means to gain advantage, violating moral code. Overall, the market mechanism proves to be untenable due to the information asymmetry, without visible solution from Heath’s theory.
Nevertheless, market signals are an important measure to combat information asymmetry with the use of moral codes that Heath’s theory can provide. Guarantees and safety codes can serve well as such signal. Additionally, the reputation of the company remains an important factor: its brand transparency and public behavior towards it. The point is, however, that the behavior of agents after the contract signing is very difficult to predict. Dishonest individuals will comply with the terms of the contract to a minimum or even evade their implementation if no sanctions are provided. This moral hazard always exists, and Heath’s theory explores it, providing insights on how to reduce it. Still, the risk of moral violations associated with information asymmetry is especially great in conditions of joint work. When the contribution of each agent cannot be clearly separated from the efforts of other alliance members, the potential behavior of each side in regard of information distribution is completely unknown. Overall, the solution that Heath suggests is to establish a strict moral code in the form of a legal law. His theory, when applied with thought, can help reduce the risks and violations listed above.
References
Blunden, C. (2021). Between Market Failures and Justice Failures: Trade-Offs Between Efficiency and Equality in Business Ethics.Journal of Business Ethics.
Heath J. (2004) A Market Failures Approach to Business Ethics. In: Hodgson B. (eds) The Invisible Hand and the Common Good.Studies in Economic Ethics and Philosophy. Springer, Berlin, Heidelberg.