The transparent exchange of value

Business ethics professor and blogger Chris MacDonald posted an insightful entry yesterday regarding whether it is ethical to depend on your customers not understanding your business model for your success.  You can read his initial post here.  I’ve given a lot of thought to what might count as the most important business ethics principle and, while my reflections are by no means complete, I’ve come to the interim conclusion that full disclosure and comprehension of value is the essential requirement for ethical business transactions.  Here’s the comment I left Professor MacDonald and his response to it, and below that some further commentary from me.

I think you are on to something very central here, Professor MacDonald. The most important justification for capitalism is that the people who exchange goods and services do so for a net gain in utility/value. I give you my money for your widget because the widget is worth more to me than the money (or the other things I could buy with it) and you sell me the widget because the money (or the other things you could buy with) is worth more to you than the widget. Without this rationale for the market system, its moral basis quickly falls apart. An unstated assumption is that both parties have complete knowledge (or reasonably complete knowledge) about the utility of the goods or services exchanged. Thus I think that *the* ethical question one has to ask of any transaction is: “if the partner in this exchange knew everything that I do about the exchange, would s/he still think this is an equitable exchange”. If the answer is no, then you are treading ethically questionable territory. As you point out, there are firms (some credit card companies, many of the lenders in the run-up to the subprime crisis, e.g.) that depend upon their customers not understanding the terms and conditions of the exchange. Or, in some cases (many pre-Dodd-Frank banks) firms assume that customers don’t understand the way the product works (e.g. overdraft charges that were manipulated by selecting which transactions were processed first). I think the basic idea here is correct, but I think it is a specific instance of a more general principle about information, utility, and ethics in the market system. While I can imagine limited counterexamples, as rule any firm that benefits from hiding information or, more subtly, relies on predictable cognitive bias (see your recent blog posting re: same) in order to trick an exchange partner into participating in an exchange is very likely an ethically bad actor.
  • Chris MacDonald on 
    Thanks for your comment. This sounds right, but I’ll just make two clarifications:
    a) The information assumption isn’t really unstated, at least to economists — it’s an important precondition for ideal markets;
    b) Seeking “equitable exchange” is hard; but the information requirement is needed for something even more basic than that, though, namely mutual advantage. Guaranteeing equitable benefit is a much tougher requirement.

Professor MacDonald is absolutely right about a) in that much of the theoretical underpinning for market economies is that information is freely available to the market. I’d add that, as an assumption, it’s a dodgy one.  While auditors, accountants, risk managers and compliance managers are employed, in one way or another to make this assumption true, we’ve seen rather a lot of examples of where it has not been.  There’s also the issue regarding the difference between the availability of information and its comprehensibility.  If one makes data available but similarly depends on your exchange partner not understanding its import, the same damning ethical judgement obtains, I think.

Point b) is also salient, though I may not have been entirely unambiguous in my original comment.  I don’t think that the requirement for equitability is a strict one. In fact, the only requirement is that both parties judge the transaction as equitable.  I’m not sure there would be a non-relative way of showing equitability, in any case.

Extending the idea a little further, take for instance the examples of monopolies or cartels.  There’s a general view that monopolies and cartels (except in some limited instances) are pragmatically and ethically suspect. The reason for this comes back to the judgement of equitability.  If a monopolist charges an above-market rate for his product because there are, by definition, no other sources of that product, his exchange partners may be driven by need to purchase that product with full information.  They won’t, however, consider it an equitable trade.  In this case, the requirement for full, comprehensible information disclosure is met but there is still a lack of equity and, therefore, ethical good.

As always, my ideas on the subject are open to discussion and further refinement, but I think there is something vital about both conditions for ethical exchange, full information and the mutual judgement of equitability.  I’d be interested to hear from anyone who has a different view on the matter.

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