You should read Joseph Heath’s Morality, Competition, and the Firm. My review of the book, forthcoming in KEIJ, is available online here.

Excerpts:

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.

On stakeholder theory:

Stakeholder theory—perhaps the dominant theory of business ethics—is worse [than stockholder theory, which also sucks]. Stakeholder theory claims that when making decisions, managers 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.

An overview of his theory

Instead, the ethics of the market is a kind of adversarial ethics, like the ethics of sports. It’s a set of rules designed to constrain or shape how competitors compete, with the goal being that competition leads to Pareto-efficient gains for everyone involved. (A situation is Pareto-efficient just in case it is impossible to make one person better off without making someone else worse off.) Market competition tends to discipline firms to act in publically beneficial ways. (This is Adam Smith’s invisible hand.) Government regulations are needed to correct some market failures. (This is the visible fist of government.) But market and government regulation are not enough to make the system work well; we need morality as well. David Gauthier had argued that a perfectly efficient market would (and even should) be a morality-free zone (Gauthier 1986, 83-112); Heath agrees, but responds that since real-world markets are not perfectly efficient, we need morality to help rectify their deficiencies. Thus the label the “Market Failures Approach”: the morality of the market is meant to correct inefficiencies in the market. For that reason, whatever norms Heath’s theoretical framework leads to depend in large part on empirical issues, such as to what extent real-world markets fail, and to what extent various norms, when widely followed, can lead to Pareto-optimal results.

For Heath, competing market agents are not themselves supposed to aim for Pareto-optimal results. Instead, “achieve Pareto-optimality” is a rule of recognition by which the moral norms of the market are derived. In the same way, the point of staging a baseball competition is to have fun, but players on the field are not bound by a rule of trying to maximize the fun. Instead, fun results from the players following properly designed rules (Rawls 1955).