Business ethics and economic growth

Linking Business Ethics to Economic growth 4.. THE BASICS OF ECONOMIC GROWTHEconomic growth is a sustained expansion of production measured as the increase in real Gross Domestic Produ

ASSOCIATION OF CERTIFIED CHATERED ECONOMIST (ACCE)

BUSINESS ETHICS and ECONOMIC

GROWTH

STRUCTURE OF PRESENTATION :

1 Economic growth

2 Business Ethics

3 Linking Business Ethics to Economic growth

4 Assess the impact of Business Ethics on the

Economy

THE BASICS OF ECONOMIC GROWTH

Economic growth is a sustained expansion of

production measured as the increase in real

Gross Domestic Product (GDP) over a given period.

Rapid economic growth maintained over a

number of years can transform a poor nation into a rich one.

Slow economic growth or absence of growth can

a nation into poverty

CALCULATION OF GROWTH RATES

The economic growth rate is expressed as the annual

percentage change of real GDP.

Formula:

T2 - T1

Growth rate = x 100

T1

Where: T1 is the real GDP in previous year

and T2 is the real GDP in the current year

GROWTH RATE CALCULATION: EXAMPLE

We assume that a country has real GDP of

GH¢ 80bn in the 2008, and real GDP of

Growth rate = 6.7%

SOURCES OF ECONOMIC GROWTH

Real GDP grows when the factors of production

grow or when persistent advances in technology make them increasingly productive

Why are we interested in real GDP

 Because it contributes to improvement in our

standard of living.

Our standard of living improves only if we produce more goods and services with each hour of labor.

The real GDP depends on:

i Aggregate lab our hours

ii Labor productivity.

Labor productivity depends on:

i The amount of physical capital

ii The human capital

iii.The state of technology

Growth in aggregate hours and growth in labor productivity bring real GDP growth.

Physical capital growth

Human capital growth:

growth

= Labor

productivity growth

Real GDP growth

THEORIES OF ECONOMIC

GROWTH

1 Classical growth / Malthusian/ Doomsday

theory:

The theory that the clash between an exploding

population and limited resources will

eventually bring economic growth to an end.

2 Neoclassical theory:

The theory that real GDP per person will

increase as long as technology keeps

advancing.

Growth theory cont.

3 New growth theory:

The theory that our unlimited wants will lead

us to ever greater productive and perpetual

economic growth.

**** making choices and innovations

• Human capital expands because of choices.

• Discoveries results from choices

• Discoveries bring profit

PRECONDITIONS FOR ECONOMIC

GROWTH

1 Economic Freedom: A condition in which people are able

to make personal choices, their private properties are

protected, and they are free to buy and sell in markets.

2 Property rights: The social arrangements that govern the

protection of private property

3 Free markets: Buyers and sellers get information

and do business with each other in markets And market prices send signals to buyers and sellers that create incentives to increase or decrease the quantities demanded Markets enable people to trade and to save and invest.

POLICIES TO ACHIEVE FASTER

GROWTH

1 Create Incentive Mechanisms: Incentives to save, invest , and innovate.

2 Encourage savings: Savings finances investment, which brings capital

accumulation So encouraging savings can increase the growth of

capital and stimulate economic growth

3 Encourage Research and Development: Everyone can use the fruits of

basic research and development efforts.

4 Encourage International Trade: Free international trade stimulates

economic growth by extracting all the available gains from

specialization and trade.

5 Improve the Quality of Education: The free market would produce too

little education because of it brings social benefits beyond the benefits

to the people who receive the education By funding education and by ensuring high standards in skills such as language, mathematics, and science, governments can contribute enormously to a nation’s growth potential.

1 Gibson (2005) defines ethics as ‘ the practice

of studying morality’.

2 Doing the right thing

ETHICS

Business ethics is a system of moral principles

applied in the commercial world (Business the ultimate resource 2006)

Business ethics provide guidelines for

acceptable behavior by organizations in both their strategy formulation and day – to – day operations.

BUSINESS ETHICS

THE THEORETICAL BACKDROP OF

BUSINESS ETHICS

THE FOUR CONCEPTS BY ETHICAL THEORIST

1 Ethical Relativism: Ethics is a question of individual

choice and preference; we may not agree with others,

but we have no right to impose our views on them This view suggests there are no universal or absolute values

on which people can agree However, we should not take disagreement over values to suggest there are none.

Thomas Beauchamp points out that the fact that people

follow different religions does not lead them to believe that religion should be abandoned altogether.

Humans live in societies and at a basic level maintain contracts to coexist

2 Impartiality: Most classical theories suggest that we should treat

one another as equals where every one counts for one and none for more than one.

The goal here is to maximise the happiness of the maximum

number, relies on us caring about everyone else in a significant way.

3 Sympathy: One way of understanding sympathy is as the

imaginative to put yourself in someone else’s shoes In ethical

theory we are often asked to care about the rest of humanity,

often to the extent that we love our neighbors as ourselves In business terms, this may amount to a company being concerned with the welfare of individuals who may never be paying

customers.

4 Moral sufficiency: What separates the morally decent from the

morally heroic? If we are required, for example, to produce the maximum good for the maximum number, is there a place that one can stop on the grounds that we have done as much as could

THINKING ETHICALLY: A FRAMEWORK

FOR MORAL DECISION MAKING

FIVE APPROACHES TO DEAL WITH MORAL ISSUES

1 The Utilitarian Approach: Utilitarianism was conceived in the

19thcentury by Jeremy Bentham and John Stuart Mill They

suggested that ethical actions are those that provide the greatest

balance of good and evil.

To analyze an issue using the utilitarian approach:

i First , we identify the various courses of action available to us

ii Second, we ask who will be affected by each action and what

benefits or harms will be derived from each.

iii And third, we choose the action that will produce the greatest

benefits and the least harm The ethical action is the one that provides the greatest good for the greatest number

2 The Right Approach: This approach to ethics has its roots in

the philosophy of the 18th century thinker Immanuel Kant

and others like him, who focused on the individual’s right to choose for himself or herself According to these philosophers , what makes human beings different from mere things is that people have dignity based on their ability to choose freely

what they will do with their lives, and they have a

fundamental moral right to have these choices respected

Other rights that humans have include:

 The right to the truth

 The right of privacy

 The right not be injured

FIVE APPROACHES TO DEAL WITH MORAL ISSUES

Cont

3 The Fairness or Justice Approach: The fairness approach to

ethics has its roots in the teachings of the ancient Greek

philosopher Aristotle, who said that “equals should be

treated equally and unequals unequally.”

The basic moral question in this approach is: How fair is an action? Does it treat everyone in the same way, or does it

show favoritism and discrimination?

Favoritism gives benefits to some people without a justifiable reason for singling them out

Discrimination imposes burdens on people who are no

different from those on whom burdens are not imposed

FIVE APPROACHES TO DEAL WITH MORAL ISSUES:

Cont

FIVE APPROACHES TO DEAL WITH MORAL ISSUES: Cont

4 The Common – Good Approach: This approach to ethics

presents a vision of society as a community whose members are joined in the shared pursuit of values and goals they hold

in common This community comprises individuals whose

own good is inextricably bound the good of the whole

The common good is a notion that originated more than

2,000 years ago in the writings of Plato, Aristotle, and Cicero More recently John Rawls defined the common good as

“certain general conditions that are … equally to every to everyone’s advantage.”

In this approach, we focus on ensuring that the social

policies, social systems, institutions, and environments on

which we depend are beneficial to all

FIVE APPROACHES TO DEAL WITH MORAL ISSUES: Cont

5 The Virtue Approach: The virtue approach to ethics assumes

that there are certain ideals toward which we should strive, which provide for the full development of our humanity

These ideas are discovered through thoughtful reflection on what kind of people we have the potential to become

Virtues are attitudes or character traits that enables us to be

and to act in ways that develop our highest potential They enable us to pursue the ideals we have adopted

Honesty, courage, compassion, generosity, fidelity, integrity, fairness, self- control and prudence are all examples of

virtues

ETHICAL PROBLEM SOLVING

These five approaches suggest that once we have ascertained the facts, we should ask ourselves five questions when trying to

resolve a moral issues:

i What benefits and what harms will each course of action

produce, and which alternative will lead to the best overall

consequences?

ii What moral rights do the affected parties have, and which

course of action best respects those rights?

iii Which course of action treats everyone the same, except where there is a morally justifiable reason not to, and does not show favoritism or discrimination?

iv Which course of action advances the common good?

SOCIAL AND ETHICAL

OBJECTIVES

1 Growing awareness of social and ethical responsibilities

Whereas twenty years ago many companies might have placed profits and growth at the top

of their corporate objectives ranking list, few would do so nowadays: there

are so many other issues to be taking into accounts Not only doubts persist as to whether profits and growth are desirable ends in themselves, there is also skepticism about their practicality Additional new measures related to pollution control, conservation of

natural resources, avoidance of environmental disfigurement by companies, and so on are now highlighted Over the past few decades a social conscience has developed in the corporate body even though it is often at the cost lower profits

'The possibility that ethical and commercial considerations will conflict has always faced those who run companies It is not a new problem The difference now is that a more widespread and critical interest is being taken in all decisions and in the ethical

judgements which he behind them.’

( Source: Adrian Cadbury, Chairman, Cadbury Schweppes, (Harvard Business Review, September - October,

Social and ethical objectives- contd

As society changes, so do the organizations which are its substance The contemporary set of guidelines or prin ciples governing company actions are generally concerned with creating the correct public image, and anything likely to create a bad press is avoided at all cost There are plenty of pressure groups, such

as consumer protection societies and environmentalists, who stand watch-dog and are , prepared to use political muscle against any erring organization Commercial pressure and social responsibility are now inextricably intertwined

Andre Valldam summed it up, ‘ I would compare the relationship between

companies and society to that between the African Buffalo Bird and the Rhinoceros: the bird lives on the back of the rhinoceros In return for a gratis mobile home, it renders a valuable service When danger impends, it emits a loud shriek and flies off the rhinoceros' back, thereby warning its host of the immediate peril.'

'We know that a business cannot operate in a vacuum, concerned only with

profits and markets and oblivious to the impact it has upon the rest of society Now, perhaps, for the first time, we are part of a real attempt to integrate

two different value systems: those that are oriented toward making a living

with those that are oriented toward making a life.'

Social and ethical objectives- contd

2 The srtakeholder Approach

The 'stakeholder' approach suggests that corporate objectives, are, or ought to be, shaped and influenced by the collective pressures of those internal and external organisations or coalitions of people which have sufficient involvement or interest in the company's

operational activities, such as:

Entrepreneurs who wish to 'do their own thing' - become financial magnates, develop

their own technical or commercial ideas, be independent.

Investors who are concerned with return on investment and capital appreciation and who

probably want information and participation in decision-making additional to the minimum legal requirement (entitlement).

Managers often preoccupied with their own status measured in terms of size of office,

type of company car, number of staff working for them, sales turnover of their operation, etc.

Non-managerial employees normally concerned with improving pay and conditions and

(particularly in the current economic situation), job security Safety at work, freedom from discrimination and industrial democracy are also concerns of employees.

Customers and final consumers interested in value of money, ethical advertising and

consumer protection.

Suppliers wanting a fair price, regular business and payment on time.

Government seeking finance through taxation and other means, as well as often seeking

Smith and Johnson (1996) differentiate three

general approaches that organizations take to

corporate responsibility:

i Social obligation: the company does only what is

legally required.

ii Social responsiveness: the company responds to

pressure from different stakeholder groups.

iii.Social responsibility: the company has an agenda

of proactively improve society.

Depending on the Smith and Johnson approach, we can assess the impact of business ethics on

economic growth.

SOCIAL OBLIGATION

Examples

• Standard and certified

products

• Issue VAT receipts

• Paying SSNIT contribution

2 Government revenue goes up.

3 Government expenditure

on health etc goes down

4 Excess revenue could be directed to other sectors

or for PSDR

• Funding public R&D

• Employing local people

• No fatty bonuses and fees

for directors

• Respect human and animal

rights

Impact

1 Human capital expands.

2 Sales increases locally / int.

3 Local products stand foreign competition.

4 Government expenditure on environment etc goes down

5 New findings from research lead

to new technology.

6 Quality of lives improves

7 Shareholders (investors) are happy.