[MUSIC] Welcome to this third video of the sixth week of our course on unethical decision-making. In our previous video, we discussed the influence of institutions on unethical decision-making. In this video now, we would like to zoom into one particular form of institutions, namely those that have become rigid, dogmatic and ideological. In this session, you will learn how institutions might morph into ideologies. You will understand the moral foundations of the free market ideology. That's the one that interests us most in this session. And you will get familiarized with a critical perspective on free market ideology. And finally, you will understand the supportive role of institutions as ideologies in the process of becoming ethically blind. In our discussion on institution theory we highlighted the fact that a lot of decisions are copies of the decisions of others. They are imitations. Isomorphism was a term that was shaped for this. People imitate others even if those cop, those copies are strategically irrational. Even if those copies might be largely efficient. Even if those copies might be morally doubtful. We simply follow what we perceive as the rules of the game. Institutions can become too dogmatic. They can deliver too narrow interpretations of the world. They become ideologies. Ideologies can be understood as structured simplifications. What they do, is they position certain beliefs and practices and values as objective and incontestable. We might tend to perceive the prevailing root of the game, caught by ideologies, as natural and without alternatives. You remember our discussion of Václav Havel in the forum. His essay on the power of the powerless. One key element of, of his reflections is that the power of ideologies lies in their thoughtless acceptance. When we look back at business scandals like Enron, Lehmann Brothers, Siemens, our first reaction often is to say well, these are deviations from the norm, bad apples. But maybe these are not deviations, but on the contrary, these are over-stretched interpretations of the rules of the game. So they're very much in line with the institutional context in which these organizations are embedded. Or to argue more carefully, they are too rigid interpretations of that institutional order. Unethical behavior might fall on very fertile, ideological ground. If we talk about ideology in the context of our course on mainly corporations, and there's one that sticks out as the dominating theory of what markets and organizations do or should do, it's the shareholder value ideology of Milton Friedman. In September 1970, Milton Friedman, the Chicago economist, publishes an article in the New York Times Magazine with the provocative title, The Social Responsibility of Business is to Increase Its Profits. And it had a tremendous impact on theory and practice of management and on how we designed our economies, in the US with Ronald Reagan, in the UK with Margaret Thatcher. In this article and afterwards around the world because this became the dominating model of how we design markets in the world. In this article, Milton Friedman makes the following statement. In a free-enterprise, private-property system, a corporate executive is an employee of the owner of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible. So Friedman harshly criticizes those who defend a broad understanding of corporate responsibility. Arguing that those who, for instance, fight for a responsibility of the corporation beyond profits are just socialists who threaten the freedom of our society. Why? Because managers are agents of shareholders. They have to align their own decisions with the interests of the shareholders. You cannot spend shareholder money for your own decisions. For your own deviating interests. If you, for instance, invest in a better pollution filter for your factories that goes beyond the law, according to Milton Friedman, you are stealing the money from the shareholders because they don't give you the right to do that. It's their money that you take for your own decisions. As managers, we have just one moral duty which is to maximize profits. Other more duties exist, but they are foreseen for other, other roles and other identities. You have other obligations in your role as a church goer, as a mother, as a father, as a good citizen. But all of these moral obligations are strictly separate from those of the manager. How could Friedman make such an argument? And how could such an argument fall on such fertile ground and find such a strong support? We have to understand Friedman's position from his particular historical context and from his belief system. We look at Friedman with a hindsight with the advantage of the hindsight. And what might look very immoral to us might make a lot of sense in his particular value system. Milton Friedman writes down his theory in the late 60s, early 70s. This is the climax of the fight of the systems. Communism and capitalism. And it is far from being clear who would win this fight. So in both camps, defenders of the respective ideologies defended them without compromise. And a key pillar of the Western model, the capitalist model, is the belief in property rights. Where does that come from? In the Middle Ages, there was a saying in Europe and mainly in the German part of Europe that was town air makes free, town air makes free. Why does town air make free? Well, most people were slaves of feudal landlords. And they were condemned to lead a miserable life. There was one chance to get out of this situation. They could flee to one of these cities that popped up in the Middle Ages. And they had, to a certain degree, their own rules of the game already established. If they could flee to one of these cities and live there for one year and one day, they received citizen rights which, basically at that time, meant property rights. The right that nobody could come and take away your property arbitrarily. So human rights in Europe developed as property rights. And the capitalist system as such is deeply shaped by this belief that property rights are a key element of how we understand human rights. The government is the enemy because it's the government who reduces or threatens by arbitrary rule making, your property rights. This is deeply ingrained in our belief systems. And it is connected to another strong element of our capitalist belief system. It's the belief in the power of the free markets. Markets are, according to this belief, the best instrument to protect property rights. But not just that, they are also superior to all other economic systems that we know with regards to the promotion of the common good. That's what we believed for many decades. And it goes back to the 18th century philosopher Adam Smith, who made an amazing observation when he looked at markets. He said, by pursuing his own interest, the individual promotes that of society more effectually than when he really intends to promote it. So on the market, people meet as egoists, only interested in their own projects. If I'm a buyer, I'm a seller, I want to make money. I want to have a product. I'm only interested in that, but by meeting, by doing this transaction, we do not just satisfy each other. The more of these transactions there are, the higher the level of the production of goods, the higher the level of prosperity in a country. Human beings are calculating egoistic hectares. We are our home economicals, but the market is able to neutralize that egoism and transform it into the common good. Adam Smith calls this the invisible hand of the market. Ronald Reagan later on called this the magic of the market, so abracadabra, the market turns egoism into common good. Milton Friedman combines these two elements, the property rights and the market efficiency. And he argues that the market, therefore, is the best way of, of promoting both my interest and the interest of everyone else. Markets are the solution. Governments are the problem. Egoism is good. Greed is good. Over the coming decades, this has become a rigid belief system that we teach in business course, that we enact in corporations and in making legal framework around markets around the world. When the financial industry got criticized for their role in the financial crisis, the collapse, the almost collapse of, of, of the banking system, the CEO of Goldman Sachs defended himself by saying, well, I am just doing God's work, doing God's work? This sounds like a Hebraist of a CEO who has lost his connection to the real world, but if you look at, this profound belief in the efficiency of markets to promote the common good, you might bet, get a better understanding of why a CEO can dare to say this. The invisible hand of the market promotes the coming good much better than anything else. So it's a divine mechanism. Doing God's work. Doesn't that ring a bell? Yes, bingo. Another powerful CEO has used the same expression, Jeff Skilling from Enron. And greed is good is a sentence we know from Gordon Gekko, from the film Wall Street, this rogue trader. Greed is healthy is a sentence for which even Frederick Buskey has become famous. A real rogue trader, who said this in a graduate ceremony at the University of California at Berkeley in 1980. So we trained generations of managers in this idea that something that normally is perceived as bad, greed, egoism, is a good thing. As a manager, you should be greedy, you should be egoistic, because that's the best way to promote the common good. If we all believe in this, it is easy to imagine how we can disconnect from a broader social context, how we can focus just on maximizing profits, regardless of the consequences for society in general. It does not necessarily lead to ethical or to unethical decisions. But it supports an atmosphere of rule breaking, it supports this effect that we have seen already in all the stories that we shared, where managers disconnect from a broad understanding of what their role is. So let me conclude with four observations. First, institutions can turn into rigid ideologies, they are perceived as true in that very moment. Second, ideologies are structured simplifications. Third, shareholder value ideology promotes greed as a virtue, and shareholder value ideology is perceiving profit maximization as the only moral responsibility of corporations. And finally, therefore, it can promote ethical blindness when it is aligned with organizational and situational forces that push managers in exactly the same direction. [MUSIC]
