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17/05/2016

This article appeared on Business Day Live on 16 May 2016, written by Dean of the Faculty of Business & Economic Sciences, Dr Ismail Lagerdien.

http://www.bdlive.co.za/opinion/2016/05/16/economics-fails-to-factor-in-role-of-ethics

Classical economists forget about human agency and what makes us human: happiness, sadness, irrationality, and unpredictability — and unethical behaviour, writes Ismail Lagardien

THERE is never a bad time to discuss ethics in business and society; and in SA today, it is a particularly good time to discuss ethics — or when and why we cheat.

There has been a significant increase in claims of human rights abuses laid against business in the past two decades or so.

Last week, Mitsubishi admitted to having cheated on fuel ­economy tests on at least 600,000 cars sold in Japan.

These human rights violations and lapses in ethical conduct have created an uncomfortable relationship between society and business. This discomfort highlights an absence of adoption of codes of conduct and the enforcement of legal norms that would help us overcome the supposed incompatibility of ethics and economics.

This is, in fact, a narrow understanding of economic activity, which is, in turn, the result of ossified ideological beliefs and values, as well as the usual externalising approach of economics. It is necessary, therefore, that ethics is integrated firmly in economics and business.

This would help us and encourage an expansion of the economic horizon as well as a reconceptualising of the status of economic theories. There is no need to feel threatened about the theories we hold dear — especially those we have reproduced over decades, to pay the rent.

Theories come and go, and their veracity and force rise and fall over time; there can be no time when we believe that we have reached the end of knowledge, that we cannot expand our knowledge based on specific, sometimes unique, sometimes universal conditions.

There is no theory independent of a concrete historical context. A theory is always for someone and for some purpose.

We need to know the context in which a theory is produced and used; and we need to know whether the aim of the user is to maintain the existing social order or to change it.

One of the more orthodox economists, the Nobel laureate for economics, Ronald Coase, writing in the Harvard Business Review in 2012, said: "Economics as currently presented in textbooks and taught in the classroom does not have much to do with business management, and still less with entrepreneurship. The degree to which economics is isolated from the ordinary business of life is extraordinary and unfortunate."

Economics, especially the orthodox neo­classical model that dominated higher learning in the 20th century, has lost touch with reality. It has lost touch with the very basis of what makes us human, and has left us with many more questions about recurrent crises in the global political economy than there are answers.

"This separation of economics from the working economy has severely damaged both the business community and the academic discipline," Coase wrote.

"Since economics offers little in the way of practical insight, managers and entrepreneurs depend on their own business acumen, personal judgment, and rules of thumb in making decisions.

"In times of crisis, when business leaders lose their self-­confidence, they often look to political power to fill the void. Government is increasingly seen as the ultimate solution to tough economic problems, from innovation to employment."

Those who have been following the crisis in the global political economy may recognise this. By one estimate, the UK government spent £850bn on bailing out banks in 2009 — the full cost may not be known for many years to come. The US government spent an estimated $29­ trillion.

The greatest effect of this chain of crises is the disruption caused among economists complacently paddling in the pool of neo­classical orthodoxy. ...

THERE is evidence that governments and the state — what Marianna Mazzucato calls the entrepreneurial state — can play a role in tackling market failures.

As countries in East and Southeast Asia demonstrated during the post­war period, the state can play a role in development. There is also incontrovertible evidence that institutions ideologically loyal to "the market" turn to governments when things go wrong.

The general equilibrium model is not all it’s cracked up to be; at the best of times, it is unsatisfactory. There is also an abundance of evidence that the state "has not just fixed markets, but actively created them". It is not an accident that the World Bank’s 1997 World Development Report made a forceful argument for the role of the state in development.

There are times and places, at home and abroad, where governance failures, especially deficits in trust, legitimacy and alarming ethical lapses, all compound market failures, and constrain the ability to provide public goods and services.

Evidence shows that in many cases, (almost always, actually) behind a failure in economics, finance, or banking, there were quite diabolical political decisions, a lack of insight and failure to see the long view, and the absence of a solid ethical basis.

Economics and the manner in which it underpins how and what we study in business, management, administration, human resource management, and accounting, has been allowed to drift too far from reality, from the social world in which business is moored.

We are, unfortunately, handing this culture, and rather narrow view of economics, down to students — the next generation of leaders. There is a groundswell of opinion, and some excellent scholarship, building on the realisation — across a spectrum of economists, political economists, and social scientists — that economics orthodoxy has failed business and society.

Economists, especially those working in the mainstream, failed to anticipate the most recent of recurrent global crises, and there seems to be no way out of the drift. One issue that threatens our future is unemployment, especially unemployment among the youth, to whom we will bequeath the future, and the effect this will have on inequality. Youth unemployment is at historically unprecedentedly high levels across Europe and Africa. It is not unfair to state that if the state and business were confident of the future, they would invest in the youth. Evidence suggests they are not doing so.

If we accept the criticism of, say Joseph Stiglitz and Karla Hoff, about the failure of neo­classical economics to account for history, institutions, culture and historical distribution of wealth — and they are by no means the only mainstream economists who have raised the issue — then we have to return to a position where economics has to be pried open.

It is impossible to speak of an economy without reference to people, without understanding human agency and the very things that make us human: happiness, sadness, irrationality, and unpredictability — and unethical behaviour.

There is a great danger that we are faced with a weak ethical basis of governance (state and corporate), where "a little bit of cheating" is considered to be necessary to grease the wheels of business and the government.

There is a problem that is a greater threat to society than corruption in business and the government: it is the permissibility of corruption — the underlying belief that a little bit of cheating is acceptable. There may be times when we cheat and other times when we do not cheat; there may, sometimes, be a reason for cheating, and other times not so much.

However, if we start from a position that leaves room for cheating, then we undermine the very basis of trust that we so desperately need in SA today ...

THE lack of an ethical basis for society also strips us of our humaneness, which is so intrinsic to the concept of ubuntu.

The very idea of ethics is not alien to Africa: it is umbilically linked to our humaneness and personhood.

"The various societies found in traditional Africa routinely accept this fact that personhood is the sort of thing which has to be attained, and is attained in direct proportion as one participates in communal life through the discharge of the various obligations defined by one’s stations," explains Nigerian philosophy professor Ifeanyi Menkiti.

“It is the carrying out of these obligations that transforms one from the ‘it’ status of early childhood, marked by an absence of moral function, into the person­ status of later years, marked by a widened maturity of ethical sense — an ethical maturity without which personhood is conceived as eluding one."

It is unfortunate, but no less true that, as Coase wrote in the Harvard Business Review, economics as presented in textbooks and taught in the classroom, does not have much to do with business management, and that it remains increasingly isolated from the real world.

It is disturbing that graduate students, when they start their first jobs, have no sense of the world around them. There is a need, of course, to prepare students for their first job, but there is a greater need to prepare them for a fuller life as engaged and active members of society.

We should avoid the narrow and fatal delusion that there is a natural, common­sensical and necessary link between the curriculum and employability. It is certainly true that our students will be the workers, producers, entrepreneurs, artisans and artists, doctors, nurses and teachers, leaders and decision makers of the future. It is also true that they are now, and will always be, rights-­bearing human beings, full members of society and citizens who have to make informed decisions about their lives, and who can participate in democracy with a deeply grounded epistemic capacity.

We live in testing times; times of great uncertainty with near-­profound lapses in ethics, and when ethics are conveniently and expediently tossed around. Ethics — when and why we cheat — belong close to the centre of public and corporate governance.

• Dr Lagardien is the executive dean of the business and economics faculty of Nelson Mandela Metropolitan University 

Contact information
Dr Ismail Lagardien
Executive Dean: Faculty of Business and Economic Sciences
Ismail.Lagardien@mandela.ac.za