The evolution of ethics and the market economy

The conventional economic wisdom predicts that ethical behaviour (non-narrowly profit maximizing behaviour) should negatively affect the competitiveness of the firm. Such behaviour, therefore, would not be sustainable. I argue that ethical behaviour is consistent with competitive market economics and, from a microeconomic perspective, with the efficient operation of the firm and with its capacity to successfully compete. A key modelling assumption made in this chapter is that ethical behaviour contributes to increased production efficiency, technical change and consumer loyalty. But such positive attributes of ethical behaviour do not imply that there is an imperative towards ethical firm behaviour. Unethical firms can survive and even thrive on the market based on ‘low wage’ strategies to remain competitive, low quality, imperfect and misleading information (bounded rationality), government protection, and mental models on what makes firms competitive. One has a multiple equilibrium with respect to ethical and unethical firms co-existing on the market. Ethical behaviour is a function of micro and macro power relationships, mental models, culture, norms, decision-makers’ preferences and government policy. These can shift the balance towards ethical behaviour. But market forces and a socio-cultural-political environment favourable to capitalist free market production are no guarantee that ethical market behaviour will evolve and persist over time. This chapter contributes towards demonstrating the superiority of an ethical economy, whilst explaining why such economies need not dominate the economic playing field.