Philosophy of business
Encyclopedia
The Development of management theory and philosophy considers the fundamental principles that underlie the formation and operation of a business enterprise; the nature and purpose of a business, for example, is it primarily property or a social institution; its role in society; and the moral obligation
s that pertain to it. The subject is important to business
and management
, and is closely related to business ethics
and political economy
. It is influenced significantly by philosophy
, ethics
, and economic theory.
One must draw an important distinction between the philosophy of business and business philosophy, which is an appellation that one often hears in the business world. More often than not, the latter designation is intended to denote a way of doing business or a business outlook, a popular use of the term philosophy, instead of its more formal, academic meaning, using the concepts and methods employed by philosophers. The latter meaning applies to the philosophy of business in this article. The phrase philosophy of business also might be used in the same way as business philosophy, for example, "Risk taking represents my philosophy of business." However, this is not the same sense that philosophy is used in this article.
or philosophical perspective until relatively recently. Indeed, few philosophers can be said to have paid much attention to the business enterprise, itself, prior to the latter part of the 20th century. Many philosophers tended to look askance at commercial activity, believing, as Plato
did, that only the worst sort of people are involved in such matters. Plato is not unlike many academics throughout history, even today, who tend to think of business as a necessary evil in society, and not as something worthy of serious philosophical consideration.
Although there have been few "philosophers of business", per se, business and economics has not developed in a vacuum. It is built on many tacit philosophical principles and assumptions that we can examine. As a general rule, business practitioners and theorists tend to accept the principles that are current in their society. In the European Middle Ages, for example, the dominant Christian influence resulted in a pricing practice known as just price
, and in the Enlightenment the dominant view of economic decision making was one of rationality.
The formative years in the development of the modern philosophy of business and economics was the 17th and 18th century. At that time, thinkers like Hobbes, Locke
, Rousseau, Shaftesbury, and Smith
created the intellectual foundation upon which modern business and capitalism was built. A basic principle subsumed within business practice and economic theory alike is the notion of free will. Thomas Hobbes
, John Locke
, and Jean-Jacques Rousseau
all accepted that we are free moral agents, able to make decisions, control our own destiny, and engage in a social contract. This notion would later be celebrated in the idea of the entrepreneur
, someone that freely decides to pursue a risky venture in the hope of receiving great rewards. It is also at the core of utility
theory, a model of consumer behaviour in economics in which consumers freely choose what to purchase.
Another philosophic principle that would become part of business theory and practice is rationality. The general philosophic predilection of the enlightenment was that people were fundamentally rational. Philosophers such as René Descartes
and Spinoza had built whole systems of thought on this assumption. Capitalism would do the same. For two hundred years economics was founded on the assumption of Homo economicus
. This assumption has recently been challenged by Herbert Simon
, among others.
Another key philosophic assumption is atomism. It was John Locke
's view of society as an aggregation of independent, autonomous individuals, rather than Jean-Jacques Rousseau
's vision of society as an organic collective that would become an integral part of business philosophy. The key ethical unit is the individual. Social institutions are merely constructs that individuals can use for their own purposes. Many years later, Milton Friedman used this assumption in arguing that corporations have no moral responsibility because, he contended, they are not individuals capable of responding to moral claims. Only the individuals within the business enterprise have a moral responsibility.
Modern business practice and theory developed in the age of scientific discovery, and this gave it a mechanistic orientation. In particular, Newton had just discovered classical physics. This would influence business and economics in ways that we are just beginning to understand. Early writers dealing with economic topics, such as Adam Smith
, borrowed many of their techniques and terminology from classical physics. They would use terms like "equilibrium", "labor force", "elasticity", and "income accelerator". Today a few theorists are starting to question the mechanistic approach and model business on biological principles or chaos theory. Newton's law of inertia has found its way into marketing where it is claimed that consumers will continue in their current state unless they are encouraged to act otherwise. Thus advertising is claimed to perform the valuable role of helping people experience a more variegated and interesting life.
John Locke also contributed an important attitude towards the private ownership of property. He claimed that individuals have certain inalienable, natural rights. One of these is the right of ownership. He said that if we toil on the land and mix our sweat with the soil, we become the rightful owners of the land. This argument was extended to other assets including the factors of production
, a conclusion that many, including Karl Marx
, would challenge.
Another key concept that underlies modern business is psychological egoism
. This states that the core moral obligation is to oneself. Thomas Hobbes saw all action as motivated out of self-interest. A group of philosophers including Mandeville, Butler, Shaftsebury, Hutcheson, and Smith (sometimes referred to as the "enlightened self-interest school") developed this into one of the core concepts of modern business theory. Bernard Mandeville claimed that private vices are actually public benefits. In The Fable of the Bees (1714) he laments that the "bees of social virtue are buzzing in mans bonnet". Civilized man has stigmatized his private appetites and the result is the retardation of the common good. Bishop Butler
claimed that pursuing the public good was the best way of advancing one's own good since the two were necessarily identical. Lord Shaftesbury turned the convergence of public and private good around, claiming that acting in accordance with ones self interest will produce socially beneficial results. An underlying unifying force that Shaftesbury called the "Will of Nature" maintains equilibrium, congruency, and harmony. This force, if it is to operate freely, requires the individual pursuit of rational self-interest, and the preservation and advancement of the self. Francis Hutcheson
also accepted this convergence between public and private interest, but he attributed the mechanism, not to rational self interest, but to personal intuition which he called a "moral sense". Adam Smith developed a version of this general principle in which six psychological motives combine in each individual to produce the common good. He called it the invisible hand
. In The Theory of Moral Sentiments
, vol II, page 316, he says: By acting according to the dictates of our moral faculties, we necessarily pursue the most effective means for promoting the happiness of mankind. Since Smith's time, the principle of the invisible hand has been further incorporated into economic theory. Leon Walras
developed a four equation general equilibrium
model which concludes that individual self interest operating in a competitive market place produce the unique conditions under which a society's total utility is maximized. Vilfredo Pareto
used an edgeworth box
contact line to illustrate a similar social optimality.
A link can also be made between utilitarianism
and the fundamental principles of the philosophy of business, however this is more theoretical than practical. Economists use utility theory to model human actions. Like Jeremy Bentham
, modern economists assume that people are hedonists, that is they prefer more satisfaction to less satisfaction. The amount of satisfaction can be expressed in terms of the utility a person derives from the satisfaction. Social welfare function
s used in modern welfare economics
are an outgrowth of John Stuart Mill
's utilitarian calculation of obtaining the greatest good for the greatest number. The grounding of business principles on teleological ethics has been challenged by many deontological philosophers. John Rawls
' maxmin criterion also provides an alternative.
Perhaps the best known modern philosopher of business is Peter Drucker
, whose publications have had a profound influence on management and organizational theory, generally, and on how we think of the business enterprise. More often than not, people who think about business issues are considering it from an applied perspective, which is to say, what is the best or most effective means of transacting commerce or managing the enterprise, with some goal in mind, usually profitability, improving employee relations, or marketing. While Drucker has dealt with these issues and many more in numerous publications over his long life, he also inquires into the principles and concepts that underlie commercial activity and organizational structure, and he asks what ought the mission of a business to be, and, in particular, how can we reconcile a business mission with conflicting interests in the marketplace and society.
One of the most frequently discussed topics is the matter of organizational change in a complex environment. Paul R. Lawrence has dealt primarily with organizational change, organization design, and the relationship between the structural characteristics of complex organizations and the technical, market and other conditions of their immediate environment. His 1967 book, Organization and Environment (written with Professor Jay Lorsch), added contingency theory
to the vocabulary of students of organizational behavior.
Other philosophers of business, for example, Geoffrey Klempner, are principally interested in examining how business is even possible, which is to say, how can an enterprise function in society as a whole. Klempner states that theories of ethics and business are often at odds, and that one might even have to suspend the normal ethical considerations that would apply outside of business in order for a business to be possible. This is reminiscent of Albert Z. Carr's famous and controversial Harvard Business Review
article on bluffing, where he said business was similar to playing poker
, and that deception
is a necessary part of business.
Of course, there is a close relationship between the philosophy of business and business ethics. Philosophers specializing in business ethics are primarily interested in how business people ought to conduct themselves in the marketplace and in society. Philosopher Norman E. Bowie
adopts Kant's three versions of the categorical imperative
for ensuring ethical business conduct, and he pays particular attention to the third variation, whereby the people within a business must be seen as a kingdom of ends, and not merely treated as means to an end.
The "invisible hand" is a favorite metaphor for practitioners of modern-day Western capitalism, the ideology driving globalization and, for the most part, business as we know it today. What many of the bottom-line fundamentalists may ignore is the degree to which the so-called "free market" has been skewed and maneuvered in ways Adam Smith never envisioned. Thus the question of ethics and conscience runs deeper yet. With exponential increases in government laws, regulations and court decisions regarding business in the past century, ethical practice has morphed from doing "the right thing" as conscience would dictate to doing what complies with the law or isn't explicitly illegal. Thus there's been a gradual relaxation of internal moral compass and greater reliance on external parameters, as in "if it isn't illegal, it must be all right," as well as a new skillset in finding "legal loopholes" in stretching the boundaries of compliance.
was a proponent of this view.
Others would say that its principal purpose is to serve the interests of a larger group of stakeholders, including employees, customers, and even society as a whole. Most philosophers would agree, however, that business activities ought to comport with legal regulations. One proponent of a broader view which includes a moral component has been U.S. businessman-turned-futurist John Renesch http://www.renesch.com who writes, "Corporations are human-made organisms, associations of human beings. To see this association as having one solitary purpose and responsibility, to grow
only in economic terms, is such an extreme view that implosions like what
happened to Enron, WorldCom and other corporate collapses will become more and
more commonplace."
Anu Agha, ex-chairperson of Thermax Limited, once said, "We survive by breathing but we can't say we live to breathe. Likewise, making money is very important for a business to survive, but money alone cannot be the reason for business to exist". Profit maximization is extremely relevant when top management is mandated with the job of selecting the right strategy for the business. According to Jackson Mullane
, the primary goal for any business strategy exercise must be that of maximizing profitability.
Peter Drucker
defined the very purpose of business as creating a satisfied customer. This definition is also useful in evaluating to what extent a business is succeeding in fulfilling its stated purpose.
Many observers would hold that concepts such as economic value added
(EVA) are useful in balancing profit-making objectives with other ends. They argue that sustainable financial returns are not possible without taking into account the aspirations and interests of other stakeholders (customers, employees, society, environment). This conception suggests that a principal challenge for a business is to balance the interests of parties affected by the business, interests that are sometimes in conflict with one another.
Spiritual capital
theory is a new emerging approach to business purpose, and becomes more and more influenctial due to the recent financial crisis.
believe that a business is a community of participants organized around a common purpose. These participants have legitimate interests in how the business is conducted and, therefore, they have legitimate rights over its affairs. Most contract theorists see the enterprise being run by employees and managers as a kind of representative democracy.
Philosophers who subscribe to this view generally point out that a property owner's rights are nevertheless not unlimited, and that they are constrained by morality. Thus, a home owner cannot burn down his home and thereby jeopardize the entire neighborhood. Similarly, a business does not have an unlimited right to pollute the air in the manufacturing process.
Followers of John Locke
would suggest that the first instance of property is the property that one has in himself, and that one's labor is an extension of this. The labor theory of value
suggests that when one mixes his labor with an object, he thereby makes it his property, and that his labor is the principal means of measuring value. Many classical economists and Marxists both subscribe to this view. Marxists also believe that modern production, which involves many inputs, makes an equitable division of this property impossible, which, among other reasons, necessitates that the state hold property and the factors of production in common for everyone. They assert that labor value provides an objective measure of economic activity, compared to price and other measures which they see as subjective and fluctuating.
Many neo-classical thinkers, for example, Ludwig von Mises
, believe that value is subjective and that labor is incommensurable (e.g., comparing the labor of a house painter to the labor of Picasso). They return to the classical belief in practice but assert that price is objective, the product of multiple, albeit subjective, valuations. Moreover, they assert that what really matters for assigning ownership is whether or not property was acquired or exchanged legally (see Robert Nozick
), which is known as the historical entitlement theory, whereas Marxists assert that there are no property rights in the means of production.
Libertarian socialists
, sometimes known as left-anarchists, hold that, as Proudhon
said, "Property is theft" — that is, in reference to the ownership of productive resources, property is not the right to use, but the right to keep others from using. Advocates of this philosophy therefore hold the "institution of property", as they sometimes call it, to be immoral in itself, so the accumulation of wealth that includes productive resources, especially land, is also immoral. This means that no business can really be ethical, since the very foundation of business as we know it is private property.
Regardless of how one thinks about these matters, it is undeniable that a business enterprise represents an increasingly important part of people's lives, especially the employees working there, for, in many ways, the business constitutes a person's principal social group, and it amounts to a replacement for the village or tribe that was the central social setting for our ancestors. In many ways, one's affiliation with a business is the most important social institution most of us have outside of the family.
business that is owned by its clients, as in the case of a mutual insurance company? Do the owners of insurance policies buy them primarily for a profit? What about charitable enterprises, such as Goodwill Industries
, or religious organizations such as Trinity Broadcasting Network
? Are all of these organizations businesses in the same sense as, say, General Motors is?
What is it that fundamentally distinguishes a business from other kinds of organizations, say, governmental organizations? For example, how could we characterize quasi-governmental organizations such as the U.S. Post Office
and Amtrak
, which are supposed to be self-sustaining, even profitable (for reinvestment, reducing or eliminating taxpayer subsidy, reserves)? Would we call such organizations businesses? One might suggest that these are run for the benefit of society, whereas a business is to satisfy the interests of its owners. However, is it not the case that society owns the government? One also would have to ask, how is one entity's satisfying the various interests of some segment of society substantially different from another entity's making a profit that also satisfies various interests, sometimes even the same ones?
What about a person who trades his labor in return for a wage? Is he also in business? After all, he is putting up risk capital
, in the sense that he's giving up his time...an opportunity cost
...and even making an investment of himself, his labor. He is performing a service, just as a business does. His employer is, in a sense, a customer
, someone whom he must satisfy. And the employee markets himself, his skills, either to get a job or to get ahead. He has either an explicit or implicit performance agreement, a contract. He even hopes that his revenues will exceed his expenses, which is to say, that his efforts will be profitable. Does this, therefore, make every laborer a business person?
In other words, a philosopher might reasonably ask, what elements constitute the essential and distinguishing characteristics of a business enterprise? Perhaps it ends up being something as simple as being one or more persons engaged in any number of possible exchanges that satisfies any number of possible interests in an intentional, organized, planned manner. In any case, these are at least some of the questions one might ask about the ontology
of a business.
or deductive methods. We test our hypotheses, using them as long as they are not empirically falsified, and thereby develop business theories, organized explanations of the facts. To what extent is what we purport to be business knowledge...other than that which is relatively trivial...reliable or veridical?
Business relies heavily on inductive reasoning, which assumes a uniformity of nature, such that the future is assumed to resemble the past. This, of course, is problematic, especially when considering the complexity involved in adequately factoring in the effects of customers, competitors, legislative and regulatory encumbrances, employees, environmental and climatic hazards, war, new technology, and so forth, into useful quantitative formulae. It is impossible to bind all of the variables for making probabilistic judgments on many of the most important business problems with a high degree of confidence. For this reason (among others)...because of the number of variables and the sheer unpredictability of outcomes...there is a rather considerable risk of failure in business; conversely, there would seem to be a rather high degree of luck in achieving success, or putting it in the vernacular, being at the right place at the right time. This relates to the simple fact that business knowledge is highly tentative, and subject to error or obsolescence.
The philosopher of business might also reasonably ask, to what extent does intuition play a role in our business knowledge. What does it mean to have "a gut feeling" about a business matter, and how is it useful. Is there even such a thing as business intuition
, or is it simply a matter of internalizing knowledge through a variety of experiences, such that it seems intuitive. At the very least, a great many managers and marketers would say that they operate using their intuition a great deal, perhaps especially in dealing with people, which, of course, leads us to inquire into the role of psychology
.
Moral obligation
The term moral obligation has a number of meanings in moral philosophy, in religion, and in layman's terms. Generally speaking, when someone says of an act that it is a "moral obligation," they refer to a belief that the act is one prescribed by their set of values.Moral philosophers differ as to...
s that pertain to it. The subject is important to business
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
and management
Management
Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively...
, and is closely related to business ethics
Business ethics
Business ethics is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations.Business...
and political economy
Political economy
Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...
. It is influenced significantly by philosophy
Philosophy
Philosophy is the study of general and fundamental problems, such as those connected with existence, knowledge, values, reason, mind, and language. Philosophy is distinguished from other ways of addressing such problems by its critical, generally systematic approach and its reliance on rational...
, ethics
Ethics
Ethics, also known as moral philosophy, is a branch of philosophy that addresses questions about morality—that is, concepts such as good and evil, right and wrong, virtue and vice, justice and crime, etc.Major branches of ethics include:...
, and economic theory.
One must draw an important distinction between the philosophy of business and business philosophy, which is an appellation that one often hears in the business world. More often than not, the latter designation is intended to denote a way of doing business or a business outlook, a popular use of the term philosophy, instead of its more formal, academic meaning, using the concepts and methods employed by philosophers. The latter meaning applies to the philosophy of business in this article. The phrase philosophy of business also might be used in the same way as business philosophy, for example, "Risk taking represents my philosophy of business." However, this is not the same sense that philosophy is used in this article.
Development of Management Theory and Philosophy
It is a somewhat curious truism that despite the fact that business touches nearly every aspect of our lives, few thinkers have shown an interest in it from a rulesor philosophical perspective until relatively recently. Indeed, few philosophers can be said to have paid much attention to the business enterprise, itself, prior to the latter part of the 20th century. Many philosophers tended to look askance at commercial activity, believing, as Plato
Plato
Plato , was a Classical Greek philosopher, mathematician, student of Socrates, writer of philosophical dialogues, and founder of the Academy in Athens, the first institution of higher learning in the Western world. Along with his mentor, Socrates, and his student, Aristotle, Plato helped to lay the...
did, that only the worst sort of people are involved in such matters. Plato is not unlike many academics throughout history, even today, who tend to think of business as a necessary evil in society, and not as something worthy of serious philosophical consideration.
Although there have been few "philosophers of business", per se, business and economics has not developed in a vacuum. It is built on many tacit philosophical principles and assumptions that we can examine. As a general rule, business practitioners and theorists tend to accept the principles that are current in their society. In the European Middle Ages, for example, the dominant Christian influence resulted in a pricing practice known as just price
Just price
The just price is a theory of ethics in economics that attempts to set standards of fairness in transactions. With intellectual roots in ancient Greek philosophy, it was advanced by Thomas Aquinas based on an argument against usury, which in his time referred to the making of any rate of interest...
, and in the Enlightenment the dominant view of economic decision making was one of rationality.
The formative years in the development of the modern philosophy of business and economics was the 17th and 18th century. At that time, thinkers like Hobbes, Locke
John Locke
John Locke FRS , widely known as the Father of Liberalism, was an English philosopher and physician regarded as one of the most influential of Enlightenment thinkers. Considered one of the first of the British empiricists, following the tradition of Francis Bacon, he is equally important to social...
, Rousseau, Shaftesbury, and Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
created the intellectual foundation upon which modern business and capitalism was built. A basic principle subsumed within business practice and economic theory alike is the notion of free will. Thomas Hobbes
Thomas Hobbes
Thomas Hobbes of Malmesbury , in some older texts Thomas Hobbs of Malmsbury, was an English philosopher, best known today for his work on political philosophy...
, John Locke
John Locke
John Locke FRS , widely known as the Father of Liberalism, was an English philosopher and physician regarded as one of the most influential of Enlightenment thinkers. Considered one of the first of the British empiricists, following the tradition of Francis Bacon, he is equally important to social...
, and Jean-Jacques Rousseau
Jean-Jacques Rousseau
Jean-Jacques Rousseau was a Genevan philosopher, writer, and composer of 18th-century Romanticism. His political philosophy influenced the French Revolution as well as the overall development of modern political, sociological and educational thought.His novel Émile: or, On Education is a treatise...
all accepted that we are free moral agents, able to make decisions, control our own destiny, and engage in a social contract. This notion would later be celebrated in the idea of the entrepreneur
Entrepreneurship
Entrepreneurship is the act of being an entrepreneur, which can be defined as "one who undertakes innovations, finance and business acumen in an effort to transform innovations into economic goods". This may result in new organizations or may be part of revitalizing mature organizations in response...
, someone that freely decides to pursue a risky venture in the hope of receiving great rewards. It is also at the core of utility
Utility
In economics, utility is a measure of customer satisfaction, referring to the total satisfaction received by a consumer from consuming a good or service....
theory, a model of consumer behaviour in economics in which consumers freely choose what to purchase.
Another philosophic principle that would become part of business theory and practice is rationality. The general philosophic predilection of the enlightenment was that people were fundamentally rational. Philosophers such as René Descartes
René Descartes
René Descartes ; was a French philosopher and writer who spent most of his adult life in the Dutch Republic. He has been dubbed the 'Father of Modern Philosophy', and much subsequent Western philosophy is a response to his writings, which are studied closely to this day...
and Spinoza had built whole systems of thought on this assumption. Capitalism would do the same. For two hundred years economics was founded on the assumption of Homo economicus
Homo economicus
Homo economicus, or Economic human, is the concept in some economic theories of humans as rational and narrowly self-interested actors who have the ability to make judgments toward their subjectively defined ends...
. This assumption has recently been challenged by Herbert Simon
Herbert Simon
Herbert Alexander Simon was an American political scientist, economist, sociologist, and psychologist, and professor—most notably at Carnegie Mellon University—whose research ranged across the fields of cognitive psychology, cognitive science, computer science, public administration, economics,...
, among others.
Another key philosophic assumption is atomism. It was John Locke
John Locke
John Locke FRS , widely known as the Father of Liberalism, was an English philosopher and physician regarded as one of the most influential of Enlightenment thinkers. Considered one of the first of the British empiricists, following the tradition of Francis Bacon, he is equally important to social...
's view of society as an aggregation of independent, autonomous individuals, rather than Jean-Jacques Rousseau
Jean-Jacques Rousseau
Jean-Jacques Rousseau was a Genevan philosopher, writer, and composer of 18th-century Romanticism. His political philosophy influenced the French Revolution as well as the overall development of modern political, sociological and educational thought.His novel Émile: or, On Education is a treatise...
's vision of society as an organic collective that would become an integral part of business philosophy. The key ethical unit is the individual. Social institutions are merely constructs that individuals can use for their own purposes. Many years later, Milton Friedman used this assumption in arguing that corporations have no moral responsibility because, he contended, they are not individuals capable of responding to moral claims. Only the individuals within the business enterprise have a moral responsibility.
Modern business practice and theory developed in the age of scientific discovery, and this gave it a mechanistic orientation. In particular, Newton had just discovered classical physics. This would influence business and economics in ways that we are just beginning to understand. Early writers dealing with economic topics, such as Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
, borrowed many of their techniques and terminology from classical physics. They would use terms like "equilibrium", "labor force", "elasticity", and "income accelerator". Today a few theorists are starting to question the mechanistic approach and model business on biological principles or chaos theory. Newton's law of inertia has found its way into marketing where it is claimed that consumers will continue in their current state unless they are encouraged to act otherwise. Thus advertising is claimed to perform the valuable role of helping people experience a more variegated and interesting life.
John Locke also contributed an important attitude towards the private ownership of property. He claimed that individuals have certain inalienable, natural rights. One of these is the right of ownership. He said that if we toil on the land and mix our sweat with the soil, we become the rightful owners of the land. This argument was extended to other assets including the factors of production
Factors of production
In economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...
, a conclusion that many, including Karl Marx
Karl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
, would challenge.
Another key concept that underlies modern business is psychological egoism
Psychological egoism
Psychological egoism is the view that humans are always motivated by self-interest, even in what seem to be acts of altruism. It claims that, when people choose to help others, they do so ultimately because of the personal benefits that they themselves expect to obtain, directly or indirectly,...
. This states that the core moral obligation is to oneself. Thomas Hobbes saw all action as motivated out of self-interest. A group of philosophers including Mandeville, Butler, Shaftsebury, Hutcheson, and Smith (sometimes referred to as the "enlightened self-interest school") developed this into one of the core concepts of modern business theory. Bernard Mandeville claimed that private vices are actually public benefits. In The Fable of the Bees (1714) he laments that the "bees of social virtue are buzzing in mans bonnet". Civilized man has stigmatized his private appetites and the result is the retardation of the common good. Bishop Butler
Bishop Butler
Bishop Butler may refer to:*Joseph Butler , Anglican Bishop of Bristol and Durham*John Butler, 12th Baron Dunboyne , Roman Catholic Bishop of Cork...
claimed that pursuing the public good was the best way of advancing one's own good since the two were necessarily identical. Lord Shaftesbury turned the convergence of public and private good around, claiming that acting in accordance with ones self interest will produce socially beneficial results. An underlying unifying force that Shaftesbury called the "Will of Nature" maintains equilibrium, congruency, and harmony. This force, if it is to operate freely, requires the individual pursuit of rational self-interest, and the preservation and advancement of the self. Francis Hutcheson
Francis Hutcheson (philosopher)
Francis Hutcheson was a philosopher born in Ireland to a family of Scottish Presbyterians who became one of the founding fathers of the Scottish Enlightenment....
also accepted this convergence between public and private interest, but he attributed the mechanism, not to rational self interest, but to personal intuition which he called a "moral sense". Adam Smith developed a version of this general principle in which six psychological motives combine in each individual to produce the common good. He called it the invisible hand
Invisible hand
In economics, invisible hand or invisible hand of the market is the term economists use to describe the self-regulating nature of the marketplace. This is a metaphor first coined by the economist Adam Smith...
. In The Theory of Moral Sentiments
The Theory of Moral Sentiments
The Theory of Moral Sentiments was written by Adam Smith in 1759. It provided the ethical, philosophical, psychological, and methodological underpinnings to Smith's later works, including The Wealth of Nations , A Treatise on Public Opulence , Essays on Philosophical Subjects , and Lectures on...
, vol II, page 316, he says: By acting according to the dictates of our moral faculties, we necessarily pursue the most effective means for promoting the happiness of mankind. Since Smith's time, the principle of the invisible hand has been further incorporated into economic theory. Leon Walras
Léon Walras
Marie-Esprit-Léon Walras was a French mathematical economist associated with the creation of the general equilibrium theory.-Life and career:...
developed a four equation general equilibrium
General equilibrium
General equilibrium theory is a branch of theoretical economics. It seeks to explain the behavior of supply, demand and prices in a whole economy with several or many interacting markets, by seeking to prove that a set of prices exists that will result in an overall equilibrium, hence general...
model which concludes that individual self interest operating in a competitive market place produce the unique conditions under which a society's total utility is maximized. Vilfredo Pareto
Vilfredo Pareto
Vilfredo Federico Damaso Pareto , born Wilfried Fritz Pareto, was an Italian engineer, sociologist, economist, political scientist and philosopher. He made several important contributions to economics, particularly in the study of income distribution and in the analysis of individuals' choices....
used an edgeworth box
Edgeworth box
In economics, an Edgeworth box, named after Francis Ysidro Edgeworth, is a way of representing various distributions of resources. Edgeworth made his presentation in his book Mathematical Psychics: An Essay on the Application of Mathematics to the Moral Sciences, 1881...
contact line to illustrate a similar social optimality.
A link can also be made between utilitarianism
Utilitarianism
Utilitarianism is an ethical theory holding that the proper course of action is the one that maximizes the overall "happiness", by whatever means necessary. It is thus a form of consequentialism, meaning that the moral worth of an action is determined only by its resulting outcome, and that one can...
and the fundamental principles of the philosophy of business, however this is more theoretical than practical. Economists use utility theory to model human actions. Like Jeremy Bentham
Jeremy Bentham
Jeremy Bentham was an English jurist, philosopher, and legal and social reformer. He became a leading theorist in Anglo-American philosophy of law, and a political radical whose ideas influenced the development of welfarism...
, modern economists assume that people are hedonists, that is they prefer more satisfaction to less satisfaction. The amount of satisfaction can be expressed in terms of the utility a person derives from the satisfaction. Social welfare function
Social welfare function
In economics, a social welfare function is a real-valued function that ranks conceivable social states from lowest to highest. Inputs of the function include any variables considered to affect the economic welfare of a society...
s used in modern welfare economics
Welfare economics
Welfare economics is a branch of economics that uses microeconomic techniques to evaluate economic well-being, especially relative to competitive general equilibrium within an economy as to economic efficiency and the resulting income distribution associated with it...
are an outgrowth of John Stuart Mill
John Stuart Mill
John Stuart Mill was a British philosopher, economist and civil servant. An influential contributor to social theory, political theory, and political economy, his conception of liberty justified the freedom of the individual in opposition to unlimited state control. He was a proponent of...
's utilitarian calculation of obtaining the greatest good for the greatest number. The grounding of business principles on teleological ethics has been challenged by many deontological philosophers. John Rawls
John Rawls
John Bordley Rawls was an American philosopher and a leading figure in moral and political philosophy. He held the James Bryant Conant University Professorship at Harvard University....
' maxmin criterion also provides an alternative.
Modern philosophers of business
It is fair to say that most modern philosophers of business are involved in other philosophical or scholarly pursuits, and that they come to the philosophy of business as a sub-specialty, or only indirectly because it relates to another area of interest. Thus, they are primarily philosophers dealing with other subjects, economists, or business management theorists. If one were to examine the philosophy departments in most universities, today, one would find precious few courses in the philosophy of business (as opposed to a growing number of business ethics or applied ethics courses). There are indications that a growing number of philosophers with formal training in academic philosophy will come to specialize in the philosophy of business.Perhaps the best known modern philosopher of business is Peter Drucker
Peter Drucker
Peter Ferdinand Drucker was an influential writer, management consultant, and self-described “social ecologist.”-Introduction:...
, whose publications have had a profound influence on management and organizational theory, generally, and on how we think of the business enterprise. More often than not, people who think about business issues are considering it from an applied perspective, which is to say, what is the best or most effective means of transacting commerce or managing the enterprise, with some goal in mind, usually profitability, improving employee relations, or marketing. While Drucker has dealt with these issues and many more in numerous publications over his long life, he also inquires into the principles and concepts that underlie commercial activity and organizational structure, and he asks what ought the mission of a business to be, and, in particular, how can we reconcile a business mission with conflicting interests in the marketplace and society.
One of the most frequently discussed topics is the matter of organizational change in a complex environment. Paul R. Lawrence has dealt primarily with organizational change, organization design, and the relationship between the structural characteristics of complex organizations and the technical, market and other conditions of their immediate environment. His 1967 book, Organization and Environment (written with Professor Jay Lorsch), added contingency theory
Contingency theory
Contingency theory is a class of behavioral theory that claims that there is no best way to organize a corporation, to lead a company, or to make decisions. Instead, the optimal course of action is contingent upon the internal and external situation...
to the vocabulary of students of organizational behavior.
Other philosophers of business, for example, Geoffrey Klempner, are principally interested in examining how business is even possible, which is to say, how can an enterprise function in society as a whole. Klempner states that theories of ethics and business are often at odds, and that one might even have to suspend the normal ethical considerations that would apply outside of business in order for a business to be possible. This is reminiscent of Albert Z. Carr's famous and controversial Harvard Business Review
Harvard Business Review
Harvard Business Review is a general management magazine published since 1922 by Harvard Business School Publishing, owned by the Harvard Business School. A monthly research-based magazine written for business practitioners, it claims a high ranking business readership among academics, executives,...
article on bluffing, where he said business was similar to playing poker
Poker
Poker is a family of card games that share betting rules and usually hand rankings. Poker games differ in how the cards are dealt, how hands may be formed, whether the high or low hand wins the pot in a showdown , limits on bet sizes, and how many rounds of betting are allowed.In most modern poker...
, and that deception
Deception
Deception, beguilement, deceit, bluff, mystification, bad faith, and subterfuge are acts to propagate beliefs that are not true, or not the whole truth . Deception can involve dissimulation, propaganda, and sleight of hand. It can employ distraction, camouflage or concealment...
is a necessary part of business.
Of course, there is a close relationship between the philosophy of business and business ethics. Philosophers specializing in business ethics are primarily interested in how business people ought to conduct themselves in the marketplace and in society. Philosopher Norman E. Bowie
Norman E. Bowie
Norman E. Bowie is a professor of strategic management and of philosophy. He teaches in both of those departments at the University of Minnesota in Minneapolis, Minnesota....
adopts Kant's three versions of the categorical imperative
Categorical imperative
The Categorical Imperative is the central philosophical concept in the moral philosophy of Immanuel Kant, as well as modern deontological ethics...
for ensuring ethical business conduct, and he pays particular attention to the third variation, whereby the people within a business must be seen as a kingdom of ends, and not merely treated as means to an end.
The "invisible hand" is a favorite metaphor for practitioners of modern-day Western capitalism, the ideology driving globalization and, for the most part, business as we know it today. What many of the bottom-line fundamentalists may ignore is the degree to which the so-called "free market" has been skewed and maneuvered in ways Adam Smith never envisioned. Thus the question of ethics and conscience runs deeper yet. With exponential increases in government laws, regulations and court decisions regarding business in the past century, ethical practice has morphed from doing "the right thing" as conscience would dictate to doing what complies with the law or isn't explicitly illegal. Thus there's been a gradual relaxation of internal moral compass and greater reliance on external parameters, as in "if it isn't illegal, it must be all right," as well as a new skillset in finding "legal loopholes" in stretching the boundaries of compliance.
The purpose of a business
Most would argue that the main purpose of a business is to maximize profits for its owners, or in the case of a publicly-traded company, its stockholders. The late economist Milton FriedmanMilton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...
was a proponent of this view.
Others would say that its principal purpose is to serve the interests of a larger group of stakeholders, including employees, customers, and even society as a whole. Most philosophers would agree, however, that business activities ought to comport with legal regulations. One proponent of a broader view which includes a moral component has been U.S. businessman-turned-futurist John Renesch http://www.renesch.com who writes, "Corporations are human-made organisms, associations of human beings. To see this association as having one solitary purpose and responsibility, to grow
only in economic terms, is such an extreme view that implosions like what
happened to Enron, WorldCom and other corporate collapses will become more and
more commonplace."
Anu Agha, ex-chairperson of Thermax Limited, once said, "We survive by breathing but we can't say we live to breathe. Likewise, making money is very important for a business to survive, but money alone cannot be the reason for business to exist". Profit maximization is extremely relevant when top management is mandated with the job of selecting the right strategy for the business. According to Jackson Mullane
Jackson Mullane
Jackson Mullane is an Australian actor known for his portrayal of Outlaw in the Gladiators . Mullane is also a State Representative rugby union player....
, the primary goal for any business strategy exercise must be that of maximizing profitability.
Peter Drucker
Peter Drucker
Peter Ferdinand Drucker was an influential writer, management consultant, and self-described “social ecologist.”-Introduction:...
defined the very purpose of business as creating a satisfied customer. This definition is also useful in evaluating to what extent a business is succeeding in fulfilling its stated purpose.
Many observers would hold that concepts such as economic value added
Economic value added
In corporate finance, Economic Value Added or EVA, a registered trademark of Stern Stewart & Co., is an estimate of a firm's economic profit – being the value created in excess of the required return of the company's investors . Quite simply, EVA is the profit earned by the firm less the cost of...
(EVA) are useful in balancing profit-making objectives with other ends. They argue that sustainable financial returns are not possible without taking into account the aspirations and interests of other stakeholders (customers, employees, society, environment). This conception suggests that a principal challenge for a business is to balance the interests of parties affected by the business, interests that are sometimes in conflict with one another.
Spiritual capital
Spiritual capital
Spiritual capital is a concept that involves the quantification of the value to individuals, groups and society of spiritual, moral or psychological beliefs and practices. Proponents liken it to other forms of capital, including material capital , intellectual capital, and social capital...
theory is a new emerging approach to business purpose, and becomes more and more influenctial due to the recent financial crisis.
Contract theory
Advocates of business contract theoryContract theory
In economics, contract theory studies how economic actors can and do construct contractual arrangements, generally in the presence of asymmetric information. Because of its connections with both agency and incentives, contract theory is often categorized within a field known as Law and economics...
believe that a business is a community of participants organized around a common purpose. These participants have legitimate interests in how the business is conducted and, therefore, they have legitimate rights over its affairs. Most contract theorists see the enterprise being run by employees and managers as a kind of representative democracy.
Stakeholder theory
Stakeholder theorists believe that people who have legitimate interests in a business also ought to have voice in how. The obvious non-owner, stakeholders are the employees. However, stakeholder theorists take contract theory a step further, maintaining that people outside of the business enterprise ought to have a say in how the business operates. Thus, for example, consumers, even community members who could be affected by what the business does, for example, by the pollutants of a factory, ought to have some control over the business.Business as property
Some philosophers believe that a business is essentially someone's property, and, as such, that its owners have the right to dispose of it as they see fit, within the confines of the law and morality. They do not believe that workers or consumers have special rights over the property, other than the right not to be harmed by its use without their consent. In this conception, workers voluntarily exchange their labor for wages from the business owner; they have no more right to tell the owner how he will dispose of his property than the owner has to tell them how to spend their wages, which is property belonging to the workers. Similarly, assuming the business has purveyed its goods honestly and with full disclosure, consumers have no inherent rights to govern the business, which belongs to someone else.Philosophers who subscribe to this view generally point out that a property owner's rights are nevertheless not unlimited, and that they are constrained by morality. Thus, a home owner cannot burn down his home and thereby jeopardize the entire neighborhood. Similarly, a business does not have an unlimited right to pollute the air in the manufacturing process.
Followers of John Locke
John Locke
John Locke FRS , widely known as the Father of Liberalism, was an English philosopher and physician regarded as one of the most influential of Enlightenment thinkers. Considered one of the first of the British empiricists, following the tradition of Francis Bacon, he is equally important to social...
would suggest that the first instance of property is the property that one has in himself, and that one's labor is an extension of this. The labor theory of value
Labor theory of value
The labor theories of value are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics...
suggests that when one mixes his labor with an object, he thereby makes it his property, and that his labor is the principal means of measuring value. Many classical economists and Marxists both subscribe to this view. Marxists also believe that modern production, which involves many inputs, makes an equitable division of this property impossible, which, among other reasons, necessitates that the state hold property and the factors of production in common for everyone. They assert that labor value provides an objective measure of economic activity, compared to price and other measures which they see as subjective and fluctuating.
Many neo-classical thinkers, for example, Ludwig von Mises
Ludwig von Mises
Ludwig Heinrich Edler von Mises was an Austrian economist, philosopher, and classical liberal who had a significant influence on the modern Libertarian movement and the "Austrian School" of economic thought.-Biography:-Early life:...
, believe that value is subjective and that labor is incommensurable (e.g., comparing the labor of a house painter to the labor of Picasso). They return to the classical belief in practice but assert that price is objective, the product of multiple, albeit subjective, valuations. Moreover, they assert that what really matters for assigning ownership is whether or not property was acquired or exchanged legally (see Robert Nozick
Robert Nozick
Robert Nozick was an American political philosopher, most prominent in the 1970s and 1980s. He was a professor at Harvard University. He is best known for his book Anarchy, State, and Utopia , a right-libertarian answer to John Rawls's A Theory of Justice...
), which is known as the historical entitlement theory, whereas Marxists assert that there are no property rights in the means of production.
Libertarian socialists
Libertarian socialism
Libertarian socialism is a group of political philosophies that promote a non-hierarchical, non-bureaucratic, stateless society without private property in the means of production...
, sometimes known as left-anarchists, hold that, as Proudhon
Pierre-Joseph Proudhon
Pierre-Joseph Proudhon was a French politician, mutualist philosopher and socialist. He was a member of the French Parliament, and he was the first person to call himself an "anarchist". He is considered among the most influential theorists and organisers of anarchism...
said, "Property is theft" — that is, in reference to the ownership of productive resources, property is not the right to use, but the right to keep others from using. Advocates of this philosophy therefore hold the "institution of property", as they sometimes call it, to be immoral in itself, so the accumulation of wealth that includes productive resources, especially land, is also immoral. This means that no business can really be ethical, since the very foundation of business as we know it is private property.
A mini-republic or modern village
Some philosophers see the business enterprise as a means of transmitting social justice, as a kind of mini-republic. This is especially true of contract and stakeholder theorists. Those who view a business as being primarily someone's property reject this view. While they might believe that the net effect of people disposing and exchanging their property freely will benefit society as a whole, they would argue, even if this were not the case, if there were no utilitarian advantage, one ought not to limit another's freedom, that is, unless it is harmful to others.Regardless of how one thinks about these matters, it is undeniable that a business enterprise represents an increasingly important part of people's lives, especially the employees working there, for, in many ways, the business constitutes a person's principal social group, and it amounts to a replacement for the village or tribe that was the central social setting for our ancestors. In many ways, one's affiliation with a business is the most important social institution most of us have outside of the family.
The ontology of the business enterprise
What makes a business a business? We take for granted that a business is a profit-making entity. How, then, are we to characterize a business that is run only for the benefit of the people who buy from it, for example, a so-called co-operative? Similarly, how might we characterize an insuranceInsurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
business that is owned by its clients, as in the case of a mutual insurance company? Do the owners of insurance policies buy them primarily for a profit? What about charitable enterprises, such as Goodwill Industries
Goodwill Industries
Goodwill Industries International is a not-for-profit organization that provides job training, employment placement services and other community-based programs for people who have a disability, lack education or job experience, or face employment challenges...
, or religious organizations such as Trinity Broadcasting Network
Trinity Broadcasting Network
The Trinity Broadcasting Network is a major American Christian television network. TBN is based in Costa Mesa, California, with auxiliary studio facilities in Irving, Texas; Hendersonville, Tennessee; Gadsden, Alabama; Decatur, Georgia; Miami, Florida; Tulsa, Oklahoma; Orlando, Florida; and New...
? Are all of these organizations businesses in the same sense as, say, General Motors is?
What is it that fundamentally distinguishes a business from other kinds of organizations, say, governmental organizations? For example, how could we characterize quasi-governmental organizations such as the U.S. Post Office
United States Postal Service
The United States Postal Service is an independent agency of the United States government responsible for providing postal service in the United States...
and Amtrak
Amtrak
The National Railroad Passenger Corporation, doing business as Amtrak , is a government-owned corporation that was organized on May 1, 1971, to provide intercity passenger train service in the United States. "Amtrak" is a portmanteau of the words "America" and "track". It is headquartered at Union...
, which are supposed to be self-sustaining, even profitable (for reinvestment, reducing or eliminating taxpayer subsidy, reserves)? Would we call such organizations businesses? One might suggest that these are run for the benefit of society, whereas a business is to satisfy the interests of its owners. However, is it not the case that society owns the government? One also would have to ask, how is one entity's satisfying the various interests of some segment of society substantially different from another entity's making a profit that also satisfies various interests, sometimes even the same ones?
What about a person who trades his labor in return for a wage? Is he also in business? After all, he is putting up risk capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
, in the sense that he's giving up his time...an opportunity cost
Opportunity cost
Opportunity cost is the cost of any activity measured in terms of the value of the best alternative that is not chosen . It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. The opportunity cost is also the...
...and even making an investment of himself, his labor. He is performing a service, just as a business does. His employer is, in a sense, a customer
Customer
A customer is usually used to refer to a current or potential buyer or user of the products of an individual or organization, called the supplier, seller, or vendor. This is typically through purchasing or renting goods or services...
, someone whom he must satisfy. And the employee markets himself, his skills, either to get a job or to get ahead. He has either an explicit or implicit performance agreement, a contract. He even hopes that his revenues will exceed his expenses, which is to say, that his efforts will be profitable. Does this, therefore, make every laborer a business person?
In other words, a philosopher might reasonably ask, what elements constitute the essential and distinguishing characteristics of a business enterprise? Perhaps it ends up being something as simple as being one or more persons engaged in any number of possible exchanges that satisfies any number of possible interests in an intentional, organized, planned manner. In any case, these are at least some of the questions one might ask about the ontology
Ontology
Ontology is the philosophical study of the nature of being, existence or reality as such, as well as the basic categories of being and their relations...
of a business.
The epistemology and logic of business
In the epistemology of business, we ask what are business facts and how do we come to know them? What constitutes business knowledge versus mere belief? As in other aspects of life, in business we acquire our knowledge through empirical study, from which we draw conclusions using inductiveInductive reasoning
Inductive reasoning, also known as induction or inductive logic, is a kind of reasoning that constructs or evaluates propositions that are abstractions of observations. It is commonly construed as a form of reasoning that makes generalizations based on individual instances...
or deductive methods. We test our hypotheses, using them as long as they are not empirically falsified, and thereby develop business theories, organized explanations of the facts. To what extent is what we purport to be business knowledge...other than that which is relatively trivial...reliable or veridical?
Business relies heavily on inductive reasoning, which assumes a uniformity of nature, such that the future is assumed to resemble the past. This, of course, is problematic, especially when considering the complexity involved in adequately factoring in the effects of customers, competitors, legislative and regulatory encumbrances, employees, environmental and climatic hazards, war, new technology, and so forth, into useful quantitative formulae. It is impossible to bind all of the variables for making probabilistic judgments on many of the most important business problems with a high degree of confidence. For this reason (among others)...because of the number of variables and the sheer unpredictability of outcomes...there is a rather considerable risk of failure in business; conversely, there would seem to be a rather high degree of luck in achieving success, or putting it in the vernacular, being at the right place at the right time. This relates to the simple fact that business knowledge is highly tentative, and subject to error or obsolescence.
The philosopher of business might also reasonably ask, to what extent does intuition play a role in our business knowledge. What does it mean to have "a gut feeling" about a business matter, and how is it useful. Is there even such a thing as business intuition
Intuition (knowledge)
Intuition is the ability to acquire knowledge without inference or the use of reason. "The word 'intuition' comes from the Latin word 'intueri', which is often roughly translated as meaning 'to look inside'’ or 'to contemplate'." Intuition provides us with beliefs that we cannot necessarily justify...
, or is it simply a matter of internalizing knowledge through a variety of experiences, such that it seems intuitive. At the very least, a great many managers and marketers would say that they operate using their intuition a great deal, perhaps especially in dealing with people, which, of course, leads us to inquire into the role of psychology
Psychology
Psychology is the study of the mind and behavior. Its immediate goal is to understand individuals and groups by both establishing general principles and researching specific cases. For many, the ultimate goal of psychology is to benefit society...
.
External links
- Filoempresa, edited by Godofredo Chillida & Gabriela Berti
- Peter Drucker's web site
- The journal "Philosophy for Business" edited by Geoffrey Klempner
- The journal "Philosophy of Management" edited by Nigel Laurie