Ethics, Morality And Business: The Development Of Modern Economic Systems, Volume II: Modern Civilizations [2, 1st Edition] 3030680665, 9783030680664, 9783030680671

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Dipak Basu · Victoria Miroshnik

Ethics, Morality and Business: The Development of Modern Economic Systems, Volume II Modern Civilizations

Ethics, Morality and Business: The Development of Modern Economic Systems, Volume II

Dipak Basu · Victoria Miroshnik

Ethics, Morality and Business: The Development of Modern Economic Systems, Volume II Modern Civilizations

Dipak Basu Nagasaki University Nagasaki, Japan

Victoria Miroshnik Reitaku University Chiba, Japan

ISBN 978-3-030-68066-4 ISBN 978-3-030-68067-1 (eBook) https://doi.org/10.1007/978-3-030-68067-1 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

This book is dedicated to our uncle Nishith Ranjan Mitra, the Managing Director of the famous publishing house of India, Deb Sahitya Kuthir, who has stimulated us always.

Introduction

In this book, we have analyzed the modern ideas of ethical dimensions in economics and business. The modern battle is between capitalism and socialism, in which capitalism is winning now, after the destruction of the Soviet Union and the resultant demise of Yugoslavia, Venezuela, Libya, and Syria. In this book, we have discussed the ethical dimensions of this conflict. Ethical justifications for capitalism were supported by Adam Smith, Bentham, John Stuart Mill in the nineteenth century and by Weber, Friedman, and Stigler in the twentieth century. Socialism was justified by Marx and Engels in the nineteenth century, and Lenin, Bukharin, Trotsky in the twentieth century. In this book, we have analyzed these issues along with the ethical management as demonstrated by Japanese corporations and in Scandinavian countries where socialist characters are implemented within a capitalist economy. Corrupt people prohibit the development of a country by using public resources for personal gains. The moral suggestion to solve this problem is that one must work solely for common good. The corrupt people have their rationality but from the moral point of view, it is not justified. However, capitalism gave its justification, as Friedman justified the state power to protect the drug dealers. Adam Smith justified the selfishness of individual traders in terms of creating utility for the society through the invisible hands of the market. Utilitarian, like Bentham or

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John Stuart Mill, justified colonialism, as they were all directors of the East India Company who colonized India. Socialism justified human goods in terms of developing and nourishing essence of human nature. In that sense, Marx followed Kautilya, Aristotle, Aquinas, and Spinoza in his avocations of workers freedom in terms of achieving human essence. Inequality of distribution of resources impedes the perfection of both rich and poor. In that sense, Pareto Optimality is an impediment for the proper redistribution of resources in any society, as redistribution can affect the rich adversely although it benefits the poor. From the society’s point of view, moral values can be fully realized only in a society in which each member is roughly equal in power and status with the others. That was nearly achieved in the Soviet Union and Yugoslavia, but both were destroyed because of human greed. Now Japan and Scandinavian countries are trying to achieve that goal of a moral society by reducing inequality. If economics has to be useful, it should promote Rousseau’s idea of a moral economy, in which the will of the society would prevail upon the will of the individual. The challenge of the government should be to enhance public and private welfare by creating conditions of equitability and justice. That would create individuals into moral and responsible subjects who would not be interested to accumulate fortune at the expense of the people, which is the principle of the stock market led economics. Modern economics is now a useless economics, full of unnecessary mathematics and statistical theories. It has to be rescued to include useful mathematics and statistics to plan the economy to enhance morality in social and economic affairs. That is the ethical duty of the new generations of economists for whom this book is directed.

Contents

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1

Ethics of Management

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Ethics of Capitalism?

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3

Marxist Ethics

57

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Business Ethics and Ethical Leadership

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Japanese Management System

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Socialism in Yugoslavia and Sweden

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Conclusion

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Index

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List of Tables

Table 3.1 Table Table Table Table

3.2 3.3 3.4 3.5

Table 3.6 Table 3.7 Table 3.8 Table 3.9 Table 4.1 Table 4.2

Table 4.3 Table 5.1

Analysis of economic growth rate (real GNP at 1987 price) Average growth rate in the EEC and CMEA (in % pa) Analysis of economic growth rates and labor productivity Investment ratio and investment efficiency A dynamic comparison of the Soviet and U.S. economies (USSR as % of USA) USSR: growth rates of the GNP (av.annual rate) USSR: total trade, 1981–1990 (billion current U.S. dollars) USSR: estimated hard currency balance of payments (million current US dollars) USSR: estimated hard currency debt to the west (billion current U.S. dollars) Ethical and unethical leadership The Ethical Leader Examples of final (personal and ethical–social) and instrumental values (ethical–moral and values of competition) Criteria for evaluation of ethical leadership Lean production system

77 79 80 80 81 81 88 89 90 97

99 99 142

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There are two different views of ethics, as the discipline that deals with morals. Ethics tries to describe the role morality plays in our everyday lives, this is descriptive ethics. It may try to tell us what is morally right and wrong. That is called normative ethics. Descriptive ethics raises the question about the role of “morality” actually plays in the actual economy. We may say that business has nothing to do with morality. However, morality has important roles in the efficiency of any economic system. In an exchange economy, if there is no trust in transactions, there cannot be any transaction (Bowie 2017; Abend 2014). The concept of “Moral Economy” has a long history. It was mentioned by Kautilya, Aristotle, Cicero, and Jesus. In recent years, the concept was elaborated by Polanyi (1957), Thompson (1963), Schumacher (1963), Sayer (2000), and Bowles (2016). The idea is that a pure exchange economy is immoral unless it would be accompanied by concerns for the people, would create harmony in the society or Ji-Hi, as in the pre-Meiji economy of Japan (Hiroike 1928; Horide 2009) or Maurya Dynasty and Pala Dynasty in ancient and medieval India (Mazumdar 1917). There are issues that can undermine ethical norms. There can be nepotism, and favoritism, which discriminate against outsiders. There can be bribery, which discriminates those who play by the rules and creates an atmosphere of fraud. There can be cartels and price fixing in which © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 D. Basu and V. Miroshnik, Ethics, Morality and Business: The Development of Modern Economic Systems, Volume II, https://doi.org/10.1007/978-3-030-68067-1_1

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companies form “oligopolies,” restricting competition to create excessive profits. As a result, consumers and the country have to incur losses. Prices can go up and there can be mal-distribution of wealth and assets. Without morals and ethical behavior, efficient and legitimate business cannot survive. Ethical–moral values refer to forms of conduct that one has to live by in order to reach desired outcomes in the form of final values (Bolton and Laaser 2013; Friberg and Gotz 2015; Gotz 2015; Gotz et al. 2020; Sayer 2004). In recent decades, efforts have been made to implant capitalist economic systems and impose capitalist structural reforms on countries meant to induce some sort of self-sustaining economic growth. The efficient functioning of economic institutions is not independent of its cultural context. If economic theory itself is ignorant of that context it will be irrelevant and could not produce any real effects. The success of an economic system and its resultant institutions are very much contingent on cultural factors and moral criteria (Abend 2014; Esterly 2002). Moral norms make economic behavior more predictable and reliable. Thus, they make economic transactions possible. Moral norms create an important economic resource, called “social capital,” denoting intangible resources that can be sustained via social relationships. Such moral norms include (Wicks 2020; Sandel 2012): • a commitment to honor contracts; • relationships, inside and between organizations, built on loyalty, and harmony with friendship, reciprocity, and cooperation; • compliance with the moral laws.

Values Values drive organizational culture (Schein 1992). A value can be defined as “an enduring belief that a specific mode of conduct or end state of existence is personally or socially preferable to an opposite or converse mode of conduct or end-state of existence” (Rockeach 1973). Values guide an individual’s behavior, actions, and judgments (Rockeach 1973; Abend 2014). Ethical values in an organizational setting are strengthened through values-based leadership, that can be defined as a relationship between

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leaders and co-workers, based on shared, internalized values, that are to be implemented by the leader (Daft 2007) in an organization. The leaders that demonstrate integrity are honest with themselves and others, learn from mistakes and are constantly in the process of selfimprovement. Progressive companies increasingly incorporate numerous strategic approaches, which go beyond narrow economic considerations. Such companies supplement economic views of strategy and competition with a view that strong corporate values are essential components of competitiveness and superior financial performance. In society, values help to define people’s “core” feeling and related thinking (Abend 2014; Hunt et al. 1989). In an organization, “values serve to convey a sense of identity to its members, enhance the stability of its social system, direct a manager’s attention to important issues, guide subsequent decisions by managers, and facilitate commitment to something larger than self” (Deal and Kennedy1982). Ethical orientation of an organization is revealed through the formal and explicit activities of business life on a daily basis. The basis of these activities is provided by the enterprise’s accepted procedures and policies. Hood (2003) classifies values in terminal values (desirable end-states of existence) and instrumental values (modes of behavior or means of achieving the desirable end-states). He divides terminal values further into social and personal values. Instrumental values fall into morality-based and competency-based values. Social values include items such as freedom, equality, and world at peace, while morality-based values include items such as politeness, helpfulness, affection, and forgiveness. Personal values include factors such as self-respect, broad-mindedness, and courage. Competency-base values include items such as logic and competence. Ethical behavior depends on formal adoption and implementation of organization’s ethical programs. Core values of every organization need to reflect their ethical content. The core values, order, success, community, and synergy are important and these are related to culture and enterprise climate.

Characteristics of Values 1. Values represent an individual’s driving forces. 2. Values are forces affecting behavior. 3. Value depends on time.

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4. Many values are relatively constant and durable. 5. It contains a judgment element. 6. Different individuals have different values. Aristotle (2009) in Nicomachean Ethics proclaims happiness as an ethical virtue, but happiness derived from wealth or pleasure is not part of virtue. Striving for a life of pleasure is “a life for grazing animals” (p. 7). “The money-maker’s life is, in a way, forced on him and clearly wealth is not the good we are seeking, since it is useful, for some other end” (p. 8). While profit is a measure of achievement, it is not a corporate value. Corporate values allow employees to develop their mind, body, and soul, creating an environment and culture, which supports the employee to create personal growth. A corporate values system can effectively create a sustainable competitive advantage.

Ethics Ethics is the study of morality. It is the value that is worth pursuing in life. It is honorable behavior. Ethics is relative. What is honorable in one society may not be honorable in another. It depends on several factors: world views, descriptive values, and moral values. It is a function of the environment. What one salesperson may consider being an unethical marketing behavior, another salesperson may perceive it as an aggressive marketing strategy.

Ethical Codes Ethical codes state the major philosophical principles and values in organizations and function as policy documents which define the responsibilities of organizations to stakeholders. They spell out the conduct expected of employees and articulate the acceptable ethical parameters of behavior in the organization. Most large U.S. and multinational firms today have a code. If utilized effectively and embraced, codes can be key strategic documents in organizations for moderating employee behavior and reducing unethical actions. To be effective they must be communicated well and become a part of the culture of the organization (Wicks 2020).

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Codes range in length from one paragraph to more than fifty pages and are intended to impact employee behavior (Stevens 1994). Also called codes of conduct, business principles, codes of ethics, and corporate ethics statements, they typically contain open guidelines describing desirable behavior and restrictive language prohibiting other behaviors such as bribery and conflict of interest (Nijhof et al. 2003). Codes differ from mission statements by articulating the value system and answering the question—with what ethical standards and values should the mission be pursued? In contrast mission statements spell out the objectives of a company and articulate organizational goals. Firms frequently attempt to manage and articulate ethics through their codes, which are designed for internal and external audiences. An effective code enhances social responsibility and clarifies the norms and values the organization seeks to uphold. It is visionary and transformational, providing guidance in difficult circumstances (Stevens 2008). It sets the tone for the organization and can be the key corporate strategic document upon which all decisions are based. Adherence to the code in ethical organizations is a commitment an organization can undertake to ensure a strong ethical climate. When codes are embedded in an organization’s climate and both leaders and employees embrace the codes with words and actions, they can help create and maintain successful ethical organizations. Most large U.S. corporations today have an ethical code, after increasingly adopting them in the 1980s and 1990s (Chonko et al. 2003; Trevino et al. 1999) and they can found in about 53% of the largest companies worldwide (Kaptein 2004). Most of these companies reflected concern over unethical behaviors that could hurt profits (Cressey and Moore 1983). A content analysis performed by Mathews (1987) showed that firms primarily emphasized avoiding illegal activities, employee misconduct and placed little emphasis on the environment, product quality, or safety. Another study confirmed that the most frequently mentioned topics in codes were conflict of interest, gifts, and misuse of confidential information (Pitt and Groskaufmanis 1990). A study by Stevens (1996) showed that codes were primarily designed to defend organizational against egregious behavior by employees and were lacking in ethical guidance and vision. Snell and Herndon (2000) agreed, concluding that codes were focused largely on corporate self-defense (Cressey and Moore 1983).

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Kaptein and Schwartz (2008) reviewed sixty-seven code studies and found codes positively affected behavior in many organizations. This study added to the growing body of knowledge supporting the use of codes and provided additional evidence that codes work. Codes can serve as core foundational documents that give organizational members a sense of shared values and commitment to ethical purposes (Stevens 2008). A number of studies have yielded evidence that they work in deterring unscrupulous behavior, but codes must be communicated effectively and supported by the management team. Good communication is the first requirement for effectiveness. Companies professing a deep commitment to sustainable, ethical business practices to help foster genuinely positive organizational culture must understand that, where integrity is concerned, we must think beyond the “business case.” Sometimes a company simply needs to walk away from a lucrative opportunity that would contradict its core principles. The public increasingly distrusts private sector rhetoric on ethical business, and there is a pressing need for leaders that will take, and adhere to, clear decisions about core values and priorities. Corporate reputation reflects the organization’s strategy, culture, and values. A good corporate reputation signifies trust in a firm; it creates an emotional and intellectual bond with a number of stakeholders and acts as the source of authority and credibility for all the company’s dealings “ethics of strategy” (Verhezen 2002, 2016). It is increasingly important for companies to deal with ethics as a corporate strategy that, if uniquely implemented, could achieve competitive advantage for the company rather than waiting to react to possible ethical issues of importance to the targeted stakeholders. It is the necessity of being ethically proactive company rather than being ethically reactive company. One of the oldest concepts of management, business ethics is a form of applied ethics. It includes not only the analysis of moral norms and moral values, but also attempts to apply conclusions of this analysis to that assortment of institutions, technologies, transactions, activities, and pursuits that we call a business (Verhezen 2002, 2016). It is clear in this definition that business ethics is related to moral norms and values. At this point, it is necessary to ask if companies have moral norms and values as individuals do. Verhezen (2002, 2016) argues that companies do have moral duties in a secondary sense. By saying that, Verhezen (2016) implies that the codes constitute the business ethics of

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that company. This is why companies now provide ethical codes or codes of conduct and expect workers of all levels to obey these codes when they make a decision as a part of their jobs. According to the code of conduct of most companies, employees are not allowed to accept any gifts of substantial value from partners. Thus, this code provides an idea as to what is right and wrong in the offices of Facebook. As a result, business ethics is not only moral obligations to its stakeholders but ethical behaviors expected from employees. By taking the definitions above into consideration, it can be argued that corporate governance, social responsibility, and business ethics concepts have some shared characteristics and that all these three concepts are interrelated. Corporate governance demands that executives make their companies more transparent and accountable; social responsibility demands that companies support society with their activities, and business ethics clarifies moral norms for employees. Business ethics can help a manager make his/her company more accountable and transparent. Similarly, when a company adopts corporate governance principles, it also has to meet the expectations of its stakeholders. Corporate governance principles include principles related to business ethics and social responsibility. However, some scholars (Heath and Norman 2004) believe a coherent theory of CSR cannot be created without corporate governance. In any case, it is logical to conclude that all these three concepts are interrelated and they are imposed upon companies by shareholders and stakeholders (Scott 2007). Thus, we simply argue that companies take corporate governance, social responsibility, and business ethics concepts into consideration in order to gain legitimacy though they do not care about their potential impact on corporate performance or strategy. From this point, these concepts can be dealt with as institutional pressures, which force companies to isomorphism (DeMaggio and Powell 1983). Obviously, companies have to adapt to their institutional environments in order to gain legitimacy and to survive even if this adaption harms corporate performance. One of the fervent opponents of this idea was Nobel laureate economist Milton Friedman (1970). In 1970, Friedman gave an interview to the New York Times Magazine (http://www.colorado.edu/ studentgroups/libertarians/issues/friedman-soc-resp-business.html, retrieved 8.3.2013) and in this interview, he explains his opinions about social responsibility with these words:

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In a free-enterprise, private-property system, a corporate executive is an employee of the owners 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 while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.

If Friedman and others who think like him are right, it is logical to believe that bending to these social advantages since acquiescing makes additional costs inevitable. In fact, early studies that focused on the relationship between corporate governance, social responsibility, business ethics, and the financial performance of a company reported that these concepts had a negative impact on profits, returns on investment, and stock prices. Researchers who found this negative impact had a simple explanation: social responsibility involves certain costs that fall on the bottom line, but its potential positive impact on corporate performance is simply uncertain (Gulati et al. 2013). However, a significant amount of recent research has documented the exact opposite. For example, Ergin and Onder (2012) found that corporate governance rankings and sub-components of corporate governance had a significant positive impact on the stock prices of publicly owned Turkish companies. Rehman et al. (2012) reported that also for Pakistan.

Ethical Climate Ethical climate concepts remain popular as a means of understanding the right-brain-based ethical atmosphere in enterprises. For the purpose of our discussion, we will use ethical climates as identified by Victor and Cullen (1988). In their opinion, an institutional normative system can be considered as an element of culture, although enterprise culture is more comprehensive and includes the patterns of behavior, artifacts, ceremonies, and special language. Victor and Cullen (1988) describe the enterprise climate as perceptions that “are psychologically meaningful moral descriptions that people can agree and characterize a system’s practices and procedures.” Further on, the authors argue that the prevailing perceptions of typical organizational practices and procedures that have ethical content constitute the ethical work climate.

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Ethical climate, therefore, influences members of the organization what they can do on the treatment of other members. According to these authors, climate types represent the perceived norms of an organization based on ethics. These perceived norms have their origin in the socialization process within the organization (Casell and Smith 1997). Enterprise members may be forced by peers or superiors, to conform. In this way, informal social norms create social order of the organization (Adam and Rachman-Moore 2004). On the other hand, the example set by the managers may be the tool advocated by the philosophy of the organization. “The role model” is the roles that managers are expected to demonstrate, for “proper and desirable behavior” for their employees to observe. Top management creates appropriate strategy for the implementation of the vision, mission, and goals to be an ethical organization. The long-term success of organizations depends on successful satisfaction of interest of the stakeholders (Orlikoff and Totten 2004). If the organization’s vision and policy are not in the interest of all stakeholders, they will not take part in the business activities in future.

Psychology and Ethics Psychology’s contribution to ethics comes from two sources. One is the literature of humanistic psychology. That literature is based on the concept of a hierarchy of wants. Pioneered by Abraham Maslow (1943, 1954) the concept hypothesizes that human wants are organized in a hierarchy and that lower ranking wants in the hierarchy must be minimally satisfied before higher ranking wants have any motivational effect. One version of the hierarchy orders the wants in the following ascending order: 1. Physiological Needs 2. Safety and Security Needs 3. Belongingness Needs (love, affection, acceptance) 4. Esteem Needs (self-esteem, esteem by others) 5. Self-Actualization Needs (meaningfulness, aesthetics, perfection, justice, service, truth, love).

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The Maslovian hierarchy suggests that those individuals who have satisfied their lower ranking wants may, indeed, be driven by a need to be ethical. The next relevant portion of the literature of psychology is Kohlberg’s extensive research into the development of ethical standards among children (Kohlberg 1984). That work suggests that most individuals are subjected to intensive ethical brainwashing in their childhood. Parents, schools, churches, and the media all conspire to make society’s generally accepted ethical standards part of the young person’s internal makeup. The result is that over one-half of American young people grow up with an internal standard of ethics somewhere between the ethic of justice and altruism. They judge themselves by that standard, feeling good when they meet it, and experiencing pangs of guilt when they do not. The remaining youth manage to overcome the socialization and choose their own ethical standards independently of society’s dictates. The adoption of a code of business ethics can be viewed as an investment on the part of the business leader. Just as investments in plant, equipment or education have a “payoff,” so the business leader’s investment in an ethical code has a potential payoff. In fact, there are at least three types of payoff (Kaptein and Wempe 2002). The ethical standards a person uses in dealing with others will influence the way those others respond. The literature on business excellence suggests that through the use of the right ethical standards a business leader can increase consumer demand, boost employee productivity, improve the terms offered by suppliers, reduce the cost of investment funds, lessen the attacks of competitors, and generate community support. If such a cornucopia of payoffs does exist, then ethics could become a major management tool. There are three possible explanations for this asserted positive payoff to the right standard of ethics. They are: a. implicit contracts b. transaction costs c. multiple valued transaction benefits. The implicit contract explanation views the business leader as offering to raise the standard of ethics in return for greater cooperation from the other party. The transaction cost explanation says that by raising the level of ethics, the business leader reduces the transaction costs required by the other party (to protect his or her self-interest).

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The multiple valued transaction benefit explanation interprets the exchanges between the business leader and another economic agent as involving both the goods and services being exchanged and an affirmation or negation of the other agent’s worth. The higher the level of ethics practiced by the leader, the greater the degree of affirmation of the other agent’s worth. Because having self-esteem is a benefit, the agent will accept less in the way of financial remuneration or give more in the way of effort than would otherwise be the case. An example of the self-worth phenomenon would be the case of the degree of respect shown by an employer toward an employee. When the employer gives an order to an employee, it makes a difference whether or not the message is conveyed in a tone of respect. Shown respect, the employee’s feeling of self-worth is strengthened and the employee is more likely to perform in the spirit of the order. Shown disrespect, the employee is more likely to violate both the spirit and the letter of the order. The second payoff to the selection of the right code of business ethics is psychological. Kohlberg’s research (1958) and humanistic psychology suggest that a majority of business leaders will derive sensations of pleasure from acting in accord with the higher ethical standards and will experience feelings of guilt if they behave unethically. The psychological basis of those feelings may be the conditioning process discovered by Kohlberg (1958) or it may be the “free choice” of the self-actualizing person envisioned by Maslow. In the Maslovian case (1954) the lower level needs would have been satisfied and the higher ones would have become dominant. It would be consistent with the literatures of psychology, philosophy, and religion to hypothesize that adherence to high ethical standards would be a dominant need for some such persons. For such individuals, the payoff to a high standard of ethics in business would be the personal satisfaction of living up to the ideal (Tomaskova and Kanovska 2019). The nearly universal approach is to assume that economic agents receive pleasure from the happiness of others. That is, the utility of other parties is an argument in the utility function of the economic agent. This psychological phenomenon would be another reason for arguing that the business leader might, ceteris paribus, act in a highly ethical manner because of the pleasure, which he or she feels from doing so. A major reason for expecting diminishing returns to the investment in ethical behavior is the likelihood that the intended beneficiary will experience diminishing marginal utility to successive increments of ethics.

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When the business leader employs honesty, courtesy, friendliness, loyalty, fairness, or helpfulness, the recipient customer or employee (or other agent) gains utility. However, the marginal gain to successive doses will eventually go down. At some point, satiation may occur. In other words, a customer or other agent can only take pleasure from the consumption of so much honesty, or friendliness, or other ethical duty. Beyond that point, additional doses of ethics might actually provide disutility. Additional information will not be wanted either because the customer is not willing to invest the time to learn or because the customer does not have the sensory capacity to absorb any more information. Diminishing returns can also be expected because of the fixed factor of the business leader’s cognitive and communication capacities. In order to raise the level of ethical behavior exhibited toward another agent, the business leader needs to learn more about how the intended beneficiary thinks and feels. The time needed to gain each additional bit of information probably increases beyond some point. The time needed to utilize the additional information probably increases as the new bits of information add to the complexity of the decision process.

Philosophy and Business Philosophy of Business refers to an understanding of the moral and ethical basis of business as an area of knowledge. Just as medicine is an area of knowledge, business is an area of knowledge. Philosophy deals with knowledge. It answers the question of what the role of a business is and as to what is the ethical basis of judgment of whether it is fulfilling its role or not. To draw an analogy if the role of medicine is to cure the question is as to whether it is right for medicine to produce artificial genetic material (genomic varieties of new forms of life, new species)? Therefore, while business philosophy is a part of business policy or strategy the philosophy of business is a part of applied philosophy. Since applied philosophy is different for each applied discipline, business ethics is a “separate” study and needs to be so. Good Governance: The corporations are formed on the basis of division of ownership and control, in which, the investor or owner relies on the manager i.e., CEO to manage the business on his behalf, which implies that a principal agent relationship exists between investor and manager. That causes the room for asymmetric information i.e., there

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is always a gap between the information possessed by the manager visà-vis the investors. This situation calls for a good governance, corporate governance means transparency. The shareholders must have full and true information. There should be transparency in processes, so that the agent (manager) cannot mismanage or take the advantage of the asymmetric information. The objective of good governance is to have such a system of controlling and managing so that the interest of the owner may be protected. For this to be successful, whatever hurdles are there in the processes are to be removed. The processes are necessary to prohibit the manager to push their own agenda or self-interest, i.e., the manager as working in the capacity of agent, might have their own individual goals to pursue which are not in line with organizational goals. Such processes are to be institutionalized which protect the interest of the owner i.e., profit maximization and wealth maximization. Therefore, ethical structure has the implication for good governance, which means better profits. It is important to make profits within ethical framework. There is a shift in the psychology of investors, they are not only curious to know how much profit the company has booked but also how this profit has been earned, i.e., ethically or unethically. Therefore, business has to be done ethically, the profits are to be taken seriously, if not, it would be interpreted as if the business is not indulging into good governance.

Culture, the Basis for Business Ethics There is common agreement that a country’s culture is directly related to the ethical behavior of its managers. The behavior is exhibited in two main ways: first, by overt actions such as public or corporate statements and actions about ethical behavior; second, by the collection of the group of ethical attitudes and values. One problem in dealing with culture is that it is difficult to define universally. It represents the values and patterns of thinking, feeling, and acting in an identifiable group. While many nations possess the infrastructure of modern, developed civilization, culture represents how people in the civilization interact with one another. A view that may help understand the culture is to look at its levels (Schein 1985). Schein (1985) proposed that culture has three levels. The most obvious concerns the works of culture, its artifacts. These are apparent and portray some of the values of the culture. Public works,

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works of art, museums, hospitals, and universities can reveal the value that the culture places on the arts and sciences. The Coliseum, in ancient Rome, and its purpose in entertaining the public revealed how Romans valued individual human life. A deeper and less obvious level comprises those things which individuals hold dear and which guide their behavior. They serve as rules of conduct and can be important guidelines for how individuals should or ought to behave. The Japanese elevation of politeness in behavior may reflect the limited physical space in the island nation. However, politeness to others is clearly how the Japanese should behave toward one another. Violations of the norm cause others surprise and anger and sometimes lead to sanctions against the offender. The third and hidden level represents values, and specifically represents the assumptions we use to perceive and deal with reality. For example, some cultures perceive people as essentially good while others tend to take a more pessimistic view. It is difficult to separate the lower two levels since attitudes and values tend to overlap. However, they form the underpinnings of individual and business interactions. Types of ethical conflict managers like clear guidelines to aid their decision-making. A list of rules citing prohibitions and allowed practices is often helpful. Unfortunately, such lists are too simple to guide cross-cultural ethical interaction. For example, gift-giving is not usually prohibited in most cultures. However, in a given culture, giving a gift may be ethical or unethical. In some societies, like China, presentation of a small, carefully chosen business gift conveys a great deal of respect and is a sign that the business relationship is valued by the giver. If there is a problem, it may rest with the receiver who may not trust the giver’s motives. In this case, the issue can be understood as one of business etiquette. Conversely, gifts whose purpose is to influence a decision-maker’s judgment is actually or essentially a bribe. They are more universally recognized as such. This leads to a second issue involving basic values. What is the proper place of a bribe in the business context? In Western cultures, bribes are usually not considered “right” or fair and are often against the law. In this case, the conflict deals with fundamental standards of fairness (Kohls and Buller 1994). There is a continuum of ethical conflict ranging from simple, rather innocuous practices like giving token gifts to serious issues like employing

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sweatshop or political prisoner labor. Judging the seriousness of the differences requires a look at the aspects of both the American and Chinese cultures.

The Cultural Foundation of American Ethics To understand the impact of differences in ethical attitudes toward the conduct of business between the USA and China we should start with the ethical foundations in the USA. There are several key questions to address: • What constitutes ethics in business? • What issues and behaviors are important? • What constitutes the ethical standards of business conduct? Answers to these questions are important to our ability to reconcile differences in the way business agents in each country think and act. Ethical roots in the USA date back to the country’s Puritan origins. They tend to be based on a foundation of traditional Judeo-Christian and Western socio-theological laws and principles. Underlying this system is the belief in an intrinsic underlying truth. This belief is central to the biblical system of ethics and morality. Here, moral and ethical bases are provided through the decrees of a sovereign moral authority, God. As a sovereign, God declares right and wrong, providing a general moral and legal framework for organizing a society (Ziff 1969). Separately, enlightenment philosophers reached similar conclusions. While Christianity was the predominant religion among the nation’s founders, enlightenment philosophy and its focus on “natural law” led to their affirmation of an individual’s “inalienable rights.” The founders identified three basic “self-evident” truths regarding the “inalienable” rights of mankind to: 1. life; 2. liberty; and 3. the pursuit of happiness; exercised in an environment in which people are equal under the law.

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Equality under the law does not imply equality in the endowment of natural talents, intelligence, and abilities. Rather, it means that there exist no a priori claims, against one’s life, liberty, and/or ability to dispose of one’s personal property in the pursuit of his or her personal life goals and activities. Limits on such freedom of choice are imposed only in two important cases. The first is when the individual voluntarily agrees to be bound by such a claim as part of a voluntary contract. The second case involves criminal or civil activity resulting in the harm to another’s life, liberty, or property. That activity has led to the imposition of legal penalties as a result of a claim enforced under due process of law. As a result, the USA has become a place where the individual’s rights are emphasized, contracts are important, and order in society is a goal. The importance of an individual’s right to choice is the foundation of the belief that competitive markets are the best way by which the economy can be organized. The economy’s role is to provide the greatest degree of satisfaction to the needs and desires of society. Laws enabling this process to function are designed to deny others the opportunity to deprive an individual of his/her freedoms of choice and property rights via the use of fraud or force. In the absence of fraud and force, any “heads-up” transaction in which property or time is exchanged is perfectly legal if not ethical. The functioning free market economy has often been described as a “nexus of contracts,” whereby individual and corporate economic agents voluntarily agree to exchange money, time, resources, and other goods and services in the pursuit of their own economic well-being. Since individual and corporate agents are principally responsible for their own well–being, they play the role of an advocate whose motivation and behavior are self-interested. There are both benefits and costs to such a system. The principal benefits of the market system are that resources are allocated in an “optimal” fashion. The principal cost of this system is that it is designed to best satisfy the needs of the overall society, but not necessarily the specific needs of any given individual or group within that society. Adam Smith (1759/2009), who is given credit for contributing to the design of this system, argued that, while it was important to allow the market economy to function freely, other social mechanisms would need to function in such a way as to make up for its deficiencies. In his book The Theory of Moral Sentiments, Smith outlined the importance of the role played by “institutional society,” which is, in essence, charged with

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the responsibility to teach and encourage the practice of civic virtue in society. While the behavior in the market economy is dictated by selfinterest, in the civic society that should be driven by the principle of selfcontrol. The three main elements of institutional society (Ziff 1969): 1. home; 2. church; and 3. school; are thereby responsible for instilling principles of ethical behavior in society, seeing to it that the practice of such behavior is socially rewarded. Self-controlled behavior in civic society may serve to mitigate the adverse effects of self-interested behavior in the commercial markets (Mueller 2003). The integration of behavioral and ethical codes taught within civic and commercial society serves to make the overall society “decent.” In the ideal setting, the civic virtue of self-control will influence commercial transactions in such a way as to maintain a high degree of ethical standards of conduct. While individuals acting out of self-interest in commercial transactions will play the part of advocates, transactions will be negotiated in an environment in which participants will be bound by the truth, and will represent themselves “in good faith.” This brings us back to the importance of the traditional ethical foundations of the USA and the way in which transactions are negotiated and completed. In the USA, business transactions revolve around the contract. The contract, most often a written document, spells out the nature of the business relationship and the obligations of each party to the business transaction(s) covered by the contract. While many transactions are conducted on an informal or non-contractual basis, virtually any significant transaction will be based on a fairly detailed contract to which and by which the parties are bound both legally and ethically. Contracts are negotiated in between parties acting as advocates but in good faith. It is generally accepted that commitments made will be honored to the letter if not the spirit of the agreement. The contract becomes the a priori vehicle for resolving disputes. If the parties to the contract cannot reach an agreement, an arbitrator or other third party may be called on to interpret the contract. In either

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case, however, the contract becomes the principal document governing the relationship. The importance of the absolute nature of the truth and its role in commercial transactions governed by contracts can be seen in some of the teachings of the Judeo-Christian tradition. Once an agent freely enters into a contract he/she satisfy needs of overall Society Nature of business relationship agrees to be bound by its points. This is not only a legal but a socially ethical commitment made by the individual to other parties involved in the contract. Ethically speaking, individuals are bound to negotiate in the context of the truth, “saying what they mean” and “meaning what they say.” To summarize the impact of this ethical context on the conduct of commercial transactions, business agents in the USA can be expected to act as personal (or corporate) advocates, attempting to engage in transactions that maximize their own well-being. The process of negotiation, however, is intended to be in good faith, where the truth is represented in the words and actions of those participating. Once agreements are reached in this context, the participants are both legally and ethically bound to carry out their obligations and commitments as outlined in the contract. While this type of behavior can, if followed to the letter, be predatory in certain cases, the teaching of the value of self-control in institutional society will moderate the adverse effects of self-interested behavior in the environment where the terms of the transaction are carried out (Trevino and Weaver 2003).

Business Ethics as Competitive Advantage Business ethics should become part of corporate codes, and if implemented in the line of business as a corporate philosophy it should help to achieve a competitive advantage for the firm. While short-term competitive advantage is obtained by appealing to customers in targeted external markets (in the context of globalization), long-term sustainable competitive advantage is the result of exploiting an enduring core of relevant capability differentials cultivated by responsible management of tangible and intangible internal skills and assets (Petrick and Quinn 2001). Business ethics of a firm has been defined as one of the invaluable intangible assets for competing. In general, intangible assets are assuming increasingly competitive significance in rapidly changing domestic and global markets. As the speed of comparable tangible assets acquisition

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accelerates and the pace of imitation quickens, firms that want to sustain distinctive global competitive advantages need to protect, exploit, and enhance their unique intangible assets, particularly integrity (building firms of integrity is the hidden logic of business ethics). Sustainable global competitive advantage occurs when a company implements a value-creating strategy which other companies are unable to imitate. For example, a company with superior business leadership skills in enhancing integrity capacity increases its reputation capital with multiple stakeholders and positions itself for competitive advantage relative to companies without comparable leadership performance. Companies could perceives stakeholder interdependence, demonstrate ethical awareness, and respond effectively to moral issues, management creates a position of a competitive advantage in comparison to other companies who are without those resources, by providing a more comprehensive list of ethics (Petrick and Quinn 2001; Mulej and Bohnic 2021). International organizational leaders can and should be held accountable for enhancing the intangible strategic asset of integrity capacity in order to advance global organizational excellence. The marketplace with globalization is becoming increasingly aware of, and increasingly discriminating against, corporations that fail to meet the criteria of ethical business operations and ethical management principles (Svensson and Wood 2004). Furthermore, sustaining advantage requires change. It demands that a corporation should utilize and exploit industry trends on business ethics. It also demands that a company invest to close off the avenues along which competitors could attack (Porter and Kramer 2006). Business ethics as competitive advantage involves effective building of relationships with a company’s stakeholders based on its integrity that maintains such relationships. Business relationships, like personal ones, are built on trust and mutual respect (Boatright 2005; White 2006; Carter 2012). Successful business must treat the parties affected by the corporation’s actions as constituents to be consulted rather than spectators to be ignored. Doing so was just smart business. This was a novel step in that it was among the first attempts to characterize the impact of ethical behavior on a company’s financial performance. As Henry Ford, Sr. once said: “For a long time people believed that the only purpose of industry is to make a profit – They are wrong. Its purpose is to serve the general welfare” (Harting et al. 2006).

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Appendix 1: Lehman and the Investment Bank Crisis Lehman Brothers, Inc., a 158-year-old investment bank, closed its doors in September 2008. Its shares plummeted shortly after announcing a $2.8 billion loss in the third quarter of 2008. Lehman was widely exposed to toxic subprime mortgages and the Federal Government declined to rescue the bank, citing its size and lesser impact on the economy. Like those at several other investment banks, managers at Lehman did not consider the risks of defaulted subprime loans or a downturn in the economy, yet both occurred simultaneously. They were audited by Ernst and Young who also failed to weigh in the risks (Richard 2008). The company filed for bankruptcy on September 15, 2008 and its New York operation was purchased by Barclay’s Bank. Other investment banks also needed emergency assistance. Bank of America bought Merrill Lynch for $50 billion. Bears Stearns was subsumed by JP Morgan Chase which also bought the bankrupt Washington Mutual Bank, whose collapse represented the largest bank failure in U.S. history. The Lehman Brothers Code of Ethics (Lehman 2007) is a five-page document outlining the behaviors that were expected from its employees. Its first page is an introduction stating that all employees must comply with the code. Four pages of the body then follow. Page one states that the code is meant to be read along with Lehman’s internal Code of Conduct, which is also discussed in this paper. These two documents comprise Lehman’s position on its corporate values. Paragraphs three and four contain strong statements about trust (p. 1, Lehman Brothers Code of Ethics). The code emphasizes that strong client relations have been built over the years with the statement, “The lynchpins of that trust are our ethical standards and behavior. We must always do business in a manner that protects and promotes the interest of our clients” (p. 1). Paragraph four takes a stronger position stating that “Ethical business practices are the product of more than a fear of legal ramifications.” Then follows “Ethical business practices entail a clear understanding of right and wrong, and a motivation on the part of our directors and employees to act at all times in a manner of which they can be proud” (p. 1, para. 4). These sentences have transformational aspects to them as they can be described as insightful, mind stretching, and visionary. They outline the philosophy of ethics and the language used is not a reflection of the opposite concept on the model—rigorous, precise, and controlled. So in this passage, one finds transformational elements.

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But the remaining four pages of the body communicate in a different way with a legalistic tone and language that is not conversational or insightful. For example, a passage on page 2 states, “The Firm has established procedures for submitting concerns regarding accounting, internal auditing controls or auditing matters to the Audit Committee of the Board and for submitting other concerns to the non-management members of the Board” (p. 2, para. 3). Here language becomes more dense and it continues as the code progresses. A paragraph on p. 5 about full and fair disclosure is comprised of only three sentences, but the first uses 32 words, the second, 69 words, and the third, 56 words. These are extremely complex sentences, considering the average business document uses sentences ranging in length from 16 to 24 words. Many other sentences in the document exceed 50 words. The code addresses the basic topics found in most corporate codes such as conflict of interest, retaliation, stealing, use of proprietary information, non-retaliation, and compliance with laws, EEO issues and fairness. Not particularly unique as a code, it appears to be written by legal staff to protect the firm against egregious behavior, a typical approach used in corporate codes in the USA (Stevens 1996). The code relies most heavily on phrases reflected in informational quadrant whose central descriptors on the model are “rigorous, precise controlled” and “focused, logical, organized.” The vast majority of language and information fits these descriptors as many of the sentences are commands phrased in passive voice, as in “Employees and directors are not permitted to remove, sell, loan, convey, or dispose of any record, voucher, money, or things of value belonging to the Firm without the Firm’s consent” (p. 3, para. 4). In stressing informational, fact-based material, the writers sacrificed the transformational aspects, which are in opposite positions on the model. The code affirms that Lehman follows EEO laws, believes in fairness and full disclosure, and ends by saying the Board of Directors may waive the code at their discretion. With its extremely legal focus and language, this code would be most useful to Lehman attorneys wanting to legally separate the egregious actions of an employee from the organization. What is missing? The code is weak in transformational aspects giving little guidance in gray areas. It does not help when wrestling with a difficult decision; rather the code almost exclusively discusses topics that violate federal laws and warns employees not to break them. Also missing are the values of the corporation beyond adhering to laws. Nowhere in

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the Lehman code can be found a discussion about managing risk responsibly. One does not find any statement telling employees to safeguard the company’s assets so the company will endure in times of financial stress. Rather, an opposite message is conveyed with “Employees and directors have a duty to the firm to advance its legitimate interests whenever the opportunity arises” (p. 3, para. 2). The next sentence admonishes the employees not to take anything for themselves or their friends. On the fourth page, the employee is urged to “compete aggressively in furthering the interests of the firm” which, of course, is a perfectly valid position for Lehman—but it lacks elaboration along ethical lines. When should the employee compete aggressively? Under what conditions should more restraint be exercised? How far should one go in competing aggressively? What are Lehman’s ethics and values in those circumstances where it may not be the right thing to compete aggressively? None of these issues are addressed. The meltdowns in the financial sectors occurred because companies acted recklessly and assumed too much risk. The U.S. government has not been sufficiently strict with financial institutions or tried to belay aberrant behaviors. No visionary ideas are present and it is not an inspirational or thoughtprovoking document. Generic to the extent that with a few changes in wording, the code could be applied to any bank, insurance company, or financial institution, it raises no issues other than those that could hurt the firm. Additionally, Lehman’s code says nothing about protecting the environment, committing to the community in which they lived, or adding value to the world community. When codes such as Lehman’s focus too narrowly on prescribing or dictating behavior, they miss the transformational aspects that could be present and lack guiding, visionary thoughts and language. A 1996 study showed codes were generally framed from a defensive position to protect the organization against egregious behavior and could benefit by being more instructional and transformational (Stevens 1996). Too much focus on prescriptive behavior means the transformational and instructional elements are compromised. A number of scholars have also argued against the downward, command-style approach of communicating ethical values. The Lehman code of ethics (Lehman 2007) and internal code of conduct are not documents offering vision and guidance to its employees. Absent are strong guiding principles and visionary aspects that defined

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Lehman as an organization and it is weak on the transformational aspects of the Competing Values Framework. While the code lays out the basic rules expected of all Lehman employees, executives missed the opportunity to create a unique code that might have thoroughly defined the Lehman culture. The Lehman code did a basic job of protecting the organization against illegal actions by employees, but it did little to advance an ethical culture. Perhaps that culture did not exist. A code cannot create a culture that is not present or change the organization by itself. The investment banking industry itself reflects a culture where regulation was ignored. Nine investment banks including Morgan Stanley Dean Witter were fined in 2003, SEC Chairman William Donaldson noted that MWD’s CEO Philip Purcell showed “a troubling lack of contrition” (Gross 2003, p. 2). The fines ($1.4 billion) represented only a fraction of the profits companies gained using corrupt practices and the sanctions amounted to a slap on the wrist. The Lehman code reflects the culture of the investment banking industry which was aggressive, competitive, and interested in adhering to regulations only when it was in their best interests to do so. In this case, their ethical code was not a strategic document and it did not influence central decision-making. A different code could not have helped the company. Codes that are not key strategic documents embedded in the culture serve primarily as window-dressing to appease stakeholders and do little to influence decision-makers.

Appendix 2: ITOCHU Corporation ITOCHU Corporation founded in 1858 is a large global trading company, and its founder, Itoh Chubei (1842–1903) was from Ohmi merchant. The spirit of San Po Yoshi is an ethic of business practice widely followed by Oumi merchants in the Edo period. San means three, Pou means party, and Yoshi means satisfaction. To put it briefly, it means that everyone concerned in business is happy: sellers are happy, buyers are happy. Itoh Chubei’s Motto: Business is a Bodhisattva’s karma, and the venerableness of business makes both sellers and buyers happy, and fills up the shortage of goods and services for the people. That is the mission of a Buddhist.

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The present ITOCHU Credo: ITOCHU is committed to the global good, Economic Benefits, Societal Benefits, and Individual Benefits so that people are happy.

Itochu has another big company, Nippon Life Insurance Company founded by Hirose Ukesaburou (1843–1913) from Ohmi merchant.

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CHAPTER 2

Ethics of Capitalism?

Ethics is a philosophical term originating from the Greek word “ethos” meaning custom or character. It is concerned with describing and prescribing moral requirements and behaviors, which suggests that there are acceptable and unacceptable ways of behaving that serve as a function of philosophical principles (Aristotle 2000; Kautilya 1992). Ethical behavior is defined as behavior, which is morally accepted as “good” and “right” as opposed to “bad” or “wrong” in a given situation (Sims and Brinkman 2003). Ethics is the code of values and moral principles that guides individual or group behavior with respect to what is right or wrong. Ethical behavior is both legally and morally acceptable to the larger community (Trevino and Weaver 2003). Ethical dilemmas though, are present in uncertain situations, in which different interests, values, beliefs pertaining to multiple stakeholders are in conflict. Will Durant (1953) suggested that “…Ultimately, there are three systems of ethics, three conceptions of the ideal character and the moral life.” Durant’s trilogy consisted of a system that calls for the universal application of love (as in all of the world’s great religions), a system that calls for the universal application of the principle of survival of the fittest (as in the writings of Nietzsche), and a system that calls for the mixture of the first two (as in the writings of Aristotle). The first system on Durant’s list will be called

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 D. Basu and V. Miroshnik, Ethics, Morality and Business: The Development of Modern Economic Systems, Volume II, https://doi.org/10.1007/978-3-030-68067-1_2

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Altruism; the second the Exploitation Ethic; and the third the Justice Ethic (Durant 1953).

The World of Adam Smith Like his friend and colleague, the great philosopher David Hume, Adam Smith, was a key member of the Scottish Enlightenment. A believer in a free market economy, he is known as the father of modern capitalism. Adam Smith’s Views on the Political Economy of Capitalism Political economy is one that protects its citizens, creates conditions for well-being, including economic growth, and provides public services in the context of personal liberty protections of rights, and enforcement of laws of justice. (Smith 1776, 1982; Bentham 1983, 2009; Hayek 1976; Von Mises 1949, 2008; Hirschman 1977; Sen 1990, 1993). Adam Smith provided a blueprint for a model of social organization based on the system of perfect liberty. Private property and voluntary exchange are the main features of the capitalist economy. Smith offered an important insight into the role of the division of labor, competition, capital accumulation, and private property in creating a functioning and prosperous commercial society. He gave a vision of the society as a whole moving toward a distant but clearly visible goal of Progress. He gave a vision of society where individuals are following their self-interest without state interference or a central planning authority, through a mechanism called Political Economy, or, in today’s terminology, economics. In his laws of market, he tried to settle the fundamental question of how the private interest and passion of individuals can be led in a direction that can bring foreseeable beneficial results for society as a whole. He was interested to explore the mechanism through which society is held together, despite everyone busily following his or her self-interest. He demonstrated through his laws of market that competition among self-motivated individuals will result in the provision of commodities to society at market price that society is prepared to pay. According to Smith, the natural price therefore is as it were, the central price, to which the prices of all commodities are continually gravitating. Different accidents may sometimes keep them suspended a good deal above it, and sometimes force them down even somewhat below it. Whatever may be the obstacles, which hinder them from settling in this center of repose and continuance; they are constantly tending toward it.

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However, this is only possible in the case when the market operates under the condition of perfect liberty. Thus, individual self-interest in a market economy, under the condition of perfect liberty, is guarded through competition rather than any planning authority. Competition transmutes the selfish motives of men through a self-regulating system of the market system for society’s orderly provisioning. The law of accumulation and the law of population propel the productivity of the market in an ascending spiral. Therefore, if accumulation reaches its saturation point, where more demand for labor increases the wages to the extent that they eat away the sources of accumulation, the law of population will bring the balance back (Heilbroner 1999). Smith was the economist of pre-industrial capitalism and his name is often heard along with the terms self-interest, laissez-faire, and invisible hand. However, despite Smith’s panegyric of a free and unfettered market, he recognized three important functions of the government in a society of natural liberty. First, it should protect that society against the violence and invasion of other societies. Second, it should provide an exact administration of justice for all citizens. And third, the government has the duty of erecting and maintaining public institutions and those public works which may be in the highest degree advantageous to a great society, but which are of such a nature that the profit could never repay the expense to any individual or a small number of individuals (Heilbroner 1999). Adam Smith enjoys a unique position in economic thought. Being a moral philosopher, he was a part of an intellectual structure, based on a broader moral foundation of natural rights. However, the main thrust in economic thought has divorced Smith’s analysis of the free market from its moral foundation. Lewis argued that although Smith advocated the removal of market restriction, increased productivity and growth, he had a broader and more subtle purpose of the market system in mind. Smith saw the market as a crucial mechanism to save civil society through the way in which it forced men to recognize natural rights. There has been little concern with these normative and political aspects of Smith’s basic economic concepts has a far-reaching effect on economic theory and policy. Sen (2010a) has also argued that, though not so widely acknowledged, the relevance of Smith’s ideas in The Theory of Moral Sentiments is farreaching and has insights to offer to the world today. Smith’s analysis is, in fact, deeply relevant today in understanding what has just happened in the financial world. Smith did not take the market mechanism and profit

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motive as the sole performer of excellence in the market exchange. Along with the self-motivated behavior of individuals at the moment of market exchange, Smith was also concerned with the other wider moral motivations for economic activities. In his The Theory of Moral Sentiments, Smith discussed more refined motivation other than just the pursuit of one’s own gain or even prudence. Smith argues that, while “prudence” is “of all the virtues that which is most useful to the individual humanity, justice, generosity, and public spirit, are the qualities most useful to others” (Smith 1776; Sen 2010b). Smith believed a society can benefit through the pursuit of enlightened self-interest. Smith proposed a very democratic notion of the purpose of the market. He believed that capitalism will favor consumers rather than producers. He also conceived capitalism as a system that will promote the wealth of society without jeopardizing the interest of society at large and it will bring discipline, moderation, and order throughout society. He believed that every individual in a society has a strong desire for approval from his fellow beings and this desire is a leverage of control that guides fundamentally self-interested individuals toward sympathy and benevolence in a well-functioning society. However, virtues of capitalism, advocated by the father of capitalism, could not be fully materialized in the modern capitalist system and capitalism has been exposed to various challenges in the modern world (Porter and Kramer 2011; Offer 2012). The impulse of self-interest is not in itself immoral, but rather, when it is translated into the highly commendable virtue of prudence, it brings good for the society as well. Smith wanted to construct a system in which he attempted to show that commerce is consistent with morality and both these attributes of economizing and moralizing are natural to man. Smith presented a system of naturalistic ethics in which each part is connected to the whole through a complex chain of reasoning. Every individual has a perception of right and wrong that sometimes can be tainted by excessive self-love. However, in a process of moral equilibration potentially harmful self-love is checked against the less self-interested standards by an impartial spectator. Thus, Smith had a foundation for ethical judgments, which was independent of utility. His moral foundation is grounded in the community, which provides a meaningful conception of morality to the individual. This ethical foundation also bears relevance for individual conduct in the commercial order. Smith was convinced on utilitarian grounds that government regulation cannot improve morality or economics. In many parts of his analysis Smith regarded capitalism as

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a morally sparse doctrine having no place for the nonobligatory virtues of benevolence and charity. As argued by Smith (1776) in his widely quoted passage, It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves not to their humanity but to their self-love. (pp. 26–27)

He was always a realist about human nature. He was convinced that benevolence was only possible in very small, face-to-face relationships. Non-cooperative self-interest and others regarding sympathy are the major pillars of Smith’s model of market economy in impersonal and personal exchange, respectively (Smith 1998). Therefore, in market relationships, where we are often dealing with strangers, only self–interest can motivate people to produce a general beneficial outcome since the satisfaction of personal desire depends upon the capacity to satisfy the desires of others. The most relevant moral virtues for commercial society are justice, honesty, reliability, and frugality, which are essential features of the market system. For Smith, greater penetration of society by business attitudes would on the whole lead to a rise in moral standards, because without the expectation that agreements will be honored, property respected, and individual integrity respected, the capitalist system cannot flourish. Thus, rules of justice need to be enforced in commercial societies (Naz 2014; Collins 1994; Durant 1961).

Utilitarianism Bentham’s work (Bentham 1983/1987) opens with a statement of the principle of utility: “Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do… By the principle of utility is meant that principle which approves or disapproves of every action whatsoever according to the tendency it appears to have to augment or diminish the happiness of the party whose interest is in question: or, what is the same thing in other words to promote or to oppose that happiness. I say of every action whatsoever, and therefore not only of every action of a private individual, but of every measure of government ” (Scanlon 2009). In Chapter VII, Bentham says: “The business of government is to promote the happiness of the society, by punishing and rewarding… In proportion

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as an act tends to disturb that happiness, in proportion as the tendency of it is pernicious, will be the demand it creates for punishment ” (Bentham 1983/1987). Mill’s approach is to argue that the pleasures of the intellect are intrinsically superior to physical pleasures (Mill 1899). Few human creatures would consent to be changed into any of the lower animals, for a promise of the fullest allowance of a beast’s pleasures; no intelligent human being would consent to be a fool, no instructed person would be an ignoramus, no person of feeling and conscience would be selfish and base, even though they should be persuaded that the fool, the dunce, or the rascal is better satisfied with his lot than they are with theirs. A being of higher faculties requires more to make him happy, is capable probably of more acute suffering, and certainly accessible to it at more points, than one of an inferior type; but in spite of these liabilities, he can never really wish to sink into what he feels to be a lower grade of existence… It is better to be a human being dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied. And if the fool, or the pig, are of a different opinion, it is because they only know there own side of the question…Mill argues that if people who are “competently acquainted” with two pleasures show a decided preference for one even if it is accompanied by more discontent and “would not resign it for any quantity of the other,” than it is legitimate to regard that pleasure as being superior in quality. Mill recognizes that these “competent judges ” will not always agree, and states that, in cases of disagreement, the judgment of the majority is to be accepted as final (Rosen 2005). Harsanyi claimed that his theory is indebted to Adam Smith, who equated the moral point of view with that of an impartial but sympathetic observer; to Kant, who insisted on the criterion of universality, which may also be described as a criterion of reciprocity; to the classical utilitarians who made maximizing social utility the basic criterion of morality; and to “the modern theory of rational behaviour under risk and uncertainty, usually described as Bayesian decision theory” (Harsanyi 1982, 2012). Adam Smith, in a book titled The Theory of Moral Sentiments, published in 1759, presented a detailed highly celebrated outline of an ethical system he believed to be consistent with classical and Christian values and the challenges of a capitalist economy. He identifies prudence, justice, and benevolence as the key virtues arising from human tendencies. Those virtues are rewarded in a just society, Smith said, by their consequences, so their practice “is in general so advantageous, and that of vice

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so contrary to our interest,” that there need be no conflict between doing good and doing well (Sen 1990; Macfarlane 2000). The Theory of Moral Sentiments remains an effective guide to living a life of virtue without being a burden on those around us. This book differs from most classical discourses on ethics because it recognizes people are actors first, and philosophers second or not at all. Because our actions necessarily affect those around us, a vital function of ethics is to establish rules of conduct that allow people to live together in harmony. This secular, pragmatic, and personal development-oriented approach to ethics, although written before the Industrial Revolution, would seem to be more useful than many contemporary guides to self-improvement and happiness (Barry 1990; Hattwick 1986; Myrdal 1974). Benjamin Franklin’s thirteen Virtues are: Benjamin Franklin (Ziff 1969) provides another pre-Industrial Revolution view of the ethics most appropriate to a capitalist economy. In his Autobiography, written in 1771, Franklin provided a list of virtues he had planned to incorporate into a book, never written, that would “have endeavored to convince young persons that no qualities are so likely to make a poor man’s fortune as those of probity and integrity”. These are only words as the mass murder of the native Americans continued after the war of independence more vigorously. According to Ludwig von Mises (Linsbichler 2017) a free market economy is based on anthropological and ethical assumptions, which fully correspond to human nature and that therefore the market economy is for human beings just the natural form of mutually beneficial social cooperation. Mises’ basic contention that the market economy is the natural order of human cooperation beneficial for every single individual person much better concords with the classic idea of natural law and the JudeoChristian anthropology of human beings created in the image and likeness of God than with utilitarianism. The essential regulatory principle of markets and consequently of a market economy is the price system. The information and signals provided by prices coordinate the actions (of buying, selling, and producing) of people pursuing in each case their own ends and preferences. However, a price system can only do its work under the condition of freedom, that is, in a “free market” in which the price mechanism really works. Admittedly, a market economy can be hampered by interventions into the proper logic of its functioning and we would still talk about a (more or less free) “market economy.” However, to the extent a market economy

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is “less free” it is also “less a market economy.” In the extreme case, an economy can possess only the appearance of being based on a market, because the essential regulatory principle of markets, the price system, is working under conditions of state intervention so that market mechanisms are not really responsible for prices and the allocation of resources (Medema 2005). This is not to say, that markets work “perfectly” in the sense of preventing any kind of disequilibrium and of infallibly allocating resources without any kind of efficiency losses. In the real world there is no such thing as “perfect markets” and neither is there such a thing as “perfect competition.” Therefore, the so-called “market failures,” that is, the sub-optimal allocation of resources by the market in comparison with an ideal model of static “perfect competition” are not properly failures of the market economy, but the more or less inevitable imperfections of the real world and the human beings acting in it which precisely encourage innovation and stimulate entrepreneurial creativity. These imperfections are best overcome, or better: taken advantage of, by the free market itself and its competitive structure (Scott 2006). As economists of the Austrian School, especially F. A. Hayek (Petsoulas 2013), have shown the market is a discovery process which does its best precisely in a world of imperfection, that is, the real world which is open to continuous improvement by entrepreneurial creativity. Ludwig von Mises’ wrote (Linsbichler 2017): “The market economy is the social system of the division of labor under private ownership of the means of production. Everybody acts on his own behalf; but everybody’s actions aim at the satisfaction of other people’s needs as well as at the satisfaction of his own. Everybody in acting serves his fellow citizens. Everybody, on the other hand, is served by his fellow citizens. Everybody is both a means and an end in himself, an ultimate end for himself and a means to other people in there endeavors to attain there own ends.” This definition highlights the following essential and ethically highly relevant features of the market economy. First: the existence of division of labor; second: “private ownership of the means of production”; third: freedom of choice and of mutually beneficial cooperation. According to von Mises, “Capitalism” is an economic system in which private wealth is put at the disposal of the economy so as to become “capital,” that is, “a means of production of new wealth utilizing labor, wages, goods and services” (Linsbichler 2017). The driving force of capitalism is the entrepreneur who is conceptually different from the capital owner

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even if in many cases they are identical. It is the entrepreneur/capitalist who decides about the alternative uses of the factors of production. The whole process takes place at the risk of the owner of the means of production (the “capitalist”) who, therefore, legitimately makes a corresponding profit but also will bear the burden of future losses. Thus, private property and property rights concerning the whole range of means of production are essential for capitalism. And for the same reason only under capitalism real division of labor is possible. If the means of production, that is, a society’s capital goods are publicly owned, also the decision concerning their use and the allocation of resources is a public decision made by state planning. This, however, while degrading “division of labor” to the mere field of the execution of central plans and converting the entire national economy into one huge state enterprise, in reality eliminates division of labor where it is most crucial: on the level of entrepreneurial decisions about the alternative use of resources (Rasmussen 2011). This is why a free market economy—in the proper sense of the word— does only develop its full potential under the condition of capitalism, that is, of private ownership of the means of production. “Free market” and “capitalism,” how they are actually known to us, form a unity not only historically but even more so conceptually. The market is a social system of mutual benefit of the “Great Society” of F. A. Hayek because by their individual choices and through the price system of the market reacting to these choices the actors in the market provide the means for other people—they do not know and will never meet—to make choices following there own preferences. It is reasonable, therefore, that Mises bases his Treatise on Economics (which is the subtitle of his Human Action) on the principle of “methodological individualism.” “Methodological individualism” is justified precisely by the fact that choices are made and actions are performed only and exclusively by human persons, that is, by individuals (Linsbichler 2017). According to Mises, “society is nothing but the combination of individuals for cooperative effort. It exists nowhere else than in the actions of individual men.” So, the “total complex of the mutual relations created by such concerted actions is called society” (Linsbichler 2017). The dark side of Utilitarian is that Adam Smith, Jeremy Bentham, John Stuart Mill, David Ricardo, all were directors of the East India Company and they all supported colonialism on the basis of enhancing human welfare of the colonized people irrespective of the opinion of the colonized. Karl Marx would definitely object that in his book, The First

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War of Independence of India, 1857, where he has described the evil consequences of the British rule in India (Marx 1959; Naz 2014). At the World Economic Forum in Davos in 2014, a group of business, NGO, and government leaders discussed this question in a panel titled “Ethical Capitalism - Worth a Try?”: “Consider the extraordinary human achievement of the past two centuries generated by capitalism. As John Mackey reminds us in his book, Conscious Capitalism, 85 percent of the globe lived in extreme poverty just 200 years ago. Today, that number is 16 percent. Life expectancy has more than doubled, individual freedom has bloomed across the globe, and extraordinary innovation spurred by capitalism has changed daily life immeasurably” (Hanouz et al. 2014). The heart of the issue is this: Capitalism is only as good as capitalists. Ethical Capitalism has at least two essential ingredients: A focus on creating long-term economic and social value, and a commitment by business to act as stewards of the full spectrum of its constituencies— customers, employees, suppliers, investors, and society. Ethical Capitalism seeks to build deep, trust-based relationships in the service of society as well as the bottom line. In other words, it is a business model with a “higher purpose.” The benefits are real and long-lasting. Companies committed to this higher purpose attract more customers, minimize operating costs through energy efficiency and reduced waste, improve employee retention rates and benefit from an experienced workforce that has a stake in the company’s long-term success. Ethical Capitalism is not some idealistic dream; it is a powerful engine that drives long-term value creation (Henry Jackson Initiative 2012). In the early days of capitalism there appeared literature addressing the issue of business ethics. The conclusions were optimistic. The writers predicted that the market system would promote honesty and, in general, a higher standard of ethics. That promising beginning was cut short by Adam Smith. Smith’s approach in The Wealth of Nations was to analyze capitalism with a worst-case assumption of selfishness. Smith, of course, was aware of altruism. In fact, he made it a major subject of his earlier book, The Theory of Moral Sentiments. However, he chose to show that one did not have to appeal to ethical considerations to make a case for capitalism’s superior performance (Twigg 2008). For two centuries following the publication of The Wealth of Nations economists ignored the issue of business ethics. There simply was no

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interest in investigating the extent to which capitalism encouraged the business person to practice such duties as honesty, fairness, loyalty, or courtesy. The rare exceptions that can be found took a negative view, arguing that the market process prevents the business leader from developing his personality to the fullest. That was Frank Knight’s lament in “The Ethics of Competition,” and that was the lament of such critics of capitalism as Sismondi, Marx, John Ruskin, John Hobson, and E.F. Schumacher (Sims 2003). Sen’s defense of capitalism conforms to the idea that its success depends on its mode of regulation and the role of coordinating institutions, only one of which is the market (Sen 1987). Cudd and Holmstrom (2011) describe Sen’s defense of capitalism in the following words: “As Sen argues in ‘Development as Freedom’, regardless of the efficiencies of the market, ‘the more immediate case for the freedom of market transactions lies in the basic importance of that freedom itself’.” Sen (2009) also defends capitalism in a limited sense as a matter of freedom, where freedom is understood to include a rich variety of support for individual autonomy. Sen’s contribution to human development theory and social policy are shaped by his rejection of income as the sole measure of well-being. By emphasizing that income, although instrumentally significant, is not adequate to fully understand what people value, he introduced the concepts of functioning and capability as an alternative approach to judgments about the development of a society. Finally, his capability approach is central to the idea of liberalism that he endorses. Capabilities are a kind of freedom, which can enhance a person’s opportunity (functioning), but are also deemed intrinsically important. Sen’s idea of justice makes the case for increasing positive freedom through appropriate social policy. Sen has pointed to the danger of overestimating the wisdom of market processes. Theoretical representations of capitalism that rely on markets alone are “fictitious” in that they are narrow and unrealistic. In this respect, Sen quotes Adam Smith who, contrary to popular (mis)interpretation, “wanted institutional diversity and motivational variety, not monolithic markets and singular dominance of the profit motive.” Sen himself thus argues that we need to do away with the idea of markets being the best regulators (Sen 1977). The reliance on markets is a result of the theoretical and methodological concerns of neoclassical economics. Conforming to scientific

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exigencies, traditional economic theory has become formal and mathematical, based on utilitarian principles. Scientific rigor was achieved through the development of rigorous, general theories and through processes of complex modification. The necessary generalizations and simplifications were achieved, notably, through the device of the representative agent. In seeking to be more scientific, mainstream economic theories are thus based on the conception of human beings as representative agents, in other words, all alike as rational maximizers. Neoclassical economists do not question the preferences that lead agents to choose the best possible option, but simply assume that agents are consistent in these choices. It is, thereby, agreed that man could be characterized by his single-minded pursuit of self-interest. Sen adds that “the purely economic man is close to being a social moron” (Sen 1991). The notion of the representative agent can be traced back to the late nineteenth century. Francis Edgeworth (1881) used the term “representative particular,” while Alfred Marshall (1890) introduced a “representative firm” in his Principles of Economics. The concept is used in mainstream economics to make particular assumptions about individuals which guarantee that the collectivity will also act like an individual, thus providing micro-foundation for aggregate behavior. These assumptions typically state that all individuals have identical utility functions and that the relative income distribution is fixed and independent of prices (Baumol 2000). Martha Nussbaum interprets utilitarianism in the following manner: “Given that all moral responsibility is understood as personal responsibility to maximize total or average welfare, there is a large question about what becomes of the person and the sense that a person has a life. People are just engines of maximization. More or less all there energy has to be devoted to calculating the right thing to do, and than doing it. They will have to choose the careers that maximize total of average well-being, the friendships, the political commitments ” (Nussbaum 2005). Hodgson (2008) mentions the limitations of the rational choice model, in line with Sen’s reservations, when discussing the new research on institutions by neoclassical, mainstream economists: “Overall, however, the rational choice model that lies behind much mainstream thinking on institutions has revealed its limitations. Either rationality ends up being defined rather vacuously as consistency of preferences (it is vacuous because no two choice situations are ever identical and hence strict consistency is never

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tested) or it is shown to be inadequate in dealing with questions concerning the nature and evolution of institutions.” Kenneth Arrow founded contemporary social choice theory in 1951, showing that no social choice procedure could satisfy all of a small number of conditions. In brief, a social choice procedure has to produce an ordering of alternatives that has to apply to any domain or any set of individual preferences (unrestricted domain) (Arrow 1951; Reiss 2013). It has to also satisfy the technical condition that states that social choice over any set of alternatives has to depend on preferences only over those alternatives (independence), and finally, any procedure should satisfy the Pareto principle and non-dictatorship. The Pareto principle applies to the social choice procedure by requiring that if everyone in a society prefers one alternative to another, the final outcome must match the same. As for non-dictatorship, this condition rules out the possibility of someone’s preference over another “dictating” social choice regardless of everyone else’s preferences. This theory is based on utility as the principal measure of well-being (Sen 1987). Sen (1993) has developed the capability approach, a more faithful, pluralistic representation of people. The approach explored sees individual advantage not merely as opulence or utility, but primarily in terms of the lives people manage to live and the freedom they have to choose the kind of life they have reason to value. The basic idea here is to pay attention to the actual “capabilities” that people end up having. The capabilities depend both on our physical and mental characteristics as well as on social opportunities and influences (and can thus serve as the basis not only of assessment of personal advantage but also of efficiency and equity of social policies). The utility approach advocated by neoclassical theory gives too narrow a view of a person’s happiness. According to Sen, it also confuses means and ends. Utility is actually achieved through a more complex process, involving having an income, but also being able to utilize that income— through a person’s characteristics and functioning—to achieve well-being (Sen 1993). According to Vilfredo Pareto, the allocation of resources is deemed optimal when it is impossible to make someone better off without making another worse off. Sen has criticized this view of efficiency by showing that it does not promote justice. As Sen (1987) puts it, “A state can be Pareto optimal with some people in extreme misery and others rolling in

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luxury, so long as the miserable cannot be made better off without cutting into the luxury of the rich.” On the subject of means and ends, Alvey (2011) makes a significant point about the “fact/value or positive/normative dichotomy”: “Human ends are said to be subjective and beyond rational debate. Means can be subject to rational debate and economics focuses on them. Because ends are subjective and beyond rational debate, they are taken as given. For the economist/technician, human rationality refers to thinking and calculating about means.” “At a philosophical level, then, there is no inconsistency in supporting a form of capitalism that provides at least minimal welfare for its citizens – and, indeed, despite the popularity of the free market model in recent decades in the United States, most defenders of capitalism defend a model of capitalism with some welfare provisions, from middle-of -the-road liberals in the United States to supporters of more extensive social welfare as found in most European countries ” (Cudd and Holmstrom 2011). Capabilities are the various combinations of functionings (beings and doings) that a person can achieve, and they describe the real possibilities open to a person. Sen himself did not want the capability to single-handedly replace utility. Indeed, it is the very dogmatic nature of utility that he criticizes. The problem is that the conceptual and theoretical content based solely on these terms fails to alert us to the possibility of creating distortion by policies aimed only at increasing one of these (Virlics 2013). For Sen, the focus on utility in moral or economic decision-making is too singular a view to capture all the relevant factors (Sen 2010a). Importantly, modern economics, based on Pareto optimality, is not concerned with distributive justice. Overcoming the distortions and inequalities inherent in modern welfare economics is imperative for Sen and his theory of justice provides valuable advice on how to make actual situations more equal. For Sen, this focus on the satisfaction of efficiency is associated with the confusion between ends and means. More importantly, this perspective omits the issue of distributive justice (Virlics 2013).

Financial Capitalism and Justice In response to the financial crisis, Sen explains (Sen 2010b) that a subprime lender who misled a borrower into taking unwise risks, could pass off the financial instruments to other parties remote from the original transaction. The need for supervision and regulation has become

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much stronger over recent years. Yet the supervisory role of the government of the USA in particular has been, over the same period, sharply curtailed, fed by an increasing belief in the self-regulatory nature of the market economy. Precisely as the need for state surveillance has grown, the provision of the needed supervision has shrunk. In the face of the crisis therefore regulation must take the form of curbing predatory lending and strengthening of financial education so that people understand the products from which they can choose. For this, in his words, “the process has to begin with some immediate restraining of the unopposed power of rating agencies to issue unilateral commands. These agencies are hard to discipline despite their abysmal record, but a well-reflected voice of legitimate governments can make a big difference to financial confidence while solutions are worked out, especially if the international financial institutions lend their support” (Stiglitz 2002; Mugge 2010; Glyn 2006). Protecting consumers from risks, often too complex to be understood and certainly too heavy to be borne by them, is another objective for regulators. From the point of view of justice once more, restrictions are defended on products that are designed to be incomprehensible. As Mugge aptly puts it: “the freedom of the banker to sell products he or she chooses weighs less heavily than the potential loss of freedom of people who get entrapped in impenetrable legalese and debt ” (Mugge 2010).

Democratic Processes: Public Debate and Discussion In keeping with the capability approach, public debate and reasoning provide people with the tools for empowerment, which is constitutive of a person’s freedom. As mentioned earlier, the approach relies on the distinction between formal rights or resources, real rights or capabilities, and actual behavior or functioning. What was at stake, in political toleration was not just the liberal political arguments, but also the traditional values of tolerance of plurality, which had been championed over the centuries in many different cultures—not least in India. Indeed, as Ashoka had put it in the third century B.C.: “For he who does reverence to his own sect while disparaging the sects of others wholly from attachment to his own, with intent to enhance the splendour of his own sect, in reality by such conduct inflicts the severest injury on his own sect ” (Mazumdar 1917). To see political tolerance merely as a “Western liberal” inclination seemed to me to be a serious mistake.

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Sen’s recommendations on reform of capitalism, notably the American financial system, are based on his notion of justice, which emphasizes empowering people and enhancing their positive freedoms (Sen 2012). Sen (1987) emphasized that economics has two origins, both of which are linked to politics, albeit in different ways: one is based on “engineering” (meant in the mathematical sense of rational engineering) and mainly deals with logistical problems, while the second, based on ethics, is linked to “politics from a moral point of view” and deals with ultimate goals and human “well-being.” Elements of “engineering” approaches are, of course, found in fourth century BC Indian texts such as “A Treatise on Politics ” by Kautilya; however, with William Petty, Léon Walras, and the economists of the Soviet Union, like Feldman and India, like Mahalanobis these ideas were fully developed. The origins of ethical foundation reach back to Ancient Indian, Greek, Jewish, and Christian philosophers. Take for example, in his work The Politics, where Aristotle established a partly moral distinction between the domestic economy and the chrematistic. Whilst the “domestic form” of acquiring, based on the value of the use of assets, is laudable, the commercial form is not as it leads the person who adopts this form of acquisition to hybris . In Nicomachean Ethics, the Lyceum’s founder subordinates economic science (as is the case for military science or rhetoric) whose objective, he explains is wealth, to political science which is defined as “the most authoritative science, the highest master science,” whose objective is the achieving of good. In the Bible, Ecclesiasticus (31:3–7) explains: “Passion for gold can never be right; the pursuit of money leads a man astray.” In the New Testament, the Gospels teach that no human can serve both God and money (Matt 6:24, Luke 16:13) and that it is “easier, in fact, for a camel to get through the eye of a sewing needle than for a rich man to get into the Kingdom of God” (Luke 18:25). Neoclassical literature promotes a collection of value judgments directly springing from utilitarianism and Paretian thinking (from Vilfredo Pareto, Léon Walras’ successor at the University of Lausanne). These judgments take the form of recommendations, such as: “the sum of individual utilities must be maximized,” “social well-being depends entirely on individual well-being,” “the individual alone can judge his own level of well-being,” “social well-being increases when the well-being of at least one individual increases without another’s decreasing.”

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Utilitarianism, of Jeremy Bentham and John Stuart Mill during the eighteenth and nineteenth century, is a philosophy which holds that the objective of an action, whether individual or collective, should be the pursuit of maximum pleasure and minimum pain. The famous formula, “the greatest good for the greatest number of men,” is the modus operandi for utilitarian doctrine. Thus, neoclassical economists try to pass off metaphysical, if not basically political, beliefs as scientific. According to basic liberal doctrine, the market is a self-regulating mechanism that leads to the optimal granting of resources. Unfortunately, when elements such as asymmetrical information, exogenous shocks, an absence of synchronization between the supply and demand, and a lack of basic income allowing people to live without working…(all these are daily realities of any economy)… are introduced to such a model, a radically different result is obtained from that which would be predicted by a simplified model. It becomes clear that, far from being that well-oiled machine described by some, the market is an extremely unstable system (Weirich 2015; SustainAbility 2004). It was in this context of relative disillusion about development that François Perroux, in The Economy of the 20th Century, established the now accepted distinction between growth and development. In his work, growth is described as “the sustained increase…of a size indicator; for a nation: the gross or net global product, in real terms ” - in other words, a purely quantitative improvement - meanwhile, development is described as “the combination of mental and social changes in a population which makes it ready for cumulative and durable growth of it’s real global product ” (Perroux 1964; UNDP 1999; Savali 2018; David and Wade Hands 2011). In 1974 Gunnar Myrdal defined development as “the movement upward of the entire social system, where there is circular causation between conditions and changes with cumulative effects.” Rejecting both hard-line ecology and narrow economism, and its theses of “zero growth”—exposed at the famous Meadows Report of the Club of Rome—and the advocates of anything-goes industrialization, the ecodevelopment theorists defend the thesis which holds that the conflict between growth and development can be only be resolved by methods other than by halting growth (Myrdal 1957; Meadows et al. 1972). At the 38th session of the UN Assembly General in 1983, the World Commission for the Environment and Development (WCED) was created to

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re-examine the planet’s big environmental and development problems as well as draft realistic proposals to resolve them. This concept of critical natural capital could form an extension to human capital and social capital. It is clear that below a certain level of healthcare, education, and training that human capital can not reproduce. The same is true for social capital, which erodes irreversibly when inequalities reach too high a level. Therefore, sustainable development is indispensable in helping to create a new analysis and economic practice. This was the basis for Joseph Stiglitz’s damning diagnosis: “Globalization is not working for many of the world’s poor. It is not working for much of the environment. It is not working for the stability of the global economy” (Stiglitz 2002).

Weber’s Protestant Ethic Max Weber (2002) claimed that whereas Protestantism fostered the proper ethic to spur capitalism, the religions of East Asian nations did not. Weber was correct in concluding that hard work, asceticism, and a strong entrepreneurial spirit were necessary preconditions to economic success, but not necessarily for capitalism only. He was incorrect about Japan’s ability to develop such an ethic. This was curious, because in his time, Japan was the world’s most economically and technologically advanced East Asian and Confucian-based nations. Its incredible economic rise and success since the late-nineteenth century has provided further evidence of the error of Weber hypothesis (Jacobs 2010; Hiroike 1928). Weber had incorrect knowledge about the religions of non-European countries and was an ignorant racist. Long working hours have been the result of a number of factors. Most prominent among them have been: (1) a “catchup” nationalist ideology, first instilled during the 1868 Meiji Restoration; (2) a hegemonic politicosocial context, which has stressed filial piety; and (3) a post-World War II segmented internal labor market, which has both demanded devotion to firm and has severely inhibited labor mobility. Together, hard work, asceticism, and entrepreneurialism have constituted the main ingredients of Japan’s Weberian like ethic, which, along with its vaunted national industrial policy, has transformed it into the world’s second largest economy. In The Protestant Ethics and the Spirit of Capitalism, published in 1905, Weber attempted to explain why modern capitalism had developed more

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rapidly in Protestant countries than in others. Here, Weber defined capitalism as an economic system based on money, not bartering, in which the underlying premises were: (1) the rational and peaceful pursuit of profit by private individuals and businesses; (2) the expectation of profit through exchange; and (3) the utilization of goods, services, and money as a means of acquisition and accumulation. For Weber, an individualistic, private capitalist entrepreneur or enterprise represented a person or firm who/which purposefully took full advantage of available opportunities for profit-making, realizing that if they did not, their business would cease to exist. Weber argued that Protestant ethos had created the prime conditions necessary for capitalism to flourish in the West (Golzio 1985). According to Weber, Protestant sects, particularly Calvinism, first and foremost emphasized asceticism (living a modest life and abstaining from spending your earnings on unnecessary material objects). Secondly, he claimed that the Calvinists interpreted the concept of a job/work, as a Biblical “calling,” a duty unto God and proof of genuine faith in the almighty. In turn, working long hours, and any subsequent wealth achieved and saved from such hard work, was interpreted by them as a sign of being in the good graces of, and as a gift from, God. Finally, Weber maintained that in addition to making a person a good Christian, the Protestant ascetic and “calling” to work had provided Western nations with the best climate possible to provoke an entrepreneurial “spirit of capitalism.” Combined, these three elements made it possible to accumulate more wealth through the productive investment of capital, and in turn, capitalism to expand and thrive (Jacobs 2010). In contrast to Protestantism, Weber argued that East Asian religions, such as Confucianism and Buddhism, prevalent in China, Korea, and Japan, were too firmly grounded in taboo and kinship ties to foster the development of capitalism. Moreover, he thought that unlike Puritan formal rationality, Confucian substantive rationality, which stresses collectivism, was incompatible with the development of economic individualism, and thereby, inhibited the emergence of the proper entrepreneurial spirit necessary to foster capitalism. He said that while John Wesley taught his followers that frugality and economic success were both evidence of righteousness, the Confucian nations, such as Japan, accorded merchants very low status, and frowned upon thrift, even viewing it as hoarding. Instead, the ideal Confucian was thought to be a learned gentleman of grace and dignity, who above all, desired ‘salvation’ from

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ignorance/a lack of education. As a result, in such societies, ritual and the goal of self-perfection superseded any desire for individual wealth (Schroeder 2016). From this assessment, Weber concluded that as long as Confucianism was dominant, East Asian societies would always lack the necessary economic rationality and entrepreneurial spirit that had energized the modern money-based capitalist economies of the Western Anglo-Protestant countries. However, by lumping all East Asian nations together in his typology, what Weber ignored was the fact that, whereas Chinese, Japanese, and South Korean ethos were all heavily influenced by the Analects of Confucius, each society also was forcefully shaped by its particular historical, political, cultural, and geographic context. Weber totally ignored the role of colonialism on the economic advancement of the Anglo-American Protestant countries. He had ignored how Britain in particular used India to finance the Industrial Revolution of 1760s from the money it extracted from India from 1757 to 1947 (Basu and Miroshnik 2020). He had no proper knowledge about Asian religion or the economy either. Pre-Meiji Japan had more or less the same standard of living as the British workers at that time in the nineteenth century, but Britain had a worldwide empire to exploit. Shintoism, which is indigenous to Japan, and characterized by ancestor worship, among other things, impacted those aspects of Confucianism which were integrated into that nation, as compared with China and Korea. Therefore, whereas Chinese Confucianism stressed benevolence, Japanese Confucianism was based upon a trinity of values—loyalty, filial piety, and duty—which did not prohibit money-making and accumulation, as long as merchants remained loyal to their local lord or nation (Hiroike 1928). In his writings on Asia, Weber failed to apply his own basic rule of inquiry: how an economic system within a particular society was uniquely shaped by its history, culture, and other embedded superstructure. Although guided by a different set of ideological principles, the same basic tenets of capitalist development which Weber attributed exclusively to Protestantism, hard work, asceticism, and profit-oriented, private entrepreneurship, were already long present in Japan at the time of his writings in the early tweniteth Century (Jacobs 2010). In fact, evidence suggests that all three elements were among the guiding tenets of Japanese entrepreneurs for more than 400 years, especially among the merchants of its historic commercial capital, Osaka, its

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neighboring city Sakai (both in Osaka Prefecture), and in the regional provinces of Ise (now in Mie Prefecture) and Omi (now Shiga Prefecture). The same can be said for a rational money economy, which has been present in Japan since the seventeenth Century, if not even earlier (Hiroike 1928).

Capitalism and India The philosophy of capitalism, Utilitarianism was known to Raja Ram Mohan Roy, the father of the Indian renaissance in the nineteenth century, but was ignored. It was mocked at by the famous nineteenth century writer Bankim Chandra Chatterjee as “the Philosophy of the stomach” (Chatterjee 1986). Whether the doctrine of selfishness as a virtue can be acceptable to the world culture, which is based on renunciation and selfless work, is highly debatable. The philosophical basis of the “Globalization” process is the philosophy of capitalism, i.e., the utilitarianism of Bentham (1983/1987), James Mill (1986), John Stuart Mill (1899), and other writers. The idea is that maximization of self-interests is the virtue and the rationalism. Individuals, while maximizing selfishly their own interests, maximize the combined social welfare of the society; the process was explained as the “invisible hands of the market” by Adam Smith (1998). This virtue of self-interest is the motive force of capitalism and is the so-called “Protestant ethics” (Weber 1946/1993). The idea of the modern-day economists who are the high priests of “Globalization” are not any different from their eighteenth-century predecessors. According to Bentham (1983/1987) “what is good is pleasure or happiness, … therefore one state of affairs is better than another if it involves a greater balance of pleasure over pain.” John Stuart Mill (1899) said “.. … Pleasure is the only thing desired; therefore pleasure is the only thing desirable.” General happiness that results from these pursuits of pleasures is the effects but not intention. All Human actions are based on self-preservation and self-interest. Selfishness is a virtue, which brings economic prosperity. In the pursuit of profit maximization, the producers allocate resources only to satisfy demands so as to use the most efficient production system to minimize cost. Consumers are satisfied to receive high-quality goods at the lowest cost. Because economic growth depends on acquisitive actions, self-serving behavior is justified. To enhance economic growth, the state should intervene as little as possible restricting

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itself to the defense and judicial system leaving everything else to the spirit of free enterprise (Alvey 2003). This doctrine of “laissez-faire” was propagated by the originators of modern Western economists, David Ricardo and J.B. Say and further decorated, using mathematical tools, by Jevons, Marshall, Knight, and Walras and very recently by Milton Friedman or Robert Lucas. The argument remains the same although the society has changed and the “perfect competition” as imagined by Adam Smith is not a reality in the days of monopolistic market of large multinational corporations. The idea is that capitalism, leaving it to itself, can recover from any crisis and any public intervention can only make things worse. Thus, any public actions are nothing but distortions to the system, which must be minimized so that the multinational companies can pursue their self-interests freely so as to maximize the interest of the world economy (Adair-Toteff 2011). The efficiency of the market is to satisfy demand, which can only be created by people who can afford to create demand. Those, who cannot, are rejected by the market. As prices are determined by the monopolistic multinational companies, the number of people rejected by the system cannot be determined by the policies of the national governments. For a country with poverty, the number of these rejected people can go on increasing, thus producing a growing army of the so-called “underclass” who exist in large numbers even in the developed countries (Hodgson 1996). In capitalism, wealth is being concentrated in the hands of the few. The dominion of the capitalist class today is justified in the name of economic growth and production efficiency. The resultant deprivations are visible even in the developed countries. In the USA, about 12 million people are homeless, one-third of the people cannot afford even primary healthcare, 17% of the children are living below the poverty line, about 23% of the people are functionally illiterate, there is no security of either job or life. Albert Einstein has explained, “The United States is fortunate in producing all the important industrial products and foods in her own country, in sufficient quantities. The country also possesses almost all important raw materials. Because of her tenacious belief in ‘free enterprise’ she cannot succeed in keeping the purchasing power of the people in balance with the productive capacity of the country. For these very same reasons there is a constant danger that unemployment will reach threatening dimensions” (Einstein, Reply to Soviet Scientists 1948).

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Thus, capitalism has so far failed to maximize social welfare through the maximization of individual profit. The resultant discontent will grow substantially due to the “Globalization” process, which will intensify deprivation in the pursuit of efficiency across the globe. If the economic system imposed from outside does not correspond to the national culture or the philosophy of life, it will collapse sooner or later due to its own inherent contradictions. According to the Hindu philosophy of life, we are in the era of the merchants or the capitalistic system. This system cannot last forever due to the tyranny, oppression, and degeneration it creates just like other systems those that came before it. Relationship between culture or the philosophy of life of a country and its economic and social system is important for all nations. Humanistic aspects of Indian national culture, i.e., renunciations, selfless work, sacrifice, work without any attachments to the results do not correspond to the acquisitive consumerism glorified by capitalism which is the philosophy of the “Globalization” process. The essential characteristics of national cultures can be traced on these basic human values signified by the Hindu philosophy of life which suggests that the present acquisitive consumerism or the capitalist system controlled by the merchant class cannot last, but would be replaced by an alternative system. While the market economy is based on materialism and selfishness, the ideals of Hinduism are exactly opposite to these. Sri Krishna has described Utilitarian men very clearly, “They say: ‘this world has no truth, no moral foundation, no God. There is no law of creation’ (Bhagwat Gita, Ch16, verse 8). Their highest goal is sensual enjoyment and they firmly think that is all” (Bhagwat Gita, Ch 16, verse 11). “In their chain of selfishness and arrogance, of violence and anger and lust, these malignant men hate me” (Bhagwat Gita, Ch 16, verse 18). Market system is based on profit; every work must be justified by the results. Hindu ideals are based on selfless work without expecting any rewards. “When work is done as sacred work, unselfishly, with a peaceful mind, without lust or hate, with no desire for reward, then the work is pure” (Bhagwat Gita, Ch 18, verse 23). Sri Krishna also said, when a man dwells on the pleasures of sense, the lust of possession arises, which leads to anger, ruin of reason, and ultimate destruction (Bhagwat Gita, Ch 2, verse 62). Thus, market economy is against the Hindu ideals. Amartya Sen, although Indian, does not subscribe to the Hindu ideals as he justified capitalism in terms of freedom.

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Like Aristotle and unlike Adam Smith, Marx also thought that capitalist exchange perverts human virtue. Under capitalism, moral virtues no longer appear as ends to be sought. In the relationship between lender and borrower, normal human virtues are calculated in terms of potential credit risk. Trustworthiness no longer appears as a value or a virtue that is an end in itself. Human morality is determined by market forces only, which Krishna or Buddha or Jesus would never approve.

References Adair-Toteff, C. 2011. Protestant Ethics and the Spirit of Politics. History of the Human Sciences 24 (1): 19–35. Alvey, J.E. 2003. Adam Smith’s Views of History: Consistent or Paradoxical. History of Human Sciences 16 (2): 1–25. Alvey, J.E. 2011. Ethics and Economics: Today and in the Past. Journal of Philosophical Economics 5 (1): 5–34. Aristotle. 2000. Nicomachean Ethics. Cambridge: Cambridge University Press. Arrow, K. 1951. Social Choice and Individual Values. New York: Wiley. Basu, D., and V. Miroshnik. 2020. Imperialism and Capitalism. Basingstoke: Palgrave Macmillan. Baumol, W.J. 2000. What Marshall Didn’t Know. Quarterly Journal of Economics 115 (1): 1–44. Bentham, J. 1983/1987. Utilitarianism and Other Essays. London: Penguin. Bentham, J. 2009. An Introduction to the Principles of Morals and Legislation. London: Dover Publications. Bhagwat Gita. 1964. Translated by Juan Muscaro. London: Penguin. Chatterjee, Bankim Chandra. 1986/1886. Krishna Charita, in Complete Works, vol. 4. Calcutta: Tuli-Kalam Publishers. Collins, D. 1994. The Fall of Business Ethics in Capitalist Society: Adam Smith Revisited. Business Ethics Quarterly 4 (4): 519–535. Cudd, A., and N. Holmstrom. 2011. Capitalism, For and Against: A Feminist Debate. Cambridge: Cambridge University Press. David, J.B., and D. Wade-Hands. 2011. The Elgar Companion to Recent Economic Methodology. Cheltenham: Edward Elgar. Durant, W. 1953. The Pleasures of Philosophy a Survey of Human Life and Destiny. New York: Simon & Schuster. Durant, W. 1961. The Story of Philosophy. New York: Simon and Schuster. Edgeworth, F.Y. 1881. Mathematical Psychics. London: Kegan Paul. Einstein, A. 1948. Reply to the Soviet Scientists, Monthly Review, Special Volume. Glyn, A. 2006. Capitalism Unleased. Oxford: Oxford University Press.

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SustainAbility Ltd. 2004. The Global Compact Challenge, 2 May 2008. http:// www.institut-entreprise.fr/fileadmin/DocsPDF/Global_Compact/Global CompactChallenge.pdf. The Henry Jackson Initiative. 2012. Towards More Inclusive Capitalism. http://www.henryjacksoninitiative.org/uploads/files/e5202114f33d 3b6fd9874529c73a4daad7f98b4e.pdf. Twigg, L. 2008. Capitalism and Morality: Adam Smith v/s Karl Marx. https:// www.wju.edu/academics/bus/iscm/LTwigg.pdf.

CHAPTER 3

Marxist Ethics

Marx’s critique of the capitalist economy is essentially an explanation of how the capitalists created existing forms of production, distribution, exchange, and consumption. How these are interrelated and how the people are affected by these are also explained by Marx and Engels (Marx & Engels 1966a, 1996/1848; MECW 1975). Through pre-history and pre-capitalist modes of production the sense of individuals was developed through family and tribal groups. Immanuel Kant (1959), wrote, “that moral behaviour involves the suppression of natural desires that are seen as selfish and individualistic.” The “private interests” assumed to be natural and modern moral theory are a product of history. Marx (1994/1843) points to a fundamental problem with this approach. It is only with capitalism that social relations between people became the means toward their private purposes. In a capitalist society individuals are independent of any social bonds. Thus, Morality is a historical product with different historical stages that determine whether any specific actions are moral or immoral (Marx 1970/1843). Marx-Engels said that the proletariat must develop its own ideology to explain social contradictions (Brodov 1984; Wills 2011) for morality is “ideology.” Morality, like other forms of ideology, has a class character in accordance with the interests of what classes a person belongs to © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 D. Basu and V. Miroshnik, Ethics, Morality and Business: The Development of Modern Economic Systems, Volume II, https://doi.org/10.1007/978-3-030-68067-1_3

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(Marx and Engels 1970). Rather he follows Kant in putting human freedom at the center of his social theory, while arguing that Kant fails to understand real human freedom. Kant argued that morality involves the use of reason to overcome our natural competitiveness. The moral law acts as an obstacle to our selfish and sinful desires (Kant 1963). The utilitarians argue that individual selfishness leads to a general increase in wealth, which in turn makes us all happier. This approach has been used to justify all manner of inhuman acts like colonialism and slavery in the name of their future happiness. Marxist–Leninist ethics is materialist: morality as a property of man’s behavior is conditioned by his social and historical existence. The central theme of Marx’s moral theory is how to realize human freedom. Workers have no control over the means of production. They are forced to work for capitalists, and factory work denied them any freedom. This is the nature of capitalist production (Marx 1871/1996). In his Economic and Philosophical Manuscripts (1844), he argued that while Adam Smith and David Ricardo show that the worker, far from being in a position to buy everything, must sell himself and his humanity; they also said that capital is the power to command labor, and its products and capital is nothing but accumulated labor (Brodov 1984; Wills 2011). “The misery of the worker is in inverse proportion to the power and volume of his production” (Marx 1844, 1967a). Marx argued that it was capitalism’s inhumanity that compelled workers to rebel against their situation. Workers feel their alienation as dehumanization against which they tend to struggle for selfrealization (Human Requirements and the Division of Labour, MarxEngels Collected Works (MECW from now on), volume 3, p. 306). As a solution, social production must be coordinated socially, and directed toward the creation of a society “in which the free development of each is the precondition of the free development of all.” Marx created a concept “rich individuality,” which means the human being in whom human essence has been brought into accordance with human appearance (Brodov 1984; Wills 2011). Communist morality is that which unites the working people against all exploitation. For Marx, the antagonists are not nations but classes. For Marx, the state should transform “natural independence into spiritual freedom, by the individual finding his good in the life of the whole, and the whole in the frame of mind of the individual” (Marx and Engels 1970; West 1969).

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Morality, for Marx, only arises in a state, and moral theory is inseparable from social and political theory. It is only the state that is “the great organism, in which legal, moral, and political freedom must be realized, and in which the individual citizen in obeying the laws of the state only obeys the natural laws of his own reason, of human reason” (Marx and Engels 1970; Brenkert 1975; Wills 2011). Moral evil is the outcome of a state of affairs in which an empirical existent fails to live up to its essence. Marx calls this failure alienation. All institutions that treat humans merely as means must be transformed in a revolutionary way (Marx 1973). Aristotle said that happiness comes from activities which are aligned with virtue. Like Aristotle, Marx thought that, without exchange, the limit of need and human essence would form the limit of production (Aristotle 1980). This, for Marx, is the real exchange value of labor for the product. In a market economy with wage labor, what is produced is not controlled by the wage worker. The ownership of the product determines the amount and distribution of the product. Adam Smith argues that in an exchange economy a common good is produced unconsciously through an invisible hand. Marx completely rejects Smith’s model for human society. His objection is in large part a moral one and was supported by Socrates, and certainly Aristotle as well as for Kant. That is to produce a good in accordance with given moral expectations as Adam Smith did, does not amount to morality. Morality requires conscious intent with society must be consciously and purposively directed. Exchange should not be allowed to operate independently of human beings, subverting human values and virtue. According to Marx a communal organization of society is the society that can realize the human essence; it is the only moral society (Draper 1971). Thus, Marx envisions a society in which need directly regulates production. Individuals work to realize their essence. Relationships between individuals would be like the community of friends that transforms unconscious civil society into a consciously controlled and purposively directed economic community. Unalienated human beings are not dominated by alien market forces. In a fully developed communist society, according to Marx, the social contradictions which create the basis for morality (Marx 1973). According to Marx, moral judgment is morally good if it contributes to further human development. Therefore, the rationale that promotes human development, the expression of human essence, and the abolition of alienation, is different in different historical settings. In the 1844

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manuscript, “Antithesis of Capital and Labour,” Marx wrote that capitalism produces “immorality, deformity, and dulling of the workers and the capitalists” (Economic and Philosophic Manuscripts of 1844, MECW 3:284). Marx argues that a communist society is the only one in which the full development of all-sided individuals as the highest value for human beings can be truly realized. In the Critique of the Gotha Programme, Marx argues that capitalism is despicable because it results in “the enslaving subordination of the individual to the division of labor” (Critique of the Gotha Programme, MECW 24:87), impeding the full development of the individual’s capacity to act, and restricting the expression of his full personality.

Alienation Alienation, in its most basic form, is a condition in which human existence takes on a character that is at odds with human nature. Otherwise put, in alienation, human appearance is not reconciled with human essence (Oilman 1976; West 1969; Wills 2011). Alienation is an inversion of the relationship between human beings and their products through their labor. Under capitalism, the worker’s own product is produced in accordance with the economic laws of supply and demand. “The devaluation of the world of men is in direct proportion to the increasing value of the world of things” (MECW, volume 3, p. 272). Thus, “the emancipation of the workers contains universal human emancipation” (MECW, volume 3, p. 280).

Marx’s Critique of Christianity, Kantianism, and Utilitarianism Kantianism, Marx writes, depends on a conception of the “free will” that fails to account for the fact that human beings do not form their wills in a free way, but do so within historical production conditions that shape determining roles in creating their will. Kantian morality accommodates itself too readily to a powerlessness of human beings to intervene effectively into reality. Marx argues that utilitarianism substitutes happiness and usefulness, for a distorted and narrow picture of human and immorality of colonialism. (Antonio 2003; Grimes and Simmons 1970).

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Marx on Christian Morality Marx’s critique of religion is not purely negative; rather, he recognizes that, “the miserableness of religion is at once the expression of real misery and the protest against real misery. Religion is the sigh of the oppressed creature, the heart of a heartless world, just as it is the spirit of spiritless conditions. It is the opium of the people” (Economic and Philosophic Manuscripts of 1844). Religion is not the source of human troubles. “The struggle against religion is therefore indirectly a fight against the world of which religion is the spiritual aroma” (MECW, volume 3, p. 175). Marx in an article for the Deutsche-Brüsseler-Zeitung, explained the inadequacy of Christian morality to defend human liberation. The social principles of Christianity justified the slavery, the serfdom, and are incapable of defending the oppression of the proletariat. Christianity explains all the acts of the oppressors against the oppressed as examinations of God for the people (The Communism of the Rheinischer Beobachter, MECW, volume 6, p. 231). Christianity accepts the status quo and dissuades the oppressed from making any revolutionary changes. Marx writes, “Kant’s good will fully corresponds to the impotence, depression and wretchedness of the German burghers, whose petty interests were never capable of developing into the common, national interests of a class” (The German Ideology, MECW, volume 5, pp. 193–194). The first is that because of its importance on “free will” and its conformity with the Moral Law as the main issue for morality, Kantian morality cannot give any support for any revolutionary social change (The German Ideology, MECW, volume 5, p. 195). Marx on Utilitarianism Marx criticizes James Mill’s moral philosophy (Mill 1969), as Utilitarianism explains the human only as the enjoyer of utility and Utilitarianism functions to justify existing capitalist society and colonialism (The German Ideology, MECW, volume 5, p. 412). The core of Bentham’s Utilitarian theory is the doctrine that a moral action is good or bad according to the extent to which it maximizes utility, bringing about the greatest happiness for the greatest number of people. Utilitarianism is “a mere apologia for the existing state of affairs, an attempt to prove that under existing

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conditions the mutual relations of people today are the most advantageous and generally useful” (The German Ideology, MECW, volume 5, pp. 413–414).

Utopianism and Scientific Socialism As Marx writes in The Communist Manifesto, “utopian socialists, they reject all political, and especially all revolutionary, action; they wish to attain their ends by peaceful means, and endeavor, by small experiments, necessarily doomed to failure” (The Communist Manifesto, MECW, volume 6, p. 515).

Ideology and Morality As Marx writes in 1859, it is human beings’ “social existence that determines their consciousness” (Preface to A Contribution to the Critique of Political Economy, MECW, volume 29, p. 263). The economic interests of the capitalist class neglect the conditions necessary for the advancement of humanity as a whole and to promote the entire human society individual bourgeois should identify their interests with the interests of the working class. Marx writes, “we shall have an association, in which the free development of each is the condition for the free development of all” (Manifesto of the Communist Party, MECW, volume 6, p. 506). Marx’s moral theory is based on this conception of essential humanity (Marx 1975). On Imperialism Karl Marx was a great admirer of India. He wrote a number of books (The First War of Independence, Notes on Indian History) and a large number of articles on India and the British rule. He is the first person to call the so-called Sepoy Mutiny of 1857 as the First War of Independence of India. Marx’s admirations and sympathy for India are reflected in his writing when he has compared India to Italy, one of the two (Greece being the other one) foundations of European civilization. He wrote: Hindostan is an Italy of Asiatic dimensions, the Himalayas for the Alps, the Plains of Bengal for the Plains of Lombardy, the Deccan for the Apennines,

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and the Isle of Ceylon for the Island of Sicily. The same rich variety in the products of the soil, and the same dismemberment in the political configuration. (Marx and Engels 1959)

Karl Marx in “The British Rule in India” wrote: There cannot, however, remain any doubt but that the misery inflicted by the British on Hindustan is of an essentially different and infinitely more intensive kind than all Hindustan had to suffer before. They destroyed it (India) by breaking up the native communities, by uprooting the native industry, and by leveling all that was great and elevated in the native society. The historic pages of their rule in India report hardly anything beyond that destruction. (Marx and Engels 1959) Did they not, in India, to borrow an expression of that great robber, Lord Clive himself, resort to atrocious extortion, when simple corruption could not keep pace with their rapacity? While they prated in Europe about the inviolable sanctity of the national debt, did they not confiscate in India the dividends of the rajahs, who had invested their private savings in the Company’s own funds? The devastating effects of English industry, when contemplated with regard to India, a country as vast as Europe, and containing 150 millions of acres, are palpable and confounding. (Marx and Engels 1959)

Some writers in India have misquoted Marx by saying that Marx made some derogatory remarks on India by saying that India had no history. However, what Marx wrote in this matter, in New York Daily Tribune, 1853, is as follows: Indian society has no history at all, at least no known history. What we call its history, is but the history of the successive intruders who founded their empires on the passive basis of that unresisting and unchanging society. Arabs, Turks, Tartars, Moguls, who had successively overrun India, soon became Hindooized, the barbarian conquerors being, by an eternal law of history, conquered themselves by the superior civilization of their subjects. (Marx and Engels 1959)

Rabindranath Tagore (1903) also wrote, that in our history books, there are no explanations that among those massacres and mayhem, how our society could give birth to Guru Nanak, Kabir, Tukaram, and Sri Chaitannaya, because we do not have any history of our society.

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Marxian Methodology in History A historian cannot be called a Marxist unless he or she would follow Marx’s method on history, which is based on his philosophical idea of “Dialectical Materialism.” In “dialectics” nature is an integral whole in which all objects and phenomena are interlinked, interdependent, and inter-conditioned. Nature is always in a state of continual motion and change, of renovation and development. A Marxist historian follows this basic philosophy while writing history. According to Marx, social and historical development has economic roots. If there is a contradiction (or dialect) that develops in the economic system, social and historical developments follow. Thus, a historian following Marx’s methodology must explain these economic contradictions in history rather than just narrating invasions after invasions or about kings and emperors. The historians following the British tradition describe India as an inferior civilization, always poor, always defeated, and fragmented. Instead, Marx has explained how British rule has transformed India from a prosperous self-sufficient country to a country of destitute and famines. This transformation is the historical process of evolution from feudalism to capitalism, as described by Marx and Engels. “Constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones” (in The Communist Manifesto). For India, it meant destruction of her self-sufficient village economies along with both Indian industry and agriculture because of the free trade with Britain, excessive tax collections, and absence of any public works. Marx demonstrated how India was devastated through the British rule. British historians totally reject these. Recently they are trying to justify imperialism in terms of expansion of civilization to these dark areas of the world and establishment of economic progress. Karl Marx and Swami Vivekananda It is unknown in India, but Karl Marx and Swami Vivekananda had similar views on the historical cycle of the world. According to Marx the world history has four cycles starting with primitive communism of tribal societies, then feudalism, capitalism, and ultimately socialism followed by

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advanced communism. For Marx the history is deterministic, these cycles are bound to happen due to the contradictions or dialectics in the existing system. In Karl Marx, “Changes occur in society because of contradictions in prevailing ideology, in its social, economic, and political order. These contradictions arise from hostilities between the social classes” (in Marx 1977) in A Contribution to the Critique of Political Economy). Swami Vivekananda similarly divided the world history into four cycles, starting with the Age of the Priests, Age of the Warriors, Age of the Merchants as we are now in, and ultimately the Age of the Worker, which is coming. With each cycle, society rises to higher and still higher stages and is perfected (Vivekananda 1924). The contradiction in the society according to Vivekananda is as follows, “… At a certain time every society attains its manhood, when a strong conflict ensues between the ruling power and the common people” (Brodov 1984). In the new Age of the Workers, “just distribution of material values will be achieved, equality of the rights of all members of society to ownership of property established and caste differences obliterated” (Brodov 1984). Sri Aurobindo also has expressed similar views on history. India’s First War of Independence as Described by Karl Marx During the revolt of 1857, Karl Marx was writing regularly in the New York Daily Tribune about the progress and the suppressions of that revolt. His description of the Mongal Pandey’s courageous act is as follows: On the 22nd of January, an incendiary fire broke out in cantonments a short distance from Calcutta. On the 25th of February the 19th native regiment mutinied at Berhampore; the men objecting to the cartridges served out to them. On the 31st of March that regiment was disbanded; at the end of March the 34th Sepoy regiment, stationed at Barrackpore, allowed one of it’s men to advance (i.e., Mongal Pandey) with a loaded musket upon the parade-ground in front of the line, and, after having called his comrades to mutiny, he was permitted to attack and wound the Adjutant and Sergeant-Major of his regiment. During the hand-to-hand conflict, that ensued, hundreds of sepoys looked passively on, while others participated in the struggle, and attacked the officers with the butt ends of there muskets. (Marx and Engels 1959)

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Thus, Mongal Pandey was not alone; he was not drunk or intoxicated but he was a part of the Sepoys who could not tolerate any more the continuous humiliations or torture of their countrymen by the British. According to Karl Marx, the action of Mongal Pandey was the beginning of the revolt, which spread like bonfire after that incident. Marx wrote, “Subsequently that regiment was also disbanded. The month of April was signalized by incendiary fires in several cantonments of the Bengal army at Allahabad, Agra, Umballah, by a mutiny of the 3rd regiment of light cavalry at Meerut, and by similar appearances of disaffection in the Madras and Bombay armies” (Marx and Engels 1959). The cause of the revolt was not just religious taboo or superstitions, as the British historians and their Indian slave historians have suggested, but torture and humiliations the people suffered in the hands of the army of the East India Company. On August 28, 1857, Marx published an article in The New York Daily Tribune in order to show that “the British rulers of India are by no means such mild and spotless benefactors of the Indian people as they would have the world believe.” Marx cited the official Blue Books—entitled “East India (Torture) 1855–57,” that were laid before the House of Commons during the sessions of 1856 and 1857. The reports revealed that British officers were allowed an extended series of appeals if convicted or accused of brutality or crimes against Indians. Concerning matters of extortion in collecting public revenue, the report indicates that officers had free reign of any methods at their disposal. Marx also refers to Lord Dalhousie’s statements in the Blue Books that there was “irrefragable proof” that various officers had committed “gross injustice, to arbitrary imprisonment and cruel torture.” According to Karl Marx, before this, there had been mutiny in the Indian army, but the present revolt is distinguished by characteristics and features. It is the first time that sepoy regiments have murdered their European officers; that “Mussulmans and Hindoos, renouncing their mutual antipathies, have combined against their common masters”; that “disturbances beginning with the Hindoos, have actually, ended in placing on the throne of Delhi a Mohammedan Emperor;” that the mutiny, “has not been confined to a few localities”; and lastly, that “the revolt in the Anglo-Indian army has coincided with a general disaffection exhibited against English supremacy on the part of the great Asiatic nations, the

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revolt of the Bengal army being, beyond doubt, intimately connected with the Persian and Chinese wars.” The ‘unorganized peasants’ of India fought one of the most powerful empires in the world to near defeat with limited resources and even more limited training. It is clear that British interference governments and the oppression of the Indian people, religious and economic, created a bloody revolution. If there is a lesson to be learned from any of this, it is that a people, once pushed into a corner, will fight for nothing more than the freedom to fight, and live, if not for religion then for their basic right to live in freedom. (Marx and Engels 1959)

Marx’s Plan for the Future Marx sees communism as the natural outcome of historic class conflicts. Crises create the need to end capitalism, and the creation of the proletariat creates the class to do it. Marx sees communism as a resolution of these contradictions (Monette 2018). Where capitalism is unplanned and crisisprone, communism is to be planned and crisis-free. Marx believes that proletarian struggles will take three forms before pushing capitalism over the edge. Once the trade unions will form a political party. This political party will seize state power through revolutionary struggles, and establish the “dictatorship of the proletariat” so that socialism might be brought about.

Application of Marxism in the Soviet Union This chapter explains the success of the Soviet economy from 1953, the year Stalin died and 1985, the year Gorbachev started his new economic and social policy, and the failure of the subsequent period since 1987. It analyzed the main feature of that system of controls and planning, and the reason for its decline in the later years. Market system and planned economy are two opposite ideas of organization of activity in economics. Market system has no planning in a real sense. All components are influenced by supply and demands of various items. Prices are determined by the market. Intrinsic values may be different.

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Alternatively, a planned economy is controlled by a government who is the owner of all resources, factors of production, means of distribution, and determine prices or entitlements for the citizens. In practice, most countries use some mixture of market system and planned economies. Karl Marx argued that a market system, as the owners of capital determine the results, by definition creates inequality, injustice, and instability. Marx has created the term capitalism (Dobb 1966). Under capitalism, individuals or companies own the resources and without any intervention of the government have the freedom to exchange in a market place, which is the collection of these buyers and sellers. Scarcity and preferences of the items determine the prices in the market which has nothing to do with the welfare of the society, however, somehow this system can uphold the utility of the entire society. Governments do not play any role to direct the economy in any specific direction. People can take care of themselves from the business owners who are responsible people not to commit fraud or form a cartel to cheat the people. There is no need for the government in that utopian society, where those who are poor are considered to be rejected by the market system. Socialism is exactly opposite to the market economy. There is no market, instead the government decides what are the basic requirements of the people and how best these can be supplied. Requirements include food, accommodation, education, electricity, water, medical facility, sports, and recreation. These are available from the government as entitlements. Agriculture and industry also are organized in similar ways. The government supplies all factors of production and it expects productions. Foreign trade is controlled by the government. The triumph of the Russian Revolution nearly a century ago was truly a world-historic event. It was the first time in history that the poor working class was able to reconstruct the market so as to make it work for the benefits of the society. That is called socialism. It proved that the oppressed, with their own leadership, their own efforts, could create a new world where there is no oppression (Dobb 1966; Baykov 1946). As Rabindranath Tagore (1960) wrote in his book Letters from Russia, after his visit to the Soviet Union in 1930, that “Little is their material wealth, but the spirit of their efforts defies any comparison. They are trying to prove to the world, what they want is genuine, there is no fraud in it.”

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Challenges Faced by Revolution The new Soviet government had some important tasks of defending the country against the supporters of the old regime and a number of Western countries and Japan. Their aim was in the words of the infamous imperialist Winston Churchill, then the First Lord of the Admiralty of Britain and later the Prime Minister of the UK, to “strangle the Bolshevik baby in its crib” (Baykov 1946; Dobb 1966). The new government had to provide for the starving population as the new country was under a total economic blockade imposed by the Western countries and Japan. For that a new alliance was needed to combine the efforts of the workers internationally through the Comintern, or the organization for the international socialists. The biggest obstacle to any revolutionary success was the lack of a revolutionary party in any industrialized countries (Davies 1998; Baykov 1946) at that time. However, contrary to the Western negative propaganda of a failed economic system in the USSR, the Soviet planned economic system demonstrated for the first time in the history of the world, the remarkable success of socialism (Baykov 1946). Again we quote Rabindranath Tagore from his book, Crisis of Civilization, written in 1941, “Within twenty years they had wiped out tears from the eyes of the people of this vast continent” after observing the progress of the Soviet economy until 1940. Planned Economy: Central Direction The most famous example of a planned economy was that of the former Soviet Union, which operated under a socialist system (Baykov 1946; Ellman 1973, 1989). Since in a planned economy, all decisions are centrally determined, although decentralized planned economy also is possible, the government determines all of the supply and sets all of the demand as entitlements. Prices may not even exist for most items as these are entitlements for the consumers and requirements for productive firms. When these exist, these are determined by the planners. In a planned economy, macroeconomic targets determine the allocation of resources and capital. Planned economies are concerned with taking care of the people irrespective of their ability to earn money.

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Ludwig Von Mises (1981) argued that command economies were untenable and doomed to failure because no rational prices could emerge without competing, private ownership of the means of production. This would lead to necessarily massive shortages and surpluses. However, Mises could not understand that there may not be any price in a socialist economy where most items would be available as entitlements. Milton Friedman (1962) noted that command economies must limit individual freedom to operate. He also believed that economic decisions in a command economy would be made based on the political selfinterest of government officials and not promote economic growth. In a market economy corruption and frauds determine resource allocation. Thus, these decisions are also corrupt and individuals are powerless to do anything about these systems controlled by the powerful banks and big corporations. Beginnings of the Soviet Planned Economy The year 1917 saw the Russian czar overthrown by groups of revolutionaries who fought and won a subsequent civil war to create a socialist state. Five years later, the Union of Soviet Socialist Republics (USSR) was formed. Starting in 1924, a planned economy would define the Soviet Union for most of the remaining twentieth century (Baykov 1946). The Soviet planned economy organized economic activity through the issuance of directives, by setting social and economic targets, and by instituting laws and regulations to control the labor forces and organizations. Soviet leaders planed on the state’s social and economic targets and the methods to achieve these. In order to achieve these targets, all of the country’s social and economic activities were controlled by the agents of the GOSPLAN. Officials managed to gather the information necessary for the execution of plans. Hierarchical structures were constructed at all levels of economic activity, with higher level of officers having influence on the managerial stages of executions. Socialism is a system, in transition to communism. Under Socialism a contradiction between requirements of centralized planning and class relations will continue. In 1956 the CPSU (communist party of the Soviet Union) announced its acceptance of the theory of peaceful transition to socialism (Dobb 1966). The paramount problem was how to maintain

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a consistent proletarian internationalism and at the same time conduct necessary relations (which involved every aspect of its existence) with the rest of the world (Nove 1993). The planned economy of the Soviet Union was based on a system of state ownership of the means of production, collective or cooperative farming, and managerial control. The first major project of the plan was the GOELRO plan, which was introduced in 1920 and basically fulfilled by 1931. It included construction of a network of 30 regional power plants, including ten large hydroelectric power plants, and numerous electric-powered large industrial enterprises (Ellman 1973, 2014). The GOELRO Plan became the prototype for subsequent Soviet fiveyear plans. From 1928 to 1991 the entire course of the economy was guided by a series of five-year plans. Within about 50 years, the nation evolved from a mainly backward agrarian society to one of the world’s three top industrialized countries, manufacturers of a large number of capital goods, and heavy industrial products. The Soviet economy was developed with the support of Gosplan (the State Planning Commission), Gosbank (the State Bank), and the Gossnab (State Commission for Materials and Equipment Supply). The economy was directed by a series of five-year plans from 1928, with a brief attempt at seven-year planning. For every enterprise, planning ministries (fondoderzhateli) defined the technology and the schedule for completion (Dobb 1966; Ellman 1973). Industry was utilized for the production of capital goods through metallurgy, machine manufacture, and chemical industry. In Soviet terminology, the capital goods were known as group A goods, or means of production. This aim was for a very fast industrialization of the Soviet Union. After the death of Stalin in 1953, importance was on consumer goods, however, heavy industry was always very important for the Soviet economy. As a result, the Soviet Union became one of the leading industrial nations of the world (Ellman 1973; Dobb 1966). Economic plans performed very well during the early and mid-1930s, World War II-era mobilization, and for the first two decades of the postwar era. The Soviet Union became the world’s leading producer of oil, coal, iron ore, and cement; manganese, gold, natural gas, and other minerals (Baykov 1946). In 1961, a new redenominated Soviet ruble was issued. It maintained exchange parity with the Pound Sterling until the dissolution of the USSR in 1991. By 1970, the Soviet economy had reached its zenith and was

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estimated at about 60% of the size of the USA in terms of the estimated commodities (like steel and coal) (Ellman 1973). Agriculture was organized into a system of collective farms (kolkhozes) and state farms (sovkhozes). Organized on a large scale and highly mechanized, the Soviet Union was one of the world’s leading producers of cereals, although bad harvests (as in 1972 and 1975) necessitated imports and slowed the economy. The 1976–1980 Five-Year Plan shifted resources to agriculture, and 1978 saw a record harvest followed by another drop in overall production in 1979 and 1980 back to levels attained in 1975. Cotton, sugar beets, potatoes, and flax were also major crops. Impressive growth rates during the first three five-year plans (1928–1940) are particularly notable given that this period is nearly congruent with the Great Depression. During this period the Soviet Union encountered a rapid industrial growth while other regions were suffering from crisis (Baykov 1946; Dobb 1966; Davies 1998). The major strength of the Soviet economy was its enormous supply of oil and gas, which became valuable exports after the world price of oil went up by 400% in 1974. After Mikhail Gorbachev came to power in 1985, he began a process of economic liberalization toward a mixed economy and a multiparty democracy that cause chaos and disintegration. Initial Period of Rapid Growth The Soviet Union experienced rapid economic growth in the initial period. The Soviet economy posted an estimated average annual growth rate in gross national product (GNP) of 5.8% from 1928 to 1940, 5.7% from 1950 to 1960, and 5.2% from 1960 to 1970. There was a dip to a 2.2% rate between 1940 and 1950 due to the effects of the Second World War (Ellman 1973). An intense focus on industrialization and urbanization at the expense of consumption gave the Soviet Union a period of rapid growth of the economy. However, the Western critiques would say that once the country began to catch up with the West, its ability to borrow evernewer technologies, and the productivity effects that came with it, soon diminished (Nove 1993; Davies 1998).

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Gains of Socialism From being the least developed of the big European countries at the time of the revolution, 40 years later the Soviet Union became the second largest economy in the world, only after the USA This despite the fact that after barely a decade of initial rapid development in the 1930s, twothirds of the industry and much of the agriculture was destroyed by the Nazi invasion beginning in 1941. It was the Soviet Union that bore the brunt of the Nazi war machine and destroyed it—but at a cost of 27 million killed. The U.S. death toll in WW II was about 400,000—a huge toll itself but about 1.5% of the Soviet death toll (Dobb 1966; Baykov 1946). Before the revolution, much of the population went through life without ever seeing a doctor. In 1966, a leading U.S. medical journal wrote that “life expectancy doubling in the last 50 years. …At present time, the Soviet Union graduates annually about as many physicians as there were in whole Russian Empire before the First World War. Of all the physicians in the world today, more than one in five is Soviet … while only 1 person in 14 in the world today is a Soviet citizen” (Fields 1966). Not only that, but none of those doctors—three-quarters of whom were women—paid a kopek for their education, nor did anyone else in any field of work. Of course, they could not hope to become millionaires. It was a fundamentally different system than the one we live in, more like the one in Cuba today. Every person was guaranteed the right to a job, housing, healthcare and education, and also the right to vacations, pensions, and culture. There were many, many nationalities, each entitled to literature, newspapers, and education in their language. Scores of languages that were not previously written were alphabetized. In the wake of the destruction of WWII, vast industrial, infrastructure, and housing projects were undertaken. The absence of capitalist competition between enterprises enabled very rapid scientific and engineering development (Baykov 1946; Dobb 1966; Ellman 1973, 1989). In addition to its remarkable internal development, Soviet aid was vital to national liberation movements and newly independent states around the world. The victories of the Chinese, Korean, Vietnamese, and other revolutions would have been much delayed or prevented without the

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Soviet Union. Without Soviet support, Cuba would have undoubtedly been invaded by the USA, and Soviet aid was vital to the Palestinians and many African revolutionary movements. Slowing Growth and the Beginning of Reforms The Soviet economy started stagnating as it became increasingly complex. With average GNP growth slowing to an annual 3.7% rate between 1970 and 1975, and further to 2.6% between 1975 and 1980, the planned economy’s stagnation became obvious to Soviet leaders (Ellman 2014). Reforms of the Sovnarkhoz implemented by Nikita Khrushchev in the late 1950s attempted to begin decentralizing economic control, allowing for a “second economy” to deal with the increasing complexity of economic affairs. These reforms, however, affected adversely the command economy’s institutions and Khrushchev was forced to “re-reform” back to centralized control and coordination in the early 1960s. With economic growth declining partial reforms to allow for more decentralized market interactions were reintroduced in the early 1970s. The aim of Soviet leadership was to create a more liberal market system in a society whose core foundations were characterized by centralized control (Ellman 2014; Davies 1998). Perestroika and Collapse These early reforms failed to revive the increasingly stagnant Soviet economy, with productivity growth falling below zero by the early 1980s. This ongoing poor economic performance provoked more radical set of reforms when Mikhail Gorbachev took over the leadership in 1985. Gorbachev stopped the planning and tried to privatize the economy and open the economy up to foreign trade and capital. This restructuring, referred to as perestroika, encouraged individual private incentive, creating greater openness but also destruction of the country itself. Perestroika was in direct opposition to the planned economy. A severe economic contraction characterized the late 1980s and early 1990s, which would be the last years of the Soviet Union (Davies 1998; Ellman and Kantarovich 1992). Soviet leaders no longer had power to intervene amidst the growing economic chaos. With its economy and political unity in tatters, the

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Soviet Union collapsed in late 1991, fragmenting into fifteen separate states. The early strength of the Soviet planned economy was its ability to rapidly mobilize resources and direct them in productive activities. (Ellman 2014). Various piecemeal reforms instead only undermined the economy’s core institutions. Gorbachev’s radical political liberalization with multiparty election in 1991 was the final nail in the coffin, when anti-socialist Yeltsin was elected as the president of Russia and within a few months he destroyed the Soviet Union. Causes of the Collapse of the Soviet System Recently a number of authors have put forward the idea that the demise of the Soviet Union is due to the inherent defect of the socialist system (Denemark 1994; Hausner 1994). Because the socialist economy cannot calculate efficiently the price signals to divert resources into most efficient uses, the collapse is due to the internal contradictions between the absence of the market and the desired aim of the planning system to create a perfectly competitive market. Recently another line of argument was provided by some economists, notably Krugman (1994) along with the World Bank (1993) who argue that the Soviet system was without any technical progress, the economic growth was the result of increased uses of capital and labor; due to the lack of technical efficiencies the system had started to decline and collapsed. The purpose of this paper is to critically examine these theories and to provide an alternative explanation. There are two types of schools within this category; (a) the so-called Sovietologist’ school (Nove 1983) who have argued for decades about the stagnations of the socialist system in terms of the “built-in” defects of the system; (b) the “efficiency” school (World Bank 1993; Krugman 1994) of Western economists who are arguing about the lack of productivity in the Soviet system. Both of these schools are against the socialist system, so their attack on the Soviet system was from outside, i.e., they are trying to prove the superiority of market system. We can analyze each of those schools and try to find out flaws in their arguments. Built-In Defects School Built-in Defects school has emphasized the inherent defects of the socialist system where prices do not reflect market clearing signals but are instruments to allocate resources across the economy according to the prior

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objectives of the planner. The result can be a mismatch between the prior objectives of the planner. The result can be a mismatch between the supplies and demands. When that disequilibrium would spread throughout the economy, shortage and bottlenecks will emerge and as a result growth will be slowed down and the economy will stagnate. Another line of argument is that socialism is against basic human nature. As no one is in possession of productive resources workers will be reluctant to perform unless they are forced to; as a result productivity will decline and the economy will stagnate. Empirically although it is not possible to prove the validity of these theories at a specific level of industry or firms, because a diversity of factors can affect productivity and performances, the proponents of this theory normally point out the cyclical nature of the Soviet economic growth and particularly to the declining rate of growth of the Soviet economy since 1970. These theoretical justifications can be negated by saying that the market economy also cannot derive efficient price because of market imperfections and the segmented nature of the market and as a result we can often have market failures. The depression during the interwar period and recessions, stagflations during the postwar decades in the advanced capitalist countries are enough proofs of the inefficient calculations of price signals through the market system. At least in the socialist system the planners have the chance to recalculate their prices again and again and because of the controlled nature of the economy disturbances cannot be spread throughout the economy. Similarly regarding the incentive of the workers, the socialist planners can point out to the fact that in the capitalist system workers are alienated from the fruit of their work and that can lead to increasing dissatisfaction with their jobs and lower productivity. On the other hand in a socialist system because the workers are producing for their collective benefits, social virtues like voluntary works, patriotism, communal welfares can play big roles to motivate the workers to achieve higher goals. Although in the Western society these social aspects are ignored and as a result the western economists put their emphasis only on the self-interest of an individual which is the foundation of “utilitarianism.” From the empirical points of view the “built-in defects” school argues that the defects of socialists stern are obvious from the fact that since mid-70 Soviet Union and other socialist countries were on a declining path and eventually that led to stagnations and collapse. Although this is the prevailing opinion among the Western writers (McCauley 1993;

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Table 3.1 Analysis of economic growth rate (real GNP at 1987 price) Economic growth rate

Soviet Union USA UK JAPAN

Labour force productivity

1960– 1970

1970– 1980

1980– 1986

1960– 1987

1960– 1970

1970– 1980

1980–1986

7.9

5.0

3.6

5.4 (3.4)

5.4

3.4

3.0

3.9 2.8 10.6

2.9 1.3 4.7

2.9 1.8 3.4

3.2 2.2 6.5

2.1 2.4 9.3

0.5 1.2 4.2

1.4 2.5 2.0

Source Kudrov (1997); Comecon Secretariat Publication; Note figure within bracket is the estimate of the C.I.A.

Hausner 1994) a comparative analysis of the economic growth performances of some of the centrally planned economies and the capitalist economies shows that the reality is more complex than the theory. As we can see from Table 3.1, although the growth rates of the Soviet Union declined from the later half of the 80s, it was still higher than that of the USA, UK, and Japan. Even the revised figures of the CIA show higher overall growth rate for the Soviet Union compare to the USA and the UK. It also shows that the decline of the growth rates is a natural phenomenon when the economy matures; also it is due to basic arithmetic. If a country has one house and decides to build one house every year for the next five years, the growth rate for the first year will be 50%; in the second year it will be 33%, in the third year it will be 25% and so on. The decline in the growth rate does not mean the country is getting poorer. The decline of the growth rate for Japan during that period is much more significant than that of the Soviet Union but during the same period Japan was on the way to be the richest country in the world by early 90s. So the slogan of the so-called Western Sovietologists that the stagnation of the Soviet Economy had set in since 70s does not make much sense. The Western Sovietologists have conveniently forgotten that the purpose of the formation of the Soviet Union was not to set up a more efficient economic machine than the capitalist system that was always a secondary purpose. The principal purpose was to establish socialism

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throughout the world. Although Stalin had decided to abandon that principle in favor of “socialism in one country,” Khruschev and particularly Brezhnev have adapted that doctrine very faithfully. Since 1955 Soviet Union has started giving substantial support to the newly independent countries and to the anti-colonial wars throughout the world. Since mid-60s it was deeply involved in supporting Vietnam and (since mid-70s), Afghanistan in addition to several African, Asian, and Latin American countries. All these have caused severe strains on the resources of the Soviet Union. Since early 80s, as a response to Regan’s Strategic defense initiative or “Star War” the Soviet Union had to divert an increasing amount of her resources for defense-related research and developments; results of these activities do not show up directly in the volume of net material production which was the foundation of calculation of the national income of the socialist countries. That can be the cause of the downturn of economic growth rate and the productivity. The Efficiency School The “efficiency” school (World Bank 1993; Krugman 1994) has based their arguments on the assumption of the law of diminishing return to scale and the conviction that the Soviet Union was technically inefficient compare to the West. For the Soviet Union according to Krugman “the rapid growth of output could be fully explained by rapid growth in inputs: expansion of employment, increase in education levels and above all massive investment in physical capital…Economic growth that is based on expansion of inputs, rather than on growth in output per unit of in-put is inevitably subject to diminishing returns. The rate of efficiency growth was not only unspectacular, it was well below the rate achieved in Western economies. Indeed by some estimates, it was virtually nonexistent.” The so-called growth accounting of Krugman (Krugman’s idea is not original, it is the old C.I.A—World Bank thesis, see Cohn 1987) is simple arithmetic which I have explained in Section 1 (a). Krugman (1994) has provided an arithmetic example which is full of silly errors, in simple terms it means if we assume constant returns to scale, basic arithmetic tells us, the rate of growth will decline overtime. So the total factor productivity in Krugman (1994) is nothing but an index of increasing returns to scale what he has defined as “efficiency” or “technical progress.” From the

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Table 3.2 Average growth rate in the EEC and CMEA (in % pa) Year

National income

1961–1965 1966–1970 1971–1974 1975 1976

Industrial production

CMEA

EEC

CMEA

EEC

6.1 7.3 6.6 6.4 5.5

4.7 4.5 3.6 −2.5 4.2

8.3 8.4 8.1 8.5 10.2

5.3 4.8 3.4 −7.6 6.2

Source Kudrov (1976, 1977)

historical experience it is very easy to prove Krugman’s arguments are nothing but wrong assertions. Table 3.2 shows the average growth rates of the national income and industrial production where the CMEA (Council of Mutual Economic Corporation, i.e., socialist countries in Eastern Europe; Cuba and Vietnam were added later) had performed better than the EEC. However there are considerable difficulties in these types of comparisons. Western countries use standard national income calculations, where service sector plays a big role and the pricing of the service sector due to the very high cost of services as a result of higher wages, can cause an upward bias in the national income calculations of the Western countries. CMEA followed the “net material production” method to calculate national income, where the service sector is undervalued. There is also no way to compare the pricing of essential items (basic foods, energy, housing, transport, medicines, education) which were available at either nominal or zero prices in the CMEA whereas the corresponding Western prices for those items were very high. The only possible way out is to compare the national income at the purchasing power level. There is also the question of quality, A “Royal Enfield rifle” is not the same in quality as a “Kalashnikov” rifle, a West-Land helicopter cannot operate in the extremes of Siberia as an Antonov helicopter can. Even ignoring these considerations in favor of the Western countries, Table 3.3 shows labor productivity in a dynamic sense was higher for the USSR compared to the USA and the UK. The economic growth rate and the productivity increases slowed down in the USSR, but the same situation did occur in the USA, the UK, and Japan. Korea was the only

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Table 3.3 Analysis of economic growth rates and labor productivity Economic growth rate (% pa)

Labor force productivity (% pa)

USSR USA UK JAPAN KOREA USSR USA UK JAPAN KOREA 1960–1970 1970–1980 1980–1986

7.9 5.0 3.6

3.9 2.9 2.9

2.8 1.3 1.8

10.6 4.7 3.4

8.4 8.1 8.3

5.4 3.4 3.0

2.1 0.5 1.4

2.4 1.2 2.5

9.3 4.2 2.0

5.7 4.4 6.9

Source Comecon Secretariat Publication

exception. Table 3.4 shows that the efficiency of investment was growing at a higher rate in the USSR compared to the USA, the UK, and Japan. This cannot be explained by the accumulation of inputs as Krugman has suggested. In the most formative period of the USSR (i.e., 1960–1970) the ratio of investment to the national income was less in the USSR than in the USA, the UK, Japan, and Korea. In the later decades it was less in the USSR than in Japan and Korea, although only slightly higher in the USSR than in the USA and the UK. Table 3.5 shows the gap between the USSR and the USA and demonstrates that the gap was narrowing over the year. Particularly significant were the comparisons in terms of physical units which showed more productions in the USSR than in the USA. The labor productivity in the industry was increasing all the time disproving the basic hypothesis of Krugman. In fact Gomulika (1971) showed (in Fig. 3.1) that the least Table 3.4 Investment ratio and investment efficiency Investment ratio

Efficiency of investment (% pa)

USSR USA UK JAPAN KOREA USSR USA 1960– 1970 1970– 1980 1980– 1986

UK

JAPAN KOREA

15.2

22.7 16.5

35.2

24.2

0.520 0.172 0.170 0.301

0.347

27.3

20.2 19.9

33.6

29.8

0.183 0.144 0.065 0.140

0.272

25.8

18.5 16.7

29.4

29.5

0.140 0.157 0.108 0.101

0.281

Source Comecon Secretariat Publication

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Table 3.5 A dynamic comparison of the Soviet and U.S. economies (USSR as % of USA)

National Income Industrial output Agriculture output Labour productivity In industry In agriculture Output in physical units Oil Steel Mineral fertilisers Cement

1950

1957

1965

1975

1985

1989

31 30 55

50 47 70

59 62 75

>66 >80 85

56

51

30–40 20

40–50 20–25

40–50 20–25

>55 20–25

14 30 31 26

28 49 42 58

63 75 69 111

120 128 125 188

Source Kudrov (1976, 1997)

dynamically efficient countries (during the period 1958–1968) were the UK, Chile, South Africa, all are capitalist countries. Although the Soviet level of labor productivity was less than that in the USA, it was increasing at a higher rate. The most efficient country was Japan, which according to Krugman (1994) has not achieved productivity increases. However, the Soviet economy could not narrow down the gap since 1975 due to some extraordinary international political situations which were ignored by Krugman and by the Western “Sovietologists” (Table 3.6). Table 3.6 USSR: growth rates of the GNP (av.annual rate)

1951–1965 1956–1960 1961–1965 1966–1970 1971–1975 1976–1980 1981–1985 1986 1987 1988

5.5 5.9 4.9 5.1 3.0 2.1 1.9 4.0 1.3 1.5

(2.2) (2.4) (2.7) (3.7) (4.4)

Note Figures within the brackets are the corresponding figures for the USA Source Comecon Secretariat Publication

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There are a number of reasons to explain the decline of the Soviet economy since mid-70s which Krugman has conveniently ignored. Since mid-70s the Soviet Union was involved in helping liberation wars in Vietnam, Mozambique, Angola, Rhodesia, South Africa, and wars against the reactionary forces in Afghanistan, Cambodia, Nicaragua; it is also helping a number of developing countries in their economic developments. All these particularly the wars in Africa and Afghanistan had caused serious drains on the Soviet economy. On top of that since 1980 the USA under Reagan has started massive defense spending under the “strategic defense initiative” or Star War. A major portion of the national income in the Soviet Union was diverted to combat the growing threat of the Western alliance; the result was reduction of investment, which had affected the growth of the national economy. The result was declining output and shortages. Whereas the USA could go on borrowing despite of serious balance of payment deficits (the IMF rules are not applicable to the USA), the Soviet Union and the CMEA as a whole had faced an increasingly hostile financial world controlled by the West, so their abilities to borrow to finance deficits were also limited. Combination of these factors can explain the gradual decline in productivity and the rate of growth of output (see Figs. 3.2, 3.3, 3.4, and 3.5), however it can not explain the collapse of the system. Krugman has mentioned Solow (1957) to measure the technical efficiency. Solow has used Divisia (1926) indexes to measure “Total Factor Productivity (TFP)” indexes the existence of separable aggregator functions for inputs and outputs g (x) and h(y) are assumed to obtain T F P = h(y) g(x) , this presupposes independence between input and output substitution possibilities. It is a restrictive and unrealistic requirement, it also needs price data for each input and output, which makes the estimate (Sudit 1995) subjective. Recently Park and Kwon (1995) have shown that by using generalized Leontief cost function, it is possible to have a rapid growth of output with negative TFP growth. An economist’s (Western) idea of technical progress or technical efficiency is very different from a technologist’s idea of technical progress or efficiency. According to the economists, technical progress is expected to reduce costs, as a result the economists may disregard scientific inventions or product quality improvements which may not necessarily reduce costs. That is possibly the reason Krugman has suggested that there was no technical progress in the

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Soviet Union or in Japan, technologists (or even management scientists) will certainly disagree with this idea. Krugman has tried to implement the Marshallian Law of diminishing returns (which can not be empirically validated even at the firm or industry level) to the national economy and has failed to provide the empirical validity. Socialist Explanation: World System School In this category we mention the “World System” school (Frank 1988, 1989, 1992, 1994; Halliday 1992; Hobsbawm 1991; Chirot 1991). The authors who subscribe to this school have a similar thought although they differ in detail. The main argument of this school is that there is only one world system, i.e., the capitalist world and the world wide competitive process of capital accumulation is the motor force of history. The Western capitalist countries are the center and both socialist and southern developing countries are in the periphery. The gap between the rich North/West and the poor South/East has been around for a long time and growing. The East during the 50s and 60s has managed to narrow the gap. During the 70s they were able to maintain or had narrowed the gap, however during the 80s due to the deepening crisis in the world economy the East had missed the technological train and lost the race. The South also have failed, the economic decline of the Latin America and the decay of Africa provide the proof; as the economic policies of the East during the 70s and 80s are not any different from the policies pursued by the South. Thus the failure of the Soviet system is due to its participations in the world economic system. The Soviet Union was affected through its relations and interdependency with Eastern Europe, through the crisis-driven arms race that began in 1979 and by policy miscalculations. We can elaborate the thesis as follows. The socialist countries have started their industrialization with a strong handicap and their ability to catch up with the west was undermined by their inability to receive the benefits of the world financial system dominated by the capitalist countries. During the 70s socialist countries in the Eastern Europe have adopted an import-led growth strategy by borrowing from the Western countries. The accumulation of debts had resulted in their near-default financial situation and as a result during the 80s they had to adopt deflationary policies which had reduced their ability to buy Soviet exports or to supply cheap manufactured products to the Soviet Union. On top of

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that came Gorbachev’s economic policy since 1985 which had delinked economic partner countries in the COMECON and in the Eastern Europe by demanding dollar payments for trade. Soviet Union was also affected by the collapse of the international price of crude petroleum and natural gas since 1984–1985, so it could not buy directly from the Western countries bypassing the Eastern Europe. Gorbachev’s policy of “Perestroika” had allowed some freedom to the industrial and commercial enterprises to set their prices. The result was a runaway inflation and breakdown of the central planning; the republics within the Soviet Union had started ignoring the planning directives and started their own trading; that had led to economic dislocations, chaos, and serious supply crisis. At the same time the Regan had started his “Strategic Defense Initiatives” or “Star War” with the open objective to bankrupt the Soviet Union. The result was increasing expenditures in the Soviet Union on defenses, increasing budget deficit was financed by printing money, and the result was a runaway inflation. So they (i.e., the socialist countries) had lost the race (Chuev 1991; Menshikov 1990). However attractive the theory may seem to be, it is difficult to accept that due to some economic crisis the Soviet Union had collapsed. The Soviet Union had a vast economy with enormous national and technological resources. It was not difficult to face the growing world economic depression during the 70s and 80s, as the Soviet Union isolated itself from the world economy during the Stalin period. Gellner (1992) has pointed out that “…what had gone wrong economically? The simple answer is that nothing had. The West does not realize the Soviet Union isn’t so terrible economically.” A Pragmatic Explanation If we want to search for the realistic explanation we will be disappointed if we restrict ourselves to economics only. There was no economic explanation. As Ellman and Kantarovich (1992) had pointed out the system could have survived for a long time if not forever. We need to look at the political situations and psychology of the ruling class (“apparatchiks”) of the former USSR. It cannot be said that there were severe troubles in the external finance before 1985 although much of the economy has declined since 1980. In 1985, the net debt to the Western countries (hand currency areas) was US$15.7 billion. Even in 1990, the net hand currency debt was US$45.4

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billion and the net credit to the LDC’s was US$37.76 billion. Thus the net deficit in the external asset situation was far from alarming. Although the rate of growth of the economy in the USSR was falling, but that was true for other mature developed economies in the USA, UK, and Japan as well. Even the C.I.A. got to admit that during the period between 1950 and 1975 the Soviet economy outpaced the U.S. economy. Since 1981, the economy really declined in the international race; this is partly due to the fact that an increasing share of total investments was going toward the defense production and research which could not add much to the net material production of the nation. The increasing hostility of the Western countries and their increased defense spending had prompted a reply from the USSR particularly since Regan had started his aggressive posture toward the USSR during 1980s. Hostility of the Western alliances had taken the shape of increasing attacks on the Soviet allies in the third world. As a result the Soviet defense aids to various third world countries particularly Afghanistan, Angola, Cambodia, and Nicaragua, went on increasing which was a serious burden on the Soviet economy. If less and less were being spent on productive sectors of the economy, the growth rate of the real economy had to decline. Even then the economy could have survived given the strength of the Soviet economy, its non dependency on external finances or trade, its vast resources of oil and gold, and due to the fact that living standard of the people has already reached an adequate level with essential consumption items including housing, transport and energy available at a nominal price, absence of unemployment, universal access to medical care and education, and a comprehensive welfare system. The death blow to the Soviet system was struck by Gorbachev and Yeltsin, who have declared as early as in 1985 the introduction of market system and the resultant destruction of the planned economy. Whole sections of heavy industry were deprived of their investment need including the working capital; declines were most prominent in the metallurgy and chemical industries. These declines have spiraling effects on the rest of the economy, particularly on the lifeline of the Soviet economy, the oil industry. Consumers’ goods industries have also suffered due to the shortages of materials and machineries. Before Gorbachev, the State Planning Committee, Gosplan, used to translate Communist party policies into investment and output targets

86

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country wide and incorporates these info five-year plans and in more detail in annual plans. Central planning use to operate on the principle that if each unit meets or exceeds its plan, then demand and supply will balance. The government establishes prices for all goods and services based on the role of the product in the society. Gorbachev’s reform was designed to do away with all these and establish a capitalist economy. In July 1987, the state enterprises were freed to determine output levels based on demand from consumers and other enterprises. Enterprises became self-financing and insolvent enterprises faced bankruptcies. The enterprises exercised their recently acquired autonomy to raise wages far in excess of any increase in productivity. Individual enterprises had started to refuse ruble payments for output. The consequent barter deals and payments in U.S. dollars were the norm not only for material inputs to maintain production but also to supply the workers with the consumer goods which were no longer available in the state shops. The republics have banned shipments of goods outside their borders except for the U.S. dollar payments, disrupting existing trade patterns, and destroying the interconnections between different industries and different parts of the same industry across the republics. Regions producing key raw materials began to ignore centrally mandated delivery targets and started dealing with the buyers from different parts of the Soviet Union and abroad directly. The result was a sharp reduction in industrial outputs leading to sharp decline in consumer’s supplies. The republics also have started to withhold their dues to the central governments. At the same time in order to satisfy in increased wage cost, money supply went up and up. The monetary discipline during the planned economy to support production and distribution was replaced by the excessive growth of money supplies to finance administration costs and wage bills. The combined effects of the growth of personal money income and real shortages lead to inflation in consumer prices which came into open in April 1991 when retail prices of consumer goods were raised by 60– 70% on average with larger increase in food prices that were particularly alarming for the low-income population. The combined effect of all was a reduction in absolute rate of growth of the economy and real contractions. By 1991 most of the republics and the Russian Federation itself were showing a real decline in their national output and industrial productions. The effect of that on foreign trade sector was continuous increases

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in imports and foreign borrowings. Hard currency debt continued to increase from 1987 onward and by 1989 it was almost doubled compared to the level at 1987. The crisis of the economy has raised the demand for the removal of Gorbachev; when the attempt was made by the Gorbachev’s cabinet colleagues in August 1991 it was crashed by a number of factors which are purely noneconomic, although these factors have played a decisive role in the destruction of the Soviet Union and the Soviet system. Gorbachev as a part of his democratization process has released a large number of common criminals along with political prisoners. The criminal elements have started smuggling drugs from Afghanistan to Germany via the Soviet Union sometime in collaboration with the army and have gathered a considerable amount of wealth and established a series of private banks. The privatization of state industries and properties was the declared aim of the Gorbachev’s reform program. The privatization was already implemented in Poland since 1989 and the Soviet “apparatchiks” both in the civil service, army, and the KGB have realized from the experience of Poland that by appropriating state properties through the privatization process financed by the private banks they can amass riches beyond their dreams. That was the reason why they have refused to obey orders from the government when in August 1991 Gorbachev was replaced, during the so-called “Coup.” The role of the Western intelligence agencies cannot be ruled out either. It was widely reported in a number of Russian newspaper (“Muscovy Komsomolets and Moscow Times” in particular) that during the so-called “Coup” of August 1991, the American Embassy was in constant contact with the Soviet army generals and the KGB and it was the American Embassy who had informed Yeltsin to come out of hiding and pose in front of the Western press. Immediately after that Yeltsin had banned the Communist Party and dissolved the Soviet Union. Comments Although because of Gorbachev’s reform program to replace central planning by the capitalist system the Soviet economy was in a crisis in 1991, it was possible even then to achieve recovery through concerted government actions and appropriate planning. Due to noneconomic factors such as growing financial powers of the criminal class, betrayals of the “apparatchiks” and the determined Western efforts to destroy the Soviet Union,

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the system had collapsed. The argument of the World Bank, Krugman, and Cohn was not supportable from the historical fact (Tables 3.7, 3.8, and 3.9). The argument of “World System” school is too farfetched. There was no compelling economic reason for the Soviet economic system to collapse. Subsequent Developments in Russia and other former republics of the Soviet Union has proved the inefficiency of the Western-backed reform program. Introduction of capitalist system has brought chaos and miseries for the people. The Privatization process has transferred 60% of the Russia’s economy to the hand of organized crime, industrial production was declined by about 50%, economic links between different republics on curtailed due to the introduction of separate currencies for each one of them at the insistence of the IMF and the World Bank, the advices of which were partisan to say the least; these international organizations are only interested to destroy every element of the past system, so that capitalism will be irreversible in Russia. However the recent events are proving the 1992 was not the “end of history,” as the people of the former Soviet Union are rejecting the so-called “reform” program and now consider the West as their enemy, as the NATO came to the doorstep of Russia. President Putin has stabilized the economy and enhanced the international prestige of Russia as the saviour of Syria from the ‘Islamic State’.

Table 3.7 USSR: total trade, 1981–1990 (billion current U.S. dollars) Annual Averagea

Total soviet exports Communist Developed countries Developing countries Total soviet exports Communist Developed countries Developing countries

1981–1985

1986

1987

1988

1989

1990

87.4 49.4 25.2 12.7

97.0 65.0 18.8 13.2

110.7 71.0 22.7 14.9

110.7 71.0 24.6 15.2

109.3 67.1 26.6 15.7

104.1 52.1 38.7 13.3

79.1 44.7 24.9 9.5

88.9 59.4 22.7 6.8

96.0 59.4 22.1 7.3

107.3 71.6 27.2 8.5

114.7 71.0 33.4 10.3

a Includes both hard currency trade and trade conducted with soft currency countries

Source GOSKOMSTAT

120.9 61.4 48.6 11.0

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Table 3.8 USSR: estimated hard currency balance of payments (million current US dollars) 1975 Current account balance Merchandise trade Exports f.o.b. Imports f.o.b. Net Interest Other invisible and transfers Capital account balance Change in gross debt Official debt Commercial debt Net change in assets in Western banks Estimated exchange rate effect Net credit to LDC’s Gold Sales Net errors and omissions

1980

1985

1986

1987

1988

1989

1990

−4565

1470

137

1383

5118

1183

−4419 −4500

−4804

1814

519

2013

6164

2634

−2115 −1300

9453 27,874 26,400 25,111 29,092 31,165 32,931 35,500 14,257 26,960 25,881 23,098 22,928 28,531 35,046 36,800 −521 −1234 −1482 −1730 −2146 −2551 −3404 −4300 760 890 1100 1100 1100 1100 1100 1100 6981

284

1869

1795

−739

965

6807

7573

6786

−792

6804

6811

5011

1579

8500

2800

1482 5294

−280 −512

463 6340

391 6420

480 4532

−1300 2879

6600 1900

NA NA

−163

−35

1787

1595

−527

1119

−900 −6500

−22

−411

3248

3322

4977

−2205

−681 −2400

715

950

1700

4100

4800

5500

725 −2416

1580 −1754

1800 −2006

4000 3178

3500 −4329

3800 −2148

5656

3775

3665 4500 −2388 −3073

a Net errors and omissions include hard currency assistance to and trade with communist countries

to finance sales of oil, and other nonspecified hard currency expenditures, as well as errors and omissions in other line item of the accounts Source GOSKOMSTAT

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Table 3.9 USSR: estimated hard currency debt to the west (billion current U.S. dollars)

Gross debt Commercial debt Government and government-backed debt Assets in Western banks Net debt

1975

1980

1985

1986

1987

1988

1989

1990

12.5 8.2 4.3

20.5 11.0 9.5

29.0 19.5 9.5

35.8 25.9 9.9

40.8 30.4 10.4

42.3 33.2 9.1

50.8 39.8 11.0

53.6 42.3 11.3

3.8 8.7

10.0 10.6

13.3 15.7

14.9 20.9

14.4 26.4

15.4 26.8

14.7 36.1

8.2 45.4

Source GOSKOMSTAT

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Marx, K. 1967c. German Ideology. Marx–Engels Collected Works, MECW 5. Moscow: Progress Publisher. Marx, K. 1967d. Economic and Philosophic Manuscripts of 1844. Marx–Engels Collected Works, MECW 3. Moscow: Progress Publisher. Marx, K. 1967e. Debates on Freedom of the Press. Marx–Engels Collected Works, MECW, vol. 1. Moscow: Progress Publisher. Marx, K. 1967f. Introduction to the Critique of Hegel’s Philosophy of Law. Marx– Engels Collected Works, 3. Moscow: Progress Publisher. Marx, K. 1967g. Critique of Hegel’s Philosophy of Law. Marx–Engels Collected Works, MECW 3. Moscow: Progress Publisher. Marx, K. 1967h. Capital, ed. F. Engels, vol. I. Marx–Engels Collected Works. Moscow: Progress Publisher. Marx, K. 1970/1843. Critique of Hegel’s “Philosophy of Right”. In Early Political Writings, ed. Joseph J. O’Malley. Cambridge: Cambridge University Press. Marx, K. 1973. Grundrisse, trans. M. Nicolaus. London: Allen Lane. Marx, K. 1975. Critique of Hegel’s Philosophy of Law. MECW 3. Moscow: Progress Publisher. Marx, K. 1977. A Contribution to the Critique of Political Economy. Moscow: Progress Publishers. Marx, K. 1994/1843. A Contribution to the Critique of Hegel’s Philosophy of Right: Introduction. In Early Political Writings. Cambridge: Cambridge University Press. Marx, K. 1994/1844. “A Contribution to the Critique of Hegel’s Philosophy of Right: Introduction,” in Economic and Philosophical Manuscripts. In Early Political Writings, ed. Joseph O’Malley. Cambridge: Cambridge University Press. Marx, K., and Friedrich Engels. 1970. The German Ideology, ed. Christopher John Arthur. London: Lawrence & Wishart. Marx, Karl, and Freidrich Engels. 1959. The First Indian War of Independence 1857–1859. Moscow: Foreign Languages Publishing House. Marx, K., and Friedrich Engels. 1996a. Manifesto of the Communist Party. Cambridge: Cambridge University Press. Marx, K., and Friedrich Engels. 1996/1848. Manifesto of the Communist Party. In Later Political Writings, ed. Terrel Carver. Cambridge: Cambridge University Press. McCauley, M. 1993. The Soviet Union: 1917–1991. London: Longman. MECW. 1975. Marx Engels Collected Works. Moscow: Progress Publisher. Menshikov, S. 1990. Catastrophe or Catharsis: The Soviet Economy Today. London: Inter-Verso.

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Mill, James. 1969. Utilitarianism. The Collected Works of John Stuart Mill, Vol. X, Essays on Ethics, Religion and Society. Toronto: University of Toronto Press. Monette, S. 2018. Marx and Lenin on Communism. New York: New School for Social Research. Nove, A. 1983. The Class Nature of the Soviet Union Revisited. Soviet Studies 35 (3): 298–312. Nove, A. 1993. An Economic History of the USSR, 1917–1991. Cambridge: Cambridge University Press. Oilman, B. 1976. Alienation: Marx’s Conception of Man in Capitalist Society. Cambridge: Cambridge University Press. Park, S.R., and T.K. Kwon. 1995. Rapid Economic Growth with Increasing Returns to Scale and Little or No Productivity Growth. Review of Economics and Statistics 12 (May): 303–407. Solow, R.M. 1957. Technical Change and the Aggregate Production Function. Review of Economics and Statistics 2: 312–320. Sudit, E.F. 1995. Productivity Measurement in Industrial Operation. European Journal of Operations Research 85 (3): 435–453. Tagore, Rabindranath. 1903. History of India. Calcutta: Vishwa Bharati Publishers. Tagore, Rabindranath. 1941. Crisis of Civilization. Calcutta: Vishwa Bharati Publishers. Tagore, Rabindranath. 1960. Letters from Russia. Calcutta: Vishwa Bharati Publishers. Vivekananda. 1924. Complete Works of Swami Vivekananda. Calcutta: Advaita Asram. Von Mises, Ludwig. 1981. Socialism. Indianapolis: Liberty Fund. West, E. 1969. The Political Economy of Alienation, Karl Marx and Adam Smith. Oxford Economic Papers 21 (1): 1–23. Wills, Vanessa. 2011. Marx and Morality. PhD thesis, University of Pittsburgh, Pennsylvania. World Bank. 1993. The East Asian Miracle: Economic Growth and Public Policy. Oxford: Oxford University Press.

CHAPTER 4

Business Ethics and Ethical Leadership

Leadership signifies a relation between a leader and his followers within a situational and organizational context. According to insights and research, leadership is defined as a power- and value-laden relationship between leaders and followers/constituents who intend real changes that reflect their mutual purposes and goals (Rost 1993, 1995; Bowie 2017). Leadership in the context of normative organizational ethics would be defined with regard to how individuals should or ought to behave in an organization. This includes speculations about criteria that define ethical decisions and personality characteristics. Ethical leadership is crucial and vital in providing direction that enables the organization to fulfill its mission and vision and achieve declared goals (Kanungo and Mendonca 1996; Wicks et al. 2020). Ethical leadership is regarded as a key factor in the management of an organization’s reputation in the external environment and in comparison with competitors (Blanchard and Peale 1996; Kanungo and Mendonca 1996; Wicks et al. 2020). An organization’s moral health depends upon the standards and the example of the chief executive (Kelly 1990). According to Hitt senior leadership has two key responsibilities: (1) to ensure that ethical decisions were made; (2) to develop an organizational climate in which ethical follower conduct was fostered (Hitt 1990).

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 D. Basu and V. Miroshnik, Ethics, Morality and Business: The Development of Modern Economic Systems, Volume II, https://doi.org/10.1007/978-3-030-68067-1_4

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Ethical leadership can be viewed in terms of healing and energizing powers of love, recognizing that leadership is a reciprocal relation with followers. Leader’s mission is to serve and support and his passion for leading comes from compassion (Kouzes and Posner 1992; Mulej et al. 2020). That ethical leadership is starting to receive attention is even shown in an effort to boil ethical leadership down to love. Based on an extensive review of literature Brown and colleagues formed the following definition: ethical leadership is defined as “the demonstration of normatively appropriate conduct through personal actions and interpersonal relationships, and the promotion of such conduct to followers through two-way communication, reinforcement and decision-making” (Brown and Trevino 2006). This definition proposes that (1) ethical leaders’ conduct serves as role-modeling behavior for followers as their behavior is accepted as appropriate; (2) ethical leaders communicate and justify their actions to followers (i.e., they make ethics salient in their social environment) (Bass and Steidlmeier 1999); (3) ethical leaders want to continually behave according to ethics, therefore they set ethical standards in the company and reward ethical conduct (Minkes et al. 1999; Mihelic et al. 2010) on the part of employees as well as punish unethical behavior; (4) ethical leaders incorporate ethical dimension in the decision-making process, consider the ethical consequences of their decisions, and above all try to make fair choices. The above definition places ethical leadership among the positive forms of leadership and focuses on leader behavior and thereby disentangles personal characteristics, attitudes from the actual behavior (Rubin et al. 2010). Enderle (1987) proposes two goals of (managerial) ethical leadership, the first is to explicitly state the ethical dimension that exists in each and every managerial decision, whereas the second is to formulate and justify ethical principles (that are an essential aid for responsible leadership) which cannot substitute for personal responsibility in decision-making (Enderle 1987). Being ethical involves “doing more than fulfilling moral minima and moral courage” (Murphy and Enderle 1995). A person with an ethical mind, according to Howard Gardner, asks himself the following question: “What kind of a person, worker and citizen do I want to be? If all workers in my profession adopted the mindset I have and did what I do, what would the world be like?” (Kannair 2007). The possibilities to behave unethically in an organization are limitless and unfortunately, this potential is too often realized. Why does

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Table 4.1 Ethical and unethical leadership The Ethical Leader

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The Unethical Leader Is humble Is concerned for the greater good Is honest and straightforward Fulfills commitments Strives for fairness Takes responsibility Shows respect for each individual Encourages and develops others Serves others Shows courage to stand up for what is right

Is arrogant and self -serving Excessively promotes self -interest Practices deception Breaches agreements Deals unfairly Shifts blame to others Diminishes others’ dignity Neglects follower development Withholds help and support Lacks courage to confront unjust acts

Source Yukl (2013), Mihelic et al. (2010), Carter (2012)

ethics matter? Ethical companies can recruit candidates more efficiently, choosing those recruits that will fit the existing organizational values. Namely, people usually want to work for a high-quality organization with excellent reputation. Consumers want to deal with a reputable company and business partners search for renowned companies as only with such companies it is possible to foster trust-based relationships (Bazerman 2008). Why do people (leaders and followers) in organizations not behave as ethically as they should? According to young managers because they are pressured to comply with four powerful organizational commandments: performance is what counts in the end; by all means show that you are loyal and a team player; do not break the law; do not over-invest in ethical behavior. These rules are hardly sufficient to create an ethical organization. What is even more interesting is that only a minority of young managers believe that ethics pays in terms of career advancement (Badaracco and Webb 1995). The criteria relevant for judging ethical behavior of a leader include individual values, conscious intentions, freedom of choice, stage of moral development, types of influence used, and use of ethical as well as unethical behavior (Yukl 2006). Some of the characteristic behaviors of ethical and unethical leaders are shown in Table 4.1.

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The traits that CEOs most often attribute to ethical leaders are honesty, trustworthiness, and integrity. Trust is associated with credibility, consistency, and predictability in relationships and honesty is the crucial element needed in a trust-based relationship. Ethical leaders treat people right, have a high level of moral development, and play fair. The leader who is honest with and about himself and with others inspires trust that encourages followers to take responsibility. For more than a decade, Kouzes and Posner have been asking employees around the world what they most value or want from a leader and what would it take for them to follow him willingly. Without exception, honesty (integrity, trustworthiness) is the first on the list (Kouzes and Posner 1992). How do employees know that leaders are (dis)honest? They observe the behavior and the consistency of behavior in similar conditions. If a leader constantly changes his behavior, followers perceive him as unpredictable, unreliable, and therefore unworthy of trusting. Another thing that undermines trust is if a leader espouses one set of values (the way he should behave) and actively promotes them, whereas personally practices another. Ethical values in an organizational setting are emphasized and strengthened primarily through values- internalized values, that are acted upon by the leader (Daft 2007). Leadership can be defined as a relationship between leaders and coworkers; it is based on shared values, and, general principles that guide action. Values are not actions, they are codes which underlie the sanctions or punishments for some choices of behavior and rewards for other (Tables 4.2 and 4.3). On the basis of virtue (value) theory five values are crucial for ethical leaders (Blanchard and Peale 1996): • Pride: Lacking self-esteem, an ethical leader will hardly receive esteem and respect from followers. Ethical leaders demonstrate healthy pride, not vanity, as the dividing line between them is thin due to strong egotistic tendency in human beings. Ethical leaders recognize that inordinate self-love is a vice not virtue. • Patience: In the process of implementing strategies that enable an organization to reach its goals, a leader is faced with obstacles from internal and external environment, reluctance, and lack of commitment from followers. As it takes time to overcome barriers patience is of utmost importance. • Prudence: Prudence is a virtue that refers to exercising sound judgment in practical affairs. It is considered as the measure of moral

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Table 4.2 Examples of final (personal and ethical–social) and instrumental values (ethical–moral and values of competition) Personal values: What are the most important things in your life? Ethical –social values : What do you want to do for the world? Ethical–moral values : How do you think you should behave toward people that surround you? Values of competition: What do you believe is necessary to compete in life

Happiness, health, salvation, family, personal success, recognition, status, material goods, friendship, success at work, love Peace, planet ecology, social justice Honesty, sincerity, responsibility, loyalty, solidarity, mutual confidence, respect for human rights Money, imagination, logic, beauty, intelligence, positive thinking, flexibility,

Source Mihelic et al. (2010), Carter (2012), Yukl (2013)

Table 4.3 Criteria for evaluation of ethical leadership Criterion

Ethical leadership

Unethical leadership

Use of leader power and influence Handling diverse interests of multiple stakeholders Development of a vision for the organization

Serves followers and the organization Attempts to balance and integrate them Develops a vision based on follower input about their needs, values, and ideas

Integrity of leader behavior Risk taking in leader decisions and actions

Acts consistent with espoused values Is willing to take personal risks and make necessary decisions

Communication of relevant information operations

Makes a complete and timely disclosure of information about events, problems, and actions

Response to criticism and dissent by followers Development of follower skills and self -confidence

Encourages critical evaluation to find better solutions Uses coaching, mentoring and training to develop followers

Satisfies personal needs and career objectives Favors coalition partners who offer the most benefits Attempts to sell a personal vision as the only way for the organization to succeed Does what is expedient to attain personal objectives Avoids necessary decisions or actions that involve personal risk to the leader Uses deception and distortion to bias follower perceptions about problems and progress Discourages and suppresses criticism or dissent Deemphasizes development to keep followers weak and dependent on the leader

Source Yukl (2013), Mihelic et al. (2010), Carter (2012)

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virtues as it provides a model of ethically good actions. A leader in the habit of exercising prudence and fortitude is not inclined to resort to unethical practices even in times when things do not go as planned. • Persistence: It refers to a leader striving for goals and his continuing quest to take all the necessary steps to achieve them, even if they involve sacrifice and personal risk. Persistence lies in trying to overcome the “practice” of justifying unethical conducts when one feels overwhelmed by mounting pressures, because of a sense of duty to others. • Perspective: It is understood as the capacity to perceive what is truly important in any given situation. The leaders that demonstrate integrity are honest with themselves and others, learn from mistakes, and are constantly in the process of selfimprovement. They lead by example and expect as much of others as they do of themselves. Leaders are the primary influence on ethical conduct in an organization (Hitt 1990; Jansen and Von Glinow 1985) and are responsible for the norms and codes of conduct that guide employees’ behavior (Bennis and Nanus 1985; Cyert 1990). There are three ethical tasks a leader should normatively involve in: perceiving, interpreting, and creating reality; showing responsibility for the effects of one’s decisions on the human beings concerned; being responsible for the implementation of organizational goals (Enderle 1987; Ykul 2010). Kouzes and Posner (1992) offer practical suggestions for being an ethical leader, explaining that this emanates not so much from the head as it does from the heart. Based on numerous interviews they conclude that love constitutes the soul of ethical leadership.

Corporate Social Responsibility (CSR) The strategic decisions of large companies involve social as well as economic consequences, which are intimately connected (Mintzberg 1983). Porter and Kramer (2006) discuss the existence of the interdependence between corporations and society, since a company’s activities have a direct impact on the communities with which they work. This can lead to either positive or negative consequences. Strategists and executives should take into account societal expectations and decisions, as there can

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be some attractive alternatives when goodwill or services to society are considered. Decisions from the strategy formulation process should take into account the positive and negative impacts that may arise, not only for the business itself, but also for stakeholders and society in general. Hence, the Ethos Institute (2007) has adopted the following definition of strategy and CSR: Corporate social responsibility is a form of management that is defined by the ethical relationship and transparency of the company with all the stakeholders with whom it has a relationship as well as with the establishment of corporate goals that are compatible with the sustainable development of society, preserving environmental and cultural resources for future generations, respecting diversity, and promoting the reduction of social problems.

The European Commission defines corporate social responsibility as “companies acting voluntarily and beyond the law to achieve social and environmental objectives during the course of their daily business activities.” Husted and Allen (2000) use business strategy tools and concepts to formulate new models of social strategy. Social corporate strategy therefore needs to be linked to the following four elements: (a) structure of industry; (b) internal resources of the firm (Barney 1991); (c) corporation ideologies and values; and (d) the relationship with stakeholders. We can see a similarity between the elements these authors consider in the formulation of social strategies and the elements of corporate strategy observed by Andrews (1987). For Molteni (2006), social responsibility is part of corporate strategy, as it can help corporate management find innovative solutions based on the expectations of stakeholders. The author proposes an innovation model based on social responsibility, affirming that this can be a creative factor in the development of competition. Husted and Salazar (2006) affirm that companies should put their social responsibility strategies into practice with the intention of improving both economic and social performance. Husted and Salazar (2006) examined CSR strategies in firms with the objective of maximizing both profits and social performance. Through a comparison between firms, the authors identified three types of social investment (altruistic, selfish, and strategic), concluding that strategic investment creates better results for companies that try to simultaneously achieve the maximization of both profit and social performance. This strategic investment consists of the creation of well-being and positive advantages to society

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and the local community. It also consists of additional benefits to the company, such as an enhanced reputation, better and more qualified labor, the differentiation of products, and extraction of a premium price. The conclusions of this study point out that a company can add value and obtain competitive advantage through socially responsible activities, but it must act strategically and CSR should be connected with the corporate strategies. Actions should be seen as adding value to products in the eyes of the public and should also improve the local business environment (Porter and Kramer 2002). Social responsibility has become a strong and irreversible part of corporate actions. When managed effectively, CSR programs and projects can create significant benefits in terms of reputation and returns as well as the motivation and loyalty of employees. CSR can also contribute toward strengthening valuable partnerships (Pearce and Doh 2005). Husted and Allen (2000) state that CSR strategies can create competitive advantages if used properly, pointing out that there is a positive association between strategic social responsibility actions and competitive advantage. According to Barney (1991), the creation of competitive advantage occurs through the implementation of strategies that add value and create benefits for one company when another company fails to do so. Competitive advantage can be achieved through internal resources or a group of internal resources from the firm. However, to obtain this advantage, the resources must be (1) valuable, exploring the opportunities and neutralizing threats to the environment of the firm; (2) rare, not being present in any rival or potential rival company; (3) inimitable, so that others cannot imitate them; and (4) non-substitutable, meaning they do not have strategic equivalents (Barney 1991; Yukl 2013). Thus, a group of intangible resources, such as good corporate governance, efficient execution of innovative social projects and ethical management in business, can be a differentiating source of competitive advantage. However, it is important to say that there is only the creation of competitive advantage through CSR if the benefits to society really exist, as such benefits should be implicit to the philosophy of social strategies (Husted and Allen 2000). To be a source of competitive advantage, CSR actions should create real and consistent results for society. Increased concern with external aspects as an internal value to strategic social decisions leads to reflection regarding courses of action, analyzing and anticipating the effects of the corporation behavior while predicting the potential positive or negative consequences (Alessio 2003).

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Once CSR becomes part of corporate culture and values, it is an internal resource that can generate competitive advantage (Branco and Rodrigues 2006). In order to spread the CSR concept throughout the corporation, it is important for it to become a stated corporate value and, as suggested by a Carrefour manager, there are tools to be applied in order to reinforce such statements and foster continuous implementation. CSR includes the social practices where the company is discharging its responsibility toward community at large, i.e., stakeholders. Stakeholders are the ones who can influence or can be influenced by the actions, decisions, policies, practices, and goals of the company. Apart from shareholder, it includes employees’ consumers, supplies, government competitors, and community at large. Traditionally, so far business was treated purely from the point of view of private personal pecuniary motive. Now, a company has acknowledged its responsibilities to society that goes beyond the production of goods and services at a profit. It involves the idea that the corporate has a broader constituency to serve than that of shareholder alone. In more recent years, the term stakeholder has been widely used to express this broader set of responsibilities. By now, it is accepted that corporations are more than economic institutions and they have a responsibility to help society to solve pressing social problems. CSR is about how companies manage the business processes to produce an overall positive impact on society. CSR is about business giving back to society. The concept of social responsibility is fundamentally an ethical concept as it involves changing notions of human welfare, and emphasizes a concern with the social dimension of business activity that has to do with improving quality of life. The concept provided a way for business to concern itself with these social dimensions and pay some attention to its social impacts. As a result, many of them put a step forward for discharging their responsibility by indulging in philanthropy or by bringing CSR into business strategy. The subject of Corporate Social Responsibility has become widely discussed in business circles. The origin of this concept is linked to the debate about the relationship established between corporations and society, which emerged subsequently after the phenomenon of globalization. Companies do not operate isolated from society and, as such, their performance will be related to factors such as the social and ethical responsibility and how those items are related to the objectives of the corporation.

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Jamali (2008) argued that the curiosity attributed to CSR thematic started with the phenomenon of globalization and the consequent increase in international trade. This scenario carried an increased business complexity and demanded for transparency and humanization of companies. The definition of CSR defended by Sacconi (2006) presents CSR as a management model where managers have responsibilities that range from meeting their responsibilities to shareholders until the fulfillment of responsibilities to other stakeholders of the company. The classic economic theory does not embrace CSR thematic. In spite of the existence of some social objectives, for classical economists the profit was the prima facie indicator for enhancing social welfare and, therefore, firms should maximize it. Friedman (1962) believes that the philosophy advocated by CSR is not defensible since the sole responsibility of business is to increase profit. This same perspective is given by Jamali (2009) who argued that “the classical model has a narrow focus and little tolerance for a social role of business, reasoning that CSR inevitably reflects in additional costs and reduced competitiveness.” The supporters of this model believe that Corporate Responsibility lies solely in providing goods and services to consumers. The modern paradigm, in turn, considers that corporations operate within a wider society and, therefore, they have responsibilities to a wide range of stakeholders. The classical view considers that the adoption of CSR relies on a cost for corporation and there is a narrow sense for CSR. The modern view firms consider that corporations have a wide responsibility on society and consider that the adoption of CSR politics might origin a benefit. The socioeconomic view firms have a narrow sense for CSR but believe in a benefit for corporations that adopt it. Finally, the philanthropic view considers that the adoption of CSR is a responsibility of firms but is costly. They concluded that modern and classical clusters were the most evident, with the modern view being the most representative one. According to Weyzig (2009), there are three major perspectives on the CSR topic: the perspective of the stakeholder, the perspective of broad objectives, and the neoliberal perspective. The first one states that CSR can only be understood as the company’s responsible attitude on its regular business. So, corporations have certain responsibilities toward their stakeholders and CSR is defined in negative terms, identifying what the organization should not do. The second perspective shows that the CSR concept

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requires a proactive approach in the corporation in order to promote sustainable development and reduce poverty. It can be reached through initiatives in areas where the company can make valuable contributions. Finally, the neoliberal perspective claims that the company will create greater social welfare through the pursuit of its own objectives of private profit, than by assuming other responsibilities. According to the Guide of CSR in Europe (Europe 2009), the interaction between business and society is ruled by a great economic, political, and cultural diversity in the old continent. The initiative of corporate contribution for social welfare improvement (beyond the legal obligations which are imposed) has a great tradition in Europe, particularly in the Anglo-Saxon countries. Bonn and Fisher (2005) have analyzed how corporations can address concerns about CSR and business ethics in their corporate governance structure. The authors consider that “society expects businesses to make a profit and obey the law and in addition to behave in certain ways and conform to the ethical norms of society” (Bonn and Fisher 2005). They have found three weaknesses in incorporating business ethics into corporate governance, namely bureaucratic and formalized approach, lack of implementation, and lack of integration throughout the organization. To avoid the bureaucracy problem, the authors suggest that the development of business code of ethics should involve different levels of the organization (board, senior managers, middle managers, and other employees), so that it could be understood and owned by everyone in the corporation. To overcome the potential problem of the lack of implementation, the authors suggest that “ethic committees should ensure that top managers and line personnel address ethical issues on a regular basis and that the prime responsibility for developing policies, procedures and codes of ethical conduct is given to line managers who are responsible for implementation” (Bonn and Fisher 2005). Finally, to avoid the lack of integration problem it should be established “training programs for employees and the provision of communication channels for receiving feedback on initial and ongoing problems and difficulties” (Bonn and Fisher 2005). The authors conclude that high standards of ethical behavior can be achieved by an incorporated approach toward CG and business ethics. This behavior may enhance corporate governance and organizational reputation and competitiveness.

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Corporate Social Responsibility (CSR) is a term we use frequently (Porter and Kramer 2011). This implies that doing the morally correct behavior can be beneficial in the long run. Eco-efficient processes and devices and socially responsible investments save natural resources and are ultimately profitable. Good management, which is efficient and legitimate, can promote reputation in a market economy as kind for the workers and reliable for the customers. Corporate Social Responsibility (CSR) by business that can be said to enhance society is removed from business for-profit activity and is voluntary and thus not required by law or any other form of governmental coercion. It is, though, increasingly hard to isolate CSR from mainstream business and government regulation given the prominence of the “business case” and government incentives through soft regulation. Nonetheless, CSR is still distinguished by its focus on responsiveness to and even anticipation of social agendas, and by increased attention to social performance. Today, by contrast, most companies publish annual environmental reports and much more information is available that is directly relevant to issues of CSR. The Japanese business–society relations legacy in Japan, a company has long been associated with the formation of community, and thus forms the basis of society to which an individual employee belongs. In contrast to an Anglo-American model of community, in Japan both individuals and companies are members of society and hence responsible to it. The Japanese word for business, keiei, is a compound of the words kei, meaning “governing the world in harmony while bringing about the well-being of the people,” and el, meaning making “ceaseless efforts to achieve.” So, too, the emergence of corporate business in Japan has, from the beginning, assumed a notion of CSR. The most well-known manifestation of this is corporate Japan’s long-standing commitment to workforce welfare in what was known as shogai koyo, or “life-time employment.” From a strategic viewpoint and following Godfrey and Hatch (2006), literature regarding CSR can be divided into two branches: (1) the ethical or moral orientation and (2) the business orientation. In its extreme form, the first approach suggests that CSR is an act of reciprocity between the firm and its stakeholders (based on the company’s obligation toward them). As such, this morally oriented approach is manifest, for example, in stakeholder theory.

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In relation to the stakeholder approach, the selection of a CSR initiative depends on the way the stakeholders perceive the problem and the need to resolve it, and on a decision process which is based on a complex network of relationships among internally and externally affected groups (Mitchell et al. 1997). Thus, some questions with potentially different answers, such as establishing which stakeholders the firm creates value added for or what benefits stakeholders are going to receive, are raised. However, certain limitations exist, which organizations must not exceed, in relation to dignity and human rights, work conditions, or environmental respect (Werhane 2008). On the contrary, the economic (business) approach suggests a positive relationship between CSR practices and financial performance. Clearly this second perspective provides a strategic anchor for CSR that can be rationally linked into and forms a part of company business strategy (Sharp and Zaitman 2010). In this view, CSR activities should be compatible with the objective of profit maximization, thus contributing to obtaining the best long-term economic performance (McWilliams et al. 2006). Economists from Adam Smith to Milton Friedman have argued that business enterprises should behave as purely economic entities driven by the sole purpose of profit maximization. The last few decades have brought about changes in the classical perspective. Under this “alternative” perspective, the firm’s value to society is contingent on both the value it adds to economic stakeholders and the social benefits it creates for all stakeholders. A firm’s “social viability” depends on the degree to which the social goods it generates exceed the social costs it calls upon society to bear. Stated differently, the value of the social goods generated by the firm should normally exceed the social costs it imposes. It is important to note, however, that except for some regulatory legislation (pollution control requirements, minority employment laws, etc.) there is no short-run mechanism to eliminate firms whose social costs exceed the social goods they provide. This alternative view contends that it is in the long run that the importance of a firm’s social performance is made evident. Economic performance may dictate whether a firm is viable in the short run, but it is the combined social and economic performance which determines long-term legitimacy. Legitimacy, here, refers to “the belief or perception by society that a particular social institution is appropriate or proper or consistent with the moral foundations of that society” (Epstein and Votaw 1978).

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A firm improves its social value added by either reducing “social costs” or increasing “social goods.” Economic and social aspects of a firm’s performance are obviously interrelated, and different methods of increasing social value will affect the economic value of different firms in different ways. Consequently, certain strategies for social responsiveness (enterprise strategies) will be more effective for some firms than for others. Freeman (1984) and Freeman and Gilbert (1988) have put forth the only enterprise strategy classifications to date. Freeman’s (1984) classification outlined five possible enterprise strategies: (1) Narrow stakeholder strategy—maximize benefits to one or small set of stakeholders; (2) Stockholder strategy—maximize benefits to stockholders or “financial stakeholders”; (3) Utilitarian strategy—maximize benefits to society; (4) Rawlsian strategy—act to raise the level of the worst-off stakeholder; and (5) Social harmony strategy—act to maintain or create social harmony. Stakeholder groups and scope stakeholders may be defined as individuals or groups who believe they are able to affect or are affected by some aspect of firm behavior (Freeman 1984; Abend 2014). Stakeholder groups include, among others, management, employees, stockholders, customers, suppliers, local communities, governmental bodies, and so on. In keeping with the concept of value added, our classification is built on a distinction between economic and noneconomic (social) stakeholders. Any single action of the firm may affect both types of stakeholder groups. Economic and social stakeholders are sufficiently distinct to differentiate between the roles of their members at any point in time (fulfilling the mutually exclusivity requirement). They also account for all possible stakeholder groups that interact with the organization (collectively exhaustive). The benefits provided by the firm may be economic, noneconomic, or some combination of both. Based on the distinction between “social goods” and “social costs,” social value can be generated by an increase in social goods, a decrease in social costs, or both, in combination. The long-term performance of certain types of firms may be enhanced best by focusing on reducing the social costs imposed on society. Other firms may find a strategy of increasing social benefits more effectively. Still others may find that they must, at least in the short run, neglect social stakeholders and concentrate solely on economic performance.

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Accommodative/Broad Enterprise Strategy This strategy is typical of those firms perceiving themselves as answerable to society at large for the way their operations are conducted. These firms are broad both in terms of the stakeholders they recognize and the benefits they provide. Such firms typically have a strong emphasis on corporate ethics and social responsibility—with statements to that effect often included in their charter or purpose statement. They actively seek innovations to improve social welfare and consciously attempt to minimize any social cost generated by their operations. For example, Dow Chemical promotes many products as aids to improve worldwide social conditions (creating social goods), and its concern over public opinion prompts attempts to reduce environmentally harmful byproducts from its operations. Business Philosophy is a driving force of a particular business. For instance, the “Business Philosophy” of Tata Enterprise might be to develop a business that is quality conscious and produces products that are within the reach of the common man. Philosophy of Business explains the moral principles that underlie business as a domain. It goes into the purpose of business and the ethical basis and consequences of business. Therefore, “Business Philosophy” relates to the vision of a company whereas “philosophy of business” is an area of study. It is a subdiscipline of philosophy. The “Business Philosophy” may or may not include the ethical dimensions. Peter Drucker and some leading management thinkers believe that it need not. Starting from the famous but controversial statement of Peter Drucker (1981)—“There is neither a separate ethics of business nor is one needed.” However, business ethics and social responsibility are not unrelated. It shows how it is necessary to distinguish between business philosophy and philosophy of business. Through this distinction it develops a framework that relates the two—business ethics and CSR. It goes on to argue that there is a paradigm shift in the philosophy of business. This shift leads to a framework wherein a new perspective on business ethics and social responsibility emerges. It is coined as Corporate Responsibility. It consists of (a) good governance (b) Corporate Social Responsibility (“CSR”) (c) environmental accountability (Bowie 2017; Mulej et al. 2020).

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The Role of Top Management The leaders of the business must realize the importance of putting people and the planet at par with the profit if not before it. As in today’s highly competitive economy, the importance of ensuring a positive impact on the society can be crucial to both the corporate reputation and business success. For incorporating ethical considerations, that comes no doubt from top leadership who are aware of the fact that three dimensions of ethics percolates all through the organization. Such awareness about CR (Corporate Responsibility) must be backed by commitment and consciousness to enforce the top management to find out the ways to integrate ethics and values into their day-to-day decision-making. Of course, the role of top management is crucial in the sense that he has the responsibility to translate this vision into business strategy. Top Management has to further harness the CR practices by bringing out the organizational transformation with which this vision would be carried down from top to bottom level in the organization. It is possible by developing systems, processes, policies, plans, and practices having programs so that it is deeply embedded into the organization. Ultimately, it pervades the whole organization which means not only from top to bottom but also in all functional areas, whether it be HR, marketing, account, finance, etc. This whole process is known as institutionalization of CR practices into the business system. If the organization desires to have successful implementation of CR practices, then CR efforts are not only to be institutionalized but also to be perpetuated in the organization. Besides this, top management should try its level best to build a system by which CR would become sustainable, only then vision would become reality. There are several ways in which we may look at the role of top management. In the light of the above discussion, we believe the most crucial issue is to know whether she is aware and conscious of CR, how he translates this vision into CR practices, how she contributes to the process of organizational transformation in order to make CR efforts pervade the entire organization. The most important criterion is about what steps have been taken to have the sustainability and the perpetuation of CR efforts within organization.

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Environmental Accountability Corporate Responsibility has another dimension in form of accountability of business toward environment. As business interacts with its natural environment, it draws its resources from the environment. It also influences the environment by its actions. Therefore, it is also accountable to it for any impact, which it makes. Earlier corporates dumped their wastes with impunity in the environment. With the growing awareness and concern about environmental degradation, depletion of natural resources like water and fossil fuels, and the phenomenon of global warming, there is moral and legal pressure on corporates to realize that the earth needs to be preserved and looked after so that future generations are not adversely affected. Corporate Responsibility is closely linked with the principles of Sustainable development, in proposing that the enterprises should be obliged to make decisions based not only on financial or economic factors but also on the social and environmental consequences of their activities. Therefore, Corporate Responsibility is about how businesses align their values and behavior with the expectations and needs of different stakeholders. It also describes a company’s commitment to be accountable to its environment, i.e., planet, to be responsible to its society at large, i.e., people, and to be transparent in its business practices, i.e., good governance which determines the profit for the investors. If the organization desires to have successful implementation of CR practices, then CR efforts are not only to be institutionalized but also to be perpetuated in the organization. Besides this, top management should try its level best to build a system by which CR would become sustainable, only then vision would become reality. It is possible by developing systems, processes, policies, plans, practices, having programs so that it is deeply embedded into the organization. Ultimately, it pervades the whole organization which means not only from top to bottom but also in all functional areas, whether it be HR, marketing, account, finance, etc. This whole process is known as institutionalization of CR practices into the business system. However, the major challenge is of evolving a strategy for laying down standards that take care of major issues and provide standards that are measurable, objective, and universal. The three central issues of International Social Responsibility Standards are : Acceptance of the trifocal approach—Governance, Responsibility, and Accountability. Approach to

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methods of measurement is resolved. The mandatory versus voluntary issue can be resolved only if issues of measurement and their universal applicability is resolved. As beliefs and shared values are at the core of organizational culture, it will act as a propellant, or instead as a barrier, in relation to CSR plans implementation. If culture is rightly aligned to CSR, it will be likely that these kinds of initiatives can be accepted and institutionalized better than if they are not. Should this alignment happen, it is also very important that a clear leadership exists in order to push employees toward goals achievement, among which those of the stakeholders are included (Maak 2007). On the other hand, culture will be affected by changes that CSR practices (among which ethical behaviors are included) introduce in the company. As Sims (2000) asserts, an accepted fact is that an organization’s culture socializes people and that ethics (and a responsible behavior in relation to stakeholders) is an integral part of the organization’s culture.

Integration of Corporate Social Responsibility in Business Management In terms of modern management, the origin of the social responsibility concept goes back to the 1950s (Carroll 1999). Avoiding philosophical and linguistic discussions, social responsibility can be defined as voluntary efforts by companies to take on responsibility in order to eliminate—or at least reduce—the negative impacts of their business activities on the stakeholders. As Gjolberg (2009) states, in the modern world, companies have been given more freedom but they are also expected to play social roles, such as mitigating climate change or protecting human rights. Finally, as one of the oldest concepts of management, business ethics is: a form of applied ethics. It includes not only the analysis of moral norms and moral values, but also attempts to apply conclusions of this analysis to that assortment of institutions, technologies, transactions, activities and pursuits that we call business. (Velasquez 2002)

It is clear in this definition that business ethics is related to moral norms and values. At this point, it is necessary to ask if companies have moral norms and values as individuals do. Velasquez (2002) argues that companies do have moral duties in a secondary sense. By saying that, Velasquez

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(2002) implies that the ers constitute the business ethics of that company. This is why companies now provide ethical codes or codes of conduct and expect workers of all levels to obey these codes when they make a decision as a part of their jobs. For example, according to the Facebook code of conduct, employees are not allowed to accept any gifts of substantial value from partners. Thus, this code provides an idea as to what is right and wrong in the offices of Facebook. As a result, business ethics is not moral obligations to its stakeholders but ethical behaviors expected from employees. By taking the definitions above into consideration, it can be argued that corporate governance, social responsibility, and business ethics concepts have some shared characteristics and that all these three concepts are interrelated. Corporate governance demands that executives make their companies more transparent and accountable; social responsibility demands that companies support society with their activities, and business ethics clarifies moral norms for employees. Business ethics can help a manager make his/her company more accountable and transparent. Similarly, when a company adopts corporate governance principles, it also has to meet the expectations of its stakeholders. As a matter of fact, corporate governance principles include principles related to business ethics and social responsibility. However, some scholars (Heath and Norman 2004) believe a coherent theory of CSR cannot be created without corporate governance. In any case, it is logical to conclude that all these concepts are interrelated and they are imposed upon companies by shareholders and stakeholders (Scott 2007). Thus, we simply argue that companies take corporate governance, social responsibility, and business ethics concepts into consideration in order to gain legitimacy though they do not care about their potential impact on corporate performance or strategy. From this point, these concepts can be dealt with as institutional pressures, which force companies to isomorphism. Obviously, companies have to adapt to their institutional environments in order to gain legitimacy and to survive even if this adaption harms corporate performance. One of the fervent opponents of this idea was Nobel laureate economist Milton Friedman. In 1970, Friedman gave an interview to the New York Times Magazine (http://www.colorado.edu/studentgroups/libert arians/issues/friedman-soc-resp-business.html, retrieved 8.3.2013) and in this interview he explains his opinions about social responsibility with these words:

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In a free-enterprise, private-property system, a corporate executive is an employee of the owners 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 while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.

From a strategic viewpoint and following Godfrey and Hatch (2006), literature regarding CSR can be divided into two branches: (1) the ethical or moral orientation and (2) the business orientation. In its extreme form, the first approach suggests that CSR is an act of reciprocity between the firm and its stakeholders (based on the company’s obligation toward them). As such, this morally oriented approach is manifest in stakeholder theory. In relation to the stakeholder approach, the selection of a CSR initiative depends on the way the stakeholders perceive the problem and the need to resolve it, and on a decision process which is based on a complex network of relationships among internally and externally affected groups (Bowie 2017). Thus, some questions with potentially different answers, such as establishing which stakeholders the firm creates value added for or what benefits stakeholders are going to receive, are raised. However, certain limitations exist, which organizations must not exceed, in relation to dignity and human rights, work conditions, or environmental respect (Werhane 2008). On the contrary, the economic (business) approach suggests a positive relationship between CSR practices and financial performance. Clearly this second perspective provides a strategic anchor for CSR that can be rationally linked into and form a part of company business strategy (Sharp and Zaitman 2010). In this view, CSR activities should be compatible with the objective of profit maximization, thus contributing to obtaining the best long-term economic performance (McWilliams et al. 2006). Irrespective of one or another approach, both perspectives (ethical and economical) give a rationale for the firm to integrate CSR into corporate and business strategy. Sharp and Zaitman (2010) call this process “strategization of CSR,” which from a “strategy as practice” approach (Whittington 2006). It is an attempt to explain the process by which CSR is strategized in an organization (i.e., the process by which a strategy is integrated into organizational behavior and culture).

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From this starting point, the question to deal with makes reference to the way the company will carry out the strategization of CSR (Sharp and Zaitman 2010). In other words, how to institutionalize CSR in the firm, in line with its strategic objectives and internal characteristics. Although strategy can be viewed from a content or process viewpoint (Whittington 2006), we consider aspects from both perspectives. Thus we take into consideration that institutionalization of CSR in firm management implies the intended approach based on the elaboration of formal plans and also the emergent approach, which implies the consideration of factors that affect the way CSR plan is implemented and put in practice, such as knowledge management systems, culture, leadership, or human resource practices. The integration of CSR into firm strategy could be established through the development of the following stages: 1. Introduction: In this stage, the fundamental issue is the transmission of ethical principles and their integration into the culture which is shared by the organizational members. This is not easy to accomplish, owing to the firm that has to take into account its strategic objectives which are influenced by the stakeholders’ needs, power, and legitimacy (Mitchell et al. 1997; Nelson 2006) and the managers’ ethical posture. From this starting point, formal plans are elaborated in order to attain concrete goals. Also, an effective communication plan is necessary to develop in order for the employees and other stakeholders to have a clear perception that CSR is an aspect of strategic importance for the company. 2. Implementation of the CSR plan: In this stage, certain factors come into play when CSR formal plans are implemented, which are mainly related to HR practices, capabilities development and certain changes in order to adapt the organizational structure to the new situation, for which knowledge management systems and organizational culture are essential aspects. 3. Generalization of CSR: This is an essential part of the CSR integration into the company strategy. This is only possible to achieve if the previous stages have been successfully overcome, and it implies a global change for the company, since CSR will be incorporated into the firm’s culture, mission, and values. This third stage is completed with reports in order to measure advances in CSR and benefits for the stakeholders.

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Strategic Management and CSR Ansoff (1979) coined the terra “enterprise strategy,” to broadly encompass a firm’s product/market/technology strategy, resource strategy, limited-growth strategy, societal strategy, and legitimacy strategy. Schendel and Hofer (1979) refined Ansoff’s definition by restricting “enterprise strategy” to social-legitimacy concerns. They argued that, with the exception of social legitimacy, all the strategic issues referred to by Ansoff were addressed at the corporate, business, and functional strategy levels. According to Schendel and Hofer (1979), “enterprise strategy attempts to integrate the firm with its broader noncontrollable environment…in the sense of the overall role that business… should play in the everyday affairs of society.”

Enterprise Strategy and Corporate Social Responsibility Enterprise strategy is closely associated with the concept of Corporate Social Responsibility (Ansoff 1979; Schendel and Hofer 1979; Freeman 1984; Wicks et al. 2020). Numerous studies have attempted to establish a linkage between Corporate Social Responsibility and economic performance (Folger and Nutt 1975; Vance 1975; Sturdivant and Ginter 1977; Cochran and Wood 1984; Bowie 2017). Most assumed that social responsibility and economic performance have a direct relationship despite organizational and environmental differences. Taken together, the results of these studies have not established the direction of the relationship or even that such a relationship exists. Some found positive relationships (Sturdivant and Ginter 1977), some found negative relationships (Vance 1975), some found a weak relationship (Cochran and Wood 1984), and others found no relationship at all (Folger and Nutt 1975). Although some concentrate on the methodological weaknesses of these studies (Aupperle et al. 1985; Sandel 2012), the failure to uncover a consistent relationship between economic performance and social responsibility may be due to inadequate conceptual models. More specifically, the nature of this relationship may not be universally consistent, but may instead be contingent on the situation facing the organization. Socially responsive activities are not necessarily related to improved or superior profitability.

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Rather, as strategic management theory suggests, superior performance comes from successful implementation of a strategy that matches organizational skills and resources with environmental opportunity in ways that create competitive advantage. We contend that there are many “enterprise strategies” which a firm may adopt. The adequacy of the “fit” between the firm’s activities, stakeholder interests, and the selected strategy will determine the impact of the firm’s social activity on its long-term survival and economic performance. Both Schendel and Hofer’s and Ansoff’s definitions of enterprise strategy helped place Corporate Social Responsibility concerns within the strategic management paradigm, however, neither definition has been used to develop an enterprise strategy classification. Ansoff’s definition was extremely complex and included elements incorporated into other strategy levels. Schendel and Hofer’s definition, based on the overall role of business in society, was too general to identify the specific components of enterprise strategy. Freeman (1984) has gone a step further by developing a better understanding of the scope of a firm’s “social-legitimacy concerns” using the stakeholder approach. Under this approach firms are seen as responsible to different groups of stakeholders, and the firm’s survival depends on whether it makes adequate contributions to the stakeholders’ well-being. Freeman (1984) defines enterprise strategy as “what a firm stands for.” Such a definition, while useful for distinguishing between firms, poses at least two problems for those interested in research concerning enterprise strategy. First, it is quite likely that there will be conflicting values among those belonging to the firm. Second, the normative issues raised in comparing firms’ values would subject enterprise strategy research to the ethical judgments of researchers, making it difficult to compare one researcher’s findings to another’s. To keep within the traditional understanding of strategy, enterprise strategy might better be defined as matching the firm’s value creating activities to the values and needs of its stakeholders. The “matching” aspect, while present in Freeman’s writing is absent in his definition. Enterprise strategy can be defined as follows: “How the firm attempts to add value to its stakeholders in order to legitimize its existence and ensure its future.” The components of enterprise strategy are, therefore: (1) The environment to which the firm adds value (stakeholders) and (2), the types of value the firm adds (benefits). This definition maintains Ansoff’s and

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Schendel and Hofer’s “social-legitimacy concerns” and builds on Freeman’s stakeholder approach. It establishes the criteria for social legitimacy (providing sufficient benefits to stakeholders) and it addresses the components (stakeholders and the valued benefits added) of a firm’s enterprise strategy (Chrisman et al. 1988; Wicks et al. 2020). And, as will be demonstrated, it can support a classification based on its components.

Classifying Enterprise Strategies Classification systems should meet at least three objectives: differentiation, generalization, and identification. To accomplish these objectives, each category within the classification should be mutually exclusive, internally homogeneous, collectively exhaustive, based on relevant names and stable. The classification as a whole must be general in purpose, based on all key characteristics of the phenomena, parsimonious, hierarchical (or capable of supporting a hierarchy), and timeless (Abend 2014). Freeman (1984) and Freeman and Gilbert (1988) have put forth the only enterprise strategy classifications to date. Freeman’s 1984 classification outlined five possible enterprise strategies: (1) Narrow stakeholder strategy—maximize benefits to one or small set of stakeholders; (2) Stockholder strategy—maximize benefits to stockholders or “financial stakeholders”; (3) Utilitarian strategy—maximize benefits to society; (4) Rawlsian strategy—act to raise the level of the worst-off stakeholder; and (5) Social harmony strategy—act to maintain or create social harmony (Freeman 1984; Bowie 2017). Freeman’s classification is parsimonious, appears to be collectively exhaustive, (the “Narrow” and “Utilitarian” categories alone are capable of embracing all combinations of stakeholders) and seems to be timeless. On the other hand, several problems exist. The “Narrow stakeholder,” “Stockholder,” and “Rawlsian” strategies are not mutually exclusive. In fact, the Stockholder strategy and Rawlsian Strategy are actually Narrow stakeholder strategies. This also raises the issue of stability of the classifications. For example, one researcher could identify a firm as having a “Stockholder” strategy while another researcher might classify the strategy as “Rawlsian” if stockholders happened to be the worst-off stakeholder group. Ambiguity might also be encountered in distinguishing the “Social Harmony” from the “Utilitarian” strategy. “Acting to gain consensus

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from society” (social harmony strategy) may entail “maximizing benefits to society” (utilitarian strategy). While redefining the categories further may resolve those problems, a more fundamental issue exists: Freeman’s classification is not based on both of the key attributes of enterprise strategy. If strategy is how an organization matches its skills and competences with the opportunities (and threats) in its environment, then enterprise strategy, to be a strategy, must define the scope of the environment and how the organization uses its resources and skills to meet environmental needs. Freeman (1984), however, considers only the stakeholders and not the types of value/benefits offered. Thus, a new classification is needed.

The Components of Enterprise Strategies Stakeholder Groups and Scope Stakeholders may be defined as individuals or groups who believe they are able to affect or are affected by some aspect of firm behavior (Freeman 1984). Stakeholder groups include, among others, management, employees, stockholders, customers, suppliers, local communities, governmental bodies, and so on. In keeping with the concept of value added, our classification is built on a distinction between economic and noneconomic (social) stakeholders. Any single action of the firm may affect both types of stakeholder groups. Economic and social stakeholders are sufficiently distinct to differentiate between the roles of their members at any point in time (fulfilling the mutually exclusivity requirement). They also account for all possible stakeholder groups that interact with the organization (collectively exhaustive). The possibility of further dividing these groups suggests that the classification is capable of supporting a hierarchy. Enterprise strategies can vary widely in scope. At one extreme are firms which provide a very specific benefit to a very specific group (e.g., a small manufacturer which provides a single industrial good to one customer). At the other extreme are large conglomerates with high visibility, highly diversified product lines, and a large stakeholder population. The benefits provided by the firm may be economic, noneconomic, or some combination of both. Based on the distinction between “social goods” and “social costs,” social value can be generated by an increase in social goods, a decrease in social costs, or both, in combination. The

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long-term performance of certain types of firms may be enhanced best by focusing on reducing the social costs imposed on society. Other firms may find a strategy of increasing social benefits more effective. Still others may find that they must, at least in the short run, neglect social stakeholders and concentrate solely on economic performance. Start-up firms and firms on the verge of bankruptcy often resort to a “classical” enterprise strategy. Defensive/Narrow Enterprise Strategy A firm adopting this strategy focuses on a narrow stakeholder segment, and attempts to reduce social costs. The “defensive/narrow” firm waits until stakeholders express dissatisfaction with its actions and then seeks to appease these stakeholders by reducing a social cost. Certain defense contractors seem to have exhibited this strategy in the past. For example, scandals about defense contractors overbilling the Defense department for labor on government contracts usually resulted in this behavior being modified in order to appease stakeholders and, presumably, assure compliance with certain ethical standards in order to minimize costs to society. Defensive/Broad Enterprise Strategy These firms concentrate on lowering social costs, but they respond to the dissatisfactions of a very broad stakeholder. For example, firms, which provide only economic benefit do not serve social stakeholders, and consequently all cells along the top line which incorporate social stakeholders are excluded. The reverse is true for the bottom line. If a firm provides only social benefits, all cells incorporating economic stakeholders are excluded. Classical Enterprise Strategy A firm employing this strategy concerns itself only with economic performance. Decisions are made entirely on the basis of the “bottom line.” Such a strategy may not “legitimize” the firm in the long run, but may be necessary for short periods of time. Firms following this strategy will usually obey the law, however the social effects of business are often disregarded at times when the firm’s

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survival is in jeopardy or when the power of financial stakeholders is excessive. Start-up firms and firms on the verge of bankruptcy often resort to a “classical” enterprise strategy. Accommodative/Narrow Enterprise Strategy These firms both decrease social costs and increase social goods to a narrow group of stakeholders. Such firms are usually closely attuned to the interests of their stakeholders, in order to understand the social costs the firm generates and to attempt to improve the condition of their stakeholders. These firms are vitally concerned with the opinion of particular stakeholder groups and aggressively seek to avoid alienating those stakeholders. Nuclear power generating firms illustrate this type of strategy. Their concern for safety illustrates an interest in reducing social costs, and at the same time they seek to increase social goods by the construction of parks and other recreation facilities. Accommodative/Broad Enterprise Strategy This strategy is typical of those firms perceiving themselves as answerable to society at large for the way their operations are conducted. These firms are broad both in terms of the stakeholders they recognize and the benefits they provide. Such firms typically have a strong emphasis on corporate ethics and social responsibility—with statements to that effect often included in their charter or purpose statement. They actively seek innovations to improve social welfare and consciously attempt to minimize any social cost generated by their operations. For example, Dow Chemical promotes many products as aids to improve worldwide social conditions (creating social goods), and its concern over public opinion prompts attempts to reduce environmentally harmful byproducts from its operations. Not-for-Profit Enterprise Strategy This strategy is associated with those organizations involved exclusively in social causes, which rely on charitable contributions for survival. Such firms are typically concerned almost exclusively with the achievement of social goals; few “economic benefits” are provided to stakeholders.

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Evaluating the Classification Whether the classification is stable will depend on the degree to which a single enterprise strategy, as these are classified above, dominates the operations of a firm. The classification is parsimonious, and it is applicable to firms in different historical contexts and in different stages of development. However, the relevant question in the social responsibility versus profit debate may not be “how much do corporate social activities affect economic performance?”, but rather “how appropriate is the firm’s enterprise strategy, given its competences and stakeholders?”

The Integral Strategy The integral strategy allows us to theoretically incorporate all three variables (i.e., economic, social, and environmental) into the strategic management of a firm. Pursuit of a triple bottom line requires a triplebusiness management strategy: an internally focused values-based strategy, a competitively focused economic strategy, and an externally focused sustainability strategy. As in the traditional strategy pyramid, the tiers of the integral model must also build upon each other and be interrelated to create the most effective strategy. Key to an integral vision is the acceptance and appreciation of the diversity of all individuals, organizations, societies, and systems and to seek commonalities to further develop and aid interdependent growth. Within the quadrants, it is realized that each individual (both interior and exterior) and each collective (both interior and exterior) are currently at differing stages of development and that each progresses at a different rate. Furthermore, there is an appreciation of the vast variety of current states of individual, organizational, economic, cultural, societal, and worldwide development. The internal strategy of an organization is built upon a strong values system. Several authors have advocated values-based management (Anderson 1997; Blanchard and O’Connor 1997; Fernandez and Hogan 2002; Pruzan 1998; Schnebel and Bienert 2004). Companies built on strong values were born out of a desire to create a company that made a difference and often created an organizational environment from which employees benefited from personal satisfaction—regardless of their monetary gain (Beck-Dudley and Hanks 2003; Wicks et al. 2020).

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Hood (2003) argues that ethical orientation of an enterprise is revealed through the formal and explicit activities of business life on a daily basis. The basis of these activities is outlined by the enterprise’s accepted procedures and policies. A formal statement of the enterprise’s ethical stance is a means through which the values and ethical orientation of the enterprise are transmitted to employees. In the author’s findings, values are the point at which the individual intersects with society (Grunnert and Scherhorn 1990; Mulej et al. 2020). Hood (2003) classifies values in terminal values (desirable end-states of existence) and instrumental values (modes of behavior or means of achieving the desirable end-states). He divides terminal values further into social and personal values on one hand, where on the other hand instrumental values further fall into morality-based and competency-based values. Social values include items such as freedom, equality, and world at peace, while morality-based values include items such as politeness, helpfulness, affection, and forgiveness. Personal values include factors such as self-respect, broad-mindedness, and courage, and competency-base values include items such as logic and competence. Hood (2003) defends the opinion that enterprise success can be controlled and focused by maintaining and examining the enterprise’s ethical orientation through creating the underlying enterprise’s values. Various authors (Knights and O’Leary 2006; Molyneaux 2003; Morrison 2001) developed the term ethical leadership: development of a specific value or set of values is important for enterprise’s success including integrity, prudence, courage, temperance, and justice. Morris et al. (2002) argue that the core values of every organization need to reflect their ethical content. Thommen (2003) proposed the categorization into three dimensions of an enterprise’s credibility (responsible, communicative, and innovative behavior) considered as the “highest” value. Von Marrewijk (2004) finds that for the enterprise’s success the enterprise’s core values including order, success, community, and synergy are relevant. These four core value systems have a further strong relation with enterprise culture and enterprise climate. Garcia-Marza (2005) argues that there are interests common to all stakeholders, which in order to be satisfied demand a specific orientation in management decisions and actions. Considering this, the author proposes basic or core values that represent the corporate constitutional framework, responsible for establishing the basic rules for subsequent definition of relationships and strategies among various groups (enterprise stakeholders). In his opinion, if we eliminate any of these values,

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a dialogue will no longer represent a process of reaching agreement but will become a mere strategy or compromise, where the final outcome is decided by the more powerful side. So-called ethical core values (GarciaMarza 2005) help to establish and maintain the standards that delineate the “right” things to do from the things “worth doing” and from other types of behavior. The right ethical values influence an individual’s choices and lead to actions, which every organization supports. Some authors (Garcia-Marza 2005) believe that when the (modern) ethical values of an enterprise are widely shared among its members, the enterprise’s success will be enhanced. Victor and Cullen (1988) describe the enterprise climate as perceptions that “are psychologically meaningful moral descriptions that people can agree characterize a system’s practices and procedures.” Further on, the authors argue that the prevailing perceptions of typical organizational practices and procedures that have ethical content constitute the ethical work climate. In their opinion, ethical climate is conceptualized as a general and pervasive characteristic of an organization, affecting a broad range of decisions. Ethical climate therefore “informs”/influences members of the organization what one can do and what one ought to do regarding the treatment of others. Emotional, social, spiritual, ethical, moral, philosophical, psychological, and other interior individual values are missing from traditional strategic models, such as those of Porter, Mintzberg, and other models of strategic competitive positioning. A value can be defined as “an enduring belief that a specific mode of conduct or endstate of existence is personally or socially preferable to an opposite or converse mode of conduct or end-state of existence” (Rockeach 1973; Von Marrewijk 2004). Values guide an individual’s behavior, actions, and judgments (Rockeach 1973) and, therefore, are important in understanding strategic decision-making. Not only are values fundamental in understanding individual behavior, but also in understanding organizations (Katz and Kahn 1978). Values drive organizational culture (Schein 1992). Wilber’s integral theory allows integration of economicoriented industrial organizational theories of strategic management with human, interaction-oriented, sociological theories of strategic management. By extending the configuration strategy (Mintzberg et al. 2003), we can expand the identity of the organization beyond the archetypes we now use such as integrators to include social, spiritual, and environmental practices. Strategy can become a narrow configuration of ideal archetypes

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that are one-dimensional. Our contrasting view is best described by Waddock (2006), “A company’s level of awareness or consciousness represents a wholly different domain of development, which can generally be characterized as how progressive the company is.” Progressive companies increasingly incorporate numerous strategic approaches, which transcend economic considerations. Such companies supplement economic views of strategy and competition with an awareness or consciousness that human development and strong corporate values are a critical component of competitiveness. Similar to Collins (2010), our view of strategy allows for the inclusion of ethical behavior and spiritual transcendence as contributors to superior financial performance. Landrum and Gardner (2012) argue that an integral theory of the firm will draw upon theories in strategic management, organizational behavior, human resource management, organizational theory, economics, political science, sociology, moral philosophy, and other disciplines to help us understand firm performance.

Integral Strategy Model While many organizations are addressing these three tiers of strategy— internal, economic, and external—it is necessary to view them as interrelated and as one larger initiative to create sustainable competitive advantage. This model of integral strategy allows us to theoretically incorporate all three variables (i.e., economic, social, and environmental) into the strategic management of a firm. Pursuit of a triple bottom line requires a triple-business management strategy: an internally focused values-based strategy, a competitively focused economic strategy, and an externally focused sustainability strategy. As in the traditional strategy pyramid, the tiers of the integral model must also build upon each other and be interrelated to create the most effective strategy.

Tier 1: Internal Strategy: Values-Based Strategies We refer to Tier 1 of the integral strategy as the internal strategy. When we combine interior and exterior individual quadrants to create a focus on the internal development of individual employees, we have effectively created the first tier of a three-tiered integral strategy. Companies built on strong values were born out of a desire to create a company that made a difference and often created an organizational environment from

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which employees benefited from personal satisfaction—regardless of their monetary gain (Beck-Dudley and Hanks 2003; Abend 2014). Aristotle in Nicomachean ethics proclaims happiness as an ethical virtue, and happiness as wealth or pleasure is not part of virtue. “Happiness is a virtue” (p. 20) is the “most choiceworthy of all goods” (p. 15). Striving for a life of pleasure is “a life for grazing animals” (p. 7). “The money-maker’s life is, in a way, forced on him, not chosen for itself; and clearly wealth is not the good we are seeking, since it is merely useful, choice-worthy only for some other end” (p. 8). Examples of such environments are well described by Meyerson and Scully’s (1995) concept of tempered radicals (Meyerson 2001, 2003); Ray and Anderson’s (2000) concept of cultural creative; and Csikszentmihalyi’s (1990) concept of flow. All of these authors demonstrate there are employees who serve as agents of positive social change within their organizations. While profit is a measure of achievement, it is not a corporate value. Rather, corporate values allow employees to develop their mind, body, and soul, creating an environment and culture which nurtures the employee to aid in personal growth and fulfillment. A corporate values system, strategically planned, implemented, and perpetuated just as any other part of the strategy can effectively aid in seeking a sustainable competitive advantage. The ideas included in the values-based management approach of today have evolved from deep skepticism 20 years ago to growing acceptance and awareness today. We feel values-based management approaches are on the verge of being embraced in contemporary management practices.

Tier 2: Competitive Strategy: Economic-Based Strategies While the mindsets of corporate business executives are economically driven within the realm of these competitive strategies, their Tier 2 approaches deeply embed their Tier 1 values to set a standard and example within the industry. Tier 2 strategies allow the company to compete in a way that showcases its strong values system and raises the standards within its industry. Leading companies are replacing traditional corporate citizenship practices with a more strategically integrated model operationalized throughout the organization (Porter and Kramer 2002; Rochlin and Googins 2005).

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Tier 3: External Strategy: Social & Environmental Sustainability Strategies The social sustainability strategies seek to address the impact a company has in resolving pressing social issues thus improving the quality of life for humankind. Social impact strategies can address global issues (for example, poverty, HIV/AIDS, population growth, healthcare, education, peace); industry issues (such as forced labor or genetically modified foods); national issues (such as obesity); or regional and local issues (such as literacy or job skills). The environmental sustainability strategies seek to address the impact a company has in resolving issues related to natural resources and the natural environment (such as resource consumption and depletion). The desired outcome is to engage individuals, companies, and societies beyond the traditional economic industry boundaries and enlist them in creating systemic change for the betterment of human and natural world (Bowie 2017). A management view that incorporates social and environmental sustainability is also shared by others, such as the World Wildlife Fund and Sustainability reports which state the need to “transform the system governing markets so that they work for, rather than against, sustainability” (World Wildlife Fund 2007). The Global Compact Challenge addresses the need to focus initiatives on “achieving critical mass across all industry sectors, and (which) are connected to wider public policy efforts that address the root cause of the problems” (SustainAbility Ltd 2004).

Possible Misinterpretations of Integral Strategy Past research has viewed Corporate Social Responsibility (an exterior collective initiative) from a resource-based view (RBV), but only viewing the particular Corporate Social Responsibility (CSR) initiative as a bundle of resources (McWilliams and Siegel 2001; Russo and Fouts 1997). Corporate Social Responsibility and sustainability strategies comprise only a single piece of the puzzle in the company’s bundle of resources. From a resource-based view, the CSR effort is transparent and can be easily imitated (Reinhardt 1998; Nelson 2006); therefore, CSR alone should not be misinterpreted as the bundle of resources. If we took seriously the idea that strategic management and business ethics are inseparable, this captures the essence of our objective: to reenergize a dimension of management research that seeks to combine the

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two fields, inherently embracing the relevance of one to the other. Such an approach recalls Freeman and Gilbert, who asserted that “ethics and strategy go together, and we need to tell a radically different story about organizational life to connect these concepts” (Freeman and Gilbert 1988; Sandel 2012). Grant (2008) was suggesting that business is about creating value. The value added created by firms is distributed among different parties: employees (wages and salaries), lenders (interest), landlords (rent), government (taxes), and owners (profit). In addition, firms also create value for their customers to the extent that the satisfaction customers gain exceeds the price they pay (i.e., they derive consumer surplus) (Grant 2008; Satz 2010). The emphasis on value creation in both the strategy and ethics literatures—along with the growing interest in the measurement of stakeholder value creation—reflects a convergence between the two fields.

Stakeholder Theory Stakeholder theory has advocated for the convergence of strategy and ethics for quite some time, and although much of its development has occurred in the ethics literature, it has recently attracted a great deal of recent attention from a broader community of management scholars (Chandler and Rindova 2008; Darnall et al. 2009; Mahoney 2009; Zollo et al. 2009). Harrison et al. (2010) pursue stakeholder management’s role as a source of competitive advantage. In the ethics literature, the development of stakeholder theory has reached a complementary point. Jones et al. (2007) examine firms with “limited morality” vs. “broadly moral” “stakeholder cultures.’’ Establishing to whom the firm has obligations, and to whom they orient themselves, has recently enabled further, more specific work, on the content of those obligations (Goodstein and Wicks 2007; Wicks et al. 2020). These works emphasize the reciprocal relationship between corporate and stakeholder responsibility—and the value created by responsibility when stakeholders value responsibility— which, like much of the other recent stakeholder work, emphasizes the fundamental role of ethical values in strategy.

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Managerial Discretion Strategists and organization theorists, on the other hand, have explicitly recognized that the managers face varying levels of discretion—and that stakeholders in particular might act as a constraint on that discretion. Constraint exists whenever an action lies outside the “zone of acceptance” of powerful parties who hold a stake in the organization; extending the concept to other types of stakeholders, one can think of board members, bankers, regulators, key employees, customers, as well as other parties, as all having their own zones of acceptance (Phillips et al. 2010). Diverse theoretic contributions have, however, explicitly examined stakeholder behaviors that tend to restrict managerial discretion (Eesley and Lenox 2006; Frooman 1999; Reid and Toffel 2009; Rowley and Moldoveanu 2003). Instigating an entire stream of research on the question of whether, and how, environmental responsiveness might improve the financial performance of firms (King and Lenox 2002) has now emerged, under the broad umbrellas of strategic management and business ethics—both from a stakeholder perspective and as a context in which to study industry self-regulation. This stream of research was also linked to the resourcebased view suggesting that environmentally friendly capabilities are difficult for competitors to imitate. Recent works approach this relationship more contingently, examining the conditions under which environmental performance provides competitive advantage for firms (Tomaskova and Kanovska 2019). The work on strategy and the natural environment also constitutes a debate about the role of coercion and regulation in environmental performance. Different studies argue for the relative superiority of formalized state-sponsored regulation, environmental entrepreneurship and industry self-regulation (Dean and McMullen 2007; York 2008). Comments Business codes are a widely used instrument. However, the surveys on the efficiency of such instruments show contradictory results (Kaptein and Schwartz 2008). The efficiency degree of any code of ethics has to be measured accordingly to the expectations of stakeholders and taking into account the possible existence of external codes of ethics (Kaptein and Schwartz 2008; Mulej et al. 2020). The ethical climate refers to

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the share perception of what is ethically correct behavior. The ethical standards can be identified as the maximization of self-interest (egoism), maximizing the interest of many people (benevolent) and the adherence to a universal standard of belief (principle). The source could be employee’s self-determined ethical beliefs (individual), the organization’s standard and policies (local), or organizational (cosmopolitan) code of ethics. There are differences between corporations that have a code of ethics and those that do not have that instrument. Unethical accounting practices still is the problem. Due to that, ENRON lost $24 billion in 2001, and it was closed. The accounting firm, Arthur Anderson, which supported ENRON, also closed down. Sarbanes–Oxley act of 2002 could not stop the unethical behavior of the Wall Street companies as the “Occupy Wall Street” movement of 2011 demonstrated. Unethical behavior of the Wall Street companies caused the financial disaster of 2008. The great occupation of the Wall Street companies by China recently caused the near-death of democracy in the USA with the corrupt practices in the 2020 election for the presidency of the USA. The role played by the media and the social media in particular to kill democracy in the USA is well exposed now. Discrimination, on the basis of race, color, sex, and wage inequality, affects employees and employers all over the world. Unethical behavior of large multinational drug and chemical companies in collaboration with the corrupt political leaders of various countries are very well known. On the pretext of developing the polio vaccine, Bill Gates recently made at least half a million children in India and Kenya invalid for the rest of their lives but the political authorities in India and Kenya took no action against Bill Gates. According to the World Food Programme, a quarter of a billion additional people will be pushed to hunger and 300,000 could die everyday as a direct result of the “lockdown” suggested by the World Health Organization, controlled by China. According to UNILO, 1.6 billion informal economy workers out of a worldwide total of two billion and a global workforce of 3.3 billion, have suffered damage to their capacity to earn a living. Killing cannot be a prescription for saving lives. Microsoft got a patent, patent WO 060606, by the World Intellectual Property Organization (WIPO), which is an intellectual property claim over our bodies and minds. Thus, political corruptions encourage and support business corruptions and no amount of ethical codes can stop this evilness, as

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most international organizations are mute spectators of these unethical behaviors.

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CHAPTER 5

Japanese Management System

Japanese Management System is unique but it was not yet appreciated in the West. One can visit a major Japanese company in Japan or in any other country and one will be overwhelmed to see the differences. The Japanese Management System is the product of Japanese social culture and consists of some visible and invisible elements which create human ware (Shingo 1985). The visible elements are: (a) production and operations managements in which Keizan or continuous improvement and lean production system (Liker and Morgan 2006) are the most important element; (b) employment relations and importance of Jinjibu or the human resources management department; (c) emphasis on overall equality of treatment of all employees. Japanese system of management is a complete organizational philosophy, which can affect every part of the enterprise. There are three basic ingredients, which are interlinked: a lean production system, total quality management, and human resources management. The invisible element is the culture, which sustains these visible elements. Competitive advantages come from the Keiretsu system, in which all interrelated firms are moving together with the main firm and the main bank. The firm’s profit motives and self-interest become secondary to the community feeling and cooperation. A recent example is a taxdispute of a Japanese company in India with the Government of India. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 D. Basu and V. Miroshnik, Ethics, Morality and Business: The Development of Modern Economic Systems, Volume II, https://doi.org/10.1007/978-3-030-68067-1_5

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All Japanese companies stopped their investments in India until the case was solved in favor of the Japanese company in 2016. The Japanese companies are linked all over the world through cross-share ownership, common banking, trademarks, technology transfers, and preferential inter-firm trading (Kosumi 2000). Major benefits of this system are that it enhances trust, collectivism, and a sense of interdependence among employees, loyalty to stimulate corporate performance. Toyota Motor Corporation is the model for the Japanese companies. Its management system is followed by all companies as far as possible. Thus, in order to understand the Japanese management system it is essential to analyze the Toyota management system.

The Toyota Production Management System Toyota Motor Corporation, which had started as a subsidiary of General Motors of the USA in 1936, is now a global company. To the employees of Toyota the company is a living entity. Continuous progress and mutual respect are the ultimate objectives of the employees of Toyota, whose corporate objective is perpetual growth and continuous improvement. The then the President of Toyota in 1995, Shoichiro Okuda said that his task is “to encourage a change in nationality through gobalization— to transform the Toyota Motor Corporation into Toyota, a company with a world nationality” (Okuda 1995). Respect for the employees and their suggestions for improvements are designed to promote long-term success of the organization, and harmony in the workplace and social environment. These feelings lead them to develop a family feeling within the workplace, and responsibility toward their fellow employees and the community at large. Irrespective of location, Toyota and other Japanese companies strive to install these values into the employees across the globe, creating organizational citizenship, which will carry the essential values of Japan within a global organization. The fear of loss of face due to non-achievement of the objectives by the employees is the motive for Toyota’s efforts to mold every employee irrespective of their nationality into a company citizen. Managers in Toyota use the “Ten Management Principles” of Tadashi Yamashita (President of the Toyota Technical Center) as a guideline: 1. Always keep the final target in mind. 2. Clearly assign the tasks to yourself and others.

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3. Think and speak on the basis of verified, proven information and data. 4. Take full advantage of the wisdom and experience of others to send, gather, or discuss information. 5. Share information with others in a timely fashion. 6. Always report, inform, and consult in a timely manner. 7. Analyze and understand shortcomings in your capabilities in a measurable way. 8. Relentlessly strive to conduct Kaizen activities. 9. Think outside the box or beyond common sense and standard rules. 10. Always be mindful of protecting your safety and health. Total Quality is a philosophy that runs through every aspect of the business, where quality is the responsibility of every single person of the organization. Quality standard and targets are set in all areas, individual workers have the power to stop the entire production line if he/she can detect any defects or inclusion of any defective component in the production process. Results of quality evaluations are regularly reviewed and fed back to improve individual process. Personnel management has the objective to create mutual trust and cooperation between all people within the production system, which depends on quality rather than to “inspect and rectify.” Workforce is divided into teams and they meet regularly to discuss any problem and how to improve the production system. There are common terms and conditions of employment for all the staff. For example, everyone is salaried, there are no time clocks. The sickness benefits scheme, private medical insurance, performance appraisal system, and canteen are the same for everyone irrespective of ranks and position. Toyota believes that high caliber, well trained, and motivated people are key to success. Lean Production System is described in Table 5.1. We analyze below the detail of this system (Basu and Miroshnik 2014, 2019). Kaizen: Constant striving for perfection or Kaizen is the overriding concept behind good management, in which the production system is being constantly improved. Perfection is the only goal. Involving everyone in the work of improvement is often accomplished through quality circles. These are activities where operators gather in groups to come up with suggestions on possible improvements. There are schemes

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Table 5.1 Lean production system

Fundamental Principles Multifunctional teams Vertical information system No indirect resources Networks Manufacturing System Continuous Engineering innovation Keizan Just In Time Total Quality Management Decentralized Information System Cross-functional Teams Suppliers involvement in procurement Zero defect Pull instead of Push Importance of Jinjibu or the Human Resources Department Distribution System Global network Customers involvement Source Katayama and Bennet 1996; Shingo 1985

for implementing suggestions, rewarding employees, and feeding back information on the status of the suggestions. Zero Defect : In order to attain high productivity it is essential that all parts and products are fault-free from the beginning. The goal is to work with products that are fault-free through the continuous improvement of the manufacturing system. Thus, zero defects denote how a lean company works in order to attain and improve quality. In a lean production system, it is important to move toward a higher degree of process control. Each process is controlled through knowledge gathered about the parameters of the process. Thus, instead of controlling the parts produce, the process is kept under control. The idea is to prevent defects from occurring by discovering errors that can lead to defects. A lean production system uses “autunomous defect control,” which is an inexpensive means of conducting inspections of all units to ensure zero defects. Quality assurance is the responsibility of everyone. The identification of defective parts is the responsibility of workers, who are allowed to stop the production line in the event that defective parts are found. Responsibilty for repairing the defective parts is delegated to workers.

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Team based Manufacturing : Manufacturing tasks are organized into teams. This makes the workers more aware of the need to manufacture only fault-free parts. An important reason for this improved awareness was that the physical contact between manufacturing stages allowed better communication. Largely through the use of teams, workers found it beneficial to have the responsibility for correction resting with that part of the process where the error had occurred. Through the use of statistical process control with tests after each part of the process, the company can gain better control over its production process. Just in Time: The principle of Just in Time, means that each process should be provided with the correct parts, in the correct quantity at exactly the correct time. The ultimate goal is to minimize the total time required to complete the task. It is possible to have different levels of Just in Time. First, there is the case where parts are moved between different processes in lots. Second, parts are differentiated according to product variants. Third, there is a sequential Just in Time, where parts arrive with reference to the individual products on the line of production. For example, car seats may arrive at the assembly line in the exact order in which they are needed. In general, the higher the level of Just in Time a company can master, the better. However, sequential Just in Time is not always needed. It varies depending on the nature of the products. When the products are standardized and relatively inexpensive, it may not be too important to achieve the highest level of Just in Time. Pull Instead of Push: The scheduling of materials is closely related to the principle of Just in Time. Before starting to implement lean production in a company final assembly is made to customer order. In all other stages of the manufacturing process, production is according to a forecast. Gradually, the number of manufacturing stages producing to customer order has to be extended. Thus, somewhere in the material flow is a point where pull meets push. Behind this point, backward requests are used. Ahead of that point there is forward scheduling. This may create difficulties in stock-out or large stocks at this pull-push point due to the difficulties in making correct forecasts. Multi-Functional Teams : The most important feature of the organizational set-up of the Lean Production System is the extensive use of multifunctional teams, which are groups of workers able to perform many different functions. The teams are organized according to a cell-based production flow system. Due to the rotation of the tasks in a team the

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increased flexibility reduces the vulnerability of the production system. The number of job-classification also declines. Workers receive training in a number of tasks, such as statical process control, quality control instruments, computers, set-up performance, and maintenance. They also have to be trained in a number of functional areas such as materials management, purchasing, maintenance, and quality control. The company has to rotate the workers among tasks frequently. Decentralized Responsibilties : In the Lean Production System responsibilities are decentralized. There is no supervisory level in the hierarchy. The multifunctional team is expected to perform supervisory tasks. This is done through the rotation of team leadership among the workers. As a result, the number of hierarchical levels in the organization can be reduced. The number of functional areas, that are the responsibility of the teams, increases. People who are not required as a result of the reduction in the requirement for indirect control normally move to other areas because in the Japanese system the company has no lay-off policy. Vertical Information System: In a multifunctional setup it is vital to provide information in time and continuously in the production flow. Information can be of two types: (a) strategic information about the overall performance and plans of the company; (b) operational information about the performance of the teams, quality, productivity, lead times, and other factors in the production process. Operational information is needed more frequently than strategic information about market plans, production plans, process development plans, and financial performance.

Sociological Explanation Behind Japanese Management System Japanese regard individuality as evidence of immaturity and autonomy as the freedom to comply with one’s obligations and duties (Fox 1977). According to Fox (1977), the “traditional Japanese male employee is born into an intricate web of obligations and relationships” in which workers “blend selflessly into a system”. This socially committed male is chosen from graduates of the best universities to become manager in a Japanese company for life. As a Japanese manager who abhors unpleasant faceto-face confrontations and discord, he will manage through a system of apparent consensus building.

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Fox (1977) describes the Rinqi system as a process in which a proposal prepared by middle management is circulated to affected units of the organization for review, revision, and approval. When each unit has attached its approval seal to the proposal, it goes to the appropriate higher level authority for final approval and implementation. Although the system involves numerous group meetings and much delay, once final approval is granted, the organization owes surprisingly quickly to implement it. Fox claims that this system should be labeled “consensuat understanding” instead of decision-making by consensus. Fox believes the Rinqi system is not true decision-making by consensus; he does believe the system nurtures commitment. Tsurumi (1978) takes a more critical view and characterizes the decision-making process inside Japanese corporations as “personality-based.” He claims that “the art of consensus-building is to sell ideas and decisions to others.” The seniority system supported lifetime employment, motivating workers to remain in the company and cementing their loyalty while discouraging experienced workers from changing jobs. Secondly, due to the inadequacy of the postwar education system to the needs of Japanese companies rapidly implementing new technologies, the seniority system supported and rewarded the gradual accumulation of competence within the company. Third, the seemingly irrational wage levels of the oldest workers were justifiable in the context of a complete lack of adequate public pensions and retirement systems. Enterprise union (kigyô betsu rôdôkumiai) constitute the third pillar of the classical definition of Japanese management. Above all we have to accept harmonious cooperation between the union members and management and the membership of mid-level managers in the union. Seniority-based wages (Nenko joretsu chingin gata), constitutes the second pillar of Japanese management, and is inseparably linked with lifetime employment, which is disappearing in the context of the current stagnation of the economy. William Ouchi (1981) added a new concept of hidden mechanism of control, which he called clan culture. Referring to the existing typology, Ouchi proposed a typology of organization, referring to the Japanese organizations as type J, American organizations as type A and organizations using a blend of the two styles as type Z (Pascale and Athos 1981). Japanese management philosophy could be best characterized by a focus on the human factor. The basic assumption is that the skills and experience of its employees constitute the main assets of the company, as opposed to capitalism, in which the capital is the most important asset.

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The important aspect of Japanese management is the strategic level. It contains three mutually complementary business strategies, namely, development of community, the internal labor market, and human resources development. The strategy of the company as a community takes into account the cultural aspects of Japanese management, such as common values and interests, harmony, collectivity, and egalitarianism. The internal labor market strategy refers to the specific tendency of Japanese management to acquire, isolate, and protect key human resources. The level of organizational practices is another important aspect of Japanese management. As in Schein’s model of culture, in which artifacts are secondary to values and assumptions, we propose that management practices should be treated as mere outcomes to strategy and philosophy. One of the key features of the Japanese society is the fact of belonging to a group. Indeed, the Japanese will almost always describe their social status by referring to a particular structure (group, company, etc.) rather than by explaining their own role (Nakane 1973). That is to say, when a Japanese introduces himself, he will usually put emphasis on the organization he works for rather than on the position he has in it. At work, it seems that people exist in the eyes of each other’s thanks to and through their membership to a group rather than by their own individual personality. As a consequence, when one meets a new person in an important meeting, the best thing one can do is having someone escorting him and personally introduce him to the new person. When one can’t do that, it is good to go prepared with references and names of people who are known by each other. Indeed, in Japan, the personal network is even more important than in the Western countries (Patrick 1976). Modesty is also a very respected quality in Japanese culture where successful people defer the recognition of their individual performance and cite the group as the source of it (Nakamura 1995). In Japan, in private as well as in business life, collectivity is highly valued. Collectivism could be explained as follows: individuals can expect their relatives or members of a particular in-group to look after them in exchange for unquestioning loyalty (Sugimoto 2003). In that respect, the Japanese society is one of the most collectivist societies in the world (Shinohara 1982). Japanese would not really care if they win or lose, as long as they were acting in unison. Aiming for the same goal is of supreme importance (Smith 1983). The harmony inside the group is also really important and groups should remain relatively stable. It is important for everybody to avoid

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an uncomfortable situation or somebody to lose face. The Japanese will always try to search for consensus which will protect them against humiliation toward the group, considered as the worst thing that could happen (Fukukawa and Moon 2004). Harmony is of course the most desired condition in most companies but it is particularly true in Japanese companies where, without this harmony, people can’t work effectively (Yamamoto 1992). An individual who disagrees too strongly or insists on maintaining a different opinion disrupts the harmony of group consensus and may be thought to be immature. Trust in the group is a matter of reliability, commitment, and sincerity. It is determined by the willingness to systematically identify oneself with the goals of the group. One slowly builds the backbone of relationships through working together and granting favors to each other, before being accepted into the group. Those granting favors imply obligations which will be covered later on. These social skills combined with the ability to facilitate a discussion or ease tensions within the group, are highly valued skills in Japan (Sugimoto 2003). Japanese are known to be hard workers and to spend a lot of time at work. A consequence of this is that many groups are created at work. In Japan, work friendships are often integrated into the private life. It is thus frequent to keep in touch and to meet with colleagues after the working time. “Uchi” (being on the inside) and “soto” (being on the outside) refer to the perception Japanese have of in-groups and out-groups (Smith 1983). Of course, all societies have norms dictating how individuals belong or not to different groups. However, a difference between Japan and many other societies is the strong rigidity of the boundaries between groups. Indeed, it is much more difficult to move between in-group and out-group status in Japanese organizations (Nakamura 1995). “Giri” is another important concept to understand Japanese society; giri is the moral force that pushes Japanese to enter the socially expected reciprocal activities. It is also often translated in Western culture as a “burden of obligation.” If parties don’t fulfill these expectations, it will result in a loss of trust and support, not only from the party engaged in the activity, but also from any observers. It is thus very important to remember every favor, no matter how small or insignificant they are, in order to calculate the appropriate reciprocation (Yamamoto 1992). Kaizen is the most prominent Japanese management practice. It refers to continuous improvement and the idea that any managerial process can

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be perfected. Kaizen is not so much a detailed management practice but a philosophy that should be lived and implemented by every member of a Japanese firm, from the top management to the shop floor. The idea of kaizen does not include radical changes, such as job cuts, but mostly consists of small changes, often on a daily basis, and is based on constant communication with other group members. • The 5S system is a system consisting of five concepts that begin with the letter “S” in Japanese: seiri (sort), seiton (set in order), seiso (clean), seiketsu (systematize), and shitsuke (standardize). The 5S system is an organizational system for production processes. • Quality circles are a means of quality management in the Japanese firm. They support employees in contributing their own ideas. • Genchi genbutsu refers to inspection at the level of the shop floor. In doing this, Japanese employees can find solutions for problems at the actual place where they occur. The Japanese worker also has a need to belong. To fulfill this need he is willing to subordinate himself to the higher collective goals of the firm. The Japanese equivalent of the Protestant work ethic lies in the concept of sacrificing personal interest for the organizational good. Individualism is encouraged in Western society, but just the opposite within the Japanese culture. In Japan, “being a unique person is often assumed to be bad because being unique implies that one is not well balanced …. The most important aim is not the individual good; rather it is trying to keep harmony. Maintaining harmony within a group is of paramount importance in all Japanese relations. The notion of ‘saving face’ stems from this, as it is considered highly improper to embarrass an individual” (Yamamoto 1992; Sugimoto 2003). Subordinating individual tastes to the harmony of the group and knowing that individual needs can never take precedence over the interests of all is repellent to the Western citizen. But a frequent theme of Western philosophers and sociologists is that individual freedom exists only when people willingly subordinate their self-interests to the social interest. Japanese productivity and quality at the workplace are enhanced by this group orientation. In addition, the Japanese worker is even more conscientious and diligent because many Japanese believe in their work

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as the highest self-fulfilling goal for them to attain. Japanese workers do regard their work as the most important part of their overall lives. They view their company as an extension of their family life. Many of them equate the importance of their company with that of their own life. While holding their work in such esteem it is clear as to why the quality of Japanese workmanship is so high. In Japan, work is not considered to be an infringement on human freedom. The Japanese believe that to work is to live and that at work one establishes identity. Neither blue or white-collar workers consider their interests to be opposed to those of the company; a worker’s salary and bonuses reflect the company’s success. This same attitude is reflected in other facets of the Japanese work environment. To the Japanese worker delays are something to be ashamed of and might cause problems for others. The concern for others is also a reason why the Japanese worker will not take all his allotted vacation time. The workers hate to inconvenience their colleagues in the office. The long-term view in Japan is also supported by managers who expect to spend their entire career with a single firm. Because of this, the goal of those at the managerial level is not to dazzle shareholders with short-term profits, but to ensure the stable long-term growth of the company. In Japan no one individual carries responsibility for a particular task. Rather, a group or team of employees assumes joint responcibility for a set of tasks. The overriding principle of the Japanese principles of management is: they treat employees as human beings. Each employee is part of the “family.” Each employee gets a chance to participate in company decisionmaking, through quality circles, if not otherwise. This apparently has built a great sense of company loyalty in the employees. “Japanese labor unions are organized on a company-by-company basis encouraging a strong sense of sharing the fate of their company. This sense is reinforced by the fierce competition among industries for a bigger market share” (Nakamura 1995). As a rule, the physical structure of major Japanese offices is a large open space. An entire group of white-collar workers, belonging to one business division, work at desks with no partitions. This environment encourages constant human contact and intimacy between superiors and subordinates, and among subordinates themselves. Because of the large amount of exposure to managers by the Japanese workers, the Japanese boss is more of a mentor.

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The employees of Toyota Motors in Japan are a good example. Every year Toyota Motors is getting about nine suggestions for improvements per employee and is adopting more than eighty percent of them. By contrast. General Motors gets less than one suggestion per employee per year and adopts less than a fourth of those received. Not only are Japanese companies getting more suggestions, but they are getting better ones. The Japanese managers consider workers to be not tools, but individuals with great potential for creative input. Informally, the Japanese have been able to mesh their employees by requiring all workers, at all levels, to wear the same work clothes, eat in the same cafeteria, and use the same restrooms. This has been done in some Japanese subsidiaries in the USA and in the UK. Some of the American or British workers feel uncomfortable with the conformity, but Japanese Executives are respected for sharing the same work conditions. This earned respect has fostered a more dedicated workforce, thereby increasing productivity. The guiding ethos of Japanese industry is the ongoing search for quality and productivity improvements. When an idea is implemented that results in better productivity or product quality, the search begins anew for a successor idea. This process never ends. The shared responsibility between managers and workers, along with consultative decision-making, help to support this constant re-examination of the production process. The real success of the Japanese is not founded on some magical formula, but rather on a methodical pursuit of improving productivity in manufacturing practices. Says Masao Kanamori, president of Mitsubishi Heavy Industries, “The existence of our company would be impossible if we failed to reassess our performance in quality, production and cost.” Japanese realize that they must constantly reassess their goals if they are to compete in the long run (Tanimoto 2009). Japanese business leaders believe in making investments that may seem risky in the short-run, as long as they look profitable in the long run. Ouchi (1981) cites seven characteristics which describe the Japanese style: 1. Lifetime Employment 2. Slow Evaluation and Promotion 3. Nonspecialized Career Paths 4. Implicit Control Mechanisms 5. Collective Decision-Making

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6. Collective Responsibility 7. Wholistic Concern. Hatvany and Pucik (1981) have developed a three-tier model of Japanese management concentrating on human resource management, rearranging several of Ouchi’s characteristics. 1. Focus: Emphasize human resource management through Jinjibu, the human resource management department, which has the supreme importance in Japanese companies. 2. General Strategies: Develop an internal labor market, articulate a unique company philosophy, and engage in intensive socialization.

WA: The Path to Consensus The concept of wa, or “Peace and Harmony” has been considered as the distinct idealogical characteristic that helps to explain the accomplishments of the Japanese. This concept of peace and tranquility in behavior and thought may have originated in the native religion of Japan, or Shinto. Shinto, or The Way of the Gods, is an ancient body of beliefs which identifies the Japanese as descendants of a group of heavenly beings, that all men and all things are spiritual brothers, that both spiritual and physical harmony is necessary to keep man and things right with the cosmos (Ikegami 1995).

Leadership Japanese leadership is highly participative. This participative style is based largely on the Japanese companies’ ringi method of decision-making and their intolerance for deviation from decision based on consensus. Such participation and shared responsibility are evidenced in cohesive work group and quality circles. Quality circles are groups of workers who meet regularly to solve problems and improve quality. An understanding of the importance of the relationships in these work groups and of the manager’s role in the group is central in order to understand Japanese leadership style. Moreover, in this participative context, managers often

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look to subordinates for advice, and managers are expected to be transformational which is to raise the aspirations of subordinates and to secure their respect and faith. The use of “quality circles” has created a number of advantages for many Japanese organizations. Yamamoto (1992) has claimed that quality circles, which have been used by many Japanese multinational companies such as Toyota, Mitsubishi Motors Corporation, Toshiba, and Komatsu have improved the technical skills of the employees and reduced defect rates. At Toyota, workers are organized in teams that take full responsibility for some production activity, as opposed to each worker specializing in some repetitive task. The team members are able to handle various tasks. They have job security and are paid according to their seniority, not by what job they are currently doing. They strive continuously to improve the product and the process. Guided by high standards, workers will stop production of their component at any time an error occurs, instead of hiding the error and letting it get embedded in the final product, only to be later corrected at greater expense. The workers use the error as an occasion to unearth the error’s fundamental cause so that it would not happen again (Nakane and Oishi 1990). Japanese have a sense of unlimited commitment to their responsibilities and, accordingly, the proverbial “passing the buck” namely, transferring or pushing responsibility to someone else, is unusual in mainstream Japanese industrial organizations. In addition, group participation involves suppliers, which can enhance core competencies. Companies carefully select their suppliers and plan to involve them in long-term commercial relationships. The close relationship with suppliers has created core competencies for companies as through timely information received from all suppliers, production speeds can be increased, and companies are able to detect production defects faster (Shinohara 1982). As suppliers are an important asset to the company, Japanese managers tend to maintain cooperative, long-term relationships with them. This has been exemplified by major companies such as Toyota and Mitsubishi Motors Corporation, which have maintained a long-term relationship with their suppliers for a number of decades (Nakamura 1995). Further, retailers or dealers participate in the development of products based on their experience in hearing what customers want. Companies use this information as an additional source to improve the technology or other important features in creating a new product (Sugimoto 2003).

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Participation is often used to make an employee feel like he or she Is taking part in the decision-making process even if the employee’s input does not actually have an effect on the process. Pascale and Athos (1981) reinforces the similarity in decision-making style between American and Japanese managers in an extensive study of communication practices in U. S. and Japanese corporations. Managers in Japanese firms engage in over 30% more face-to-face contacts each day than do managers in U. S. firms. In addition, Japanese managers score themselves higher on decision quality and substantially higher on implementation quality than U. S. managers, yet, there is no significant difference in the style of decision-making used by Japanese and American managers. Japanese managers do not use a consultative decision-making process more often than American managers. Pascale argues that the Japanese managers’ tendency to use more face-to-face contacts is more efficient because the Japanese language does not lend itself to mechanical word processing. In addition, face-to-face communication is encouraged by the crowded Japanese work setting in which many levels of the hierarchy are located in the same open work space. Thus, the nature of the Japanese language and the work setting may be the major determinants of the Japanese manager’s communication style. This face-to-face style, in turn, leads to higher perceived decision quality and higher perceived implementation quality. The dominance of face-to-face communication may account for the perception that there is more openness about major decisions in Japanese firms and more desire to explore and learn together (Collins 1997). While Japanese managers are not actually using a consultative decision-making style, they are talking to their workers a great deal. This increased faceto-face contact is interpreted by observers of the system as openness. No matter how decisions are actually made within Japanese corporations, there is no doubt that Japanese companies are highly successful. McMillan(1980) attributes the phenomenal success of Japanese industry to high productivity due to the “best technology-oriented hardware which combines the newest processes available, an emphasis on quality control and cost-volume relationships, and, where necessary, automation and robot technology”(McMillan 1980). Fox (1977), on the other hand, takes a more humanistic approach to the success of the Japanese system. He claims that the Japanese system has accomplished so much due to “dedicated, self-sacrificing workers, added by a sense of urgency.”

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The differences between:U. S. and Japanese management are summarized in the following conclusion of McMillan (1980): Regarding employment system Japan has a system of career oriented long term system; in the USA the system is short term market oriented. Regarding management values, Japan prefer harmony and consensus, whereas in the USA it is openness and accountability which are preferable. Regading management style Japan has perfectionism in long term and paralysis in the short term whereas in the USA the managent style is action oriented with short term horizons. Regarding work values in Japan there is collective responsibility but in the USA there is individual responsibility. Regarding control processes Japan has implicit and informal control whereas in the USA the control process is explicit and formalized. Regarding the learning system Japan has company training and internal consultants. The USA instead there are external consultants and universities.

Sociological Foundation of Japanese Management System Jacobs (2010) wrote, that Max Weber (1905/1992) claimed wrongly that whereas Protestantism fostered the proper ethic to spur capitalism, the religions of East Asian nations did not. Weber was correct in concluding that hard work, asceticism, and a strong entrepreneurial spirit were necessary preconditions to capitalism, but he was ignorant about Asia. However, what he was incorrect about was Japan’s ability to develop such an ethic. This was curious, because in his time, Japan was the world’s most economically and technologically advanced East Asian nation. Its incredible economic rise and success since the late-niineteenth Century has provided further evidence of the error of Weber hypothesis. While there have been various theories which have attempted to explain Japan’s emergence, perhaps Weber’s own constructs best explained Japan’s rise. Simply put, similar to Weber’s Protestant ethic, Japanese capitalism was spawned in the nineteenth Century and has evolved ever since within a politico-economic-cultural context which has long encouraged long working hours (hard work), and high savings rates (asceticism). It also has been, for more than 400 years, a fertile crucible for private, profit-driven entrepreneurship. Long working hours have been the result of a number of factors. Most prominent among them have been: (1) a “catchup” nationalist ideology,

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first instilled during the 1868 Meiji Restoration; (2) a hegemonic politicosocial context which has stressed filial piety; and (3) a post-World War II segmented internal labor market, which has both demanded devotion to firm and has severely inhibited labor mobility. Among the embedded factors influencing its high savings rates have been: (1) a relatively “small” government as compared with Anglo nations, such as the USA and UK, especially in relation to national defense; (2) a compensation system which has deferred a sizable portion of worker salary through semi-annual bonuses; (3) an underfinanced social security system; and (4) national government policies that have severely suppressed consumption, such as through strict regulations on consumer credit. Finally, at the time of Weber’s writing, Japan already had a well-established merchant class adroit at exploiting its rational money economy. Numerous good examples of this more than 400-year rich history of profit-driven entrepreneurship can be found throughout Japan. Together, hard work, asceticism, and entrepreneurialism have constituted the main ingredients of Japan’s Weberian like ethic, which, along with its vaunted national industrial policy, has transformed it into the world’s second largest economy. For Weber, an individualistic, private capitalist entrepreneur or enterprise represented a person or firm who/which purposefully took full advantage of available opportunities for profit-making, realizing that if they did not, their business would cease to exist. Weber argued that Protestant ethos had created the prime conditions necessary for capitalism to flourish in the West. In contrast to Protestantism, Weber argued that East Asian religions, such as Confucianism and Buddhism, prevalent in China, Korea, and Japan, were too firmly grounded in taboo and kinship ties to foster the development of capitalism. Moreover, he thought that unlike Puritan formal rationality, Confucian substantive rationality, which stresses collectivism, was incompatible with the development of economic individualism, and thereby, inhibited the emergence of the proper entrepreneurial spirit necessary to foster capitalism. The Confucian nations, such as Japan, according to Weber, gave merchants very low status, and frowned upon thrift, even viewing it as hoarding. Instead, the ideal Confucian was thought to be a learned gentleman of grace and dignity, who above all, desired “salvation” from ignorance/a lack of education. As a result, in such societies, ritual and the goal of self-perfection superseded any desire for individual wealth.

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Weber was ignorant. He made these comments without knowing Japan. Japanese caste system was very different from that in China. In Japan caste system always before the mid-nineteenth century gave very great importance to the business class and the military class. Japanese system did not prohibit money-making and accumulation, as long as merchants remained loyal to their local lord or nation. During the Meiji Period, fear of foreign influences also fueled an extreme sense of nationalism, including economic nationalism with loyal private capitalists (another Weberian requirement to capitalism). That played an important role in shaping Japanese capitalism, and in promoting devotion to firm, asceticism, and entrepreneurship among the Japanese populace. In fact, evidence suggests that all three elements were among the guiding tenets of Japanese entrepreneurs for more than 400 years, especially among the merchants of its historic commercial capital, Osaka, its neighboring city Sakai (both in Osaka Prefecture), and in the regional provinces of Ise (now in Mie Prefecture) and Omi (now Shiga Prefecture). The same can be said for a rational money economy, which has been present in Japan since the seventeenth Century, if not even earlier (Sansom 1963a, b). During the Tokugawa Period (1603–1868), the merchants of Ise and Omi became so numerous and well renowned in Edo for their salesmanship, ability to accumulate wealth, frugality, and general love of money that envious rivals in that city began referring to them as the “Ise Kojiki” (the Misers or Beggars of Ise), and the “Omi Dorobou” (the robbers of Omi). The markets of Izumi and Settsu, centered on Sakai and Osaka, date back to the fourteenth and fifteenth Centuries, respectively. The area was so renowned for its commercial activities that it was frequently referred to as either the “Manchester of the Orient” or the “Manchester of the Far East,” (Yamamura 1967). Nakamura (1967/2002) claimed that sempai–kohai relations have fully incorporated what she called the Golden Rule of Japanese ethics: No man can serve two masters. She claimed that the transference of this “golden rule” to the company setting has fostered a kind of closely knit, “all-in” or “all-for-one group” solidarity among colleagues that would have been difficult to cultivate otherwise in contemporary capitalist Japan. Socialized by their firm that they must compete and collaborate with their peers and sempai in order for the company and themselves to succeed, Japanese labor has committed to working as long as necessary for their firm.

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Historical Basis of Japanese Management System Buddism proliferated throughout Japan from 1200 to 1500 in the form of the Pure Land and Zen movements. The making of the dynamic market economy dates from these centuries. The monasteries and the popular Buddhist movements built up networks of transactions that by the outset of the Tokugawa unification had placed Japan on at least as high an economic level as any other part of the world. The beginnings of economic growth in medieval Japan can be traced through several waves of religious movements (Nakamura 1967). The original Japanese society of kin-based clans was organized in the sixth and seventh centuries into a centralized state, primarily by the establishment of Buddhism as a state religion. The main economic difference between the temples and the aristocratic estates was that the temples had more organizational dynamism: They established branches throughout the countryside, sometimes at considerable distances, often by incorporating local Shinto shrines under their jurisdiction. Both materially and motivationally, the Buddhist organizations, and especially their popular branches, constituted the leading sector of economic growth. Buddhist institutional growth gave farmers, craftsmen, and dispossessed persons the opportunities to circulate through lower monastic positions. The social fluidity of the pre-Tokugawa period was caused by an intermingling among wealthy monasteries, and cultivated merchants closely connected with the religious economy. These religious organizations became the framework in which labor could move to new places and positions where opportunities for economic growth were expanding. Temples not only created physical capital in the agrarian economy, but took the lead in organizing industries that converted agricultural produce into finished goods (Hiroike 1928; Henderson 1968). In the Sengoku period (1465–1580), the za form was used to create self-governing city councils of elders; for example, the great commercial city Sakai began as za paying dues to temple patrons. Finance capital also emerged from the temples. In Japan, the first Japanese commoners to rise to social prominence were leaders of Buddhist evangelical movements. The temples converted goods extracted by the leisure aristocracy to capital for wider circulation and productive use. Japanese temples accumulated cash as well as goods, and engaged in loans. The regions where the Buddhist temples owned the greatest proportion of land were those where the market economy had developed most spectacularly by the 1500 s

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(Ikegami 1995). The temples were the first entrepreneurial organizations in Japan: the first to combine control of the factors of labor, capital, and land so as to allocate them for enhancing production. Not surprisingly, the monasteries (especially the great centralized orders of the Rinzai Five Mountains) were the first institutions to develop rationalized administration, with annual plans and strict accounting practices. An ethic of self-discipline and ascetic restraint on consumption, resulting in accumulation and investment, originated in internal reforms in medieval Japanese Buddhism (Hiroike 1928). Buddhism, within its own sphere, had the features of systematic legal regulation that enabled it to expand its own markets for the factors of production. Internally, Buddhism had a long-standing legal system, embodied in the Vinaya regulations (Ritsu), that covered every aspect of monastic life including monks’ personal possessions and use of collective property. Monks specialized as literate scholars, monastic assistants, attendants, workers, lay brothers, guards, and other positions. The higher administration of a monastery was divided between the Western section, in charge of religious training and practice, and the Eastern section, which took care of the organization’s material and financial activities (Hauser 1974; Nagahara 1990; Nakai and McClain 1991). This section was quite large in wealthy temples with many branches and property holdings. The task of administering internal transactions among parts of a temple’s corporate properties represented a decisive step toward farreaching legal regulation of economic transactions. They represented the existence of Buddhist political machinery capable of enforcing property rights. Religious organizations mobilized resources from all social classes as no other institution could. The religious economy was not the only contributor to dynamic capitalism, but in the breakout from agrarian–coercive relations, it constituted the leading sector. In Asia, a Buddhist monastic economy laid the foundations for growth. Initially the economic effect of the temples was to widen markets for commodities. The fact that Buddhist organization had developed an internal legal system would not in itself generate legal rights in the surrounding political order. The unifiers Nobunaga and Hideyoshi carried out a policy of monastic property confiscation similar in many respects to that of the Protestant Reformation in Europe. Guild privileges were undermined by the establishment of free markets; toll barriers (previously operated by temples as sources of revenue) were abolished; merchants were allowed free movement within domains. Nobunaga enhanced his

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domains’ attractiveness to merchants by protecting them from debt cancellation decrees previously promulgated by secular lords. Hideyoshi went further, abolishing the self-governing towns that had emerged under the auspices of the temples, abolishing guilds, and exempting merchants and artisans from land rents in order to free them from the control of both aristocrats and temples. As a result, Buddhist capitalism was substantially eliminated (Hiroike 1928). The leading sector of Buddhist capitalism had catalyzed secular capitalism that by the 1500s made central Japan a network of market towns. The Tokugawa was the period of the second-wave economic boom; secular market capitalism outgrew religious capitalism, resulting in the urban wealth of that time. From 1600 onward, Japan’s economy was well within the scale of Western Europe as a whole. By 1800, Japanese workers’ standard of living was close to that of English workers, which itself was exceptional within Europe (Nagahara 1990; Nakai and McClain 1991). Tokugawa Japan also had the world’s highest popular literacy rate, and one of the earliest and largest commercial markets for books. On most major dimensions, Tokugawa Japan was a substantially modern society. Dominance of a capitalist market economy made the government prisoner of its tax base and ruined military aristocrats who depended on the old agrarian-coercive system of extraction. For these reasons, the significance of the Meiji Restoration has been overrated; it was a political revolution within a substantially modern institutional structure. In both Europe and Japan, the institutional structures of a capitalist market economy had already penetrated the traditional shell (Kawakatsu 1994). Rationalization in Weber’s sense means application of the economic ethic of calculation and investment, directed toward the steady expansion of profits. Rationalization of techniques need not involve hardware. Japanese capitalism developed without much innovation in industrial technology because of its particular pattern of market growth. Agricultural production intensified through small enterprises, not large ones, and textiles rather than heavy industry dominated until the 1930s, making labor-intensive technologies most profitable. Here capitalist innovation involved neither labor-saving machinery nor large firms, but rather the growth of specialization and exchange among many small units. By the late Tokugawa period, it is estimated that “industrial” output, consisting of nonagricultural production and services and making household consumer goods available even to the poorest social levels,

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contributed 40–45% of the national income. The Japanese had early on developed a mass-market economy. Following an alternative to the machine production of standardized goods, Japanese capitalism instead created innovative products of high quality (Nagahara 1990; Nakai and McClain 1991). Religious capitalism in late medieval Japan laid the institutional groundwork for a further, secular phase of capitalism. This development in turn led to the general revival of East Asian economic dynamism that has surged to such heights in the world trading system of the twentieth century (Hauser 1974; Henderson 1968).

Ethics of the Japanese Management It is not unreasonable to assume that people are not always motivated by compensation or monetary reward. We often see that workers achieve a task beyond their capability when they are highly motivated. The humanoriented attitude in Japanese management has its origin in the spirit of Ji-hi, such as the virtue of compassion of the Buddha. Ji-Hi in Japanese is a Buddhist term. In Japanese, Ji means giving happiness to all living things; Hi means freeing all living things from torment and distress (Nakamura 1967). Emperors traditionally governed the people with the spirit of JiHi (Nakane 1973; Nakamura 1967). Among them, Tokugawa Ieyasu (1542–1616), the founding shogun of the Tokugawa feudal government, exercised sovereignty over the people with the spirit of Ji-Hi. We have a historical document that is designated as Ieyasu’s Will, Toshogu Goikun, in which Ieyasu clearly indicated three virtues, Ji-Hi, Honesty, and Wisdom as the important principles for political ethics. He strongly claimed that the spirit of Ji-Hi was not merely the one that should take precedence over everything else, but also the one that every political activity should be performed under the spirit of Ji-Hi. A bead, a sword, and a mirror, which are traditionally called three treasures in Japan, are the symbols of our traditional virtues. A bead stands for Ji-Hi, a sword for Honesty, and a mirror for Wisdom. Among them, the essential virtue is Ji-Hi. Honesty with Ji-Hi is deemed to a true Honesty, and Wisdom with Ji-Hi is regarded as a true Wisdom…You shall never impose your vicious tyranny on your people. (Hiroike 1928)

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According to Mikawa Monogatari (the Tale of Mikawa Count), Ji-Hi was an inheritance discipline that had been transmitted from generation to generation by the Tokugawa family, whose Shoguns ruled over people with the spirit of Ji-Hi (Ikegami 1995). Honsaroku is an essay on political administration, the author of which is presumed to be Honda Masanobu (1538–1616). According to its foreword, this essay was written for Tokugawa Hidetada, a successor to Ieyasu, to expound the doctrine of political administration focused on the spirit of Ji-Hi. According to Nakamura (1967), Suzuki Shosan, the de facto apostle of work ethics in Japan, strongly advocated that sweating at one’s work means nothing other than the best practice of Buddhism. In other words, it means that any person whether one is a samurai, a farmer, an artisan, or a merchant, must exercise diligence in one’s profession when one desires to the Buddhist faith. Shosan insisted that working hard is nothing but Buddhist practice. Consequently, we may safely say that diligence and industriousness are a kind of DNA inherited successively in Japanese mind attitude with the strong support of the Tokugawa feudal government for Buddhism. Suzuki Shosan, a Japanese priest, wrote Shimin Nichiyo (Everyman’s Companion), in which he claimed that working hard is no more than the practice of Buddhism. Consequently, devout Buddhists worked hard for the practice of Buddhism, which obeyed the teachings of Buddha. Shosan preached, in Shimin Nichiyo, the teachings of Buddhism to people according to social ranks, such as samurais, farmers, artisans, and merchants, as stated below: 1. Samurais must sacrifice themselves for lord and master with courage, which is precisely Buddhist practice for samurais. 2. Farmers must go out into the fields to work with single-hearted devotion, which is just the practice of Buddhism for farmers. 3. Artisans must pursue a craft with great application, which is literally converted to Buddhism for artisans. 4. Merchants must work with integrity in the name of heaven, and should engage in trade for the benefit of country and people at the risk of their lives. That is exactly Buddhist training for merchants (Hiroike 1928).

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The House of Mitsui and the Spirit of JI-HI For 350 years, the House of Mitsui conducted business under the management of one family. The firm began in 1673, with the founder Takatoshi Mitsui’s opening a drapery store in Edo (the old name for Tokyo) and continued until the end of World War in 1945 (legally in 1946). However, the origin of much of the success attained by Takatoshi, his offspring, and later generations of the Mitsui family may well be attributed to Takatoshi’s mother, Shuho, who is cited as the de facto founder of the House of Mitsui (Horide 2000). Shuho illustrates her merciful attribute by the following examples from Shobaiki (1973), which was originally written by Mitsui Takaharu in 1722: 1. While she had a good head for business and worked diligently, she tried to economize. She did not live a life of luxury, but lived modestly. Much used articles were reutilized at her strong will. 2. Even after she was far better off more than before, she kept her lifestyle and led a frugal life. It is needless to say that Shuho’s spirit of Ji-Hi directly inherited by their sons was transmitted to posterity in a sustainable way (Bellah 1985). Soju Daikoji Gyojo states that Takatoshi inherited the spirit of Ji-Hi from Shuho as follows: 1. Success and failure in business rely heavily on one’s moral character. One must improve oneself and lead a virtuous life with integrity. (Mitsui Bunko 1973) 2. One should work diligently with honesty and frugality from a longrange perspective, which leads to the reputation for reliability and finally to success in business (op.cit: 20–21). After his father died in 1694, Takahira, the eldest son, succeeded to the senior head of the House of Mitsui. The following quotations are illustrative passages from Takahira’s will (Sochiku Isho):

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1. The members of the House shall promote the common welfare with one accord. If one lives in luxury and neglects his business, there will be no prosperity for the House. 2. Unless a merchant is diligent and attentive, his business will be taken over by others. 3. Farsightedness is essential to the career of a merchant. In pursuing small interests nearby, one may lose huge profits in the end. 4. The Gods and Buddha lie within one’s heart. Instead of wasting gold and silver on the shrines and temples, you should make appropriate contributions to the poor and suffering (Mitsui Bunko 1973). In consequence, on the basis of the historical documents, we can conclude that, at the House of Mitsui, the spirit of Ji-Hi inherited from generation to generation had led to its innovative marketing for the benefit of customers and society; its human-oriented attitude toward its employees (Mitsui Bunko 1973). From Jitsugo Kyo: 1. Human value depends on whether one is rich in wisdom or not. 2. Property is perishable and Intelligence is eternal. 3. Let those above treat those below with kindness, and those below treat those above with respect. 4. Those who respect others are respected by others. 5. There should be no delay in carrying out a good deed and keeping away from an evil deed (Mitsui Bunko 1973). In the Edo period before 1860, samurais exercised great influence over everyday life of the common people who lived under the patronage of samurais, while, in Kyoto, financially comfortable merchants assumed real political power and made a significant contribution to child and adult education for common people. Shingaku wrote a textbook on morals, Zen Kun, and delivered a lecture to boys (from seven to fifteen years old) and girls (from seven to twelve years old) without tuition. Teshima Toan preached morality in plain words to children in Kyoto. What we must emphasize here is that he was an active merchant, neither a priest nor a samurai, and that people assisted him were also active merchants. The spread of child education for the common people under the Tokugawa feudal government was closely related to the improvement of

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literacy rate and morality of Japanese people at large, which finally led to the quick modernization of industry and trade after the Meiji Restoration in 1868. Education policy under the civilian government in the Edo period played a crucial role in transmitting the spirit of Ji-Hi, the fundamental concept of Japanese morality, to later generations (Kumon and Rosovsky 1992).

The Establishment of Business Ethics in the Edo Period Ishida Baigan and the Teachings of Morality The teaching of morality that Ishida Baigan advocated alone in Kyoto was widespread among the common people by Teshima Toan, his successor, and formed the basis of business ethics generally called Shingaku, which was a Japanese moral philosophy based on the three moral disciplines of Shinto, Buddhism, and Confucianism. Baigan wrote two books, Tohi Mondo (city and country dialogue) in 1739 and Kenyaku Seika Ron (frugality: discussion on household management) in 1744. The one was a collection of dialogues on morality between Baigan and his disciples, and the other was an essay on frugality. These two books provide the basic ideas of Baigan’ teachings together with Baigan Goroku, the collection of his sayings. He wrote in Ishida Baigan Zenshu Book 1: We must lead a virtuous life… All of parents and children, husbands and wives, affinity groups, and hired servants must live happily together…We must practice frugality…We must deal with hired servants mercifully…We must come to the aid of those who are in need…We must provide perquisite to employees from time to time. (Hiroike 1928)

In the above quotations, we find out phrases closely related to the spirit of Ji-Hi such as “a virtuous life,” “mercifully,” “come to the aid„ “provide perquisite,” ”innate moral principles,” “stinginess,” “not greedy by nature,” “honesty,” “without self-interest,” “born with the spirit of JiHi,” “honest behavior,” “someone’s behalf,” “the spirit of compassion.” Baigan argued that merchants were functional equivalent to samurais in society, and that profit in business equaled with samurai’s payroll. This is the reason why Baigan strongly proposed that education for merchants

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was a necessary requirement for the betterment of merchants’ status. His idea that employee–employer relation is regarded as parent–child relation leads to the spirit of Ji-Hi between employees and employers. This is still the core of the Japanese management system. We can also see the spirit of Ji-Hi in his definition of profit as the following excerpt from Akindo Yawaso, Nihon Keizai Taiten 13, published in 1727 shows: Making a profit for a life of extravagant luxury is nothing but personal greed. Meanwhile, earning a profit not only for happiness of family and employees but also for unforeseen expenses is the fundamental principle of business. However, affluent one may become, one should not let oneself be puffed up by one’s success. This is the legitimate motive of making a profit. (Hiroike 1928)

Also from Waga Tsue in Zoho Teshima Toan Zenshu, we can see that “In business, merchants should not make unreasonable requests, and mutual consent between buyer and seller is imperative. That is Wagou. An employer should not ask unreasonable demand to employees, and employees should not ask a big favor to their employer, which leads to mutual understanding between them. Accordingly, what is most important is that an employer should treat employees with the spirit of Ji-Hi and show tenderness toward them. An employer’s lack of the spirit of Ji-Hi causes employees’ disobedience. That is not an employees’ fault ” (Hiroike 1928). Kamada Issou born in 1721 was a direct disciple of Baigan. The following quotation from Baiboku Sensei Konuka Dawara, Shingaku Sosho Book 1, shows his idea of altruism: If one has trouble, someone will lend a helping hand. One cannot put a price on this joy…The joy obtained from the mercy that one shows to someone is so far above the one from the other people’s charity that someone depends on. It is a great pity that there are many people who do not know this logic. (Hiroike 1928)

The original purpose of commerce is a matter of win-win; both a seller and a buyer win. In a zero-sum game, one wins and the other loses. In consequence, the commerce of winning or losing is virtually a zerosum game, which defeats the real purpose of commerce. (Baiboku Sensei Konuka Dawara Kohen, Shingaku Sosho Book 1 1777/1904, 1919; Hiroike 1928).

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The righteous way of money spending is to spend money not for selfinterest but for other person’s interest, which, namely, leads to the spirit of J-Hi. What Issou emphasized was the public nature of money. Baigan was the original founder of Shingaku, and Toan established it as business ethics under the name of Shingaku. Kamada Issou was one of the powerful preachers who contributed to the popularization of Shingaku among the common people. Issou wrote ten books of the teachings of Shingaku, any of which was accompanied by illustration and easy to read for the common people; in consequence, the teachings of Shingaku became widespread among them in particular. At the same time, the spirit of Ji-Hi deeply permeated within the minds of the common people. Shingaku that Baigan founded and Toan established was chiefly preached to the merchants. Then, Shingaku developed by Issou and others had been widely popularized among the common people, and this popularization is, we argue, one of the main reasons that the spirit of Ji-Hi even now remains vivid within the minds of the Japanese people consciously (Ogura 2003). We can excerpt the following passage from Teshima Toan’s Chounin Shindai Naoshi: A merchant who seeks a profit for one’s own interest without regard for others is similar to the one who turns the entire world against oneself. However strong one may be, one will find difficulty in competition with the entire world. Sellers and buyers friendly sympathize and patronize with a merchant who is not greedy. (Hiroike 1928)

How the Spirit of Ji-Hi Survived the Upheaval After the Meiji Restoration In 1868, the Tokugawa feudal government collapsed and the Meiji government was established under the constitutional monarchy. The new government attempted to discard Confucianism and introduce a new integrative system of Shinto and Confucianism as the state-sponsored religion. The traditional values remained deeply within their minds as seen in the maxims: Japanese spirit and Western learning, which led to the achievements of modernization and industrialization in emerging Japan. The strong leadership of young samurais successfully conducted the Meiji Restoration with Japanese spirit and Western learning (Oland 1939/1970).

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Buddhism strongly supported by the Tokugawa government lost its patronage. A number of Buddhist temples were destroyed. However, regardless of the decay of Buddhism after the Meiji Restoration, the spirit of Ji-Hi, etched indelibly within the minds of the common people over a long period, stayed alive in the face of the moral turmoil caused by the Meiji Restoration. After the end of the World War, the Japanese government separated religion from education and politics by the special order of the Occupation Army, and both Shinto and Buddhism lost institutional support. However, the generations of business leaders of Japan still maintained traditional values steadfastly (Roberts 1973). Japan is proud of the human-oriented attitude toward working people of the Japanese management in comparison with the American management. Most of the Japanese companies have high regard for their employees’ competence and do not adopt personnel retrenchment as a prompt means to come out of a business slump. it is very difficult to see employees suddenly dismissed except for bankruptcy. Ji-hi means, “Giving happiness and freeing from torment and distress to all living Ihings.” In order to act up to the spirit of Ji-hi, one should give priority to other people’s happiness over one’s own interest. In other words, we can say that it means altruism. The spirit of Ji-hi means that one should consider oneself in other people’s place; that one should bear in mind partner’s feeling. In other words, it leads to a human-oriented attitude toward working people, a customer-oriented attitude toward consumers and business partners, and a serious consideration toward the public interest.

Comments Corporate Social Responsibility (CSR) by business is that can be said to enhance society, is removed from business for-profit activity, and is voluntary and thus not required by law or any other form of governmental coercion. It is, though, increasingly hard to isolate CSR from mainstream business and government regulation given the prominence of the “business case” and government incentives through soft regulation. Nonetheless, CSR is still distinguished, by its focus on responsiveness to and even anticipation of social agendas, and by increased attention to social performance.

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Today, by contrast, most companies publish annual environmental reports and much more information is available that is directly relevant to issues of CSR. The Japanese business–society relations legacy in Japan, a company has long been associated with the formation of community, and thus forms the basis of society to which an individual employee belongs. In contrast to an Anglo-American model of community, in Japan both individuals and companies are members of society and hence responsible for it. The Japanese word for business, keiei, is a compound of the words kei, meaning “governing the world in harmony while bringing about the well-being of the people,” and el, meaning-making “ceaseless efforts to achieve.” So, too, the emergence of corporate business in Japan has, from the beginning, assumed a notion of CSR. The most well-known manifestation of this is corporate Japan’s long-standing commitment to workforce welfare in what was known as shogai koyo, or “life-time employment.”

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CHAPTER 6

Socialism in Yugoslavia and Sweden

Yugoslavia officially ceased to exist in October 1991. Following the popular referendum in Slovenia and Croatia and the subsequent declaration of political independence by the two republics in June 1991, the Yugoslav federation disintegrated into five independent states: Bosnia and Herzegovina, Croatia, Macedonia, Federal Republic of Yugoslavia consisting of two republics, Serbia and Montenegro, and Slovenia. Further disintegration took place after the split between Montenegro and Serbia in June 2006 and Kosovo’s unilateral declaration of independence in February 2008. The main objective of this chapter is to evaluate the Yugoslav model of socialism from a longer-term perspective, trying to ask what lessons have been learnt from Yugoslavia’s experience.

The Birth of the Yugoslav Model of Socialism In the end of World War 2, Josip Broz Titos victorious revolutionary army created Yugoslavia, which was recognized by the Allied army in 1945. Tito was a socialist and he anti-Nazi. As such it first intended to follow and expand the Soviet model (Estrin 1983). The Yugoslav model followed Marx-Engels, who suggested that the socialist economy should be based on a socially planned regulation of production in accordance with the needs both of society as a whole and of each individual (Bartlett and © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 D. Basu and V. Miroshnik, Ethics, Morality and Business: The Development of Modern Economic Systems, Volume II, https://doi.org/10.1007/978-3-030-68067-1_6

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Uvali´c 1986; Furubotn and Pejovich 1970; Uvali´c 1964). The political situation was difficult as in the next door Greece, the British supporting the Greek Royalist pro-Nazi army against the Greek socialist. Thus, Tito in a very clever mood pretended to be anti-Stalin with the approval of Stalin. Yugoslavia’s “third way” was implicitly supported by Stalin as Stalin thought that by pretending to be anti-Soviet, the Yugoslav regime would have the chance to survive. “The pretended schism between Stalin and Tito was not the result of ideological differences, but arose mainly, according to but as a survival method” (Ellman 1973). The result was the expulsion of Yugoslavia from the Soviet bloc, but with all other cooperation between Yugoslavia and the Soviet Union continued. Politically, Yugoslavia along with India and Egypt joined the so-called nonaligned block of countries, which had the blessing of the Soviet Union in terms of extensive economic and strategic supports. The economic system in Yugoslavia of Tito was based on centralized planning, state ownership of enterprises brought about through nationalization and expropriation of private property, state monopoly over the most important spheres of the economy like investment, banking, foreign trade, and administrative control of most prices (Uvali´c 1964). The land reform in 1945 eliminated the feudal system of land holding with restriction to a maximum of 75–87 acres which was lowered further to 25 acres in 1953 (Uvali´c 1954). The 1946–1951 Five-Year Plan emphasized heavy industry and capital goods sector. A public sector based organization representing the entire nation was in power. Planning encompassed all enterprises and co-operative farms. The state was responsible for the allocation of means of production according to the production plans with prices for final products and services were fixed by the planners (Uvali´c 1964). Enterprises in the same industry were operating within each republic under a central directorate at the federal level (Uvali´c 1954). However, Yugoslavia showed how market mechanism can be merged with the socialist system. The direct management of public property was given to the hands of the workers. This law of 1950 would differentiate its economic model from those in other Eastern European countries.

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Economic Reforms: Combining the Plan, the Market, and Workplace Democracy Each decade in postwar Yugoslavia brought a new set of systemic reforms designed to reform centrally planned economy into a decentralized system. That period can be divided into three segments: (a) the “Visible Hand” period from 1952 to 1965; (b) the “Market Self-Management” era from 1965 to 1972 and (C) the “Social Planning” period after 1974 (Estrin 1983). The important features of the socialist economic system, as specified by Horvat (1982), were maintained, however, collective ownership of the means of production in the form of social property was the most important feature. The system of self-management with workers’ participation in decision-making through representative organs was introduced, with overall political guidance on important enterprise policies. (Uvali´c 1992). In the early 1950s the system of centralized planning as in the Soviet Planning was replaced by a more flexible system based on the planning of overall targets only, or “planning basic proportions” as in the French style “Indicative planning.” The plan prepared at the beginning of each year no longer fixed the total volume of production, with detailed provisions regarding its structure and distribution (as done previously), only the general outlines (Uvali´c 1954). Annual plans were abandoned in 1966 and were substituted by Economic Resolutions, the general features of economic policies in the forthcoming year, which defined the general objectives of economic development and main priorities to be pursued in a given period. In addition there was also a ten-year plan for the 1976–1985 period which identified the major development problems that needed to be tackled and the main directions of economic development. There were the General investment funds (until 1963) and the Regional funds for the development of the less developed republics and regions, to implement a redistribution of national resources to reduce inequality among the regions. From 1975 onward, Yugoslavia passed the system of self-management planning, which envisaged the active participation of all workers at all levels. The property regime in Yugoslavia was based on the system of social property, officially defined for the first time in the 1953 Constitution as the property of the whole society. The bulk of the Yugoslav economy was in social property, which gave enterprises the right to

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use socially owned assets and to appropriate their product, but not full property rights, which remained in the hands of the state (Horvat 1994). In the new 1974 constitution, it was explicitly stated that enterprises were owned by no one: “Since no one has rights of ownership over the social means of production, nobody – not socio-political communities, nor organisations of associated labour, nor groups of citizens, nor individuals – may appropriate on any legal-property grounds the product of social labour or manage and dispose of the socials means of production and labour, or arbitrarily determine conditions for distribution” (The Constitution of the SFRY 1974, III part of Basic Principles, p. 13). “The expansion of the private sector, consisting mainly of agriculture and certain crafts and services, was restricted by law, since private property on a larger scale was considered incompatible with the socialist economic system. The 1953 land reform reduced the limit on the size of private holdings further, from 35 to 25 acres per family, while in other sectors limits were placed on the number of workers that could be employed, usually five workers other than family members. As a result, the social sector remained the dominant part of the Yugoslav economy, in 1989 still contributing 86.2% of Social Product (SP)” (Savezni zavod za statistiku 1991). Yugoslavia pursued rapid industrialization, where priority was given to heavy over light industry (at least until the late 1950s) and to very high investment rates, in order to achieve rapid economic growth. The system of remuneration was to respect, as much as possible, the principle of egalitarianism, that would not lead to major inequalities in workers’ earnings, but would provide each worker a personal income according to his own contribution. “This was to be accomplished through the introduction of wage scales, which were to assure that workers of similar qualifications were paid similar personal incomes ” (Estrin 1983). Socialist countries have more equal distribution of income but in the case of Yugoslavia there was high level of regional inequality, thus, the distribution of income was unequal, but not extreme like in the USA. These values were relatively stable over the 1973–1983 period, and Yugoslavia had a moderate level of income inequality (Milanovi´c 1990). Along with the other East European socialist countries and the USSR, Yugoslavia had a strong welfare state that provided free education and healthcare, social support to citizens in need, and specific housing policies that secured the working population a place to live, usually giving them tenants’ rights but not privately owned apartments.

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The Yugoslav system was also based on principles of solidarity as from the 1970s onward, all republics and regions had to contribute a certain percentage (less than 2%) of their respective Social Products to the Federal Development Fund, while the sole recipients were the three less developed republics—Bosnia and Herzegovina, Macedonia and Montenegro—and Kosovo. The financial assistance through the Federal Development Fund initially consisted of grants, but after 1971 it took the form of loans at highly preferential terms. Additional instruments were added in the 1970s in order to stimulate direct investment by enterprises in the less developed parts of the country. In addition to the Federal Development Fund, there were other mechanisms of redistribution of income in Yugoslavia, including budgetary transfers through the fiscal system (Mencinger 2000). The Market Mechanism Regarding remuneration, socialist practice was to find a way of reconciling as much as possible two postulates: (1) there should be a relatively equal distribution of personal incomes with no great differences should be allowed for the same amount and same quality of labor and a guaranteed lower limit of remuneration; and (2) the magnitudes of remuneration should be directly dependent on the success of given production units and proportional to the contribution of each individual. “The creation of a capital market would imply an extension of the rights of economic organisations at the expense of society as a whole … Instead of alleviating, it would further increase social inequalities, which is certainly not a goal of Socialism” (Uvali´c 1964). Financial capital and a capital market would be in contradiction with the socialist principle or Marxian labor theory that labor is the only source of income. These doctrines have strongly influenced the contents of economic reforms. The market-oriented economic reform was to abolish the state monopoly of foreign trade along with the freedom of the enterprises in their foreign trade operations; some relaxation of price controls; the replacement of state property by social property in 1953; the decentralization of the banking system by setting up of sectoral banks for agriculture, investment and foreign trade. However, the system of mobilizing and allocating capital investment remained centrally directed by the planners (Uvali´c 1954, 1983; Horvat 1967, 1970, 1972).

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The Republics got some responsibility for light industries. They could raise some local taxes. Local communes could supervise enterprises and implement social plans. The economic reforms that were to introduce “market socialism” in Yugoslavia were first announced in a Program of the League of Communist in 1958 (Mencinger 2000), to be implemented during the 1963–1967 period. Price liberalization was carried further, though certain prices continued to be fixed administratively; thus in 1969, 40% of prices of industrial goods were still under state control (Horvat 1970). A two-tier banking system separated the central bank from commercial banking, which became the diversified structure of all-purpose banks. General investment funds were abolished in 1963 and their resources were transferred to banks, which became the main financial intermediaries. Firms were able to select their own investment projects; they could determine the future investment plans (Uvali´c 1992). In order to open the economy to the world market, the system of multiple exchange rates was replaced by a uniform exchange rate. Import restrictions were reduced. The first Joint ventures law was adopted in 1967, with restrictions of 49% for foreign participations. The most important consequence of the reforms implemented in the 1960s was the increasing power in the hands of managerial class and technocrats. Although managers and directors were predominantly members of the League of Communists, their increasing power reduced the control of the workers and the fundamental principle of self-managed firms. It also reduced the control of the Communist party, which might have played a role in the destruction of the Yugoslav union (Mencinger 2000). There were a new set of economic reforms in the 1970s, which started with the 1971 constitutional amendments and were further developed in the 1974 new constitution and the 1976 Associated Labour Law. The 1970s reforms decentralized the Yugoslav economy further and brought substantial devolution of powers from the federation to the republics and lower level local political authorities. Monetary and exchange rate policies although controlled by the federal government, the republican governments got the veto power. After 1977, republics got the rights to retain earned foreign exchange from exports and foreign investments, thus increasing regional inequalities and resentments. That could be a factor for destruction of the union. The 1970s reforms also tried to reduce the role of banks to prevent the concentration of financial resources within banks. Banks were transformed

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into “service” agencies of enterprises operating under their direct control. A 1971 law on securities introduced new Western instruments such as bonds, treasury bills, and promissory notes. In order to reward workers’ investment efforts, a new system of remuneration was also elaborated by Edvard Kardelj. The new system of workers’ remuneration was to be based not only on their ‘live’ (current) labour, but also on their ‘past’ (embodied) labour. Kardelj preferred to use the term “past labour” instead of social capital, accumulation, or means of enlarged reproduction, in order to emphasise that such remuneration would not be linked to capital but to labour (Estrin 1983). Under the pressure of mounting financial problems and the inability of the government to fulfill its debt repayment obligations, several IMFsponsored austerity programs were implemented from 1981 onward, which might have contributed to the destruction of Yugoslavia by intensifying regional inequalities. A special Commission of the Federal Social Councils for the Problems of Economic Stabilisation was created in 1982. The IMF induced economic reforms could not bring any effective changes in the Yugoslav economic system. Due to the economic crisis, the government had to introduce measures which effectively restricted the operations of the market, such as wage freezes. In 1988–1989 a list of legislative changes opened the doors to private sector development on a larger scale.

Self-Management in the Yugoslav Socialist Model An important feature of the Yugoslav socialist model was selfmanagement. The earlier mentioned 1950 Law gave workers the right to elect members of Workers councils which decided on production, inputs, hiring policies, to a limited extent on prices and income distribution. “The workers’ councils became responsible for the election of members of Management boards and for appointing and removing the manager of the enterprise. The workers’ councils could have from 15 to 120 members, but in enterprises with less than 30 workers the whole staff and officials constituted the workers’ council” (Uvali´c 1954). “Members of the management board were elected from among the workers, technical personnel and other officials, but at least three-quarters had to be workers employed directly in the production units of the enterprise” (Uvali´c 1954). The Management board was also responsible for

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preparing drafts of the basic plans, issuing monthly operational plans, and executing these plans. Initially capital was given to enterprises free of charge, but after 1954 they had to pay a small 6% tax for the use of social capital “The right of the workpeople to draw up the list of wage scales for the enterprise and to distribute part of the enterprise’s net income is a great incentive in the system of self-management… the list is drawn up by the Workers’ council with the agreement of the higher trade union bodies; if they do not reach an agreement the matter is decided by state arbitration. The trade unions are called to prevent excessive differences occurring between wages in different undertakings. The wage for each category of workers is fixed according to the volume of planned production and the size of the corresponding wages fund. In order to reduce differentiation in workers’ incomes, the portion of the surplus distributed to workers and officials in the form of bonuses was subject to a special progressive tax” (Uvali´c 1954, 1964). During the 1960s, self-management was extended to all types of organizations and sectors of the economy. The 1961 and 1965 economic reforms substantially increased workers’ decision-making rights regarding the distribution of income. After 1961, the previously existing progressive taxes on bonuses distributed above the minimum wages were abolished, and enterprises were in principle given more freedom to allocate their net income between accumulation and gross personal incomes (Uvali´c 1992). Many of the described economic reforms were to a great extent facilitated by Yugoslavia’s specific international relations. After the Tito—Stalin conflict in 1948, encouraged and supported by Stalin, Yugoslavia decided to develop its own third way, placing itself somewhere between the East and the West. Yugoslavia did not join the CMEA in 1949 (although it did participate, after 1964, in some of its standing committees) nor was it a member of the Warsaw Pact. Together with Egypt and India, Yugoslavia created the nonaligned movement and hosted its founding conference in Belgrade in 1961. The nonaligned movement practically disappeared when Yugoslavia’s breakup in 1991. Achievements of the socialist system of Yugoslavia were many. Despite the slowdown in the mid 1960s, growth rates still remained close to 6% during the 1966–1979 period. Yugoslavia registered a remarkable increase in Gross Domestic Product (GDP) per capita, from 1947 to 1981 by more than five times, entering a period of stagnation only in the 1980s, followed by an extreme fall registered during the years of its breakup, perhaps due to the IMF programs for economic reforms (Fig. 6.1).

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Fig. 6.1 Trends in GDP per capita (US$, PPP) in SFR Yugoslavia/successor states, 1947–1993 (Source The Maddison-Project, http://www.ggdc.net/mad dison/maddison-project/home.htm, 2013 version; GDP per capita is expressed in Geary-Khamis [GK] dollars, equivalent to the international 1990 dollar [PPP])

End of the Socialist System Despite such an impressive growth record, Yugoslavia started having problems of unemployment already from the mid 1960s. The average unemployment rate increased from 6% in 1965 to over 16% in 1990 after the IMF policies were introduced and socialist policy was abandoned. There were substantial differences across the republics—Slovenia had practically full employment, while Macedonia and Kosovo had particularly high rates of unemployment. IMF suggestions had intensified the regional differences, which the socialist policy had tried to reduce. Yugoslavia was also facing increasing inflationary pressures, particularly after prices were further liberalized in the mid 1960s. Average annual inflation increased from 10% in the 1960s to 20% in the 1970s, reaching particularly high levels in the 1980s (Uvali´c 1993). The inadequate instruments of monetary control by the National Bank of Yugoslavia, particularly after 1974, and the maintenance of low nominal interest rates which remained negative in real terms, contributed to excessive credit expansion at all levels.

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In the 1980s, the attempts of the government to implement a tighter monetary policy were largely ineffective. Enterprises tried to bypass the banking system by using alternative means of finance (such as issuing promissory notes), which led to the uncontrolled growth in inter-enterprise credit and added further inflationary pressures. The average annual inflation rate progressively increased, from 30% in 1980 to three-digit figures in 1987–1988, becoming hyperinflation in 1989. Yugoslavia’s specific economic features based on self-management and increasing reliance on the market mechanism inspired a growing literature on market socialism and the labor-managed economy (Estrin and Uvali´c 2008). The Yugoslav experience seemed to indicate the possibility of a third way, a view enhanced by President Tito’s global role as one of the leaders of the nonaligned movement. The extension of the principles of democracy in decision-making was viewed by many as an objective for an economic system in its own right (Estrin and Uvali´c 2008). In Political Economy of Socialism (1982) Horvat elaborated in great detail the advantages of the self-managed economy, based on a somewhat idealized vision of self-management. Horvat (1972, 1982) argued that the self-management system has greater advantages than any other economic system, because of its strong effects on workers’ incentives and favorable macroeconomic implications: high rates of growth are assured by the higher propensity to invest, due to reduced risk and uncertainty; full employment, by the reluctance of workers to dismiss fellow workers; and price stability by the absence of the fundamental employee–employer conflict. Yugoslavs also worked in an environment, which was more democratic than in other socialist countries, because self-management, despite its limitations, for many years did give workers the feeling that they could participate both in decision-making and in enterprise profits (Uvali´c 1992). The Yugoslav experience was a concrete and unique example of economic democracy applied to the whole economy; “The Yugoslavs have shown that democratic control of the workplace is feasible” (Estrin 1983). After Yugoslavia’s breakup in 1991, there have been very different interpretations and explanations of the causes of the country’s disintegration, sometimes attributing all the ills that had affected the country to the system of self-managed socialism. Also more recently in its successor states, self-management has sometimes been blamed for the remaining lack of discipline of workers, survival of collective principles of solidarity, and slow acceptance of new norms of behavior.

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The causes of Yugoslavia’s breakup are clearly much more complex and have to be viewed in the context of various international and national events of those times. On the international scene, IMFs destructive suggestion during the 1980s, the radical changes in parts of Eastern Europe toward market economies, the disintegration of the USSR, the invasion of Yugoslavia by NATO, absence of any support from the USSR and Russia of Gorbachev and Yeltsin, were unprecedented events of historical importance. Because of the firm determination to remain a socialist country based on a one-party political system, Yugoslav policymakers remained faithful to the key Marxist principles that were to prevent major inequalities within society, and thus retained the most important features of the socialist economic system, including non-private property. However, the reforms suggested by the IMF contributed to deteriorating economic performance and economic instability. Yugoslavia experienced problems, introduced by the IMF policies, which are typical of the capitalist economy: unemployment, inflation, and cyclical instability. Throughout its post-Second World War development, Yugoslavia implemented an ambitious economic growth strategy, which, as in other socialist countries, was based on high investment rates that until the 1980s remained remarkable—on average, 32% in 1961–1970 and 33% in 1971–1980. During the first three decades, the strategy produced impressive results in terms of rapid economic development. The Yugoslav economy registered very high rates of output growth and even higher rates of industrial output growth, which permitted a continuous increase in living standards. Yugoslav GDP growth averaged around 6% during the period between the start of reforms in 1952 and the late 1970s, higher than in the Soviet Union or in the capitalist market economies of Western Europe (Estrin and Uvali´c 2008). From the early 1970s, the development strategy increasingly relied on foreign loans and external borrowing. As a result, Yugoslavia’s external debt increased from less than US$2 billion in 1970 to US$14 billion in 1979 and, following the second oil shock, to US$18 billion in 1980 (Uvali´c 1992). Yugoslavia registered a record trade and current account deficit in 1979 and was no longer able to service its external debt. A stand-by arrangement was concluded with the IMF which required austerity packages implemented after 1981, leading the Yugoslav economy into a profound

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and long recession—stagnating or declining output, negative rates of investment growth, rising unemployment, and increasing inflation. From 1981 onward, the stop–go character of certain measures—monetary restrictions, price and income controls, interest rate policies—had a number of counterproductive effects, especially on prices (Uvali´c 1992). Restrictive income policies in combination with rising inflation led to declining living standards: between 1980 and 1984, there was a 34% drop in real net wages. There were also mounting social tensions, which led the government to relax income controls, which in turn further contributed to rising inflationary pressures. The various stabilization programs, suggested by the IMF, implemented during the 1981–1989 period had been largely unsuccessful, since the economic crisis persisted throughout the 1980s culminating in hyperinflation in 1989 (Uvali´c 1992, 2010). Another serious problem of Yugoslavia’s economic development was rising regional inequalities. The gap in economic development and GDP between Kosovo and Slovenia was of 8:1 in 1989. The more developed republics—Slovenia and Croatia—felt exploited because of the obligatory transfer of resources to the Federal Development Fund, which usually remained outside their direct control, or other policies to their disadvantage, like the retention of foreign currency earnings from exports and tourism (Uvali´c 1993). The increasing gap in economic development between the republics/regions in Yugoslavia, intensified by the IMF policies is probably the major failure of Yugoslavia, since it fundamentally contributed to increasing conflicts in the late 1980s. USSR in late eighties had the same problem when Gorbachev abandoned planning and tried to introduce market system within planning. However, the most serious disadvantage of Yugoslavia in 1989 was the latent political crisis that intensified particularly in the 1980s, leading progressively toward the disintegration of the Yugoslav federation. A major problem in the late 1980s was the lack of consensus on the future organization of the Yugoslav federation. Serbia supported by Montenegro wanted a more efficient and more centralized state, whereas the Slovenes wanted a looser arrangement. These radical changes would have eliminated the main features of both the socialist economic systems. The secrets of the crushing of Yugoslavia are emerging, telling us more about how the modern world is policed. The former chief prosecutor of the International Criminal Tribunal for Yugoslavia in the Hague, Carla

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Del Ponte (2008), published her memoir The Hunt: Me and War Criminals. There was no genocide in Kosovo. The “Bosnian holocaust” was a lie. The NATO attack had been fraudulent. Yugoslavia was a uniquely independent and multiethnic, if imperfect, federation that stood as a political and economic bridge in the Cold War. At a 1999 Kosovo “peace” conference in France, the Serbs were told to accept occupation by NATO forces and a market economy, or be bombed into submission. It was the perfect precursor to the bloodbaths in Afghanistan and Iraq.

Swedish Model Scandinavian-style social democracy has many benefits for working-class people, and it would represent a massive advance for workers in the USA to win even a fraction of the reforms at its core. In Sweden, where the unionization rate is extremely high, more than 85% of the workforce, workers enjoy the benefits of union organization and collective bargaining. Indeed, compared to the USA, the Swedish labor movement is, across the board, much stronger, better organized, and united (Kvist 2012). This strength is the key reason why Swedish workers were able to force the passage of ambitious reforms that benefit the working class as a whole. They include: free medical care coverage for all from cradle to grave; free tuition for university students; guaranteed free housing for all; subsidized child care; paid parental leave (13 months leave at 80% pay); extensive unemployment benefits (including cash transfers as well as job training and retraining programs); generous pensions; provision for the disabled; and care for the elderly (Brandal et al. 2013). As a result of this, poverty rates in Sweden are very low compared to the USA This is largely because social democratic governments in Sweden were committed to ensuring full employment. For most of the twentieth century, Sweden averaged around 2% unemployment—a very low figure when compared to the USA. Income and wealth inequality are also much lower than in the USA. This isn’t just a Swedish thing—the same is true in most Scandinavian countries. Denmark, for instance, has the most equal distribution of income among all OECD countries and one of the lowest infant mortality rates (Sandberg 2013).

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Sweden’s pro-worker reforms would never have been passed without a powerful, united, well-organized labor movement with a political arm— the Social Democratic Party (SAP)—that was capable of advocating for the interests of the working class as a whole. In May 1931, a general strike by timber and pulp workers in the town of Ådalen was met by brutal state violence. Troops opened fire on a demonstration by the workers, killing five people. This was the background to the Social Democrats winning the largest number of seats in national elections in 1932. They formed a coalition government with the right-wing Agrarian Party, and in exchange for highest rate of agricultural protection, passed sweeping social reforms, including public works programs, unemployment insurance, pension increase, shorter working hours for rural workers, and paid vacation time for all workers (Kvist 2012). Because of its geographical location, Sweden was able to remain neutral during the Second World War, but during the late 1930s and 1940s, it was a major supplier of raw materials and parts to the German arms industry, and as a result, its economy expanded rapidly. This economic boom, based on servicing the Nazi war machine, gave Swedish bosses the ability to make concessions to workers that wasn’t possible for employers in other capitalist countries. Meanwhile, the Social Democrats paid for reforms by taxing wages, wealth and inheritance, but left taxes on corporate profits low. After the war, Sweden benefited from the fact that its infrastructure and industry were intact. Its economy continued to grow quickly as it sold materials for reconstruction to the rest of Europe. The Social Democrats took advantage of this to institute wage policies that drove less efficient, low-paying employers out of business. They also used tax policy to encourage reinvestment of profits. The postwar boom of the 1950s and 1960s led to labor shortages. The Social Democratic government responded by making it easier for women to enter the workforce—this was the origin of Sweden’s progressive policies on statefunded child care, paid family leave, abortion rights, anti-discrimination laws, and so on (Kvist 2012). Sweden’s Economic model was based on its special position in the world economy and a deal struck by the Social Democrats with the country’s capitalists, who own 90% of the economy. The latter were promised high profits based on exporting to the world market, and in exchange, workers received social reforms and a high social wage.

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Scandinavian Social Democracy in the Last Three Decades In the last two decades, in particular, income and wealth inequality grew faster in Sweden than any other OECD country. Neoliberal pension “reforms” have eroded the long-standing system by which seniors were guaranteed a generous, reliable benefit. Disinvestment in the welfare state decreases the standard of living of workers, but it also has troubling political consequences (Zakaria 2020). Swedish workers are still strong enough to protect many of the gains they made over the course of the twentieth century. They still enjoy cradle-to-grave medical coverage, extensive unemployment benefits, and so on. Working-age families in countries such as Denmark still receive about three times more aid than their American counterparts. However, the fracturing of the welfare state and the recent rise in poverty and inequality is real. However, in the long run, recessions and economic downturns cannot be avoided under capitalism. This is exactly what happened in Scandinavia from the 1980s to the present (Kvist 2012). There is no minimum wage that is required by legislation. Instead, minimum wage standards in different sectors are normally set by collective bargaining. About 90% of all workers are covered by collective agreements, in the private sector 83% in 2018. The high coverage of collective agreements is achieved despite the absence of state mechanisms extending collective agreements to whole industries or sectors. That reflects the dominance of self-regulation (regulation by the labor market parties themselves) over state regulation in Swedish industrial relations. The precise nature of that economic system is in dispute. It is definitely not socialism of the Stalinist variety. Ninety percent of production is in the private sector, yet the state controls about 50% of the disposition of national income. The export industries necessarily have to be free to maintain efficiency and international competitiveness. Some characterize the Swedish system as Welfare State Socialism but a more accurate characterization would be Welfare State Corporatism. The benevolent corporatist society is one in which decisions are made through negotiated compromise among the organized interest groups. Compromise has been a prominent feature of Swedish political history since 1932. In the early 1930s a definite shift in political sentiment and the governing ideology in Sweden. The Social Democratic Party that came to power in 1932 had represented the labor movement and had, at one time, advocated socialism. What materialized under Swedish Social Democratic

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Party rule was not Marxist socialism but a democratic social welfare state. This means that the production sector remained predominantly (90%) private but the government, through regulation, taxes, price controls, and social programs, determines what is produces and who it goes to. The weakness of the Social Welfare State is that a large share of people’s income must be taken in taxes to pay for the social services the state provides. This leaves people with the necessities taken care of but with a yearning for more income to spend at their discretion. Many Swedes have coped with this need for discretionary income by working two jobs. The main job’s income is largely taken in taxes to pay for the social services. The second job’s income becomes their real income, the income they have to spend. In the 1970s labor unions began to ask for union representation on the boards of directors of private companies. This was not a threat to company ownership. Such union representatives were better able to convey the needs of the company.

The Swedish Economy The glory days for Sweden economically took place prior to the 1960s, when they had a free economy, low regulation, and lots of wealth. Between 1870 and 1950, Sweden had the highest per capita income growth in the world and became one of the richest countries, behind only Switzerland, the USA, and Denmark. In the 1960s, Sweden started to redistribute wealth, which brought wealth creation to a halt. By the mid-1990s, the country had growing economic problems because it continued to redistribute wealth it wasn’t creating. It was at disjuncture that many of the wealthy (ABBA band members included) and entrepreneurs were leaving Sweden. In 1994, Sweden began implementing the following measures designed to reverse dis trend: • • • •

Reduce Regulation Reduce Government Spending Reform their Welfare Programs Shrink their Government.

Many view Sweden as socialist. However, the country is, in fact, very procapitalism, but it does redistribution through taxes. Personal income is

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taxed at a rate of 61.85%, plus a 7% social security tax rate for employees. On top of these taxes, Sweden also has a 25% consumption tax. For these sacrifices of financial freedom, Sweden offers for citizens in benefits: Pension, Healthcare, Unemployment Insurance, Education through Ph.D. Level, Child Day Care, Very generous leaves of absence from work with benefits including education up to 6 months, starting your own company up to 6 months off, parental leave up to 16 months with 80% of your pay during time off, and 16 public holidays. In Sweden, the government tries to price healthcare at near zero, so demand is unlimited. However, resources are limited, resulting in rationed healthcare. Long waiting lines are the norm (Zakaria 2020; Sanders 2013). One aspect of taxes in Sweden that is not well known is that while taxes are high on labor, they are relatively low for corporations (22%) and capital. Keeping taxes low keeps corporations and capital from going to other countries. The fiscal side of Sweden has become increasingly profree market. Like the USA, Sweden is experiencing mediocre economic growth and little progress compared to pre-1960s levels. The Nordic model comprises the economic and social policies as well as typical cultural practices common to the Nordic countries. This includes a comprehensive welfare state and multilevel collective bargaining based on the economic foundations of free-market capitalism, with a high percentage of the workforce unionized and a large percentage of the population employed by the public sector (roughly 30% of the work force). Sweden at 56.6% of GDP, Denmark at 51.7%, and Finland at 48.6% reflect very high public spending. One key reason for public spending is the large number of public employees. These employees work in various fields including education, healthcare, and for the government itself. They often have greater job security and make up around a third of the workforce (more than 38% in Denmark). Public spending on social transfers such as unemployment benefits and early retirement programs is high. In 2001, the wage-based unemployment benefits were around 90% of wage in Denmark and 80% in Sweden, compared to 75% in the Netherlands and 60% in Germany. The unemployed were also able to receive benefits several years before reductions, compared to quick benefit reduction in other countries (Kvist 2012; Sandberg 2013). Public expenditure for health and education is significantly higher in Denmark, Norway, and Sweden in comparison to the OECD average. Overall tax burdens (as a percentage of GDP) are high, with Denmark

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at 45.9% and both Finland and Sweden at 44.1%. [The Nordic countries have relatively flat tax rates, meaning that even those with medium and low incomes are taxed at relatively high levels. The Nordic countries share active labor market policies as part of a corporatist economic model intended to reduce conflict between labor and the interests of capital. The corporatist system is most extensive in Norway and Sweden, where employer federations and labor representatives bargain at the national level mediated by the government. Labor market interventions are aimed at providing job retraining and relocation.] The Nordic labor market is flexible, with laws making it easy for employers to hire and shed workers or introduce labor-saving technology. the government labor market policies are designed to provide generous social welfare, job retraining, and relocation services to limit any conflicts between capital and labor that might arise from this process. The various components of the Swedish and Nordic model have been continuously adjusted over time in order to manage various challenges and changes in circumstances. The model will have to do this in the future as well, but the objective of greater prosperity that benefits all will remain the fundamental premise of the model.

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Conclusion

Economics came under attacks recently from the Chairman of Federal Reserve and even the Queen of England for its failure to predict the future and as a result, failure of economic policy of the government in most countries. Thus, the present economic theories, which are the basis for economic models for forecasting, are incorrect, to say the least. Economics is a social science. It is a combination of many aspects of the society; only mathematical treatment cannot catch the reality of the society. In a so-called “free economy,” individual economic agents can think and work in unpredictable ways, which are irrational for the market but rational for their self-interest. Thus, the purpose of the market and free economic agents do not always match. We have many examples in the history. South Sea bubbles to the Great Depression to the Asian Financial Crisis to the collapse of the subprime mortgage market are the major examples. In every case, the action of the government was needed on a gigantic scale to save the market. Thus, the concept of free market is illusory. Economic theories based on those illusions should not be taken seriously either. However, the real purpose of economic models is not forecasting in a capitalist economy, but economic planning in a socialist economy. A socialist economy is possible within any political system. Socialism within a monarchy was suggested by Kautilya in ancient India and was implemented within the Maurya Empire in ancient India and Pala Empire © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 D. Basu and V. Miroshnik, Ethics, Morality and Business: The Development of Modern Economic Systems, Volume II, https://doi.org/10.1007/978-3-030-68067-1

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CONCLUSION

of medieval India. Socialism with markets and decentralized control through self-managed workers council was implemented in Yugoslavia. Total control and abolition of the market were implemented in the Soviet Union. Socialism within a capitalist country is being implemented in the Scandinavian countries. The destruction of socialism was due to adverse and hostile political actions, it has never failed by itself. Whenever capitalism failed, socialist actions of the state came to the rescue, which is called Keynesianism. Making money just for itself was opposed by both Aristotle and Kautilya but supported by Adam Smith, Bentham, and John Stuart Mill, who also supported colonialism. Immorality has close links with capitalism, and morality is embodied with socialism. That is the attraction of socialism because a human is inherently moral. That is the essential quality of a human being, which was emphasized by both Gautama Buddha, Cicero, and Jesus. In this book, the solutions suggested by Kautilya and Aristotle are examined while the governments of practically all countries still following the false theories of the Directors of the East India Company, Adam Smith, David Ricardo, Bentham, John Stuart Mill, who created theories to promote the profits of the East India Company disregarding the interest of India, and its people. Unfortunately, both the IMF, the World Bank, and the World Trade Organization, still promote these discredited theories, and most of the economists are the main proponents of these false theories and organizations. In Arthashashtra, Kautilya wrote, “In the happiness of his subjects lies King’s happiness; in their welfare his welfare. The king shall not consider as good only that which pleases him but treat as beneficial to him whatever pleases his subjects.” He advanced the hypothesis that the pursuit of productive activities was the key to the stabilization of the current income and its rapid growth in the future. Ethical leadership is very important to determine the moral quality of the society and economic organizations with it. When leaders fail to upheld morality, moral cynicism prevails. Today, leaders of the societies of the world are employees of major financial organizations, social media owners, and China. They are destroying democracy in the most powerful country in the world, thus everything is for sale. Leaders who can promote high moral standards and values are extremely rare. That is the utility of this book. Happiness does not come from more and more consumptions as the modern economists

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following “Utilitarianism” suggest, but from the implementation of high moral values in the society.

Index

A Accommodative/broad enterprise strategy, 109 Advanced communism, 65 Alienation, 58, 59 Altruism, 30 B Barbarian conquerors, 63 Bears Stearns, 20 Behavior, 29 Bourgeois epoch, 64 British Rule, 63 British workers, 48 Buddhism, 47, 157 Business codes, 129 Business ethics, 6 Business Philosophy, 109 C Capability approach, 41 Capitalism, 36

Capitalist economy, 57 Centralized planning, 175 Christian morality, 61 Christian values, 34 Classical enterprise strategy, 120 CMEA, 82, 180 Code of Conduct, 20 Collective farms, 72 Collectivity, 146 COMECON, 84 Comintern, 69 Communism, 67 Compassion, 96 Competitive advantage, 18, 102 Competitive strategy, 126 Competitive structure, 36 Confucian-based nations, 46 Confucianism, 166 Consensus, 151 Contradictions, 65 Corporate governance, 8, 113 Corporate reputation, 6

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 D. Basu and V. Miroshnik, Ethics, Morality and Business: The Development of Modern Economic Systems, Volume II, https://doi.org/10.1007/978-3-030-68067-1

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198

INDEX

Corporate Social Responsibility (CSR), 7, 114 institutionalization of, 115 strategization of, 114 Corporate strategies, 102 Corporation ideologies, 101 Corporatist system, 190 Culture, 13 D Decentralization, 177 Decentralized responsibilties, 144 Decentralized system, 175 Dehumanization, 58 Descriptive ethics, 1 Determinism, 65 Dialectical Materialism, 64 E East Asian nations, 46 East India Company, 37 Economic (business) approach, 107 Economic liberalization, 72 Economic reforms, 175 Economic theory, 31 Effective code, 5 ‘Efficiency’ school, 75, 78 Egotistic tendency, 98 Egregious behavior, 5 Employment relations, 139 Engineering approaches, 44 English industry, 63 English workers, 159 Enterprise strategy, 116 Enterprise union, 145 Entrepreneurial creativity, 36 Entrepreneurial decisions, 37 Environmental accountability, 111 Environmental performance, 129 Equal distribution, 177 of income, 185

Ethical capitalism, 38 Ethical climate, 8 Ethical codes, 4 Ethical foundation, 44 Ethical framework, 13 Ethical judgments, 32 Ethical leader, 97 Ethical leadership, 95 Ethical mind, 96 Ethical–moral values, 2, 99 Ethical–social values, 99 Ethics, 29 Ethos Institute, 101 European Commission, 101 Exploitation Ethic, 30 External strategy, 127

F Federal Development Fund, 184 Financial performance, 114 First War of Independence, 62 Five-Year Plans, 72 Four cycles, 65 Freedom, 39 of the banker, 43 Free market, 37 Full employment, 182

G Globalization, 46 GOELRO plan, 71 GOSPLAN, 70 Gotha Programme, 60 Gross Domestic Product (GDP), 180

H Hard currency debt, 87 Harmony inside the group, 146 Heavy industry, 71 High productivity, 153

INDEX

Hindu ideals, 51 Hindu philosophy, 51 Human appearance, 60 Human emancipation, 60 Human essence, 60 Humanistic aspects, 51 Humanity, 58 Human morality, 52 Human virtue, 52 Hybris , 44 I Ideology, 57 IMF programs, 180 Implicit and informal control, 154 Implicit contracts, 10 India, 62 Indian society, 63 Individual freedom, 38 Individual humanity, 32 Individual selfishness, 58 Industrialization, 176 Inferior civilization, 64 Inflationary pressures, 182 Instrumental values, 3 Integral strategy, 122 Integral strategy model, 125 International Criminal Tribunal, 184 Investment bank, 20 Invisible hand, 31 J Japanese Confucianism, 48 Japanese leadership style, 151 Japanese Management System, 139 Japanese workers, 159 Japan’s economy, 159 Ji-Hi, 160 JP Morgan Chase, 20 Justice Ethic, 30 Just in Time, 143

199

K Kaizen, 141 Kantian morality, 60 Keiei, 168 Keiretsu, 139 Kosovo "peace" conference, 185

L Laissez-faire, 31 Law of accumulation, 31 Law of population, 31 Laws of market, 30 Leader behaviour, 96 Lehman Brothers, Inc., 20 Lehman code, 22

M Macroeconomic targets, 69 Managerial discretion, 129 Market economy, 35 Market self-management, 175 Market system, 51, 67 Marxian labor theory, 177 Marx’s methodology, 64 Meiji Period, 156 Mission statements, 5 Mitsubishi Motors Corporation, 152 Mitsui, 162 Monetary control, 181 Moral behaviour, 57 Moral Economy, 1 Morality, 34, 57, 59 Moral Law, 61 Moral norms, 2, 112 Moral philosophy, 61 Moral responsibility, 40 Moral theory, 62 Moral virtues, 33 Multi-functional teams, 143

200

INDEX

N Native communities, 63 Native industry, 63 Nazi invasion, 73 Neoclassical economists, 40 Neoliberal pension, 187 Normative ethics, 1 O Oppressed creature, 61 Organization, 4 Organizational ethics, 95 Organizational goals, 100 Osaka Prefecture, 49 Oumi merchants, 23 P Pareto optimal, 41 Partners, 7 Patience, 98 Perestroika, 74 Persistence, 100 Perspective, 100 Philosophical principles, 29 Philosophy of Business, 12 Planned economy, 67, 68 Pleasures, 34 Political economy, 30 Political liberalization, 75 Price liberalization, 178 Price stability, 182 Pride, 98 Privatization process, 88 Production and operations managements, 139 Pro-free market, 189 Prosperous self-sufficient country, 64 Protestant Ethics, 46 Protestantism, 155 Pro-worker reforms, 186 Prudence, 98

Pull instead of push, 143 Puritan origins, 15 R Rational behaviour, 34 Redistribute wealth, 188 Religion, 61 Resources, allocation of, 36 Revolt, 66 Rich individuality, 58 Rinqi system, 145 Russian czar, 70 Russian Revolution, 68 S Samurai, 166 Scandinavian-style social democracy, 185 Scientific socialism, 62 Self-interest, 17, 31 Selfishness, 49 individual, 58 Self-love, 33 Self-managed firms, 178 Self-management, 175 Seniority system, 145 Sensual enjoyment, 51 Sepoy Mutiny, 62 Shinto, 166 Slavery, 61 Social choice, 41 Social contradictions, 57, 59 Social Democrats, 186 Social planning, 175 Social property, 175 Social utility, 34 Social welfare, 104 Social Welfare State, 188 Sociological explanation, 144 Soviet defense aids, 85 Soviet leaders, 70

INDEX

Soviet model, 173 Sovietologist, 75 Soviet planned economic system, 69 Soviet system, 85 Sovnarkhoz, 74 Spiritual aroma, 61 Stakeholder approach, 107 Stakeholders, 7 ‘Strategic Defense Initiatives’, 84 Strategic management, 116 Swedish industrial relations, 187 Swedish labor movement, 185 Swedish political history, 187 T Team based manufacturing, 143 Technical efficiencies, 75 Terminal values, 3 ‘Third way,’ Yugoslavia, 174 Tito – Stalin conflict, 180 Tokugawa Period, 156 Torture, 66 Total factor productivity (TFP), 78, 82 Total quality management, 139 Toyota management system, 140 Toyota Motor Corporation, 140 Trust, 98 Trust in the group, 147 U Unemployment, 50 Unemployment Insurance, 189 Unethical accounting practices, 130

Unethical behaviour, 97 Unethical leader, 97 Utilitarianism, 33 Utopian socialists, 62

V Values, 2, 98 Christian, 34 ethical–moral, 2, 99 ethical–social, 99 instrumental, 3 terminal, 3 Values-based management, 122 Values-based strategies, 125 Vertical information system, 144 Virtues, 32 Vision of society, 30

W Weber hypothesis, 46 Welfare State Socialism, 187 Western Sovietologists, 77 World Food Programme, 130 World Health Organization, 130 ‘World System’, 83

Y Yugoslav federation, 184 Yugoslav model, 173

Z Zero defect, 142

201