Philosophy of business

The Development of management theory and philosophy considers the fundamental principles that underlie the formation and operation of a business enterprise; the nature and purpose of a business, for example, is it primarily property or a social institution; its role in society; and the moral obligations that pertain to it. The subject is important to business and management, and is closely related to business ethics and political economy. It is influenced significantly by philosophy, ethics, and economic theory.

One must draw an important distinction between the philosophy of business and business philosophy, which is an appellation that one often hears in the business world. More often than not, the latter designation is intended to denote a way of doing business or a business outlook, a popular use of the term philosophy, instead of its more formal, academic meaning, using the concepts and methods employed by philosophers. The latter meaning applies to the philosophy of business in this article. The phrase philosophy of business also might be used in the same way as business philosophy, for example, "Risk taking represents my philosophy of business." However, this is not the same sense that philosophy is used in this article.

Development of Management Theory and Philosophy

It is a somewhat curious truism that despite the fact that business touches nearly every aspect of our lives, few thinkers have shown an interest in it from a rules or philosophical perspective until relatively recently. Indeed, few philosophers can be said to have paid much attention to the business enterprise, itself, prior to the latter part of the 20th century. Many philosophers tended to look askance at commercial activity, believing, as Plato did, that only the worst sort of people are involved in such matters. Plato is not unlike many academics throughout history, even today, who tend to think of business as a necessary evil in society, and not as something worthy of serious philosophical consideration.

Although there have been few "philosophers of business", per se, business and economics has not developed in a vacuum. It is built on many tacit philosophical principles and assumptions that we can examine. As a general rule, business practitioners and theorists tend to accept the principles that are current in their society. In the European Middle Ages, for example, the dominant Christian influence resulted in a pricing practice known as just price, and in the Enlightenment the dominant view of economic decision making was one of rationality.

The formative years in the development of the modern philosophy of business and economics was the 17th and 18th century. At that time, thinkers like Hobbes, Locke, Rousseau, Shaftesbury, and Smith created the intellectual foundation upon which modern business and capitalism was built. A basic principle subsumed within business practice and economic theory alike is the notion of free will. Thomas Hobbes, John Locke, and Jean-Jacques Rousseau all accepted that we are free moral agents, able to make decisions, control our own destiny, and engage in a social contract. This notion would later be celebrated in the idea of the entrepreneur, someone that freely decides to pursue a risky venture in the hope of receiving great rewards. It is also at the core of utility theory, a model of consumer behaviour in economics in which consumers freely choose what to purchase.

Another philosophic principle that would become part of business theory and practice is rationality. The general philosophic predilection of the enlightenment was that people were fundamentally rational. Philosophers such as René Descartes and Spinoza had built whole systems of thought on this assumption. Capitalism would do the same. For two hundred years economics was founded on the assumption of Homo economicus. This assumption has recently been challenged by Herbert Simon, among others.

Another key philosophic assumption is atomism. It was John Locke's view of society as an aggregation of independent, autonomous individuals, rather than Jean-Jacques Rousseau's vision of society as an organic collective that would become an integral part of business philosophy. The key ethical unit is the individual. Social institutions are merely constructs that individuals can use for their own purposes. Many years later, Milton Friedman used this assumption in arguing that corporations have no moral responsibility because, he contended, they are not individuals capable of responding to moral claims. Only the individuals within the business enterprise have a moral responsibility.

Modern business practice and theory developed in the age of scientific discovery, and this gave it a mechanistic orientation. In particular, Newton had just discovered classical physics. This would influence business and economics in ways that we are just beginning to understand. Early writers dealing with economic topics, such as Adam Smith, borrowed many of their techniques and terminology from classical physics. They would use terms like "equilibrium", "labor force", "elasticity", and "income accelerator". Today a few theorists are starting to question the mechanistic approach and model business on biological principles or chaos theory. Newton's law of inertia has found its way into marketing where it is claimed that consumers will continue in their current state unless they are encouraged to act otherwise. Thus advertising is claimed to perform the valuable role of helping people experience a more variegated and interesting life.

John Locke also contributed an important attitude towards the private ownership of property. He claimed that individuals have certain inalienable, natural rights. One of these is the right of ownership. He said that if we toil on the land and mix our sweat with the soil, we become the rightful owners of the land. This argument was extended to other assets including the factors of production, a conclusion that many, including Karl Marx, would challenge.

Another key concept that underlies modern business is psychological egoism. This states that the core moral obligation is to oneself. Thomas Hobbes saw all action as motivated out of self-interest. A group of philosophers including Mandeville, Butler, Shaftsebury, Hutcheson, and Smith (sometimes referred to as the "enlightened self-interest school") developed this into one of the core concepts of modern business theory. Bernard Mandeville claimed that private vices are actually public benefits. In The Fable of the Bees (1714) he laments that the "bees of social virtue are buzzing in mans bonnet". Civilized man has stigmatized his private appetites and the result is the retardation of the common good. Bishop Butler claimed that pursuing the public good was the best way of advancing one's own good since the two were necessarily identical. Lord Shaftesbury turned the convergence of public and private good around, claiming that acting in accordance with ones self interest will produce socially beneficial results. An underlying unifying force that Shaftesbury called the "Will of Nature" maintains equilibrium, congruency, and harmony. This force, if it is to operate freely, requires the individual pursuit of rational self-interest, and the preservation and advancement of the self. Francis Hutcheson also accepted this convergence between public and private interest, but he attributed the mechanism, not to rational self interest, but to personal intuition which he called a "moral sense". Adam Smith developed a version of this general principle in which six psychological motives combine in each individual to produce the common good. He called it the invisible hand. In The Theory of Moral Sentiments, vol II, page 316, he says: By acting according to the dictates of our moral faculties, we necessarily pursue the most effective means for promoting the happiness of mankind. Since Smith's time, the principle of the invisible hand has been further incorporated into economic theory. Leon Walras developed a four equation general equilibrium model which concludes that individual self interest operating in a competitive market place produce the unique conditions under which a society's total utility is maximized. Vilfredo Pareto used an edgeworth box contact line to illustrate a similar social optimality.

A link can also be made between utilitarianism and the fundamental principles of the philosophy of business, however this is more theoretical than practical. Economists use utility theory to model human actions. Like Jeremy Bentham, modern economists assume that people are hedonists, that is they prefer more satisfaction to less satisfaction. The amount of satisfaction can be expressed in terms of the utility a person derives from the satisfaction. Social welfare functions used in modern welfare economics are an outgrowth of John Stuart Mill's utilitarian calculation of obtaining the greatest good for the greatest number. The grounding of business principles on teleological ethics has been challenged by many deontological philosophers. John Rawls' maxmin criterion also provides an alternative.

Modern philosophers of business

It is fair to say that most modern philosophers of business are involved in other philosophical or scholarly pursuits, and that they come to the philosophy of business as a sub-specialty, or only indirectly because it relates to another area of interest. Thus, they are primarily philosophers dealing with other subjects, economists, or business management theorists. If one were to examine the philosophy departments in most universities, today, one would find precious few courses in the philosophy of business (as opposed to a growing number of business ethics or applied ethics courses). There are indications that a growing number of philosophers with formal training in academic philosophy will come to specialize in the philosophy of business.

Perhaps the best known modern philosopher of business is Peter Drucker, whose publications have had a profound influence on management and organizational theory, generally, and on how we think of the business enterprise. More often than not, people who think about business issues are considering it from an applied perspective, which is to say, what is the best or most effective means of transacting commerce or managing the enterprise, with some goal in mind, usually profitability, improving employee relations, or marketing. While Drucker has dealt with these issues and many more in numerous publications over his long life, he also inquires into the principles and concepts that underlie commercial activity and organizational structure, and he asks what ought the mission of a business to be, and, in particular, how can we reconcile a business mission with conflicting interests in the marketplace and society.

One of the most frequently discussed topics is the matter of organizational change in a complex environment. Paul R. Lawrence has dealt primarily with organizational change, organization design, and the relationship between the structural characteristics of complex organizations and the technical, market and other conditions of their immediate environment. His 1967 book, Organization and Environment (written with Professor Jay Lorsch), added contingency theory to the vocabulary of students of organizational behavior.

Other philosophers of business, for example, Geoffrey Klempner, are principally interested in examining how business is even possible, which is to say, how can an enterprise function in society as a whole. Klempner states that theories of ethics and business are often at odds, and that one might even have to suspend the normal ethical considerations that would apply outside of business in order for a business to be possible. This is reminiscent of Albert Z. Carr's famous and controversial Harvard Business Review article on bluffing, where he said business was similar to playing poker, and that deception is a necessary part of business.

Of course, there is a close relationship between the philosophy of business and business ethics. Philosophers specializing in business ethics are primarily interested in how business people ought to conduct themselves in the marketplace and in society. Philosopher Norman E. Bowie adopts Kant's three versions of the categorical imperative for ensuring ethical business conduct, and he pays particular attention to the third variation, whereby the people within a business must be seen as a kingdom of ends, and not merely treated as means to an end.

The "invisible hand" is a favorite metaphor for practitioners of modern-day Western capitalism, the ideology driving globalization and, for the most part, business as we know it today. What many of the bottom-line fundamentalists may ignore is the degree to which the so-called "free market" has been skewed and maneuvered in ways Adam Smith never envisioned. Thus the question of ethics and conscience runs deeper yet. With exponential increases in government laws, regulations and court decisions regarding business in the past century, ethical practice has morphed from doing "the right thing" as conscience would dictate to doing what complies with the law or isn't explicitly illegal. Thus there's been a gradual relaxation of internal moral compass and greater reliance on external parameters, as in "if it isn't illegal, it must be all right," as well as a new skillset in finding "legal loopholes" in stretching the boundaries of compliance.

Some important philosophical topics and questions

The purpose of a business

Most would argue that the main purpose of a business is to maximize profits for its owners, or in the case of a publicly-traded company, its stockholders. The late economist Milton Friedman was a proponent of this view. Others would say that its principal purpose is to serve the interests of a larger group of stakeholders, including employees, customers, and even society as a whole. Most philosophers would agree, however, that business activities ought to comport with legal regulations. One proponent of a broader view which includes a moral component has been U.S. businessman-turned-futurist John Renesch [1] who writes, "Corporations are human-made organisms, associations of human beings. To see this association as having one solitary purpose and responsibility, to grow only in economic terms, is such an extreme view that implosions like what happened to Enron, WorldCom and other corporate collapses will become more and more commonplace." Anu Agha, ex-chairperson of Thermax Limited, once said, "We survive by breathing but we can't say we live to breathe. Likewise, making money is very important for a business to survive, but money alone cannot be the reason for business to exist". Profit maximization is extremely relevant when top management is mandated with the job of selecting the right strategy for the business. According to Jackson Mullane, the primary goal for any business strategy exercise must be that of maximizing profitability.

Peter Drucker defined the very purpose of business as creating a satisfied customer. This definition is also useful in evaluating to what extent a business is succeeding in fulfilling its stated purpose.

Many observers would hold that concepts such as economic value added (EVA) are useful in balancing profit-making objectives with other ends. They argue that sustainable financial returns are not possible without taking into account the aspirations and interests of other stakeholders (customers, employees, society, environment). This conception suggests that a principal challenge for a business is to balance the interests of parties affected by the business, interests that are sometimes in conflict with one another.

Spiritual capital theory is a new emerging approach to business purpose, and becomes more and more influenctial due to the recent financial crisis.

Contract theory

Advocates of business contract theory believe that a business is a community of participants organized around a common purpose. These participants have legitimate interests in how the business is conducted and, therefore, they have legitimate rights over its affairs. Most contract theorists see the enterprise being run by employees and managers as a kind of representative democracy.

Stakeholder theory

Stakeholder theorists believe that people who have legitimate interests in a business also ought to have voice in how. The obvious non-owner, stakeholders are the employees. However, stakeholder theorists take contract theory a step further, maintaining that people outside of the business enterprise ought to have a say in how the business operates. Thus, for example, consumers, even community members who could be affected by what the business does, for example, by the pollutants of a factory, ought to have some control over the business.

Business as property

Some philosophers believe that a business is essentially someone's property, and, as such, that its owners have the right to dispose of it as they see fit, within the confines of the law and morality. They do not believe that workers or consumers have special rights over the property, other than the right not to be harmed by its use without their consent. In this conception, workers voluntarily exchange their labor for wages from the business owner; they have no more right to tell the owner how he will dispose of his property than the owner has to tell them how to spend their wages, which is property belonging to the workers. Similarly, assuming the business has purveyed its goods honestly and with full disclosure, consumers have no inherent rights to govern the business, which belongs to someone else.

Philosophers who subscribe to this view generally point out that a property owner's rights are nevertheless not unlimited, and that they are constrained by morality. Thus, a home owner cannot burn down his home and thereby jeopardize the entire neighborhood. Similarly, a business does not have an unlimited right to pollute the air in the manufacturing process.

Followers of John Locke would suggest that the first instance of property is the property that one has in himself, and that one's labor is an extension of this. The labor theory of value suggests that when one mixes his labor with an object, he thereby makes it his property, and that his labor is the principal means of measuring value. Many classical economists and Marxists both subscribe to this view. Marxists also believe that modern production, which involves many inputs, makes an equitable division of this property impossible, which, among other reasons, necessitates that the state hold property and the factors of production in common for everyone. They assert that labor value provides an objective measure of economic activity, compared to price and other measures which they see as subjective and fluctuating.

Many neo-classical thinkers, for example, Ludwig von Mises, believe that value is subjective and that labor is incommensurable (e.g., comparing the labor of a house painter to the labor of Picasso). They return to the classical belief in practice but assert that price is objective, the product of multiple, albeit subjective, valuations. Moreover, they assert that what really matters for assigning ownership is whether or not property was acquired or exchanged legally (see Robert Nozick), which is known as the historical entitlement theory, whereas Marxists assert that there are no property rights in the means of production.

Libertarian socialists, sometimes known as left-anarchists, hold that, as Proudhon said, "Property is theft" — that is, in reference to the ownership of productive resources, property is not the right to use, but the right to keep others from using. Advocates of this philosophy therefore hold the "institution of property", as they sometimes call it, to be immoral in itself, so the accumulation of wealth that includes productive resources, especially land, is also immoral. This means that no business can really be ethical, since the very foundation of business as we know it is private property.

A mini-republic or modern village

Some philosophers see the business enterprise as a means of transmitting social justice, as a kind of mini-republic. This is especially true of contract and stakeholder theorists. Those who view a business as being primarily someone's property reject this view. While they might believe that the net effect of people disposing and exchanging their property freely will benefit society as a whole, they would argue, even if this were not the case, if there were no utilitarian advantage, one ought not to limit another's freedom, that is, unless it is harmful to others.

Regardless of how one thinks about these matters, it is undeniable that a business enterprise represents an increasingly important part of people's lives, especially the employees working there, for, in many ways, the business constitutes a person's principal social group, and it amounts to a replacement for the village or tribe that was the central social setting for our ancestors. In many ways, one's affiliation with a business is the most important social institution most of us have outside of the family.

The ontology of the business enterprise

What makes a business a business? We take for granted that a business is a profit-making entity. How, then, are we to characterize a business that is run only for the benefit of the people who buy from it, for example, a so-called co-operative? Similarly, how might we characterize an insurance business that is owned by its clients, as in the case of a mutual insurance company? Do the owners of insurance policies buy them primarily for a profit? What about charitable enterprises, such as Goodwill Industries, or religious organizations such as Trinity Broadcasting Network? Are all of these organizations businesses in the same sense as, say, General Motors is?

What is it that fundamentally distinguishes a business from other kinds of organizations, say, governmental organizations? For example, how could we characterize quasi-governmental organizations such as the U.S. Post Office and Amtrak, which are supposed to be self-sustaining, even profitable (for reinvestment, reducing or eliminating taxpayer subsidy, reserves)? Would we call such organizations businesses? One might suggest that these are run for the benefit of society, whereas a business is to satisfy the interests of its owners. However, is it not the case that society owns the government? One also would have to ask, how is one entity's satisfying the various interests of some segment of society substantially different from another entity's making a profit that also satisfies various interests, sometimes even the same ones?

What about a person who trades his labor in return for a wage? Is he also in business? After all, he is putting up risk capital, in the sense that he's giving up his time...an opportunity cost...and even making an investment of himself, his labor. He is performing a service, just as a business does. His employer is, in a sense, a customer, someone whom he must satisfy. And the employee markets himself, his skills, either to get a job or to get ahead. He has either an explicit or implicit performance agreement, a contract. He even hopes that his revenues will exceed his expenses, which is to say, that his efforts will be profitable. Does this, therefore, make every laborer a business person?

In other words, a philosopher might reasonably ask, what elements constitute the essential and distinguishing characteristics of a business enterprise? Perhaps it ends up being something as simple as being one or more persons engaged in any number of possible exchanges that satisfies any number of possible interests in an intentional, organized, planned manner. In any case, these are at least some of the questions one might ask about the ontology of a business.

The epistemology and logic of business

In the epistemology of business, we ask what are business facts and how do we come to know them? What constitutes business knowledge versus mere belief? As in other aspects of life, in business we acquire our knowledge through empirical study, from which we draw conclusions using inductive or deductive methods. We test our hypotheses, using them as long as they are not empirically falsified, and thereby develop business theories, organized explanations of the facts. To what extent is what we purport to be business knowledge...other than that which is relatively trivial...reliable or veridical?

Business relies heavily on inductive reasoning, which assumes a uniformity of nature, such that the future is assumed to resemble the past. This, of course, is problematic, especially when considering the complexity involved in adequately factoring in the effects of customers, competitors, legislative and regulatory encumbrances, employees, environmental and climatic hazards, war, new technology, and so forth, into useful quantitative formulae. It is impossible to bind all of the variables for making probabilistic judgments on many of the most important business problems with a high degree of confidence. For this reason (among others)...because of the number of variables and the sheer unpredictability of outcomes...there is a rather considerable risk of failure in business; conversely, there would seem to be a rather high degree of luck in achieving success, or putting it in the vernacular, being at the right place at the right time. This relates to the simple fact that business knowledge is highly tentative, and subject to error or obsolescence.

The philosopher of business might also reasonably ask, to what extent does intuition play a role in our business knowledge. What does it mean to have "a gut feeling" about a business matter, and how is it useful. Is there even such a thing as business intuition, or is it simply a matter of internalizing knowledge through a variety of experiences, such that it seems intuitive. At the very least, a great many managers and marketers would say that they operate using their intuition a great deal, perhaps especially in dealing with people, which, of course, leads us to inquire into the role of psychology.

Sources

References

• Drucker, P. (1954) The Practice of Management, HarperBusiness, Reissue edition 1993, ISBN 0-88730-613-6
• Fort, Timothy (2001) Ethics and Governance: Business as Mediating Institution, Oxford University Press USA, New York.
• Friedman, M (1962) Capitalism and Freedom, University of Chicago Press, Chicago, 1962
• Hutcheson, F. (1729) An Inquiry Concerning Morall Good and Evil, 1729.
• Kalin, J. (1968) "In defence of egoism", in Morality and Rational Self-interest, edited by David Gauthier, Prentice Hall, New York, 1970.
• Mandeville, B. (1715) The Fable of the Bees.
• Rawls, J. (1971) A Theory of Justice, Harvard University Press, Cambridge Mass. 1971.
• Renesch, John, 'OVERCOMING FUNDAMENTALISM IN BUSINESS'- Repossessing Enterprise from Perverse Absolutism, Philosophy for Business, Issue #30, 17 June 2006.
• Shaftsebury L. (1710) Enquiry Concerning Virtue.
• Smith, A. (1759) The Theory of Moral Sentiments, in Adam Smiths Moral and Political Philosophy, edited by H. Schneider, Harper, New York, 1948 and 1970.
• Strasnick, T. (1981) "Neo-utilitarian Ethics and the Ordinal Representation Assumption", in Philosophy in economics, edited by J. Pitt, Reidel Publishing, 1981.

External links

• Filoempresa, edited by Godofredo Chillida & Gabriela Berti
• Peter Drucker's web site
• The journal "Philosophy for Business" edited by Geoffrey Klempner
• The journal "Philosophy of Management" edited by Nigel Laurie