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Welcome to this third video of

the sixth week of our course on
unethical decision-making.
In our previous video,
we discussed the influence of institutions
on unethical decision-making.
In this video now, we would like to zoom
into one particular form of institutions,
namely those that have become rigid,
dogmatic and ideological.
In this session, you will learn how
institutions might morph into ideologies.
You will understand the moral
foundations of the free market ideology.
That's the one that interests
us most in this session.
And you will get familiarized
with a critical perspective on
free market ideology.
And finally,
you will understand the supportive role of
institutions as ideologies in
the process of becoming ethically blind.
In our discussion on institution
theory we highlighted the fact that
a lot of decisions are copies
of the decisions of others.
They are imitations.
Isomorphism was a term that was shaped for
People imitate others even if those cop,
those copies are strategically irrational.
Even if those copies might
be largely efficient.
Even if those copies might
be morally doubtful.
We simply follow what we perceive
as the rules of the game.
Institutions can become too dogmatic.
They can deliver too narrow
interpretations of the world.
They become ideologies.
Ideologies can be understood
as structured simplifications.
What they do,
is they position certain beliefs and
practices and values as objective and
We might tend to perceive
the prevailing root of the game,
caught by ideologies, as natural and
without alternatives.
You remember our discussion
of Vclav Havel in the forum.
His essay on the power of the powerless.
One key element of,
of his reflections is that the power of
ideologies lies in their
thoughtless acceptance.

When we look back at business scandals

like Enron, Lehmann Brothers, Siemens, our
first reaction often is to say well, these
are deviations from the norm, bad apples.
But maybe these are not deviations,
but on the contrary,
these are over-stretched interpretations
of the rules of the game.
So they're very much in line with
the institutional context in
which these organizations are embedded.
Or to argue more carefully,
they are too rigid interpretations
of that institutional order.
Unethical behavior might fall on
very fertile, ideological ground.
If we talk about ideology in the context
of our course on mainly corporations, and
there's one that sticks out as
the dominating theory of what markets and
organizations do or
should do, it's the shareholder
value ideology of Milton Friedman.
In September 1970, Milton Friedman,
the Chicago economist,
publishes an article in the New York Times
Magazine with the provocative title,
The Social Responsibility of
Business is to Increase Its Profits.
And it had a tremendous
impact on theory and
practice of management and
on how we designed our economies,
in the US with Ronald Reagan,
in the UK with Margaret Thatcher.
In this article and
afterwards around the world because this
became the dominating model of how
we design markets in the world.
In this article, Milton Friedman
makes the following statement.
In a free-enterprise,
private-property system,
a corporate executive is an employee
of the owner 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.
So Friedman harshly criticizes those who
defend a broad understanding
of corporate responsibility.
Arguing that those who, for
instance, fight for
a responsibility of the corporation beyond
profits are just socialists who
threaten the freedom of our society.

Because managers are agents of

They have to align their own decisions
with the interests of the shareholders.
You cannot spend shareholder money for
your own decisions.
For your own deviating interests.
If you, for instance, invest in a better
pollution filter for your factories
that goes beyond the law, according
to Milton Friedman, you are stealing
the money from the shareholders because
they don't give you the right to do that.
It's their money that you take for
your own decisions.
As managers, we have just one moral
duty which is to maximize profits.
Other more duties exist, but they
are foreseen for other, other roles and
other identities.
You have other obligations in your
role as a church goer, as a mother,
as a father, as a good citizen.
But all of these moral obligations
are strictly separate from
those of the manager.
How could Friedman make such an argument?
And how could such an argument
fall on such fertile ground and
find such a strong support?
We have to understand Friedman's position
from his particular historical context and
from his belief system.
We look at Friedman with a hindsight
with the advantage of the hindsight.
And what might look very
immoral to us might make a lot
of sense in his particular value system.
Milton Friedman writes down his
theory in the late 60s, early 70s.
This is the climax of
the fight of the systems.
Communism and capitalism.
And it is far from being clear
who would win this fight.
So in both camps,
defenders of the respective ideologies
defended them without compromise.
And a key pillar of the Western model,
the capitalist model,
is the belief in property rights.
Where does that come from?
In the Middle Ages, there was a saying
in Europe and mainly in the German
part of Europe that was town air
makes free, town air makes free.
Why does town air make free?
Well, most people were
slaves of feudal landlords.
And they were condemned

to lead a miserable life.

There was one chance to
get out of this situation.
They could flee to one of these cities
that popped up in the Middle Ages.
And they had, to a certain degree, their
own rules of the game already established.
If they could flee to
one of these cities and
live there for one year and one day,
they received citizen rights which,
basically at that time,
meant property rights.
The right that nobody could come and
take away your property arbitrarily.
So human rights in Europe
developed as property rights.
And the capitalist system as such is
deeply shaped by this belief that
property rights are a key element
of how we understand human rights.
The government is the enemy because
it's the government who reduces or
threatens by arbitrary rule making,
your property rights.
This is deeply ingrained
in our belief systems.
And it is connected to another strong
element of our capitalist belief system.
It's the belief in the power
of the free markets.
Markets are, according to this belief,
the best instrument to
protect property rights.
But not just that, they are also superior
to all other economic systems that we
know with regards to
the promotion of the common good.
That's what we believed for many decades.
And it goes back to the 16th
century philosopher Adam Smith,
who made an amazing observation
when he looked at markets.
He said, by pursuing his own interest,
the individual promotes that of
society more effectually than when
he really intends to promote it.
So on the market, people meet as egoists,
only interested in their own projects.
If I'm a buyer, I'm a seller,
I want to make money.
I want to have a product.
I'm only interested in that,
but by meeting,
by doing this transaction,
we do not just satisfy each other.
The more of these transactions there are,
the higher the level of
the production of goods, the higher
the level of prosperity in a country.

Human beings are calculating

egoistic hectares.
We are our home economicals,
but the market is able to
neutralize that egoism and
transform it into the common good.
Adam Smith calls this
the invisible hand of the market.
Ronald Reagan later on called
this the magic of the market, so
abracadabra, the market turns
egoism into common good.
Milton Friedman combines
these two elements,
the property rights and
the market efficiency.
And he argues that the market,
therefore, is the best way of,
of promoting both my interest and
the interest of everyone else.
Markets are the solution.
Governments are the problem.
Egoism is good.
Greed is good.
Over the coming decades,
this has become a rigid belief
system that we teach in business course,
that we enact in corporations and
in making legal framework around
markets around the world.
When the financial industry got criticized
for their role in the financial crisis,
the collapse, the almost collapse of, of,
of the banking system, the CEO of Goldman
Sachs defended himself by saying, well,
I am just doing God's work,
doing God's work?
This sounds like a Hebraist of a CEO who
has lost his connection to the real world,
but if you look at,
this profound belief in the efficiency
of markets to promote the common good,
you might bet, get a better understanding
of why a CEO can dare to say this.
The invisible hand of the market
promotes the coming good much better
than anything else.
So it's a divine mechanism.
Doing God's work.
Doesn't that ring a bell?
Yes, bingo.
Another powerful CEO has used the same
expression, Jeff Skilling from Enron.
And greed is good is a sentence
we know from Gordon Gekko,
from the film Wall Street,
this rogue trader.
Greed is healthy is a sentence for which
even Frederick Buskey has become famous.
A real rogue trader, who said this in

a graduate ceremony at the University of

California at Berkeley in 1980.
So we trained generations
of managers in this idea
that something that normally is perceived
as bad, greed, egoism, is a good thing.
As a manager, you should be greedy,
you should be egoistic,
because that's the best way
to promote the common good.
If we all believe in this, it is easy
to imagine how we can disconnect from
a broader social context, how we can
focus just on maximizing profits,
regardless of the consequences for
society in general.
It does not necessarily lead to ethical or
to unethical decisions.
But it supports an atmosphere
of rule breaking,
it supports this effect that we have seen
already in all the stories that we shared,
where managers disconnect from a broad
understanding of what their role is.
So let me conclude with four observations.
First, institutions can
turn into rigid ideologies,
they are perceived as
true in that very moment.
Second, ideologies
are structured simplifications.
Third, shareholder value ideology
promotes greed as a virtue, and
shareholder value ideology is
perceiving profit maximization as
the only moral responsibility
of corporations.
And finally, therefore,
it can promote ethical blindness when
it is aligned with organizational and
situational forces that push managers
in exactly the same direction.