LESSON 1

THINKING CONCEPTUALLY ABOUT POLITICS

L. Ganguly
Financial Analyst
After reading this lesson you will be familiar with:
Thinking conceptually about politics
The concepts of Liberty, Equality, Justice and Rights
Lets face it. To todays youth Politics is not cool. Nor is Ethics. Business to todays young
businessperson is almost by definition supposed to have no Social Responsibility whatsoever.
Young MBAs go on about the need to have everything in life (whether in the private or public
sectors) operate on a lean and mean basis with as much accruing to the bottom line in the Profit & Loss
a/c as possible even if that means indiscriminately firing working people for instance who have families
to feed. If you try arguing that on a macro basis this is unsustainable and no society can maintain its
social stability and go on functioning with such obsessions, they just shrug and move on without pausing
to appreciate your point. To them their own performances and careers are all that matters.
So the introduction of a new paper forcing a reflection on such aspects of ones life and subjects of
study and work, for students of business and commerce, is welcome and not a day too soon.
Particularly so because in the last half a decade or so worldwide, the trend of the eighties and early
nineties of ruthless and valueless corporate capitalism with its obsessive stock market led focus on short
term (sometimes quarterly) profit figures has thrown up its potential for causing massive economic and
social havoc. Thousands of people, for instance, who worked for ENRON in the US lost their retirement
funds and jobs when the unethical and fraudulent practices in that company ultimately caused its
worldwide collapse. Thousands more lost the value of their investments in Enron stock and a whole
community in the town where the corporate headquarters of Enron was located suddenly were left
stranded and out of work one fine morning. The story has been similar in other stories like WORLDCOM
in the USA or more recently in PARMALAT in Italy or in other examples in other parts of the world. In
India too, there are too many piled up examples of the blatant abuse of proximity to political power by the
owners of large industry groups for their own selfish benefit and also for harming/destroying business
rivals often in shameless violation of both legal and societal commitments. Functioning ethically while
conducting business or spending money on public welfare out of a sense of social responsibility, needless
to say, hasnt been in the list of priorities for such entities. But there are notable exceptions (like the Tata
Steel sub-group of the Tata Group, for instance) from whom equally there is much to learn.
Why and what peoples economic and political behaviours are, can be and should be systematically
studied and pondered. That is what the study of politics seeks to do and political behaviour is almost
entirely linked to economic behaviour and interests and vice-versa. That is the reason why many schools
of politics and political thinkers prefer even to identify their subject as political economy rather than
simply as either politics or economics. Most students of business or commerce are either unaware or dont
systematically ponder this link as part of their curriculum of studies. They only become aware of this
reality of real (as opposed to theoretical) life when their professional lives start and thus often rather late
in life.
Hence this paper should go a long way in a more wholesome intellectual arming as it were of
students of commerce and business, who clearly need to have the ability to think and think more than
merely in terms of accounting, legal and management techniques for coldly managing businesses. For
businesses dont operate in vacuum. They are social entities of any living and functioning society where

politics is determined by economics and economics is determined by politics and social nuances add its
own spice of complication to the picture.
Nowadays young people often pompously declare: I am not interested in politics. To them politics
is some disreputable art of manipulating ones way into positions of state power for personal and party
gains. And they dont look forward to being called a politician ever in their working lives. In fact the
word has almost gradually become a term of abuse.
As far as the concept of politics is really concerned this is a most naive and dumb notion. Actually
we are all politicians.
In everything we say or do, we are taking a position that is actually a political position whether we
like it or not. For politics concerns everything in life. What and whether you will be educated, what and
whether you will get a job, how much money you need to pay your bills and run your life and that of your
family, how much money you can or should earn and from it how much you need to and should surrender
in taxes to the state etc are all political questions. Should your education and preparation in life be the
same as of everybody else or should some people other than you have more or less opportunities than you
have? . Even whether what you call your private property is or should be strictly your own or is or should
be owned ultimately by the whole of society and the nation and what rights you can or should have to
dispose off your property as you like are political questions. In other words ones level of individual and
collective freedom, equality vis--vis others, justice, rights and duties are all part of the realm of politics.
You are not living in a no mans land or in the middle of the ocean or on some planet in outer
space. You always exist within and under the jurisdiction of a state that has its own set of laws, rules and
policies with its own bias. So when you take the stance, as many do, that you are only following the rules
of the game and trying to live your life, that is also a political position because that only means you have
by your actions (by default) accepted the status quo whatever it is. If you are advantaged in society
relative to others then you have accepted that deal (probably happily) and dont want to touch politics for
things are fine with you. If you are not advantaged on the other hand or you are exploited or are otherwise
getting a bad deal you have still accepted the state of affairs as they are without trying to change your lot.
So when you say you want to keep away from politics and do nothing, you are actually taking a political
position in favour of the system as it is.
If you do decide to do something then of course you are in politics in one form or the other. Even if
you dont you still are in politics because you are helping the status quo to prevail and be as it is by
accepting it and working under it.
Frankly therefore whatever you do or you dont is political one way or the other whether you like it
or not.
So you might as well start thinking and pondering politics systematically. How about starting out by
looking at how mankind has been thinking on politics conceptually from earliest times to the present day.
Then maybe you can decide for yourself what you think politics is or more accurately what your politics
is or should be ?.
The route that the evolution of human thought took was sunbstantially determined by historical
development. The political structures of the times often egged on by the growth of some streams thought
in political philosophy.
Even as long ago as in the times of the Greek civilisation there emerged concepts that were
substantially of the nature of modern democracy. For instance the Greeks had city- states where all male
citizens who did not work as labourers or with hands could vote and elect representatives to rule. Women
could not vote nor could men who worked with hands as labour. So the concept of democracy, which has

embedded within it the concepts of equality of all human beings, was not fully developed but had some
sort of a birth during this time. This was also the time when great political philosophers like Socrates,
Plato, and Aristotle (regarded as the father of political science) propounded their thoughts. Their thoughts
and the political structure of state at the time, it is observed, were somewhat in sync and not in opposition
to each other. So both reinforced each other in a way.
In India, there is strong historical evidence to believe, we have had the system of Panchayats in
villages even thousands of years back. And initially the panchayats did function democratically with
villagers electing representatives to govern the village. The aberrations that we see today like where the
same family, often from upper castes, control the powerful positions in the panchayat hereditarically for
ever, particularly in North India happened much later over the centuries.
After the Greek era, starting with the era of the Romans in Europe and later there was the
development of monarchy and a line of feudal serfs ruling under them in a feudal structure. During this
period up to Machiavelli, the thinkers were concerned with the role of the king, the church etc. There was
no attempt on the whole to suggest that the monarch or some select families can not be more equal than
others.
The development of notions of equality, rights and duties, and justice were all suitably within the
realities of the reality of a monarch led feudal structure at these times. No thinker could probably have
suggested anything other than that the king and his family had a divine right to rule for ever because then
they might have been beheaded or killed. Everyone living anywhere in the world was a subject of the king
or monarch ruling over the people where one lived and could only opine on fundamental questions of
political philosophy within the limits that would not make the monarch or his family uncomfortable or
would not question the feudal structure laid down by him.
The entire period from the Greek times up to Machiavelli, eighteen or so centuries is referred to as
the classical period and all the schools of thought that arose during this vast swathe of history are
collectively referred to as the CLASSICAL schools of thought.
The classical period was more philosophical than political. The boundaries of the classical thinkers
did not stop anywhere (except perhaps with some of the thinkers in accepting the absolute right of
monarchs to rule) and included religion and spirituality, morality, fundamental question of the physical
sciences and time and space etc, warfare, relations between genders, castes, and classes and notions of
God and justice. They were obsessed with what was good and proper and how the system of society and
state may be in sync and harmony with the laws of religion, morality and spirituality. (That is perhaps the
reason why even the right of monarchs to rule was justified along religious lines.) There was a constant
quest for the best form of society and the state and the nation came before the individual in this quest and
was the main tool in creating the ultimate good. The classical notion of the individual man was that when
isolated he was not self-sufficing or able to survive and he was like a part in relation to the whole. The
end of the state was to pursue a good life for all and the state was to act as an education institution in
making every man a good citizen in pursuance of this goal. There had been a debate about which comes
first the common good or the private good but the view that prevailed was that the private good was to
be sought for individuals as members and part of a society for ultimately no private good is possible
without the common good. The common good was regarded as more complete than the private good and
it was the completeness, which made the pursuit of common good superior. Clearly the classical schools
were not ready to let each individual go his way and achieve what he wanted and leave him to enjoy or
suffer his achievements or failures as they may be. The classical schools also were concerned with
arriving at the most ideal state and the most stable system of government. The classical thinkers asked
questions like who should rule and why ? , what is the best form of government ? , why do conflicts
occur ? and how should principles of imparting justice be formulated.

In economic policy the monarchy-feudal era was dominated by what is referred to as mercantilism.
Classic mercantilism believed in regulation and control of the economy by the king or the monarch in the
interest of national strength and development. Its core belief was to follow policies of political and
economic self-interest and the building of wealth through trade policies that encouraged exports and
discouraged imports. The strength of a country, the strange belief as it was in that era, was that it could be
measured only by its gold hoard. May be because trade debts (between nations and even individuals in
some situations) were resolved in gold, and so a successful trade policy was that which was designed to
swell government coffers and thus the strength of the government. The idea was to trade with others
nations to get rich at the cost of those nations. So naturally governments led by monarchs were wary of
freeing trade beyond limits.
The classical period is regarded as having ended with the arrival of the Renaissance and the period of
Reformation in Europe and the Industrial Revolution the 15th century onwards. A new era of schools of
thought made its beginning, which survives to this day with great dominance in many ways, and is called
the Liberal school. The theories propounded by the liberal thinkers are referred to as the LIBERAL
schools. This period was seeing the beginning of a marked change in the sophistication of technological
means of production in the western world as a result of the development of modern science. Far more
could be produced in modern mills and factories by the business owning capitalist class of European
countries than these countries needed and thus the lure of earning surplus through international trade
made its appearance. Traders and businessmen wanted unfettered access to markets round the world to
sell their production and source raw materials. The authority of kings and monarchs the world over was
an impediment to free trade and business because they would impose taxes and also restrict trading access
wherever they ruled. The new notion of equality and maximum freedom for instance, for all men, that
liberal thinkers came up with proved very useful for the new business and trading classes who obviously
felt that they should not be under the control of monarchs and feudal powers in the forward march of their
rise to wealth and power. Again as mentioned before historical and economic realties helped aid the rise
to prominence of patterns of thought in the realm of politics and philosophy which it has to be said served
those realities well. The main liberal thinkers were Grotius, Hobbes (who wrote the classic Levathian),
John Locke, Adam Smith, Thomas Jefferson, Thomas Paine, Jeremy Bentham, J.S. Mill, and Herbert
Spencer.
The central theme of this new political philosophy was individualism. The individual man was all
that mattered. His freedom to do as he pleases or exert his will was the main focus. If one individual
through an exertion of will gets ahead and others stay behind that was of no consequence to liberals.
They believed and still do in the survival of the fittest. If in the competition between individuals
somebody got ahead and others fell back and that created a permanent advantage to on for the winners
and their families in the competition that was fine with liberals. The lot of each and every man was not
to be the responsibility of the community. If somebody was poor and miserable, so be it, as long every
individual was under the laws of the land equal and the state had a system of adjudication and governance
over the disputes between individuals in a proper legal set up of law courts and the state defended the
people of a state from foreign aggression.
The one major positive in the liberal scheme of things was the assertion of the theoretical equality of
all men and no special privileges or divine rights for the monarch or any one individual or family. All
individuals were endowed by his creator with certain inalienable rights according to the liberal thinkers
and these were principally the rights of life, liberty and property. Since man predated the state, the state
should have no right to take any of these rights away. The newly rising classes of traders and businessmen
were attracted to the appeal of this philosophy easily because they more than anybody else wanted
unfettered access and rights to trade and the right to accumulate wealth and property which they did not
want the state to have powers of taxation over. To them lesser the restrictions and taxes the better it was
and so the appeal of main liberal notions was obvious to them. (It is interesting to observe here that
though we are far removed in terms of time and geography from the settings of those days, to this day

when our government in this day and age, whether the one that was voted out last year in 2004 or the
present one, carries out liberalisation and liberal economic reforms it is always the business interests
and classes who are to be found most loudly cheering.)
The liberals have three basic assumptions as far as the political economy view of the world is
concerned.
First, that individuals are the principal actors within the political economy and therefore should be
the proper unit of analysis for thinkers. While to many this may seem obvious at first glance, since all
social activity can ultimately be traced back to individuals, this basic approach is totally different from
that of Socialism or Marxism for instance which makes other totally alternative assumptions.
Second, that individuals are rational utility-maximising actors in the political economic scene.
(There will be much said on the philosophical-ethical concepts of utility and utility maximisation later
in Chapter III) Rational action simply means that individuals make cost-benefit calculations across a wide
range of possible options, and then choose the option which yields the highest level of subjective
satisfaction or makes him or her least worse off.
Third, that any individual maximises utility by making trade-offs between goods. For instance,
consider a trade-off between clothing and jewellery. If the price level of clothing is high, and the level of
jewellery is low,, then some individuals depending upon their desires for these two goods would be
willing to trade jewellery for apparel. So in a process of exchange and trade, individuals according to
Liberals, increase their utility. Similarly those who prefer clothing over jewellery will trade off their
consumption of jewellery for clothing. This process of exchange goes on until each individual, given the
existing quantities of jewellery and clothing, is as well off as possible without making someone else
worse off. At this point, all individuals in society will have maximised their uniquely defined utilities.
The Liberal argument has been most profoundly applied to the economy. The argument of liberals is
that because market exchanges are voluntary, and if there are no impediments to trade among individuals,
then everyone can be made as well off as possible given existing stocks of goods and services. All
participants in the market, in other words, will be at their highest possible level of utility.
The liberals introduced the notion of contract between the individual and the state. They declared
the state is not a natural institution but comes into existence by mutual consent for the sole purpose of
preserving and protecting the individual rights. When the contract is violated the individuals have not
only the right but the responsibility to revolt and establish a new government. By rights of course, the
liberals mainly meant the right to own property and to have the right to add to it to any extent (or to
corner as much wealth as possible and get as rich as possible), having the freedom to engage in any
activity and live ones life exactly as one wanted (whether it was moral or immoral, bad or good,
exploitative of others or benevolent in nature) and have full protection of the state. The role and
responsibility of the state was merely to provide protection for these rights. The state was not to bother
with whether everybody had access to the basic necessities of life like food etc and leave everybody to
free competition for the scheme of nature was such that only the fittest survived. So in other words the
state needs have no particular developmental role as we understand that to be nowadays. The liberals
were dismissive of the idea of common good. They propounded that notion that the least role for the
government was the best option and the least government was the best government. (Nowadays when we
hear relentless urgings from economic reformers asking for less government and more reforms we
hear the same school of political and philosophical thought actually.)
The main and obsessive focus of the liberals was on individual freedom and rights without any
compromise, particularly with respect to property and to equality before the law (for all without any
exceptions made for monarchs or feudal lords or anybody else) and thus in this limited sense for justice
and democracy.

There have been historically three stages of liberal thinking though. The original liberals starting
from the eighteenth century like Adam Smith and J.S. Mill were the original Classical (or Negative)
Liberals. After the great Socialist and Marxist critique of capitalism and liberal thought (to be discusses
later) that came the middle of the nineteenth century onwards, the liberals strain thought of modified itself
to adapt to the weaknesses of capitalism and liberal thinking. A new school of liberal thinking emerged
with thinkers like Harold J. Laski and later Keynes (the economist) who propounded that there needs to
be intervention of the state in many aspects of the life of the economy and the society for the rights
propounded by earlier liberals to be meaningfully available and enjoyable. Without such positive
intervention guarantees of liberty, equality, freedom etc will only remain theoretical and on paper with no
actual enjoyment available to anybody particularly those without adequate financial means. This new
school of liberal thinking came to be known as the Positive Liberals. Since the 1950s and 1960s and in
particular in the closing quarter of the last century, there has been a return to some of the views of the
earlier and original liberals led by people like Sir Isaiha Berlin and the economist Milton Friedman. Also
there have been many minor schools of thought in between mostly originating in America. All of these
schools of thought which disapprove of the idea of intervention of the state and wish to see the most
minimised existence and influence of the state in peoples lives are collectively and somewhat loosely
referred to as the Neo Liberals. The neo-liberals have a fanatical belief in economic policies like
deregulation, privatisation, international trade liberalisation, free capital movements across the world and
a constantly shrinking social and public sector (including for such basics like health care and primary
education and even such basic state tasks like tax collection by the government). These measures are all
that is needed according to them for a permanent dawn of global prosperity and abundance. It is important
to note here that until recently important and powerful international organisations like the IMF and the
World Bank shared the fanaticism of the neo-liberals fully and aggressively advocated them and put them
up as conditions even for sanctioning loans and financial assistance programs to developing and poor
nations. Only recently they have begun moderating their position only very slightly while still remaining
basically committed to the neo-liberal plan.
(Liberal thinking is also sometimes referred to in popular discourses and debates as rightist for
instance in newspapers and other popular media.)
Just as Liberalism emerged in reaction to Mercantilism, Marxism and other Socialist Schools of
thought emerged as a response to the spread of Liberalism in the nineteenth century. The onset of a liberal
trading and business environment had caused the emergence of a new class of rich business owners by the
eighteenth century. Previously there were only the few kings and feudal lords who were both rich and
militarily powerful. But now suddenly there emerged in the manufacturing and industrial belts throughout
the western world a whole new class of owners of businesses and manufacturing enterprises who were
constantly getting richer and richer and a vast new class of workers and working classes (the majority)
emerged to serve them who were getting increasingly poorer and poorer and became the toiling masses on
whose labour basically the owning classes accumulated their wealth. Through out the western world, this
new class of business owners of production lived in great luxury whereas hundreds of thousands of
citizens of the working classes lived like animals in ghettos and slums in inhuman animal like conditions.
Further the owning families used their wealth (please note the poor had no money to invest in businesses
and only the rich had surpluses for investment) to increase their grip on all economic production in
society. The son or daughter of a worker looked forward only to a life of animal like treatment from his
rich employers and to a life of animal like toil under the son or daughter of the new bourgeois business
owner who would just inherit the whole set up of advantage of his family and continue to aggrandize that
position of advantage. Thus there emerged two classes the rich or the bourgeois and the poor or the
proletariat. The prevailing situation looked like the bourgeois would keep getting richer and richer and
add to its wealth with every new generation whereas the poor or the proletariat would keep getting poorer
with each of its own new generation. Thus a relationship of permanent slavery was coming into existence
between the two classes, the rich and the poor, by the eighteenth century. The poor became slaves almost,
of the rich, and stuck in that relationship, it seemed, for eternity. Further it became clear that on the whole
there could be no movement between the two classes. A poor man would always be poor however hard he

worked and a rich man would always be rich and powerful because his family was rich. The freedoms and
rights and sense of justice that the liberals theorised about suddenly made no sense to the vast majority.
What did those liberal values mean if only a few could become very rich while the vast majority became
poor and lived like animals? . It seemed the freedoms, and rights and liberal values and systems of state
that the liberal thinkers advocated really only suited the interests of the rich business owning classes and
their families to keep getting richer and richer. Why should the world be only for the winners in business
while the rest (the losers) of the society should be left to just rue their luck and stay dirt poor for ever in a
corner? such questions began to be asked. It is into this historical setting of a vicious cycle in the
western world of vast ever increasing wealth for the few and equally ever increasing poverty and
pauperisation for the overwhelming vast majority, that Marxism and other socialist thinking emerged.
Karl Marx, who was a political economist of the nineteenth century, became perhaps the severest
critic of liberal capitalism. Whereas Liberals argued that the market allows individuals to maximise their
utility, Marx propounded that capitalism and the market tends to create extremes of wealth for the
capitalists (those who own and deploy capital to start and run businesses) and extremes of poverty for the
workers. Marx rejected the assertion of the liberals that exchange between individuals necessarily
maximizes the welfare of the whole society and propounded the theory that capitalism is an inherently
contradictory, flawed and non-sustainable system (without any state intervention as the liberals up to that
time wanted) that should be and will be both inevitably overthrown and replaced by socialism. Marxism
makes three main assumptions. First, that classes are the most important actors in the political economy
of any society and are the appropriate unit therefore for analysis. Further that there are mainly two classes
that are important for understanding the world: the class of capital, or the owners of the means of
production, and labour, or workers. Second, that the classes act in their own material economic interests
just as Liberals assume that individuals act rationally to maximise their utility. Marxists assume that each
class acts to maximise its own economic well being, of the class as a whole that is. Thirdly, Marxism
assumes that the basis of the capitalist economy is the exploitation of labour by capital.
(Marx based his analysis on the labour theory of value, which propounds that the value of any
product is determined by the amount of past and present labour used to produce it. According to this
analysis, in capitalism, the value of any product can be broken down into three components: constant
capital, or past labour as embodied in plant and equipment or the raw materials necessary to produce that
good; variable capital, the wages paid to labour to produce the item; and surplus value defined as
profits, rents, and interest which was expropriated by or paid to the capitalist. The capitalists
expropriation of surplus value, according to Marx, denies labour the full return for its efforts.)
(Marx extended his theory to predict that since a minority of the capitalist class was taking an unfair
share of the gains away from labour perpetually and since the relationship between the two classes was
essentially antagonistic, it would ultimately lead to a conflict. He also constructed a sophisticated theory
to show that capitalism as it was then practised would ultimately suffer a crisis and would lead to a revolt
by the workers who would overthrow capitalism and establish a socialist society in which the means of
production would be owned jointly by all members of society and no surplus value would be exclusively
expropriated by any one dominant class. He a system of state emerging gradually where all mean of
production would be owned by the people collectively and its fruits reaped and shared collectively on the
basis of from each according to his need to each according to his ability.)
It is important to understand that not all streams of socialist thought went as far as to predict a total
end of capitalism and thus were fundamentally rather different from Marxism but over time Marxism has
attracted and dominated most of the socialist space for whatever reasons.
(Different streams of socialist thinking are collectively referred to as leftist in popular discourse
just as liberal thinking is referred to as rightist. The left versus right debate has gone on for more than a
hundred and fifty years now and is unlikely to end soon.)
The political, philosophical, ethical and economic aspects of basic concepts like Liberty, Justice,
Rights and recognition all have a liberal view and a socialist or Marxist view. Or in other words a

rightist view and a leftist view. This book will attempt to ecxplain all views of the concepts as far as
possible.
(It is the authors hope this will help students to think, ponder and feel and make their own choices in
the end when formulating their own political biases and preferences as a conscious process or otherwise.)
The Story of Social Thought
TIME PERIOD
Ancient times up to
Early
18th
Century
onwards (for a hundred and
fifty
years
or
so
approximately)
Mid
19th
Century
onwards
Early
onwards

20th

1960s onwards

Century

SCHOOL
THOUGHT
Classical

OF

Negative Liberals

Socialist and Marxist

Positive Liberals

Neo-Liberals
(who are substantially
similar to the early negative
liberals in their belief system
the reason why they are
referred to as neo-liberals)

PRINCIPAL THINKERS
(and their principal works)
Socrates, Plato, Aristotle,
Machiavelli
Bentham,
J.S.
Mill,
Rousseau, Herbert Spencer,
Adam Smith (The Wealth of
Nations, 1776)
Karl Marx (Das Kapital,
1867), Fredrich Engels, V.I.
Lenin, Paul Sweezy
Harold J. Laski, John M.
Keynes (The End of Laissez
Faire, 1926), McPherson,
John Gray, John Rawls
Sir Isaiah Berlin, Milton
Friedman (Capitalism and
Freedom, 1962), F.A. Hayek
(The Constitution of Liberty,
1963)

(Please note Vedic or Upanishadic Indian thought for instance or any other thought from any other
part of the world finds no place in the above table since it is intended to be principally a chart of western
thinking and is as per the design of the syllabus for this course)
Liberty
The word liberty is derived from the word liber which means free. We all want to be free and have
as much freedom as possible. But what exactly to be free means or should mean. Should there be
restrictions on freedom and what and how much? . What if the freedoms enjoyed by two people leads
them to come into conflict. Such questions have been attracting thinkers from the earliest times.
Almost all liberal thinkers commented on liberty but they all brought their own flavour to it and one
cant assert that there is an exact uniform view. Also this is one concept on which the views have been
more philosophical and ethical than either political or political-economic. Hobbes defined liberty as the
absence of external impediments, which impediments may oft take part of mans power to do what he
would do1. For the German philosopher Hegel, liberty strangely was simply obedience to the law. John
Stuart Mill, one of the most important thinkers in the liberal tradition, commented the only freedom that
deserves the name is that of pursuing our own good in our own way so long as we do not attempt to
deprive others of theirs or impede their efforts to obtain it2. Later after the limits of liberal capitalism
1
2

Hobbes, Levaithan, op. cit.

J.S. Mill, Three Essays-Liberty, Oxford University Press, London 1975, p. 4

became apparent. Marxian and Socialist thinking emerged to interpret liberty as (1) liberation from the
coercive social apparatus and institutions (which the working class faces), and (2) to establish an
atmosphere in which man could build a world according to the needs of humanity as opposed the needs of
capital and capitalists who own the capital.
Post the socialist critique of the liberal interpretations of liberty, the positive liberals in the early part
of the twentieth century refined the old liberal notions. Laski, for instance, defines liberty as the absence
of restraints upon the existence of those social conditions which in modern civilisation are a necessary
guarantee of individual happiness3. And McPherson defined liberty as living life to the fullest.
(Obviously he meant if you had all the freedom and liberty but not enough food or decent shelter and
were worked like an animal or a machine all day, liberty would be a theoretical meaningless notion for
you.)
So at one stage of history, liberty merely was understood to be absence of restraint in the free
competition of men with being law being as silent as possible and state interference at its least. Soon it
was realized after the experience of a century or so, that liberty needs to be attained by all and can not
merely be left to the lack of impediments. The state and social institutions need to actively help in that
process of attainment it was left. So while the earlier concept of liberty which was in the nature of bar on
the state was a sort of a negative liberty the latter conception asking for the involvement of the state and
society in helping people get achieving liberty was positive liberty.
There are three problems or aspects that arise when analysing or thinking about the concept of
liberty:
(i)the nature of liberty
(ii)
the institutions to safeguard liberty and
(iii)
hindrances to achieve liberty.
As far as the nature of liberty is concerned the early Liberal thinkers were obsessed with individual
liberty, may be because they were principally fighting against medieval orthodoxy, feudalism, ignorance,
and a society based on privileges of kings and landed feudal lords. They were arguing that once man is
freed from these chains, man will individually, each according to his preference, find his own individual
happiness. All that was needed was rule of law and political rights, representative government with
separation of powers and independence of the judiciary. Political parties were conceived and became the
principal institutions to safeguard liberty. It was realised it is not enough for the rights and freedoms to
be granted but there was a need for institutions like political parties, parliament etc. But since the number
of people who would unselfishly and honestly uphold liberty and who had the means to do so was
extremely small due to the class divide in society, Socialist and Marxist ideas of liberty emerged which
argued that hindrances in the path of liberty are not only the absolute and dictatorial political
institutions, the removal of which will provide liberty, but also much more deep rooted and difficult
problems like poverty, hunger, ignorance, alienation, and economic inequality etc. (They also argued
women, who were one-half the population of course have always been denied liberty.) They argued that a
collective initiative was needed from humanity as a whole in which some people may even loose their
individual liberties which liberalism considers as sacred. So the emphasis moved on from preventing the
state or anybody else denying an individual living his life to asking what would the quality of that life be?
.
Liberal thinking on liberty changed from negative liberty to positive liberty over a century and a half,
from Adam Smith to Hobhouse and Laski, from the notion of silence of laws as liberty to the presence
of socio-economic conditions and political conditions to ensure true freedom.

Laski, Liberty in the Modern State, George Allen and Unwin, 1961, p. 42

The development of the initial concept of negative liberty happened over a century or so as a result
of the contribution of thinkers like Adam Smith (1723-90), John Locke, David Hume, Thomas Paine,
Herbert Spencer, Bentham and John Stuart Mill (1806-73). Later in the second half of the last century,
mainly among some economists, advocating maximised free markets and free international trade, the
early concepts of liberty made a comeback. Thinkers like economists like F.A. Hayek, Milton Friedman
and Robert Nozic etc and Sir Isaiah Berlin, also sometimes referred to as neo-liberals, are the principal
advocates of this latest trend in liberal thought.
The most eloquent of the early liberals who advocated what we now call Negative Liberalism was
John Stuart Mill (1806-73) whose essay On Liberty (1859) went beyond mere liberty from the
interference of the state. It also talked of liberty for the individual from the pressures of society, public
opinion and social customs and conventions. He really saw liberty as the means to an end, the end being
self-development. (This was also the concern of the classical Green thinkers like Socrates and Plato.) As
long as an individual did not harm others or interfere with others interests he should be free to pursue his
own development and interests the way he wanted or deemed good. So even if a person wanted to smoke,
drink, gamble, take drugs, watch pornographic films all day and even decide to commit suicide, he should
be free to do so because these are his personal individual decisions and he needs to have full liberty to
pursue his own path of growth.
(It is safe to assume Mill would had no problem with many of the modern debates of the day like
marriage between homosexuals or allowing full freedom for abortion or allowing euthanasia. He would
have heartily supported all of them. Quite something for a man of that long ago clearly.)
Mill also of course, like other early liberals, extended his theme of personal liberty to the economic
sphere to advocate what Adam Smith had advocated a hundred or so years back - that is the capitalist
model of classical economics, which saw maximum economic benefit for all in allowing and promoting
maximum economic licence and freedom for operations in trade and commerce.
Mill was convinced social and political progress depended mainly on the originality and energy of
the individual and his free choice and so every encouragement was needed for each person to assert
himself in his own peculiar way. For this reason very interestingly he objected even to state provisions for
education because he feared this may lead to brain-wash or to the moulding of each person like another.
Most significantly for his times, he was even suspicious of democracy for he felt it could lead to the
tyranny of the majority over the minority and wanted protection for the minority from the interference of
a democratic state. He commented:
The notion, that the people have no need to limit their power over themselves, might seem
axiomatic such phrases as self-government and the power of the people over themselves, do not
express the true state of the case. The people who exercise the power are not always the same people
with those over whom it is exercised; and the self-government spoken of is not the government of each
by himself, but of each by all the rest. The will of the people, moreover, practically means the will of the
most numerous or the most active part of the people precautions are as much needed against this as
against any other abuse of power. The limitations, therefore, of the power of government over individuals
loses none of its importance when the holders of power are regularly accountable to the community and
in political speculations the tyranny of the majority is now generally included among the evils against
which society is required to be on its guard4.
(This was probably the earliest realisation by any thinker of the perils of oppressive rule by a
majority that democracy clearly can lead to. An example of liberty being violated would be the recent
reports from some states where some universities have tried to impose a dress code on women students
barring them from wearing jeans to college and have received the support of some elected representatives
for the same as well. Clearly this would be a case of a minority of the population of girl students who
4

J.S. Mill, On Liberty, Everyman, pp. 67-8

10

want to wear jeans to college having to face a bar on their personal liberty with the support of
democratically elected representatives who are by definition winners of majority support in a society.
Similarly but morally at a different level perhaps would be the recent case of the issue of closure of
Dance Bars in Mumbai where a minority of the people, those who work for dance bars and those visit
them are seeing their personal liberties, the liberals of the Mill pattern of thinking would argue, being
trampled upon and extinguished by the majority. One can look for and find numerous examples from our
colourful and varied democracy even, where in however small a way, there is a tyranny of the majority.)
Apart from Mill in more recent times, the neo-liberals like Sir Isaiah Berlin, Cranston and Milton
Friedman have gone back to many of the views of the early negative liberals. Sir Isaiah for instance has
commented that you lack political liberty or freedom only if you are prevented from attaining a goal by
human beings5. He even said that if a man is free to purchase food or go on a world tour, but can not do
so for lack of money, it his fault he has the liberty but he himself is incapable of enjoying it. He
comments:
If my poverty were a kind of disease, which prevented me from buying bread or paying for the
journey, or getting my case heard, as lameness prevents me from running, this inability would not
naturally be described as a lack of freedom, least of all political freedom6. He clearly distinguished
between the presence of liberty and the socio-economic and political-economic conditions necessary for
enjoying liberty. He says for instance:
Thus the distinction between freedom and the conditions for freedom is not a mere pedantic
distinction, for if it is ignored, the meaning and value of freedom of choice is apt to be downgraded. In
their zeal to create social and economic conditions in which alone freedom is of genuine value, men tend
to forget freedom itself7.
So clearly, the main characteristics of the belief system of the liberals - the classic early negative
liberals and the more recent neo-liberals also to some extent are the following:
1. All individuals are rational beings knows what his interests are.
2. Liberty is essentially negative the absence of restraints.
3. The state or society can not interfere with an individuals liberty. The main liberties,
which are all personal essentially, the liberties of thought and discussion, of association and
assembly.
4. There is no conflict between personal interest and collective social interest for it is by
serving his own interests that an individual serves the social interest. Personal liberty is a precondition of any social progress.
5. Those actions of individuals which influence or harm the society can be controlled and
stopped by the state through the use of laws and the justice system but this interference should be
the minimum.
6. There should be a constitutional guarantee against the state taking away personal liberties
through laws. Even peoples representatives sitting in parliamentary democracy should not have
the right to enact laws beyond a point that take away an individuals liberties. Democracy is not a
sufficient guarantee of personal liberties as it may lead to the tyranny of the majority over the
minority.
7. There is a difference between liberty and necessary socio-economic conditions for the
realisation of liberty. Liberty may be against justice and equality. Free market capitalism is the
only system for organising economic activity, which ensures the liberty of each individual and
also optimises production and economic benefit in any society.
The objection that one can have in accepting the above negative concept of liberty are of three kinds:
5

Sir Isaiah Berlin, Two Concepts of Liberty, in A. Quinton (ed.), Political Theory, Oxford University Press, 1967,
pp. 141-152
6
Ibid.
7
Four Essays on Liberty, Oxford, 1969, p. LIV

11

1. Philosophical (One finds it hard to believe that man is either as isolated and
individualistic or selfish or rational in choice as they assume. In fact most of us would argue that
man is essentially a social animal. Man has lived in united and collective communities since time
immemorial and has formulated social rules and customs for smooth functioning of societies.
They have not been felt as a bar or restriction on free operation for character and personality
development at all times and by all participants. There have been exceptions of course. And also
of course the case of women and lower castes in the Indian context is totally different.)
2. Moral (Morally freedom to do as one wills or free will can be quite difficult to digest at
times. What if one mans freedom is harming another and the man doing the harm cannot or fails
to see that he is harming others. It can be argued moral norms exist not against freedom but they
exist to ensure the right use of freedom.)
3. Economic (Free competition and markets as will be later discussed often only leads to the
wild volatile gyrations or up and down in prices of commodities and services like in our stock
markets here in India for instance, leaving for the duration of those extremes in pricing the poor
and the vulnerable without the availability of those essential commodities and services even
without which life is not possible and can cause starvation for instance. Also free markets over
time it has been observed leads to the concentration of wealth and power in the hands of those
individuals and families who emerge the winners in the free market business competition that the
early negative liberals and modern day neo-liberals advocate. What about others? . Should they
be forgotten about? . What use is there to argue that the losers in the free competition or the poor
have all the rights and they need only work their way up using those rights when clearly only a
few at any given time can be the winners and all the rest must be the losers given the nature of the
game. There can be only a few winners in any game and there is a winner only if there is a loser.
This realisation led to the development of Socialist and Marxist thought and even to the new
school of Liberal thinking that is called Positive Liberalism and is discussed below.)
After the Socialist and Marxist critique of the liberal view of the world the middle of the nineteenth
century onwards and following the historic lacuna that capitalism in the classical liberal sense threw up in
the closing decades of the nineteenth century and the early decades of the twentieth century (which
peaked in the Great Depression of 1929), a new positive concept of liberty emerged which as explained
above is also referred to as Positive Liberalism. The foremost thinkers of this new school of liberal
thought were Green, Bosanquet, Barker and Laski. In more recent times McPherson, John Gray and John
Rawls have also made noteworthy contributions. The positive concept of liberty emphasises the moral
and social aspect of man and views liberty in relation to society, socio-economic conditions for the
realisation of liberty, law, morality, justice and equality. Liberty according to the positive liberals is a
positive thing and is not merely the absence of restraint.
The most influential of positive liberal thinking that emerged was that of H. J. Laski. He defined
liberty as follows:
By liberty I mean the eager maintenance of that atmosphere in which men have the opportunity to
be their best selves. Liberty, therefore, is a product of rights Without rights there cannot be liberty,
because without rights men are the subjects of law unrelated to the needs of personality. Liberty,
therefore, is a positive thing. It does not merely mean absence of restraint8.
Taking the opposite view of John Stuart Mill, he declared Liberty thus involves in its nature
restraints, because the separate freedoms I use are not freedoms to destroy the freedoms of those with
whom I live9. While he believed that personal liberty cannot be enjoyed in isolation from society he did
nevertheless maintain that liberty should not be left at the mercy of the State because state action is
action by government Liberty, therefore, is never real unless the government can be called to account;
and it should always be called to account when it invades rights10.
8

H.J. Laski, A Grammar of Politics, 1925, p. 142

ibid., p. 144
10
ibid., pp. 145-6
9

12

Laski classified liberty into three kinds private, political and economic. He saw all of them as
essential for the development of the human personality. By private liberty he understood mainly the
personal individual liberty, which he saw essentially as negative like the negative liberals. Political liberty
he defined means the power to be active in the affairs of the state. It means that I can let my mind play
freely about the substance of public business11. He saw the need for two conditions to prevail for
political liberty to be real. One, education and the other, provision of an honest and straight forward
supply of news. Economic liberty he defined as the security and opportunity to find reasonable
significance in the earning of ones daily bread I must be safeguarded against the wants of tomorrow12.
Thus he clearly sees political and economic liberty as meaningless without the necessary conditions being
available for their realisation. The responsibility for creating these conditions Laski saw as principally a
job of the government and hence Laski supported positive intervention of the state. Laski therefore put
down three positive conditions that are required for liberty to be achievable and to be meaningful:
1.The Absence of Special Privileges: No person, family or class or group od persons in a society
can be granted special privileges according to Laski for liberty to be achieved. Special privileges he
opined are incompatible with freedom and search for freedom is a characteristic of all humans alike.
Thus liberty is possible only when equality is there.
2. The Presence of Rights: Liberty can only be enjoyed in the presence of rights. There cannot
be liberty where the rights of some depends upon the pleasure of others13 and it is the duty of the
state to maintain equal rights.
3. Responsible Government: The government must be responsible which means it is responsible
for creating the socio-economic conditions and political conditions so that all can realise liberty and
rights in actual practice. Or in other words the government should be a welfare state.
(Later in 1929 Laski reacting mainly to the rise of fascism changed his views somewhat. He wrote in
the send edition of his book A Grammar of Politics in 1929:
In 1925, I thought that liberty could most usefully be regarded as more than a negative thing. I am
now convinced that this was a mistake, and the old view of it as an absence of restraint can alone
safeguard the personality of the citizens.
In more recent times, the liberal thinker McPherson has forcefully argued for positive liberty and has
preferred to rename it developmental liberty even though he has argued there is no division between
negative and positive liberty. Not accepting the logic for the classification or division of liberties he has
argued negative liberty is the absence of any extractive power and it is counter-extractive liberty.
Counter-extractive liberty meaning that in which there is no exploiting force in the society and it is a
precondition to developmental liberty. McPherson defined liberty to mean availability of life (or lifes
basics) and labour (or employment) to each member of society. He suggested that capitalist mode of
production, based on private property, should be replaced by some other system. Liberty cannot merely be
the negative liberty he argued because the liberty of one individual (to trade and engage in accumulation
of wealth through business for instance without any limit or bar of the state) can destroy the liberty of
another individual (the worker for instance who becomes like a slave to his owner employer after some
time). He comments since each individuals liberty must diminish or destroy anothers, the only sensible
way to measure individual liberty is to measure the aggregate net liberty of all the individuals in a given
society14. By focussing on total liberty of all in a society McPherson is giving importance to the social
dimensions of liberty.
John Gray put the same thoughts more clearly:

11

ibid., p.146
ibid., p.147
13
ibid., p. 150
14
C.B McPherson, Democratic Theory, Oxford, 1973, p. 117
12

13

The political content of the positive view of liberty is that if certain resources or amenities are
needed for self-realisation to be effectively achievable, then having these resources must be considered a
part of freedom itself15.
(It is the content of the above thoughts of the positive liberals starting with Laskis in the early part
of the twentieth century that led to the gradual development of the concept of welfare state as freedom
enhancing or establishing institutions particularly after the Keynesian revolution in Economics, that will
be explained later. In India too, what is referred to as Nehruvian Socialism - for the welfare state that
Nehru launched after independence from the British - had its roots in this school of thought.)
Liberty The Two Concepts
NEGATIVE LIBERTY
POSITIVE LIBERTY
1. Focuses on the personal aspect of mans
1. Looks upon it in totality in the socioliberty and regards it as inherent to the economic and political conditions of society.
personality of an individual.
2. Sees liberty mainly as absence of
2. Emphasizes the essential availability of
restraints.
positive conditions for meaningful realisation
of liberty by individuals in society.
3. Sees the state as an enemy of personal
3. Sees the state as the essential
liberty.
responsible agency for creating socio-economic
and other conditions, which will ensure the
realisation of liberty.
4. Emphasizes the personal philosophical
4. Emphasizes the social and economic
and political aspects of liberty.
aspects of liberty.
5. Does not wish to associate concepts of
5. Regards liberty, justice and equality as
rights, equality, morality and justice with the mutually related and different aspects of one
concept of liberty.
and the same thing.
6. Wants the state to be minimised and as
6. Wants a welfare state that will actively
tiny as possible.
intervene to create adequate socio-economic
and political conditions for a meaningful
realisation of liberty.
7. Believer in the concept of each man for
7. Believer that man is a social animal and
himself. Free competition between free men hence collective effort for collective benefit via
that will maximise utility for society as a whole the welfare state is the way forward if
with no special allowance or care shown for necessary by denying the absolute right to
those left behind or the losers of the free private property. (The Socialist also supported
competition.
this view.)

It has already been explained how and in what circumstances the rise of radical Socialist and Marxist
thought happened as a reaction to early negative liberal thinking just as classical negative liberal thinking
had emerged in reaction to the feudal-monarchical mercantilist order that preceded the rise of liberalism.
The early liberals were supporters of free market capitalism that by the middle of the nineteenth century
had begun to show its limitations. While there was great development or new industry and technology led
manufacturing and great wealth as a consequence for some individuals and families, there was also
emerging oppression, exploitation, unemployment and starvation and liberty it was clear was while being
available in theory was not available in practice for the vast majority.
The Socialists (as indeed the later positive liberals) were unwilling to accept the absolute nature of
the right to property and property accumulation that the Negative Liberals advocated. They argued that
15

John Gray, Liberalism, Open University Press, Edinburgh, 1986, pp. 57-8

14

liberty has no meaning if you did not have the basics food, clothing and shelter. And that free market
capitalism eventually leads to the real (as opposed to theoretical) undermining of liberties in this sense
because a vast majority loose or dont have the basics. Further that there needs to be central planning and
intervention in the economy and government ownership of productive resources, either fully or
substantially, for the creation of conditions that will aid the realisation of liberties.
Marxian Socialism went further and suggested the complete abolition of private property or any
productive resource (not the most fundamental basics like personal belongings etc). Karl Marx (18181883), the most influential socialist thinker in history, went so far as to predict that on its own a point is
reached in a capitalist free market economy where the majority of the population, the working class, rise
in revolt at their plight of exploitation and misery at the hands of the upper classes and owning classes,
and overthrow their rule to establish the rule of the proletariat.
Marx carried out an incisive analysis of the strengths and weaknesses of the sort of capitalism that
prevailed in his day in the middle of the nineteenth century and argued that all commodity value is
determined by labour content direct and indirect in the form of capital equipment like machinery. For
example, the value of a shirt comes from the efforts of the textile workers who put it together, plus the
efforts of the workers who made the looms. By implying that the value of the output is really the value of
the labour ultimately, Marx showed in a mathematically argued theory that the part of the output that is
produced by workers but received by capitalists amounts to unearned income which Marx saw as an
injustice. He also argued that technological advances enable capitalists to replace workers with machinery
as a means of earning greater profits, but this increasing accumulation of capital has two contradictory
consequences. As the supply of available capital increases, the rate of profit on capital falls but at the
same time, with fewer jobs, the unemployment rate rises, and wages fall. Marxs predicted the reserve
army of the unemployed would grow, and the working class would grow progressively alienated from
their jobs because working conditions would deteriorate. So he concluded this unbalanced growth could
not continue forever. He predicted that there would be an ever increasing economic inequality which
would lead to the gradual emergence of class consciousness among the downtrodden proletariat. Business
cycles would become ever more volatile as mass poverty resulted in macroeconomic under consumption.
Finally a cataclysmic depression would sound the death knell of capitalism. Just as happened with
feudalism before it, capitalism would contain the seeds of its own destruction.
(The Great Depression of the 1920s in the western world, particularly in America, and the overthrow
of the Russian Czar and the Russian Revolution were the high points of Marxs predictive model coming
true - it has to be accepted. But then Positive Liberal thinking arrived on the scene and under the
leadership of economists like J.M. Keynes massive reforms were carried out to the capitalist model, and
capitalism the 1920s and 1930s onwards, wasnt the same as that of the nineteenth century. Massive
investments and interventions were undertaken by the state in the economy (by creating massive
productive resources in the public sector) and the business environment and concepts like minimum
wage and maximum working hours introduced for workers under President F.D. Roosevelts (FDR) rule,
for instance, in America. All measures that nowadays would be promptly dubbed leftist and hence
somewhat suspect under the neo-liberal influenced and dominated economic and social policy
environment that we live in.)
He felt deeply for the animal like plight of the working class at the receiving end of both the business
owning employers (capitalist class) and the state and state institutions, who were usually under the
influence of the capitalist owners. This led him to give a call for the overthrow of the capitalist class in
the Communist Manifesto (1848) saying: Let the ruling classes tremble at a Communist revolution. The
proletarians have nothing to lose but their chains. His also penned the following words that appear on his
gravestone:
Up till now philosophers have only interpreted the world in various ways. The point, though, is to
change it.

15

Marx was the first major thinker to carry out an entirely economic interpretation of history and he
was probably the first to focus on how economic interests mainly lie behind and determine our values. He
would argue for instance, why do business executives and owners support parties that want to focus on
economic reforms that will help them expand business and profits whereas labour leaders support parties
that advocate putting in place and raising if necessary minimum wages or introducing unemployment
benefits and legislative acts for employment guarantee. Marx was convinced principally peoples beliefs
and ideologies reflect the material interests of their social and economic class.
The Marxian concept of Liberty is based on the Marxist concept of freedom.
Marx and Engels argues that in a capitalist bourgeois society Liberty comes to have no real meaning
ultimately for the vast majority. And this majority eventually gets alienated from society. Since this vast
working class gets dehumanised and loses the objective of living for self-development because of
poverty and exploitation and social injustice, there is no question of the development of moral and social
personality using legal and constitutional guarantees of liberty. Marx argued in a constitutional capitalist
democracy there might be all the liberties available legally but in such a society neither the rich man is
free nor the poor man. The rich man is the slave, rather than the master, of the wealth that he owns and
the poor man is the slave of his unmet material needs. Man is not an isolated being but is defined in
relation to the society he lives in for man is a social animal. Marx defined liberty to mean freedom he did
not regard mere absence of restraint as freedom. Nor did he agree that personal and political freedoms are
the highest ideals and other freedoms are based on these. He linked freedom to the essence and purpose of
man. Marxist thinkers Huberman and Paul Sweezy explain this as follows:
Freedom means living life to the fullest the economic ability to satisfy the needs of the body in
regard to adequate food, clothing and shelter, plus effective opportunity to cultivate the mind, develop
ones personality, and assert ones individuality. Rejecting the liberal individualist position, that says
man seeks maximised happiness and pleasure (in the absolute sense), and that therefore is the priority,
Marxism rejects all attempts to seek mans purpose outside of social relations in the realm of abstract
ideals, the sphere of the instincts, or that of individual psychology, in activity directed to the satisfaction
of selfish interests, not to mention attempts to find it outside the world of real things Mans purpose in
the Marxian view is creative activity directed towards improved well-being and the achievement of free
all round development for society and all its members16. Or in other words, mans purpose is not merely
his own well-being or self-interest than it will be contrary to his essence. Man cannot separate his
happiness and development from social happiness and development. Marx advocated a revolutionary
and conscious effort at overthrowing oppressive systems and creating new systems which will be in tune
with the socialist concept of humanism. According to the Marxist view a life devoted to the joy of others,
their happiness, freedom, equality and welfare, for the triumph of genuinely human relations, conscious
struggle for a new social order, for socialism and communism17 - that is what constitutes the meaning of
life and real happiness.
The best thinkers in the liberal tradition have taken the position as Rousseau took that man is born
free. Marx argued man is not independent from natural and social laws as immediately after his birth, he
becomes the slave of natural forces like hunger, weather, illness, etc.
One of the most important facets of the Marxian approach to liberty and freedom is its analysis from
the class point of view. If the Liberal view of freedom is accepted, Marxists would argue, what it means
or comes to mean eventually is that freedom for the owners of property will mean freedom to own private
property without restrictions (without urban land ceiling laws for instance to illustrate with the help of an
example we urban Indians are familiar with), of earning profit from employing property without
restrictions (like taxes for instance), of employing someone or removing him (with the least labour laws
or none at all) etc etc. On the other hand, Marxists argued, for the property-less it can only mean in effect
16
17

M. Petrosyan, Humanism: Its Philosophical, Ethical and Sociological Aspects, Moscow, 1972, pp. 159-60
ibid. , p. 163

16

or in reality the freedom to starve, to be laid off from ones job when the employer doesnt need him
anymore or if he doesnt like him for any reason, working conditions and salary terms that are bad and
exploitative but which must be accepted because that is what the contract with the employer stipulates
(full freedom of contract is of the essence of liberal constitutional democracy) and there are no other jobs
available to earn ones living and avoid starvation etc etc. So Marxists argue, in a class-divided society
freedom will be meaningless for working people. For them freedom means emancipation from
exploitation, starvation, poverty, excessive hours of work, social insecurity, etc and hence for him
freedom can only mean the struggle for the establishment of a class less society which is only attainable
via a socialist revolution.
To summarise the main points of the Marxist view on freedom and liberty:
1. The issue of liberty is associated with humanism and can only be considered with due
consideration to it.
2. The essence of man is in his social relations, the sum total of it. In a class-divided society
based on private property, man is alienated eventually and his existence contradicts his essence
and hence in that case the question of his freedom can not arise.
3. Freedom means the availability of conditions for the multi-dimensional development of
man as a social being which alone leads to self-fulfilment and self-realisation.
4. There cannot be free will ultimately as mans free will is subject to the objective laws of
nature and society (material want) which exist independently of human will.
5. Man can achieve freedom by developing scientific understanding of these objective laws.
6. Once scientific understanding is attained, there should be revolutionary social activity on
that basis to change society because without changing society and nature, freedom is not possible.
7. In a class-divided society the freedom of owners of property is built upon the un-freedom
of the property-less. So freedom in such a society is class determined.
8. Freedom is only possible in a classless society and because in only such a society man
gets the socio-economic conditions for the free development of his personality.
9. The struggle for a socialist revolution is thus justified and is really a struggle for freedom.
Liberty The Liberal VS. The Marxist View
Negative Liberalism is based on the
philosophical concept of free will and believes
free will being the absolute ideal there should
be no social or political restrictions on
individuals. Positive Liberalism also believes
in the absolute validity of individual free will
but advocates state creation of some soci0economic conditions to make free will
meaningful.
The principal purpose of man is to serve
his own selfish ends and to seek happiness in
his own way and society is an artificial
invention that exists to serve individual ends.
Man needs liberty for personal development
and the fundamental character of liberty is
personal and not social.
Negative Liberalism regards the State as
an enemy of individual freedom but considers
it necessary only for the purpose of maintaining
security and law and order or, governance.
Positive Liberalism wants the state to enlarge
and grow as big as necessary to create socio-

Marxism believes there can not be free

will because the laws of nature and society
restrict fee will and make it meaningless. But
Marxism maintains that by understanding the
scientific laws of nature and society and by
working to counter them, one can make gradual
progress towards greater freedom and free will.

Marxism suggests there can be a

contradiction between mans essence and his
existence. Mans essence is the sum total of his
social relations and in a capitalist society
because of alienation the essence of man does
not correspond with his existence and he gets
dehumanised.
Marx believes both the State and Class
divisions in a society need to disappear for a
free society to be established.

17

economic conditions for the meaningful

realisation of individual liberty.
Liberalism is focused on the political
Marxism and socialism regards all the
aspects of liberty even though Positive other liberties to be based upon economic
Liberalism does regard it also necessary that liberty in a true sense for all and believes till
adequate socio-economic conditions be created. economic exploitation is eliminated no liberties
can be realised. Marxism goes further and
advocates the abolition of all private individual
means of production and the state to take over.
Liberalism talks about freedom in abstract
Socialism and Marxism views freedom in
philosophical terms linking it to the relation to social, economic and historical
philosophical concepts of free will and free circumstances.
soul of atomised individuals, and maintains
personal freedom can be restricted by society,
social organisations and institutions. So the less
of these the better.
Liberals have no problems with society
Marxism regards class struggle as
being divided along class lines and believe fundamental and maintains in a class-divided
freedom and liberty can be provided to all society, a class struggle will always eventually
classes, both rich and poor. Freedom according inevitably break out since freedom is basically
to Liberalism basically means free choice. only available to the business owners of means
They believe all classes and individuals can co- of production and the working class is usually
exist harmoniously in what they call an open exploited. So only in class less free society is
society.
freedom for all possible since a wolf and sheep
cannot live side by side. The struggle for the
establishment of a class less free society is
therefore a freedom struggle and is referred to
as a socialist revolution by them.
Liberals are divided on the issue of
Socialism and Marxism also support the
negative and positive freedom. Classical early positive concept of freedom but unlike Positive
liberals and present day neo liberals, both Liberalism defines the exact conditions
support basically the idea of a negative concept necessary. Marxism for instance defines an
of liberty and freedom. But the revisionist exact scientific way way to achieve liberty
liberals of the early 20th century like Laski and specifies abolition of private means of
called for a positive concept of liberty. Positive production, equality, socialist revolution and
Liberals dont specify the exact conditions material development as the means to that end.
necessary for achieving liberty but want the
democratic state to take upon itself this task.

Equality
Equality is a somewhat modern concept. Not always has humanity felt the need for equality between
men (and women) as at present. In the western world kings and monarchs had a divine right to rule and so
did feudal lords in the areas under their rule and priests and the clergy often knew the best on most
matters. Everybody else was there to serve the king and the church.
(In our country the brahmin was at the top of the heap and had the sole right to lay down the
ultimate wisdom on all matters, the kshatriya had the sole right to armed military might and the vaishya
enjoyed a monopoly of making money and accumulating wealth through trade and money lending. The
dalit or the shudra had no superior rights, only a monopoly similarly, on all the inferior rights and jobs of
society. And this continued for thousands of years.)

18

In the Greek period there was a feeble rather limited attempt made at establishing equality but it was
only the in the 17th century in Europe that demands for rights and liberty began to be raised and only in
the 18th and 19th century that equality was demanded.
The initial demands were raised by the newly rich among traders and businessmen, or bourgeois,
who questioned why was it that while both they and the feudal lords and monarchs had wealth and
economic status but the legal status was not the same. In England for instance, as Tawny puts it:
Since most conspicuous of them in equalities were juristic not economic, it was in the first place
legal privilege, not inequality of wealth, which was the object of attack.The primary aim of reformers
was the achievement of the first (legal equality), since once the first was established, the second
(economic equality), in so far as it was desirable, would, it was thought establish itself18. Similarly in
France, the issue was not economic equality but the uniformity of legal rights, and the struggle for
equality set the new aristocracy of wealth on a footing of parity with the old aristocracy of land19.
While in the 18th century the voice for legal and political equality was raised mainly, it was in the
19 century that a more vigorous demand for social-economic equality was made as a result of the rise of
a new working class. The march of lazes faire capitalism in the 19th century while creating great wealth
for some families on one side also created great poverty and economic inequality on the other. Hence the
demand for economic equality arose and was raised by humanists, utopian socialists, Marxists and
positive liberals. This demand for economic equality was not for negative political and legal equality but
a demand for positive equality and it implied a check on private property, a check on exploitation of the
poor by rich, and it implied a positive role of the State with regard to the overall economic system of
society.
th

A very important milestone in the struggle for equality was in the early part of the twentieth century
when women got the right to vote as a result of the movement by suffragettes. Also in the same century
the freedom movements in colonies like India from imperial powers like Britain marked further
movement in the march of equality.
Defining Equality is tricky. It is far more abstract than immediately apparent. Most people subconsciously associate equality with the ideas that words like same, identical, equitable similar etc
indicate. H.J. Laski commented no idea is more difficult in the whole realm of political science20 than
equality. Rousseau distinguished between natural and conventional equalities. Inequalities created by
nature (one man being lame for instance or blind and another being neither) are natural inequalities
whereas inequalities created by society (like caste, gender, rich-poor, worker-capitalist, malik-naukar etc)
are conventional inequalities. Socialists and Marxists have argued conventional inequalities particularly
economic ones have the power to over-shadow all natural inequalities. Marx comments:
what I am and am capable of is by no means determined by my individuality, I am ugly but I can
buy for myself the most beautiful women. Therefore, I am not ugly, for. The effect of ugliness its
deterrent power is nullified by money. I, according to my individual characteristics, am lame, but
money furnishes me with twenty-four feet. Therefore, I am not lame. I am dishonest, unscrupulous,
stupid, but money is honoured and hence its possessor.I am brainless, but money is the real brain of all
things and how then should its possessor be brainless? Besides, he can buy clever people for himself, and
is he who has power over the clever not more clever than the clever?21.
(It is thoughts like the above that lead socialist and Marxists to be so wary of the abusive power of
economic inequalities in society.)
Laski, the most influential positive liberal thinker, set down the following conditions for equality:
18

R.H. Tawney, Equality, London, 1952, p. 95

ibid., p. 98
20
H.J. Laski, A Grammar of Politics, p. 152
21
K. Marx, Economic and Philosophical Manuscripts of 1844, Moscow, 1974, pp. 120-21
19

19

1. End of special privileges in society

2. Adequate opportunities to all for developing the full potential of their personalities.
3. Access to social benefits for all with no restrictions on any ground like family position or
wealth, heredity etc.
4. Absence of economic and social exploitation.
Equality has mainly four dimensions legal, political, economic and social.
Legal equality refers to equality before the law and equal protection of the law. The concept is all
men are created equal and hence deserve the same status before the laws. The law is blind and will make
no allowance for the person being dealt with. He may be wise or a fool, brilliant or dumb, short of tall,
rich or poor etc but he would be treated the same by the law as others. But there are exceptions for
instance c child would not be treated as an adult man or woman and allowance would be made to a child.
(Legal equality does not necessarily mean real equality unfortunately because as we all know legal
justice is not free and the rich can hire the best lawyers and even bribe judges in some cases and get away
with injustice. In a strictly liberal set up while you will have theoretical equality before the law you will
need time and money to make use of it and if you did not have it the legal equality promised to you would
be meaningless.)
Political equality basically refers to universal suffrage and representative government. Universal
suffrage means the right to vote to all adults and one-man-one-vote. Representative government means all
have the right to contest elections without distinction and contest for public service. It does not mean
however that all will be forced to vote and give his or her preference. Or that if some people are dissuaded
not to vote or vote one way or the other due to undue influence, the state can do much about that. Also no
political inequality can be alleged, as per the strict liberal understanding of the term, if most people or, a
large segment of the population, dont vote, thereby diluting the representative character of the
government.
(For instance in America, which regards itself as a democracy offering full political freedom and
equality to all its citizens, it has been found that just about half the country usually votes in elections. The
people not voting are mostly the poorer half and blacks particularly poorer blacks. In the liberal tradition
this is not a cause for particular concern as long as constitutionally, equality is guaranteed and present for
all.)
Mere political equality guaranteed technically or constitutionally also does not mean real political
equality for it has been found that money power in elections come to a play major role in liberal
democracies giving people, groups and classes with the money power and the willingness to exert it, an
advantage in pushing their political interests that is quite formidable to neutralise. So sheer money power
usually and often manages to control the result of elections to a large extent.
(It is believed President George Bush and his Republican Party spent a few hundred billion
dollars in his election campaign last year almost all of it raised from large business houses and
corporate groups. It is not conceivable how his party and he himself can resist taking the side of
corporate interests versus that of the common people, should the need to choose in a particular issue
arise. Hence it is clear political equality is a very difficult idea state that is almost never established in
any liberal democracy. It may be mentioned here that in India it can take even cruder forms where
voters are sometimes paid cash illegally or even offered a night of free drinking by candidates and
parties to vote for them. Also of course, it is an open secret that most Indian political parties have
corporate friends who donate hundreds of crores of what is usually black money paid in cash for
fighting elections etc.)
It is not merely the actual money spent by candidates and parties but the whole range of money
relationships that helps. Media plays a huge role in modern day liberal democracies particularly in those
with a large middle class and even though media is supposed to be free, they in reality cannot be so
because they owe their economic survival and viability substantially to corporate advertising and

20

therefore they need to be sensitive to the political sensitivities and interests of the collective business and
corporate agenda. To the extent that media influences people, these agendas then get transmitted or
propagated, whether by design or otherwise, or due to compulsions or otherwise, whatever they may be,
and hence ends up skewing the level of political equality that would have otherwise possibly existed in
practice without their presence.
Quite apart from the above, in most democracies like India, there are powerful executive
bureaucracies and members of the judiciary services, who are not elected by the people (as with
politicians) and who cannot be thrown out in elections if people are fed up with them. The members of
these groups due to educational and family backgrounds often come from higher economic, class (and
caste) categories usually and maintain an ongoing powerful influence on policy formulation. These
groups clearly are more politically equal than others. When a judge of the Supreme Court for instance
stops a policy measure of the government and declares it illegal, which was put in place by elected
representatives of the people in free and fair elections, however illiterate or non qualified educationally
they may be, from the purely political (as opposed to the legal) point of view, he is clearly enjoying a
position of greater political equality than most other of his fellow citizens.
(There is even a liberal theory of democracy referred to as the Elitist Theory of democracy,
which claims political equality is a myth, as political power is always enjoyed, and should always be
enjoyed by an elite. Hence there is no need and it is futile to make efforts to grant greater political say
or equality to the poor and economically weaker citizens.)
The notion of Economic or social equality implies rather differently to different people. Early
liberals meant by economic equality merely the right of choosing ones trade or profession irrespective of
family position or economic status and the right or freedom to contract so that everybody in the land is
treated equally as far as contractual obligations are concerned. Gradually the position began to change
towards a notion of equality of opportunity for everyone to live the life of a full human being.
(No doubt this was partly due to the Socialist and Marxist critique of capitalism which developed
great acceptance worldwide before the onset of positive liberalism culminating probably with the
Russian revolution of 1917 and its emphasis on economic equality which they defined almost as
identical economic conditions for all.)
It was understood and accepted gradually equality should mean no one in society should be so poor
that he or she lacks the basic needs and the basic opportunities for mental and physical development. As
Rousseau put it, by equality we should understand not that the degree of power and riches be absolutely
identical for everybody, but that no citizen be wealthy enough to buy another and none poor enough to be
forced to sell himself22. H.J. Laski gave the positive liberal notion of economic equality finer shape and
meant by equality availability to all things without which life is meaningless. He said the basics must be
accessible to all without distinction in degrees or kind. All men must have access to the essentials of food
and shelter. He insisted equal satisfaction of basic needs as a precondition for equality of opportunity and
advocated for that creation of economic equality by reduction of the extremes of economic inequality.
(Whether by progressive taxation or interventionist welfare schemes for the poor for instance. It was the
onset of the welfare state as a consequence of the influence of ideas of positive liberal thinkers like Laski
and economists like Keynes that policies like mixed economy, differential taxation, regulation and raising
of wages by stipulating minimum wages etc, all of which basically seeks to tax the rich to provide welfare
for the poor were introduced. The positive liberals and Keynesians claim this changed capitalism for ever
into a welfare system and did much to eradicate poverty and economic disparity and levelled the ground
for all citizens from the point of view of economic equality. The great economist and thinker John
Kenneth Galbraith has even claimed that this almost made economic inequality a non-issue in the western
world for many some decades. In the last few decades particularly the 1980s onwards influence of neoliberal thinking which is similar to the old classical early liberal thinking has taken such a strong hold and
22

Rouseau, Social Contract., George Allen and Unwin, London, 1924

21

put the clock back so much in that sense that any suggestions and ideas that are similar to positive liberal
welfare ideas are immediately seen as leftist socialist or Marxist and hence scary from the point of view
of the neo-liberal dominated policy establishments worldwide.)
The Marxist view of equality associates equality, particularly economic equality, with property and
class-exploitation. In fact, the link between equality and property has been pointed out by some nonMarxist liberal thinkers as well, like Rousseau and Gans. Gans comments for instance: Societies that
have no use for private property, such as nomadic and hunting tribes, find it easy to be egalitarian, but
societies that enable individuals to collect such property do not23. In Marxian analysis equality is only
established with the abolition of classes or a class divided society and that is only fully achievable by the
abolition of private property. The Marxian idea is to establish a society where there will be no private
property or economic classes and each will have or will be given from each according to his ability to
each according to his need. The job of distribution will be of the state. Lenin and other Marxists attack
the positive liberal social democratic notion, that by intervention of the state economic disparities can be
removed and the basics for living guaranteed for all, for they believe, without abolishing private property
sooner or later economic exploitation and disparities will creep back in due to the power of money of the
upper classes.
Social equality refers to the absence of discriminations on the basis of colour, gender, caste, sexual
orientation etc. Quite apart from the legal, political, and economic aspects of equality over the years it has
been realised the residual social discriminations that have existed for thousands of years in some societies
can be very difficult to undermine even with a rapid march of constitutional political and legal rights and
economic development and removal of economic inequalities. Women got the right to vote even in
England as late as in the 1920s. Blacks in South Africa and parts of the United States until just a few
decades back were barred from large areas of their own country. In many countries scavengers are forced
to live away from society in ghettos not due to economic or political reasons really but due to social
conditionings in society. Even today there are villages in India where members of the lower castes are
treated almost like animals by members of the upper caste and even if anybody from among them
managed to get rich or powerful he or she would not be treated differently.
(The former Chief Minister of Bihar, Laloo Pradad Yadav for instance has narrated many times
how in his childhood he could not walk past the house of any upper caste member of his village
through public roads in slippers or any other footwear. The norm was all members of the lower castes
must be bare foot.)
Neo-Liberal thinking, propounded in particular by thinkers like economists Milton Friedman and
F.A. Hayek24 that holds such great sway on policy formulation worldwide at present, particularly at
international institutions like the IMF and the World Bank, believe liberty and equality are
fundamentally opposed to each other and hence inequality has to be tolerated for the sake of liberty.
(They also believe ultimately tolerating inequality will be of the maximum benefit to the economy as
a whole as a result of the growth in private economic activity.)
The main features of this neo-liberal belief system are:
1. Liberty is natural and so is inequality. So it is ordained by nature that liberty and
inequality are not compatible.
2. Liberty principally means absence of any restraint or coercion, but establishing equality
would mean some restraints or some levelling which is fundamentally against the idea of liberty.
Also the economic well being of an individual is dependent on his personal efforts and ability
rather than on society. The liberty to own private property without any restriction is a natural
liberty and should not be restricted in the interest of equality.

23

H.J. Gans, More Equality, New York, 1973, p. 62

Milton Friedman, Capitalism and Freedom, Chicago, 1962 and F.A. Hayek, The Constitution of Liberty, London,
1963

24

22

3. When in an effort to establish equality, the powers of the state are increased as they must
be, to whatever level, that is a threat to liberty by definition. Equality needs a positive
interventionist state whereas Liberty needs a negative and minimised State.
4. Without free market capitalism the power of the State cannot be checked and without
such a check liberty is always incomplete and under threat. Thus Liberty and Capitalism
complement each other but Equality and Capitalism are fundamentally in conflict. (This view was
first articulated by Milton Friedman.)
5. The Elitist Theory of Democracy which must be regarded as part of the neo-liberal
tradition, advocate the presence of an economic and political elite without which according to
them democracy descends into a mobocracy and populism, and liberty ceases to be available
eventually in such a system. Since without an elite there can be no liberty or democracy,
establishing equality by eliminating elites, destroys liberty. Hence Equality and Liberty are
opposed to each other.
Justice
Mankind has always had a problem in deciding what should be the exact meaning of justice and
nearly always ended up explaining it in the context of the times and in terms of the notions of the times
that the individual thinker defining lived in. Loosely it has meant what is good and has been stretched
acco4dingly. As D.D. Raphael commented justice is Janus like or dual faced, showing two different
faces at the same time. It is legal as well as moral. It is concerned with social ordering and rights of
society as much as individual rightIt is conservative (looking to the past) as well as reformative
(looking to the future)25.
The Greeks and the Romans first attempted to settle on a meaning of justice (as far as the western
thought is concerned, that is). Plato, the Greek philosopher defined justice as one of the principles of what
he called virtue along with temperance, wisdom, and courage. Justice is about sticking to ones duty or
station in life, he said and is the virtue that harmonises all the other virtues. According to him justice is
the virtue that introduced or preserved balance in any society. His disciple Aristotle, modified the notion
of justice by stating that justice necessarily implies a certain level of equality. This equality could be
based upon (1) identity of treatment and (2) proportionality or equivalence. He further said identity of
treatment leads to commutative justice and proportionality leads to distributive justice - the role of the
courts and the judges being to distribute commutative justice and the role of the legislature being to
distribute distributive justice. In legal disputes between two individuals the punishment should be as per
the principles of commutative justice with the judiciary seeking to reach the middle point of equality. And
in matters of allotment of political rights, honour, wealth, and goods, it should be as per the principles of
distributive justice. Also there is a need to reconcile the demands of distributive and commutative justice
in any society, and so he saw the concept of justice in any society as a moving equilibrium, and nothing
that is fixed, forever.
The Romans and the Stoics developed a rather different notion of justice. They regarded justice as
that which is not adapted from laws and customs but is discovered by reason. It would be divine and same
for all men. Laws of society must be in with these laws to be worth anything. Positive law, to be worthy
of law must conform to it and the idea of Natural Justice which the Stoics first developed and which was
later adopted by the Roman Catholic Christian fathers and which treated all men as equal. Justian in his
book Institutes made a distinction between the law discovered or developed by reason and that of the
common people or the common law of the people or jus gentium.
Then not much happened till the Reformations, Renaissance and Industrial revolutions in Europe.
Thinkers like Locke, Rousseau and Kant associated saw justice as a synthesis of liberty, equality and law.
25

D.D. Raphael, Problems of Political Philosophy, Macmillan (India), New Delhi, 1977, p. 165

23

The early liberals saw feudalism, absolute monarchy and caste privileges as unjust and hence illegal.
Justice without liberty and equality made no sense according to them. This became the prevailing notion
of justice until the nineteenth century when there arose a disagreement between the Liberal and Socialist
or Marxist schools of thought. Bentham and Mills Utilitarian Theory, which held great sway, saw justice
as what was conducive to the maximisation of happiness or utility of mankind. They felt total absence of
all restrictions would be happiness maximised but the Socialists and Marxists then emerged to argue that
extremes of poverty and economic inequality arising out of capitalist property relations are unjust and can
not be supported which of of course the Liberal had no problems with. As far as the liberal schools of
thought go, the view of justice held by the classical early liberals was the man view till the middle of the
twentieth century. But with the rise of Keynesian welfare states, a new notion of justice had to be
developed in the liberal tradition. That notion is probably best explained in John Rawls A Theory of
Justice (1971). By the closing decades of the twentieth century and the rise of neo-liberalism and what is
called in America, Libertarianism, which is substantially a return to the notions of early classical liberals
(with suitable changes made to build the case for Globalisation and International Free Trade) of free
markets, minimal state, and absolute individual rights to freedom and property, yet another theory of
justice emerged in the liberal tradition. This is the Entitlement Theory of Justice popularised by Robert
Nozic in his book Anarchy, State and Utopia.

Rawls Theory
John Rawls in his work, Theory of Justice attempted to build a theoretical foundation for the a
notion of justice that would be in the liberal tradition but not as each-man-for-himself as the early liberals
and hence help to support the notion of a welfare state that became the preferred developmental aim and
route of non-communist nations worldwide by the end of the second world war.
(Including in India for instance where Jawaharlal Nehru launched a model of a developmental
interventionist state and an ideology behind it that is also referred to as Nehruvian Socialism. In reality of
course it was not remotely socialistic but firmly positive liberal in the Laskian and Keynesian tradition.)
Needless to say Rawls theory takes a position that was opposed to that of the Utilitarian Classical
Liberals like Bentham and Mill whose ideas of justice held great sway particularly in the legal traditions
of Anglo-Saxon countries till the middle of the last century. Rawl draws up his theory on the basis of the
notions of social contract and distributive justice. He defines two kinds of goods (1) Social Goods: such
as income and wealth, opportunities and power, rights and liberties that are directly distributed by social
institutions and (2) Natural Goods: like health, intelligence, vigour, imagination, natural talents etc which
are not directly distributed by social institutions but may be subject to those institutions partly or affected
by them.
Since Rawl also built his theory in the traditions of Rousseau, Hobbes and Locke, he used the
hypothetical assumption of a social contract in his analysis. Rawl assumes a pre-social period in the
history of mankind and nature when human beings did not naturally live together in communities and
societies but later came together after reaching a consensus among themselves as to the form the society
that they live in and agree to be members of should take. Here he assumes that the individual participants
in a society would naturally choose a form of society, which is just under the sterile conditions of
impartial choice. About the individual participants for the purpose of his theory he makes the following
assumptions:
1. All the individuals are indifferent to others and dont suffer from envy as long their own
interests are satisfied.
2. All the individuals in agreeing to be part of one society are seeking to maximise their
own interests like rights, liberty, opportunities, income or wealth.
3. Each individual is under a veil of ignorance at all times which prevents him from
knowing fully about the talents of others.

24

If these conditions or assumptions are satisfied, then that would be what Rawl terms the original
position in which he says every one has particular wisdom and general ignorance. Rawl believes such
a society would be a just society since each person would seek to advance his own interest but since no
one is able to distinguish him self from others, he will favour principles which allow the maximum
opportunity to everyone for the pursuit of ones life plans to everyone. Also everyone will choose a kind
of society which minimises his possible losses and makes sure that even the worst of persons is not too
destitute. Rawl terms this the maximising principle and says it maximises the minimum welfare. In such
a just society, according to Rawls, people would inevitably choose two principles of justice:
(1) That each person should have an equal right to the most extensive basic liberties.
(2) And Social and Economic inequalities are to be so arranged so that both are (a) to
the greatest benefit to the least advantaged, and (b) attached to positions and offices open
to all under conditions of fair quality of opportunity26.
Rawls also deals with the possibility of conflict between the two above principles of justice. For
instance it is possible that a restriction on liberty of some individuals may constitute an inequality but it
may satisfy the second principle above that is it may lead to lead to greater benefits for everyone. But
Rawls says such inequalities will not be acceptable then since people will always give priority to the first
principle that is liberty. Even an improvement of in the welfare of everyone is an insufficient
justification for inequitable abridgement of liberty. So clearly Rawls puts liberty first and says the basis
for self esteem in a just society is the publicly affirmed distribution of fundamental rights and liberties.
Thus the two principles of justice and the priority of the liberty principle are the fundamental elements of
justice.
Rawls suggests that after fixing the justice principles, the constitution needs to be decided upon and
it should be so done that the principles of justice are subsumed into the principles of liberty. After the
establishment of the constitution legislation in parliament should be such that it targets the long-term
social and economic goals. The social and economic policies should be aimed at maximising the longterm expectations of the least advantaged under conditions of fair equality and opportunity. Hence if the
laws are such that they favour the privileged but no benefit accrues to the least advantaged as a
consequence, to the maximum extent, then those laws have to be regarded as unjust.
Rawls theory, as far as distributive justice is concerned stands somewhere in between the classic
liberal laissez faire on the one extreme and the communist or Marxist view on the other extreme. He
clearly concludes that the proper function of government is not limited to maintaining social order but
the achievement of distributive justice by placing the highest social value on the need of the neediest.
But he is not advocating complete elimination of inequalities and a fully egalitarian distribution.
According to him, natural abilities and circumstances of birth foster privileges and since such inequalities
can not be eliminated, a just society will seek to compensate for the resulting privileges by investing its
resources including the abilities of the most talented in efforts assigned to improve the plight of the least
fortunate. Justice does not mean rewarding those with superior abilities (ethics of reward) but
compensating those endowed with lesser ability (ethics of redress). Hence Rawl, it seems, basically
provides a theoretical concept of justice to support the liberal welfare state that is a constitutional
democracy. He comments:
If law and government act effectively to keep market competitive, resources fully employed,
property and wealth distributed over time and to maintain the appropriate social minimum, then if there is
equality of opportunity underwritten by education for all, the resulting distribution will be just27.
Critiques of Rawls Theory
26
27

John Rawls, A Theory of Justice, p. 199

Ibid. , p. 107

25

Rawls theory has faced criticism from thinkers along the following lines mainly:
1. Brian Barry has argued that (i) it is difficult to identify the least advantaged individuals
and groups in any society, (ii) what is included in the connotation of self-respect by Rawl is not
clear, and (iii) the principles of constitutional engineering enunciated by Rawl are too fragile to
make an impact.
2. Norman P. Barry has argued the theory of Rawl is just a re-statement of the liberalcapitalist principle and according to him it seems, the pleasure of the better off, however great,
can not compensate for the pains of the worst off.
3. The positive liberal thinker MacPherson has argued, Rawl assumes that a capitalist
society will always be badly class divided and that inequality of income will always be necessary
in such a society as an incentive to efficient production and hence in a welfare state transfer
payments must always be limited by design to an amount that leaves one class better off than
another. But this class inequality can in free market capitalist system lead to an inequality of
power as well as income and as a consequence allow one class to dominate over the other.
4. The American libertarians have questioned the idea of distributing both talents and
natural assets on the basis and for satisfying the principles of social justice.
The Neo-Liberal Entitlement Theory of Justice
Robert Nozics Entitlement Theory is the most influential among modern day neo-liberal views on
the concept of justice. He explained his theory in his book Anarchy, State and Utopia. He is like all neoliberals for the most minimised existence for the state akin to almost a non-existence. There is no role
almost, in the neo-liberal view of the world that Free Markets cannot play and play better than anybody
else, particularly the state. Re-distributive taxation (taxing the rich more to give relief to the poor) is
morally and inherently wrong and a violation of basic rights as far as they are concerned. People have a
right to sell what they produce at any price they want and work for others for as cheap as they want (or in
other words even if they are compelled to do so due to socio-economic conditions) and the government
and the state should stay away and not try to intervene and provide social justice to the needy. He
comments:
People have rights and there are things no person or group may do to them (without violating their
rights). So strong and far reaching are these rights that they raise the question of what, if anything, a state
and its officials may do28.
Nozic in his Entitlement Theory makes a central assumption which relates justice with the market.
He assumes if everyone is entitled to the goods they currently posses then a just distribution is simply
whatever results from peoples free exchanges in a free market economy set up or society. Any
distribution that results from free transfers and exchanges, from a situation that was just to begin with is
just itself. And for the government to step in and tax these market determined exchanges and transfers is
unjust even if the taxes are used to compensate undeserved natural handicaps in individuals. The only
taxation that is acceptable is what is needed to maintain the background institutions of governance that
will protect the system of exchanges and free market transfers and enforce the those transfers (like police,
law courts, regulatory bodies like SEBI for instance etc).
(This is the core of the neo-liberal belief system that is in a dominant position at present particularly
as far as the developmental strategies in countries worldwide are concerned and as far as the basic
ethical/moral/political assumptions in the policy prescriptions of the international organisations like
World Bank/IMF are concerned. This is also the belief system that the so called leftists challenge
arguing that governance can not be limited to merely facilitating free market business exchanges and
transfers and needs to go further and offer direct aid and assistance to the to the needy and the exploited.)
The entitlement theory is based upon three principles of justice:
28

Robert Nozic, Anarchy, State and Utopia, Basic Books, New York, 1974

26

(i)
The Principle of Transfer: whatever is acquired without injustice as per
the laws must be freely transferable without any state or other interference
(ii)
The Principle of Just Initial Acquisition: how the acquisition was
originally made and that it was done by just means is important
(iii) The Principle of Rectification of Injustice: If the acquisition was not
just then there needs to be rules to rectify that.
The three principles taken together would mean if peoples current holdings are justly acquired, then,
the formula of just distribution as Robert Nozic formulates it in his book is from each as they choose, to
each as they are chosen.29
Nozic relies on two appeals, it would seem, to justify his theory. One, that the free exercise of
property rights is absolute and is more attractive. Two, that the principle of what he calls self-ownership
justifies that right. By the first he means if somebody has acquired something without breaking the law
then he has an absolute and natural right over it and to dispose it off as he wishes even if such transfers
cause inequality and lack of opportunity for some other members of society. Or in other words if some
people are more talented than others they will get ahead and get rich and they can get as rich as they want
and have all the rewards even if others as a consequence of that starve and suffer. Nozic argues that
starting from any initial state of distribution which is legitimate if free market exchange and transfers lead
to inequalities there is no logic in taxing the rich by the state to create distributive social justice for a third
party, i.e., the victim of inequality, starvation etc.
The second appeal of Nozics theory is based on the principle of self-ownership as Nozic puts it.
What Nozic means by that is that people are the end-in-themselves in the tradition of German
philosopher Kant and not the means to an end. So they should not be used or sacrificed for others or the
benefit of others by society because we are all individuals in the end and have our own rights, which
nobody has the right to take away. In other words Nozic believes:
(1)
recognising people as owners of their own selves fully or self-owners is
fundamental to treating people as equal with equal rights and
(2)
only unrestricted free market capitalism recognises this self-ownership.
Hence according to his theory only a minimised state limiting itself to the narrow function of
protection against force, theft, fraud, and enforcement of commercial contracts and so on is justified and
acceptable. Any efforts on the part of the state to take an initiative in things like education, public health
care, transportation, roads, or parks is unjust because all of these would involve the coercive taxation of
people with excess money against their will, violating the basic justice principle of Entitlement Theory from each as they choose, to each as they are chosen.
The Socialist Theories of Justice are mainly Marxist and that of Democratic Socialism. The
historical context in which socialism and Marxism emerged before has been explained before. By the fag
end of the nineteenth century there was an attempt to synthesis democracy, liberalism and socialism,
which is sometimes refereed to as Democratic Socialism.
Marxist notion of justice as propounded by Marx and Engles went beyond merely defining justice as
social justice and argued that to say that the capitalist system is unjust and drawing attention towards its
inequalities was not sufficient because it obscures the essential nature of capitalist production, which is
inherently exploitative and therefore justice in a capitalist system is impossible. The only solution was to
create a new society on socialist lines and principles. Marx attacked the very idea of justice as commonly
understood up to his time along the lines of equal rights and fair distribution. He argued some people
have greater talent and will inevitably get ahead and accumulate control over means of production and
constitute a separate class. Ultimately the people without the talent will be exploited at their hands. So the
29

ibid., p. 160

27

right to equality is in fact a right to inequality. And any attempt to create equality by redistribution of the
wealth and resources will only solve the problem temporarily since eventually again the successful upper
classes will climb back into a position of power and be in a position to exploit the poor. The only
permanent solution, he therefore argued, was to distribute the means of production equally among the
members of the whole society and that means ownership of the production capacities by the state itself.
Marxists believe the question of justice will arise only if circumstances are maintained that perpetuate
conflict or the possibility of conflict. If conflict persists hen justice will be needed. So the best thing to do
is to get rid of the possibility of conflict itself and that is best achieved by all members of society living in
a situation where the means of production are controlled by the state with everybody contributing in his
own way and taking the reward from each according to his need to each according to his ability.
Conflicts arise due to lack of uniformity of goals among members of society and due to the scarcity of
resources. So both will needed to be dealt with to eliminate the potential for conflict and hence eliminate
the need for a juridical system of justice in the liberal sense. Marxists held the root cause for injustice in
the world (particularly it would seem of the times when Marx lived) was exploitation and in the context of
industrial societies exploitation of workers by capitalists. The Liberal state according to Marxists legalises
the exploitation by allowing the buying and selling of labour. Workers are forced to work for the
capitalists since they dont own the productive assets of society and can only earn a living to avoid
starvation by working for the properties classes. Hence wage-relationships are inherently exploitative. So
all citizens including disenfranchised women for instance and unemployed and wage-workers have an
unequal access to the means of production and in that sense are always victims of exploitation due to the
system of the liberal state. Marx also argued that it wrong to argue that the capitalist class always
acquired their property through conscious savings or through their hard work or better talent and many
times violent conquest, enslavement, robbery, murder, fraud an d force played the greater part in capitalist
accumulation.30
Democratic Socialisms notion of justice is a modification of the Marxian notions in many ways.
The basic difference between Marxian Socialism and Democratic Socialism is on strategies and even on
what constitutes the substance of socialism. Democratic Socialism unlike Marxism (which wanted a
violent revolutionary overthrow of capitalism) wanted a slow evolutionary transformation process
towards socialism using the structures of the capitalist liberal-framework. As long as the democratic
constitutional set up genuinely exists according to democratic socialists, the best way is to use that state
set up to achieve socialism, which according to them in not by definition another instrument of upper
class exploitation as the Marxists believed.
(The Marxists have suggested that with their superior money power upper class industrialists and
controllers of the economy always manage to bribe or otherwise influence state actors like the politicians,
police and the bureaucracy and also manage to influence the media etc which ultimately means the state
in even a democratic liberal constitutional set up ultimately becomes an instrument of upper class
exploitation. The democratic socialists regard this as alarmist and have faith in working through the
structures and systems of liberal constitutional democracies to achieve socialism.)
It is important to remember the historical background here. Democratic Socialism emerged by the
end of the nineteenth century and in the first quarter of the twentieth century. By then agitations by
workers and women etc had begun to change a lot of things and the predicted collapse of capitalism as a
consequence arguably of that did not come through. Legislation designed to benefit the working class
under the pressure of the working class movements and the freedom granted to trade unions (including in
this country where a Trade Unions Act was passed by the British colonial government in 1926) had begun
to diminish the revolutionary tendencies of the working class and the alienation and polarisation between
the upper owning classes and the working classes that had been predicted by Marx did not happen in most
western capitalist democracies. Instead there was emerged a belief based on those successes that socioeconomic justice can be achieved by peaceful agitation (instead of the revolutionary path of Marx)
30

Karl Marx, Capita: A Critique of Political Economy, Vol. I, Penguin, Harmondsworth, 1977, p. 875

28

through agitations for universal suffrage, direct legislation, and civil rights. Thus socialism was seen as
the potential logical culmination of the working out of liberal principles. So the idea of a path of
Democratic Socialism emerged and it was believed a just society can be achieved by pursuing democracy
fully and then due to political power and trade union pressure the working class can take over means of
production. The basic features of a democratic socialist view of justice can be summed up as follows:
1. Democratic Socialism has faith in the power of the state in a liberal constitutional
democracy and seeks to make use of it to achieve a socialist society. So in other words
democratic socialists see Socialism as the fulfilment of liberal democracy.
2. Only Socialism according to Democratic Socialism can deliver social justice. Social
justice exists in a state of full employment, universal higher education, a high standard of living
for all and not just a few, as fair a distribution of income and resources as possible and a full
equality of opportunity to develop ones talents as much as possible.
3. To achieve socialism and welfare of the community it is necessary to promote public
ownership of the means of production. This may take the nationalisation of existing industries
(wherever necessary but not in every case), creation of new public enterprises and consumers
and producers co-operatives.
4. Trade Unions and organisations of producers and consumers are a necessary element of a
democratic society.
5. Socialist planning does not necessarily mean that all economic decisions should be placed
in the hands of the government and economic power should be decentralised as much as possible.
6. An individual should be rewarded according to his efforts.31
Apart from the liberal and socialist concepts of justice discussed above, there have also been
miscellaneous schools of thought referred to as Anarchists who have based their notions of justice and a
just society on the belief that justice is only possibly when their is no state or authority to govern people.
For the anarchists the State is an abomination for it is unfair with its subjects not by accident but due to its
very nature and unavoidably. The only solution therefore according to them is to have no state.
(These theories being slightly on the fringe of mainstream thought both in terms of number of
followers and in terns of influence in the history of mankind so far is not discussed in detail. In that sense
it is outside the scope of the syllabus even arguably for the B.Com(h) paper this book is principally
designed for. Those who are interested to further explore Anarchism may read the book edited by I.L.
Horowitz32 and also of course can look up the topic on the internet.)
And quite apart from the views of liberal, socialistic and the anarchist schools of thought it is
undeniable justice has always meant and worked out rather differently for some parts of humanity like
women or specially disadvantaged people (like lower castes in the Indian context for instance) and hence
there has been also been a Feminist View of justice for the former and a Subaltern View for the latter.
Isnt it amazing that women, even England, the home of liberalism in many ways and of the great
Bentham and Mills did not give women even the right to vote until the late 1920s and that too was
granted under pressure due to the intense path breaking agitation launched by the women suffragette
activists of that era. That even today in India which calls it self a democracy based on the principle of
universal adult franchise in most parts of the country women decide to vote not of their own volition but
are taken to the polling booths and ordered to vote by their male family member one way or the other.
The above are just examples but there is no denying that women have had negligible role in
formulating economic and developmental policies until recently event though lack of economic progress
and democratic and other rights influence women as much as and arguably even more than men. Hence
Feminists thinkers have forcefully argued that justice and the discussions of the concept is incomplete and
quite meaningless without taking into account the fact that for half of humanity, the female half, it has
31
32

Harry Laidler, History of Socialism, Routledge and Kegan Pal, 1968, p. 863
I.L. Horowitz (ed.), Anarchism, Bell, 1967, p. 48-49

29

been quite another story. What justice can be there even in the so called constitutional liberal democracies
(like India for instance) when in large segments of the population the status of women is like that of
chattel (and even worse as merely sexual objects). What justice have we been talking about? .
Interestingly most of the schools of thought over the march of history had accepted the egalitarian
principle that all members of society should be treated equally but until recently have tended to defend
gender discrimination taking various pleas like family life, privacy, good of children, natures ordained
roles etc and as feminists have argued mankind has tended to design principles of justice with only mens
interests and priorities in mind without incorporating womens needs and experiences. The feminist view
of justice is based on three broad issues: (1) the nature of gender discrimination, (2) public versus private
sphere arguments and (3) justice and the ethics of care.
The nature of gender inequality has been such that women have been fundamentally treated by men
and society as inferior and incapable and unsuited for most roles outside the home. This has in turn led to
a tendency over time, which is only slightly changing now, to define roles in terms that favour men with
no effort being made to accommodate women in the process. Laws and legislations to force equality have
failed to a large extent. As long as mens attitudes dont undergo a revolutionary change it would seem,
gender justice is a far away goal.
On the issue of public versus private arguments there are three aspects. One the assumption that
classical liberal theory had made that it is biologically ordained that men are the heads of families and the
sphere of public issues is of men and that of the family of women justice is only a matter of relations
between families. Feminists have stoutly argued against these assumptions. Another aspect is the
arguments that are based on the right to privacy. It has been argued by feminists that the right to privacy
that is invoked in the context of family life acts as huge hindrance to reforms to deal with domestic
oppression of women. After all if a husband just beats up his wife everyday for instance and when the
society tries to intervene, he argues that it is his private family miya-bibi acrimony and everybody should
stay out, what it really means in practice is that the victim, that is the woman, will just have to continue to
continue to suffer and have her basic human rights and dignity violated on daily basis quietly. So
feminists have strongly argued against the privacy plea being taken. Privacy is a basic and almost sacred
liberal principle, but according to feminists, and rightly so it would seem, it can be a huge hindrance to
achieving gender justice. Another argument of feminists is that only women are presented with a choice
between career and family. If a woman can not simultaneously raise her child and manage a full time job,
then she is forced to depend economically on somebody like her husband who is a regular income earner.
Why should women have to make this difficult choice. Should not the state intervene and treat the raising
of the child as a societal responsibility and pay the woman for instance who is only rearing a child and not
doing anything else.
An important reason for relegating women to the domestic sphere has been the belief that men and
women are associated with different modes of thoughts and feelings. And so a lot of traditions in politics
and ethics of the public realm has been justified on gender lines. The belief that the task of governing and
regulating social order and managing public institutions should be monopolised by men because they are
perceived to more rational possibly erroneously, whereas the task of sustaining private personal relations
is should be of women because they are more sentimental, friendly and caring again possibly erroneously
is challenged by feminists who argue it is precisely this sort of thinking that sustains patriarchy. Perhaps
women were caring and sentiment, feminists argue, because of the roles that they were thrust into away
from public responsibilities and because they were not offered opportunities to pursue other roles
requiring application of rational decisive thinking. Feminists have pointed out theories of justice have not
adequately taken into consideration gender issues when constructing their impressive edifices.
(There is a difference of views between Liberal feminists and Marxist feminists. Liberal feminists
argue equal rights and opportunities with men are all that is needed because then women can then
compete with men in all fields and achieve equality. Marxist feminists on the other hand argue oppression

30

of women throughout history has been basically a by-product of free market capitalism with its
consumerist focus. They point out to how in capitalist societies in spite of laws to guarantee gender
equality we see advertising for products and services for instance that are sexually degrading and portray
women as sexual show pieces and sex objects and as to how for instance prostitution survives and thrives
as an industry in a Liberal State with the state mostly failing to do anything about it because the women
workers involved in such trades can argue back that they have a basic liberal democratic right to earn their
living the way they want. Yet another school called the Radical feminists focus mainly on the experiences
of women under patriarchy and argue all subordination of women can be traced to patriarchal attitudes.
Socialist feminists combine the radical perspective of patriarchy with the Marxists class analysis by and
focus on the relationship between capitalism and patriarchy.)
Subaltern means of inferior rank and as we all know like lower castes and tribals in India and the
blacks in America or what was South Africa in the years of apartheid there have been people who have
been much below the usual mainstream of people who do the social thinking and talk and engage in
politics and seek and introduce reforms in any society etc. Subalternism is a view of history, society and
politics from below. The purpose of a subaltern study is to understand the consciousness that existed or
exists and played or plays a role in the political action taken by subordinate groups independent of any
elite initiative. The believe we can really understand history by studying the people down below and how
they reacted and formed and fought for justice and political rights etc. For instance a peasants view of the
colonial British Raj in India would be a triad of the sarkar (the British Government), the sahukar (the
Indian money lender) and the zamindar (again Indian) -- with all three being equally his rulers. But for
the Congress led national leadership who were fighting the freedom movement this was hardly how they
felt. Many of them were zamindars themselves and depended heavily for funds and activists on large
zamindars, traders and money lenders and industrialists. They tended to use the poorer subaltern groups
as raw material as it were in their economic and political activities. It was the elite again that wrote the
official versions of history, and formulated the thinking on norms of justice etc. The language of the elite
was (and is) in terms of nation-building, rights, liberties, political representation, citizenship etc. The
language of the ordinary people or the subalterns on the other hand was (and is) in terms of their
relationship with power, authority, and hierarchy, colonialism, and even pre-colonialism. While the
problem of the elite is how to use and exploit the subordinate group, the problem of the subordinates or
subalterns is to how to resist, ambush, fight and negotiate exploitative relationships. The Subaltern School
draws a distinction between mainstream theories of justice and subordinate peoples concept of justice.
The major thinkers over the time and the span of history according to the subaltern school did not really
talk of justice from the peoples perspective. For instance Greek thinker Aristotle, who is regarded as the
father of Political Science, justified slavery. Whereas for mainstream thinkers, justice has been thought of
in achieving concepts like rule of law, rights, liberty and equality, for the subordinate groups these
concepts have often ended up meaning ploys for continuation of a system of domination and exploitative
social relationships. If for the elite the right to property without restrictions is an important right for the
subordinate classes it a meaningless right because they or their children could not ever hope to own any
substantial property. Hence, for the subordinate classes even crime may not be abnormal or inherently bad
but just a case of non-compliance by an individual. For them the law is merely an, emissary of the state
representing dominance and suppression the elite. Hence violent crime even can be seen a glorious
pathway way to justice by subaltern subordinates.
Rights and Recognition
As has been explained before it had not always been felt throughout history that all human beings are
entitled to rights (and recognition). Kings and religious Clergy/Priests for instance in many societies have
had more rights than commoners. But the with the onset of early classical liberalism there had been a
demand raised for equal rights and recognition on the basis that all men are born equal particularly by the
newly rich trading bourgeois who felt that while they had the same wealth as feudal lords and princes they
did not have the same legal and social power. Later socialism added its own interpretation to the concept

31

of rights and recognition who were followed by the Positive Liberals in the early part of the twentieth
century. By the middle of that century the concept of rights was well accepted and fairly universally
excepting in the case some special countries like South Africa and some Islamic states like Saudi Arabia
in the Middle East where women have till today been not granted the status of full human beings both in
theory and practice. The Universal Declaration of Human Rights in 1948 cemented the legitimacy of
rights forever in a way.
Each school of thought defined rights and recognition in its own way. The central question or theme
on the basis of which views have differed has been on what basis rights and recognition should be given
to the individual? Over three hundred or so years in the development of the concept since the birth of
liberalism different theories have been propounded which have based their justification for rights (and
recognition) on different bases. The main theories of rights have been:
1. Theory of Natural Rights
2. Theory of Legal Rights
3. Historical Theory of Rights
4. Idealist/Moral Theory of Rights
5. Social Welfare Theory of Rights
6. Recent Liberal Theory of Rights
7. Marxist Theory of Rights.
The Theory of Natural Rights was the first plea for rights in the western world on the basis that
naturally by birth man is entitled to some rights and there are no requirement of birth, family position,
social position, wealth etc that can be imposed. John Locke, the classic liberal had declared all men are
born with some inherent rights and God gives them to his children just as he gave them arms, legs, eyes,
and ears. The social contract theorists like Hobbes, Locke, and Rousseau argued that man had these basic
rights before the origin of the State and he surrendered some of them to a superior authority, i.e., civil
society to safeguard his other rights from encroachment to obtain the benefits of community living.
Hobbes called the right to life a natural right, Locke the rights to life, liberty and property whereas
Rousseau said that liberty and equality are gifts of nature. They argued the individual cannot surrender
these rights to the state. The theory of natural rights came under attack and disapproval of later thinkers.
The great utilitarians did not find the idea that man had rights before the advent of and prior to the
relationship with the state. They argued rights can only be conferred by the law. English political and
legal thinker Edmund Burke argued rights can only be on the basis of customs and sentiments of the
society in which an individual lives. The main points of criticism of the natural theory have been along
the following lines:
(a) If an individuals rights are absolute then the society cannot touch them even in
conflicting situations where the interest of the most members of society by restricting
those rights. For instance in a famine, if a man asserts his right to property on one side
and hoards food and on the other hand many others lose their rights to life as a
consequence, there is conflict.
(b) It was argued rights are there due to social recognition for the same. So there
cannot be any inherent rights. Green pointed out every right must be justified in terms of
ends, which the community considers good and that which cannot be attained without
rights. The positive liberals like Green and Laski related rights with useful functions in
society.
(c) The natural theory assumed one can have rights and obligations independent of
society but many thinkers have argued the question of rights emerges only in the society
and in the context of social relationships.
(d) Also many thinkers have felt to use the term natural right lands one in a tricky
situation because one cannot define and justify what natural means.

32

The Theory of Legal Rights was propounded by the legal philosophers, and utilitarians like
Bentham, who argued all rights of man are derived from law and law itself is based upon utility. Law and
rights he said are simply two aspects of something, which is essentially one: law the objective aspect and
right the subjective. The state draws up and lays down a bill of rights and so the rights are not prior to the
state but from the existence of the state itself. It is also the legal framework of the state that guarantees
rights. It is again the state which changes the content of rights whenever it wants. But they accepted that
rights may not necessarily be the creation of the state but they become rights only when they are enforced
by the state. The legal theory of rights was rejected by the later positive liberal thinkers (and others) who
argue along the following lines:
(a) The legal theory did not cover the whole range of rights. There are rights we enjoy from
our society that often dont enjoy legal recognition but they exist nevertheless.
(b) It seems the legal theory only accepts only those rights, which are drawn up by the state
and legally enforced and recognised. Laski argued men enjoy rights not merely as members of the
state but also as members of the society and various associations and relationships in society. He
found the idea of limiting rights to one source, the state, unacceptable and strange.
(c) If the state and the law are the sole source of rights then there is no right against the state.
The liberal writers like Green and Laski saw the need to resist the state in certain circumstances.
As Laski argued the material source of rights is the communitys sense of justice and not the law.
Law is nothing but the concretisation of the feelings of the community and hence the obedience to
the state is obedience to right and not might and obedience to the law is obedience to the justice
and not authority.
The Historical Theory of Rights has its origin in the writings of Savigny and Puchta in Germany, Sir
Henry Maine and Edmund Burke in England and James Carter in the USA. The position taken by these
thinkers was that all rights are derived from the character of the state and the law, which are in turn
basically entirely historical in nature. They are all a product of history. Burke argued for instance that the
French Revolution gave rights to the French people which were not a part of their historical common
consciousness, and so after the revolution and the execution of the King the system could not sustain and
the revolution turned into a dictatorship. Rights are the crystallization of custom, the historical school
argued, which in the course of time become rights. If there is a tradition of certain rights or there are
rights which people are accustomed to having then people start assuming they ought to have those rights.
Or in other words custom is the original form of law and most of the rights according to the historical
school are those which turn out to have had the sanction of the longest and least broken custom. It appears
the historical theory was principally an attack on the natural law theorist and on the analytical school of
jurisprudence to regain the old conservative traditional positions. The theory obviously does not bother to
distinguish between what would be right and wrong in customs as a source of law. If somebody argued
that he had a right to keep slaves, indulge in polygamy, apartheid etc could he be allowed to stand his
ground. Will people wait for the day when abominable customs and traditions change so that they can
have basic rights. Progressive reform and social justice comes to a stop if this theory is accepted and
hence this theory is almost laughable.
The Idealist/Moral Theory of Rights holds that the basis of all rights is morals and neither natures
actions, nor law, nor customs etc. Every individual has a moral self and the need to develop his
personality and rights provide the environment to help man in his journey of moral upliftment. Since
everybody in society has the same aim of developing his personality it implies that rights arise only in the
context of a society and the rights of the individual are to be in harmony with those of others. So the
individuals rights are a part of serving the common good as well. Rights are recognised by the society
and enforced by the state and so there is no question of rights without the state. So positive liberals Green
supported the moral theory and aw it as supportive of their idea of a welfare state. The moral theory
bases its concept of rights on morals but it has been pointed out that moral rights are contextual rather
than universal because they are limited to people who share a common code of morality.

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The Social Welfare Theory of Rights was a combination of the various theories of rights that came
before it like those that were based on natural rights, legal, ideal or historical. This theory was developed
by the positive liberals and to support their prescription of a welfare state. The major contributors were
T.H. Green, G.D.H. Cole, L.T. Hobhouse, Harold Laski, Ernest Barker etc. Their central proposition was
that a law, custom, natural right etc should all yield to what is socially useful or socially desirable. As
Hobhouse put it: Genuine rights are conditions of social welfare and the various rights owe their validity
to the functions they perform in the harmonious development of society. Laski commented on this
concept of rights extensively in his book A Grammar of Politics and made the following major points as
follows:
(a) The concept of Rights emerges only in the context of a society. A right is at once a
private claim of the individual and a right shared with others together in a community situation.
Hence when promoting individual rights the common good is and must be served.
(b) An individual can claim and justify rights only in relation to the functions he performs in
society for the social good.
(c) Rights are a claim against the state and the state must enable the realisation of rights. The
state can put limitations on rights in the interest of social welfare of the society as whole but if
these restrictions become unreasonable then it looses its moral authority and then the individual
has not only a right but a duty to resist the state.
(d) Since establishment of rights are a condition for social welfare, the state must guarantee
some rights like the right to work, a right to a minimum or adequate wage, a right to reasonable
hours of work, education and the right to participate in industry. The state also needs to limit the
right to property.
(e) The authority of the state must be limited, democratic and decentralised. The state must
not be alien to the citizen and there must be active and proper communication between the two.
In the last quarter of the twentieth century there has been a new wave of Liberal Theories of Rights
dominated by thinkers like John Rawls and Robert Nozic who in turn have inspired other writers in the
same tradition. While Rawl was clearly a positive liberal in the Keynesian tradition Robert Nozic was a in
the neo-liberal tradition that is really a re-incarnation of the early classic liberals in many ways. So while
Nozic argued for unbridles free market and free trade capitalism, and a minimal state, Rawls argued for
the welfare state concept while preserving the capitalist system. Nozic asserts individuals have rights and
there are no things persons or groups may do to them (without violating their rights)33. What he basically
meant by that was the right to own property and to profit unrestrictedly from using that property through
trade but the moral logic he adopted to build his theory was based on celebrating the individualistic nature
of man. He argued individuals must be the ends and not the means and hence individuals rights are
supreme and society can not restrict them I the interest of the common good. Respect for rights he
suggested was respecting peoples rights to be equal. He negates the idea of welfare rights of the
individual as held in the positive liberal tradition. His far right concept of property rights excludes any
welfare rights and their protection by the state. He also suggest all political institutions are coercive by
definition and must command the unanimous assent of the governed. Every individual lives in his own
exclusive domain and must not be disturbed. He is the owner of himself and his talents and property and
he should have full freedom with no restrictions even in the interest of societal good to put them to
whatever use he wants. Rawls on the hand used the words rights and justice interchangeably. All rights
emerge from justice. To do justice rights are granted and they may also be taken away for the same
reason. He was of the view rights should guarantee a fair share of economic resources. The social and
economic inequalities should be managed and such that those with the least material goods such as
income , wealth, education etc get a larger share than they have been getting. But Rawls does not wish to
change the basic structure of the market economy with its inevitable creation of extreme material
inequalities but wants the system of taxation for instance to be so designed that leads to some level of

33

Robert Nozic, Anarchy, State and Utopia, p. 1 (op. cit.)

34

redistribution of goods to the worse off in society. He advocated that peoples rights to social goods
should not be dependent upon their natural endowments.
The Marxist Theory of Rights would be a bit of a misnomer because the Marxists never really
attempted to propagate a separate theory of rights but offered a great critique of the liberal bourgeois
concept of rights. He argued economic inequalities lead to political inequalities and make most
constitutionally guaranteed liberal rights meaningless. Marx made the following points in his criticism of
the bourgeois concept of rights:
(a) Most rights guaranteed in a liberal constitutional set up are abstract and formal and
useless really unless institutional changes were introduced by law to make the rights a living
reality. For example the right to life means nothing if it doest mean the right to means of
subsistence on which life depends. Marx made the point that property ownership does not merely
give the holder of property the power over the thing that he owns but also power over men
because the property is also a means of production and using that means of production men earn
their living. The owner of the property or the means of production can easily exclude who ever he
fancies. That means whoever is excluded for whatever reason becomes jobless and hence must
starve.
(b) Equality of rights is an essential condition for achieving social justice but it is not
enough. That is because the rich always are protected and given justice differently from the poor
due to the influence of the money power. Hence Marx declared every right is in general a right
of inequality in a liberal set up. A right to be equal only ends up meaning a right to be unequal
due to the power of capital or money or property of the rich.
(c) Rights granted by the state constitutionally can never make them a de facto reality but
they are dependent on the economic structure and cultural development of society for a real
existence.
(d) Rights were hence not as important as setting up a classless society in a revolutionary
struggle which is the only way to achieve socio-economic and structural conditions that will
endure on a permanent basis and not get corrupted or distorted and guarantee real de facto equal
rights.
Questions:
a. What does politics conceptually deal with? . Explain.
b. What are two major approaches in social and political thought? .
c. What approach of social thought has dominated in what phases of human
history? . And where? .

SUGGESTED READINGS
1. H.J. Laski, A Grammar of Politics, 1925
2. Karl Marx, Das Kapital, 1867
3. Adam Smith, Wealth of Nations, 1776

35

LESSON 2

THE IDEA OF A GOOD SOCIETY

L. Ganguly
Financial Analyst
After reading this lesson you will be familiar with:
The idea of a Good Society
The concept of Business Ethics and its importance
The concept of Corporate Social Responsibility (CSR)
We all want a good society to live in and be part of. But what exactly is a good society? . Do we
agree on what is a good society? . Aristotle commented in his book, Politics, the task of Political Science
is to decide what is the good.
Different schools of thought have differed on their notion of what is a good society. Adherents of the
different schools have tried to propagate and impose its own understanding and in the process there has
always been conflict even violent conflict at times. Event today the debate goes on in most countries
about what is good society and along what lines their countries should progress to achieve a good society.
(In this country too we have always had a debate, which is a raging now as it has ever been on what
would be the parameters of a good society for India. The various political parties and ideological schools
like Gandhian, Nehruvian welfare-ists, Neo-Liberal Free Market Enthusiasts, Hindutva followers, broad
leftist socialists and the Communists like the Naxalites all differ and have their own ideas on what would
the meaning of a good society for India. The struggle of each group to impose its own belief system on
the nation is ceaseless and not always non-violent. Of late the neo-liberal free market reformists have
been dominating the debate and has held the state political power for about a decade and half now.)
The Liberal notion of common good in its early period had almost dropped the notion of community
and obsessively focussed on the individual on the basis of the belief that society is an artificial man-made
entity to serve the interests of the individual. The Utilitarians believed the maximum utility or benefit for
the community as a whole was best achieved by maximising the good of the individual the most. The
good of the individual according to them was maximised by leaving them alone as much as possible to
pursue his own happiness in his own way without harming others. They did not rule out public activity for
public good but saw it as fully served if the individuals came together in institutions like parliaments that
are constitutional institutions.
It was Laski and Green principally, the two giants of positive liberalism who changed the notion of
common good in the liberal tradition in the early decades of the twentieth century and gave it a collective
welfare-ist direction. Green argued individuals being social beings live in communities and come to
acquire their individual capacities by being part of a social set up and not in isolation. Hence it can only
be for the common good that individuals live in a society. Rights, freedoms, and justice etc are all
concepts that are relevant only in so far as they promote the societal good. So the job of politics should
be to serve the common good and not the individual good. He basically rejected the utilitarian position
that maximising individual good equals maximising the common good. He instead wanted an
interventionist state to actively provide the external conditions for the internal development of man. The
state should secure the rights, liberties and justice as well as do things like invest in public education, and
introduce factory legislation, prevention of food adulteration etc. He also wanted the state to regulate the
economy and act to remove inequalities since competition and inequality undermined human fellowship
making the realisation of the common good impossible. Laski spelled out the role of the state in securing
the common good in even clearer terms and equated common good with the concept of a welfare state
where the state would indulge in activities like raising the economic standard of people, provide education
and health care, basic human dignity and the material and other requirements for the same. John Rawls in

36

his classic work A Theory of Justice added to the positive liberal voice and asked for a re-distribution of
goods if necessary to remedy any state of inequality unless that state of inequality benefits everyone.
From the middle of the twentieth century, there has been again a return of sorts to the notions of common
good held by the early liberals led by thinkers like Sir Berlin and the economist Milton Friedman. They
are referred to as neo-liberals and they believe in a free market and free international trade led society
worldwide to achieve the common good of the whole world.
The !980s and 1990s saw the arrival of a new notion of common good propagated by American
thinkers who are called Communitarians. The communitarians like Charles Taylor, Michael Sandal,
Walzer and others argued the liberal-individualistic theories dont appreciate the role and value of the
community sufficiently and there needs to be a balance between the need for liberty of the individual and
the community. Communitarians believe the individual is embedded in the social practices of the place
were he lives and his freedom is only true when it is situated in that setting. The community which
already exists in the form of social practices, cultural traditions and shared social understandings needs to
have its interests and survival balanced with that of the individual. So the conception of what would be
good society needs to accommodate the shared practices and mutual understandings within each society.
Also according to the communitarians, while social good may be reducible to individual good, the reverse
is not always true. A good society according to communitarians should have three characteristics: a
cultural structure that provides people with meaningful economic and social options is preserved, a shared
forum exists in which to evaluate these options and political legitimacy for the views of the community.
The communitarians believe the structure of society which provides people with options really
should not be left to be determined by individuals, businesses like multi-national corporations or the
market forces. For instance historical monuments will fade out due to constant wear and tear if the state
does not step forward and preserve them. The interest that people have in a good way of life and the
support they are willing to provide may not be enough to guarantee their existence for future generations.
So the state has a role that market forces cannot play.
The communitarians also want to replace individual choice with collective choice to some extent
because they believe individual judgements about what is good depend on the collective evaluation of
shared experiences. So there needs to be collective deliberations and testing of options. The
communitarians argue that since people are social basically they would have a tendency to drift socially
without the state actively bringing them together to evaluate and propose the good.
The communitarians also link the cultural situation with the political situation and the individuals
behaviour with in all that. The argue citizens will identify with the state and accept its demands as
legitimate only when there is a common lifestyle which is seen as a good and people will not respect the
claims of others unless they are bound by shared conceptions of what is good. So the politics has to be of
the politics of common good and everyone needs to participate in it. The communitarians it can be said in
summary are basically for a practice of state and politics, which is for the common good as collectively
arrived at in the normal cultural life of the society.
The Marxist notion of common good revolves around their conviction that in a class-divided society
the common good can be nothing more than the ideology propagated by the ruling classes as a moral
justification for their legitimacy. Liberal capitalism they argue for instance would claim that private
property and its free accumulation serves the common interest of all whereas in realty it serves the interest
of a particular class and is a means of exploitation and suppression of the non-propertied classes. So Marx
advocated the creation of a stateless and classless communist society base upon a community of interests.
Marx argued in a liberal capitalist society there is a fundamental source of disharmony between capital
and labour, which brings conflicts ultimately, to the three aspects of life productive forces, human
relations and consciousness. The ownership of the means of production in a few hands in a capitalist
society and the sole aim being maximisation of profits for the individual capital owners or their families

37

leaves the vast non-propertied classes with only the power to sell their labour so as not to starve. So the
growth of capitalism leads to concentration of wealth and production on the one hand and the growth of
unemployment, oppression and exploitation on the other hand. The state or political order also serves the
interest of the propertied classes. The worker on the hand works only in order to live and gradually
becomes alienated from the society because everyone is separated from the community and works only
for his own private interest or survival. In such a society Marx argues common good has no meaning
and a good society is not possible. A goods society is therefore only possible when a class less society is
created. This Marx predicted would happen as a result of a proletarian revolution eventually in all
capitalist societies. (He had obviously not seen the possibility of widespread welfare-ist reforms that were
carried out in the western capitalist societies in the early part of the twentieth century under the influence
of positive liberals.) The common good can be realised and a real good society brought into existence
only in a communist society which would be the first truly equal or egalitarian society. all en will be
treated equally in a communist society be respected simply for being individuals and not on the basis how
rich or wealthy he is. An individuals property size will not determine his social status in society. There
will be no ruling class because there will be no private property but only professionals like administrators,
managers, scientists, doctors, engineers etc. But even a factory worker or sweeper or a farmer will be
treated as a professional and will have no less status than anybody else. He will also be as materially
comfortable and have access to the same standard of living as anybody else in society. Marx went further
and declared that a good society is only fully realised when the state becomes irrelevant and withers away
because coercion and power cannot in an absolute fundamental sense exist in a perfect society.
Individuals must feel that they have come together in a voluntary association where no one is an owner
and the other is his servant or employee, but rather that everybody is a worker either of the hand or the
brain. There will no clash of interests because interests are based mainly on property ownership and in a
communist society property ownership is abolished.
The Gandhian notion of common good base on the views of Mahatma Gandhi is different from the
Liberal, Communitarian or Marxist views in a fundamental respect because Gandhiji developed his views
based on the reality and the strengths and weaknesses of the Indian rural life of the villages. Also he fused
his understanding of religious and spiritual values pertaining to the need for spiritual self-development as
opposed to merely the material development in his scheme of things for a good society that he visualised.
He named his notion Sarvodaya by which he meant goodwill of all and welfare of all. He placed a
strong emphasis on harmony and non-violence at all costs because all violence was non-spiritual and evil
in his view. He was of the view that one should resist becoming violent in reply even when facing
exploitation and oppression but should instead try to change the oppressor and persuade him to give up
his exploitative behaviour. He also spoke forcefully against the Indian caste system and was for equal
opportunity for all. He relied heavily on the strengths of socio-economic system of the Indian village and
only wanted some changes made into that system to achieve what he argued would be a perfect society
for India. His views were meant and designed for India principally, it can be safely assumed. Also he was
it would be seem in the context of this day and age one of the original environmentalists. He was
vehemently against the mechanisation and industrialisation of event the most basic necessities of life and
argued or a certain of self-reliance that would also be regarded as ecological and environment friendly to
use the popular terminology of out times. The problem with the Gandhian idea of a good society is that
there are many vague and unclear aspects to his views or too many loose ends and all of his views he did
not spell out clearly in so many words but have been deduced from his actions and reactions to various
events during the freedom movement by historians and analysts. For instance once when in an incident
poor farmers unable to bear the extortionate burden of paying the moneylender-zamindar combine
revolted and there was a spontaneous violent incident he was very angry and scolded the farmers for
having become violent and destroying the harmony by their way of protest. It is not clear what and if he
told the zamindars but there is some evidence he once addressed an association of zamindars on a
different occasion and told them that he was not against their existence but wanted them to adopt a
benevolent attitude. From this some historians have concluded he was not against class equality but was
wanted a harmonious existence at all costs where each person will be benevolent and kind and

38

responsible. He thus principally placed great faith in the power slow, non-violent and persistent
persuasion, one has to conclude, to achieve an idealist and good society that will be self-reliant and in
harmony with nature and the environment and preserve the beauty and strength of the village life of India.
The Concepts of Business Ethics and Corporate Social Responsibility (CSR)
As will be clear by now from the above, the economic life and survival of all non-communist
societies is substantially dependent on the business sector that is owned privately. Since private motives
are usually selfish and work on the basis of maximising personal profits and gains, there is always the
possibility of bad, immoral or fraudulent behaviour from them that can render the basic civic basis of any
society that depends on private business shaky and even unviable. Further since the principal
responsibility of achieving economic developmental and social-justice goals are left to the growth and
good behaviour of private business (as opposed to the government in socialist and communist societies),
in the liberal and neo-liberal schemes of things designed on the principles of free market capitalism, any
lapse on the part of business in their expected role can put the whole society in a precarious position.
Private business can always argue that their main role is to maximise their earnings for their shareholders
or owners and expectation of ethical behaviour from them is unfair if it means more than simply
following the letter of the rules and the laws. In such circumstances concerns with respect to a whole
range of issues from social and economic development to environment to legal morality etc come under
threat. Hence the essential need for business behaviour based on good ethics, which is a word derived
from the Greek word ethos meaning character guiding beliefs, standards and ideals of a community or
people.
From another point of view one can say that Ethics is a whole separate subject as a part of
Philosophy and Business Ethics is simply a form of Applied Ethics, which has now become a whole
separate subject of study and practice particularly in the US and Europe. The International Business
Ethics Institute (IBEI), a US based organisation, chooses to see Business Ethics as a form of applied
ethics that aims at inculcating a sense within a company's employee population of how to conduct
business responsibly. The concept has also been variously termed by organizations world over as
integrity, business practices or responsible business conduct. As the IBEI comments on its website:
Understanding the landscape of business ethics can be problematic. The field is vast, often encompassing
such concerns as corporate governance, reputation management, accurate accounting and audits, fair
labour practices and environmental stewardship to name but a few. In fact, the field addresses the entire
scope of responsibilities - or obligations - that a company has to each of its stakeholders: those who have
a vested interest - or stake - in the decisions and actions of a company, like clients, employees,
shareholders, suppliers and the community. Depending upon the company in question, one may even be
able to identify additional stakeholders..The field of business ethics is further complicated by the fact
that many terms exist to refer to corporate offices and programs intended to communicate, monitor, and
enforce a company's values and standards. In theory, one can make some rough distinctions among the
various domains related to business ethics, e.g., corporate responsibility, social responsibility, corporate
compliance, etc. In practice, however, such distinctions blur because corporate offices of compliance
established in the 1970s may now function similarly to an office of corporate and social responsibility.
Hence the scope of Business Ethics is wide and there is therefore also a lot of room for each business
to define its own understanding of what is ethical and what is not. Previously most businesses used to
accept that compliance with laws or Corporate Compliance was all there is to ethical behaviour. U.S.
business scandals that in the 1980s - particularly related to government contractsgave rise to a separate
identity for the idea of corporate compliance, which is most often narrowly focused on complying with
national and local laws and regulations as the IBEI quoted above points out. But very often, corporate
compliance offices and programs have bothered not with the spirit of the law but merely with the letter of
the law.

39

Gradually as the concept of Business Ethics developed more fully and its need was felt ever more,
the theory of stakeholders was developed and it was suggested that a business organisation has to be
ethical in its behaviour to all its stake holders. Stakeholder Theory provides an important tool for
identifying the interested parties of a business, the responsibilities the business has to those interested
parties, the interactions between the business and its stakeholders, etc. More practically, stakeholder
theory can serve as an important management tool, assisting managers to consider the consequences of
their decisions before making them and their actions before taking them. Corporate Responsibility refers
to fulfilling the responsibilities or obligations that a company has toward its stakeholders. When
examining a particular corporate practice, like profit versus environmental protection, corporate
responsibility can help distinguish between a stakeholder expectation and a corporate obligation, i.e., is
the company obligated to provide absolute environmental protection at all cost or is it obligated to
maximize profits for its investors at the cost of damaging the environment? . Corporate and Social
Responsibility also referred to as simply Corporate Social Responsibility or CSR can be understood in
terms of corporate responsibility, but with greater stress laid upon the obligations a company has to the
community, particularly with respect to charitable activities and environmental stewardship. Corporate
and social responsibility is sometimes described as being a tacit contract between business and a
community, whereby the community permits the business to operate within its jurisdiction to obtain jobs
for residents and revenue through taxation. Additionally, the community expects the business to preserve
the environment and to make the community a better place to live and to work through charitable
activities. The meaning of CSR is broader and rests on the belief that socially responsible business
practices strengthen corporate accountability, respecting ethical values and in the interests of all
stakeholders.Responsible business practices respect and preserve the natural environmentHelping to
improve the quality and opportunities of life, they empower people and invest in communities where a
businessoperates. Companies in Europe had shown greater propensity initially to start offices of
corporate and social responsibility more often than in other part of the world but now the whole world is
catching up not the least due to legal and political pressures. Corporate Social Responsibility (CSR)
encompasses all responsibilities that a company has to all of its stakeholders, including social and
environmental responsibilities.
So it is clear that discharging the requirements of Corporate Social Responsibility (CSR) is an
essential part of ethical behaviour in business but not necessarily vice versa because Business Ethics is a
very wide term implying and encompassing a lot of things not all of which can be enumerated even. As
and when issues come up the right ethical attitude sh0ould lead the way in adopting the right actions from
the point of view of business ethics. But the outlines or limits of CSR for a business organisation can be
more accurately defined in greater detail and laid down as in written corporate codes for instance that
will be discussed in later chapters.
Good Corporate Governance which refers to the oversight of company operations by bodies (e.g.,
board of directors) that bear the responsibility to oversee, direct, and evaluate company operations on
behalf of the companys investors is also an important part of Business Ethics that is increasingly
attracting much attention. In India for instance the Securities Exchange Board of India (SEBI) appointed a
Committee under the Chairmanship of Kumar Mangalam Birla of the Aditya Birla Group who in their
report stated:
Corporate governance has several claimants shareholders and other stakeholders - which include
suppliers, customers, creditors, the bankers, the employees of the company, the government and the
society at large The Committee therefore agreed that the fundamental objective of
corporate governance is the "enhancement of shareholder value, keeping in view the interests of other
stakeholder". This definition harmonises the need for a company to strike a balance at all times between
the need to enhance shareholders wealth whilst not in any way being detrimental to the interests of the
other stakeholders in the company.34
34

Report of the Committee on Corporate Governance of the SEBI

40

In the US while some companies have had a form of business ethics program for many years, most
of them developed their business ethics programs as a result of such legislations as the Foreign Corrupt
Practices Act and the 1992 U.S. Federal Sentencing Guidelines. Large multinational corporations
particularly developed internal policies and procedures to comply by these legislative actions. The US
Federal Sentencing Guidelines, in particular, serve as an incentive for companies to establish business
ethics or compliance programs. Companies that have established effective ethics programs are, under the
Guidelines, penalized less harshly if found guilty of corporate wrongdoing. According to the guidelines,
an effective business ethics or compliance program must consist of seven elements:
(1)
(2)
(3)
(4)

An individual in charge of the ethics function

Written standards of conduct
Employee training on the code document
A hotline for whistleblowers

As a result of the Guidelines, most U.S. companys business ethics programs have come to share a
number of common features, which may or may not represent the optimal components for any given
companys circumstances and environment.
Companies other than in the USA have historically typically not had the same pressure or have been
offered similar incentives to establish business ethics or compliance programs. In recent years however,
more and more countries have been enacting similar legislative acts, particularly involving bribery issues.
The Organisation for Economic Cooperation and Developments (OECD) Convention on Combating the
Bribery of Public Officials for instance means that legislation will be created in every country that ratified
the Convention. In Western Europe, programs have tended to concentrate on corporate and social
responsibility. In regions with high levels of corruption like Africa, Asia and Eastern Europe business
ethics efforts have often been programs designed to combat corruption. The field of business ethics is vast
and as we move forward, we are likely to see the field grow and evolve. Many different types of programs
and initiatives are likely to be developed over time.
In the last few decades there has been a realisation among management thinkers and consultants and
large businesses particularly multi-national corporations that following good business ethics or at least the
perception that the company does follow good ethics helps the companies image and operations. So it is
in the selfish interest of the company perhaps in some situation at least to behave ethically. Many
Ethicists and thinkers have criticised this trend and found it to be in inherently bad faith even though
almost nobody (excepting the most extreme liberal free-market fundamentalists) advocates not imposing
the responsibility of ethical behaviour on business organisations. For instance Ethics scholar, Professor
Lisa Newton comments:
The development of business ethics in the late 1970's and 1980's brought us one more bad reason to
go after ethics. It happens to be the case, unsurprisingly, that over a very large range, the ethically correct
decision is also the decision that will please the customer, conform to the law, and generally optimise
returns for the company. This unremarkable fact can be seized upon for new and trendy company slogans:
"At XYZ, the right thing to do is the bottom line," or, "Ethics is everyone's first job at ABC Company."
For ethics, after all, is just good business, over that range, and will indeed improve the bottom line.
Therefore, just as the businessman went after computers and industrial psychology when they were hot,
now they go after ethics. This trend is still very much with us. A recently published text in business ethics
lies in front of me. The cover copy reads: "For managers and executives, employees and members of the
board, the one book that shows you (bullet) How ethics is the key to improved performance in business
for your company and yourself (bullet) What is really important about "corporate culture" (bullet) Why
social responsibility is good business (bullet) How businesses go wrongand right." I am overjoyed at
such candour. In this there is no need to ferret out underlying profit-oriented motives from all that ethical

41

rhetoric. In this, the profit-oriented motives are sitting right there on the cover of the book. The question
is not, what do they really want? The question is, should we, as philosophers, cooperate in this naively
cynical, profit-maximizing endeavour? The answer to that question is, yes, we should.35
American businessman Peter Cooper commented in 1874: I have always recognized that the object
of business is to make money in an honourable manner. I have endeavoured to remember that the object
of life is to do good. But then another American, Andrew Young had may be somewhat cynically
summed it up rather well when he had said: Nothing is illegal if a hundred businessmen decide to do it.
Questions:
1. What should the term Good Society mean? . What is the difference between the different major
schools of social thought on the idea of a good society? .
2. What is business ethics and why is it important? . Comment on the obligation or lack of it of
businesses and private enterprises to be ethical. And the imperatives of being ethical if there are
any?
3. Explain the idea of Corporate Social Responsibility (CSR) and comment on how historically and
politically businesses and private corporations came to be regarded as having social obligations.

SUGGESTED READINGS
1. The Report of the Committee on Corporate Governance, Securities Exchange Board of
India (SEBI)
2. The Collected Works of Swami Vivekananda, Ramakrishna Math
3. John Kenneth Galbraith, The Affluent Society

35

Doing Good and Avoiding Evil, Lisa Newton, Hale Chair, Ranmaisance Institute of Technology (www.rit.edu)

42

LESSON 3

DEMOCRACY AND WELFARE STATE, MARKET AND

GLOBALISATION
L. Ganguly
Financial Analyst
After reading this lesson you will be familiar with:
The political economy of a Welfare State
The political economy of free Markets and Globalisation
Most colleges of Delhi University (and other universities) were set up by the government, so that
India may have a large body of trained and well educated young people to take up the challenges of
taking the country forward. It was not done to earn profits by providing education to those who can afford
as in private educational institutes (like the computer institute NIIT for instance) considering that talented
people can be born both in poor and rich families and the nations needs to reap the talents of all its
citizens. But the fees and other expenses charged to a student by the colleges is only a fraction of the
actual costs incurred in educating him or her. Should this be so? Or should students be forced to pay their
costs either by self-funding or bank loans as a recent report of the Planning Commission seems to be
suggesting? . What if a talented student or his family have neither self-funds available nor the financial
qualifications for availing a bank loan. Should he be deprived of a education? . Similarly if you anybody
falls sick and he cant afford a private clinic or hospital, should be allowed to die as he cannot afford
medical care. Should the state have provisions for government run hospitals and free medical care? .
Should the state be at all responsible for needs like education, health etc or is the job of the state limited to
facilitating individual and private initiative in these and all other aspects of our lives. Or in other words
should the state merely create conditions for the market economy system as represented by private
businesses and entrepreneurs to provide all products and services at the price that they will. Or should the
state intervene? . If so how much, when and where? .
These fundamental questions have always inspired much debate over centuries and have never been
and cannot be purely matters of economic science. They are almost always decided by any society based
on its notions of ethics and in the course of the working of its political system or processes whatever they
may be.
Democracies being by definition of the people, by the people and for the people, it has been
observed over the march of history, generally tend to assign much more to the state by way of such
fundamental responsibilities. That is partly because in democracies people go to vote and tend to vote for
parties and governments who take responsibility for delivering to people the basic needs. If the market
system does not deliver or can not within a reasonable length of time the state often has to intervene
directly. After all people cant wait for ever for private companies to start hospitals for instance to get
treated of life threatening sickness. The government has to intervene and invest in the hospital or medical
care sectors for instance and in other sectors of necessity.
Even though the idea of democracy, at least in the western world is quite old, the idea of the state
playing a role or interventionist role in it is rather recent. As the legendry management guru and thinker,
Peter F. Drucker puts it: before 1929, nobody believed that government had any responsibility for the
economy36. Everything was left to the market or to the interplay of private business interests. Professor
Paul A. Samuelson, eloquently narrates the historical shifts as follows:

36

Peter F. Drucker, The Frontiers of Management, p. 14, Heinmann, London, 1987

43

One of the principal problems of political economyis deciding on the appropriate boundary
between state and market. We can better understand the issues if we examine how the boundaries evolved
to their present point. In medieval times, the aristocracy and town guilds directed much of the economic
activity in Europe and Asia. However, about two centuries ago, governments began to exercise less and
less power over prices and production methods. Gradually, the restraints of feudalism were replaced by
what we call the market mechanism or competitive capitalismIn most of Europe and North
America, the nineteenth century became the age of laissez-faire. This doctrine, (propounded by Adam
Smith in the seventeenth century) which translates as leave us alone, holds that government should
interfere as little as possible in economic affairs and leave economic decisions to the interplay of supply
and demand in the market place. Many governments espoused this economic philosophy in the middle of
the nineteenth centuryNevertheless by the end of the century, the unbridled excesses of capitalism led
the United States and the industrialised countries of Western Europe to retreat from full laissez-faire.
Governments assumed a steadily expanding economic role, regulating monopolies, collecting income
taxes, and taking on such tasks as providing support for the elderly (social security). This new system,
called the welfare state, is one in which markets direct the detailed activities of day-to-day economic life
while governments regulate social conditions and provide pensions, health care, and other aspects of the
social safety net. Under the guiding hand of government, the market economies of Western Europe and
North America flourished in the three decades after World War II. Those years witnessed an
unprecedented period of sustained economic growth and prosperity. Then, around 1980, the tides shifted
again, as conservative governments in many countries began to reduce taxes and de-regulate
governments control over the economy. Particularly influential was the Reagan revolution which
changed public attitudes about taxes and government and reversed the trends in U.S. federal spending on
civilian programs. The most dramatic turn towards the market came in Russia and the socialist countries
of Eastern Europe. After decades of extolling the advantages of central planning and a government run
command economy, these countries started to make the difficult transition to a decentralised, market
economy. China, while still run by the dictatorship of the Communist Party, has enjoyed an economic
boom in the late 1980s and early 1990s by allowing markets to operate within its borders. Developing
countries like Taiwan, Thailand, and Chile have enjoyed rapid income growth by embracing capitalism
and reducing the role of government in their economies. This capsule history of the shifting balance
between state and market will naturally raise many questions. What is a market economy, and what makes
it so powerful? . What is the capital in capitalism? . What government controls are needed to help
markets? .37
The answers to the above questions are really for study courses in economics but it is necessary to
remember briefly the basics of a market economy that was the norm worldwide before the advent of the
welfare state happened as a combination of consequences of peoples pressure in democracies, the
influence of Marxism, the growth of the ideas of positive liberalism and of the solutions for economic
development developed by the Keynesian revolution in economics.
A market economy functions on the premise that at every moment some people are buying and some
others are selling in the market place for different goods and services and in that process the fundamental
decisions on what to produce, how to produce and for whom get taken automatically. Whatever is in
demand and enjoys a high price as a consequence will get produced (even if it is something useless or
harmful like cigarettes), the most efficient way to produce will get automatically selected by the producer
to maximise his profits (for instance by installing computerised machines and systems if a producer can
produce better and with less people than previously he will save the money spent on salaries saved by
sacking the now extra staff and hence he will choose the new technology because it is more profitable
for him), and the question of for whom is answered simply by whoever has the money and can afford to
buy (if some people have the money and can pay then what they want to buy will be produced even if it is

37

Paul A. Samuelson and William D. Nordhaus, ECONOMICS, 1998, pp. 25-26

44

useless inherently like gold jewellery for instance on the other hand even if some other people badly need
cheap clothes or medicines but cant pay, then those items wont be produced for them).
So notwithstanding the problems with respect to equity etc market economies on their own without
any intervention are constantly solving the question of what, how and for whom and are balancing out all
the forces operating in the economy thereby achieving a market equilibrium of supply and demand. As
Prof. Samuelson puts it: a market equilibrium represents a balance among all the different buyers and
sellers. Depending upon the price, households and firms all want to buy or sell different quantities. The
market finds the equilibrium price that simultaneously meets the desires of buyers and sellers. Too high a
price would mean glut of goods with too much output; too low a price would produce long lines in stores
and a deficiency of goods. Those prices for which buyers desire to buy exactly the quantities that sellers
desire to sell yield an equilibrium of supply and demand.38
It had become clear in the western world by the middle of the nineteenth century as pointed out
earlier that capitalism led to many problems the major one being extreme inequality. On the one side there
arose a small new class of businessmen who made a lot of money and lived very well and on another side
there arose a much larger class of workers and labourers who lived in extreme poverty and had become
almost slave like (in their way of life) to their masters, the capitalist owners of factories they worked in.
Needless to say all this state of affairs happened in spite of functioning democracies in most western
nations. The political democracy that people enjoyed had not led to but it seemed had actually increased
economic inequality and misery. So gradually the democratic processes led to rising demands against the
capitalist excesses in the form of worker and labour movements, strikes and revolts in Europe and Britain
most of which were ruthlessly put down by the state with sheer might of police and military action.
At about this time, starting with the Communist Manifesto of 1848, the thoughts and predictions of
Karl Marx entered the picture. Marx pointed out some internal inherent contradiction of the capitalist
system as it then existed in an elaborately argued theory and predicted the eventual demise of capitalism
in a violent overthrow. He predicted that while on the one hand the increasing poverty and pauperisation
of the working class would result in their alienation ultimately causing them to revolt, on the other hand
the inexorable march of technology would pose problems for capitalism. Even an industrialist like Vinay
Bharat Ram of the DCM Group of industries, who is clearly no follower of Marxian analysis, admires this
analysis nevertheless and explains it succinctly as follows:
Changing modes of production, as he (Marx) called them would alter the existing social structure,
redistributing wealth and power. Consequently the feudal order would fade into the background and the
capitalist would become a dominant part of the establishment. Even so, capitalism based on the concept of
private property, he opined would be ill suited to plan for the increasing complexity of technological
change, thus subjecting the system to cyclical crises of increasing intensity. The weaker enterprises would
succumb to takeover by the stronger whose viability would depend on a race for accumulating ever more
labour-saving machinery. In the end, the remaining few monolithic enterprises would be overwhelmed by
armies of unemployed industrial workers. Sounding the death knell of capitalism. Though the genesis of
this prognosis based on the labour theory of value remains in question, Marxs long term foresight about
capitalism cannot be lightly dismissed. His prediction that the system would be prone to cyclical
depressions has held true and one of these almost destroyed it during the 1930s. His belief that the big
fish will swallow the small is also confirmed by the spate of mergers and acquisitions over the last
century and thereafter.39 (By cyclical depressions are meant recessions when the decreases in
production happen in the economy thereby leading to the loss of jobs due to closing down of factories etc
and by big fish he means the large multi-national corporations basically who using their superior
financial strength ether force smaller businesses that he calls small fish out of business or just outright
38
39

Ibid., p. 27
Vinay Bharat Ram, Defending Marx, The Time of India, Edit Page, April 06, 2005

45

buys them out thereby capturing the market in any particular product or service or cornering an
overwhelming share of it.)
It seems even Adam Smith, the original classical liberal thinker to lay out the theoretical basis for the
free market capitalist system even had some doubts. Professor Pulin B. Nayak of the Delhi School of
Economics of the Univ. of Delhi comments on this interesting fact: Of utmost interest are the thoughts of
Adam Smith, widely regarded to be the intellectual progenitor of laissez faire capitalism. This may come
as something of a surprise, but Smith was ultimately pessimistic about the outcome of the capitalist
system. He outlined a scenario where the process of accumulation would continue till everyone arrived at
the the full complement of riches after which the process of accumulation and growth would stop. The
long upward trend in living standards would turn downward. But more grievously, the process of division
of labour would lead to a moral decline in society. There would be a widespread attitude of mechanistic
hopelessness that was so brilliantly captured by Charles Chaplin in his (film) Modern Times. At the
final stage all the nobler parts of the human character may in great measure be obliterated and
extinguished in most people40.
As a consequence of the pressure of workers movements and egalitarian political voices in the
democratic process, the western capitalist democracies while maintaining the free market did introduce
some changes like for instance putting restriction on child labour etc but the changes were very few and
far between. On the whole large segments of population remained victims of exploitation, poverty and
increasing unemployment as a consequence of the march of unbridled free market capitalism. Also since
its origin capitalism had been prone to periodic bouts of inflation (rising prices) and recession
(decreasing production leading to high unemployment). This trend is confirmed because it has still not
stopped: the United States for instance has had nine recessions since World War II making millions of
people unemployed during those periods.
Since the early decades of the twentieth century and with the rise of positive liberalism and finally
with the advent of John Maynard Keynes and his followers there was a radical new turn in western
economies including America. Keynes suggested dealing with the worst excesses of business cycles and
recessions that are inherent in free market capitalist systems by a careful use of fiscal and monetary
policies, which would help change the production output, employment and inflation. It was his remedies
for the problems that capitalism was facing with its strong advocacy of an interventionist role of the
government that led eventually to what is referred to as the welfare state. Fiscal Policies are the policies
and powers of taxation and of government spending. Monetary Polices refer to the powers of fixing or
influencing the interest rates to control the money supply so that the investments in capital goods or
productive capacities and other interest rate sensitive spending can be influenced. The 1929 Great
Depression in America and the western world generally, had created vast armies of unemployed on the
one side and a small class of very rich people on the other. The Keynesians argued using the above two
fundamental tools of macro-economic policy governments can influence the levels of spending in the
society, the level of output of products and services and their growth rate, and consequently the levels of
employment and unemployment and the rate of inflation. Also the government can redistribute income
from the rich to the poor by progressive taxation for instance to deal with the problem of extremes of
inequality. So the government could for instance launch massive programs of building roads or brides or
highways or other infrastructure that would employ the unemployed who would then earn and spend their
salaries on goods that would in turn revive or spur the closed factories in sectors facing recession. Also if
the interest rates are pushed lower with the use of monetary policy tools, people would think of starting
factories or even buying homes on loan that they wouldnt have done earlier and which would now in turn
boost the economy and push it out of recession and depression. Professor Samuelson comments on the
profound departure from earlier conservative classical attitudes as follows:

40

Pulin B. Nayak, Beyond Capitalism, The Times of India, Edit Page, March 2005

46

The early classical economists believed the distribution of income was unalterable. They argued that
attempts to alleviate poverty by government interventions in the economy were foolish endeavours that
would simply end up reducing total national income. This view was contested by the English economist
and philosopher John Stuart Mill. While cautioning against interferences with the market mechanism he
argued eloquently that government policies could reduce inequalityA half-century later, at the end of
the nineteenth century, political leaders in Western Europe took steps that marked a historic turning point
in the economic role of government. Bismarck in Germany, Gladstone and Disraeli in Britain, followed
by Franklin Roosevelt in the United States introduced a new concept of government responsibility for the
welfare of the populaceThis marked the rise of the welfare state, in which government overrides
market forces to protect individuals against specified contingencies and to guarantee people a minimum
standard of living. Important welfare-state policies include public pensions, accident and sickness
insurance, unemployment insurance, health insurance, food and housing programs, family allowances,
and income supplements for certain groups of people. These policies were introduced gradually from
1880 through to the modern era. The welfare state came late to the United States, being introduced in the
New Deal of the 1930s with unemployment insurance and social security. Medical care for the aged and
the poor was added in the 1960s.The basic purpose of the modern welfare state is to provide a
safety net for those who are temporarily or permanently unable to provide adequate incomes for
themselves. One reason for these policies is to promote greater equality41. It was the underlying growth
of democratic ideas like equality that ultimately led to the ideas that form the bedrock of a welfare state.
The search for democratic equality had led to the belief in the need for welfare states. But what should
democratic equality mean. That answer, it has been found, has varied according to the political school of
thought answering the question.
Professor Samuelson goes further and explains what is equality in the context of the idea of the
welfare state as follows:
What are the different concepts of equality?. To begin with, democratic societies affirm the
principle of equality of political rights -- generally including the right to vote, trial by jury, and free
speech and association. In the 1960s, liberal philosophers espoused the view that people should also have
equal economic opportunity. In other words, all people should play by the same rules on a level playing
field. All should have equal access to the best schools, training, and jobs. Then discrimination on the basis
of race or gender or religion would disappear. Many steps were taken to promote greater equality, but
inequalities of opportunity have proved very stubborn, and even America of the 1990s falls far short of
the goal of equal economic opportunityA third and most far reaching, ideal is equality of economic
outcome. In this idealistic dream, people would have the same consumption whether they were smart or
dull, eager or lazy, lucky or unfortunate. Wages would be the same for doctor and nurse, lawyer and
secretary. From each according to his abilities, to each according to his needs was Karl Marxs
formulation of this philosophy...Today, even the most radical socialist recognizes that some differences in
economic outcome are necessary if the economy is to function efficiently. Without some differential
reward for different kinds of work, how can we ensure that people will do the unpleasant as well as the
pleasant work or, that they will work on dangerous offshore oilrigs as well as in pleasant parks? Insisting
on equality of outcomes would severely hamper the functioning of the economy.
Quite apart from the political and ethical reasons outlined above for the movement towards a welfare
state of some sort the sheer problems of a liberal market economy over time almost leaves no other option
to states than to turn statist and intitate welfare measures. The following table mainly drawn from
Professor Samuelsons book42 charts in a compact manner the problems and welfare measures that have
been undertaken by governments round the world.

41
42

Paul A. Samuelson and William D. Nordhaus, ECONOMICS, 1998, pp. 25-26

Ibid., p. 39

47

Failure
Economy

of

Market

Government
Examples
of
Intervention Strategy to deal Government
with them
Policies/Welfare Measures

Inefficiency:
Monopolies
Externalities

Encourage
Competition Anti-Monopoly
Intervene in Markets
Anti-Pollution Laws

Public Goods

Encourage
activities

Beneficial

Laws

Invest in public goods like

public lighting, scientific
research etc.

Inequality:
Extreme and Unacceptable Redistribute Income
Inequalities of Income and
Wealth

Progressive
taxation
of
Income and Wealth and
Income Support Programs
(e.g.,
Food-for-Work
Programs,
Employment
Guarantee Schemes etc.)

Macroeconomic
Problems:
Volatile Business Cycles Stabilize the shocks and cycles Monetary
Policies
(e.g.,
(leading to high inflation and through
macro-economic changes in money supply and
unemployment)
policies
interest rates)
Fiscal
Policies (e.g., taxes and
spending programs)
Slow economic growth and Stimulate Growth (by direct Invest in education and raise
Recessions
investments
by
the national savings
government if necessary)

To understand fully the journey from classical liberal economics to welfare economics with the
Keynesian Revolution and back again in the last few decades of the last century to the, what is
substantially the old fascination with market and of international global trade under the slogan of
Globalisation with its active single minded promotion by the World Bank/IMF prescriptions, it is
necessary to understand briefly the main arguments of each school of thought that has held influence
along the way as the historical events and shifts happened.
The Classical Tradition The Market is Supreme
Classical thinking of the original liberal period was influenced in its ideas of economics mainly by
Adam Smith (1776) and later J. B. Say (1803) and John Stuart Mill (1848). They believed in the invisible
hand of the market deciding for society the questions of what how and for whom will be produced and
that an economy always ultimately naturally reaches a state of long run equilibrium where there is fullemployment or nobody is unemployed. Hence they believed the government has no role. If there sre

48

unemployed or economic misery that is only temporarily for sooner or later it will get corrected on its
own. They based this conviction of theirs on the belief that prices and wages are fully flexible and move
up and down freely. The Classical economists were fascinated by the Industrial Revolution in Europe
with its division of labour, accumulation of capital and international trade. They did see the possibility of
business cycles but they were convinced they were temporary and self-correcting deviations from the
rule. They suggested supply creates its own demand and over production is impossible. In other words
they believed whatever a factory can produce the workers will have the money to buy.
The belief of the classical liberals in the ability of prices and wages to be flexible and to adjust with
sufficient speed which then would ensure a continued and adequate level of output and employment was
so great that even during the Greta Depression when a quarter of working Americans were unemployed,
A.C. Pigou, a stalwart economist of that era wrote: with perfectly free competition there will always be a
strong tendency towards full employment. Such unemployment as exists at any time is due wholly to the
frictional resistances [that] prevent the appropriate wage and price adjustments being made
instantaneously43.
The classical liberal economists were clear the government should stay out and businesses in a free
market environment would soon solve all problems and there would be no unemployment.
The Keynesian Revolution
While classical economists were adamantly holding on to their theories and anti-state views, the
mounting army of the unemployed and the sheer depth of economic misery that was generated during the
Great Depression of the 1920 in Europe and even more so in America caused many economists to
question the classical position. The foremost among these economists was the great John Maynard
Keynes who in his The General Theory of Employment, Interest and Money (1936) offered an
alternative macro-economic theory. He suggested that prices and wages were not flexible as the classical
economists believed but that they can be sticky causing output in an economy to deviate from its full
potential for long periods of time. During that period of time consequently recessions and economic
depression become unavoidable causing massive unemployment. In any case the severity of the
depression that the western world was suffering had almost proved to everybody that supply definitely
does not create its own demand. So Keynes suggested there is a need to manipulate both the aggregate
demand and supply in an economy so that it cab get pushed back out of depression. Otherwise a nation a
can remain in its low output high misery condition for a long time, he suggested, because there is no selfcorrecting mechanism or invisible hand to guide the economy back to full employment as the classical
economists believed.
Keynes advocated using a combination of fiscal and monetary policies by the government to
stimulate the economy and maintain high levels of output and employment. Adjusted fiscal policies could
mean increased government spending by the government for instance in setting up public sector units or
spending on infrastructure like roads and bridges etc for instance which would increase aggregate
demand. The increased demand would lead to increased output closing the gap between actual GDP
(Gross Domestic Product) and potential GDP, which would in turn generate employment. Reducing
unemployment would further in turn lead to a push to aggregate demand from the money that is now
earned by the previously unemployed and would now be spent on consumer goods.
Professor Samuelson comments on the revolution that the Keynesian revolution caused leading to the
emergence of the welfare state that believes in spending by the government and its participation in
production of goods and services to boost the economy whenever needed in the following words:
Keynes analysis created a revolution in macro-economics, particularly among young economists who
43

Ibid., p. 32 (A.C. Pigou, The Theory of Unemployment, 1933, cited in)

49

were living through the Great Depression of the 1930s and sensed something was terribly wrong with the
classical model. Of course, the Great Depression was not the first event to reveal the incredibility of the
classical synthesis. Anyone with common sense could see the massive involuntary unemployment during
depressions. But for the first time the classical approach was confronted by a competing analysis. The
Keynesian approach presented a new synthesis that swept through economics and fundamentally changed
the way that economics and governments think about business cycles and economic policy.44
It should be clearly understood though that Keynes by no means proposed doing away with the
market as extreme socialists and the Marxists advocated, to exterminate economic disparities, exploitation
and unemployment. As Peter Drucker puts it, Keynes views were quite similar to what we now call
neo-conservativeHis theory had its origins in his passionate attachment to the free market and in his
desire to keep politicians and governments put of it.45 So Keynes clearly wanted to keep within the
market oriented framework of classical economics. He wanted merely to governments to tweak affairs
from time to time to deal with the rut of low production and unemployment that capitalist systems showed
a tendency to get into every few years. His main concern was maintaining the balance or equilibrium in
the classical sense. Where he differed from the classical economists in the role of the government. While
the classical economists fear the government trying to stabilize the economy by investing directly would
lead to escalating inflation and may even harm long term growth and crowd out private investment as a
consequence of the high government deficits, the Keynesians differ. The Keynesians argue the macroeconomy (in capitalist systems) has a tendency to follow business cycles with alternating periods of high
unemployment followed by speculation and inflation46 and needs to be stabilized or adjusted for with
appropriate fiscal and monetary policies. Professor Samuelson puts it in humorous terms when he says:
If he classical economists see the economy as a temperate fellow who has the requisite glass of mineral
water and vitamins every day, the Keynesian might picture the economy as a manic-depressive who
periodically has a binge of irrational exuberance and shortly thereafter falls into a depressed
hangover...Keynesians believe the government can affect real economic activity by taking monetary or
fiscal steps to change aggregate demand. A modern Keynesian economist would approve of steps to
reduce aggregate demand in recessions. Such economists increasingly lean towards using monetary
policy to stabilise business cycles. But they also maintain the importance of fiscal automatic stabilizers
that reduce the multiplier effect of unforeseen shocks, and they argue vehemently against policies, such as
a constitutional amendment requiring a balanced budget, that would have fiscal policy exacerbate
business fluctuations47.
(Legislations like the fiscal responsibility legislation that was passed in India by the last government
and is supported by the present government would not be the liking of Keynesians who would want the
room for fiscal measures kept open as wide as possible with little or nor restraints.)
Ultimately, as Professor Samuelson comments: In economics what people see depends upon the
theoretical spectacles they wear. Does a President, Senator or Macroeconomist lean towards a classical or
a Keynesian view? The answer to this question will often explain that persons view on many of the major
economic-policy debates of the day48.
In India the economic policy that Pandit Jawaharlal Nehrus government followed after
independence of India from the British was essentially Keynesian. Yet it is strange that in modern popular
discourse the welfare state interventionist polices of that era are branded Nehruvian Socialism when in
fact they were strictly speaking not remotely socialist either in intent or design. Nehru was rightly very
44

Ibid., p. 624
Peter F. Drucker, The Frontiers of Management, p. 105, Heinmann, London, 1987
46
Paul A. Samuelson and William D. Nordhaus, ECONOMICS, 1998, p. 625
47
Ibid., p. 625
48
Ibid., pp. 624-25
45

50

worried immediately after independence that the private sector in India had neither sufficient funds nor
the technical ability to create giant infrastructure industries that serve as the building blocks of an
economy like steel etc and so the government must step in and spend both to fill the capability gap and to
boost the economy and prevent it from cycles and recessions. He was thus not a socialist really strictly
speaking.
The Monetarist Revolution
The Keynesian approach pretty much was the preferred approach among economic policy makers
world wide well after the second world war but slowly as inflation became a niggling problem a new
approach that was propounded by Milton Friedman and his followers began to gain respect.
Monetarism had its roots in the older Quantity Theory of Money, which states simply that the
demand for money rises proportionally to the price levels and vice versa. Money is fundamentally from
our need for life like food clothes etc. We cant live without those but we should be able to live without
money expecting that we need money to buy those necessities. Now if the prices of those keep rising we
will need more money to buy them. The monetarists extrapolate this to suggest that since prices move
proportionally with the supply of money, by restricting the supply of money it is possible to control
inflation. There is some evidence from the experiences of countries through history that inflation and
money supply are fundamentally linked to some extent. For instance prices had risen a billion fold in
Germany under the Weimar rule there when the central bank had started massively printing new notes or
money and then releasing it into the system.
Even Keynesians hold monetary policies in high regard but the monetarists argue that money supply
is the major determinant fluctuation in the GDP in the short term and of price movements or inflation in
the long term. So while Keynesians would say that the reality is complex and many factors apart from
money supply (which can be restricted by raising interest rates and loans from banks) influence aggregate
demand and GDP the monetarist argue that money supply is the principal factor. Otherwise Monetarists
are supporters of the classical liberal laissez-faire free market system and dont want the adjustments or
restrictions that Keynesians might tolerate to boost the economy. They dont want the government to step
in and seize the initiative but want only monetary adjustments while leaving the private business sector to
be the prime movers of the economy. (Hence in many ways it was the economics of Milton Friedman and
his monetarists that can be said to form the base of the neo-liberal neo-classical approach of our times.)
The main assumptions or central aspects of monetarist thinking are as follows:
1. Money-supply growth is the main determinant of growth of aggregate demand and production.
2. Prices and Wages are flexible and can move up and down with ease and are not sticky as
Keynesians believe.
3. The free market private sector run economy is not unstable inherently as the Keynesians believe
but when left to itself is not prone to instability at all. According to the monetarists it is
government action that causes fluctuations in the nominal GDP. The most important government
actions relate to changes in the money supply as directed by a countrys central bank.
The Monetarists who basically espouse a free market led economy differ from the Keynesians in two
respects fundamentally. Firstly, about the forces that determine the aggregate demand in an economy.
While Keynesians hold fiscal policies and determinants like exports important along with monetary
polices, the monetarists believe money supply is the primary or almost the sole factor and also that the
impact of money supply on demand and production is stable and reliable. They also hold fiscal changes
and spending without monetary changes as useless. The second major difference concerns the behaviour
of aggregate supply. Keynesians argue price levels and wage levels are not flexible all that much and do
not move up and down freely and easily in response to economic realities.

51

Whatever the arguments of the Monetarists and their merits, in the last three or four decades
monetarism has been influential in determining economic policy worldwide. Their prescription of relying
on laissez faire free market economics with fixed monetary rules as opposed to discretionary fiscal and
monetary adjustments by the government have come to be substantially accepted by neo-liberal and
capitalist political dispensations worldwide including in India. The monetarists believe the private sector
led economy is stable and it is actually the government that causes instability by its interference. The
main principle of the monetarists is that the growth of money supply should be set at a fixed rate and held
on to under all conditions. They believe a fixed rate of growth of money supply at about 3 to 5 % annually
eliminates the most important cause if instability in modern economies which is discretionary changes
in monetary policy by governments. If the money supply grew at a stable rate, then the GDP of the
economy would grow at a stable rate according to them and that would mean price stability eventually if
the rate of growth of the money supply is roughly the same as that of the economy.
The Neo-Liberal Schools of Economics and Policy
The monetarists held the ground well in the eighties when some of the experiences put some doubts
into the minds of policy makers on the strictly money supply and money supply growth rate based
approach. This happened because the behaviour of financial markets and the innovations there began to
render invalid one of the main assumptions of monetarists that the velocity of money in any economy is
basically stable. But the actions of financial market participants and the increasing use of new instruments
made the velocity very unstable in the USA in the eighties which forced their central bank to abandon
some of the monetarist principles.
Although most economists in the western world agreed that monetary policy can affect
unemployment and output, at least in the short run, a new wave of revival of the old classical schools
emerged to challenge the strictly monetarist approach. These schools can be loosely referred to as neoliberal since they are basically of the old liberal persuasion including the belief in free market private
sector economies. So in many ways the new schools are a revival of the old schools; Professor Samuelson
comments the classical approach is very much alive in the writings of todays new classical
schoolNew classical economists move beyond the simplest classical approaches by allowing for
imperfect information, the existence of technological shocks, and frictions from shifts of resources among
industries. Although dressed in modern clothing, their policy conclusions are closely linked to those of
the classical economists of an earlier age49.
Of the new schools the major ones have been the Rational Expectations school and the very
influential school of Supply Side Economics.
Economist Robert Lucas of Chicago was awarded the Nobel Prize in Economics in 1996 for
developing the new classical approach based on the modern view of rational expectations. The new
approach makes tow assumptions: (1) that prices and wages are flexible and (2) that people use all
available information. The first of these assumptions is of course the old classical assumption that
Keynesians reject that is that prices and wages adjust rapidly and easily to balance supply and demand.
The second assumption, is the contribution of the new school and holds that people form their
expectations on the economic future on the basis of all the available information. Or in other words the
government or powerful institutions whether private or public can not fool the people or act assuming that
people dont have access to the same data and statistics and information that they have and on the basis of
which they would formulate their policy.
In modern market economies expectations are important in life. Just to create a real life example
suppose two young graduates working in a call centre decide to get married and decide to avail of a
49

Paul A. Samuelson and William D. Nordhaus, ECONOMICS, 1998, pp. 623

52

housing loan to buy a flat to stay. They decide to go for a floating rate loan from ICICI Bank and buy
the flat that they want. They are of course assuming lots of things. First they are assuming that the
economy (domestic and international) will be strong enough and there would be no recessions. So they
will be able to keep their jobs and earn the same salaries as at present or even better. They are also
assuming that the interest rates on the basis of which they took the loan even though floating will stay low
enough for them to be able to afford the monthly instalment. So they are having two fundamental
expectations one on the state of the economy and as a result their own employability and secondly that
interest rates will stay low or go even lower and certainly would not go too high. Now they are making
basing their financial decision on these expectations because they may have read articles in the
newspapers or watched programs on television suggesting that the boom in call centre outsourcing will
continue and the interest rates will keep falling. What if these assumptions are wrong? . What is the
prediction that they read or heard were done in euphoria or were biased optimistically and they
themselves bought into that biased optimism.
Whether they are wrong or right, the new classical school assumes that people have access to all the
information that anybody else (even the government has) and make unbiased accurate assumptions on the
basis of that data. Or in other words that people make rational expectations. Also that the forecasts they
make of the future are unbiased and based on all available information.
The new school has many policy implications. The new classical school believes for instance that
unemployment is basically voluntary. That people cant find jobs because most people are hunting for
better jobs during recessions than working in the ones that are available or because people have quit their
jobs to look for higher paying ones.
Another approach in the same school is what is called the real business cycle (RBC) theory which
tries to explain business cycles purely as shifts in aggregate supply, without any reference to monetary or
the demand side forces on an economy. In this approach if there are technology change shocks to the
economy or to investment or problems with labour supply that causes the nature of the aggregate demand
to shift. These shocks affect actual output due to the fluctuations of supply without any influence from the
aggregate demand. They place a lot of importance on shocks to specific industry sectors and tax and
regulatory changes, which according to them are the primary reason for changes in the rate of
unemployment.
Anther approach that combines elements of both classical and Keynesian economics is called the
efficiency-wage theory and was developed by Columbias Edmund Phelps, Joseph Stiglitz and Janet
Yellen. The most important feature of this approach is the hypothesis or assumption that involuntary
unemployment or unemployment caused due to economic realities is a permanent feature of the state of
equilibrium of an economy and can not disappear over ay length of time. According to this approach the
principal reason for unemployment is the method and quantum of taxation on labours income, high real
interest rates and energy price shocks mainly of oil and petroleum products.
Supply-side economics emphasizes the "supply" part of supply and demand and the central concept
of supply-side economics is the old Say's Law: "supply creates its own demand," the idea that one must
sell before one can afford to buy. Therefore good economic policy encourages increased production to
stimulate demandthis is the fundamental dispute between classical, supply-side economics and
Keynesian economics or demand side economics. Supply-side economics is often described astrickle
down economics. Supply-side economics was popularised in the 1970s by the ideas of Robert Mundell,
Arthur Laffer, and Jude Wanniski. The term was coined by Wanniski in 1975.
In 1978 Jude Wanniski published The Way the World Works in which he laid out the central thesis
of supply-side economics and detailed the failure of high tax-rate progressive income tax systems and US
monetary policy under Keynesian's in the 1970s. Wanninski advocated lower tax rates and a return to

53

some kind of gold standard. In 1983, economist Victor Canto, a disciple of Arthur Laffer, published The
Foundations of Supply-Side Economics. This theory focuses on the effects of marginal tax rates on the
incentive to work and save, which affect the growth of the "supply side" or what Keynesians call potential
output. The supply-side advocates were influenced strongly by the idea of the Laffer curve of Arthur
Laffer, which states that that tax rates and tax revenues were distinct -- that tax rates too high or too low
will not maximize tax revenues. Supply-siders felt that in a high tax rate environment, lowering taxes to
the right level can raise revenue by causing faster economic growth. They pointed to the tax cuts of the
Kennedy administration in the US and the high rates of the Hoover and Nixon administrations in
justification.
This led them to advocate large reductions in marginal income and capital gains tax rates to
encourage allocation of assets to investment, which would produce more supply (Jude Wanniski and
many others advocate a zero capital gains rate). The increased aggregate supply would result in increased
aggregate demand, hence the term "Supply-Side Economics". Furthermore, in response to inflation, they
called for indexed marginal income tax rates, as monetary inflation had pushed wage earners into higher
marginal income tax brackets that remained static; that is, as wages increased to maintain purchasing
power with prices, income tax brackets were not adjusted accordingly and thus wage earners were pushed
into higher income tax brackets than tax policy had intended.
Supply-side economics has been attacked as being essentially politically right wing and just classical
neo-liberal. Supply-side advocates admit that they are for reinstating classical economics.
Critics of supply-side economics have suggested that 'supply-side economics' was always a
smokescreen for politically motivated tax cuts. The Regan administrations official David Stockman's
once admitted that supply-side doctrine of across-the-board tax cuts "was always a Trojan horse to bring
down the top [marginal income tax] rate". The administration justified such changes in socio-economic
terms with the argument that benefits would "trickle down" to poorer Americans eventually. This political
argument in favour of supply-side policy is not part of supply-side thought however. For example, Jude
Wanniski had argued for lower tax rates to increase tax revenues and increase production, something
favoured by right wing political conservatives, but had also argued that redistribution of income through
taxation was essential to the health of the polity which anathema to right wing political conservatives
like those of the Republican Party in the United States.
The Welfare State
There are three main interpretations of the idea of a welfare state: (1) The provision of welfare
services by the state (2) An ideal model in which the state assumes primary responsibility for the welfare
of its citizens the responsibility being comprehensive, because all aspects of welfare are considered and a
"safety net" is not regarded as enough, nor are minimum standards accepted. It is universal, because it
covers every person as a matter of right.
(3) The provision of welfare in society. In many "welfare states", especially in continental Europe,
welfare is not actually provided by the state, but by a combination of independent, voluntary, co-operative
and government services. The functional provider of benefits and services may be a central or state
government, a state-sponsored company or agency, a private corporation, a charity or another form of
non-profit organisation.
Arguments in favor
The humanitarian postion advanced by socialists believes the right to the basic necessities
of life like food, education and medical careis is a fundamental human right, and people should
not be allowed to suffer unnecessarily because of lack of provision.

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 The democratic view advocates the gradual extension of social protection is necessary
because increasingly this is what the citizens of mature economies demand, who also approv
these as part of political election campaign promises.
Ethical Reciprocity (or fair exchange) is nearly universal as a moral principle, and most
welfare systems are based around patterns of generalised exchange.
The altruistic position says - helping others is a moral obligation in most cultures; charity
and support for people who cannot help themselves are also widely thought to be more moral
choices. Therefore naturlly this position leads to notions of state welfare.
The utilitarian principle has been applied to argue for a welfare state. Tthe same amount
of money will produce greater happiness in the hands of a less well-off person than if given to a
well-off person; thus, redistributing wealth from the rich to the poor will increase the total
happiness in society.
The spiritual and religious arguments also supports a welfare state mostly because most
major world religions emphasise the importance of social organization rather than personal
development alone. Religious obligations in many faiths include the duty of charity and the
obligation for solidarity others.
Several national systems have developed voluntarily through the growth of mutual
insurance that is akin to a welfare state.
A main economic srgument is that social welfare programs perform a range of economic
functions, including e.g. the regulation of demand and structuring the labour market.
Social welfare programs and policies are used to promote objectives regarding education,
family and work that wold otherwise get little support.
In certain cases, the private sector fails to meet social objectives or to deliver efficient
production, due to such things as monopolies, oligopolies, or asymmetric information.
Some services can be more efficiently paid for when bought "in bulk" by the government
for the public, rather than purchased by indivdual consumers. The highway system, water
distribution, the fire department, universal health, and national defense are some examples.

Arguments against
Liberal and neo-liberals believe that the "nanny state" infringes upon individual freedom,
forcing the individual to subsidize the consumption of others throuhg hightaxes for instance and
subsidies. They argue that social spending reduces the right of individuals to transfer some of
their wealth to others, and is tantamount to a seizure of private property.
Some Protestant Christians in America believe that only voluntary giving (through
private charities) is virtuous. They hold personal responsibility to be a virtue, and they believe
that a welfare state diminishes the capacity of individuals to develop this virtue.
The welfare state is accused of imposing greater burdens on private businesses, of thus
potentially slowing growth and creating unemployment as a consequence .
Advocates of the free market believe that it leads to more efficient and effective
production and service delivery than state-run welfare programs. They argue that high social
spending is costly and must be funded out of higher levels of taxation. Friedrich Hayek had
argued the market mechanism is much more efficient and able to respond to specific
circumstances of a large number of individuals than the State since public institutions of
government are unable to collect knowledge to respond to specific circumstances as well as
individual agents can.
The welfare state, argue economic liberals and neo-liberals, may have undesirable effects
on behavior, fostering dependency, destroying incentives and sapping motivation to work.
A criticism of the welfare state is that it results in high taxes. This is in many cases true,
as for instacne in places like Denmark (wher tax level was at 50.4% of GDP in 2002) and Sweden
(where tax level was at 50.3% of GDP in 2002).

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 There is fera that welfare services provided by the state are more expensive and less
efficient than the same services would be if provided by private businesses. In 2000, Professors
Louis Kaplow and Steven Shafell published two papers, arguing that any social policy based on
such concepts as justice or fairness would result in an economy which is Pareto inefficient.
Anything which is supplied free at the point of consumption would be subject to artificially high
demand, whereas resources would be more properly allocated if provision reflected the cost. The
assumption that public provision of social services is more costly overall is often backed by
examples of very large public institutions - such as the British National Health Service, which is
the third greatest employer in the world.

The Market Economy

In order for an economy to be considered a true free market, the factors of labour, goods,
services, and capital, must be free from government restrictions and trading barriers so they are
able to move freely across borders. Actually there is no state where all markets within its borders
are absolutely free or have ever been. To that extent the conceptions of Adam Smith and
Friedman are more theoretical than real. However, the term is not usually used in such an
absolutist sense. Few would prefer a free market in, say, biological weapons. Rather, a free
market economy is one where government intervention is limited to protecting property rights
and maintaining a peaceful environment for the market to function (otherwise known as laissezfaire). Many states which are said to have a capitalist system do not have the level of market
freedom that some would prefer. Even the United States, which often represents capitalism
worldwide, has restrictions upon the freedom of factors in the economy. Less market restrictions
are found in other countries, such as in Hong Kong, according to the Index of Economic
Freedom.
Free markets are also conflated with anarchy as many people believe that free market
implies an absence of government. Only a few free market scholars advocate the elimination of
government; most, including Adam Smith and Milton Friedman, believed government has a role
to play, albeit a limited one. Most free market scholars believe that governments should be
limited to at least: operating a court system for the settlement of disputes, maintaining stable
currency (combating inflation), protecting market competition and consumers, and protecting the
country through national defence. These scholars debate and disagree with each other on whether
or not governments are necessary to have government funded roads, schools, post offices,
libraries, police stations, and fire stations, as some free market scholars believe the market can
provide even these much better.
Market economies can be said to be bottom up in decision making, as consumers input
information to producers through prices paid when purchasing products in the market. In reality
all states today have some form of control over the market that removes the free and unrestricted
direction of resources from consumers and prices such as tariffs, and corporate subsidies. Milton
Friedman and many other micro-economists, believe that these forms of intervention provide
incentives for resources to be sent, and sometimes wasted, producing products society may not
value as much as a product that is, as a result of these restrictions, not being produced in many
ways.
Markets fail in some situations for instance when dealing with monopolies, when lack of
provision of public goods comes about and there are disparities such as extreme poverty. Also for
example there is currently no way for the market to understand the cost or harm pollution causes
to society. These failures are the reason some think have thought that limited government
intervention is necessary.

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Milton Friedman argues many market failures can be solved not through government
regulation of current information provided by the market but through free information disclosure.
Information disclosure would be a requirement of government law but would not actually
seriously regulate how businesses operate. Instead the disclosure of information would allow the
market to react to their behaviour by allowing consumers to vote with their money. Friedman also
argues for pollution permits to solve pollution externalities. By selling permits to the public, the
public is now able to demonstrate a price for the harm or benefit caused by pollution. He believes
that this type of government "regulation" allows better flowing information rather than the
masking of current information to the market. If people really do value clean air, the information
will be felt in the market and companies will react more quickly to be environmentally friendly.
Friedman believes governments have a role in fixing market externalities but only if the
government is helping solve information transmission problems not masking current information.
It is possible for a market economy to have government intervention in the economy. The
key difference between market economies and planned economies lies not with the degree of
government influence but whether that influence is used to coercively preclude private decision.
In a market economy, if the government wants more steel, it collects taxes and then buys the steel
at market prices. In a planned economy, a government which wants more steel simply orders it to
be produced and sets the price by decree. An economy where both central planning and market
mechanisms of production and distribution are present is known as a mixed economy. India was a
mixed economy during the early decades of Indias independence under Jawaharlal Nehru but has
now been shifting to a more free market oriented structure for almost two decades now.
The proper role for government in a market economy remains controversial. Most supporters
of a market economy believe that government has a legitimate role in defining and enforcing the
basic rules of the market. More controversial is the question of how strong a role the government
should have in both guiding the economy and addressing the inequalities the market produces.
For example, there is no universal agreement on issues such as protectionist tariffs, federal
control of interest rates, and welfare programs.
Milton Friedman, along with many micro economists, believes that too much government
intervention and regulation can result in hampering or stopping the transmission of information
necessary to allow the market to operate, what results, he believes, are very serious government
externalities that can lead to inflation, deflation, recessions, and depressions. Milton Friedman
believes that the Great Depression was the result of a government created externalities and thus
was responsible for the causes of the Great Depression. He and Fredrich von Hayek have argued
that economic freedom is a necessary condition for the creation and sustainability of civil and
political freedoms. They believe that this economic freedom can only be achieved in a market
oriented economy, specifically a free market economy. They also believe, however, that sufficient
economic freedom can be achieved in economies with functioning markets through prices and
private property rights. They believe that the more economic freedom that is available the more
civil and political freedoms a society will enjoy.
Criticism of market economy
Historically there have been a range of critics of market as an organizing principle of an
economy. These critics range from those who reject markets entirely, in favour of a planned
economy, such as that advocated by socialism, to those who merely wish to see them regulated to
various degrees, and they range from those who believe that greed is inherently immoral to those
who raise practical objections. One prominent practical objection is the claim that markets wreak
havoc through their externalities (things that the market price does not take into account), for

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example through environmental pollution. Another is the claim that through the creation of
monopolies, markets sow the seeds of their own destruction.
Even supporters of market economies dont all agree with each other. Some believe that
governments should not diminish market freedom because they disagree on what is a market
externality and what are government created externalities, and disagree over what the appropriate
level of intervention is necessary to solve market created externalities. Others believe that
government should intervene to prevent market failure while preserving the general character of a
market economy. In the model of a social market economy the state intervenes where the market
does not fulfil the needs of the market participants. John Rawls was the most important advocate
of this idea.
Globalisation
Globalisation is an all encompassing term for a whole series of economic, social,
technological, cultural and political changes seen in the world as increasing interdependence,
integration and interaction between people and companies and countries happen worldwide.
Depending on ones political economic viewpoint globalisation is both defined and regarded
as good or bad. Those who view globalisation as socially positive argue that it is an engine of
commerce; one which brings an increased standard of living prosperity to developing
countries through trade and further wealth to First World and Third World countries both at once.
This view claims that globalisation helps in economic prosperity, which in turn brings about
social prosperity.
Others view globalisation as a harmful process economically, socially, and ecologically. They argue
globalisation mainly means "corporate imperialism" or the unbridled global march of the profitability of
multi-national companies and see it as process that tramples over the basic human rights of developing
societies. It claims to bring prosperity, they would argue, yet most often simply indulges in selfish
plundering of the resources of poor countries to profit from it so that their stock prices can be made to go
to higher and higher levels and the owners can make more and more money. It is also argued that
globalisations negative effects include cultural assimilation via cultural imperialism, the export of
artificial wants, and the destruction or inhibition of authentic local and global community, ecology and
cultures. For instance Hollywood films have destroyed the local culturally oriented film industries of most
countries round the world and fostered different sorts of drams and aspirations in people who watch
Hollywood films than are relevant in the historical or cultural context or a particular country or region of
the world. Again drinking colas for instance, culturally an unknown thing in most parts of the world even
half a century ago has become a way of life in most countries driving out local drinking habits like lassi
or chanch in India for instance
The biggest supporters of globalisation in the last few decades have been the international multilateral institutions like the IMF and the World Bank both of which are almost controlled by the USA. The
International Monetary Fund stresses the growing economic interdependence of countries worldwide
through increasing volume and variety of cross-border transactions in goods and services, free
international capital flows, and more rapid and widespread diffusion of technology. Although that
definition is more narrowly related to economic globalisation, most would want to argue globalisation is a
more extensive civilization concept with diverse economic, political, cultural, and technological aspects
that may be closely inter related or inter dependent.
Globalization has become identified with greater international movement of commodities, money,
information, and people; and the development of technology, organizations, legal systems, and
infrastructures to allow this movement. The actual existence of some of these trends is debatable but it

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certainly has meant an increase in international trade at a much faster rate than the growth in the world
economy and an increase in the international flow of capital including foreign direct investment and
financial market flows (hot money). Also in a way the creation of international agreements leading to
organizations like the WTO and OPEC and the development of global financial systems. Also a greater
and more powerful role for international organizations such as WTO and the IMF and an increase of
economic practices like outsourcing, by multinational corporations which creates jobs lin countries like
India in the form of call centres etc but causes an equivalent job loss in other countries from where the
jobs are shifted. Barriers to international trade have been considerably lowered since World War II
through international agreements such as the General Agreement on Tariffs and Trade (GATT) and
throught he World Trade Organisation (WTO). Harmonization of intellectual property laws across nations
(generally speaking, with more restrictions) have also been forced at the behest ofpowerful western multinational companies particularly drug and pharma companies.
Supporters of globalisation and free trade argue that economic theories of comparative advantage
suggest that free trade leads to a more efficient allocation of resources, with all countries involved in the
trade benefiting. In general, this leads to lower prices, more employment and higher output. Furher that
laissez-faire capitalism promotes higher degrees of political and economic freedom in the form of
democracy and capitalism in the developed world which are both ends in themselves and also produce
higher levels of material wealth. They see globalization as the beneficial spread of liberty and capitalism.
Culturally globalisation has meant the spreading of multiculturalism, and better individual access to
cultural diversity, for example through the export of Hollywood movies but as pointed out above the
imported culture can easily destroy the local culture, causing reduction in diversity. Some have even
argued greater international travel and tourism and immigration including illegal immigration is also a fall
out of globalisation though that is debatable for immigration has happened consistently throughout
history.
In general supporters of globalisation argue that globalisation has decreased the percentage of
people in developing countries living below US$1 (adjusted for inflation and purchasing power) per day
has halved in only twenty years; life expectancy has almost doubled in the developing world since WWII
and is starting to close the gap to the developed world where the improvement has been smaller and infant
mortality has decreased in every developing region of the world; income inequality for the world as a
whole is diminishing; democracy has increased; proportion of the world's population living in countries
where per-capita food supplies are less than 2,200 calories (9,200 kilojoules) per day decreased from 56%
in the mid-1960s to below 10% by the 1990s; global literacy has increased etc .
Criticism of Globalisation
Those who oppose globalisation and dont see it a s appositive development doubt the statistical
evidence of the above and also argue if they have happened they may not have happened as a
consequence of globalisation. Critics of the hard economic aspects of globalisation argue that it is not and
need not be, as its supporters suggest, an inexorable process that flows naturally from the economic needs
of everyone either. The critics typically emphasize that globalisation is a process that is run according to
the priorities of the powerful business corporate lobbies and is thus under the control of elite imperatives
and by definition therefore is selfish that does not do justice to the moral claims of poor and working
classes throughout the globe, as well as environmental concerns in a more equitable way.
In general, critics claim that the results of globalisation have not been what was predicted when the
attempt to increase free trade began, and that many institutions involved in the system of globalisation
have not taken the interests of poorer nations, the working class, and the environment into account. Also
fair trade theorists claim that unrestricted free trade benefits those with more financial leverage (i.e. the
rich) at the expense of the poor.

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Critics argue globalisation is nothing but the promotion of a corporatist agenda, which is intent on
constricting the freedoms of individuals in the name of profit. Also that the increasing autonomy and
strength of corporate entities worldwide increasingly shapes the political economic policies of nationstates not in the interest of the people of those nations but in the interest of the powerful corporations.
Almost no nation is now free and sovereign to take its decisions without regard for what would promote
investment and growth, which is critics argue just an euphuism for tailoring policies to best suit the
interests of power multi-national corporations.
Some "anti-globalisation" groups argue that globalisation is necessarily imperialistic, is one of the
driving reasons behind the Iraq war and is forcing savings to flow into the United States rather than
developing nations; it can therefore be said that "globalisation" is another term for a form of
Americanisation, as it is believed by some observers that the United States could be one of the few
countries (if not the only one) to truly profit from globalisation.
Some argue that globalisation imposes credit-based economics, resulting in unsustainable growth of
debt and debt crises.
The Asian financial crises in Southeast Asia that began in 1997 in the relatively small, debt-ridden
economy of Thailand had quickly spread to Malaysia, Indonesia, South Korea and eventually were felt all
around the world. It demonstrated the new risks and volatility in the rapidly changing global markets. The
IMF's subsequent 'bailout' money came with conditions of political change (i.e. government spending
limits) attached and came to be viewed by critics as undermining national sovereignty in a neo-colonialist
fashion. Anti-Globalisation activists pointed to the meltdowns as proof of the high human cost of the
indiscriminate global economy.
Critics of unfettered globalisation and neo-liberal laissez-faire capitalism, argue that governments
and what are claimed to be quasi-governments (such as the International Monetary Fund and the World
Bank) are not behaving with responsibility to the populations that they govern and instead respond mostly
to the interests of multi-national large business corporations and the general political ideology of free
market capitalism.
Noble Laureate Joseph Stiglitz attacked the IMF/World Bank and globalisation in his book
Globalisation and its Discontents with great authority and much public impact because he was himself
the Chief Economist of the World Bank but was kicked out of that organisation when he questioned
policies that were bad economically in his view but were advocated mainly under American pressure to
promote the extreme right wing free market capitalist ideology that American governments wanted. He
comments in his book:
Over the years since its inception, the IMF has changed markedly. Founded on the belief that
markets often worked badly, it now champions market supremacy with ideological fervour. Founded on
the belief that there is a need for international pressure on countries to have more expansionary economic
policies such as increasing expenditures, reducing taxes, or lowering interest rates to stimulate the
economy today the IMF typically provides funds only if counties engage in policies like cutting deficits,
raising taxes, or raising interest rates that lead to a contraction of the economy.50
He further comments:
looking at the policies of the IMF (one feels) as if the organisation was pursuing the interests
of the financial markets, rather than simply fulfilling its original mission of helping countries in crises and

50

Joseph Stiglitz, Globalisation and Its Discontents, p. 12-13

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furthering global economic stability, one could make sense of what otherwise seemed to be a set of
intellectually incoherent and inconsistent policies.
I financial interests have dominated thinking at the International Monetary Fund, commercial
interests have had an equally dominant role at the World Trade Organisation. Just as the IMF gives short
shrift to the concerns of the poor there are billions available to bail out banks, but not the paltry sums to
provide food subsidies for those thrown out of work as a result of the IMF programs the WTO puts
trade over all else.
Environmentalists seeking to prohibit the importation of goods that are made using techniques that
harm the environment with nets that kill endangered species or electricity produced by generators hat
pollute the air are told that this is not allowed: these would be unwarranted interventions in the
market.51
Many conferences between trade and finance ministers of the nations that officially support free
market globalisation have met with large, and occasionally violent, protests from opponents of what they
"corporate globalisation".
Some anti-globalisation activists object to the fact that the current form of globalisation makes
money and business corporations global, but not working people and trade unions. For instance there are
strict immigration controls in nearly all countries, and the lack of labour rights in many countries in the
developing world.
Another more politically right wing camp opposed to globalisation is state-centric nationalists who
fear globalisation is displacing the role of nations in global politics and point to Non-GovernmentalOrganisations (NGOs) as encroaching upon the power of individual nation states.
The anti-globalisation movement is very broad, including church groups, national liberation factions,
left-wing parties, environmentalists, peasant unionists, anti-racism groups, anarchists, those in support of
re-localisation and others. Most are for reforms, but argue for more humane reforms of the capitalist
system while others are more revolutionary arguing for what they believe would be a more humane
system than capitalism like some form of socialism.
Joseph Stiglitz concludes on globalisation thus:
Globalisation today is not working for many of the worlds poor. It is not working for much of the
environment. It is not working for the stability of the global economy. The transition from communism to
a market economy has been so badly managed that, with the exception of China, Vietnam, and a few
Eastern European countries, poverty has soared as incomes have plummeted.52
Questions:
1. Compare the case for a welfare state with that of a market ruled one.
2. What is globalisation? . How has it been good for the world and bad? . Explain.
SUGGESTED READINGS
1.
51
52

Joseph Stiglitz, Globalisation and its Discontents.

ibid. , p. 216
ibid. , p. 214

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LESSON 4

APPROACHES TO MORAL REASONING

L. Ganguly
Financial Analyst
After reading this lesson you will be familiar with:
What are the different approaches to moral reasoning in ethics
What are the main strengths and weaknesses of the different approaches
Whether in politics or business or indeed life itself generally, we are constantly faced with moral
dilemmas and conflicts. Is this the right decision or that? . Is this the best course of action or not? . What
is it that a good man would do in a particular situation and what would be the action of a bad or evil man
in that same situation.
Naturally therefore we have to get into asking the question what is moral and what is immoral and
what is good and what is bad? . The moment we try to answer these questions we have entered the realm
of Ethics which is but another name for the different approaches to moral reasoning.
Ultimately we are trying to arrive at the basic truths, for we all want to act and decide on the basis of
the truth and to that extent when we ponder ethics we are thinking Philosophy for philosophy is nothing
but a search for the truth in the most general of terms. In fact in the past even Mathematics and the
Sciences like Physics and Chemistry were known as natural philosophy. In fact if philosophy is
differently studied nowadays that is mainly because philosophy has come to mean a search for not just the
truth but the most fundamental of the truths of life and nature which answer questions which can not be
formulated excepting in somewhat abstract terms (needless to say without focussing on applications in
day-to-day practical life).
Since the questions are often abstract, philosophy needs to have some fairly well established methods
to answer question, or else it will just turn into vague musings about 'the meaning of life' etc. So,
philosophers tend to use logic ('the science of deduction') to try and establish arguments to be good or
bad.
We need to study philosophy because the answers in philosophy can have great impact on the
answers in absolutely everything else - if there is no truth, what are we doing in scientific research for
instance? . Again without ethics, politics wouldnt matter? .
A subject of study is normative (as opposed to positve) if it is about what should be rather than
what is.
Ethics is mainly a prescriptive or normative science. It is only when we move into the realm of
applied ethics that ethics begins to be a positive sceince to a limited extent. Applied ethics asks question
about particular moral claims - 'Is abortion right or wrong?' for instance. Normative ethics tries to come
up with rules which explain and prescribe these applied ethical claims - 'abortion is wrong because it
infringes on the rights of the child' (for example!). Meta-ethics asks what 'wrong' means in the above
sentences: Is abortion bad because it makes me feel bad? Or that there's something about the act of
abortion itself that is 'wrong'?.
It is important to understand that there is a difference between questions of judgements of morality
and judgements of tastes. While morality judgements (ought/ought not/must/must not/ can) are
prescriptive, judgements of taste (like/dislike/desire/aversion) are descriptive. Also morality judgements

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(which can be generalised by definition) are justifiable or are sought to be made justifiable in the different
ethical approaches of moral reasoning.
There are four main primary moral principles in ethical decision making:
The Principle of Autonomy which means in certain areas of his life, an individual has the right to
be self-governing.
The Principle of Beneficence which means the promotion of well-being or benefit of each one of
us and all of us is the goal.
The Principle of Non-maleficence which means do no harm either individually or collectively to
another individual or the group.
The Principle of Justice which means equals ought to be considered equally and discrimination
should not exist.
There are three main schools of thought in ethics that adopt different appraoches to the moral
principles and how to impliment them; virtue based or ontological, deontologism, and consequentialism.
Virtue theory, is essentially the claim that right actions are those which are performed according to
virtue: Acts which result from courage, honesty, a sense of justice etc. So virtue ethics says that acts are
right or wrong depending on the motivation with which they are done.
Deontologism is the claim that certain acts somehow have 'wrongness' built into them, so murder for
instance is simply wrong, irrespective of any other considerations. So Deontologism says that certain acts
are right and wrong inherantly - something about the act itself is wrong, regardless of what comes of it.
Finally, consequentialism is the claim that what determines the rightness of an action is its
propensity to maximise the good, whatever that may be. Consequentialism is one kind of explanation of
moral claims - which seeks to explain right and wrong in terms of the consequences such acts bring.
Consequentialism and Teleological Reasoning
Consequentialism is based on teleological reasoning (the word teleological is derived from the Greek
telos which means end or purpose and the Greek logos which means reason) and has evolved from the
Utilitarianism philosophy of the Occidental philosophers like Jeremy Bentham (1748-1832) and John
Stuart Mills and others. They in turn attempted to develop the hedonistic theories of the ancient Cyrenic
and Epicurean types and evolved their ideas from earlier thinkers like Hobbes and Hume.
Bentham commented as follows in the introduction of one of his major works explaining the basic
thrust of his utilitarian ideas as follows: Nature has placed mankind under the governance of two
masters, pleasure and pain. It is for them alone to point out what we ought to do as well as what we shall
do. So man according to him always wants pleasure and and abstain from pain and this constitutes his
ethical duty too. He further says: To obtain the greatest portion of happiness for himself is the object of
every rational being. Every man is nearer to himself than he can be to any other man, and no oher man
can weigh for him his pleasure and pains. .Dream not that men will move their little finger to serve
you, unless their own advantages in doing so be obvious to them. But Bentham also however adopted an

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alturistic approach in his works and ultimately proposed that a group of people whose interests are
conjoined should together determine what course of actions to follow for the maximum good of the
maximum number and adopt that. So he did say that the standard of morality is group pleasure and
distinctions of class etc are false. Hence his approach was to maximise utility in everything or utilitarian.
As he put it: weigh pleasures and weigh pains and as the balance stands will stand the question of right
and wrong. To him it was the utility that was the standard of morality.
Bentham made no distinction between different kinds of pleasures and tendencies and also did not
explain how one may move move from individualistic selfishness to the group selfnessless that he
believed in and that he proposed would lead to maximised good for the maximum. As he did not
distinguish between different kinds of pleasures he could focus solely on the quantity of pleasures rather
than the quality. In fact he proposed a mathematical calculation system where each act would be broken
down into components of pleasures and their values assigned and then added up to get the total pleasure
or satisfaction. The act that had a higher numerical value would be chosen as the better alternative in
ethical decision making. So he wanted to measure all pleasures similarly and in numbers and thereby
easily compare two pleasures just on that numerical basis even.
So in Benthams calculas the pleasure one gets from casual stealing from a shop for instance or shoplifting could be numerically compared (and favoured even if the quantity was sufficiently greater) to the
pleasure one gets from preventing a theft even though obviously qualitatively they are total opposites.
Also intuitively while we all understand that happiness can be different from pleasure or even a series of
pleasures Bentham did not create a structure for his philosophy to make this clear.
John Stuart Mills (1806-1873) who was the son of one Benthams philosoper friends, James Mill
refined Benthams Utilitarianism and tried to deal with some of the flaws. Mill's main contribution to the
fundamental problem of the ethical theory was his small volume Utilitarianism which first appeared in
Fraser's Magazine in 1861 and was reprinted in book-form in 1863. In Chapter two, "What Utilitarianism
Is," Mill gives a precise formulation of the highest principle, and defends the principle against attacks.
The highest normative principle is that,
Actions are right in proportion as they tend to promote happiness;
wrong as they tend to produce the reverse of happiness.
Like his predecessors, such as Hume and Bentham, he refers to this as the principle of utility but Mill
also argues that by "happiness" he means pleasure both intellectual and sensual. Bentham's hedonistic
brand of utilitarianism identifies the benefits in question with pleasure and the costs with pain. John Stuart
Mill speaks, instead, of "happiness": according to Mill's greatest happiness principle, our moral aim
should be "the greatest happiness for the greatest number."
He also suggested we have a sense of dignity which has us prefer intellectual pleasures over
sensual ones. He refined the Utilitarian position and explained the principle of utility involves an
assessment of only an action's consequences, and not the motives or character traits of the agent
performing the action. Thus he rejects classical virtue theory, which would have begun and ended ay
analysis with only the inner motivations and intensions. Mill argues that the principle of utility should be
seen as a tool for generating secondary moral principles, such as "don't steal," which promotes general
happiness. Most of our actions, then, will be judged according to these secondary principles. We should
appeal directly to the principle of utility itself only when we face a moral dilemma between two
secondary principles. Suppose, for example, that a moral principle of charity dictates that I should feed a

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starving neighbour, and a moral principle of self-preservation dictates that I should feed myself. If I do
not have enough food to do both, then I should determine whether general happiness would be better
served by feeding my neighbour, or feeding myself.
In Chapter three of his book called "The Ultimate Sanction of the Principle of Utility," Mill discusses
the motivations to abide by the utilitarian standard of morality. The problem is that we are commonly
motivated to not kill or steal, which are specific acts, but it is less clear that we are motivated to promote
the broad notion of general happiness. Mill argues that there are two classes of motivations (or sanctions)
for promoting general happiness. First, there are external motivations arising from our hope of pleasing
and fear of displeasing God and other humans. More importantly, though, there is a motivation internal to
the agent himself, which is his feeling of duty. For Mill, an agent's feeling of duty consists of a
conglomerate of many feelings developed over one's life, such as sympathy, religious feelings, childhood
recollections, and self-worth. The binding force of our sense of duty is that we experience pain or remorse
when we act against these feelings by not promoting general happiness. Mill argues that duty is a
subjective feeling, which develops with experience. However, humans have an instinctive feeling of
unity, which guides the development of duty toward general happiness.
In his Chapter called, "The Proof of the Principle," Mill presents his inductive proof of the
principle of utility. He begins by saying that his proof must be indirect since no foundational principle is
capable of a direct proof and therefore the only way to prove that general happiness is desirable is to show
that people actually desire it. His indirect proof goes as follows: If X is the only thing desired, then X is
the only thing that ought to be desired General happiness is the only thing desired Therefore, general
happiness is the only thing that ought to be desired.
It could be argued that there are other things we desire besides happiness, such as virtue but Mill
responds that everything we desire becomes part of happiness. Happiness, then, is a complex
phenomenon composed of many parts, including virtue, love of money, power, and fame etc.
Critics of utilitarianism argued that morality is not based on consequences of actions (as utilitarians
suppose), but is instead based on the foundational and universal concept of justice. Mill saw this as the
strongest attack on utilitarianism. It was clear to him if one can explain the concept of justice in terms of
utility, then thereby can be addressed the main non consequentialist argument against utilitarianism. Mill
offers two counter arguments. First, he argues that all moral elements in the notion of justice depend on
social utility. There are two essential elements in the notion of justice: punishment, and the notion that
someone's rights were violated. Punishment derives from a combination of vengeance and social
sympathy. Vengeance alone has no moral component, and social sympathy is the same thing as social
utility. The notion of rights violation also derives from utility. For, rights are claims we have on society to
protect us, and the only reason society should protect us is because of social utility. Thus, both elements
of justice (i.e. punishment and rights) are based on utility. Mill's second argument is that if justice were as
foundational as non-consequentialists contend, then justice would not be as ambiguous as it is. According
to Mill, there are disputes in the notion of justice when examining theories of punishment, fair
distribution of wealth, and fair taxation. These disputes can only be resolved by appealing to utility. Mill
concludes that justice is a genuine concept, but that we must see it as based on utility.
Mill commented on political theory in his book On Liberty (1859), where he defended the broadest
possible freedom of thought and expression and argued that the state can justify interference with the
conduct of individual citizens only when it is clear that doing so will prevent a greater harm to others.
Mill also addressed matters of social concern in Principles of Political Economy (1848) and

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Considerations on Representative Government (1861) and eloquently supported the cause of women's
rights.
Different strands of utilitarian and consequentialist reasoning
Utilitarians all agree that what is good is "utility"-- human well-being or welfare. However, they
disagree about what human well-being or welfare is. Classical utilitarians were hedonistic: They held that
human well being consists of pleasure. In holding this view, they did not, of course, deny that human
well-being consists of community, self-development, wealth, and so on. What they claimed was that each
of these things were either a means to, or associated with, pleasure, and it is this association with pleasure
which makes them count as parts of human well-being. However, because of the difficulty of measuring,
and so maximizing, amounts of pleasure, few now hold this doctrine, and there are a variety of theories
of what is good among contemporary utilitarians.
The hedonistic utilitarianism of Bentham, Mill, and Sidgwick maintained that all moral judgments
can be derived from the greatest happiness principle but the ideal utilitarianism espoused by G. E.
Moore, on the other hand, regarded aesthetic enjoyment and friendship as the highest ethical value. Rule
utilitarians found a middle path sort of and suggested that utilitarian calculation should be used to make
rules rather than directly applied to evaluate particular actions.
Contemporary utilitarians differ about whether the theory should be applied primarily to acts or
rules. Contemporary utilitarians, like Peter Singer, are more apt to speak of the benefits to be counted as
"preference satisfactions" or "interest satisfactions," counting the corresponding dissatisfactions as costs.
What they are taking into account that preferences, ideas and interests of/in what constitutes pleasure or
happiness differs from individual to individual and even community to community.
To summarise according to utilitarinism, what is morally right is whatever produces the greatest
overall amount of pleasure (hedonistic utilitarianism) or happiness (eudaimonistic utilitarianism). Some
utilitarians (act utilitarians) claim that we should weigh the consequences of each individual action, while
others (rule utilitarians) maintain that we should look at the consequences of adopting particular rules of
conduct. Utilitarianism's famous creed is "the greatest good for the greatest number", which sounds like
and in fact tends to result in a kind of altruism, but which is not necessarily altruistic (for instance, Mill
advocated a kind of individualism and individual fulfillment in life, since he thought that the best way for
humanity to make progress was through the achievements of individuals).
In terms of general impressions popularly prevalent in modern times, utilitarianism has the same
mild connotations of expediency and lack of principles that pragmatism does and that too without the
positive emphasis on action.
As opposed to Ethical egoism which states that moral right, wrong, and obligation depend solely on
the value of the consequences for the agent, or Altruismwhich states that moral right, wrong, and
obligation depend solely on the value of the consequences for everyone excluding the agent,
Utilitarianism states that moral right, wrong, and obligation depend solely on the value of the
consequences for everyone, including both the agent (thereby denying ethical altruism) and everyone else
(thereby denying ethical egoism).
We can apply utilitarianism directly (by first estimating the likely consequences of each option and
then picking the option with the best consequences) or indirectly (by applying a "rule of thumb" about

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what kinds of action tend to have good or bad results). Many utilitarians reject exceptionless rules. They
think that any rule should be broken when it has better consequences to do so. So they see moral rules
only as loose "rules of thumb."
Utilitarianism basically consists of two doctrines: A theory of what is good, and a theory of what is
right. Utilitarianism's theory of what is right is consequentialism, or the doctrine that the morally right
option in any circumstance is that option which brings about the most good, or the best consequences; any
other option is wrong. Utilitarians refer to the option that brings about the best consequences, or
"maximizes the good", as being the optimific alternative. Hence, the right option is the optimific option.
An option which produces the most good also, and by definition, produces the least bad consequences.
Hence, there can be a right alternative even if the only alternatives produce bad consequences (e.g., other
things equal, the right dentist to go to is the one who produces the least pain.).
Utilitarians all agree that what is right is the optimific alternative, they are all consequentialists in
this sense. However, they disagree about what things should be evaluated according to the
consequentialist criterion -- particular actions, character traits, rules and standards of behavior or largescale institutions. Again, the classical utilitarian view held that particular actions are what must be
evaluated according to the consequentialist criterion. Hence, they held that what makes an action right is
that it produced the best consequences. However, many disagreed with this and that led to the
development of the varieties of forms of consequentialism that utilitarians hold.
The main problems with censequentialist appriaches are:
1. How are pleasure and pain to be measured, and how can they be recognised in those who cannot
express their experiences.
2. Consequentialism seems to have an advantage in that only one thing has intrinsic value happiness. However, how do you convert everything into the currency of happiness?. Also of
course notions/views what is of happiness differ individual to individual and is subjective.
3. A more fundamental critiscism of consequentialism is that separate individuals are not of
paramount importance - the maximisation of happiness is the goal. If this is achieved by unequal
distribution between individuals, nothing can be done about it. For instance some few people can
be allowed to be obscenely rich and powerful and live a lavish life and millions others asked to
live a life of relative poverty if it is felt after all the utilitarian calcutations are done and the
conclusion is drawn that that is what will spur the most GDP growth which will then eventually
cause a tricle down which will maiximise happiness and hence is the best course of action as
modern day free market fundamentalists argue but which leftists oppose.
Deontologism
The opposite of consequentialism is deontologism.
The word deontologism is derived from the Greek word for duty, deon and the Greek word
deontos which means that which is binding, right, proper and puts its emphasis on universal imperatives
like moral laws, duties, obligations, prohibitions, and so on (sometimes this is also called
"imperativism"). Kantianism is the prime example of a deontological theory, and generally speaking such
theories are varieties of altruism. Some thinkers even go so far as to claim that deontology is the extent of
ethics, and that any interest in personal happiness or fulfillment is mere egoism and therefore not a matter
for ethical theory. Deontologism is usually contrasted with teleologism (an emphasis on goals) or

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consequentialism (an emphasis on results), but sometimes is also contrasted with egoism (an emphasis on
personal happiness or fulfillment as opposed to conformance with moral imperatives). This approach is
thus an ethical position which claims that it is possible for us to identify a right act or a justified moral
rule in other ways besides considering the goodness or badness of consequences.
If it is accepted certain actions or rules are right, regardless of the consequence they have, how
would it be determined if an action is right?. Whereas teleologists hold that right acts are those which
have the best consequences, deontologists may identify right acts by appeals to such things as Kant's
Categorical Imperative (e.g., always act on that maxim which you could will to become a universal law),
to intuitions of self-evidence, to rules of behavior chosen under conditions of rational choice, to divine
command, to authoritative religious sources, etc.
Kantian Theory
German philosopher Immanuel Kant (1724-1804) proposed a test, the 'Categorical Imperative' test
which could be used to test whether a certain rule is really a duty. The Categorical Imperative, as
formulated by Kant is: 'Act only on the maxim through which you can at the same time will that it should
become a universal law'.
As a minimum, in order for a maxim to be capable of becoming a universal law it must not be selfcontradictory when stated in its universal form. For instance, to adopt the maxim of making promises
with no intention of keeping them. If this maxim was universalised it would become contradictory since
the practice of promise keeping would disappear as no one could believe promises as they would know
there was no intention of them being kept.
There are maxims which do not become contradictory when universalised, but are still not duties
since they fail the second part of the test in the Categorical Imperative, that is we can want it to become a
universal law. For instance, a maxim that states only take care of yourself. While this is not
contradictory when universalised, Kant would argue it would be in conflict with itself, since there may be
many situations where you need help from others.
Kant also argued we need to recognise other humans are also ends in themselves and not regard them
as a means to an end.
Kant is known also for transcendentalism or idealism in metaphysics and a subtle
constructivism in epistemology, his main idea was deontological in ethics. In particular, Kant's
fundamental contribution to ethical thought was the 'categorical imperative', according to which the only
actions we can legitimately call 'moral' are those that are done purely for the sake of a universal moral
law, not from any personal interest or pleasurenot even an interest in acting in the best way possible or
in living a good human life.
Immanuel Kant (1724-1804) was born in the East Prussian city of Koenigsberg, studied at its
university, and worked there as a tutor and professor for more than forty years, never travelling more than
fifty miles from home. His outward life was one of legendary calm and regularity but Kant's intellectual
work easily justified his proud claim that he has effected a Copernican revolution in philosophy. His
central thesis was that the possibility of human knowledge presupposes the active participation of the
human mind. This is of course deceptively simple and obvious sounding, but the details of its application
are complex. The Kritik der reinen Vernunft (Critique of Pure Reason) (1781, 1787) laid out the

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conditions for mathematical, scientific, and metaphysical knowledge in its "Transcendental Aesthetic"
"Transcendental Analytic" and "Transcendental Dialectic" but Kant offered a less technical exposition of
the same themes in his Prolegomena zu einer jeden kuenftigen Metaphysik die als Wissenschaft wird
auftreten koennen (Prolegomena to any Future Metaphysic) (1783). He carefully distinguished
judgments as analytic or synthetic and as a priori or a posteriori and held that the most interesting and
useful varieties of human knowledge rely upon synthetic a priori judgments, which are, in turn, possible
only when the mind determines the conditions of its own experience and hence it is we he suggested who
impose the forms of space and time upon all possible sensations in mathematics, and it is we who render
all experience coherent as scientific knowledge governed by traditional notions of substance and causality
by applying the pure concepts of the understanding to all possible experience. But regulative principles of
this sort hold only for the world as we know it, and since metaphysical (religious or spiritual) propositions
seek a truth beyond all experience, they cannot be established within the bounds of reason. From his
analysis of the operation of human will, Kant derived the case of a perfectly universalizable moral law,
expressed in a categorical imperative that must be regarded as binding upon every agent. In the Third
Section of the Grounding and in the Kritik der practischen Vernunft (Critique of Practical Reason)
(1788), Kant grounded this conception of moral autonomy upon our ideas of god, freedom, and
immortality.
The main problems with the Deontological approaches and theories are :
1. These theories may present problems in moral dilemmas, as they provide no procedure to solve
conflicts between duties. For instance, a few years back when terrorists had kidnapped passengers of an
Indian Airlines plane and had taken the plane to Afghanistan (which was under the rule of the Taliban at
the time) and in return for releasing them were demanding the release of terrorists in Indian jails, the
government had to decide between its duty to be firm with terrorists and sticking to the rule of law with
respect to trials for arrested terrorists in jails and the its duty to protect Indian citizens trapped in a
situation where their lives were under threat.
2. Deontological theories start with an internal process where we fix duties by looking inside into
ourselves and into our conscience. But those duties have to be understood and justified by reference to the
external world or ground realities sometimes and that by itself sometimes forces a certain degree of
censequentialist thinking.
The different approaches a COMPARITIVE summary
Consider this. Each approach to moral reasoning has a few fairly penetrating counterexamples.Virtue theory (Reasoning from Virtue) is plagued by the way in which a character such as
Hitler acted with courage (a virtue that virtue theories would endorse), but that doesn't seem sufficient to
make some of his actions right.
Deontologism (Reasoning from Rule) on the other hand, seems a little too obsessed with means and
not enough with ends. For instance claiming that lying is always wrong seems to come up with some
interesting results: for example a German family questioned by the Nazi Party in Germany at the time of
the second world war as to whether or not they are hiding Jews in their house could have lied and saved
many lives if they were hiding Jews and they lied.
Consequentialism (Reasoning from Consequences) finally tends to be criticised for the exact
opposite of deontologism: it justifies any means provided the ends are good enough (Example: From the

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instance cited above letting free dreaded terrorists caught after great effort in order to arrange for a safe
return of two hundred or so kidnapped passengers in an aircraft ).
At some level strangely all theories and approaches rely the other approaches for wich they offer no
explanation.
So for instance both virtue theory and deontologism are at all loss as to why consequences matter at
all, if all we are interested in are actions per se.
The problematic part of consequentialist thinking is that it suddenly becomes very unclear just what
system of thinking about ethics best lends itself to actually allowing us to get the correct answers in our
day to day lives.
Sometimes the two approaches (ontological and deontological) are both adopted together at different
levels. For instance in medicine deontological ethics is used at the hands on levels, while hedonistic
utilitarianism is used at the macro level. Also physical well-being rather than happiness would likely be
the good to be maximized in medicine.
In consequentialism, one must have data to support whatever 'good' is to be maximized. Also, an act
(each situation on its own) or a rule approach must be chosen (general rules which will maximize good).
That sometimes becomes difficult in practice.
Perhaps the fundamental advantage of deontological theories over consequentialist theories is the
recognition of the importance of the individuals - it is not legitimate to sacrifice individuals for the sake of
a particular favourable outcome.
The topic of moral reasoning lies in between two other commonly addressed topics in moral
philosophy. On the one side, there is the first-order question of what moral truths there are, if any. For
instance, are there any true general principles of morality, and if so, what are they? At this level
utilitarianism competes with Kantianism, for instance, and both compete with anti-theorists of various
stripes, who recognize only particular truths about morality.
Inductive Reasoning (Consequential) VERSUS Intuitive Reasoning (Deontological)
Mill had argued that moral theories are divided between two distinct approaches: the intuitive and
inductive schools. Although both schools agree that there is a single and highest normative principle to be
achieved, they disagree about whether we have knowledge of that principle intuitively (without appeal to
experience), or inductively (though experience and observation). Kant represents the best of the intuitive
school, and Mill defends the inductive school. Mill criticizes Kant's categorical imperative noting that it is
essentially the same as utilitarianism since it involves calculating the good or bad consequences of an
action to determine the morality of that action. Mill argues that his task is to demonstrate this highest
principle inductively. In A System of Logic, Ratiocinative and Inductive (1843) he explained in great
detail the canons for reasoning inductively to arrive at conclusions about the causal connections exhibited
in the natural world.
Questions:

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1. Compare the different approaches to moral reasoning and explain your arguments with examples
from real life.
2. Compare J. S. Mills Utilitarianism with Kants deontological approach.

SUGGESTED READING
1.
2.

Immanuel Kant, Critique of Practical Reason.

Richard Paul and Linda Elder, Ethical Reasoning: The Foundation for Critical Thinking,
2003.

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LESSON 5

THE CORPORATE CODE OF ETHICS

L. Ganguly
Financial Analyst
After reading this lesson you will be familiar with:
The concept of business ethics
The Code of Ethics of an organisation and its role
Corporate ethics and issues like the environment, accountability, responsibility, leadership
and diversity
To be ethical is to be moral in ones actions and conduct. We all understand the need to be ethical
philosophically. Of course we may differ on what exactly we mean by being moral and what would it
mean in practice but we all agree on the need to strive to live up to our own moral or ethical standards and
beliefs.
Society ultimately is composed of people and organisations of people and hence extending that logic
to it as well, it is very clear that business and corporate organisations also need to be ethical.
What would it mean for businesses to be ethical? .
There is a lot of debate on whether and how much and with whom and in what manner a business
needs to be ethical. Some people have argued that a business needs to be ethical only in its commitment
and behaviour towards its owners and others dont matter. Others have argued a business does not operate
in vacuum and depends on the employees, suppliers, customers, environmental natural resources of the
nation, government created facilities like roads etc and depends also on a system of law and order to
function smoothly. Or in other words a business depends on the whole society and many stakeholders and
hence it has a duty to be ethical towards all of them. Whatever the opinion that one may hold on the list of
stakeholders and the extent or limits of the ethical commitment, what is clear is that to do business and act
commercially business ethics is not entirely avoidable.
Thus Business Ethics is a form of applied ethics that examines ethical rules and principles within a
commercial context; the various moral or ethical problems that can arise in a business setting; and any
special duties or obligations that apply to persons who are engaged in commerce. The subject of business
ethics is thus a normative discipline, whereby particular ethical standards are advocated and then applied.
It makes specific judgements about what is right or wrong, which is to say, it makes claims about what
ought to be done or what ought not to be done. Hence business ethics is usually less concerned with the
philosophical foundations of ethics or with justifying the most basic ethical principles but are more
concerned with practical problems and applications, and any specific duties that might apply to business
relationships.
Business ethics covers the widest swathe of issues, principles, stakeholders and the realm of politics,
government and policy-making too. For instance, business ethics grapples with everything from whether
to try to influence politicians and the government with bribes to arrange for favourable policies (like tax
rates, licensing etc) to whether to allow homosexuals to work in the company or letting women work in
unsafe night shifts to whether to give regular reports to the media on what the companys confidential
plans are to exiting business processes that may be causing environmental pollution even if the
alternatives are costly or not strictly required by law etc.
Understanding the landscape of business ethics can be problematic. The field is vast, often
encompassing such concerns as corporate governance, reputation management, accurate accounting and
audits, fair labor practices and environmental stewardship to name but a few. In fact, the field addresses

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the entire scope of responsibilities or obligations that a company has to each of its stakeholders:
those who have a vested interest - or stake - in the decisions and actions of a company, like clients,
employees, shareholders, suppliers and the community. Depending upon the company in question, one
may even be able to identify additional stakeholders.
The International Business Ethics Institute comments:
The field of business ethics is further complicated by the fact that many terms exist to refer to
corporate offices and programs intended to communicate, monitor, and enforce a company's values and
standards. In theory, one can make some rough distinctions among the various domains related to
business ethics, e.g., corporate responsibility, social responsibility, corporate compliance, etc. In practice,
however, such distinctions blur because corporate offices of compliance established in the 1970s may
now function similarly to an office of corporate and social responsibility.
Before pondering or thinking about the business ethics that a business will follow, almost always the
first step is identifying the stakeholders of the company.
A companys stakeholders are all those who are influenced by, or can influence, a companys
decisions and actions and can include (but are not limited to): employees, customers, suppliers,
community organizations, subsidiaries and affiliates, joint venture partners, local neighborhoods,
investors, and shareholders (or a sole owner).
After the stakeholders are identified the issues that a business will grapple with generally can be
classified under the categories: general business ethics, professional ethical issues and international
business ethics and the ethics of economic systems.
General business ethics would cover the following:
1. Determining the fundamental purpose of the organisation or the philosophy of business. If a
company's main purpose is to maximize the returns to its shareholders, then it could be seen as
unethical for a company to consider the interests and rights of anyone else as far as that company and
its owners are concerned. Or the company may decide the fundamental purpose is more than making
money for he owners.
2. What Corporate Social Responsibility (CSR), which is an umbrella term under which the ethical
rights and duties existing between companies and society is debated, will be followed. Of course
firstly the company will have to decide if it at all feels it has a social respnsibility or duty or not. CSR
can be understood in terms of over-all corporate responsibility, but with greater stress laid upon the
obligations a company has to the community, particularly with respect to charitable activities and
environmental stewardship for instance. CSR can also be described as being a tacit contract between
business and a community, whereby the community permits the business to operate within its
jurisdiction to obtain jobs for residents and revenue through taxation. Additionally, the community
expects the business to preserve the environment and to make the community a better place to live
and to work through charitable activities and investments and financial initiatives.
3. Issues regarding the moral rights and duties between a company and its shareholders. For instance
what fiduciary responsibility the company has towards them, and issues relating to the shareholder
concept in its relation or conflict with the stakeholder concept.
4. Ethical issues concerning relations between different companies: e.g. hostile take-overs, industrial
espionage etc.
5. Corporate governance issues. Corporate Governance refers to the set of processes, customs, policies,
laws and institutions affecting the way a corporation is directed, administered or controlled. Corporate
governance also includes the relationships among the many players involved (the stakeholders) and
the goals for which the corporation is governed. The principal players are the shareholders,

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management and the board of directors. Other stakeholders include employees, suppliers, customers,
banks and other lenders, regulators, the environment and the community at large.
6. Political contributions and relationships that will be maintained and pursued.
7. The position that the organisation will take on legal reform.
8. Issues relating to the misuse of corporate ethics policies as marketing instruments.
Professional ethics covers the myriad of practical ethical problems and phenomena which arise out
of specific functional areas of companies or in relation to recognized business professions. For instance,
the ethics of finance and accounting, of human resource management, of sales and marketing, of
production and of intellectual property, knowledge and skills.
Ethics of finance and accounting woul cover the following sorts of issues:
1. Policies and issues relating to creative accounting, earnings management, misleading financial
analysis etc.
2. Issues and polcies on avoiding of insider trading, securities fraud, forex scams and criminal
practices generally.
3. In recent years there has been concerns expressed on excessive payments made to corporate
CEO's.
4. Bribery, kickbacks, facilitation payments: while these may be in the (short-term) interests of the
company and its shareholders, these practices may be anti-competitive or offend against the
values of society.
Ethics of human resource management covers the ethics of human resource management (HRM)
and covers those ethical issues arising around the employer-employee relationship, such as the rights and
duties owed between employer and employee. Some of the important issues under this category are:
1. Discrimination issues including discrimination on the basis of age (ageism), gender, race,
religion, disabilities, weight and attractiveness.
2. Issues surrounding the representation of employees and the democratisation of the workplace:
relations with worker unions and policies on strikes.
3. Issues affecting the privacy of the employee: workplace surveillance like email and phone
tapping of employees, health tests, drug testing etc.
4. Issues relating to whistle-blowing.
5. Issues relating to the fairness of the employment contract and the balance of power between
employer and employee: slavery, indentured servitude, employment law etc.
6. Occupational safety and health.
Ethics of sales and marketing deals with questions like when marketting goes beyond the mere
provision of information about (and access to) a product and seeks to manipulate peoples values and
behaviour. To some extent society regards this as acceptable, but where should the ethical line to be
drawn?. Some of the issues under this sub-category are:
1. Pricing issues like price fixing, price discrimination, price skimming.
2. Anti-competitive practices: these can include but go beyond pricing tactics to cover issues such as
manipulation of loyalty and supply chains.
3. Ethical acceptibility and propriety of specific marketing strategies like greenwash, bait and
switch, shill, viral marketing, spam (electronic/email), pyramid scheme, planned obsolescence
etc.
4. Content of advertisements: attack ads, subliminal messages, sex in advertising etc.
5. Ethical propriety of marketting to Children and marketing in schools.
6. Dealing with black markets and grey markets.

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Ethics of production is an area of business ethics that deals with the duties of a company to ensure
that products and production processes do not cause harm. Some of the more acute dilemmas in this area
arise out of the fact that there is usually a degree of danger in any product or production process and it is
difficult to define a degree of permissibility, or the degree of permissibility may depend on the changing
state of preventative technologies or changing social perceptions of acceptable risk. Someof the issues
grappled with are:
1. Defective, addictive and inherently dangerous products and services.
2. Ethical relations between the company and the environment: pollution, environmental ethics,
carbon emissions trading etc
3. Ethical problems arising out of new technologies: genetically modified food, mobile phone
radiation and health.
4. Product testing ethics: animal rights and animal testing, use of economically disadvantaged
groups (such as students) as test objects.
Ethics of intellectual property, knowledge and skills deals with the fact that these are valuable but
not easily "ownable" objects. Nor is it obvious who has the greater rights to an idea: the company who
trained the employee or the employee themselves? The country in which the plant grew, or the company
which discovered and developed the plant's medicinal potential? As a result, attempts to assert ownership
and ethical disputes over ownership arise and lead to some of the following issues:
1. Patent infringement, copyright infringement, trademark infringement issues.
2. Misuse of the intellectual property systems to stifle competition: patent misuse, copyright misuse,
patent troll, submarine patent etc.
3. The notion of intellectual property itself has been criticised on ethical grounds.
4. Employee raiding issues: the practice of attracting or weaning away or do poaching of key
employees away from a competitor to take unfair advantage of the knowledge or skills they may
possess.
5. The practice of employing all the most talented people in a specific field, regardless of need, in
order to prevent any competitors from employing them.
6. Bioprospecting (ethically done) and biopiracy (unethical).
7. Business intelligence and industrial espionage.
International business ethics was not regarded as important until the late 1990's, and became
relevant as a consequence of the international developments of that decade. New practical issues arose out
of the international context of business. Theoretical issues such as cultural relativity of ethical values
receive more emphasis in this category of ethical issues. Other, older issues can be grouped here as well
as follows:
1.
2.
3.
4.

The search for universal values as a basis for international commercial behaviour.
Comparison of business ethical traditions in different countries.
Comparison of business ethical traditions from various religious perspectives.
Ethical issues arising out of international business transactions; e.g. bioprospecting and biopiracy
in the pharmaceutical industry; the fair trade movement; transfer pricing.
5. Issues such as globalisation and cultural imperialism (particularly relevant for media companies
in Hollywood for instance).
6. Varying global standards on labour practices - e.g. the use and social acceptance of child labour
in some countries and its criminality in some others.
7. The way in which multinationals take ruthless advantage of international differences, such as
outsourcing production (e.g. clothes) and services (e.g. call centres) to low-wage countries
thereby causing job losses in the original countries of production and consumption.

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8. The permissibility of international commerce with pariah states or states that are regraded as
supporters or sponsors of terrorism for instance.
Ethics of economic systems is not really regarded as a part of, but only indirectly related, to business
ethics. Ultimately businesses support or oppose one political economic system over another by
participation in it thereby supporting it and in other ways like through political contributions and
payments to politicians for instance. This is the realm of ethics applied to the business world where
business ethicists venture into the fields of political economy and political philosophy, focussing on the
rights and wrongs of various systems for the distribution of economic benefits.
Ethics and Self-Interest
As the management sciences have developed the view has gained ground that ethical conduct and
corporate responsibility is in the interest of business corporations. The management guru Peter Drucker
was the first to advance the thesis basing his views on actual case studies from history, particularly of
American business, that business ethics and corporate responsibility help in creating customers and other
stakeholders for the future and hence must be a strategic business choice rather than a public relations
effort etc. He put forward the suggestion that businesses can and should try to turn a social problem
into economic opportunity and economic benefit, into productive capacity, into human competence, into
well-paying jobs, and into wealth53.
Michael Josephson of the Josephson Institute of Ethics comments:
Ethics is a popular topic at corporate meetings today because management correctly sees the
benefits. Good things tend to happen to companies that consistently do the right thing, and bad things tend
to happen to those that even occasionally do the wrong thing. Being ethical is playing the odds. First, over
the long haul, ethics provides a competitive edge. People prefer to work with those they trust.
Second, ethical companies have higher credibility. It's a huge advantage to be believed.
Third, trust makes decision making more efficient and economical.
Fourth, ethical companies attract and retain employees better because they have higher morale.
People feel better about their jobs and themselves.
Fifth, ethics breeds good will and loyalty from customers, vendors and employees.
So, it's true: Good ethics is good business.
But he is quick to point out that being ethical just because it is wise and smart business policy
doesnt work because nothing that is genuine and fake lasts over the longer term. He says the problem
with trying to motivate employees by stressing the corporate benefits of ethics is that:
. rationales grounded in self-interest are essentially amoral; they have nothing to do with
ethicsDoing the right thing to get something in return is an investment, not a commitment. Ethics
based on self-interest is situational; only ethics based on moral convictions is sustainable. It's the
difference between acting ethically and being ethical. Asking employees to give up the possible benefits
of lying or lawbreaking for corporate gain rather than personal goodness invites them to look at their
conduct in terms of risks and rewards rather than values and virtues. And what if they ask not what's good
53

Peter F. Drucker, Social Needs and Business Opportunities, in The Frontiers of Management, 1986

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for the company or customer, but what's good for them? Clearly, what's good for an enterprise is not
always good for its employees. It's foolish and fruitless to expect most employees to sacrifice their
financial well being for the good of the company, but many will do so for the good of their soul and the
sense of worthiness that comes from earning the respect and esteem of their family and friends.

Appeals to the heart are more powerful than appeals to the head.
He further comments:
.One problem with talking about ethics in business is that there is often a wide gap between the
rhetoric and the reality. The reality is that business is not nearly as bad as some critics make it out to be or
nearly as good as its apologists contend. By the same token, ethics may not be as crucial to success as
moralists claim. Yes, trust has been badly eroded by too much lying and cheating, even by basically
decent people. Yet every day, people of character successfully overcome pressures and resist temptations
to sacrifice ethics for expediency. At the same time, well-meaning reformers often oversell the role of
ethics in success. Asserting platitudes like "good ethics is good business" as if they were moral truths
makes the case for ethics vulnerable to cynics who are eager to disprove the generality with a host of
examples. The truth is that good ethics sometimes is good business, but sometimes it's not. It depends on
one's goals and how one defines good business. Sometimes, good ethics can end in bankruptcy. Of
course, so can bad ethics. A fairer statement is that good ethics can be a very powerful business asset and
that good things tend to happen to companies and individuals that consistently do the right thing and bad
things tend to happen to those that even occasionally do the wrong thing.
But the crucial point is that the moral obligation to live according to ethical principles is not
dependent on whether it's advantageous. People of character do the right thing in the pursuit of virtue, not
self-interest
..Whether or not good ethics is good business, it's a good way to live and when people really
believe that's enough, then good ethics will be good business.
Apart from the moral benefits of attention to business ethics, some of the other types of benefits are:
1. Attention to business ethics has substantially improved society: A matter of decades ago,
children worked 16-hour days, workers limbs were torn off and disabled workers were condemned to
poverty and often to starvation and cartels controlled some markets with the result that prices were
artificially fixed high and small businesses manipulated out of business. Price fixing crippled normal
market forces and the price discovery process. Employees were terminated based on whether the owner
like his face and there was intimidation and harassment. So society reacted and demanded that businesses
place high value on fairness and equal rights and anti-monopoly laws were instituted. Government
agencies were established and unions organised.
2. Ethics helps maintain a moral course in turbulent times: Attention to business ethics is critical
during times of fundamental change because during times of change, there is often no clear moral
compass to guide leaders through complex conflicts about what is right or wrong. Continuing attention to
ethics in the workplace sensitises leaders and staff to how they should act.
3. Ethics programs cultivate strong teamwork and productivity: Ethics programs align employee
behaviours with those top priority ethical values preferred by leaders of the organization. Usually, any
organization finds disparity between its preferred values and the values actually reflected by behaviours in

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the workplace. On going attention and dialogue regarding values in the workplace builds openness,
integrity and community -- critical ingredients of strong teams in the workplace. Employees feel strong
alignment between their values and those of the organization. They react with strong motivation and
performance.
4. Ethics programs support employee growth and meaning: Attention to ethics makes employees
feel full confidence they can admit and deal with whatever comes their way.
5. Ethics programs are an insurance policy: they help ensure that policies are legal: There is an
increasing number of lawsuits in regard to personnel matters and to the effects of an organizations
services or products on stakeholders particularly customers. Ethical principles are often on state-of-the-art
legal matters. Attention to ethics ensures highly ethical policies and procedures in the workplace. Its far
better to incur the cost of mechanisms to ensure ethical practices now than to incur costs of litigation
later. A major intent of well-designed personnel policies is to ensure ethical treatment of employees, e.g.,
in matters of hiring, evaluating, disciplining, firing, etc.
6. Ethics programs help avoid criminal acts of omission and can lower fines: Ethics programs
tend to detect ethical issues and violations early on so they can be reported or addressed. In some cases in
the USA, when an organization is aware of an actual or potential violation and does not report it to the
appropriate authorities, this can be considered a criminal act, e.g., in business dealings with certain
government agencies, such as the Defence Department. The United States Federal Sentencing Guidelines
specify major penalties for various types of major ethics violations but has provisions for lowers fines if
an organization has clearly made an effort to operate ethically.54
7. Ethics programs help manage values associated with quality management, strategic planning
and diversity management: Ethics programs identify preferred values and help ensure organizational
behaviour is aligned with those values. This effort is very useful for several other programs in the
workplace that require behaviours to be aligned with values, including quality management, strategic
planning and diversity management. Ethics management programs are also useful in managing diversity.
Diversity is much more than the colour, caste and language etc of peopleits acknowledging different
values and perspectives.
8. Ethics programs promote a strong public image: Attention to ethics is also strong public
relations but managing ethics should not be done primarily for reasons of public relations. People see
those organizations that have ethical values as valuing people more than profit, as striving to operate with
the utmost of integrity and honour.
54

While some U.S. companies have had a form of business ethics program for many years, most of them developed
their business ethics programs as a result of such legislation as the Foreign Corrupt Practices Act and the 1992 U.S.
Federal Sentencing Guidelines. U.S. companies particularly large multinational corporations sought to develop
internal policies and procedures to abide by these legislative actions. The Sentencing Guidelines, in particular, serve
as an incentive for companies to establish business ethics or compliance programs. Companies that have established
effective ethics programs are, under the Guidelines, penalized less harshly if found guilty of corporate wrongdoing.
According to the guidelines, an effective business ethics or compliance program consists of seven elements,
including:
An individual in charge of the ethics function
Written standards of conduct
Employee training on the code document
A hotline for whistleblowers

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9. Overall benefits of ethics programs: Donaldson and Davis, in Business Ethics? Yes, But What
Can it Do for the Bottom Line? (Management Decision, V28, N6, 1990) explain that managing ethical
values in the workplace legitimises managerial actions, strengthens the coherence and balance of the
organizations culture, improves trust in relationships between individuals and groups, supports greater
consistency in standards and qualities of products, and cultivates greater sensitivity among stakeholders
and customers to the impact of the enterprises values and messages
10. Unethical behaviour it has been found impacts stock market prices of the companys stock
adversely over time and to that extent makes capital raising costlier.
11. Ethical behaviour and programs there is now evidence to suggest improves productivity as
well.
Responsibility and Accountability
The term Corporate Responsibility refers to all the obligations that a company has.
The obligations are mainly in three directions - to the shareholders or owners, to the legal system and
to other stakeholders in society and society itself.
Who is a stakeholder? Anybody and everybody (including the community and the nation itself) who
is directly or indirectly interested in the company and its existence and functioning is a stakeholder.
The list of stakeholders can be long and can be roughly classified into four categories: (1)
Authorisers: Shareholders, Board of Directors, Government, Regulatory Agencies, Professional
Societies, Trade Associations, (2) Business Associates and Business Process Participants: Employees,
Unions, Suppliers, Distributors, Service Providers, (3) External Influencers: Media and Journalists,
Community Members, Special Interest Groups and NGOs (Non-Governmental Organisations), and
different Customers Segments.
Corporate Responsibility is important apart from other reasons simply because when examining a
particular corporate practice, like profit versus environmental protection for instance, notions and policies
of corporate responsibility can help distinguish between a stakeholder expectation and a corporate
obligation, i.e., is the company obligated to provide absolute environmental protection at all cost or is it
obligated to maximize profits for its investors at the cost of damaging the environment?.
The obligation of performing and then giving bona fide truthful accounts of both the financial and
legally compliant functioning of the company to the shareholders and the legal system is Corporate
Accountability. It is thus a part of and a subset of Corporate Responsibility.
The obligations, particularly social obligations, if any to the society, community and the nation and
the world at large (and to all stakeholders) is referred to as Corporate Social Responsibility (CSR) which
is thus also a part of Corporate Responsibility.
Yet another term of great importance is Corporate Governance, which refers to the set of processes,
customs, policies, laws and institutions affecting the way a corporation is directed, administered or
controlled. Corporate governance also includes the relationships among the many players involved, the
stakeholders and the goals for which the corporation is governed. The principal players are the
shareholders, management and the board of directors. Other stakeholders include employees, suppliers,
customers, banks and other lenders, regulators, the environment and the community at large.

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Corporate governance is a multi-faceted subject. The most important theme of corporate governance
deals with issues of accountability and fiduciary duty, essentially meaning the implementation of
guidelines and mechanisms to ensure good behaviour and protect shareholders. Another key theme is the
economic efficiency objective, which means the corporate governance system should aim to optimize
economic results, with a strong emphasis on shareholders welfare. There are yet other less direct themes
of corporate governance, such as the stakeholder view, which calls for more attention and accountability
to players other than the shareholders (e.g.: the employees).
Corporate Responsibility is thus the wide umbrella term under which fall the concepts of Corporate
Accountability, Corporate Governance and Corporate Social Responsibility. They are all parts of the
responsibility that a business corporation has.
Further corporate accountability it can be said is a part of corporate governance but governance is
a little bit more than mere accountability. Here too depending on which part of the world we are talking
about, corporate governance can be more or less in meaning in one part of the world than in another.
There are many different models of corporate governance around the world and they differ
according to the variety of capitalism that prevails in that particular region. The liberal model that is
common in Anglo-American countries tends to give priority to the interests of shareholders but the
coordinated model that one finds in Europe and Japan tends to recognizes the interests of workers,
managers, suppliers, customers, and the community more. Both models have distinct competitive
advantages, but in different ways. The liberal model of corporate governance encourages radical
innovation and cost competition, whereas the coordinated model of corporate governance facilitates
incremental innovation and quality competition.
Whatever the part of the world, the term corporate governance has come to mean atleast two things.

the processes by which companies are directed and controlled.

the many issues arising from the separation of ownership and control.

Reputed Indian chartered accountant and auditor, Dr. Y.H. Malegam of S.B. Billimoria & Co.
explains the increasing relevance and need for focus on accountability and corporate governance as
follows:
The issue of corporate governance arise from the fundamental basis on which public corporations
are formed and operate, namely the separation of ownership and control. This is essentially an agency
problem. In this agency relationship, the shareholders are the risk bearers, while the managers are the
decision makers. The danger is that the managers can act opportunistically at the expense of shareholders
interests and corporate governance procedures and practices are primarily designed to prevent the abuse.
The problem becomes more complicated when the control of an organisation is concentrated in one or a
group of a few shareholders. In such a situation, the agency problem degenerates into an insider-outsider
problem. The insiders are the controlling shareholders together with the management who is beholden to
them while the outsiders are the non-controlling shareholders. In this situation a conflict can arise if the
insiders treat the outsiders not as partners but a mere providers of finance. The need for corporate
governance has, therefore, existed ever since the form of a joint stock company was devised many
centuries ago. What has, however, brought the issue to the forefront in recent years is the emergence of
significant changes in the economic environment.

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The first of these is the growing dissatisfaction with financial statements and their ability to predict
corporate failures.
A second factor was the growing dissatisfaction with the role of independent directors on the boards
of companies and the seemingly large remuneration paid to them.
A third factor was the emergence of the institutional investor in the US. The first pension fund was
established by General Motors in 1950 and by 1990, the funds available for investment by institutional
investors had grown to over $ 3.5 trillion. Thereafter these funds have been growing at the rate of a billion
to 1.5 billion dollars per year. In the UK, institutional investors account for over three quarters of the
value of the London Stock Market and the ten largest investors account for almost a quarter of the total
market capitalisation. In India, also, after the liberalisation in 1991, we have seen the emergence of the
private sector mutual funds which today have well over Rs. 100,000 crores of investible funds and foreign
investors have portfolio investments of over $ 25 billion.55 There has, therefore, emerged a new class of
investors who are knowledgeable, conscious of their rights and willing to enforce them. In the US, the
largest of the institutional investors, CALPERS, has devised its own model of the corporate governance
code and it ensures that companies in which it has substantial holdings enforce this code. Again in the
US, it is institutional investors who have been at the forefront in demanding good corporate performance
and have been instrumental in removing the CEOs of large corporations when they have failed to
perform. When a company does not perform, a shareholder has three choices: he can exit, he can voice his
concern or he can continue to show his loyalty to the company by continuing as a shareholder. The first of
these choices is often not available to the institutional shareholders, often because the size of its holding is
too large or because it is using index funds. Therefore, the institutional investor is often by compulsion, a
long-term investor who needs to voice his concern.
A fourth factor, which needs to be recognised, is the impact of economic growth. As a society
becomes more prosperous, it becomes more knowledge-based. There is, therefore, the emergence of a
new breed of individual investors who are hungry for knowledge and who are concerned with ethical
issues.
Finally, there is the competition between developing countries to acquire the largest slice of the
international funds earmarked for emerging markets and the growing realisation that these funds will only
flow to those markets which are strongly regulated and which have an ethical base.56
He says in conclusion:
In the final analysis, corporate governance is not a mere matter of structures and procedures. It has
to be a way of life. In a sense, the issues it addresses in the corporate world are not different from the
issues which society addresses in a functioning democracy, that those to whom the assets of the
corporation are entrusted for management, are accountable for those assets and for the manner in which
they manage them and an assurance that no part of the assets have been diverted for personal gain; that
there is adequate transparency in the manner in which these managers communicate this accounting to the
shareholders and that this accounting is subjected to adequate scrutiny and the shareholder is entitled to
rely upon the truthfulness of this accounting; and finally that the rights of every individual shareholder are
protected and there is no oppression of the minority by the majority.57
Principles of Corporate Governance
55

At present mutual funds have almost three lakh crores of investible funds and foreign portfolio investments in
Indian stock markets are almost fifty billion dollars as a consequence of the flows since then.
56
Source: N.A. Palkhivala Foundation Lecture, Chennai, 2003
57
ibid.

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Key elements of good corporate governance principles include honesty, trust and integrity, openness,
performance orientation, responsibility and accountability, mutual respect, and commitment to the
organisation.
Commonly accepted principles of corporate governance are:
(1) Rights and equitable treatment of shareholders: Organisations should respect the
rights of shareholders and help shareholders to exercise those rights. Shareholders can be
helped to exercise their rights by effectively communicating information that is
understandable and accessible and encouraging shareholders to participate in general
meetings.
(2) Taking care of the interests of other stakeholders: Organisations should recognise that
they have legal and other obligations to all legitimate stakeholders, and not just
shareholders.
(3) Role and responsibilities of the board: The board needs a range of skills and
understanding to be able to deal with various business issues and have the ability to
review and challenge management performance. It needs to be of sufficient size and have
an appropriate level of commitment to fulfill its responsibilities and duties. There are
issues about the appropriate mix of executive and non-executive directors. The key roles
of chairperson and CEO should not be held by the same person. Also increasingly there is
a focus on independent directors and their role.
(4) Integrity and ethical behaviour: Organisations should develop a code of conduct for
their directors and executives that promotes ethical and responsible decision making.
Also systemic reliance on integrity and ethics is regarded as being bound to eventually
fail.
(5) Disclosure and transparency: Organisations should clarify and make publicly known
the roles and responsibilities of the board and management to provide shareholders with a
level of accountability. They should also implement procedures to independently verify
and safeguard the integrity of the company's financial reporting. Disclosure of material
matters concerning the organisation should be timely and balanced to ensure that all
investors have access to clear, factual information.
The main areas of the famous OECD (Organisation of Economic Cooperation and Development)
Principles of Corporate Governance are:
I.

II.

III.

IV.

Ensuring the basis for an effective corporate governance framework:

The corporate governance framework should promote transparent and
efficient markets, be consistent with the rule of law and clearly articulate
the division of responsibilities among different supervisory, regulatory and
enforcement authorities.
The rights of shareholders and key ownership functions: The corporate
governance framework should protect and facilitate the exercise of
shareholders rights.
The equitable treatment of shareholders: The corporate governance
framework should ensure the equitable treatment of all shareholders,
including minority and foreign shareholders. All shareholders should have
the opportunity to obtain effective redress for violation of their rights.
The role of stakeholders in corporate governance: The corporate
governance framework should recognise the rights of stakeholders
established by law or through mutual agreements and encourage active co-

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V.

VI.

operation between corporations and stakeholders in creating wealth, jobs,

and the sustainability of financially sound enterprises.
Disclosure and transparency: The corporate governance framework
should ensure that timely and accurate disclosure is made on all material
matters regarding the corporation, including the financial situation,
performance, ownership, and governance of the company.
The responsibilities of the board: The corporate governance framework
should ensure the strategic guidance of the company, the effective
monitoring of management by the board, and the board s accountability to
the company and the shareholders.

The OECD has states with respect to their principles:

The integrity of businesses and markets is central to the vitality and stability of our economies. So
good corporate governance the rules and practices that govern the relationship between the managers
and shareholders of corporations, as well as stake- holders like employees and creditors contributes to
growth and financial stability by underpinning market confidence, financial market integrity and
economic efficiency. Recent corporate scandals have focussed the minds of governments, regulators,
companies, investors and the general public on weaknesses in corporate governance systems and the
need to address this issue.
The OECD Principles of Corporate Governance provide specific guidance for policymakers,
regulators and market participants in improving the legal, institutional and regulatory framework
that underpins corporate governance, with a focus on publicly traded companies. They also provide
practical suggestions for stock exchanges, investors, corporations and other parties that have a role
in the process of developing good corporate governance. They have been endorsed as one of the
Financial Stability Forum s 12 key standards essential for financial stability.58
Some of the issues involving application of the above corporate governance principles would include
for instance:

oversight of the preparation of financial statements

design of internal controls and the independence of the companys external auditors
review of the compensation arrangements of the CEO (Chief Executive Officer) and other senior
executives
the way in which individuals are nominated for positions on the board particularly independent
directors
the resources made available to directors in carrying out their duties
oversight and management of risk
dividend policy of the company

(Please note this is not an exhaustive list indeed an exhaustive list can not be prepared.)
Corporate governance principles and codes have been developed in different countries and issued
from stock exchanges, corporations, institutional investors, or associations (institutes) of directors and
managers with the support of governments and international organizations. As a rule, compliance with
these governance recommendations is not mandated by law, although the codes linked to stock exchange
listing requirements may have a coercive effect.
58

OECD Policy Brief (on the OECD Principles of Corporate Governance) , August, 2004

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For example, companies quoted on the London and Toronto Stock Exchanges formally need not
follow the recommendations of their respective national codes. However, they must disclose whether they
follow the recommendations in those documents and, where not, they should provide explanations
concerning divergent practices. Such disclosure requirements exert a significant pressure on listed
companies for compliance.
Corporate governance guidelines and best practices have evolved over a period of time. The Cadbury
Report on the financial aspects of corporate governance, published in the United Kingdom in 1992, was a
landmark. It led to the publication of the Vinot Report in France in 1995. This report boldly advocated
the removal of cross-shareholdings that had formed the bedrock of French capitalism for decades. Further,
The General Motors Board of Directors Guidelines in the United States and the Dey Report in Canada
proved to be influential in the evolution of other guidelines and codes across the world. Over the past
decade, various countries have issued recommendations for corporate governance. Compliance with these
is generally not mandated by law, although codes that are linked to stock exchanges sometimes have a
mandatory content.
One of the most influential guidelines on corporate governance has been the 1999 OECD
(Organisation of Economic Co-operation and Development) Principles of Corporate Governance which
was revised in 2004. The OECD remains a proponent of corporate governance principles throughout the
world.
The OECD also publishes an annual paper on corporate governance. First issued in 1999, this paper
has provided the framework for regional corporate governance roundtables in cooperation with the World
Bank around the world. It has been endorsed as one of the Financial Stability Forums 12 key standards,
and form the basis for the World Bank's Review of Observance of Standards and Codes.
The Sarbanes-Oxley Act, which was signed by the U.S. President George W. Bush into law in July
2002, has brought about sweeping changes in financial reporting. This is perceived to be the most
significant change to federal securities law since the 1930s. Besides directors and auditors, the Act has
also laid down new accountability standards for security analysts and legal counsels.
In November 2003, the SEC approved changes to the NYSE and NASDAQ listing requirements. The
changes focused mainly on Board independence, independent committees of the Board, audit committee
composition, code of business conduct and ethics and related party transactions.
The Higgs Report on non-executive directors and the Smith Report on audit committees, both
published in January 2003, form part of the systematic review of corporate governance being undertaken
in the U.K. and Europe. This is in light of recent corporate failures. The recommendations of these two
reports are aimed at strengthening the existing framework for corporate governance in the U.K.
Enhancing the effectiveness of the non-executive directors and switching the key audit relationship from
executive directors to an independent audit committee are part of this. These recommendations are
intended as revisions to the Combined Code on Corporate Governance.
Accountability and Corporate Governance Mechanisms and Controls
Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise
from moral hazards and wrong choices and decisions. For example, to monitor the managements
behaviour, an independent third party (the auditor) attests the accuracy of information provided by

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management to investors. An ideal control system regulates both motivation and ability. Corporate
governance control mechanisms can be of two kinds internal and external.
Internal corporate governance controls
Internal corporate governance controls monitor activities and then take corrective action to
accomplish organisational goals. Some examples would be:

Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire
and compensate top management, safeguards investors capital. Regular board meetings allow
potential problems to be identified, discussed and avoided. Whilst non-executive directors are
thought to be more independent, they may not always result in more effective corporate
governance. Different board structures are optimal for different firms. Moreover, the ability of the
board to monitor the firm's executives is a function of its access to information. Executive
directors possess superior direct knowledge of the decision-making process and therefore can
evaluate top management on the basis of the quality of its decisions. It could be argued, therefore,
that executive directors look beyond the financial criteria and make better judgements.

Remuneration: Performance-based remuneration is a sort of control mechanism or tool because it

is designed to relate some proportion of salary to individual performance. It may be in the form of
cash or non-cash payments such as shares and share options, superannuation or other benefits.
Such incentive schemes, however, are reactive in the sense that they provide no mechanism for
preventing mistakes or opportunistic behaviour in advance, and can elicit myopic behaviour
because it rewards good performance only later. To win these rewards, management can act with
the intension of maximising short term performance, harming or ignoring the longer term
interests of the company.

Audit committees

External corporate governance controls

External corporate governance controls encompass the controls external stakeholders exercise over
the organisation. Some examples would include:

debt covenants imposed by lenders like banks

external auditors appointed by the shareholders in annual general meetings (AGMs)
government regulations (which has increasedover the years and is constantly evolving in response
to new scandals and challenges)
media pressure
takeovers (this works particularly well in countries like the USA where family managements
dont control most large companies like in India and hence an open bid via the stock market at an
attractive price always elicits reponses)
the pressure competition from rival companies
managerial labour market (union pressure and the pressure of loosing good people due to bad
governance has become more and more relevant in recent years)

Systemic problems in enforcing accountability / corporate governance

Some of the problems that prevent the establishment of a good system of accountability and
corporate governance are:
(a) Supply of accounting information: Financial accounts form a crucial link in enabling providers
of finance to monitor directors and hence imperfections in the financial reporting process cause

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imperfections in the effectiveness of corporate governance. This is ideally supposed to be corrected by the
working of the external auditing process.
(b) Demand for information: A barrier to shareholders using good information is the cost of
processing it, especially to a small shareholder.
(c) Monitoring costs: In order to influence the directors, the shareholders must combine with others
to form a significant voting group which can pose a real threat of carrying resolutions or appointing
directors at a general meeting. This does not happen in most Indian companies because the owning
familes often own a large majority of the shareholding and the small investors have no platform or other
mechanism to come together and combine their voting power at annual meetings.
Financial Reporting and the Accountability / Corporate Governance process
Financial Reporting is the spinal cord in many ways of any accountability and corporate governance.
Accountants and Auditors are the primary providers of information to capital market participants. The
directors of the company generally expect that management is preparing the financial information of the
companys board they sit on in compliance with statutory and ethical obligations, and tend to rely on the
auditors' competence but increasingly the idea is emerging that they have a fiduciary duty towards
shareholders and other stakeholders and hence they can not morally plead later on if something goes
wrong or amiss that they were fooled or cheated by the management and auditors. It is expected
increasingly they will take the trouble of checking and verifying things out for themselves if necessary
and when in doubt.
Current accounting practice allows a degree of choice of method in determining the method of
measurement, criteria for recognition, and even the definition of the accounting entity. The adoption of
these choices to improve apparent performance (popularly known as creative accounting) imposes extra
information costs and fools in a sense the users of the information. In the extreme, it can even mean nondisclosure of information.
One area of concern is whether the accounting firm acts as both independent auditor and
management consultant to the firm they are auditing. This may result in a conflict of interest which places
the integrity of financial reports in doubt due to client pressure to appease management. The power of the
corporate client to initiate and terminate management consulting services and, more fundamentally, to
select and dismiss accounting firms contradicts the concept of an independent auditor.
The Enron collapse is an example of misleading financial reporting. Enron concealed huge losses by
creating illusions that a third party was contractually obliged to pay the amount of any losses. However,
the third party was an entity in which Enron had a substantial ownership stake. In discussions of
accounting practices with Arthur Andersen, the reputed international audit firm, it was found the partners
in charge of auditing inevitably adopted the view of the client eventually sometimes against their best
judgements.
However, good financial reporting is not a sufficient condition for the effectiveness of corporate
governance if users don't process it, or if the informed user is unable to exercise a monitoring role due to
high costs.
Some World Developments
A number of accounting and governance scandals have occurred worldwide particularly in the past
decade that has eventually led to many legislative and regulatory initiatives in response to the outcry and

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concern that developed on the financial accountability and corporate governance standards and practices.
In late 2001 the Enron Corp. of the USA erupted into bankruptcy and there were other scandals in
companies like WorldCom, Tyco, Qwest, Adelphia, ImClone etc. Previously thee had been failures like
Maxwell, BCCI, Poly Peck and Barings in the UK and in Europe there had been scandals in reputed
companies like Credit Lyonaise, Metalgesellschaft and Schneider. In Japan, Australia and Canada there
were high profile scandals as well.
These failures confirmed the fear that financial reporting and other corporate governance measures
prevalent were unreliable and in October 2002, the International Federation of Accountants established a
Task Force on Rebuilding Confidence in Financial Reporting, which submitted its report in July, 2003.
The role of the OECD under pressure from thirty member governments has already been mentioned. In
the UK there were legal developments that made corporate crime manslaughter under English law and
this was a huge step forward in making liabilities of a criminal nature that were previously mere civil
liabilities. In July 2006 a new Corporate Homicide and Corporate Manslaughter Bill has been passed in
the UK that has made many corporate crimes criminal offences.
On of the most important developments has been the passing of the the Sarbanes-Oxley Act of 2002
(Pub. L. No. 107-204, 116 Stat. 745, also known as the Public Company Accounting Reform and
Investor Protection Act of 2002 and commonly called SOX or SarbOx; July 30, 2002) in the United
States. Named after sponsors Senator Paul Sarbanes and Representative Michael G. Oxley, the legislation
is wide ranging and establishes new or enhanced standards for all U.S. public company boards,
management, and public accounting firms. The Act contains 11 titles, or sections, ranging from additional
Corporate Board responsibilities to criminal penalties, and requires the Securities and Exchange
Commission (SEC) to implement rulings on requirements to comply with the new law. Some believe the
legislation was necessary and useful, others believe it does more economic damage than it prevents and
yet others observe how essentially modest the Act is compared to the heavy rhetoric and outcry on
corporate governance accompanying it.
The first and most important part of the Act establishes a new quasi-public agency, the Public
Company Accounting Oversight Board, which is charged with overseeing, regulating, inspecting, and
disciplining accounting firms in their roles as auditors of public companies. The Act also covers issues
such as auditor independence, corporate governance and enhanced financial disclosure. It is considered by
some as one of the most significant changes to United States securities laws since the New Deal of
President F.D. Roosvelt in the 1930s.
The Sarbanes-Oxley Act's major provisions include:
1. Creation of the Public Company Accounting Oversight Board (PCAOB)
2. A requirement that public companies evaluate and disclose the effectiveness of their internal
controls as they relate to financial reporting, and that independent auditors for such companies
"attest" (i.e., agree, or qualify) to such disclosure
3. Certification of financial reports by chief executive officers (CEOs) and chief financial officers
(CFOs)
4. Auditor independence, including outright bans on certain types of work for audit clients and precertification by the company's Audit Committee of all other non-audit work
5. A requirement that companies listed on stock exchanges have fully independent audit committees
that oversee the relationship between the company and its auditor
6. Ban on most personal loans to any executive officer or director
7. Accelerated reporting of trades by insiders

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8.
9.
10.
11.

Prohibition on insider trades during pension fund blackout periods

Additional disclosure
Enhanced criminal and civil penalties for violations of securities law
Significantly longer maximum jail sentences and larger fines for corporate executives who
knowingly and willfully misstate financial statements, although maximum sentences are largely
irrelevant because judges generally follow the Federal Sentencing Guidelines in setting actual
sentences
12. Employee protections allowing those corporate fraud whistleblowers who file complaints with
OSHA (Occupational Safety and Health Adminstration) within 90 days, to win reinstatement,
back pay and benefits, compensatory damages, abatement orders, and reasonable attorney fees
and costs.

Also in July, 2002, President Bush of USA, by an Executive Order, created the Corporate Fraud
Task Force. Headed by the Deputy Attorney General, the Task Force includes, among others, US
Government Attorneys, the FBI (Federal Bureau of Investigation) and SEC (Securities and Exchange
commission) to oversee the investigation and prosecution of financial fraud, accounting fraud and other
corporate criminal activity, and to provide enhanced inter-agency coordination of regulatory and criminal
investigations.
There have been many model codes or desirable codes and guidelines of corporate governance
that have been published round the world. Some of the most prominent one are the
Euroshareholders Corporate Governance Guidelines 2000, US based The Conference Boards
recommendations and guidelines, the Commission on Public Trust and Private Enterprises in USs
recommendations and guidelines. The United Nations has also been running what it calls The
United Nations Global Compact Program, which is also working to improve corporate
accountability and governance standards worldwide.
Some Indian Developments
In India, the Confederation of Indian Industry (CII) framed a desirable code of corporate governance
in April 1998. This was followed by the recommendations of the SEBI (Securities and Exchange Board of
India) appointed Kumar Mangalam Birla Committee on Corporate Governance, which were accepted by
SEBI in December 1999, and are now enshrined in Clause 49 of the Listing Agreement of every Indian
stock exchange. SEBI also instituted a committee under the chairmanship of Mr. N. R. Narayana Murthy
which recommended enhancements in corporate governance. SEBI incorporated the recommendations
made by the Narayana Murthy Committee on Corporate Governance in Clause 49 of the Stock Exchange
Listing Agreement for listed companies. The revised Clause 49 has come into effect from January 1, 2006
after many delays. In addition, the Department of Company Affairs, Government of India, constituted a
nine-member committee under the chairmanship of Mr. Naresh Chandra, former Indian ambassador to the
U.S., to examine various corporate governance issues.
Most of the codes and recommendations while differing in detail are focussed on three fundamental
issues:
(a)
(b)
(c)

The composition of the Boards of Directors of companies and the role of

independent directors.
The composition and role of the audit committees
The communications to the shareholders including a management analysis and
discussion statement

The basic idea is that the board of directors must direct and control the management and in turn must
be answerable to the shareholders. The board must, therefore, be independent of the management.
Therefore, a majority of the directors must be non-executive. Moreover, while a director may be non-

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executive, he would not necessarily be independent. It is therefore necessary that there should be a
minimum number of independent directors, which is what the above-mentioned Clause 49 has made
mandatory.
Case Study Infosys Technologies, Bangalore, India
Infosys, the famous Bangalore based information technology consulting company whose high profile
former Chairman, Mr. M.R. Narayana Murthy, was appointed by SEBI to chair one of the committees on
corporate governance as mentioned above, is reputed to have among the best corporate governance
standards not just in India but worldwide.
Their stated policy on corporate governance among other things says:
.sound corporate governance is critical to enhance and retain investor trust. Accordingly, we
always seek to ensure that we attain our performance rules with integrity. Our Board exercises its
fiduciary responsibilities in the widest sense of the term. Our disclosures always seek to attain the best
practices in international corporate governance. We also endeavour to enhance long-term shareholder
value and respect minority rights in all our business decisions.
They also state their corporate governance philosophy is based on the following principles:
Satisfy the spirit of the law and not just the letter of the law; Corporate governance standards should
go beyond the law; Be transparent and maintain a high degree of disclosure levels; When in doubt,
disclose; Make a clear distinction between personal conveniences and corporate resources; Communicate
externally, in a truthful manner, about how the company is run internally; Comply with the laws in all the
countries in which the company operates; Have a simple and transparent corporate structure driven solely
by business needs; Management is the trustee of the shareholders capital and not the owner.
They further state:
At the core of our corporate governance practice is the Board, which oversees how the management
serves and protects the long-term interests of all the stakeholders of the company. We believe that an
active, well-informed and independent Board is necessary to ensure the highest standards of corporate
governance.
Majority of the board of Infosys, 9 out of 16, are independent members. Their compensation,
nomination, investor grievance and audit committees, are comprised of independent directors.
They claim to follow global best practices and comply with the following:
Euroshareholders Corporate Governance Guidelines 2000, the recommendations of the Conference
Board, the Commission on Public Trusts and Private Enterprises in the U.S guidelines and also adhere to
the UN Global Compact Programme. They also are in compliance with the recommendations of the report
of the Committee on Corporate Audit and Governance (Naresh Chandra Committee) mentioned above.
They have also published notes on Infosys compliance position with the corporate governance
guidelines of six countries in their national languages. These countries are: Australia, Canada, France,
Germany, Japan and the United Kingdom.

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Codes of Ethics
Written Codes of Conduct and Ethics are a tool of ethics just like other tools like appointing ethics
officers or running ethics training programs for employees. An ethical code is also styled as a code of
professional responsibility, which may dispense with difficult issues of what behaviour is ethical.
A written code of ethics is a formal statement of the organization's values on certain ethical and
social issues. Some set out general principles about an organization's beliefs on matters such as quality,
employees or the environment. Others set out the procedures to be used in specific ethical situations such as conflicts of interest or the acceptance of gifts for instance, and lays down the procedures to
determine whether a violation of the code of ethics occurred and what remedies should be imposed. The
effectiveness of such codes of ethics depends on the extent to which to management supports them with
sanctions and rewards. Violations of a private organization's code of ethics usually can subject the
violator to the organization's remedies (in an employment context, this can mean termination of
employment; in a membership context, this can mean expulsion). Of course, certain acts that constitute a
violation of a code of ethics may also violate a law or legal regulation and can then be punished by the
appropriate governmental organ.
The Institute of Business Ethics, U.K., says developing a Code of Business Ethics sets out to provide
a practical and comprehensive guide to producing, implementing and maintaining an effective code of
business ethics. Apart from legal requirements, business in general has no recognised code or standard,
which provides a benchmark for its conduct. Individual corporations have therefore to formulate their
own values about the way they do business. An ethics policy helps companies to understand and develop
policies on issues of business and employee conduct. Having an ethics policy is now considered a
hallmark of a well-managed company. The ethics policy is normally expressed in a code of business
ethics, sometimes called a code of business conduct or principles.
Code of Conduct versus Code of Ethics
Historically organisation started by just having a Code of Conduct which acted as a sort of internal
guideline on how employees should behave with each other and/or with outside parties like customers etc
but with the growth of the ideas of business ethics, corporate responsibility to all stakeholders in society
and corporate social responsibility, the Code of Conduct was widened to include even statements on
policy regarding what the company regarded as ethical vis--vis all stake holders and the society in
general. That is how the Code of Conduct evolved into a wider document in business organisations
historically and came to be known more generally as called the Code of Ethics.
To put it another way, Codes of Conduct specify actions in the workplace and Codes of Ethics are
general guides to decisions about those actions. Also Codes of Conduct often contain examples of
appropriate behaviour to make them meaningful.
Key Reasons for Developing a Code of Business Ethics
1. Having a code of ethics is considered to be good corporate governance. Codes should not be
developed merely as a reaction to a reputation crisis. Staff at all levels and in all jurisdictions should be
involved in both the content and implementation of a code. Both consumer power and the moral
challenges of globalisation can be dealt with better with a code in place rather than without.

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2. Pressures on boards of directors worldwide to take corporate conduct seriously have grown in
recent years. They range from new legislation (some of which have provisions for a recognition of codes)
and increased employee requirements to constant media reports of corporate misconduct and the growth
of socially responsible investment (SRI). A Code of Ethics in the new developing situation has thus begun
to be regarded as a basic document almost.
3. Corporate values and ethics have to come from the top. Board involvement is vital to the
effectiveness of an ethics policy and when the chairman and/or CEO endorses the code and board
members require regular reports on how the code is operating, that inspires confidence among staff and
other stakeholders and a powerful message flows downwards which in turn helps them work more
confidently and better.
4. One size never fits all. Each company needs to develop its own unique code of ethics, based on the
core values of the particular business and organisation they are running.
5. Having a code is not enough though to ensure ethical behaviour. The code needs to be understood,
used, taught, monitored and regularly re-evaluated and revised. Only then the code comes to enjoy respect
among staff and other stakeholders that it has any value.
Written Codes a brief history
Until about 1800, ethics, especially professional ethics, was about character, honor and dishonor,
virtue and vice. Ethics had nothing to do with formal codes of conduct. A true professional, being a
gentleman, was regarded as needing no written instruction on how to behave. Thomas Percival (17401804) of Manchester, England, first proposed a code of ethics for physicians and surgeons in a pamphlet
published in 1794. The expanded version (1803) coined the expressions "professional ethics and medical
ethics".
Percival's proposal for a code of medical ethics had resonance in America. The Boston Medical
Society had such a code by 1808. Percivalean codes thereafter slowly supplanted the ethics of honor in
the U.S. By 1847, the newly-formed American Medical Association adopted a Percivalean "Code of
Ethics", the first code of ethics adopted by any national professional society anywhere, and the first to be
denominated a "code of ethics". By the beginning of the twentieth century, codes had become the
dominant form of professional ethics in the U.S. Today, a formal code of ethics is the hallmark of
professionalism for professionals everywhere.
In November 1991, the U.S. Congress enacted the U.S. Federal Sentencing Guidelines legislation,
which has had a dramatic impact on corporate America. The Guidelines had an impact on the
establishment or enhancement of corporate ethics programs because in case of an offence, it made the size
of the fine conditional on the existence of a compliance or ethics program. The most important evidence
of the existence of an ethics program is a Code of Ethics.
According to Wallace, "A credo generally describes the highest values to which the company aspires
to operate. It contains the `thou shalt's. A code of ethics specifies the ethical rules of operation. It's the
`thou shalt not's." In the latter part of the 1980s, The Conference Board, a leading business membership
organization in the USA, found that 76% of corporations surveyed had codes of ethics.

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Some business ethicists disagree that codes have any value. Usually they explain that too much focus
is put on the codes themselves, and that codes themselves are not influential in managing ethics in the
workplace. Many ethicists note that it's the developing and continuing dialogue around the code's values
that is most important.
Occasionally, employees react to codes with suspicion, believing the values expressed are just
"motherhood and apple pie" and codes are for window dressing and propaganda. But, when managing a
complex issue, especially in a crisis or scandal situation, having a code is critical because it can be relied
upon for the last word often that would settles the problem. Actually the very process of developing a
code with widespread consultation is partly about anticipating problems and creating rules for their
solution. For instance, in the mid-70s, Johnson and Johnson updated their credo in a series of challenge
meetings and prepared a code. Bob Kniffin, Vice President of External Affairs of that company, has
commented on that experience:
"We pored over each phrase and word. We asked ourselves, `Do we still believe this?' Our meetings
resulted in some fine-tuning, but basically we didn't change the values. The meetings infused the values in
the minds of all of us managers."
This process, it is believed, guided them in their well-publicised decision some years later to pull
Tylenol bottles, one of their products, off the shelves and repackage them at a $100 million expense. (This
is similar to the decision of some computer laptop makers recently to recall lakhs of sold laptops from
customers that they suspect could contain weak and faulty batteries.)
In a crisis, there's no time for moral conclusions. So one needs to have a code ready just for that
reason.
Ethics Codes Don't Make People Ethical
Michael Josephson has the following warning for those who may value a code of ethics too highly
and think it goes a long way in making people ethical. He comments:
..ethics codes don't make people ethical. They don't make bad people good. Nor do they make
people with poor judgment wise. An ethics code would not have prevented most of the objectionable
behaviour we've seen in recent years.
You see, there are two aspects to ethics: discernment (knowing right from wrong) and discipline
(having the moral will power to do what's right). A code can help define what's right and acceptable and
provide a basis for imposing sanctions on those who don't follow it. But unless it reinforces an established
ethical culture, it won't do much to assure that people do what's right.
It's proper and prudent to clarify obligations under existing laws and establish standards of conduct
in areas not governed by law. In effect, ethics codes transform one perspective of a moral obligation into a
binding rule. For example, it's helpful to set clear parameters for the use of e-mails, private information or
company property, hiring or doing business with relatives and the acceptance of gratuities. In more
complex cases, codes can mandate disclosure or certification and forbid or restrict transactions such as
loans and reimbursements that could create real or apparent conflicts of interest. To the extent we need
more clarity we need more codes. To the extent we need more character, we need a lot more.59

59

Source: Published articles of the Josephson Institute

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Case Study Cummins Engine Co., USA

Cummins Engine Company of the USA was one of the earliest business corporations worldwide to
take ethics seriously and had a code of conduct and ethics early on. Provided below is their code of
conduct and ethics as a sample illustration of what a code should (and usually does) read like:
CUMMINS ENGINE CO. Code of Conduct and Ethics
Statement of Principles
Cummins is committed to quality, innovation and integrity. This commitment is possible because
each member of Cummins follows the highest standards of ethical conduct. These standards are embodied
in the Cummins Code of Business Conduct. Individual integrity and strong corporate culture are the best
assurances that this Code will be followed.
The Code of Business Conduct is an important foundation for Customer Led Quality. Our pursuit of
Customer Led Quality will lead to Cummins being the best there is in products, customer support and
business operations, and, as a result, growing our profitability to the benefit of all of our stakeholders.
Our success in realizing Customer Led Quality depends in large part on the trust that our
stakeholders customers, employees, suppliers, shareholders and the countries and communities in
which we live and work - have in Cummins.
Our aim is that Cummins will be known as trustworthy in all respects. This means that all Cummins
people throughout the world must:

Obey the law.

Be honest - present the facts fairly and accurately.
Be fair - give everyone due regard and respect.
Be concerned - care about how Cummins' actions affect others and try to make those effects as
beneficial as possible.
Be proactive - take the initiative to address issues before they become problems.
Be responsible - particularly as a citizen of the communities and societies in which we operate
Use good judgment - avoid actions and circumstances that may appear to compromise good
business judgment or create a conflict between personal and company interests.

Following these principles on a rare occasion may mean losing some business in the short term. This
is a regrettable but acceptable outcome. Over the long haul, this type of behaviour will gain us business.
People respect and trust this type of behaviour, Wish more institutions embodied it, and will reward it.
Integrity is the foundation of Cummins' relationships with customers, suppliers, shareholders,
competitors, partners, our communities, and each other. It provides us the opportunity to meet the needs
of our customers better than our competitors. All members of Cummins - directors, officers and
employees, distributors, subsidiaries and affiliatescontinually work to develop and protect this critical
asset through their everyday activities.
Integrity in everything we do is essential to Cummins' ability to provide an excellent and sustainable
long term return to our shareholders, and to be able to satisfy the needs of all of Cummins' stakeholders.

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Our commitment to integrity means that we will exceed the minimum requirements of the law and
industry practices. This (ode serves as a daily guide to our behavior as employees of Cummins and
identifies conduct that is not permitted during employment with Cummins. Violations at any level will
not be tolerated, and in some cases could result in dismissal as well as in civil or even criminal liability
for the company, individuals, or both.
Some of the areas of conduct are very technical. Many are supported by specific policies in the
Cummins Policies and Procedures ((PPS) system, which are available in Documaster or in hard copy at
every Cummins entity around the world. Applicable policies, including their Documaster designation, are
listed below. If you have any questions about any Cummins policy, do not hesitate to call the person
designated in that policy.
Although some areas may be technical or the policies detailed, keep in mind these basic guidelines:
If
You are uncomfortable With a particular action,

You would be unwilling to tell persons you love and respect,

You would not want to see it reported on the front page of your major newspaper,

then DON'T DO IT. Instead, ask your supervisor for guidance under this Code of Conduct, or
contact the Vice President
If you feel pressured, DON'T DO IT and get guidance. You may also make anonymous inquiries by
calling the confidential "Ethics Help Line" at the appropriate number for your location.
Specific Areas of Conduct
Conducts Concerning Our Customers Suppliers and Competitors
Customer Satisfaction
We are dedicated to meeting or exceeding the expectations of our customers better than any of our
competitors. We will provide our customers with products, information and support that yield a
comparative advantage. Customer satisfaction will be the measure of our success. At every opportunity
we will take the step that delights our customers. This is our objective.
Cummins' Products
Cummins' products are an extension of the Company itself. In all aspects of the design, manufacture,
sale and support of our products, we will provide the highest levels of qualify and innovation. We are
committed to making available safe products, which meet the performance, durability and reliability
needs of our customers. As part of our dedication to environmental stewardship, our products will meet or
surpass appropriate emission standards for the country in which the product is sold.
Terms of Commercial Transactions
Cummins competes on a straight commercial basis everywhere in the world. Our employees will do

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nothing in search of business they would not reveal willingly or publicly to any other member of
Cummins, any government official, or any member of society. Conducting our business with integrity honestly and fairly - will earn repeat business from our customers and help us achieve our goal of
Customers for Life. For additional guidance, see Cummins "Ethic Standards" policy.
Cummins' Competitors
Cummins will compete vigorously with its competitors, but always with integrity.
Employees should not disparage our competitors or our competitors' products. In addition, our employees
should not fraternize with our competitors if such conduct would give even the appearance of a potential
agreement between Cummins and a competitor. Cummins respects the confidential nature of certain
information of its competitors. Never accept confidential information about our competitors. If you
receive any such information or any person offers you any confidential information, contact the Law
Department. Cummins will always return any such information to the competitor.
Supplier Selection/Conflicts of Interest
All of Cummins' employees are expected to use non-discriminatory practices throughout the supplier
selection process. Every employee is expected to avoid any situation in which his or her interests (or those
of his or her family) may conflict with the interests of the Company. Every employee with a financial
interest in any actual or potential supplier or customer must disclose that interest to his or her supervisor
immediately and, if applicable, in his or her annual Ethics Certification Statement.
Receipt and Giving of Gifts In general, employees should neither accept nor offer gifts to customers or
suppliers unless the gifts are designated as part of a recognized business event.
Gifts exceeding US $50 in value may be given or accepted only with the concurrence of an employee's
supervisor. All gifts (except minor promotional token items) not reported and approved by the employee's
supervisor must be reported annually on the Ethics Certification Statement.
Antitrust and Competition Laws
Employees must comply with antitrust laws of the United States and the competition laws of other
countries in which we do business. These laws cover agreements among competitors, agreements with
resellers, price discrimination, and other acts that may unfairly reduce competition.
Government Contracts
Because Cummins is a supplier to federal, state and local governments around the world, Cummins
employees are expected to comply with all laws and regulations relating to government contracts and to
cooperate fully with investigators and auditors who require information in connection with such contracts.
Import/Export Controls and Boycotts
Cummins transacts business on a global basis. Each (u mins employee involved with the sale or
shipment of products across international borders is expected to understand and comply with the
import/export control restrictions of all countries in which we do business. Cummins will do business
with entities in other countries based solely on commercial considerations. We will not become involved
in disputes between countries by participating in boycotts, unless the boycott is imposed by a country that
has jurisdiction over our products. We may be required to report boycott requests to relevant government
authorities even if we do not cooperate with the request. For additional guidance, contact the Law

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Department.
Equal Employment Opportunity/Diversity
Cummins is an equal opportunity employer. We make employment decisions without regard to race,
colour, religion, sex, age, national origin, disability or any other characteristic irrelevant to the job. The
(company's recruitment, hiring, transfer, promotion and compensation policies will he nondiscriminatory. Quite apart from legal requirements, diversity of backgrounds makes Cummins stronger
and is essential to our operating as a world-class competitor.
Treatment of Each Other At Work
Each employee will treat every other employee, customer, vendor and others met in the course of
work with dignity and respect. Harassment of any type in the workplace will not be tolerated.
Safe Working Environment
Cummins is committed to maintaining at each company facility a workplace free from recognized
hazards, which cause or are likely to cause physical harm to our employees. Prevention of occupationally
related injuries and illnesses is the responsibility of every Cummins employee. All employees are
expected to report unsafe or hazardous working conditions immediately to their supervisors. No
retaliatory action or other reprisal shall be taken as a result of an employee's making a good faith report.
Drug and Alcohol Policy
Possession, sale, use or being under the influence of illegal drugs (including prescription drugs
except in strict adherence to the prescription) or alcohol while on Company property, or during work
hours, is strictly prohibited. Alcohol may be permitted during certain company-sponsored events with the
advance approval of a company officer.
Company time
Full-time, regular exempt employees may not hold full- or part-time positions or directorships
outside the company without express permission from their manager and disclosure in their annual Ethics
Certification Statement.
Conducts Concerning Our Employees
Shareholder Value
Cummins is committed to providing an excellent sustainable long-term financial return to our
shareholders and to protecting and improving the value of their investment through prudent application of
corporate resources and by observing the highest standards of legal and ethical conduct in all our business
dealings.
Securities Law Compliance
Non-public information about Cummins or other companies that could affect the price of Cummins'
stock or investors' decisions must be held in strict confidence. No one with access to material, non-public
information may buy, sell or advise others regarding such stock until the information has been publicly

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released. For additional guidance, contact the Law Department.

Accuracy of Financial Records/Financial Representations
Each employee must report all corporate transactions accurately and truthfully, including receipts,
disbursements, and the nature and purpose of transactions. Invoices, quotations, receipts and other
statements reflecting charges, prices, product descriptions, terms or business intentions, must be complete
and accurate. It is against Company policy knowingly to supply false or misleading financial information
regarding the company to any person. We will cooperate fully with auditors and under no circumstances
withhold information from them.
Responsible Citizenship
Cummins is committed to improving the communities in which we operate and to being a
responsible citizen of society. Cummins entities and the Cummins Engine Foundation will actively
support initiatives designed to improve the communities in which we live in and work.
Employee Participation in Community Activities
Consistent with the above, Cummins encourages all employees to take part in community activities.
In doing so, however, it is essential that employees speak only for themselves and do not imply that they
are speaking for or making commitments on behalf of the Company, unless authorized to do so by
appropriate Cummins officials.
Conducts Regarding Our Facilities and Property
Environmental Compliance
It is the policy of Cummins to manage and operate its business in ways that are protective of the
environment and that conserve both energy and natural resources. In addition to compliance with all
applicable environmental laws and regulations, Cummins recognizes excellence in environmental
management as among the highest corporate priorities. In some cases, this may mean Cummins Will do
more than the low requires.
Computer Equipment/Copyrights
The Company's computer hardware, software and data may be used only by authorized personnel for
Company business, and provisions and copyright restrictions will be respected. Company computer assets
may be used on a limited basis with the approval of an employee's supervisor to support an employee's
work with community agencies and organizations.
Other Company Property
Company property, equipment and facilities may not be used for anything other than Company
business without prior permission of the employee's supervisor.
Confidential and Proprietary Information
Employees frequently have access to confidential or proprietary information owned by or concerning
the Company. No employee shall disclose such information to any person, except persons Within the

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Company who need to know. Employees shall use all reasonable efforts to protect and safeguard such
information. Similarly, Cummins employees will respect confidentiality new employees have to their
former employers.
Conducts Regarding Political Campaigns and Government Officials
Personal Participation
Personal participation in political activities must be separated from corporate activities. The
Company's name, property, including stationery, and work time must not be used in connection with such
activities. Payments to Government Officials
Employees must not make, promise, authorize or arrange any payment or gift of any kind to any U.S.
political party or candidate, government or military employee or agent, or their families anywhere in the
world, as part of their transaction of business on behalf of Cummins. Nominal gratuities may be
permissible in limited situations, but not consulting with your supervisor and other appropriate Company
personnel.
Cummins Practice
Subject Ethical Standards
There is much discussion in many circles today about ethical standards in U.S. corporations. The
following discussion and policies elaborate on our traditional policy in order to provide personal guidance
and to establish procedures for problem resolution. This practice is corporate in scope.
Practice
A. For Cummins, ethics rests on a fundamental belief in people's dignity and decency. Our most
basic ethical standard is to show respect for those whose lives we affect and to treat them as we
would expect them to treat us if our positions were reversed. This kind of respect implies that we
must:

1.obey the law.

2.Be honest-present the facts fairly and accurately.
3.Be fair-give everyone appropriate consideration.
4. Be concerned - care about how Cummins' actions affect others and try to make those effects as
beneficial as possible.
5. Be courageous - treat others with respect even when it means losing business. (It seldom does.
Over the long haul, people trust and respect this kind of behaviour and wish more of our
institutions embodied it.)
B. The reason for such behaviour is that, in the long run, nothing else works. If economies and
societies do not operate in this way, the whole machinery begins to collapse. No Corporation can
long survive in situations where employees, creditors and communities don't trust each other.
Since a corporation lives by society's consent, it must plan on earning and keeping that consent,
for the duration. Successes we have todayin securing sales, completing negotiations, obtaining
credit, enlisting employee loyaltiesare in major part made possible by the fact that others have
learned to expect that Cummins will deal with them fairly. What we do today will maintain or
undermine that legacy.

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C. Our aim is that Cummins - its individual members, each of its distributors and their people all
be known worldwide as trustworthy in all respects. "In all respects" is important. We can't operate
by one set of standards internally and by another set externally. We can't say one thing and do
another. Our ethical standards shouldn't tolerate split behaviour.
D. On numerous occasions the Company has reiterated its commitment to fundamental ethical
standards. There are, however, reasons for more specific statements:
1. As we grow larger, we have to set down in writing those standards that have informally guided our
action in the past.
2. Not only do we have to make these statements formal and written, but they must be expressed in
policy statements to ensure that all management employees have easy access to them.
3. Finally, general statements are important for setting the tone and character of a company, but
specific policies are required in addition to make the intent of the general principles clear to each
person.
E. Accordingly, all employees are expected to understand and subscribe to the following general
standards of corporate behaviour.
1. Cummins Engine Company, Inc. competes on a straight commercial basis; if something
more is required, the Company is not interested.
2. Cummins employees do nothing in search of business that they should not reveal
willingly and publicly to any other member of the Cummins family or to any government
official in any land.
3. Cummins neither practices nor condones any activity that will not stand the most rigorous
public ethical examination.
4. If an employee has any doubt about the appropriateness or morality of any act, it should
not be done. If an employee believes that there is a conflict between what his or her
supervisors expect and what corporate ethical standards require, the employee should
raise the issue with the Corporate Responsibility Department. The Company is prepared
to help any employee resolve a moral dilemma and to ensure that no employee is put at a
career disadvantage because of his or her willingness to raise a question about a corporate
practice or unwillingness to pursue a course of action which seems inappropriate or
morally dubious.
Responsibility
A. In order to administer these general standards the following corporate-wide processes have been
developed and agreed upon by the various Groups of the Company. Ethical practices adopted will
be published in the Cummins Practice Manual, circulated annually to all exempt employees, and
updated as needed. During the second quarter of each year each Group, Division, and Department
head should review these practices with his or her staff and should consider whether revisions or
additions are appropriate. Revisions and/or additions to these practices will take effect when
approved by each Group head and the President, and signed by the Chairman. Corporate
Responsibility will continue to coordinate this process. Corporate Auditing will be responsible for
auditing compliance with these practices and will keep such records and make such reports as are
required by the various practices.
B. Each Group, Division, and Department head is responsible for ensuring that employees within his
or her area, including new employees, fully understand and comply with these practices. Each
Group, Division, and Department head is also responsible for dealing with cases of noncompliance. North American Divisional Vice Presidents should review these practices with all
Distributor Principals in their territories during the second quarter of each year to make sure that
Cummins Distributors understand the standards under which Cummins operates. Heads of

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International Areas or Regional Managers should review these practices with all Distributor
Principals in their territories at contract review time.
C. All employees of the company are responsible for following the provisions of this practice.
Counsel
The Chairman should be consulted for any advice needed concerning this practice.

Environment
Corporates dont function in vacuum and in fact make more use of natures bounty in every way than
most other institutions of modern life. They rely on nature for raw materials, basic utilities like water, and
of course energy. Ultimately the health alomost all stakeholders is ay the end of the day is to a greater or
lesser measure dependent on nature and its constant degradation from industrys waste and wastefulness
can not but be regarded as corporate irresponsibility and even in some case as crime. So over the years the
realisation has grown partly due to the rapid climate change and environmental degradation the world has
experienced that it is the responsibility of business to do the least possible damage to the environment and
wherever possible to begin to repair the damage already done. Also it has been pointed out that business
house pay for the raw materials they buy but they dont pay for the air that burn up and turn into carbon
di-oxide and other pollutants or the water that they pollute (as a consequence of their process like in
leather tanneries for instance) and make unusuable for ever and often just dump it into a river or sea.
The green movement and this realisation has resulted in enviormental laws and also in general there
is constant vigil from non-state actors like environmental NGOs and the media to make sure that
corporate harm to the environment is minimised. Also the international organisations like the United
Nations and multi-lateral negotiations have led to initiatives like the Kyoto Protocol and to mechanisms
like carbon credits trading whereunder polluting industrial units can buy pollution control credits from
other companies in countries like in India for instance that invest in pollution control and environment
friendly green operations to offset their own polluting damage till the time they can reorganize operations
to reduce damage.
Also the gathering consensus around the idea of sustainable development has also given a boost to
the idea of concern and protection for the environment being at the heart of business ethics and
responsibiltiy more than anythig else perhaps. Some corporations have tried to argue that population
growt is the real real reason for environmental degradation and they are not responsible really because
earlier the pollution that they caused would get diluted easily through ecological processes but ecosocialists have argued that is not truw and really capitalistic free market expansion and technologies are
the real reaon for the crisis.
Apart from the United Nations the alarm over environmental destruction and the interest in
moving to a more ecologically sustainable economy a new movement among investors has emerged.
Some investors are arguing we should only invest in companies that are green and environmentally
responsible which will create a pressure on them to improve themselves. In 1989 several institutional
investors (such as public pension funds of New York City and California) came together with some of
Americas largest environmental groups (such as Sierra Club and the National Wildlife Federation) to
form the Coalition for Environmentally Responsible Economies (CERES). The original intent was to
encourage companies to adopt a positive environmental ethic. After much discussion, the CERES
coalition crafted a set of principles that asked companies to integrate environmental concerns into their
planning and reporting and to take other steps to protect the biosphere.

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Over the past few years more than 60 companies, ranging from Ben and Jerrys to General Motors,
have endorsed the CERES Principles and taken steps to meet its goals. Even more remarkably, executives
from these companies are working with other members of the coalition to tackle some of the toughest
problems of environmental management.
In the past few deaced since the Earth Day of 1970, environmentalists and government officials have
focused on establishing limits for what came out of the end of the pipe or the top of the smokestack and
fearful of the impact on their competitiveness and profitability, industry always fought such limits. The
aggressive regulatory approach adopted worlwide has curtailed the release of dangerous toxins, but it has
also distracted everyone from asking more systematic questions. While regulation and enforcement will
always be important, there is now agreement among government officials, scientists, environmentalists
and business leaders that a broad transition to sustainability will require approaches beyond command,
control and compliance.
Organisations like CERES are pushing and pointing out at the development of some new approaches
therefore:
First, institutional investors are pushing, they say, for more reliable data on environmental
performance so they can make better choices about investments. Just as accountants and auditors
gradually discovered and refined effective financial comparisons between companies, different
stakeholders are now working through organisations like CERES to establish the best standardized
indices of sustainability.
Second, companies are abandoning the old view that environmental responsibility is in conflict with
competitiveness and profits in favor of the belief that the two will soon be inseparable. Environmental
progress demands that companies innovate to raise resource productivity, write professor Michael E.
Porter of Harvard Business School and Claas van der Inde in a recent article in the Harvard Business
Review, and that is precisely what the new challenges of global competition demand.
Third, even companies with well-established commitments to the environment are adopting an
interactive and cooperative approach with other organsations to improve performance in this area without
the usual traditional hostility and with an open mind. They have realised it is better to quitely change
corporate policy wherever possible without fighting cases in court or lobbying politicians.
Fourth, all the relevant participants business managers, financial investors and environmental
activists have discovered to their surprise that a willingness to talk honestly about differences in
perspective can lead to unexpected consensus and change. A a few decades ago activists in America
believed the only way to raise tough issues with companies like General Motors was to disrupt the annual
general meeting of shareholders but now executives from that company have meetings with former
adversaries. Environmentalists also, on their part, are learning to appreciate more fully the complexity of
management.
The United Nations has identified the major environmental problems as follows:
1.Global Warming: The warming up of the earths atmosphere as a result of increase in global carbon dioxide emissions principally due to the increased use of fossil fuels like coal, diesel etc.
2. Miscellaneous Wastes: Industries in particular dump various kinds of toxic and harmful wastes ito the
land, water and air that remains uncleaned.
3. Deoforestation and threat to Bio-Diversity: Even in this industrial age humanity depends on forests to a
great extent for food, raw materials, herbs, medicines, ecological balance etc and it is a fact that there has

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been a constant increase in cutting down of forests and green areas to pursue industry often after putting
down violent revolts by tribal who inhabit such forests. In the states of Orissa for instance tribals are
being forcefully evicted from their homes so that multinational steel companies can be allowed to operate
and exploit the raw materials in those areas. All this is taking away from us for ever not just many plant
species but also many species of birds and animals.
4. Ozone Depletion: Ozone is a compound of oxygen that in layer between the sun and the earths upper
atmosphere protects the world from dangerous ultra-violet rays of the sun. This layer is getting degraded
and thinned gradually scientists believe due to the accumulation of polluting gases released from
industries.
5. Soil Erosion and Land degradation: has been caused increasingly in the past few decades due to
deforestation mainly.
6. Water Crisis: The world is in a crisis of water, particualry fresh water and it is even being predicted that
in the future wars may well happen not for territory or raw materials and other assets but water. There are
many reasons for this situation but is it is certain the business sector has much to do in terms of playing a
good role in this problem as well.
The Evolution of the Idea of Sustainable Development
The first major manifestation of the popularization of sustainable development occurred at the
United Nations Conference for Environment and Development (the Earth Summit) in 1992.
The conference was prompted by publication of Our Common Future (1987), the report of the
World Commission on Environment and Development, also known as the Brundtland Commission. The
report called for strategies to strengthen efforts to promote sustainable and environmentally sound
development. A series of seven UN conferences on environment and development followed. The
Brundtland Commission coined the most widely used definition of sustainable development, which
contains two key concepts: The concept of needs, in particular the essential needs of the world's poor, to
which overriding priority should be given; and the idea of limitations imposed by the state of technology
and social organization on the environment's ability to meet present and future needs.
Sustainable development demands ways of living, working and being that enable all people of the
world to lead healthy, fulfilling, and economically secure lives without destroying the environment and
without endangering the future welfare of people and the planet.
The precise meaning of sustainable development has been widely debated. For example, two years
after the Brundtland Commission's Report popularised the term, over 140 definitions of sustainable
development had been catalogued. However, the term "sustainability" has since been defined with
reference to scientific principles.
The position of the United Nations Environment Programme is as follows:
The intensified and unsustainable demand for land, water marine and coastal resources resulting
from the expansion of agriculture and uncontrolled urbanisation lead to increased degradation of
natural ecosystems and erode the life supporting systems that uphold human civilization. Caring
for natural resources and promoting their sustainable use is an essential response of the world

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community to ensure its own survival and well being. (source: Sustainable Management and Use
of Natural Resources)
In India over the past few decades as awareness has grown about the environmental crisis that the
world is moving towards, there have been taken many initiatives and measures to deal with the problem.
Many legislations have been passed like the Environment Protection Act and the Wildlife Protection Act
etc and the government has implimented many polices to reduce pollution and preserve the environment
including doing things like running programs of re-forestation and encouraging vehicles in cities to use
CNG instead of diesel or petrol.
Leadership
One simple definition of leadership ges as follows:
"The ability of an individual to influence, motivate, and enable others to contribute toward the
effectiveness and success of the organizations of which they are members" (House, R. J. 2004: page 15).
No matter how one defines leadership, it always involves an element of vision. A vision provides
direction to the influence process. A leader (or group of leaders) can have one or more visions of the
future to aid them to move a group successfully towards this goal.
Leadership Styles
Leaders get inevitably categorized by their style of behaviour and often come to be known more for
their styles than for the content of their leadership. There are four main styles of leadership the old style
autocratic leader, the free rein casual leader, the democratic leader and the paternalistic leader.
Autocratic leadership is the old style of leadership where there is the least or no consultation
between the leader and the led and followers are basically ordered to do as told without the least questions
or protest. Their feedback is not expected and encouraged and the leader leads on the basis of his
personally determined decisions and plans. In India the old feudal style of leadership whether inside the
home by the head of the family or in organisations and institutions from the head of the organisations is
the closest to this style. It is to be expected that this style will be less and less effective in the coming
future because we live in an age of democracy and consensus where younger people are becoming less
and less amenable to blanket directions and rigid controls. Greater self-esteem and self-worth in people
often fostered by abundant educational accomplishments and high standards of living makes them less
comfortable and tolerating of autocratic styles. For all its obvious unattractive features perhaps some
situations like that of a army platoon in action or construction workers at a site or even cricket players in a
field can perhaps be best managed in this style.
Participative and Democratic leadership is the reverse of a democratic leader and is one that
maximises consultation and believes in a group approach to leadership. The idea is to let the followers
participate in decision making so that they feel the decisions are their own and to that extent they can then
feel greater commitment towards their work. It is believed in modern times the participative style is the
preferred option since it is more conducive to the democratic spirit of the our age. Modern manufacturing
industry is increasingly finding that this is the best style for a leader to and is most conducive to the
management by objectives approach of the father of modern management, Peter Drucker.
Laissez Faire or Free Rein leadership refers to the style of leadership that is neither autocratic nor
participative but is somewhat casual relying on the group to function as it will and come up with its own

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decisions the way it wants to. It could be argued this style allows even more freedom and absence from
control but it is also a chaotic style where there is possibility of lack of harmony and clashes among
members of a group and they may also be acting at cross purposes and repetitively. The whole point of
collective action in any endeavour is to draw the benefits of combination and specialisation and if that
itself is not achieved, a distinct possibility in a free reign laissez faire style, then this style has little to
recommend for itself. Such a style sometimes becomes a necessity where each member of the group is
highly accomplished and his contribution to the group goals is based on or is highly dependent on his
personal application of his knowledge and skills, for instance in a law firm composed of lawyers
specializing in different branches of law and accepting briefs for the firm in his own area or in a
management consultancy where each partner or principal is focussed on his own client or set of clients or
on his own srea of competence. But otherwise it is hard to see what sort of set ups can benefit from this
style of leadership.
A Paternalistic leadership style refers to that style where he leader sees himself as the father of his
followers and enjoys an affectionate control of the group. The group members are encouraged to feel like
a family and draw support and assistance from each other in a spirit of brotherhood. There is the least
formality in relationships and it is assumed the members of the group can approach the leader at all times
and any time for any reason without any fear of being regarded unprofessional. The Japanese are reputed
for this style of leadership. The only problem with this style is the reverse of the lazes faire style lack of
freedom and privacy, and sometimes the whole set up can feel overbearing to members of the group.
Task-Centred leadership is about focussing on a job or a particular task and assigning and
controlling people to the most efficient achievement of that objective. The focus is on methods and
processes rather on people and the underlying philosophy is that better processes always lead and
peoples minds and emotions dont matter too much.
Theories/Views of/on Leadership
George Terry (1960) defined leadership as: "the activity of influencing people to strive willingly for
group objectives". If we define leadership simply as "influencing others to some purpose" he opined and
we define followership as "becoming influenced by others to accept (willingly or un willingly) some
purpose", then leadership and followership emerge as two sides of the same coin. Therefore leadership whether successful or not - has not occurred until at least one follower joins in. Likewise, no followership
exists without someone or something (not necessarily a leader) to follow. However, in this latter case, a
"leader" need not exercise deliberate or even conscious leadership - that is, followers can follow someone
who is not trying to lead.
James MacGregor Burns (1978) wrote that a study of the definition of the word leadership
revealed 130 definitions till that time. However, several generally-accepted variations on the definition
appear in the management and leadership literature. He concluded by presenting five characteristics of
leadership, namely:
1. Leadership is collective: He called the notion of one-person leadership as a contradiction in
terms, because both leaders and followers must exist for the leadership to happen. Also, an
organization may have multiple leaders all acting in consort with one another.
2. Leadership is dissension: Burns claimed that leadership coexists with dissent. Much of the growth
of any organization centers on the management/leadership of dissent.
3. Leadership is causative: Leadership affects the motives of individuals and groups of peoples and
alters the course of the organizational history.
4. Leadership is morally purposeful: Burns sees leadership as goal-oriented, with leaders and
followers pointing the way to some future state of the organization with plans about how those
goals might be met.

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5. Transforming leadership is elevating: Engagement between leaders and followers takes place on a
moral but not a moralistic - plane, as both leaders and followers rise to live more principled
lives.
Prof. Warren Bennis (1989) of the University of Southern Californias Leadership Institute (of
which he was the founding chairman), whose book Leaders has been named by the Financial Times
newspaper of London as one of the fifty best business books of all time, and who is regarded as the Dean
of Leadership Gurus by Forbes magazine comments as follows on leadership:
Successful leadership is not about being tough or soft, assertive or sensitive. Its about having a
particular set of attributes -- which all leaders, male and female, seem to share. And chief among these
attributes is character.60
He further adds:
the noble mission of the leader cant be used to justify the means. In the leadership arena, character
counts. Im not saying this casually. My convictions about character-based leadership come from years of
studies, observations, and interviews with leaders, and with the people near them.
Most organizations evaluate their executives and managers using these seven criteria: technical
competence or business literacy (knowledge of the territory); people skills (capacity to motivate people);
conceptual skills (ability to put things together); results results (track record); taste (capacity to choose
terrific people most of the time); judgment (ability to make wise decisions in a fog of reality and
uncertainty); and character (integrity to walk the talk).
Of all these, we know the least about judgment and character, including how to teach them. Thats
a shame, because Ive never seen a person derailed from a position for lack of technical competence. But
Ive seen lots of people derailed for lack of judgment and character. The stakes are high for the individual,
the organization and the country, so its worth knowing more about the character-component of
successful leadership.
Character isnt a superficial style. The word comes from the ancient Greek verb meaning to
engrave and its related noun meaning mark or "distinctive quality." Character is who we essentially
are. I also believe, however, that our character is continuously evolving. Unlike some of the Freudians, I
dont think character is fixed at age six. I think we continue to grow and to develop. The corollary of this
is that the process of becoming a leader, to me, is much the same process as becoming an integrated
human being. I see a real connection between what it takes to be a leader and the process of character
growth.61
He identifies four major traits of leaders as follows:
Leaders have vision and a strongly defined sense of purpose, they inspire trust, and they work for
change. One way of defining leadership is as character in action.
(1) Vision

60

Warren Bennis, The Character of Leadership in the book The Power of Character, published by The Josephson
Institute, California, USA
61
ibid.

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Leaders create a vision with meaningone with significance, one which puts the players at the
centre of things rather than at the periphery. If organizations have a vision that is meaningful to people,
nothing will stop them from being successful. Not just any old vision will do, however; it must be a
shared vision with meaning and significance.
A vision can be shared only if it has meaning for the people involved in it. You cant be the only one
making decisions. You cant be the only leader. Rather you have to create an environment in which
people at all levels are empowered to be leaders, to subscribe to your vision, and to make effective
decisions.
To communicate a vision, you need more than words, speeches, memos and laminated plaques. You
need to live a vision, day in, day out embodying it and empowering every other person to execute that
vision in everything he or she does, anchoring it in realities so that it becomes a template for decision
making. Actions do speak louder than words.
(2) Purpose
I cant exaggerate the significance of a strong determination to achieve a goal a conviction, a
passion, even a skewed distortion of reality that focuses on a particular point of view. And the leader has
to express that determination, or purpose, in various ways. There can be many different purposes. Michael
Eisner once told me that Disney didnt have a vision statement, but rather a strong point of view
about the Disney culture. When making big decisions, Eisner says, the strongest point of view almost
always wins the argument.
Max DePree, the former CEO of Herman Miller, once said, The first task of a leader is to help
define reality. Thats another way of talking about purpose. Without a sense of alignment behind a
purpose the organization will be in trouble, because the opposite of having purpose is drifting aimlessly.
And it cant be any old purpose if it is to galvanize and energize and enthral people. It has to have
meaning and resonance.
Theres no reason why that persuasive point of view cant be an ethical one. Do you want a more
ethical organization and society? Then show leadership when decisions are being made, and be a forceful,
committed advocate for ethics. Your deeply held point of view may carry the day.
But there is also a danger in presenting a strong point of view: it can intimidate others and shut down
communication, and thats deadly for character and for effective leadership.
A leader needs candour to operate effectively. Unfortunately my studies show that seven out of ten
people in organizations dont speak up if they think their point of view will vary from the conventional
wisdom or their bosss point of view even if they believe their boss is going to make an error. What a
leader needs to cultivate are firm-minded subordinates with the wisdom and courage to say no. That
means the leader needs to be trusted as a fair and honest person of integrity, someone who does not kill
the messenger who tells the truth.
(3) Trust
Real leaders, and people of strong character, generate and sustain trust. I cant overemphasize the
importance of encouraging openness, even dissent. An executive once wrote to me that his organization
had thousands of folks, union workers, who want the world to be the way it used to be, and they are very
unwilling to accept any alternative forecast of the future. The problem was that there was no trust in that

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organization. This executive was an old-fashioned control-and-command type who never could regenerate
trust among the key stakeholders. The union members were not the problem in this case.
Leaders must be candid in their communications and show that they care. They have to be seen to be
trustworthy. Most communication has to be done eyeball to eyeball, rather than in newsletters, on videos,
or via satellite. One of the best ways to build trust is by deep listening. People's feeling that they're being
heard is the most powerful dynamic of human interaction. Listening doesnt mean agreeing, but it does
mean having the empathic reach to understand another.
To trust others, to have confidence in them, people of course also need to see evidence of
competence. Yet another indispensable aspect of character, and leadership, is constancy. One of the things
you hear about the least effective leaders is that they do whatever the last person they spoke to
recommended or that they plunge forward with the latest good idea that pops into their heads. Before they
can trust a leader, followers have to know what to expect. So sometimes leaders have to put off their
grand ideas or glorious opportunities until they have had a chance to convince their allies of the ideas'
value. In business, as in politics, the effectiveness of a decision is the quality of the decision multiplied by
the acceptance of it.
What all these behaviours and skills surrounding trust add up to is integrity, and that means
character. A leader with drive but not competence and integrity is a demagogue. One with competence but
not integrity and drive is a technocrat. One with ambition and competence but not integrity is a
destructive achiever.
(4) Action
What employees want most from their leaders is direction and meaning, trust and hope. Every good
leader I have spoken with has had a willful determination to achieve a set of goals, a set of convictions,
about what he or she wanted the organization to achieve. Every leader had a purposeCharacter
counts because, in the leader, character is having the vision to see things not just the way they are but the
way they should be and doing something to make them that way.
Leaders have a bias toward action. They have the capacity to convert purpose and vision into action.
It just isnt enough to have the great vision people can trust. It has to be manifest in some external
products and results. Most leaders are pragmatic dreamers or practical idealists (even though those
descriptions may seem like oxymoron)
Strike hard and try everything, wrote Henry James. Youre never going to get anywhere unless you
risk and try and then learn from each experience. Leaders have to play even when it means making
mistakes. And they have to learn from those mistakes.62
Ronald Heifetz (1994) argued that there is a difference between a descriptive view and a
prescriptive view of leadership. A descriptive view describes leadership and how it occurs, and a
prescriptive view suggests how it should occur. The notion of "adaptive work" forms the central concept
of Heifetzs prescriptive view. Heifetz pointed out that people fail to adapt to new and unsettling
situations through six avoidance mechanisms:
1. blaming others
2. finding scapegoats (to the extent that this differs from blaming)
3. externalizing the enemy
62

ibid.

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4. denying that a problem exists

5. jumping to conclusions
6. finding a distracting issue
In a prescriptive view, the leader would squarely face the problem and avoid the six surface-level
solutions of the non-leader and a true leader would help a community face reality and deal with the issues:
finding solutions where none previously existed. A non-leader would catch fish to feed the poor while a
true leader would teach the poor how to catch fish and would motivate them to do so. The true leader
finds a way to help the community engage the problem and collectively find a solution.63
Leadership and Management
Leadership is often closely linked with the idea of management and the two are even regarded as
synonymous. If one accepts this then one can view leadership as:

centralized or decentralized
broad or focused
decision-oriented or morale-centred
intrinsic or derived from some authority

Any of the above bipolar labels traditionally ascribed to management style could also apply to
leadership style. Hersey and Blanchard using this approach claim that management merely consists of
leadership applied to business situations; or in other words: management forms a sub-set of the broader
process of leadership. They comment: "Leadership occurs any time one attempts to influence the behavior
of an individual or group, regardless of the reason. . . . Management is a kind of leadership in which the
achievement of organizational goals is paramount." (Hersey, P. and Blanchard, K. : 1982 : page 3)
A clear distinction between management and leadership may allow for a reciprocal relationship
between leadership and management, implying that an effective manager should possess leadership skills,
and an effective leader should demonstrate management skills.
Abraham Zaleznik (1977), for example had theorised that leaders are inspiring visionaries,
concerned about substance; while managers are planners who are concerned with processes.
Prof. Bennis (1989) has explicated a dichotomy between managers and leaders as follows and in
doing so he has drawn twelve distinctions between the two groups:

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Managers administer, leaders innovate

Managers ask how and when, leaders ask what and why
Managers focus on systems, leaders focus on people
Managers do things right, leaders do the right things
Managers maintain, leaders develop
Managers rely on control, leaders inspire trust
Managers have a short-term perspective, leaders have a longer-term perspective
Managers accept the status-quo, leaders challenge the status-quo
Managers have an eye on the bottom line, leaders have an eye on the horizon
Managers imitate, leaders originate
Managers emulate the classic good soldier, leaders are their own person

Heifetz, R. (1994). Leadership without easy answers. Cambridge, MA: Harvard University Press

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Managers copy, leaders show originality

Paul Birch (1999) also sees a distinction between leadership and management and has observed that,
as a broad generalization, managers concern themselves with tasks while leaders concern themselves with
people. Birch does not suggest that leaders do not focus on "the task." The things that characterise a great
leader, he correctly points out, include the fact that they achieve. The difference lies in the leader
realising that the achievement of the task comes about through the goodwill and support of others, while
the manager may not.
This goodwill and support originates in the leader seeing people as people, not as another resource
for deployment in support of "the task". The manager often has the role of organizing resources to get
something done and people form one of these resources but many of the worst managers treat people as
just another interchangeable item. The leader has the role of causing others to follow a path he/she has
laid out or a vision he/she has articulated in order to achieve a task. Often, people see the task as
subordinate to the vision. For instance, an organization might have the overall task of generating profit,
but a good leader may see profit as a by-product that flows from whatever aspect of their vision
differentiates their company from the competition.
Patricia Pitcher (1994) has challenged the bifurcation into leaders and managers. She has used a
factor analysis technique on data collected over 8 years, and concluded that three types of leaders exist,
each with very different psychological profiles. She characterises one group as imaginative, inspiring,
visionary, entrepreneurial, intuitive, daring, and emotional, and calls them "artists", a second profile
grouping she calls "craftsmen" and they are, she says, well-balanced, steady, reasonable, sensible,
predictable, and trustworthy. The third profile she terms as "technocrats" and describes as cerebral, detailoriented, fastidious, uncompromising, and hard-headed. She theorises that no one profile offers a
preferred leadership style. She claims that if we want to build, we should find an "artist leader"; if we
want to solidify our position, we should find a "craftsman leader"; and if we have an ugly job that needs
to get done (like downsizing), we should find a "technocratic leader." Pitcher also claims a balanced
leader exhibiting all three sets of traits occurs extremely rarely and that she found none in her study.
Common Behaviour Traits of Good Leaders
In 1994 House and Podsakoff summarized the behaviors and approaches of "outstanding leaders"
that they obtained from some more modern theories and research findings. They are as follows:
1. Vision: Outstanding leaders articulate an ideological vision in consonence with the deeply-held
values of followers, a vision that describes a better future to which the followers have a moral
right.
2. Self-sacrifice: Leaders display a passion for, and have a strong conviction of, what they regard as
the moral correctness of their vision. They engage in outstanding or extraordinary behavior and
make extraordinary self-sacrifices in the interest of their vision and mission.
3. Determination: Outstanding leaders display a high degree of faith in themselves and in the
attainment of the vision they articulate. Theoretically, such leaders need to have a very high
degree of self-confidence and moral conviction because their mission usually challenges the
status quo and, therefore, may offend those who have a stake in preserving the established order.
4. Image-building: Outstanding leaders are self-conscious about their own image and recognize the
desirability of followers perceiving them as competent, credible, and trustworthy.
5. Role-modeling: Leader-image-building sets the stage for effective role-modeling because
followers identify with the values of role models whom they perceived in positive terms.

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6. External representation: Outstanding leaders act as spokespersons for their respective

organizations and symbolically represent those organizations to external constituencies.
7. Expectations of and confidence in followers: Outstanding leaders communicate expectations of
high performance from their followers and show strong confidence in their followers ability to
meet such expectations.
8. Selective motive-arousal: Outstanding leaders selectively arouse those motives of followers that
the outstanding leaders see as of special relevance to the successful accomplishment of the vision
and mission.
9. Frame alignment. To persuade followers to accept and implement change, outstanding leaders
engage in "frame alignment" which refers to the linkage of individual and leader interpretive
orientations such that some set of followers interests, values, and beliefs, as well as the leaders
activities, goals, and ideology, becomes congruent and complementary.
10. Inspirational communication: Outstanding leaders often, but not always, communicate their
message in an inspirational manner.64
Diversity
Diversity in an organisation simply means the composition of the workforce is drawn from people
who speak different languages and are from different backgrounds from the point of view of race, gender,
caste, religion, education, geographical and ethnic origin etc. Also it means a policy of diversity would
take special care to see there is no discrimination of any sort towards people who have any particular
characteristic whether of language or any other like physical disability or sexual orientation (e.g.
Homosexuality) for instance.
It is generally agreed that cultural diversity in the workplace utilizes the available human talent in a
nation better and contributes to our overall growth and prosperity much more.
Also it can be smart strategy for organisations purely from the business strategy point of view. For
instance, a telecom company like Reliance Communication Ventures that sells cheap cell phone services
across the country and sometimes comes across the problem of collecting pending bills from customers
who refuse to pay will do much better to have a diversifed workforce who speak the different languages
of the nation and come from different family backgrouds so that they can then meet and communicate
with customers across the country in the languages they speak and perhaps to that extent be more
effective in recovering unpaid dues.
Another argument in favour of diversity is that it helps bridge the gap between the "haves" and "have
nots". Or those who have been traditionally richer and better off than those who have been traditionally
poorer. It is in this context that the currently raging issue of reservations for SC/ST/OBCs in private
sector employment should be considered. It is a fact that historically the lower castes have been socially
and economically poorer and backward and they have to be provided job opportunities to level the field in
society and remove or lessen this huge gap for India to be recognised as a civilsed country. As long as the
people selected for employment in private sector secotr organsiations under reservations are qualified,
seeking such diversity deliberately will help with the general political agenda of removing economic
social disparities between the upper and lower castes. Of course such forced diversity can not be
continued with for an indefinite time period in the interest of equity but implementing it for some years at
least it will definitely give a boost to the level of diversity in corporate India.
64

Robert House and Philip M. Podsakoff, "Leadership Effectiveness: Past Perspectives and Future Directions for
Research" in Jerald Greenberg (ed.), Organizational Behavior: The State of the Science, Erlbaum, Hillsdale, NJ.,
1994

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Studies conducted over the past decades have confirmed that diversity contributes to the bottom line
by: making it easier to retain good employees, lowering costs by developing skills in-house, and
developing a reputation that helps attract new employees. This becomes especially important when the
economy does well, and the demand for skilled labor is higher.
Also workplace diversity is extremely important from another point of view that of motivating
employees. A diverse and fair workplace free of discrimination gives an indication to an employee
whether his/her employer will value his/her contributions, grant promotions, provide training to take on
more responsibility, and pay accordingly. Without such assurance, employees dont feel motivated
enough.
When employees come from diverse backgrounds whether racial, ethnic, religious, social,
economic, educational or experiential the organization benefits. Diversity leads to positive creative
tension, which increases intellectual curiosity, supports creative thinking and sets the stage for innovative
solutions to organizational challenges, allowing the organization to achieve more effective results. The
point of pursuing diversity in talent hunting is that as Trevor Wilson, a global diversity consultant outs it,
We like to say that we are in the business of maximizing neurons per salary dollar""An
organization that understands and values diversity realizes that all neurons or brain cells are the same
colour (among different people) even though the packaging may be quite different."
Globalization has added another dimension to the diversity imperative. It has been found a strong
culture of managing diversity in a firm helps it in spreading its business globally and in dealing with
challenges thrown up by global expansions and acquisitions which are becoming increasingly inevitable
every passing day.
What should diversity mean in practice? There should be diversity at the following levels:
Diversity at the Officer, Board of Director, and Senior management levels
Diversity amongst the highest salaried employees in the company
Diversity amongst the company's workforce as a whole
Recruiting for new hires across regions, levels and qualities of universities and towns and villages.
Diversity is classified into having two different types or dimensions: primary and secondary.
Primary dimensions refer to the aspects of a person that came with birth and can not be changed like
race, gender, age physical and menatl disabilities and sexual orientation. It is generally assumed that the
more there are primary differences between people in the diversity mix, greater there will be the challenge
of achieving a united harmonious workforce and avoid culture clashes and conflicts. But it must be said
the general working environment or spirit of a company also matters a lot and to a large extent these
differences and the challenges arising threfrom can be dealt with smoothly if the philosophy pravailing
inside a company or organisation promotes equality and fairness and inspires and celebrates achievement
over anything else. The top leadership here can play a major role. "The organizations that get this right,"
says Wilson, author of the book Diversity at Work: The Business Case for Equity, "will ultimately win
the war for talent by creating equitable and inclusive work environments that are attractive to a diversity
of talent." He cautions though that, "People will determine pretty quickly if a leader is walking the talk or
simply spouting platitudes."
Secondary dimensions refer to the aspects of a person that can be changed, modified or influenced
like educational training, health habits, dress and appearance, cultural biases and prejudices,
communication skills, work experience etc. The best thing about secondary dimensions is that if the

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organisation decides a particular dimension among a single or multiple members of staff is unhealthy for
the company, they can make an effort to change or influence it.
Ultimately it can be said in conclusion, diversity should be seen as an opportunity by businesses and
their attitude should be that diversity brings a variety of talents and perspectives and the broader that
range the better is the opportunity. To that extent diversity should be actively pursued. An organization
that understands and values diversity is more productive, is able to attract and retain the best talent, and
provides an improved quality of service. The most creative and successful organizations are those that are able
to recognize and energize the great variety of talents employees bring to the workplace.
Case Study Hewlett-Packard Company, USA
Hewlett-Packard Company (HP), the US headquartered global multi-national makers of computer
hardware peripherals and printing solutions claim to have a robust program to promote and manage
diversity. They even have a senior executive in the company assigned at all times to manage diversity
whose job title isVice-President Culture and Diversity .
(See www.HP.com/hpinfo/abouthp/diversity.htm)
They say:
At HP, we believe that diversity and inclusion are key drivers of creativity, innovation and
invention. Throughout the world, we are putting our differences to work to connect everyone to the power
of technology in the marketplace, workplace and community.
Creating a diverse, inclusive environment has been an ongoing journey of continuous action for
many years. It has been a journey guided by deeply held values. Today, our diversity vision is one of
global proportions. One that requires courageous, bold actions from many people throughout the world.
We are proud to share what we have learned along the way and the aspirations we are actively working to
achieve
Since its founding, Hewlett-Packard has demonstrated an ongoing commitment to people and to fair
employment practices. As HP has grown and expanded throughout the world, its work force has become
more diverse. HP believes that this diverse work force helps the company realize its full potential.
Recognizing and developing the talents of each individual brings new ideas to HP. The company benefits
from the creativity and innovation that results when HP people who have different experiences,
perspectives and cultures work together. This is what drives invention and high performance at HP. We
believe a well managed, diverse work force expands HPs base of knowledge, skills and cross-cultural
understanding, which in turn, enables us to understand, relate and respond to our diverse and changing
customers throughout the world, connecting them to the power of technology. Our overall commitment is
reflected in our diversity and inclusion philosophy..
A diverse, high-achieving workforce is the sustainable competitive advantage that differentiates HP.
It is essential to win in the marketplaces, workplaces and communities around the world.
An inclusive, flexible work environment that values differences motivates employees to contribute
their best.
To better serve our customers, we must attract, develop, promote and retain a diverse workforce.

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Trust, mutual respect and dignity are fundamental beliefs that are reflected in our behavior and
actions.
Accountability for diversity and inclusion goals drives our success.
Compliance, equal opportunity and affirmative action.
HP's policies and supporting practices are built upon this philosophy, as well as a set of values that
include a strong belief that all employees should be treated with dignity and respect. In accordance with
this, HP does not discriminate against any employee or applicant for employment because of race, creed,
color, religion, gender, sexual orientation, gender identity/expression, national origin, disability, age, or
covered veteran status. It is also HP's policy to comply with all applicable national and local laws
pertaining to nondiscrimination and equal opportunity..
HP is a company committed to building a work environment where everyone has an opportunity to
fully participate in creating business success and is valued for their distinctive skills, experiences and
perspectives.
This vision is rooted in company traditions, policies and the everyday acts of HP employees We
address this commitment through development programs targeted to the next generation of HP leaders,
work-life initiatives for our employees, recruiting of diverse talent, and other efforts that help employees
and managers foster an inclusive work environment. Additionally, we establish diversity goals to create
accountability and drive our success.
By weaving diversity into the fabric of our company - into all of our processes and day-to-day
business practices - we create a mindset in every employee and manager that will allow them to think
consciously about diversity and inclusion in everything they do.
Some of the initiatives running as part of their diversity promotion and management effort are:
Nondiscrimination policy, Electronic job posting, Harassment-free work environment, Domestic
partner benefits, Employee network groups, Open Door Policy, Education Assistance Program, Employee
Assistance Program (EAP), Open communications, Management by objective, Share in company's
success, Provide development opportunities, Flexible work hours, Safe and pleasant work environment.
Questions:
1.
2.
3.
4.
5.
6.
7.
8.

How can ethical behaviour by businesses be in their self-interest ?

Explain the term corporate responsibility ? What are its different strands or components ?
What are the major recognised corporate governance principles?
Write a short note on financial accuntability as a part of corporate responsibility and governance
and detial the most important regulatory developments in this area worldwide ?
What are the different tools of an ethics program ?
Why is a written Code of Ethics important and what should it contain ?
Compare the roles of a leader and a manager ?
What do you mean by diversity at work and why is it useful for business organisations to have a
diverse workforce ?

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SUGGESTED READINGS
5. OECD Documents on Corporate Governance (www.oecd.org)
6. SEBI - Kumarmangalam Birla Committee Report (www.sebi.gov.in )

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LESSON 7

ISSUES AND CASES IN SOCIETY AND BUSINESS

L. Ganguly
--Financial Analyst

After reading this lesson you will be familiar with:

Corruption and Scandals in Business and Politics
The tool of Whistle Blowing
The problem of Corporate Insider Trading
The problem of Discrimination
Advertising Ethics
Consumer Rights and Redress
All over the world politics and business interests are intertwined and there is corruption in politics
triggered by the greed to share in the wealth of corporate houses and their owners. The corporate houses
in turn try to make more money than they legitimately might by what Dhirubhai Ambani, the founder of
the largest private sector group in India (before the split in the group between the two brothers, Mukesh
and Anil and their mother and sisters) called managing the environment (politically) and by enjoying
great influence over the government using their money power to finance political parties and buy out the
loyalty of politicians. Politicians can then be made to act not in the interest of the nation but in the interest
of the corporate group(s). No corporate group in India has used its power to manage and control
politicians more than the Reliance Group, which has now been divided into two groups one controlled by
each of the two brothers.
Corruption Case Study Telecom Licensing and Reliance
There has a long list of alleged corruption scandals relating to the Reliance Group in many of which
the group did not even bother to do much to clear its name. Government investigators whatever the
political party or coalition of parties in power have always without fail found them to have committed no
wrong. It has never been openly said why this is so but it has been whispered and understood generally
that the Reliance group can never be found guilty of anything till a political party or political leaders
come to power that is/are not sold out to them in advance.
Here the focus will be on just one alleged case of corruption that of telecom licensing that became
a scandal a few years back. This relates to a period in the early years of this century when the group was
undivided.
In the nineties licences were given out for telecom services basic telephony and mobile telephony
based on GSM technology. Companies both Indian and foreign spent thousand of crores bidding for and
winning these licenses for these licenses were seen as very valuable. This huge cost meant that most
companies who won licenses understood that they will not be able to recover their money for years or
even a decade but they never the less invested huge amounts looking at the potential of the market. At that
time the Reliance group either did not bid or bid for very a few basic licenses mostly and some regionally
small isolated mobile licenses that cost a small fraction of what it cost to win large mobile licenses with a
national spread.
Many years later when the market was much more developed and mature and its potential was clear
to all, they went to the government and asked to introduce a new technology called CDMA (Code
Division Multiple Access) Wireless-in-Local-Loop (WiLL) to offer what they argued would have a very
limited mobility service within a small area because of the nature of the technology and hence would not
be a mobile phone service really but would really be a modified flexible sort of basic (landline) service.

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They got the permission easily for only Rs. 495 crore fee (against the Rs. 1633 crore cost for a licence
that allowed full mobility and that the GSM companies had bought) because allegedly the party in power
at that time and one of its most powerful politician were paid off by them heavily with bribes, election
funding and other favours.
Of course while technically on paper they were offering a form of flexible basic services they made
it clear to everybody including customers (through huge advertisements) that what they would be offering
would be a mobile phone service with phones that they would supply called CDMA (mobile) phones.
They priced their offering very cheap and there was a great rush for their service. They even offered
roaming services on their mobile service by telling customers that they will be given a temporary new
number for every city they visit thus bypassing the bar on providing roaming because logically a limited
mobility local phone or a fixed basic phone or landline phone can not have roaming facility.
All protests of competitors like that of Bharti Telecom (providers of the AIRTEL brand mobile
service) were ignored and brushed away. Reliance used the huge savings in licence fee that it was thus
able to enjoy to offer a cheap service to corner the market that caused great difficulty and loss of market
share for competitors many of whom were making losses.
The leader who was alleged to have helped in arranging this manipulation of the licensing regime in
reliances favour was Pramod Mahajan of the BJP who was killed early this year by his younger brother
who claimed in criminal court after his surrender that his brother was what he called a 2000 crores man
but he had remained poor and was always behaved badly and with contempt by his brother who did
nothing for him. It is revealing to remember here that before becoming a politician and later
communications minister Pramod Mahajan had been a school teacher with presumably negligible income.
Also his son Rahul Mahajan was arrested in a narcotics case recently and is now out on bail. During the
investigation in this case it was revealed Rahul Mahajan has a costly lifestyle but it is not clear what is
sources of income are.
Pramod Mahajan became the communications minister in-charge of telecom in September 2001 and
in September 2002 about one crore shares of Reliance Infocom (worth more than hundred cores at that
time and worth nearly a thousand crores a few years later) was transferred at one rupees per share only to
companies run by Mumbai based businessman Ahsish Deora. It was revealed that Deora was a close
friend of Rahul Mahajan and that Deoras business partner, Anand Rao was Pramod Mahajans son-inlaw.65 It was alleged and whispered in the media that this was just an arrangement to reward Pramod
Mahajan to manipulate telecom policy and help the Reliance group. Members of parliament at that time
like Sanjay Nirupam (of the Shive Sena who is now with the Congress) even alleged that Mahajan later
favoured them (Reliance) by unifying the licensing system and allowing them to function throughout the
country66, an advantage that would have cost thousands of crores in licence fee just a few years back and
for which all other companies paid high fees.
Hartosh Singh Bal comments on the developments relating to changes in licensing rules at that time
and later as follows:
.procedure was never followed in the case of Reliance Infocomm. In fact TRAI (Telecom
Regulatory Authority of India) learnt of changes in the license agreement from newspaper reports. While
this happened before Mahajan took over, it is clear that at the very beginning of Mahajans tenure, TRAI
had informed the ministry of the violation of the (TRAI) Act as well the advantage that would accrue to
Reliance through the change in the agreement. In effect the (telecom) secretary during Mahajans tenure
told TRAI to shut up.
65
66

See reports in the Tehelka dt. 26/03/05

ibid. , p. 10

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The steps the ministry took during Mahajans stint turning a blind eye to Reliances offer of full
mobility through the back door while telling TRAI to keep quite ensured that Reliance Infocomm was
able to obtain a subscriber base of 50 lakh users. When the time came for Reliances acts to be declared
illegal, this subscriber base became the grounds for preventing action in the public interest.
Finally in October 2003, after Mahajan had left the ministry, TRAI proposed a new set of licences
that in effect regularised the Reliance services through the payment of a fine. But in effect the legalisation
after the breach of law meant the company managed to earn several times more than it paid as fine even
as the competing companies, who were working within the rules, lost out.67
Corporate Scandal Case Study Enron Corp., USA
Corporate Scandals happen almost every day but the scandal surrounding the collapse of Enron in
the USA became a huge event because it had major repercussions on the perception surrounding
corporate governance worldwide and exacerbated the collapse of the post dot-com era stock market crash
in the USA. It had an impact in India too because Enron was the main promoter of the Dabhol Power
Company in Maharashtra and there were many allegations of corruption surrounding which in a way
found confirmation from the admission by Enron that they had spent 50 crores in Indian rupees education
purposes with respect to their project. Nobody could fathom what the details of these expense might have
been and it was suspected this expenditure by Enron put down as educational expenses in its accounts
were nothing but bribes to politicians. The contract for purchasing power that was entered with the
Dabhol Power Company allowed for tariffs that were three to four times what was paid to public sector
power producers and it was suspected and alleged in the media reports that this was done by corrupt
politicians in exchange for bribes. Also it was alleged Enron officials used political connections within
the Clinton and Bush administrations to exert pressure on the Government of India and the State of
Maharashtra.
Enron Corporation was an energy company based in Houston, Texas, United States and before its
bankruptcy in late 2001 employed around 21,000 people. It and was one of the world's leading electricity,
natural gas, pulp and paper, and communications companies, with claimed revenues of $101 billion in
2000. Fortune magazine had named Enron "America's Most Innovative Company" for six consecutive
years. It collapsed at the end of 2001, when it was revealed that its reported financial condition was
sustained mostly by institutionalised, systematic, and creatively planned accounting fraud. Its European
operations filed for bankruptcy on November 30, 2001, and it sought Chapter 11 bankruptcy protection in
the U.S. two days later on December 2. It created a record as the biggest bankruptcy in U.S. history, and it
cost 4,000 employees their jobs.
Lawsuits against Enron's directors that were filed following the scandal, was notable because the
directors settled the suit by paying very significant amounts of money personally. In addition, the scandal
caused the dissolution of the Arthur Andersen accounting firm.
Enron still exists as an asset-less shell corporation but by the end of 2006 when the bankruptcy
process fully is over Enron will likely be dissolved.
Enron was formed in 1985, when Houston Natural Gas (HNG) merged with Internorth in a
transaction engineered by HNGs CEO Kenneth Lay. Lay emerged as CEO of the new company and after
initially being named Enteron, when it was pointed out that the term approximated a word referring to the
intestine (in Greek), it was shortened to "Enron".

67

ibid. , p. 11

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Enron was originally involved in the transmission and distribution of electricity and gas throughout
the United States and the development, construction, and operation of power plants, pipelines, and other
infrastructure worldwide. However, within its first year after the merger, Enron was partnering in an oil
well venture, with a company called Spectrum 7 whose chairman and CEO was George W. Bush, the son
of then-Vice President George H. W. Bush and the present president of the United States of America. Ken
Lay was also a close fiend of the Bush family. In 1998 Enron moved into the water sector, creating the
Azurix Corporation, which tried but failed to successfully break into the water utility market, and one of
its major projects, in Buenos Aires, Argentina, was a large-scale money loser. In April 2001 Enron
announced its intention to break up Azurix and sell its assets.
Enron grew wealthy, it claimed in its corporate communications and media interactions, through its
pioneering marketing and promotion of power and communications bandwidth commodities and related
derivatives instruments as tradable financial instruments, including strange contracts like weather
derivatives which were complex and little understood financial instruments at that time. As a result,
Enron was named "America's Most Innovative Company" by Fortune magazine for six consecutive years,
from 1996 to 2001. It was on the Fortune's "100 Best Companies to Work for in America" list in 2000,
and had offices that were stunning and flashy in their show. Enron was also hailed as an overall great
company until it collapsed. At that time many people, including labour and the workers, praised Enron for
its large long-term pensions and benefits for its workers and extremely effective management.
However, as was later discovered, many of Enron's recorded assets and profits were inflated, or even
wholly fraudulent and nonexistent, by putting debts and losses into entities formed "offshore" (outside the
USA in small zero tax countries called tax havens) that were not consolidated with (included in) the
company's financial statements and by the use of other sophisticated and arcane financial transactions
between Enron and related companies were used to take unprofitable entities off the company's formal
American books of accounts.
During this period slowly Enron's global reputation was undermined by persistent rumours of bribery
and political pressure to secure contracts in Central America, South America, Africa, and the Philippines
and India too as mentioned above.
After a series of scandals involving irregular accounting procedures bordering on fraud, perpetrated
throughout the 1990's, involving Enron and its accounting firm Arthur Andersen, it stood at the verge of
undergoing the largest bankruptcy in history by mid-November 2001. A white knight rescue attempt by a
similar, smaller energy company, Dynegy, was not viable. Enron filed for Bankruptcy on December 2,
2001.
As the scandal was revealed in 2001, Enron shares dropped from over US$90.00 to US$0.30. As
Enron had been considered a blue chip stock, this was an unprecedented and disastrous event in the
financial world and badly exacerbated a stock market crash that was already underway. Enron's plunge
occurred after it was revealed that much of its profits and revenue were the result of deals with special
purpose entities (limited partnerships which it controlled). The result was that many of Enron's debts and
the losses that it suffered were not reported in its financial statements. Hence potentially its balance sheet
and profit & loss statements were all actually false.
In addition, the scandal caused the dissolution of Arthur Andersen, one of the big five chartered
accounting firms with a reputation matching any other worldwide leaving only four big international
accounting firms, which is still causing difficulty for large corporations that need to use more than one
accounting firm for auditing and non-auditing services.
On January 9, 2002, the United States Department of Justice announced it was going to pursue a
criminal investigation of Enron, and Congressional hearings began on January 24. Enron had trouble with

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insider trading dating back to the late 1980s. The first documented example occurred in 1988 when two
auditors, David Woytek and John Beard, discovered bank records showing that millions of dollars had
been moved from Enron into the personal accounts of two executives Louis Borget and Thomas
Mastroeni.
Both Borget and Mastroeni were rumored to be powerful enough to socialise with the rulers of Saudi
Arabia and Kuwait, thereby gaining inside information on the workings of OPEC, the international oil
cartel. This insider information had apparently led to more profitable trading of oil commodity futures
contracts, until the cash flows from Enron into personal accounts for prostitutes were discovered by
Woytek and Beard. Both auditors were told by Chief Executive Officer Kenneth Lay to continue their
investigation and make sure every penny was returned to the rightful account; however, no immediate
action was taken against the perpetrators.
Woytek and Beard eventually gathered enough information to prove that Borget and Mastroeni were
participating in insider trading and stealing from the company. This information included bank statements
had showed cash flows that were not recorded in the company's records, along with copies of altered
statements that Borget had filed with the company. However, despite all of the evidence that the two
auditors had collected, they were told to drop the investigation by Enron's president, Mick Seidl, and the
Chief Financial Officer, Keith Kern. Unfortunately for Woytek and Beard, Borget had brought in tens of
millions of dollars of profits to the company that was what mattered to the company top management. To
both Woytek and Beard the impression was given that the annual profits that Borget brought to the
corporation were more important than maintaining legal practices.
Enron had created many offshore entities all over the world, units which can be used for planning and
avoidance of taxes, raising the profitability of the business to be shown in formal account statements in
the USA. This provided ownership and management with full freedom of currency movement, and full
anonymity, that would hide losses that the company was taking. These entities made Enron look more
profitable than it actually was, and created a dangerous spiral in which each quarter, corporate officers
would have to perform more and more contorted financial deception to create the illusion of billions in
profits while the company was actually losing money. This practice drove up their stock price to new
levels, at which point the executives began to work on insider information and trade millions of dollars
worth of Enron stock. The executives and insiders at Enron knew about the offshore accounts that were
hiding losses for the company; however the investing public and the media knew nothing of this. Chief
Financial Officer Andrew Fastow led the team which created the off-books companies, and manipulated
the deals to provide himself, his family, and his friends with hundreds of millions of dollars in guaranteed
revenue, at the expense of the corporation he worked for and its stockholders.
In August of 2000, Enron's stock price hit its highest value of $90 on the NYSE (New York Stock
Exchange). At this point Enron executives, who possessed the inside information on the hidden losses,
began to sell their stock. At the same time, the general public and Enron's investors were told to buy the
stock. Executives told the investors in the media via news conferences and television shows like on
CNBC that the stock would continue to climb until it reached possibly the $130 to $140 range, while
secretly unloading their own shares on the public.
As executives sold their shares, the price began to drop. Investors were told to continue buying stock
or hold steady if they already owned Enron because the stock price would rebound in the near future.
Kenneth Lay's strategy for responding to Enron's continuing problems was in his smart behaviour before
journalists and the media. Lay would again and again issue a statement or make an appearance on
television to calm investors and assure them that Enron was headed in the right direction.
By August 15, 2001, Enron's stock price had fallen to $42. Many of the investors still trusted Lay
and believed that Enron would rule the market. They continued to buy or hold their stock and lost more
money every day. As October closed, the stock had fallen to $15. Many saw this as a great opportunity to

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buy Enron stock because of what Kenneth Lay had been telling them in the media. Their trust and
optimism proved greatly tragically misplaced.
Lay was later formally accused of selling over $70 million worth of his privately held stocks of
Enron at this time, which he used to repay cash advances on lines of credit that he had taken. He sold
another $20 million worth of stock in the open market. Also, Lay's wife, Linda, was formally accused of
selling 500,000 shares of Enron stock totalling $1.2 million on November 28, 2001. The money earned
from this sale was arranged not to go to the family but rather to charitable organizations, which had
already received pledges of contributions from their family foundation. Records show that Mrs. Linda
Lay placed the sale order sometime between 10:00 and 10:20 AM and news of Enron's problems,
including the millions of dollars in losses they had been hiding went public about 10:30 that morning on
live television, and the stock price soon crashed to below one dollar. Mrs. Lay had in effect sold roughly
500,000 shares of Enron thirty minutes to ten minutes before the information that Enron was collapsing
went public on November 28, 2001. This was information that Enron executives had known for over a
year.
Former Enron executive Paula Rieker was charged with criminal insider trading. Rieker obtained
18,380 Enron shares for $15.51 a share. She sold that stock for $49.77 a share in July 2001, a week before
the public was told what she already knew about the $102 million loss.
Kenneth Lay and Jeffrey Skilling, both former Enron chief executive officers, went on trial for their
part in the Enron scandal in January 2006. The 53-count, 65-page indictment covers a broad range of
financial crimes, including bank fraud, making false statements to banks and auditors, securities fraud,
wire fraud, money laundering, money laundering conspiracy and insider trading.
Mr. Lay pleaded not guilty to the eleven criminal charges. Lay had stated that he was innocent and
that he was misled by those around him. At the time of his death recently a few months back in 2006 after
he was pronounced guilty the U.S. Securities and Exchange Commission (SEC) had been seeking more
than $90 million from Lay in addition to civil fines.
Former managing director of investor relations for Enron Paula Rieker pleaded guilty in federal court
to a criminal insider trading charge. The one felony charge against Rieker carries a maximum penalty of
ten years in prison and a $1 million fine. Rieker agreed to never again serve as an officer or director of a
public company. If a federal court approves the settlement, Rieker will pay the SEC $499,333, the profit
from the sale of 18,380 shares of Enron stock. Rieker has been a valuable witness for the government
investigators as she prepared earnings releases and conference calls with Enron analysts.
On December 28, 2005, former CAO Richard Causey pleaded guilty to securities fraud. He will have
to serve 7 years in prison and pay $1.25 million to the U.S. Government. Causey has the possibility of
only serving 5 years in prison if he cooperates and testifies against former Chairmen and CEO, Kenneth
Lay and former CEO and COO, Jeffrey Skilling.
Kenneth Lay and Jeff Skilling were indicted for securities and wire fraud in July, 2004, leading to a
highly-publicized trial in which Lay was convicted on all six counts and Skilling on 19 of 28 counts on
May 25, 2006. On July 5, 2006, Lay died at age 64 while vacationing in Aspen, Colorado, after suffering
an apparent massive heart attack on July 4. He was due to be sentenced on October 23, 2006.
On January 13, 2006 lobbyist William "Art" Roberts had pleaded guilty to impersonating Senate
staff members during the investigation. Roberts was hired by a German bank in June 2004 to get a letter
from a Senate subcommittee stating the bank had done their due diligence investigating the Enron
collapse, as part of the bank's defence in a suit filed against it by a London bank.

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Fallout of the Enron scandal

No scandal in recent times has had such a wide-ranging and profound fall out at least
psychologically that Enron. The implications of Enron's collapse are somewhat unclear, but there is
considerable political fallout both in the U.S. and in the UK relating to the money Enron gave to
politicians and political parties (around US$6 million since 1990). Approximately three-fourths of
American contributions went to the Republican Party, including heavy contributions to George W. Bush's
presidential campaign.
Fallout from the scandal quickly extended beyond Enron and all those formerly associated with it.
The trial of Arthur Andersen on charges of obstruction of justice related to Enron also helped to expose its
accounting fraud at WorldCom. The subsequent bankruptcy of that telecommunications firm quickly set
off a wave of other accounting scandals. This wave engulfed many companies, exposing high-level
corruption, accounting errors, and insider trading. Though at the time of its collapse, Enron was the
largest bankruptcy in history, since then it has been eclipsed by the collapse of WorldCom, another high
profile US company who were also found to have influenced politicians and committed accounting fraud
to over state earnings which caused earnings to show more than they really were.
Thousands of Enron employees and investors lost their life savings, children's college funds, and
pensions when Enron collapsed. A lawsuit on the behalf of a group of Enron's shareholders has been filed
against Enron executives and directors. This lawsuit accuses twenty-nine of these executives and directors
of insider trading and misleading the public.
Because the 401(k) plan is a defined contribution plan, there was no PBGC insurance and employees
lost the money they invested in Enron stock. They could only sue those considered a fiduciary for breach
of their duty of care based on ERISA Section 404.
The status of the pension plans that were promised to Enron's employees has been in question since
the collapse of Enron. The Pension Benefit Guaranty Corporation is attempting to cover some and
possibly all of the promised benefits.
On June 15, 2002, Arthur Andersen was convicted of obstruction of justice for shredding documents
related to its audit of Enron. Since the U.S. Securities and Exchange Commission does not allow
convicted felons to audit public companies, the firm agreed to surrender its licenses and its right to
practice before the SEC on August 31. On May 31, 2005, the Supreme Court of the United States
unanimously overturned Andersen's conviction due to flaws in the jury instructions. Despite this ruling, it
is highly unlikely Andersen will ever return as a viable business. The firm lost nearly all of its clients
when it was indicted, and there are over 100 civil suits pending against the firm related to its audits of
Enron and other companies. It began winding down its American operations after the indictment. From a
high of 28,000 employees in the U.S. and 85,000 worldwide, the firm is now down to around 200 based
primarily in Chicago. Most of their attention is on handling the lawsuits. The firms very high profile and
hugely profitable Indian subsidiary has also closed down.
Andersen was one of the "Big Five" large international accounting firms. Its demise left only four
big international accounting firms (the Big Four accounting firms). This concentration of the industry is
still causing difficulty for large corporations that need to use more than one accounting firm for auditing
and non-auditing services. In addition, the pricing of accounting services is less elastic as large
corporations feel that they must use a Big Four firm.
Societal and legal impacts

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Enron's collapse also led to the legislation called Sarbanes-Oxley Act being passed in the US on July
30, 2002 which is considered the most significant change to federal securities laws since the 1930s and
this prompted other countries including India to adopted new corporate governance rules and guidelines.
The new Sarbanes-Oxley legislation provides stronger penalties for fraud and, among other things,
requires public companies to avoid making loans to management, to report more information to the
public, to maintain stronger independence from their auditors, and most controversially, to report on and
have audited, their financial internal control procedures.
Securities law historian Joel S. Seligman was quoted in The Washington Post saying, " (Enron) was
the most important corporate scandal of our lifetimes. It was one of the immediate causes of the SarbanesOxley Act, the governance reforms of the New York Stock Exchange and NASD, and the most
consequential reorientation of corporate behaviour in living memory."
The tool of Whistle Blowing
Whistleblower is an employee, former employee, or member of an organization who reports
misconduct to people or entities that have the power to take corrective action. Generally the misconduct is
a violation of law, rule, regulation and/or a direct threat to public interest fraud, health, safety
violations, and corruption are just a few examples. Corporations have long known the advantages of
encouraging employees to report misconduct. The reporting of questionable practices is critical to the
success of a companys ethics and compliance initiatives, as well as the companys overall well being.
Various kinds of misconduct may prompt whistle blowing, but the vast majority of cases are usually
based on relatively minor misconduct. Generally the most common type of whistleblowers are internal
whistleblowers, who report misconduct to superiors within the company. External whistleblowers report
misconduct to outside persons or entities and depending on the severity and nature of the wrong-doing,
whistleblowers may report the misconduct to lawyers, the media, law enforcement or regulatory agencies,
or to the government bodies.
If the disclosure made by the whistleblower is specifically prohibited by law or is specifically
required by government order to be kept secret in the interest of national defence etc the reporting by a
whistleblower might cause him legal trouble. So this is not an activity free of any personal consequences
for the whistle blower in a legal sense.
Under the laws of some countries like the U.S.A, in order to be considered a whistleblower the
employee must reasonably believe his or her employer has committed a violation of some law, rule or
regulation; testify or commence a legal proceeding on the legally protected matter himself; or refuse to
violate the law that his company is asking him to.
Some view whistle-blowing narrowly and try to limit the impact of whistle-blowing by arguing that
so-called role-prescribed whistle-blowing, for example whistle-blowing done by quality control personnel
or internal auditors, does not constitute whistle-blowing in the traditional sense, because the purpose of
the employment is to report such things. However, laws have been changed in some countries to deal with
this problem. In the U.S. for instance courts have uniformly held that persons who hold quality control or
auditor positions are protected from retaliation for reporting violations of law or regulations. Also the
dichotomy between "internal" and "external" whistle-blowing has not been recognised under U.S. federal
law. For example, in the field of federal environmental whistle-blowing the federal courts have held that
protecting "internal" whistle blowing is wise as a matter of public policy because whistleblower statutes
are intended to encourage the free flow of information to prevent violations, "internal" reporting promotes
resolving problems at the earliest possible stage, and discouraging "internal" reporting can have disastrous
consequences.

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Attitudes towards whistle blowing varies and while some see whistleblowers as selfless martyrs for
public interest and organizational accountability; others view them as solely pursuing personal glory and
fame. Because the majority of cases are very low profile and receive little or no media attention and
because whistleblowers who report significant misconduct are usually put in some form of danger or
persecution, the latter view is generally less held.
As might be imagined companies who have to face the brave action of whistle blowers dont take to
it kindly or in a good or positive spirit. There are attempts to socially intimidate and even legally harass
whistle blowers. In countries like India it almost always leads to an instant sack.
Attacks and persecution of whistleblowers from employers has become a bid issue in many parts of
the world. Although whistleblowers are often protected under law from employer retaliation in some
countries like the US, there have been many cases where punishment for whistle blowing has occurred.
For example, in the United States, most whistleblower protection laws provide for limited remedies or
damages for employment losses if whistleblower retaliation is proven. There exists a wide spread "shoot
the messenger" mentality by corporations or government agencies accused of misconduct and in some
cases whistleblowers have been subjected to criminal prosecution in reprisal for reporting wrongdoing. As
a reaction to this many private organizations have formed whistleblower legal defence funds or support
groups to assist whistleblowers; one such example being the British Public Concern at Work.
Circumstances in different companies vary, but it is common for whistleblowers to be ostracized by their
co-workers, discriminated against by future potential employers, or getting fired. This sort of campaign
directed at whistleblowers with the goal of eliminating them from the organization is referred to as
mobbing. It is an extreme form of workplace bullying wherein the group is set against the targeted
individual.
Legal protection for whistle blowing varies from country to country. In Britain, the Public Interest
Disclosure Act 1998 provides a framework of legal protection for individuals who disclose information
from victimisation and dismissal. In the United States, legal protections vary according to the subject
matter of the whistle blowing, and sometimes the state in which the case arises. A wide variety of federal
and state laws protect employees who call attention to violations, help with enforcement proceedings, or
refuse to obey unlawful directions.
In India there is no express law as yet for whistle blowers but there are non-mandatory corporate
governance guidelines that have started mentioning the importance of whistle blowers. Also the media
can be somewhat proactive in helping potential whistle blowers and more often than not media leaks that
happen disclosing scandals and law violations by companies are usually from employees inside
companies who either anonymously or with promises of anonymity from journalists blow the whistle on
many instances of misconduct. Unfortunately this sort of surreptitious whistle blowing has very little
value for the judicial system and to that extent cannot really be regarded as proper whistle blowing. Also
Indian government departments unfortunately like the income tax department dont take cognisance of
anonymous complaints and dont investigate such complaints even. This inevitable means Indian whistle
blowers who any ways are always in awe of the money and political power of Indian industrialists and
businessman end up being of very little use to the system.
Many multinational companies have adopted a sophisticated array of tools to facilitate whistle
blowing, including 24-hour hotlines and corporate ethics offices. Recent surveys have shown an overall
increase in the reporting of misconduct worldwide but employees located outside of the United States do
not feel comfortable using the communication channels available to them to report misconduct.
Some of the challenges that multinational corporations face in encouraging employees around the
world to report misconduct are:

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1. Cultural Impediments such as:

(a) Divided Loyalties: Divided loyalties represent a significant challenge in Asia, for instance where
members of the corporation are family, making it difficult for organizations to establish an
environment that accepts whistle blowing. In Korea, for example, a subordinates loyalty to a superior
can be greater than his or her loyalty to the company. Similarly, in Japan, a tradition of lifetime
employment and a strict seniority system can discourage workers from questioning management
decisions, dictating that employees show unbounded loyalty to their co-workers. The situation in
India can be similar.
(b) History: For some countries, history exacerbates a bias against whistle blowing: in China for
instance, attempts to introduce corporate hotlines can remind employees of the horrors of the Cultural
Revolution when citizens were encouraged to report illegal activities to authorities, which included
children reporting against parents, students against teachers, and neighbors against neighbors, or in
Germany, encouraging anonymous or confidential reporting can bring to mind Gestapo tactics from
World War II or the far-reaching informant networks of the Stasi in the former East Germany, in
South Africa, whistleblowers are associated with apartheid-era informants, called impimpis, who
often faced a public death if caught or suspected of reporting.
2.Logistics problems like numerous time zones and languages are two of the many logistical factors
that prevent international employees from using corporate whistle blowing resources. International
numbers and international collect calls either do not work or are unknown in many countries and in some
locations, even gaining access to a telephone can be problematic.
3. Fear of Retaliation: Many laws including the Sarbanes-Oxley Act in the United States, the Public
Interest Disclosure Act in the UK, and similar laws in other countries, provide protection for
whistleblowers but despite such legislation, as well as reassurance from corporate headquarters that
retaliation will not be tolerated, many international employees fear otherwise. One multinational company
reported that over 60% of employees who had personally witnessed misconduct failed to make a report
because they feared retaliation. Similarly, in the US, the 2003 National Business Ethics Survey showed
that 30% of employees surveyed in the US indicated they did not report observations of wrongdoing due
to fear of retaliation by co-workers and 41% would not blow the whistle because they feared retaliation
by a manager or supervisor. There are many documented cases of retaliation against whistleblowers,
which contributes to this fear. For instance studies have shown that whistleblowers lose their jobs, are
subjected to harassment in the workplace by both co-workers and managers, are forced into retirement,
and are subjected with the loss of personal reputation. In addition to the real threat of losing a job,
whistleblowers can also be subject to legal sanctions and, in certain parts of the world violent lifethreatening retaliation is common. Sadly even in a democratic country like India where for instance there
was the case recently of Shri S. Manjunath, of Indian Oil Corporation Ltd who tried to blow the whistle
on a racket of adulteration of petrol by company dealers and was shot dead as a consequence of his efforts
on November 19, 2005 by a company petrol pump dealer in Uttar Pradesh.
The US 2003 National Business Ethics Survey also showed at least in that country the percentage of
employees reporting misconduct increased and while the figure was 48% in 1994 it increased to 65% in
2003.
Some of the strategies that companies can follow while establishing or reviewing whistle blowing
components of global ethics and compliance programs are .
1. Involving international management: Senior international managers can be skeptical of efforts to
promote open communications for cultural reasons and from the fear of losing control or receiving false
allegations. People support what they help to create and so senior managers in international operations

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should be asked to participate in the development of corporate whistle blowing policies and procedures. If
left out of the development process, they may actually become an obstacle, instead of a part of the
solution.
2. Clarify what constitutes wrongdoing: Very importantly it is essential to clarify what constitutes
inappropriate conduct, particularly since interpretations of what is and is not acceptable can vary by
culture or region and people will not become whistleblowers if they do not consider the observed activity
wrongful.
3. Establishing and communicating whistle blowing policies and procedures: All employees should
receive information about the companys confidentiality and whistleblower protection policies in writing
and they should be offered training to clarify when, why, and how to report misconduct. Such training
provides an invaluable forum for employees to discuss issues and raise questions. Further, employees
should receive ongoing, targeted messages reminding them of available reporting channels and
encouraging them to raise concerns. These guidelines should also be communicated to relevant third
parties, i.e., agents, temporary employees, contract workers, customers, and suppliers.
4. Messages should be tailored to the culture: Companies must tailor communications about whistle
blowing procedures to the cultures in which the company operates, clarifying company standards with
explanations that local employees can appreciate. For example, whistleblowers may be described as
witnesses to reduce the informant connotation. In addition, employees can be encouraged to seek
advice and guidance about questionable situations, rather than reporting misconduct.
5. Having a good environment for the reporting process to work: Employees are more apt to raise
concerns in a safe environment where they feel it is acceptable to disclose misconduct. Most multinational
corporations have corporate business practices or ethics offices where employees can confidentially or
anonymously raise questions or concerns. Providing information on external reporting channels causes
even the most ardent skeptics to start believing that the organization takes whistle blowing seriously.
6. Provide local or regional resources: International employees often feel disconnected from
corporate headquarters, both geographically and culturally. This separation can be even more evident with
newly acquired operations, which have their own corporate cultures, performance standards, and values.
Simply requesting employees to report concerns to their country managers may not provide employees
with an effective resource because many country managers of multinational corporations are expatriates
and may lack cultural understanding and sensitivity.
7. Review policies and establish performance measures: Companies should regularly review their
whistle blowing policies and procedures to ensure their effectiveness. The review process not only
provides an opportunity to re-examine policies and procedures, but also the materials and
communications that support them.
Some Prominent Whistleblowers:
Jeffrey Wigand, a former executive of Brown & Williamson who exposed his company's practice of
intentionally manipulating the effect of nicotine in cigarettes on the CBS news program 60 Minutes is
famously known as the man who blew the whistle on powerful tobacco companies and multi-nationals
and who almost single-handedly revealed the health dangers of smoking to the public.
Christoph Meili, a night guard at a Swiss bank discovered that his employer was destroying records
of savings by Nazi Holocaust victims, which the bank was required to return to heirs of the victims. After
the Swiss authorities tried to arrest him under influence of the powerful bank owners he was given
political asylum in the United States.

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Bunnatine "Bunny" H. Greenhouse, a former chief civilian contracting officer for the United States
Army Corps of Engineers exposed illegality in the no-bid contracts for reconstruction in Iraq by a
subsidiary of the notorious Halliburton company which was in the past run by the present Vice-President
of the USA, Dick Cheney and who it was suspected and alleged had influenced the process to benefit
Halliburton.
Satyendra Dubey, an engineer, accused his employer NHAI of corruption in highway construction
projects under the famous Golden Quadrilateral plan, in a letter to Prime Minister Atal Behari Vajpayee
and was assassinated on November 27, 2003. Enormous media coverage followed but his death remains a
mystery to this day. It was also revealed that none of his letters were given any importance by the Prime
Minister or his office. Indeed it was suspected that had the Prime Minsters office not revealed his name
to the media he would not have been killed.68
A Case study from India
Prominent financial journalist Sucheta Dalal brought to light an interesting case of whistle blowing
some time back in which she got involved personally herself and the attitudes towards whistle blowing in
the Indian corporate sector that it revealed. She narrated the case in one of her columns as follows:
The need to protect whistle blowers was debated around the world. But in India, an attempt to
mandate whistle blower protection was scuttled by the corporate sector with the argument that it would
only empower disgruntled employees to harass the management.
I always believed that this was typical self-serving move by corporate India; I now have some proof.
Over the last few months, I have had an opportunity to observe how a whistle-blowers attempt to
expose fraud, forgery, fake bills and excise evasion by a component maker has come to naught. The story
is amazing because those directly affected by the fraud are showing no interest in nailing the perpetrator.
This story will not mention names except to say to say are all blue chip companies. The component
maker we call it Company A is listed on the Bombay Stock Exchange and supplies component to
Company T. The terms of the agreement specify that A will only use raw material from well known
companies such as M and V. Instead of buying the better quality material (which was probably more
expensive) from these reputed companies, A simply printed fake bills and test certificates that were
identical to those normally issued by M and V and thus pretended to fulfil the terms of its contract.
A whistle blower tried to expose the fraud internally but ended up losing his job. He then approached
me to expose the mischief. He had with him a stack of the fake bills and test certificates, including an
invoice from the printer where they were printed. How does one confirm that these are counterfeit bills?.
Or, that the whistle blowers allegations are genuine? .
I decided to approach Company T and Company M. The former probably received sub-standard
components and the latter had its bills forged. Both responded positively and offered to investigate.
Company M was especially helpful. Within days, its CEO had the bills scrutinised and provided me
proof of the fraud.
First, his officials showed that Company A did not buy any material from them. Secondly, they
established that the serial numbers on the fake bills were in fact issued to another client, and provided me

68

See Blowing the Whistle in Real Life, The Indian Express, June 6, 2005, p. 11

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with a photocopy of the original bill, which corresponded to the fake bill. Thirdly, they gave me a twopage note, explaining how the seemingly genuine bills were different from the originals.
This took place in February 2005. All through Company Ms bills were being forged, its CEO felt
that Company T, as the affected party, was best placed to initiate action! .
I handed over the entire set of documents to Company T (including the information from company
M), under the mistaken impression that the fraud would now be exposed. After all, Company T, which
made expensive, quality-sensitive products, was being duped with sub-standard components backed by
bills.
Strangely, nothing happened. Having told me that they were keen on pursuing the issue, the
company went completely silent. A month later, I began to remind its directors about the issue and was
assured that the investigations was still on.
Meanwhile, the whistle blower told me that Company A had got wind of the fact hat its fraud was
likely to be exposed. One of its officials responsible for the bogus documentation quickly destroyed all
the evidence at the company (mainly test certificates and bills) and left the job.
This was sometime in March. Around then, the Excise Department also raided Company As plans
and slapped a penalty on it for excise evasion.
I then slipped up my reminders to Company T, contacted another director and asked why it seemed
so reluctant to investigate the fraud. He promised to take charge of the investigation himself and called for
an investigation by the internal audit team.
Although it was already rather late and Company A had covered its tracks, there was still hope of
some action.
Meanwhile, there was another development. Company A began negations to sell off one of its plants
to a fourth entity Company MM. I wrote to the Managing Director of company MM and gave him the
entire story.
A week ago, the Board of Company MM cleared the purchase of one plant Company A, through a
demerger. Their version is that a fraud did occur but not at the unit they are buying and it pertains to the
year 2003 and 2004. They have also been assured that people connected with the fraud have since been
fired.
I am further told that there are two sides to the issue, which probably means that the company is
ready with a set of allegations against the whistle blower if he persist in fighting for justice.
Now Company T also called back. Its internal audit team had confirmed the fraud. Stunningly,
however, it down-played the episode claiming this was probably just an excise duty fudge. It also insisted
that there was no problem whatsoever in the quality of components supplied by Company A.
Why would a company print fake bills of two raw material suppliers, showing higher purchase costs,
in order to avoid excise duty? It doesnt make sense. What is crystal clear is that Company T does not
wish to pursue the case. What is behind this mysterious reluctance to expose a fraud, especially when the
business house that Company T comes from had no qualms about lodging civil and criminal complaints
against its own directors in the past? The answer is simple.

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If it admits that it received and used sub-standard material it may lead to a customer backlash and
that would be far more damaging to its image. It makes no mention about whether it will even stop
sourcing components from Company A in future. Unless of course, the same components will now be
supplied by the unit acquired by Company MM, which is friendly to the group and has a better public
profile.69
Insider Trading
Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock options)
by corporate insiders such as officers, directors, or holders of more than ten percent of the firm's shares.
Insider trading may or may not be legal, but the term is usually used to refer to a illegal practice in
many jurisdictions, in which an insider or a related party trades based on material non-public information
obtained during the performance of the insider's duties at the corporation, or otherwise misappropriated.
All insider trades must be reported in the United States. Many investors follow the summaries of
insider trades, published by the United States Securities and Exchange Commission (SEC), in the hope
that mimicking these trades will be profitable. Legal "insider trading" is not allowed if it is based on
material non-public information. Insider trading in the US is illegal if it was done with the participation
(even indirectly) of a corporate insider or other person who is violating his fiduciary duty or
misappropriating private information, and trading on it or secretly relaying it.
Insider trading is believed to raise the cost of capital for securities issuers, thus decreasing overall
economic growth.
Rules against insider trading on material non-public information exist in most jurisdictions around
the world, though the details and the efforts to enforce them vary considerably.
According to the U.S. Securities and Exchange Commission, a corporate insider is a company's
officer or a director or any beneficial owners of more than ten percent of a class of the company's equity
securities. Trades made by these types of insiders in the company's own stock, based on material nonpublic information, are considered to be fraudulent since the insiders are violating the trust or the
fiduciary duty that they owe to the shareholders. The corporate insider it is argued just by accepting
employment, has entered into a contract with the shareholders to put the shareholders' interests before
their own, in matters related to the corporation. When the insider buys or sells based upon company
owned information, he is violating his contract with the shareholders. For example, illegal insider trading
would occur if the chief executive officer of Company A learned (prior to a public announcement) that
Company A will be taken over, and bought shares in Company A knowing that the share price would
likely rise.
Sometimes liability for insider trading violations, is attempted to be avoided by passing on the
information in quid pro quo arrangements. But the law in most countries is that as long as the person
receiving the information knew or should have known that the information was company property it is
still to be regarded as insider trading. For example, if Company A's CEO did not trade on the undisclosed
takeover news, but instead passed the information on to his brother-in-law who traded on it, illegal insider
trading would still have occurred.
Now the concept of insider trading has been developed even more in the US. The "misappropriation
theory" states that anyone who misappropriates (steals) information from their employer and trades on
that information in any stock (not just the employer's stock) is guilty of insider trading. For example, if a
69

ibid.

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journalist who worked for Newspaper Company B learned about the takeover of Company A while
performing his work as a journalist, and bought or otherwise profited from transactions in that stock (of
Company A), illegal insider trading is now still assumed to have occurred in most cases. Even though the
journalist did not violate a fiduciary duty to Company A's shareholders, he might have violated a
fiduciary duty to Company B's shareholders (assuming that the newspaper had a policy of not allowing
reporters to trade on stories they were covering).
Proving that someone has been responsible for a trade can be difficult, because traders may try to
hide behind nominees, offshore companies, and other proxies. Nevertheless, the U.S. Securities and
Exchange Commission prosecutes over 50 cases each year, with many being settled administratively out
of court. The SEC and several stock exchanges actively monitor trading, looking for suspicious activity.
Not all trading on information is illegal insider trading, however. For example, while eating in a
restaurant, you hear the CEO of Company A at the next table telling the CFO that the company will be
taken over, and then you buy the stock to profit, you wouldn't be guilty of insider trading unless there was
some closer connection between you, the company, or the company officers.
In the US since December, 2005 companies are required to announce times to their employees as to
when they can safely trade without being accused of trading on inside information. The United States has
been the leading country in prohibiting insider trading. U.S. insider trading prohibitions are based on
English and American common law prohibitions against fraud. In 1909, well before the Securities
Exchange Act was passed, the United States Supreme Court ruled that a corporate director who bought
that companys stock when he knew is was about to jump up in price committed fraud by buying while
not disclosing his inside information. Section 17 of the Securities Act of 1933 contained prohibitions of
fraud in the sale of securities, which were greatly strengthened by the Securities Exchange Act of 1934.
Section 16(b) of the Securities Exchange Act of 1934 prohibits short-swing profits (from any purchases
and sales within any six-month period) made by corporate directors, officers, or stockholders owning
more than 10% of a firms shares. Section 10(b) of the 1934 Act, SEC Rule 10b-5, prohibits fraud related
to securities trading. The Insider Trading Sanctions Act of 1984 provides for penalties for illegal insider
trading to be as high as three times the profit gained or the loss avoided from the illegal trading.
In 1984, the Supreme Court of the United States ruled in the case of Dirks v. SEC that people who
receive tips or second-hand information are also liable if they had reason to believe that the tipper had
breached a fiduciary duty in disclosing confidential information and the tipper received any personal
benefit from the disclosure. (Since Dirks disclosed the information in order to expose a fraud, rather than
for personal gain, nobody was liable for insider trading violations in his case but the rule was settled.) The
Dirks case also defined the concept of "constructive insiders," people like lawyers, investment bankers
and others who receive confidential information from a corporation while providing services to the
corporation. Constructive insiders are also liable for insider trading violations if the corporation expects
the information to remain confidential, since they acquire the fiduciary duties of the true insider.
Securities Exchange Board of Indias (SEBI) regulations prohibiting Insider Trading
Sebi passed its regulations prohibiting insider trading in 1992 and the regulations were amended in
2002 and again in 2003.
The SECURITIES AND EXCHANGE BOARD OF INDIA [PROHIBITION OF INSIDER
TRADING] REGULATIONS, 1992 defines an insider as follows:
"insider" means any person who, is or was connected with the company or is deemed to
have been connected with the company, and who is reasonably expected to have
access, connection, to unpublished price sensitive information in respect of securities of a

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company, or who has received or has had access to such unpublished price sensitive
information;
The Section 3 of the regulations prohibits insider trading as follows:
No insider shall (i) either on his own behalf or on behalf of any other person, deal in securities of a
company listed on any stock exchange [when in possession of] any unpublished price
sensitive information; or
[(ii) Communicate, counsel or procure, directly or indirectly, any unpublished price
[sensitive] information to any person who while in possession of such unpublished price
sensitive information shall not deal in securities.
Provided that nothing contained above shall be applicable to any communication required
in the ordinary course of business [or profession or employment] or under any law.]
Section 3A further provides:
No company shall deal in the securities of another company or associate of that other company while
in possession of any unpublished price sensitive information.
The SEBI regulations have detailed provisions for investigation of insider trading cases by SEBI and
for prosecution and punishment of accused. The amendments made to the regulations in 2002 and 2003
has expanded its scope and tightened the rules to prevent loop holes. Under these regulations SEBI has
successfully carried out many investigations and prosecuted many company managements including in
some cases of powerful multi-national companies.
Brokers, Security Analysis and Insider trading
Brokers and security analysts gather and compile information, talk to corporate officers and other
insiders, and issue recommendations to their clients and traders privately and sometimes even on
television and in newspapers. Thus their activities may easily cross legal lines if they are not especially
careful. The Chartered Financial Analyst (CFA) Institute of USA in its code of ethics states that analysts
should make every effort to make all reports available to all the broker's clients on a timely basis.
Analysts should never report material non-public information, except in an effort to make that
information available to the general public. Nevertheless, analysts' reports may contain a variety of
information that is complied or put together without violating insider trading laws. This information may
include non-material non-public information as well as material public information, which may increase
in value when properly compiled and documented.
In practice it is often found in India that sometimes analysts and stock brokers get illegal access to
privileged information from friendly company managements that they selfishly and illegally use to profit
themselves and help their privileged clients to profit as well. This sort of insider trading happens almost
everyday but goes unpunished particularly in this country.
Arguments for legalizing insider trading
Surprisingly some economists and legal scholars (e.g. Milton Friedman, Thomas Sowell, Daniel
Fischel, Frank H. Easterbrook) argue that laws making insider trading illegal should be revoked. They

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claim that insider trading based on material non-public information benefits investors, in general, by more
quickly introducing new information into the market. Milton Friedman comments: "You want more
insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of
the company an incentive to make the public aware of that". Friedman does not believe that the trader
should be required to make his trade known to the public, because the buying or selling pressure itself is
information for the market.
Some other critics have argued that insider trading leaves no victims because a willing buyer and a
willing seller agree to trade property which the seller rightfully owns, with no prior contract (according to
this view) having been made between the parties to refrain from trading if there is asymmetric
information.
Such advocates of insider trading also question why activity that is similar to insider trading is legal
in other markets, such as real estate, but not in the stock market. For example, if a geologist knows there
is a high likelihood of the discovery of gold or petroleum under a farmer land, he may be entitled to make
that farmer an offer for the land, and buy it, without first telling the farmer of the geological data. Of
course there are also circumstances when the geologist could not legally buy the land without disclosing
the information, e.g. when he had been hired by the farmer himself to assess the geology of the farm.
Similarly politicians or their cronies can use privileged information of plans for highways, malls and other
developments to quietly buy land near where the development is planned and at present there is no clear
law at least in India to treat such buying as illegal or criminal.
The advocates of legalization also argue that prohibition on insider trading can sometimes be against
free speech. For instance punishment for communicating about a development pertinent to the next day's
stock price might look like an act of censorship. Of course if the information being conveyed is
proprietary information and the corporate insider is under contract not to expose it he has no right to
communicate it anyway.
The "Objectives and Principles of Securities Regulation" published by the International Organization
of Securities Commissions (IOSCO) in 1998 and updated in 2003 states that the three objectives of good
securities market regulation are (1) investor protection, (2) ensuring that markets are fair, efficient and
transparent, and (3) reducing systemic risk. These "Core Principles" states that "investor protection"
means "investors should be protected from misleading, manipulative or fraudulent practices, including
insider trading, front running or trading ahead of customers and the misuse of client assets." More than 85
percent of the world's securities and commodities market regulators are members of IOSCO and have
signed on to these Core Principles.
The World Bank and International Monetary Fund now use the IOSCO Core Principles in reviewing
the financial health of different country's regulatory systems as part of their financial sector assessment
programs. So laws against insider trading based on non-public information are now expected by the
international community to be made in all countries. Needless to say enforcement of insider trading laws
varies widely from country to country, but the vast majority of jurisdictions now outlaw the practice, at
least in principle.
The Problem of Discrimination
The word discrimination comes from the Latin "discriminare", which means to "distinguish
between". To discriminate socially is to make a distinction between people on the basis of class or
category without regard to individual merit. Examples of social discrimination include racial, religious,
sexual, sexual orientation (against homosexuals), disability, ethnic, height or weight related, and agerelated discrimination.

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Distinctions between people, which are based just on individual merit, (such as personal
achievement, skill or ability) are not considered socially discriminatory.
Social theories such as Egalitarianism claim that social equality should prevail.
However, conservative thinkers like law professor Matthias Storme have claimed that the freedom of
discrimination in human societies is a fundamental human right for it is the basis of all fundamental
freedoms and therefore is the most fundamental freedom. Author Hans-Hermann Hoppe, has argued that a
natural social order is characterized by increased discrimination.
Many governments have attempted to reduce social discrimination through civil rights legislation
and equal opportunity laws. For example, Article 14 of the European Convention on Human Rights
defines the right of individuals to be free from discrimination. Some governments have also
institutionalised policies of affirmative action (called reverse discrimination by its opponents). In India
there are constitutional provisions against discrimination and also for affirmative action or reservations
as we call it here in this country. Recently, there had been large country wide protests from students
against reservation increases in educational institutions. Such reservations are actually totally legal and
any constitutionally elected government in India has the right to implement such reservations. Such
reservations or affirmative action measures are merely a tool to end discrimination in this case on the
basis of caste.
But social discrimination in some form by governments is almost universal. For example,
government discrimination based on citizenship status is almost always legal. Unemployed citizens may
receive welfare benefits funded by taxpayers, while unemployed non-citizens may be denied such
benefits. Governments often have the power to forcefully expel non-citizens but cannot expel citizens.
Other forms of government discrimination may not be legal yet may remain an actuality in practice in
many countries. For instance in many countries religious minorities face discrimination even if such
discrimination is illegal.
Some historical examples of social discrimination by states would be for instance the apartheid
regime in South Africa, institutionalised racial segregation in the USA from the Civil War up to the 1960s
or the discrimination against Jews in Adolf Hitlers Nazi Germany.
Some of the major kinds of discrimination
Racial discrimination differentiates between individuals on the basis of real or perceived racial
features categories, and has even been the official government policy in several countries, such as South
Africa in the apartheid era where blacks were discriminated against legally.
In the United States, racial profiling of minorities by law enforcement officials has been called racial
discrimination. In the Britain the inquiry following the murder of Stephen Lawrence had accused the
police of institutional racism.
Racism is often subtle and that can be more persistent. In many countries and many corporate
situations people feel subtle racist discrimination but are unable to do anything about it. Legal protection
against racism can stop the overt racial bias but hearts and minds will need to change for a real
elimination of racial discrimination.
Religious and Caste discrimination
Religious and Caste Discrimination is the social differentiation of individuals on the basis of their
religious beliefs, faith or caste affiliations. This is different from racial discrimination, which is based on

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racial categories, although racial discrimination and religious discrimination may be interconnected in
various instances. For instance in India it can be said caste discrimination has almost been like a racial
form of discrimination for thousands of years because racially also, due to the fact of almost no inter-caste
marriages and mixing of blood lines, to large extent the different castes have come to have identities
similar to racial ones. The racial point of differentiation may not be colour of skin but it is certainly racial.
Many governments in western countries now have laws against discrimination based on religion,
though this is not always enforced. For example, since the terrorist attacks of September 11, 2001 in the
United States of America, the EEOC has received more than 800 charge filings alleging religious
discrimination by individuals who are or who are perceived to be Muslim, Arabic, Middle Eastern, South
Asian or Sikh with the two most common issues being harassment and discharge. Further evidence of
post-9/11 Americas unease with Muslims is found in data on their fit (or lack thereof) in U.S. society.
For example, research conducted by the Level Playing Field Institute and the Centre for Survey Research
and Analysis at the University of Connecticut revealed that Muslims were rated very low relative to other
racial, ethnic, and religious groups in terms of their fit in the American workplace. Ten percent of survey
respondents gave the lowest possible fit rating to Muslim employees. It is easy to imagine if such
respondents have to work with these racial minorities either as colleagues or superiors in corporate
settings what sort of behaviour they are likely to demonstrate. From recruitment to promotion to smooth
working of the company everything will be impacted.
An example of religious discrimination by the state is non-Muslims being discriminated against in
the few remaining Islamic theocratic states like Saudi Arabia where laws applicable to non-muslims are
harsher and in many cities non-muslims can not even enter the city.
Marxist states have also discriminated against all religions at some time or another. They dont
discriminate against any particular religion but because they are aggressively secular and dont regard
religion as important in life they aggressively have discouraged religious practice of any and all kinds
wherever they have ruled.
Research shows that non-religious people (atheists, agnostics, etc.) who dont believe in God and are
non-religious with an extreme secular outlook are sometimes subject to the most widespread and extreme
religious discrimination outside the Communist world. During his 1988 Presidential campaign, George H.
W. Bush stated that atheists who dont believe in God like some scientists should not be considered
patriots or citizens.70
Age discrimination or Ageism
Age discrimination is discrimination against a person or group on the grounds of age. Although
theoretically the word can refer to the discrimination against any age group, age discrimination usually
comes in one of two forms: discrimination against youth, and discrimination against the elderly.
In many countries, companies more or less openly refuse to hire people above a certain age despite
the increasing life spans due to medical advancements and the average age of the population. The reasons
for this range from vague feelings that younger people are more "dynamic" and create a positive image
for the company, to more concrete concerns about regulations granting older employees higher salaries or
other benefits without these expenses being fully justified by an older employees' greater experience.
Sometimes companies act horrendously by hiring younger people and asking elder existing staff to train
them and then when the younger staff is trained adequately trained they sack the older staff who had
trained the younger staff. Sometimes instead of allowing older people to update their skills particularly in
70

He also claimed a few years back that he had invaded Iraq because Jesus had told him to do so.

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areas like computer skills much less qualified and inexperienced younger people are hired just on the
basis of minor computer skills or qualifications. Companies mostly dont pause to think if their actions
amount a sort of discrimination against older people who are also in need of livelihoods and in most cases
have families to take care of.
Interestingly, in western countries mostly, there are even some underage teenagers who consider that
they're victims of age discrimination on the grounds that they should be treated more respectfully by
adults and not as second-class citizens. Some complain that social stratification in age groups causes
outsiders to incorrectly stereotype and generalize the group, for instance that all adolescents are equally
immature, violent or rebellious, listen to rock or rap music and do drugs. Some have organized groups
against age discrimination.
Gender discrimination
Gender discrimination refers to any action that grants or denies opportunities, privileges, or rewards
to a person just on the basis of their sex.
The United Nations had concluded that women often experience a "glass ceiling" and that there are
no societies in which women enjoy the same opportunities as men. The term 'glass ceiling' describes the
process by which women are barred from promotion by means of an invisible barrier. Even in the United
States, the Glass Ceiling Commission has stated that between 95 and 97 percent of senior managers in the
country's biggest corporations are men thereby implying that discrimination may have been one of the
reasons for this statistic. About countries like India the less said the better for the situation for vast
majority of women other than in the metro cities like Delhi, Bombay or Calcutta is worse.
Interestingly, it can also be argued that there is some discrimination against men too for in some jobs
like for instance that of receptionists, private secretaries, school teachers and flight host staff men are not
accepted by the corporate recruiters. Some retail companies increasingly only want female sales staff at
their outlets and even restaurants.
Also unisexuals and trans-gendered individuals, both male to female and female to male, often
experience discrimination because of their gender identity. This may lead to dismissals,
underachievement or dire difficulty in finding a job.
Socially, sexual differences have been used to justify societies in which one sex or the other has been
restricted to significantly inferior and secondary roles. While there are non-physical differences between
men and women, there is little agreement as to what those differences are.
Legislation to promote gender equality is generally complex and varied, with a wide divergence
between different countries. The principal legislation in Britain for instance is the Equal Pay Act of 1970
(which provides for equal pay for comparable work) and the Sex Discrimination Act of 1975, which
makes discrimination against women or men (including discrimination on the grounds of marital status)
illegal in the working situation. In India there are no separate legislations but there are clauses in
legislations, guidelines and court judgements referring to discrimination. In particular there have been
rules and court pronouncements on sexual harassment, which is also a form of gender bias and
discrimination.
Sexual orientation discrimination
Sexual orientation discrimination is discrimination against individuals, couples or groups based on
sexual orientation or perceived sexual orientation. This is the most controversial form of discrimination in
western countries in part on because of some people believing that sexual orientation is a behaviour

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pattern rather than a fixed minority group. Essentially, this involves the discrimination of a person who
has a same-sex sexual orientation (homosexual), whether or not they identify as gay, lesbian or bisexual.
Sexual minorities are often seen as undesirable or immoral in many cultures and, thus, discrimination
against them is frequently codified into law. In India too, homosexuality is regarded as a crime under the
main criminal statue.
As acceptability of sexual orientation varies greatly from society to society, the degree to which
discrimination is sanctioned by society also varies greatly. Discrimination based on sexual orientation is
often exacerbated by frustration or anger brought about societal changes that seem threatening to some
members of society. In particular, changing gender roles and the increased equality afforded women in
most societies is perceived as a threat to traditional patriarchal roles. Similarly, sexual minorities can also
be viewed as a threat to gender roles that favour male power in a traditional social structure.
Conservative traditional minded religious leaders and organizations have been at the forefront of
fighting legislation to ban discrimination based on sexual orientation. Increasingly, however, progressive
religious leaders have joined with gay rights and human rights activists in seeking to overturn laws that
sanction this form of discrimination. Some other people, because sexual orientation discrimination is a
component of their religious beliefs, claim that such efforts are often a form of religious discrimination. It
is also being realised that people with gay sexual orientation are also human beings who need to earn a
living just like anyone else. In India most homosexuals and lesbians hide their sexual orientation and
hence to that extent manage to avoid this form of discrimination.
Regional and language discrimination
People are sometimes subjected to different treatment because of their regional origins and
languages. These emanate from notions of bias against particular ethnic groups. For instance people from
Indias north-eastern states are sometimes subject to bias in the form of unwanted jokes and name calling
because of their sharp mongoloid features and culturally distinct languages and appearances.
Drug discrimination
There is a legal argument that the human right to freedom from discrimination is violated by the
arbitrary difference in treatment between those who use illegal drugs and those who use often more
harmful legal ones. This argument is part of a wider debate on the arguments for and against drug
prohibition. This debate is more relevant for western nations where the laws of the land have a wide reach
and the judicial system works exhaustively and thoroughly. In India many ethnic peoples, particularly
tribals and adivasis, are known to make use of self-manufactured illegal drugs for treatment and in rituals
but they are usually not arrested or prosecuted by the criminal justice system usually because there is a
certain social acceptance of this drug use.
Reverse discrimination
Reverse discrimination is a term used to describe perceived discriminatory policies or acts that
benefit a historically socio-politically non-dominant group (typically women and minorities), at the
expense of a historically socio-politically dominant group (typically men and majority races). Some
mens rights groups have emerged in recent years for instance in the western countries particularly who
are arguing that sometimes men are now discriminated against sometimes as a consequence of measures
undertaken over decades to end discrimination of women.

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Discrimination and the Market Mechanism

There is an argument advanced by right wing neo-liberal free market economists that the free market
via its self correcting mechanism deals with discrimination quite well. When business discriminates
against individuals on any basis other than productivity, the argument goes, market mechanisms impose
an inescapable penalty on profits. Over time this penalty acts with compelling force and has made profitseeking business enterprises historically tenacious champions of fair treatment, even in the face of
government disapproval and even when the people running individual businesses would prefer to
discriminate. Further that, while governments practicing unfair discrimination face occasional losses only
if their activities attract public disfavour, the losses incurred by businesses mount with each and every
sale.
The Stakeholder Alliance, a US organisation of shareholders that campaigns against discrimination
says:
Discrimination in business is a subtle, silent, and secretive thief that steals pride, income,
productivity, hope. Discrimination costs the business firm, for when the pool of workers is arbitrarily
limited, a certain number of better workers is certain to be excluded. But discrimination costs the worker
far more, in lost earnings, lost promotions, and lost opportunity. Discrimination is, for the corporation,
economically irrational, but it occurs.
Advertising Ethics
Advertising is the commercial promotion of goods, services, companies and ideas, usually performed
by an identified sponsor, and performed through a variety of media. Marketers see advertising as part of
an overall promotional strategy. Other components of the promotional mix include publicity, public
relations, personal selling, and sales promotion.
In many ways we live in a media and advertising age. In any direction we turn through out our days
and nights we are likely to face an advert.
Hence in the context of ethical functioning of business, advertising and advertising ethics have
become very important. It is part of the social responsibility of business that they carry out adverting
ethically.
Needless to say bad or insensitive advertising can annoy potential customers and hence turn out to be
a waste of money of the shareholders of a business. In extreme cases the company can be dragged to
court, which means the company will incur a cost both in legal terms and in terms of goodwill.
Also no democratic society can allow unbridled advertising without regard for any basic norms both
for the sake of aesthetics and for the sake of social and political harmony. Social or political
discrimination or the promotion of harmful and illegal ideas in the garb of advertising would be objected
to and made illegal by any society.
Financially the size of the advertising industry has grown very large worldwide and is the major
source of revenue for the media. So there is a legitimate fear the companies and their owners who spend a
lot of money on advertising with their money power can or are in a position to influence the media
editorial bias in political and social terms. Media outlets like newspapers and televisions channels are also
businesses after all dependent for their survival in a major way on corporate ad spends. If they toe a line
socio-politically that is not to the liking of business owners they can be easily starved of advertising
revenues and hence find their existence made difficult. For instance, if pesticides residues are found in
colas by independent social or scientific organisations and a particular media outlet gives much coverage

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to that news item, it is entirely imaginable that the cola companies who spend the most money on adverts,
hundreds of crores in the case of India for instance, will cut out or boycott that particular media outlet.
Hence perhaps it is not surprising that media outlets will argue in their coverage aggressively how even
mothers milk has pesticides according to them without pointing out that a baby survives entirely on
mothers milk but nobody of any age need drink colas to survive. For many people drinking a cola is
entertainment just like smoking a cigarette.
Advertising is a vehicle of social messages and influence fashions and tastes not just in dress, food
etc but also in social mores and customs. Hence any responsible business needs to decide what social
messages intentionally or unintentionally their advertising is carrying if any.
There is no consensus on what constitutes ethical advertising and there are many published codes
available. Ultimately each company has to decide for itself its own ethical standards of advertising and
many companies are nowadays putting it down in writing as part of the general company Code of
Conduct and Ethics. However, the some (not exhaustive) of the basic minimum norms that ethical
advertising should follow are:
It should not offend the regional, ethnic, social or political sensibilities of any particular class or
group of people
It should not promote the use of any harmful substance
It should not directly or indirectly promote illegal actions
It should not encourage any harmful and dangerous action
It should not lie or make false suggestions about the product or service that it seeks to promote
It should not scare people excessively into thinking that without using the product or service that
the advert promotes the consumer will be in any danger or peril
Social Protest Against Advertising
As advertising and marketing become increasingly ubiquitous, particularly in modern Western
societies, the industry has come under criticism of groups such as AdBusters which uses methods like
culture jamming which criticizes the media and the resultant consumerism using advertising's own
techniques. Advertising, according to protest groups, is one of the engines in modern societies that is
powering a convoluted economic mass production system, which promotes consumption. Recognizing the
social impact of advertising, Mediawatch-uk, a British special interest group, that works to educate
consumers about how they can register their concerns with advertisers and regulators has developed
educational materials for use in schools.
Public interest groups are increasingly suggesting that access to the mental space targeted by
advertisers should be taxed, in that at the present moment that space is being freely taken advantage of by
advertisers with no compensation paid to the members of the public who are thus being intruded upon.
This kind of tax would be a Pigovian tax in that it would act to reduce what is now increasingly seen as a
public nuisance. Efforts to that end are gathering momentum, with the states of Arkansas and Maine in
the USA considering bills to implement such taxation. Florida enacted such a tax in 1987 but was forced
to repeal it after six months, as a result of a concerted effort by powerful corporate commercial interests,
who withdrew planned conventions etc, causing major losses to the tourism industry, and cancelled
advertising, causing a loss of 12 million dollars to the broadcast industry alone.
Regulation of Advertising
There have been increasing efforts to protect the public interest by regulating the content and the
reach of advertising. Some prominent examples are the ban on television tobacco advertising imposed in
many countries including India, and the total ban on advertising to children under twelve imposed by the
Swedish government in 1991. Though that regulation continues in effect for broadcasts originating within

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the country, it has been weakened by the European Court of Justice, which has found that Sweden was
obliged to accept whatever programming was targeted at it from neighbouring countries or via satellite. In
Europe and elsewhere there is a vigorous debate on whether and how much advertising to children should
be regulated. This debate was exacerbated by a report released by the Kaiser Family Foundation in
February, 2004 which suggested that food advertising targeting children was an important factor in the
epidemic of childhood obesity in the United States.
In many countries namely New Zealand, South Africa, Canada, and many European countries the advertising industry operates a system of self-regulation. Advertisers, advertising agencies and the
media agree on a code of advertising standards that they attempt to uphold. The general aim of such codes
is to ensure that any advertising is 'legal, decent, honest and truthful'. Some self-regulatory organizations
are funded by the industry, but remain independent, with the intent of upholding the standards or codes
(like the Advertising Standards Authority in the UK).
Naturally, many business corporations view governmental regulation or even self-regulation as
intrusion of their freedom of speech or a necessary evil. Therefore, they employ a wide-variety of
linguistic devices to bypass regulatory laws (e.g. giving English words in bold and French translations in
fine print to deal with the Article 12 of the 1994 Toubon Law limiting the use of English in French
advertising). The advertising of controversial products such as cigarettes and condoms is subject to
government regulation in many countries. For instance, the tobacco industry is required by law in many
countries to display warnings cautioning consumers about the health hazards of their products. Linguistic
variation is often used by advertising as a creative device to reduce the impact of such requirement.
Regulation in India
The Indian constitution guarantees Freedom Of Press and the Freedom Of Expression which can be
regarded as one of the most important basis of our democratic form of government. Nevertheless various
acts like the Indecent Representation of Women (Prohibition) Act have been passed to deal with
advertising and press functioning.
In order to enforce an ethical regulating code, the Advertising Standards Council of India was set up.
Inspired by a similar code of the Advertising Standards Authority (ASA) UK, ASCI follows the following
basic guidelines in order to achieve the acceptance of fair advertising practices in the interest of the
consumer:

To ensure the truthfulness and honesty of representations and claims made by advertisements and
to safe guard against misleading advertising;
To ensure that advertisement are not offensive to generally accepted standards of public decency
To safeguard against indiscriminate use of advertising for promotion of products which are
regarded as hazardous to society or to individuals to a degree or of a type which is unacceptable
to society at large; and
To ensure that advertisements observe fairness in competition so that the consumers need to be
informed on choices in the market places and canons of generally accepted competitive behaviour
in business are both served.

Examples of complaints filed with ASCI:

HLLs Clinic All Clear Dandruff shampoo claimed that it had ZPTO, the special ingredient in
Clinic All Clear that stops dandruff. This claim was found to be untrue since ZPTO is a micro
biocide, when in reality, dandruff is known to be caused by several other factors, besides,
microbes. HLLs multi-crore research wing clearly overlooked this aspect. The advertisement
has been withdrawn.

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Novartis India claimed that their disposable contact lenses ensure there is no protein build-up.
This claim was found to be totally false. The truth is that build up is a natural biological
phenomenon with all contact lenses. The ad was discontinued.

Drug and Magic Remedies (Objectionable Advertisement) Act, 1954 was enacted to control the
advertisements of drugs in certain cases and to prohibit the advertisement for certain purposes of remedies
alleged to possess magic qualities and to provide for matters connected therewith. In Hamdard
Dawakhana v. Union of India (AIR 1960 SC 554) the Supreme Court was faced with the question as to
whether the Drug and Magic Remedies Act, which put restrictions on the advertisements of drugs in
certain cases and prohibited advertisements of drugs having magic qualities for curing diseases, was valid
as it curbed the freedom of speech and expression of a person by imposing restrictions on advertisements.
The Supreme Court held that, an advertisement is no doubt a form of speech and expression but every
advertisement is not a matter dealing with the expression of ideas and hence advertisement of a
commercial nature cannot fall within the concept of Article 19(1)(a).
However, in Tata Press Ltd. v. Mahanagar Telephone Nigam Ltd[13], a three judge bench of the
Supreme Court differed from the view expressed in the Dawakhana case and held that commercial
advertisement was definitely a part of Article 19(1)(a) as it aimed at the dissemination of information
regarding the product. The Court, however, made it clear that the government could regulate commercial
advertisements, which are deceptive, unfair, misleading and untruthful.
In general the major legislations and rules (not exhaustive list) regulating advertising in this country
are:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.

Drugs and Cosmetics Act, 1940.

Drugs Control Act, 1950.
Drugs and Magic Remedies (Objectionable Advertisement) Act, 1954.
Copyright Act, 1957.
Trade and Merchandise Marks Act, 1958.
Prevention of Food Adulteration Act, 1954.
Pharmacy Act, 1948.
Prize Competition Act, 1955.
Emblems and Names (Prevention of Improper Use) Act, 1950.
Consumer Protection Act, 1986.
Indecent Representation of women (Prohibition) Act, 1986.
AIR / Doordarshan Code.
Code of Ethics for advertisement in India issued by the Advertising Council of India
Code of standards in relation to the advertising of medicines and treatments
Standards of practice for Advertising Agencies (as approved by the Advertising Agencies
Association of India, Bombay)

Consumer Rights and Redress

Consumer protection law or consumer law is considered an area of public law that regulates private
relationships between individual consumers and the businesses that sell them goods and services.
Consumer protection covers a wide range of topics including but not necessarily limited to product
liability, privacy rights, unfair business practices, fraud, misrepresentation, and other consumer/business
interactions. Such laws deal with bankruptcy, credit repair, debt repair, product safety, service contracts,
bill collector regulation, pricing, utility turnoffs, consolidation and much more.

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In India The Consumer Protection Act, 1986 is the main legislation intended to protect the large
body of consumers in India from exploitation. The Act has assumed the shape of practically the most
important legislation enacted in the country in this area during the last few years. It has become the
vehicle for enabling people to secure speedy and in-expensive redress of their grievances. With the
enactment of this law, consumers now feel that they are in a position to declare sellers be aware
whereas previously the consumers were at the receiving end and generally told buyers be aware.
The Act provided for the establishment of Central Consumer Protection Council and the State
Consumer Protection Councils for the purpose of spreading consumer awareness. The Central Council is
headed by the Minister in charge of Consumer Affairs in the Central Government and in the State it is the
Minister in charge of the Consumer Affairs in the State Government who heads State Council.
To provide cheap, speedy and simple redress to consumer disputes, a quasi-judicial machinery was
set up at each District, State and National levels called District Forums, State Consumer Disputes
Redressal Commission and National Consumer Disputes Redressal Commission respectively. At present,
there are 588 District Forums, 34 State Commissions with apex body as a National Consumer Disputes
Redressal Commission (NCDRC) having its office at Janpath Bhawan, A Wing, 5th Floor, Janpath, New
Delhi. The District Forums are headed by the person who is or has been or is eligible to be appointed as a
District Judge and the State Commissions are headed by a person who is or has been a Judge of a High
Court. The National Commission was constituted in the year, 1988. It is headed by a sitting or retired
Judge of the Supreme Court of India. The National Commission is presently headed by Honble Mr.
Justice M.B. Shah, former Judge of the Supreme Court of India as President and has five Members, viz.
Mrs. Rajyalakshmi Rao, Mr. B.K. Taimni, Honble Mr. Justice K. S. Gupta, Honble Mr. Justice S.N.
Kapoor & Dr. P. D. Shenoy.
The provisions of this Act cover Products as well as Services. Products are those which are
manufactured or produced and sold to consumers through wholesalers and retailers. The services are of
the nature of transport, telephones, electricity, constructions, banking, insurance, medical treatment etc.
etc. Service, by and large, include those provided by professionals such as Doctors, Engineers,
Architects, Lawyers etc.
A written complaint, as amended by Consumer Protection (Amendment) Act, 2002, can be filed
before the District Consumer Forum (for cases of values of up to Rupees twenty lakhs), State
Commission (for upto Rupees One crore), National Commission (for above Rupees One crore) in relation
to a product or in respect of a service, but does not include rendering of any service free of cost or under a
contract of personal service. The service can be of any description, the illustrations given above are only
indicative and not exhaustive.
The Consumer Protection Act is an alternative and cheapest remedy already available to the
aggrieved persons/consumers by way of civil suit. In the complaint/appeal/petition submitted under the
Act, a consumer is not required to pay any court fees or even process fee. Proceedings are summary in
nature and endeavour is made to grant relief to the parties in the quickest possible time keeping in mind
the spirit of the Act which provides for disposal of the cases within possible time schedule prescribed
under the Act.
If a consumer is not satisfied by the decision of the District Forum, he can challenge the same before
the State Commission and against the order of the State Commission a consumer can come to the
National Commission.
In order to attain the objects of the Consumer Protection Act, the National Commission has also been
conferred with the powers of administrative control over all the State Commissions by calling for
periodical returns regarding the institution, disposal and pendency of cases. National Commission is

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empowered to issue instructions regarding, (1) adoption of uniform procedure in the hearing of the
matters; (2) prior service of copies of documents produced by one party to the opposite parties; (3) speedy
grant of copies of documents; and (4) generally over-seeing the functioning of the State Commissions or
the District Forums to ensure that the objects and purposes of the Act are best served without in any way
interfering with their quasi-judicial freedom.
Functioning of District Forums, State Commissions and the National Commission are consumer
friendly and consumers can file complaints and can address arguments in person. In genuine cases where
the parties are unable to engage the services of an advocate Bar Association of NCDRC also provides free
legal aid to needy.
The major laws to protect consumers are:
Consumer Protection Act, 1986.
Commentary on Consumer Protection Act, 1986
Consumer Protection Rules, 1987
Consumer Welfare Fund Rules, 1992
Consumer Protection Regulations, 2005
Bureau of Indian Standards (Recognition of Consumers Associations) Rules, 1991
Supreme Court Rules Relevant to Consumer Protection Act, 1986
The consumer generally is assumed to have the following rights:

Right to Safety
Right to be Informed
Right to Choose
Right to be Heard
Right to Seek Redressal
Right to Consumer Education

Right to Safety means right to be protected against the marketing of goods and services, which are
hazardous to life and property. The purchased goods and services availed of should not only meet their
immediate needs, but also fulfil long term interests.
Right to be Informed means the right to be informed about the quality, quantity, potency, purity,
standard and price of goods so as to protect the consumer against unfair trade practices. Consumer should
insist, advices the NCDRC on getting all the information about the product or service before making a
choice or a decision. This will enable him to act wisely and responsibly and also enable him to desist from
falling prey to high-pressure selling techniques
Right to Choose means the right to be assured, wherever possible of access to variety of goods and
services at competitive price. In case of monopolies, it means right to be assured of satisfactory quality
and service at a fair price. It also includes right to basic goods and services. This is because unrestricted
right of the minority to choose can mean a denial for the majority of its fair share. This right can be better
exercised in a competitive market where a variety of goods are available at competitive prices
Right to heard means that consumer's interests should receive due consideration at appropriate
forums. It also includes right to be represented in various forums formed to consider the consumer's
welfare. The consumers can also form non-political and non-commercial consumer organizations, which
can be given representation in various committees formed by the Government and other bodies in matters
relating to consumers. One such organisation is the CERC, the Consumer Education and Research Centre
which was founded by Prof. Manubhai Shah.

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Right to Seek Redressal means the right to seek redress against unfair trade practices or unscrupulous
exploitation of consumers. It also includes right to fair settlement of the genuine grievances of the
consumer. Consumers must make complaint for their genuine grievances. Many a times their complaint
may be of small value but its impact on the society as a whole may be very large.
Right to Consumer Education means the right to acquire the knowledge and skill to be an informed
consumer throughout life. Ignorance of consumers, particularly of rural consumers, is mainly responsible
for their exploitation. They should know their rights and must exercise them. Only then real consumer
protection can be achieved with success.

Questions:
1. Describe one major corruption scandal or a corporate scandal to illustrate the interplay of ethics,
politics and business.
2. What is whistle blowing and how can this tool of ethical business be made a more powerful?
3. Explain the concept of Insider Trading?
4. Write a note on discrimination?
5. What provisions are available for regulating advertising and why is ethical advertising important?
6. What are the different rights of consumers? What laws are available to protect consumer rights in
India?

SUGGESTED READINGS
1. Naomi Klein, No Logo
2. The Consumer Protection Act, 1986 (as amended up to date)

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B.Com. (Hons.)

I Year

Political Science

Graduate Course
Paper VII (b): Politics, Ethics and Social Responsibility of Business
Contents:
Lesson 1: Thinking Conceptually About Politics
Lesson 2: The Idea of a Good Society
Lesson 3: Democracy and Welfare State, Market and Globalisation
Lesson 4: Approaches to Moral Reasoning
Lesson 5: The Corporate Code of Ethics
Lesson 6: Corporate Social Responsibility
Lesson 7: Issues and Cases in Society and Business

Editor:
Adity Ganguly

SCHOOL OF OPEN LEARNING

UNIVERSITY OF DELHI
5, Cavalry Lane, Delhi-110007
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