Philosophy of business

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

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

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

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

  Early development of the philosophy of business

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

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

Modern business practice and theory developed in the age of scientific discovery, and this gave it a mechanistic orientation. In particular, Newton had just discovered classical physics. This would influence business and economics in ways that we are just beginning to understand. Early writers dealing with economic topics, such as Adam Smith, borrowed many of their techniques and terminology from classical physics. They would use terms like "equilibrium", "labour force", "elasticity", and "income accelerator". Today a few theorists are starting to question the mechanistic approach and model business on biological principles or chaos theory. Newton's law of inertia has found its way into marketing where it is claimed that consumers will continue in their current state unless they are encouraged to act otherwise. Thus advertising is claimed to perform the valuable role of helping people experience a more variegated and interesting life. John Locke also contributed an important attitude towards the private ownership of property. He claimed that individuals have certain inalienable, natural rights. One of these is the right of ownership. He said that if we toil on the land and mix our sweat with the soil, we become the rightful owners of the land. This argument was extended to other assets including the factors of production, a conclusion that many, including Karl Marx, would challenge.

Another key concept that underlies modern business is psychological egoism. This states that the core moral obligation is to oneself. Thomas Hobbes saw all action as motivated out of self-interest. A group of philosophers including Mandeville, Butler, Shaftsebury, Hutcheson, and Smith (sometimes referred to as the "enlightened self-interest school") developed this into one of the core concepts of modern business theory. Bernard Mandeville claimed that private vices are actually public benefits. In The Fable of the Bees (1714) he laments that the "bees of social virtue are buzzing in mans bonnet". Civilized man has stigmatized his private appetites and the result is the retardation of the common good. Bishop Butler claimed that pursuing the public good was the best way of advancing one's own good since the two were necessarily identical. Lord Shaftesbury turned the convergence of public and private good around, claiming that acting in accordance with ones self interest will produce socially beneficial results. An underlying unifying force that Shaftesbury called the "Will of Nature" maintains equilibrium, congruency, and harmony. This force, if it is to operate freely, requires the individual pursuit of rational self-interest, and the preservation and advancement of the self.

Francis Hutcheson also accepted this convergence between public and private interest, but he attributed the mechanism, not to rational self interest, but to personal intuition which he called a "moral sense". Adam Smith developed a version of this general principle in which six psychological motives combine in each individual to produce the common good. He called it the invisible hand. In The Theory of Moral Sentiments, vol II, page 316, he says: By acting according to the dictates of our moral faculties, we necessarily pursue the most effective means for promoting the happiness of mankind. Since Smith's time, the principle of the invisible hand has been further incorporated into economic theory. Leon Walras developed a four equation general equilibrium model which concludes that individual self interest operating in a competitive market place produce the unique conditions under which a society's total utility is maximized. Vilfredo Pareto used an edgeworth box contact line to illustrate a similar social optimality.  

  Modern philosophers of business

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

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

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

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

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

  The purpose of a business transmission

Some would argue that the main purpose of a business is to maximize profits for its owners, or in the case of a publicly-traded company, its stockholders. The late economist Milton Friedman was a proponent of this view and many bottom-line fundamentalists used his 1970 historic statement to this effect to justify a "Darwinomics" approach to doing business.

Others would say that its principal purpose is to serve the interests of a larger group of stakeholders, including employees, customers, and even society as a whole. Most philosophers would agree, however, that business activities ought to comport with legal and moral strictures. One proponent of this philosophy has been U.S. businessman-turned-futurist John Renesch [1] who writes, "Corporations are human-made organisms, associations of human beings. To see this association as having one solitary purpose and responsibility, to grow only in economic terms, is such an extreme view that implosions like what happened to Enron, WorldCom and other corporate collapses will become more and more commonplace."

Anu Agha, ex-chairperson of Thermax Limited, once said, "We survive by breathing but we can't say we live to breathe. Likewise, making money is very important for a business to survive, but money alone cannot be the reason for business to exist". Profit maximization is extremely relevant when top management is mandated with the job of selecting the right strategy for the business. According to Michael Porter, the primary goal for any business strategy exercise must be that of maximizing profitability.

Peter Drucker defined the very purpose of business as creating a satisfied customer. This definition is also useful in evaluating to what extent a business is succeeding in fulfilling its stated purpose.Many observers would hold that concepts such as economic value added (EVA) are useful in balancing profit-making objectives with other ends. They argue that sustainable financial returns are not possible without taking into account the aspirations and interests of other stakeholders (customers, employees, society, environment). This conception suggests that a principal challenge for a business is to balance the interests of parties affected by the business, interests that are sometimes in conflict with one another.  

  Business as propertytransmission

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

Philosophers who subscribe to this view generally point out that a property owner's rights are nevertheless not unlimited, and that they are constrained by morality. Thus, a home owner cannot burn down his home and thereby jeopardize the entire neighborhood. Similarly, a business does not have an unlimited right to pollute the air in the manufacturing process.Followers of John Locke would suggest that the first instance of property is the property that one has in himself, and that one's labor is an extension of this. The labor theory of value suggests that when one mixes his labor with an object, he thereby makes it his property, and that his labor is the principal means of measuring value. Many classical economists and Marxists both subscribe to this view. Marxists also believe that modern production, which involves many inputs, makes an equitable division of this property impossible, which, among other reasons, necessitates that the state hold property and the factors of production in common for everyone. They assert that labor value provides an objective measure of economic activity, compared to price and other measures which they see as subjective and fluctuating.

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

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

  The business mission

The mission of a business is basically what it does, its principal objective (e.g., to make cars, sell guns, provide insurance, sell hamburgers). One can gussy it up with adjectives, of course, for example, to make the best, largest, greatest, etc., but, for our purposes, we intend only to know the major objective or objectives of the enterprise without the fluff or superlatives. The philosophical question arises, are some missions immoral? For example, if a business intends to manufacture and sell a recreational drug that is known to be harmful to the users, is it immoral to do so? What if the business fully discloses the risks, and non-users are not put at any unnecessary risk as a result? One could easily ask such questions of guns, sex, motorcycle helmets, dangerous amusement park rides, and so forth.

Some philosophers would suggest that a business ought to be allowed to sell virtually anything that does not harm unwilling, rational participants (i.e., innocent bystanders), provided the business fully discloses the dangers to those who purchase its products. Others, of course, would say that business and society have duties to protect people from exercising poor judgment. A libertarian might say that such proscriptions are laden with subjective valuations, and that people have a right to choose for themselves, that is, as long as they do not harm others.

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

  The ontology of the business enterprise

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

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

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

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

  The epistemology and logic of business

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

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

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

  Opportunity cost

In economics, opportunity cost, or economic cost, is the cost of something in terms of an opportunity forgone (and the benefits which could be received from that opportunity), or the most valuable forgone alternative (or highest-valued option forgone), i.e. the second best alternative. An early representation of the concept of opportunity cost is the broken window fallacy illustrated by Frédéric Bastiat in 1850.

For example, if a city decides to build a hospital on vacant land it owns, the opportunity cost is the value of the benefits forgone of some other thing which might have been done with the land and construction funds instead. In building the hospital, the city has forgone the opportunity to build a sporting center on that land, or a parking lot, or the ability to sell the land to reduce the city's debt, since those uses tend to be mutually exclusive. Also included in the opportunity cost would be what investments or purchases the private sector would have voluntarily made if it were not taxed to build the hospital. The total opportunity costs of such an action can never be known with certainty (and are sometimes called "hidden costs" or "hidden losses", what has been prevented from being produced cannot be seen or known). Even the possibility of inaction is a lost opportunity (in this example, to preserve the scenery as-is for neighboring areas, perhaps including areas that it itself owns).

Opportunity cost need not be assessed in monetary terms, but rather can be assessed in terms of anything which is of value to the person or persons doing the assessing (or those affected by the outcome). For example, a person who chooses to watch, or to record, a television program cannot watch (or record) any other at the same time. (The rule still applies if the recording device can simultaneously record multiple programs; there is going to be a limit, and if the number of desired programs exceeds the capacity of the recorder, some of them will not be saved, and thus cannot be seen.) In any case, at the time the person chooses to watch a program, either live or on a recording, they cannot watch something else, and if they are not able to record another program showing at the same time, the opportunity to view it is lost (presuming the particular program is not repeated). Or as another example, someone having a video game can choose to watch a program or play the video game on the TV; they can't do both simultaneously. Whichever one they choose is a lost opportunity to experience the other. Or for that matter, a lost opportunity to engage in some other activity entirely (exercising outdoors, or visiting with family or friends, as merely two examples).

The consideration of opportunity costs is one of the key differences between the concepts of economic cost and accounting cost. Assessing opportunity costs is fundamental to assessing the true cost of any course of action. In the case where there is no explicit accounting or monetary cost (price) attached to a course of action, ignoring opportunity costs may produce the illusion that its benefits cost nothing at all. The unseen opportunity costs then become the implicit hidden costs of that course of action.

Note that opportunity cost is not the sum of the available alternatives, but rather of benefit of the best alternative of them. The opportunity cost of the city's decision to build the hospital on its vacant land is the loss of the land for a sporting center, or the inability to use the land for a parking lot, or the money which could have been made from selling the land, or the loss of any of the various other possible uses -- but not all of these in aggregate, because the land cannot be used for more than one of these purposes.

However, most opportunities are difficult to compare. Opportunity cost has been seen as the foundation of the marginal theory of value as well as the theory of time and money.In some cases it may be possible to have more of everything by making different choices; for instance, when an economy is within its production possibility frontier. In microeconomic models this is unusual, because individuals are assumed to maximise utility, but it is a feature of Keynesian macroeconomics. In these circumstances opportunity cost is a less useful concept.