It can be argued that managerial decision makers must behave relatively more ethically than less so in order to ensure continuance and reliability of commercial relationships. Are managerial decision makers, by training, social conditioning, or innate character (among those who select themselves into commercial occupations), inclined to be ethical relativists, ethical egoists, utilitarians, or categorical imperativists? We are likely to find some of each kind in any walk of life, including commerce. A pure speculation is that the for-profit sector has a natural attraction for ethical egoists. Those who are intimately engaged in international business operations probably become drawn to ethical relativism. Managers who are professing Christians are more likely to be rule utilitarians or categorical imperativists. Social liberals who are act utilitarians are likely to be drawn into public sector managerial settings or politics.
Although American business interests may be characterized by egoism as a predominant guiding principle of their ethics, Adam Smith’s premise that there often is a convergence of private interest with the public weal goes a long way toward explaining why some may engage in actions which serve their own self interests while at the same time engaging in rhetoric to the effect that they are also contributing to the public welfare. Whether there is reality beyond the rhetoric is subject to scrutiny and debate. This issue is made more obscure because some in the non-business public take self-righteous positions in criticizing the apparently self-serving actions of American business decision makers.
In the last couple of decades, the American business community has given the appearance of becoming more socially aware and responsible. This may be a manifestation of the quest for legitimacy in the face of the challenge to the power and authority wielded by business executives. Many businesses have created and displayed business ethics statements. Some have gone to great lengths to indoctrinate their employees to act upon the tenants of their company ethics statements. For others such statements may be little more than marketing ploys. To the extent that business executives take their corporate ethics statements seriously and back them up with civic generosity and ethical behavior, this suggests that they are becoming less egoistic and more utilitarian in ethical orientation.
I have made numerous allusions in previous posts to the interrelations between the firm and the government. Our purpose in this post is to delve into these relationships, but our task is made all the more interesting and challenging by the recent events transpiring in Eastern Europe, the former Soviet Union, China, and other parts of the world where socialism has been the predominant form of economic organization for a half century or more.
The nature of the relationship between the microeconomic productive unit (i.e., the “firm” in our previous discussions) and the state depends critically upon the form of economic system in place in the society. Although it is possible to identify a wide range of economic system types (including communalism, tribalism, feudalism, and traditionalism), I shall limit consideration to the three which seem to be most pertinent to circumstances of the modern world: socialism, capitalism, and fascism.
In the extreme form of authoritarian socialism, the microeconomic productive unit may be little more than an appendage of the state. Indeed, there is little point in making distinctions among micromanagement (i.e., the management of the productive unit), industrial organization and policy, and the macro management (i.e., the implementation of macropolicy) of the entire economy. They are all tied up together. For all intents and purposes, there is virtually no freedom of enterprise in authoritarian socialism.
Efforts at centralized and authoritarian direction of the economy seem to have revealed inefficiencies almost everywhere they have been tried. However, societies employing such forms of economic organization seem to be backing away from them in favor of capitalism. Capitalism is distinguished by private ownership of productive resources which are organized by markets. Rather than being highly centralized, decision making in capitalism is widely dispersed to the managements of a myriad of microeconomic productive units, i.e., individuals and the firms or enterprises which compose the economy.
In most forms of capitalism there is a cleavage between the microeconomic productive units and the state which functions as government. In the purest form of capitalism, the state owns no productive resources and engages in no productive activity. Its role is closely circumscribed to providing a legal and social environment which is hospitable to the functioning of the private economy. By the same token, the privately-owned productive units have no significant governing responsibility or authority, but they enjoy a maximum of freedom of enterprise. It is these entities which have been the focus of managerial economic analysis thus-far in this text.
Between the extremes of authoritarian socialism and pure capitalism is possible a wide range of governmental productive activity as well as the use of market mechanisms in conjuction with central planning. The terms “mixed capitalism” and “mixed socialism” are used to describe these intermediate forms of economic organization. The exercise of decision-making authority by the managers of enterprises depends critically upon the nature of the relationship between their organizations and the government.
Fascism is a curious combination of the characteristics of socialism and capitalism. Resources remain privately owned as in capitalism, but the state (often in the form of a dictatorship) exercises centralized authority to impose production quotas to be met by the privately-owned enterprises. In fascism, freedom of enterprise is severely restricted. Although fascism has an infamous twentieth-century history, the most prominent examples of it have been eliminated from the world scene. But there almost certainly are examples of functional fascism in today’s “third world.” And some Western societies are experimenting with a softer variant, statism, which involves increasing willingness to rely upon the powers of the state to treat social, political, and economic problems.
The managerial economic principles and decision criteria elaborated in earlier posts have been postulated for the context of privately-owned, profit-motivated business enterprises operating within market capitalism. It is not clear that these principles and criteria are also applicable to microeconomic production units in a centrally planned and directed economy. Nor is it clear that they can apply to governmental departments and their subdivisions and agencies, or to organizations in the not-for-profit sector of a market economy (churches, charitable organizations, educational institutions, health-care organizations, etc.). These are similar in that while each is oriented toward pursuit of some mission, that mission is not to realize the maximum possible amount of net income. It therefore appears that decision criteria which are postulated for profit-oriented firms may not be applicable to not-for-profit organizations.
One problem is that in both the government agency and the not-for-profit sector, the financial requirement is simply to remain within budget (i.e., a budgetary non-negativity constraint), rather than to maximize profit (net revenue). A similar constraint usually is imposed upon a factory in a centrally-planned economy. However, this is not unlike satisficing, i.e., the pursuit of a target return on invested capital, in the for-profit sector of a market economy as originally hypothesized by Herbert Simon. In the government agency and the not-for-profit organization, the target return is simply zero rather than some positive net amount. If for-profit business firm managers can target some (any) positive amount of net income (rather than try to realize the maximum possible), it should be feasible for the managers of not-for-profit organizations to employ the same decision criteria in pursuit of a zero or non-negative return. Zero should be as good a target as some positive amount.
In the previous post I examined the thesis that managers of some for-profit business firms may attempt to optimize rather than maximize with respect to profit. Optimization means maximization of a primary goal subject to one or more constraints which are imposed by the existence of subsidiary goals. William Baumol hypothesized that many managers, instead of attempting to achieve the maximum possible profit, actually pursue some non-profit goal, e.g., sales volume or share of market, subject to a minimum acceptable profit constraint (e.g., a target return on invested capital). The Baumol model is elaborated in the previous post.
In the not-for-profit sector, the organization always has some mission to accomplish or some goal to pursue. Often the mission or goal can be expressed in some quantifiable but non-pecuniary form. For example, in a charitable organization such as the Salvation Army, the mission may be to provide the most welfare services (meals, shelter, etc.) to constituents while not over expending the budget. The manager of a (former) Soviet factory may be required to meet an output quota imposed by the contral plan while remaining within the factory’s budget. These are fairly straight-forward applications of the Baumol thesis taking the minimum acceptable amount of profit as zero (i.e., no loss or negative profit).
Production units in centrally planned economies and not-for-profit organizations in market economies are notorious for inefficient operation in the sense that costs tend to be excessive and goal achievement seems to be deficient in comparison to comparable for-profit enterprises. A significant problem in these situations is that it is very difficult to provide the manager with performance incentives. It is also difficult to link the process of mission pursuit to any factor which constitutes a performance incentive for the manager. This linkage often is achieved in the for-profit sector of the market economy by letting the manager share in the net income of the enterprise (bonuses, stock options). But this is a problem of linkage, not a problem of the applicability of managerial decision criteria.
A final problem which I shall note is that of organizational bureaucracy. Typically there are several levels of management in any complex organization. The managerial decision criteria which I have described in earlier posts are most appropriately employed at the highest level of managerial policy making where the managers can take a view which oversees the whole enterprise. These principles may be of lesser applicability at any intermediate level with-in the bureaucracy where the department or division-level manager (bureaucrat) can see and exercise control over only the few variables associated with the department. But bureaucracy is no less a problem for the corporation in the for-profit sector than for a charitable organization in the not-for-profit sector or the factory in a centrally planned economy.
The conclusion to which I have been moving is that the managerial decision criteria elaborated in earlier posts should be applicable to decision making in not-for-profit organizations and government agencies, but there are other problems of performance-incentive linkage and bureaucracy which must be dealt with.