Market Failure Approach to Business Ethics | Online Homework Help

Market Failure Approach to Business Ethics. Heath has a Reaction Against CSR and Stakeholder Theory Misguided Ideas. Profit Maximization v. Self Interest. Joseph Heath: “Profit maximization and self interest are not the same thing, and the failure to distinguish adequately between the two can be a source of enormous confusion.”

Stakeholder Theory Misconceptions (CSR)

Stakeholder theory suggests that…
Employees/Manager are to act on their self interest
Which is to provide independent action to do what is right for society, which will lead to
Spending less time focused on the shareholder.
Heath disagrees with this concept.
Profit Maximization v. Self Interest

Single Shareholder
Shareholder is also the sole employee
Self Interest of SH is the same self interest of the employee = maximize SH value
Single Shareholder
Maximize SH Value
No division of labor – small proprietorship
Division of labor – larger company, managers are not shareholders
Maximize Self Interest
Heath’s Hypothesis

Efforts to make employees consider the rights of “stakeholders” is misguided.
“Alternatively, profit maximization, understood as an obligation, rather than an expression of self interest, provides a perfectly legitimate platform for the development of a robust moral code”.
Where does the “obligation” stem from…

Physicians and Patients:
Physicians have an obligation to provide the best care to their patients, and they are not allowed to let self-interest creep into their decision making.
Example: gain $$ to perform a surgery when it is not needed.
Managers are like Doctors

Managers and Shareholders:
Managers have an obligation to provide the best decision making to shareholders, so that shareholders get the greatest increase in value.
Managers should not engage in self-interested behavior, such as caring for other stakeholders – it divorces the employee from their obligations.
But there is a problem with this pure analogy

Improving a
patient’s health
Making profit
Lawyers and the guilty

Changing the analogy to law…
Lawyers and clients:
Once engaged, lawyers have a duty to ensure they provide the best service for their client, even if the client is known to be guilty, and even if the lawyer does not like the client.
This activity of representing someone who you know is guilty is contrary to practical morality.
Lawyers and guilty, continued

What justifies a lawyers behavior is the fact that they operate in a context of an institution with differentiated roles.
The outcome of this behavior is a vigorous interaction where justice is served when both sides of the law have the obligation to fight for their client. The acquittal of defendant may be maximized – even though that is not the intent of the system.
The end of the exchange is JUSTICE.
(improvement of the system for all)
(maximize the benefits for everyone in society)
Lawyers and managers are alike

The manager should seek to maximize profit for the same reason the trial lawyer looks to have his client acquitted – even if the lawyer has a self interest not to do so.
Moralizing critique of the profit motive is comparable to attacking lawyers for defending rapists and murders.
Managers should be concerned not with profit maximizing for the sake of profit – BUT BECAUSE IT MAKES THE SYSTEM MORE EFFICIENT
But there is a problem with this pure analogy

Defending the guilty
Making profit
Creates an efficient legal system
Maximizing SH Value
Creates an efficient capital system
Making the system more efficient

By maximizing profit in a competitive markets, we will expect decrease in waste, decrease in price, best use of resources…plus maximize personal virtues of participants.
BUT in the short run….it also leaves people out of the market – makes certain people rich – increases the potential divide between the rich and the poor
Market Failures Occur

They occur when companies are deceptive to consumers
When companies do something that remove free competition
When the price does not reflect the full costs

Maximizes Market Virtues and Efficiency
Maximizes Virtues of Market Participants
Steer Clear of SHORT RUN Market Failures
“Disruptive Technology”


(6) Questions of the Day

What is the basic idea of the tech?
Questions of the Day

What is the basic of the tech?
What industries will be impacted?
Questions of the Day

What is the basic of the tech?
What industries will be impacted?
Should we invest?
Questions of the Day

What is the basic of the tech?
What industries will be impacted?
Should we invest?
How will Wall Street be impacted?
Questions of the Day

What is the basic of the tech?
What industries will be impacted?
Should we invest?
How will Wall Street be impacted?
How will the new disruptions alter geo/political dynamics?
Questions of the Day

What is the basic of the tech?
What industries will be impacted?
Should we invest?
How will Wall Street be impacted?
How will the new disruptions alter geo/political dynamics?
What are the ethical consequences to consider?
What is
Crashing the Kids Party – Second Wave of Blockchain

What is Blockchain?
A shared public registry of who owns what and who transacts what (BLOCK)
These transactions are secured by cryptography and linked together to create a history (CHAIN)
Decentralized network of participants who are incentivized to maintain a database


Before Blockchain
Sensitive Data
Personal, financial, identity
Single entity 3rd party data storage = Vulnerable to hacking, leaks, and fraud
Firms sell our sensitive data to unknown 3rd parties

Online merchants, platforms, banks trusted with our data


After Blockchain
Sensitive Data
Personal, financial, identity
Sensitive Data is encrypted / saved on a distributed network instead of stored on a single database
You alone have the unique key to access your own data
You control which 3rd parties, if any can access your data

How does it work?
The Centralized Bank Model

Bank of America Ledger

A New Way

A Distributed Ledger
A database held and updated independently by each participant (or node) in a large network.
Each person (node) updates new records independently
Once every (majority) node agrees on the records, consensus has been reached ( A block has been formed)
No central administrator
Think of a spreadsheet – everybody in the room needs to update with changes and then compare and contrast each one to arrive at a consensus that the spreadsheets are identical
The art of protecting information by transforming it (encrypting it) into an unreadable format, called cipher text. Only those who possess a secret key can decipher (or decrypt) the message into plain text.
“Private key” – i.e Social Security Card
“Public key” – i.e Email address

What makes it work?
How do participants who don’t trust each other, create a network that functions efficiently?
Example: Why do drivers trust that their peers will follow the same agreed upon rules?

If you don’t follow rules, you get a ticket = Monetary
If you drive poorly, you will get in an accident = Death or Injury
If you drive well, insurance costs go down. = Monetary
The answer as to why everyone else will drive well in general is because they are reasoning the same way you are, minimizing the economic cost as well as the potential for death an injury

Crypto Economics
Miners perform calculations required to do the work necessary to create blocks
Miners are incentivized via Tokens (cryptocurrency) and transaction fees to solve a complicated problem which in effect creates a new block
In Bitcoin, a miner receives 12.5 Bitcoin for solving the block and also chooses which transactions can be included in next block (can extract rent for this)
In Proof of Stake protocol, tokens are taken away for bad actions
An Example

Has anyone heard of a smart contract?
Smart Contract
A computer protocol intended to facilitate, verify, or enforce the performance of a contract.

Legal Agreements
Smart contract platform that will allow lawyers to make legally binding and self-executing agreements on the blockchain.
Can call existing agreements and customize to a new contract
This will then provide a transparent and secure contracting system that always allows all permissioned parties to see what is happening without the need for a central authority to manage or control the execution of the contract

Employee Offer Agreement
Confidentiality Agreement
Restriction Stock Grant
Alternative Dispute Resolution Agreement
Financial Settlement
Remove the need for clearinghouses and long settlement
Stocks, Bonds, and Derivatives can settle on trade date rather than the T+3 or T+2 complications

IBM is partnering with Walmart, Nestlé, Dole, Tyson Foods, Kroger, and others, to use blockchain technology to track food throughout the complex global supply chain.
Under the new system, if a consumer falls ill from E. coli traced to a batch of lettuce, scanning the barcode would quickly show where it came from and where other lettuce from the same batch went.
Imagine the amount of time and money Chipotle could have saved?
Supply Chain

How will this be a major Disrupter?
Key attributes of the Blockchain
Increases Transparency
Provides more information to everyone in the transaction – quickly
Reduces the possibility of central manipulation
The code is “typically” available for everyone to see
Limited monopoly power
Many times they share each others technology
You control your data
Removes Bottlenecks
Realigns Ownership

Finance Questions
What is a token?
How are these companies raising capital so quickly?
What is a token sale or ICO?
Is a token equity?
What is the relationship between tokens and equity?
What does the SEC say?
What do other governing authorities say about tokens?
What are Tokens?
Digital Assets
Utility Token
Security Token
Platform Use
FTC Oversight
Financial Use
SEC Oversight
Token Sale
An initial coin offering or secondary offering, where owners of blockchain companies are selling tokens to anyone with the money to afford it, including but not limited to weak agents, people of lesser means, etc…
Many times there are limited disclaimers and requirements to raise the capital – limited size restrictions
Token Rights
Tokens typically have no voting rights, liquidation rights or similar preferences provided to equity or debt holders.
Typically, they are provided some access to a platform or a project. Sometimes they are provided a dividend or guaranteed payment, but limited to no rights in the underlying company.
Relationship with Equity
Equity holders still control the company and the voting.
Many times there are automated governance structures, but most times there are still equity investors.
SEC Position
Slowly analyzing
Cautiously analyzing
Judiciously thinking through the issues
IRS Position
Taxed as real property – short term and long term capital gains treatment….
Many crypto investors are not reporting their gains.
What is
Artificial Intelligence?
AI = the ability to harness the power of data aggregation, computing power, and biological knowledge, all with the intention of hacking humans.
Ability to Hack Humans =
B (Biological Knowledge) *
C (Computing Power) *
D (Data)
[Prof.Yuval Noah Harari)
(Internet, Sensor Technology
(Biological, Behavioral)
Computing Power
(Processing Speeds, CPU)
Application to Human Experience
Convergence of Technology
Online records,
Digital photos
Geo coding
Modern smart devices dwarf the power of the supercomputers of the 1960/1970s
Greater understanding of how the human body works… better opportunity to program behavior
Build algorithms based on a set of rules…
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