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Of morals and markets

Reflections on teaching business ethics at Chicago Booth after the financial crisis.

Telling people that you teach business ethics tends to elicit a grin. Not necessarily a malicious one. More often it is a sign of bemusement. Business ethics is so commonly assumed to be an oxymoron that the very idea of a class devoted to it seems novel, naive, and perhaps even foolhardy. This is true even for those who actually engage in business—and who benefit most by vindicating the notion that business and ethics aren’t entirely incommensurate.

Students who take my Chicago Booth class, Ethics of Business, aren’t immune to such views. But most of them sincerely want to believe in business ethics, even if they have no idea what that actually entails. My approach to the subject takes shape around a memorable observation that conservative iconoclast William F. Buckley Jr. borrowed from the Austrian ex-Communist Willi Schlamm: “The trouble with socialism is socialism. The trouble with capitalism is capitalists.”

The adage indicates two standards for evaluating capitalism. The first is moral. Does capitalism generally presuppose virtuous pursuits? What kind of behavior does it reward? How does it shape society beyond the commercial realm?

The second involves what we might call the ideological integrity of capitalism. Given the story free-market proponents tell about its material promises, how well does the system hold up once it’s actually implemented?

I explain to my students that any economic system must meet both of these standards to be successful. No matter how lofty its moral ambitions, if an economic system fails to work in practice, no one is going to embrace it. By the same token, if it works extremely well to provide material benefits but turns its participants into moral monsters, most people will take a pass on it as well.

Buckley appreciated the extent to which capitalism can embolden and reward bad behavior—hence “the trouble with capitalism is capitalists”—but he did not live long enough to see the full extent to which the ideological integrity of the system was called into question by the 2008 financial crisis. In October of that year, nearly six weeks after Lehman Brothers filed for bankruptcy, Alan Greenspan famously announced to a congressional committee that there was a “flaw” in the free market ideology that had guided his decision making as chair of the Federal Reserve.

Greenspan later softened his statement, suggesting the flaw was limited to subprime derivatives contracts. These are the complex instruments that Warren Buffett called “financial weapons of mass destruction” for their tendency to mask the risk that investment banks were taking on from investors and regulators while, at same time, magnifying the banks’ leverage. Still, if the Dean of Deregulation could no longer give capitalism his unstinting support, many people were left wondering whether their own faith in the system was fundamentally misguided.

In the years following the crisis, such misgivings grew amid reports of the very sort of behavior Buckley had warned about. Perhaps most infamously, a Senate investigation revealed a Goldman Sachs banker crowing over email about a “shitty deal” he had brokered with a large institutional client in the summer of 2007. The $1 billion mortgage-linked investment known as Timberwolf, which lost 80 percent of its value in five months, was issued shortly after Goldman decided to shift $6 billion in bets that securities like it would continue to perform well to $10 billion in bets that they would fail. To many, Goldman’s salesmanship smacked of double-dealing, akin to selling a car with faulty brakes and then taking out insurance on the driver. The reassurance by some bankers that such deals were simply how capitalism worked only strengthened the conviction that the financial system was just as flawed as its participants.

Having taught business ethics for more than a decade now, I have watched the moral and cultural consequences of the financial crisis reflected in the faces of my students. In the years leading up to it, those who hailed from prestigious banks carried themselves with the airy confidence of the elect. But as panic swept the financial markets, their swagger gave way to uncertainty. In the years that followed, as the economy smoldered, these students increasingly looked like survivors of a natural disaster: wary, skittish, even slightly haunted. Finance was no longer the default choice for any ambitious MBA—a distinction now strongly contested by Silicon Valley—and those from the finance world routinely found themselves defending their employers from accusations that they were a blight on the body politic. (Indeed, some admitted to concealing their work whenever possible.)

For such students, the financial crisis gave way to a crisis of faith in capitalism. Few were prepared to give up on the system altogether, but their career decisions seemed more tentative and ambivalent. How might a business ethics curriculum address such uncertainty? My answer has been to take them back to Adam Smith and guide them through a reappraisal of the ironic wisdom of the “invisible hand.”

Though the term is only used three times in the full body of his work, the invisible hand has become the regnant image of Smith’s philosophy. The most famous instance is its single appearance in An Inquiry into the Nature and Causes of the Wealth of Nations (1776), in a passage where Smith praises the advantages of free trade and observes the paradoxical relationship between the activities of the merchant and the material advantage of the community. By his efforts, Smith observes, the merchant “intends only his own gain,” and yet, “he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention,” namely, the advancement of the common good by enlivening market forces that make an economy more productive and efficient.

Few students have ever actually read this passage before coming to my class, but many already take it for gospel. Without addressing the technical merits of Smith’s argument (a discussion best left to economists), there are three ways I attempt to challenge my students’ thinking.

First, I ask them to consider whether Smith’s vision, or the popular appropriation of it, vindicates any type of self-interested pursuit. Surely the man who steals my car is acting in his own favor no less than the salesman who sold it to me at a hefty markup. The difference between the two isn’t a matter of motivation, but the manner in which it is exercised. Self-interest isn’t its own defense, but what are the criteria by which we separate impermissible pursuits from those that are valid?

Second, I ask my students to think about the presumed connection between self-interest and the common good. Even in commercial exchanges that are voluntary and informed—the terms under which “competitive capitalism” flourishes, according to Milton Friedman, AM’33 —is it truly the case that all such transactions enhance the common good? How might this be measured? And should we only include material consequences? The last concern bears special scrutiny, for it seems strange to say that the consequences of such behavior should only be measured in dollars and cents.

Finally, I bring to their attention that Smith’s description of the ironic wisdom of the invisible hand is not exactly flattering to individual actors. On his account, self-interested pursuits in the commercial sphere tend to benefit the common good not because of the intentions of participants, but despite them. Indeed the most provocative contention of his work (and arguably the greatest triumph of his system) was not to insist on the virtue of greed, but to acknowledge our disdain for it and nevertheless to insist that, within certain bounds, we have good reason to countenance it.

The subtlety of this argument leaves it open to confusion and abuse. Some view it as a license for bad behavior—hence the perverse logic of “greed is good”—but more often it is treated as a reprieve from having to be too concerned with the consequences of one’s actions. To my mind, this is the greatest danger of a crude interpretation of the invisible hand. It’s all too easy to reduce Smith’s logic into a very convenient philosophy: Don’t worry about your actions. Do whatever you want, and good will inevitably follow.

An invitation to eschew self-awareness is generally ill-advised, but it is absolutely devastating to the mission of a business school. MBAs are trustees of the American economy, and the institutions that credential them are laboratories of commerce and temples to capitalism. Even if, morally speaking, the broader benefits of that system accrue behind our backs, there is nothing to be gained by allowing those who profit most from the system to be blithe about its activity. If business schools do nothing more than prepare their students to be efficient gears in a system whose integrity they take for granted, they will not only be poorly equipped to fix flaws that appear, they won’t be trusted with responsibility.

We live in an era when capitalism increasingly determines present conditions as well as the sense of what’s possible. It may be fairly said that, for anyone who wants to change the world, there is no better and more obvious place for learning how to do so than a business school. Whatever else it might do, an MBA education should give students a sense of self-awareness about the system they will dominate. That effort may fall within “business ethics,” but it should be shouldered in common by a business school faculty. Whatever students may believe before they arrive, our responsibility is to ensure that they leave institutions like Booth seeing themselves as stewards of their destiny, and ours, rather than heedless pawns of an invisible hand.

John Paul Rollert, AM’09, is an adjunct assistant professor of behavioral science at Chicago Booth and a PhD candidate in the Committee on Social Thought. He has taught classes in ethics, leadership, and politics at Harvard, Yale, and UChicago. He has published essays in Harper’s, the New Republic, the Atlantic, the New York Times, and Rarity.