THE COMPLEX FIRM
13.1. Firm and employee
We have spoken of the employee hired by an employer. If the employer is a firm, however, the relation between the employer and employee changes somewhat.
When an entrepreneur hires an employee to work in the firm, the firm becomes a society whose function is to perform the service of the firm.
That is, when the employer is an entrepreneur, he is not simply a consumer who wants someone to work for him; he is in the business of performing a service to consumers; and so his "help" is helping him "help" others for compensation. That is, what he wants is not something that advances his own goals, but which allows him better to serve the consumer. It is the price he gets from the consumer that advances his personal goals as an entrepreneur; and so his hiring someone is related to his own goals through what he (as "helped") is doing for the consumer.
Well yes, perhaps, in the ivory tower of theory. But does this make any practical difference? It does, in fact.
The employee in a firm is serving two people: (a) the entrepreneur who has hired him, and (b) the consumer whom the firm is serving.
He is not simply serving the employer, because the employer exists as a servant of the consumer; and hence, indirectly, the employee is serving the consumer through his service to the employer.
It follows from this that the employee in the firm has duties to the consumer, and that orders which are detrimental to the consumer are illegitimate and should not be obeyed.
That is, if the entrepreneur tells him to cut costs and the result is a product that is dangerous or misrepresented to the consumer, the employee cannot hide behind, "He told me to do this, and he's the boss," if the employee knows that the firm is engaged in malfeasance or dishonesty. If the damage to the consumer is serious, the employee must inform the entrepreneur that the practice is to be stopped, that he will not obey orders, and cannot work for a company that does a disservice to its customers. Otherwise, he is also responsible for the disservice.
It is an evasion of the responsibility the employee has to the consumer if he treats the entrepreneur as a non-entrepreneurial employer, for whom one can do foolish things as long as they are not immoral. He has an obligation not to cooperate in the disservice to the consumer.
The entrepreneur, then, is not "the boss" in the same sense as an employer who is not performing a service to the public, but only for himself. What he has done in hiring an employee, whether he likes it or not, is that he has made the firm a team, now, whose purpose is cooperative service of the consumer under the authority, of course, of the entrepreneur. He is precisely looking for help so that he and his employee can cooperate to serve the consumer.
If he wants a slave, this is one thing; but if he hires someone to work in his firm, this is something else. If he hires someone, he is stuck with the realities of the situation, and can't act consistently with the fact that he has a free human being, not only working for him, but working with him.
This subtlety is recognized by most small entrepreneurs; it is completely ignored, I think, in economics texts.
13.2. The firm's common goal and common good
If, then, the firm is a society of which the entrepreneur and the employee are members, and if this implies that the firm can't be just what the entrepreneur wants it to be, then what are the functions of the firm within which the entrepreneur has freedom to do what he pleases?
Any firm with more than one person in it has three purposes: one dealing with the public, one dealing with the entrepreneur(s), and one dealing with the employees.
The purpose for the public is that the firm is to perform the service consistently with what it claims it to be. The purpose for the entrepreneurs and the employees is the same: that the firm enable each person not only to live a human life, but to pursue human goals.
The firm also has several common goods to be concerned about: (a) the rights of potential employees, (b) the rights of the actual members of the firm, (c) the rights of the public the firm is serving, and (d) the rights of the rest of society, insofar as the firm is a member of the society, using the environment and so on.
13.2.1. Potential employees and hiring
Based on the fact that people need to serve others in order to be able to pursue human goals, and that most people can't do this as entrepreneurs themselves (especially in modern society), then most people need to work in firms to live a human life. It follows from this that
The firm has an obligation to potential employees in general; it exists (among other purposes) to allow people to work for a living.
That is, in a sense, the firm is performing a service to two "publics": the public that is the consumer of the special service it is rendering, and the "public" which consists of those who need to make a living by working.
Thus, the firm must not neglect, in its allocation of its resources, how many employees it can afford to hire. Once an entrepreneur hires employees, he has some sort of obligation to the employee-pool in general, from which he is receiving the benefit of someone's services. He would be exploiting employees if he just took from the pool as if it were a pool of fish without paying attention to the fact that he has become one of those who enable people, by working, to pursue their goals in life. After all, that is what he wants, and he wants the society of consumers to cooperate by buying what he sells.
This does not mean that the entrepreneur has to put himself out to hire more employees than he can use; it is just that, since firms are the way people find work, firms exists also to provide employment; employment is not accidental to the firm as a complex firm. Hence, providing employment is a purpose of the firm, and not simply an accident on the way to making profit for the entrepreneur--just as service to the consumer is not a pure means to profit, but a purpose of the firm as well.
Hence, how many employees can be hired without hurting the firm must be one of the considerations entrepreneurs must take into account.
126.96.36.199. Employment and the government
If people need to work, then they have a right to find jobs available for them. It sounds that the government has a duty here, since it has to see to it that people's rights are not violated.
In general, employment must be generated in the private sector, and by those government jobs that need to be done. Government may only "create jobs" (of unnecessary work for employment's sake) as an absolute last resort.
The reason for this is that a governmentally created job whose purpose is to "give employment" to the unemployed is unjust on several counts. First, to the "employed" in such jobs. They know that the "service" they are doing is no service to anyone but themselves--no one wants it, and it exists just to give them "work." Hence, they are getting a handout from the government and must do something useless to get it. This is clearly a contradiction. The idea that they are "working" for their pay is a sham; it has all the physical appearance of work, but it lacks the essence of it: service desired by someone else.
Secondly, these "make-work" programs are generally more expensive than simply handing the people the money; and hence they siphon off an unnecessarily large amount from the taxpayers in order to give the needy the illusion that they are doing something to "earn" what they have a right to have anyway.
Thirdly, insofar as the pay for these "jobs" is greater than the minimum of avoiding dehumanization, the government is exceeding its authority in providing it.
The government's function with respect to employment, then, is basically twofold: (1) to let the private sector know that it has as a whole the moral obligation to provide work for the people; and (2) not to get in the way of its providing work by creating conditions unfavorable to employment in the private sector.
If both of these measures still do not provide jobs for those who need work, then the government may create jobs, looking to that type of job-creation which is in fact useful to the public and which will lead most rapidly to a phasing-out of publicly-created jobs and assimilation of these employees into the private sector.
This is obviously a very complicated and difficult thing to do in practice without violating the Principle of Subsidiarity, and takes great wisdom on the part of government.
The point here is not, however, to pretend to solve the practical problems, but merely to show that the government has an obligation to the unemployed, but that "make-work" solutions, however "compassionate" they may be superficially, are dehumanizing; but, using the Double Effect, may be resorted to if all else fails.
In this connection, those in government (and everywhere else) must be on the lookout for a moral disease that has infected our country recently: that of "conspicuous benevolence." The idea of this is that you "capture the moral high ground" by doing what makes you look "compassionate" and "moral," whether it actually does any good to the recipient or not. Thus, certain welfare programs are counterproductive because they create incentives to add to the problems they purport to solve; but attempts to get rid of them are vilified on the grounds of "hard-heartedness," and more and more money is poured into them the more serious the problem has become.
For example, "job training" programs for the poor, which train them for jobs that don't exist, are pushed by the "compassionate" as if eliminating the programs was an attempt to push the poor back into poverty. Government is full of such programs--and somehow or other, they must be rooted out, so that government can perform its legitimate function.
In any case, let this suffice for general moral guidelines of the obligations of the firm and the government toward providing work for the potential employee.
There is, of course, the further obligation of the firm to hire people at wages that allow the potential employee an opportunity not only to live, but to pursue human goals.
But there is nothing special here beyond the obligation of any employer when hiring someone; and we already treated this question in the preceding chapter.
13.2.2. The firm and actual employees
Now then, once the employees are hired, what duties does the firm have toward them?
The first obligation the firm has, since the employee needs to work to live a human life, is, once it has hired an employee, to keep him working for the firm unless it has grounds for dismissing him.
Once an employee has been hired and an initial probationary period has passed, the firm may not arbitrarily fire him; and the longer the employee works for the firm, the stronger the grounds for firing must be.
Why is this? At the beginning, there is a period where both the employee and the firm are testing each other out, and finding if the employee is suited to the firm, and the firm to the employee.
The employee, however, is more or less committed to the firm because it is not all that easy to get employment. And this becomes truer the longer he works for the firm. He becomes more and more used to this firm's way of doing things, and perhaps less flexible in adapting to a new way of work; and so he becomes that much less useful to other potential employers.
Since this is the case, the firm has an obligation to keep the worker working for it; and this obligation becomes stronger the longer the employee works for the firm. It is not that he has been "loyal to the firm" for so many years, and therefore should be "rewarded" for his "devotion." That sort of thing is so much sentimental slop, often. The point is that he will be less and less able to get work anywhere else insofar as he stays with the one firm; and since one of the duties of the firm is to provide employment, it then has an obligation to this employee not to fire him after years of work now that it has found someone who can do the job better.
That is, employees are not cattle, who can be used and dropped based purely on the benefits to the firm. The firm, in expecting the employee to commit himself to it, also is committing itself to the employee; and the commitment on both sides gets stronger as time passes.
The employee's obligation, by the way, to stay with the firm even if he gets a better offer elsewhere is not as strong as the firm's obligation to him, because it is a lot easier to find another employee than it is to find another job.
Nevertheless, an employee has an obligation not to desert a firm unless he has a good reason for doing so; and it is also true in his case that the longer he stays in it, the stronger has to be his reason for leaving it--especially if it depends heavily upon him.
Athletic coaches seem to be the ones most obviously in violation of this obligation. They get a team in shape, and it has a winning season, and then some big state university makes them an offer they can't refuse, and poor Hometown U. has to whistle, whatever the contract was. This is not right. No one who has cooperated with others can look solely to his own interests and be consistent with his complete reality.
Assuming, then, that the employees have been hired and that the firm is aware of its duty not to fire them without cause, what other obligations does the firm have toward its employees?
The firm's first duty toward employees in their service is to recognize that the employees are engaged in a cooperative venture with it to serve the public, and to recognize the duty the employees have toward the public as well as toward the firm.
That is, it is inconsistent with the firm for the entrepreneur to act as if the employees were simply working for him and not also working with him. We saw this at the beginning of this chapter, but drew conclusions from the employees' point of view.
As far as the firm (or the authority in the firm) is concerned, this implies several things. First of all, channels of communication between employees and the authority must be opened, so that the employees can direct to the authority information they have about what the firm can and should be doing for the consumer, the public at large, and for the employees.
Employees are often in a better position than management to know when something inconsistent with the nature of the firm is going on. If management does not make it clear that it welcomes suggestions and comments, then this source of often vital information will dry up.
But this is more than just a practical matter. Since employees in fact have an obligation to the public the firm serves, the firm must not encourage the attitude that the only duty the employees have is toward the firm itself; that the authority will take care of how the firm serves the public and society, and the employees are to keep hands off this matter.
This is apt to make them think that their jobs are threatened if they "blow the whistle" on some disservice the firm is doing; hence, it tempts them to neglect a real obligation they have, and is also likely to get the firm itself into trouble, since top management is not apt to know shady practices at lower levels unless they encourage the idea that "blowing the whistle" is not "ratting" but helping the firm perform its true function.
This does not mean that the firm should be "democratic," with the employees sharing in the authority. Democracy is notoriously inefficient, and the consumer is ill-served by such a form of authority.
No, the authority in the firm is to give the orders, and the employees who are not in authority are to obey; but they still have the right and the obligation to provide information to the authority so that the authority can make correct orders; and the authority has the obligation to listen to that information and encourage it.
Nor must the authority always follow the advice of the employees who provide information (because the authority has information from several sources, and sees a larger picture than the employee). But in general, in order not to stifle the flow of information, an employee with a suggestion that is not followed should be briefly informed of the fact, together perhaps with reasons for not taking his advice, and gratitude for his providing it.
Employees, in other words, are not children in a family, to be treated in a "father-knows-best" way, but adults who are full persons and who deserve respect, even though they are under orders. Nor does the fact that they are under orders make them slaves of the authority. The relationship is one of cooperation, not servility or parent-child.
188.8.131.52. Dangers in the work
Secondly, the firm has the obligation to see to it that there are no unnecessary dangers to the employees in the work they are expected to do.
Does this mean that employees must not be exposed to danger? No, there are many firms that necessarily involve dangers or the service cannot be performed. Here the Double Effect must be used.
In the first place,
An employee must be willing to be exposed to a dangerous situation.
This implies that (a) he must be aware of what the actual danger is, insofar as the firm knows what it is. Obviously, if a firm has no way of knowing that some chemical, for instance, is toxic, then it has no obligation to tell the employee. However, if it has reason to believe (i.e. evidence) that the chemical might be toxic, it has an obligation to make this evidence known, in such a way that the degree of risk is realistically presented to the employee.
This (b) might, however, not mean presenting the evidence as it actually exists, because that might be a misrepresentation. For example, there is some risk (to consumers now, but the principle is the same) of cancer in food sweetened with saccharine; but the danger is actually extremely slight. The trouble is that the word "cancer" is fraught with horror, and that mere word can make the danger seem greater than it actually is.
It may be that there is a danger of getting cancer by being exposed to something in the workplace; but this danger is so slight as to be less of a risk to the employee than, say, the danger of being run over if you cross the street. To tell him, then, that there is one chance in ten thousand that you will get cancer from exposure to this chemical is to make him think that the risk is significant when in fact it is negligible (after all, he plays the lottery and thinks that one chance in ten thousand is pretty good odds).
Hence, informing employees of risks has to take into account what is actually communicated, so that they can make realistic choices of whether to work at this job or not.
In the second place,
No employee is to be forced to work at a dangerous task against his better judgment.
That is, he is not to be threatened with being fired if he refuses to do the job, since his job is a necessity. This would be coercion, not legitimate force.
In the third place,
The employee may be offered greater rewards (such as a higher salary) for taking the dangerous work.
To offer an extra reward is not coercion, as we saw; to threaten greater harm if he refuses is coercion.
The idea here is that the employee, in choosing to work at a dangerous job, has to use the Double Effect. The danger obviously is not of itself bad; it is a danger that something bad will happen; or in other words, what is bad is in the effect of doing the dangerous job. This effect must be independent of the good effects (on both the employee and the public) of the job's being done; the end never justifies the means. The employee obviously doesn't want the harm he is running the risk of, but the good effects; and these have to outweigh for him the good effect of not running the risk. This is why an extra reward may tip the balance for the employee. If the risk is significant, then the good effect must be proportionately great to make the choice reasonable.
Note that the dangers may be extremely great if these conditions are fulfilled. As long as the employee knows what he is getting into and does not have to choose his own harm, and is not coerced into this situation by some actual or implied threat, then there is nothing wrong with his doing something which might kill him if he loses his concentration for a single instant.
Nevertheless, if there is a danger to a third party (such as a fetus, or perhaps a spouse from contamination), the firm may and sometimes must forbid those who are "willing" to incur that risk from working at the higher-paying job.
The reasoning here goes this way: The higher pay offered for the job is supposed to provide an incentive to induce people to work at it in spite of its danger. This "tempts" them to take the job and (using the Double Effect) incur the risk. But no one may morally put someone else at risk when it can be avoided, and hence no one who is in this situation may morally take such a job.
But in order to avoid tempting (with a real temptation, now) such people into this immoral situation, the firm may (and to the extent that the temptation is very strong) must not only warn the potential employees of the risk, but forbid them to accept the job.
Thus, it was perfectly moral for the battery company recently which offered high pay for working among lead fumes to exclude women of child-bearing age from taking this type of job. The Supreme Court recently struck down this exclusion as "discrimination against women." Danger to future children by men was found to be insignificant; but danger to fetuses is not. Hence, there is a real difference between men and women in this case which is relevant to the issue. To the charge that a woman can choose whether or not to become pregnant, the answer is that pregnancies are often unintentional, and would not be discovered until significant exposure had occurred. The Supreme Court has put such firms into the moral dilemma of either tempting people to do what it is immoral for them to choose to do, or disobeying the law and ultimately being forced out of business.
Obviously, the government has no right to do this to a firm. Incidentally, since the deformed child can still sue in the future (since he didn't willingly cause his injury), and the firm was responsible for what happened to him; and it is anyone's guess what the result of such lawsuits twenty years or more from now (with a new possible attitude of the people) will be.
184.108.40.206. Working conditions
This leads us to the third duty of the firm to the employee, which is that
The firm has an obligation to make the work reasonably pleasant and comfortable for the employee.
That is, the employee is spending part of his human life in the work. To make the environment austere and depressing is to make the work painful in ways that are not connected to it as such. There may be discomforts and pains that are related to the service itself, which cannot be avoided; but there is no reason to add to them when they can be. Garbage collecting can never be made pleasant, by its nature; but there is no reason why working in an office has to be as disagreeable (because of uncomfortable chairs, excessive noise, dirty surroundings, etc.--just because these are cheap).
What I am saying is that it is dehumanizing to force a person into depressing surroundings just because he is working for someone else. If he wants to exist in depressing surroundings, that is one thing; if he has to work, that is something else.
This does not mean that the surroundings have to be palatial; it just means that they must not be such as to be positively repulsive if this is not in the nature of the job itself. The firm has no obligation to pamper the employees; but it has an obligation not to do the opposite.
If the firm is a cooperative association, is it consistent with its nature to have the employees unionized, and therefore form a group to confront management and the entrepreneur?
In the best of all possible worlds, unions would be unnecessary, because the firm would in fact be a cooperative enterprise, and the authority would be concerned with the welfare of the employees, and would listen to their advice. In such a situation, unionizing would be detrimental to the firm, because it would create a confrontational attitude of labor to management, which contradicts cooperation.
Nevertheless, in the real world, it is the entrepreneur and management which have the power, often of something close to life and death of the employees; and power tends to be abused, even by well-intentioned people. Therefore, the employees have the right to band together to acquire the power to protect themselves.
A union, then, is something which can be permitted because of the Double Effect. It has several bad effects: (1) Unions tend, when they become powerful, to seek their own interests to the detriment of the service of the firm to the public. (2) Unions foster inefficient work, since they hinder the authority from disciplining or firing the recalcitrant worker. (3) Unions almost inevitably make production more costly, since their main function is to control the supply of workers, making higher wage demands possible.
But there is also the good effect of protecting employees from unjustly low wages, poor working conditions, arbitrary firings, and other evils that the firm can impose on unorganized workers, who individually cannot do anything to prevent the injustices. And since the bad effects of the unions are effects, and are in fact not even necessary consequences of employees' organizing, the five rules of the Double Effect are fulfilled.
And since, in practice, the employees are those in the best position to know what injustices exist, the union is probably the best and least socially damaging way to correct them.
Therefore, unions should be permitted by the government.
Not to allow employees to form unions if they want to implies siding with an oppressive management. Why? Because contented workers see no need to unionize. Hence, if the workers want to form a union, this is an indication that something unjust is happening. It is not an infallible sign, but it is a sign nonetheless.
And using the Principle of Subsidiarity, if the injustice can be corrected by the formation of a union, the government should not take it upon itself to correct the wrong.
The general moral rule with respect to a union's relationship with the authority in a business is that it has a right to exert force to correct injustices, but that it should work toward a cooperative relationship with management.
That is, the union has an antagonistic or confrontational relationship with management as the lesser of two evils; the basic relationship with management should be one of cooperation of those under authority with those who give orders; it is only when the authority is abused that the relationship becomes one of confrontation.
Further, the union is not to be interested in the "welfare of the workers" to the detriment of the other functions of the firm. The firm has an obligation to the public to perform quality service at a reasonable price; and if the union can exert such leverage on management that it can force unreasonably high wages and permit sloppy work, then the union is contradicting itself as a part of the firm.
The union, like all members of the firm, has an obligation to the public the firm serves.
Unions have been historically committed to correcting injustices against workers, and have paid no attention to the firm's duty to the consumer. But as they have gained power, this duty becomes ever more pressing. It is time for unions to work with management, and not against it.
Given the nature of employees when confronted with injustices, it can be said that
The "union shop," forcing all workers to belong to the union, is legitimate and must not be legislated against.
Why is this? Why can't there be "right to work" laws, so that if a person wants to work in a certain plant or industry, he can, without having to belong to the union?
The reason is that if there is an unjust management, then the management is going to try to break the union by hiring people who will not join it, giving them extra benefits and so on until the union in fact has no power; and then the benefits will be withdrawn, and there will be no union. The only practical way to prevent this is to make it impossible for the management to hire non-union employees.
Hence, where there are real injustices, the injustices will not go away unless there is a union shop. "Right to work" laws look nice on paper; but they destroy the workers' ability to protect themselves.
220.127.116.11. Government's role
Now what function does the government have in this area of firm-employee relations?
1. Government may set general minimum standards for working conditions and hazards in the workplace, as well as minimum wages and hiring and retention standards, insofar as abuses occur and can be corrected by regulatory legislation.
2. Government may pass laws forbidding management from preventing the formation of unions, defining when strikes are allowable and when (because they are detrimental to society) they are not, and in general regulating abuses in either the power of management toward unions and that of unions toward management and the public.
Again, what the actual laws are to be is a difficult matter, and this is not the place to presume to dictate such laws. What is to be kept in mind is the Principle of Subsidiarity, leaving both firms and employees as free as possible, short of violating real rights of each other or the public.
13.3. The entrepreneur in a complex firm
I said at the beginning of the chapter that the complex firm changes the nature of the entrepreneur-employee relationship. Now is the time to look at the entrepreneur's role in the complex firm.
The general economic principle here is that the entrepreneur is serving the firm; it is not serving him. Profit, then, becomes the compensation for his service to the firm.
That is, the firm that is a society (i.e. with several members cooperating to serve the public) is now, in a sense, "bigger" than the one who organized it. By hiring other people, the entrepreneur has got himself involved in a cooperative venture, and must also cooperate with the other members (in accordance with his status in the society, of course), so that it is not he, precisely, who serves the public any more, but the firm.
Hence, the entrepreneur, like his employees, now serves the public through the firm, or by means of performing his particular entrepreneurial service to the firm; and the firm itself (the society or group) is what performs the service to the public.
This is another indication of why it is a mistake to say that the entrepreneur "owns" the firm. He cannot expect cooperation from the members if they are his slaves. Slaves don't cooperate; they do what they are told because of a threat.
13.3.1. The single entrepreneur
Let us first look at the firm that has only one entrepreneur, and a number of employees (whether this number is small or large).
A single entrepreneur serves the firm in two ways: (a) by investing money in it, so that it can function, and (b) by being the ultimate authority in the firm.
Investing money is a service, because the money represents activities that the entrepreneur could be doing to promote his own goals; but when he has this money tied up in the firm, he has to give up or postpone these goals in order to serve the firm and the public.
Being the authority in a firm is also a service, because the authority has to make the decisions of what the firm is to do, and how the employees are to cooperate toward this common goal; and hence the entrepreneur is responsible for everything that the employees do as members of the firm, and everything that the firm does as such.
Those who haven't tried exercising authority call this sort of thing "power" and regard it as anything but a service--and of course, in its abuse it is exploitation for personal gain, not a service at all. But not all persons in authority enjoy lording it over others; and they know that if you try to exercise authority responsibly, it is perhaps the most difficult of all services.
But we will assume that we are dealing with moral entrepreneurs (who else would have bothered to read this far?), and will provide guidelines based on the nature of the entrepreneur on how to behave consistently with the dual role in the firm mentioned above.
The profit from the firm's service to the public correctly belongs to the entrepreneur, within limits.
The reason for this is that without the entrepreneur, the firm would not exist, and hence the service to the public would not be performed by it; but this is not true of any employee in the firm. Secondly, the entrepreneur is responsible for what the firm does, and hence the reward for the firm's service is basically something that is the effect of what the entrepreneur is responsible for. Hence, this effect is the entrepreneur's also.
This can mean that it is in itself legitimate for the entrepreneur to become fabulously wealthy by the operations of the firm, while the employees in it make no more than decent salaries.
As long as the employees are receiving salaries that allow them to supply their needs and pursue reasonable goals, then the money that the firm makes is not really theirs, but the entrepreneur's.
The reason for this is that the employee agrees beforehand with the entrepreneur to work for a certain time for a certain salary. This salary is to be paid him, then, whether the firm makes a profit or not. As an employee, he is insulated from the profit and loss of the firm, short of the firm's bankruptcy; so he is not really a partner of the entrepreneur in the service of the public. He has agreed to cooperate with him and take his orders, but on condition of being paid.
Hence, since he is to be paid even if the firm loses money, he has by that contract given up his right to share in the profits of the firm. Thus, if his wages are decent, he has no complaint against the entrepreneur who is making huge amounts of money with (partly) the help of his services.
Nevertheless, since the entrepreneur's services are a necessity for the firm, he has the obligation to be sure that neither the firm, the employees, nor the public suffers because he is interested in huge profits.
The seller-value of the entrepreneur's service, of course, is what goals of his own the entrepreneur is giving up by investing his money and taking responsibility for the firm and the employees.
This can be considerable. Anyone who goes into business for himself knows that it is not a nine-to-five investment of time; and once there are employees to worry about, things become that much more complex. Many is the entrepreneur who is more wedded to his business than to his wife--and this is a service which deserves compensation.
But the profit can greatly exceed this seller-value; and, other things being equal, there is nothing wrong with this. The point here is that it is not always the case that other things are equal.
An entrepreneur, for instance, who is concerned about profit can allow the equipment in the business to deteriorate, can pay the employees the minimum he can get away with, can cut corners and fleece the public, and so on.
And he can get away with this, so long as the abuses are not blatant, because he is in a very peculiar position in the firm.
As authority in the firm, he has, of course, the responsibility for the allocation of the firm's resources; and so he can allocate it to himself rather than the common good of the firm or the public; and as long as he is clever at this, who can stop him? The employees can complain about the bad state the machinery is in, the public can grouse about the short life of the product; but if the entrepreneur chooses not to do anything about this, the complaints will produce no results.
Hence, the entrepreneur is acting inconsistently with his role as authority of the firm if he does not consider his profit as secondary to the economic health of the firm and the service the firm performs for the public.
The firm, strictly speaking is what is serving the public, and so the profit is the firm's compensation for its service.
But the entrepreneur is serving the firm, no longer directly serving the public; and so, as the servant of the firm, he has to decide what to do with the money that is coming in.
But the firm has several needs to fulfill with the money that comes in from its service: (a) it has to maintain and update equipment and the non-human means of performing the service generally; (b) it has to pay decent wages to the employees; (c) it has to provide its service at a reasonable price; and (d) it has to compensate the entrepreneur.
It does not follow, obviously, that from the firm's point of view, (d) deserves top priority; and so the entrepreneur, as the authority in the firm, has to look at things from the firm's point of view, keeping in mind, of course, the seller-value of his own service, so that he does not treat himself unjustly in allocating money to the other areas that need it.
Now if the firm is making enormous profits, so that the employees are doing quite well, the equipment is up-to-date, and the public is receiving a quality product at low cost, and still there is a lot of money left over, then the entrepreneur has no need to feel guilty at becoming enormously wealthy.
However, to the extent that these other needs are not met, then profits (over the seller-value of the entrepreneur's services) diverted to the entrepreneur are an abuse of the entrepreneur's position of authority in the firm, and are morally wrong.
If the firm is providing a necessity to the public, then the entrepreneur must keep consumer costs to a minimum, and therefore seek no more than a decent profit, decent wages for the employees, and no "frills" in the firm itself.
The reason for this should be obvious. Given that the service is a necessity, the consumer is dehumanized without it, and consequently has a right to have it. He has to pay for the service of providing it, of course, or the firm would be his slave; but because of his right, he as a right to pay the minimum necessary for a quality service to be offered him. This means that the entrepreneur, who is in authority over the firm, must see to it that costs are kept down as low as is humanly possible, consistent with serving the consumer well (and, of course, with not dehumanizing any of the employees); and therefore, extravagances in profits or fancy equipment and so on cannot be used.
13.3.2. Multiple entrepreneurs
Now then, suppose there is more than one person as entrepreneurs of the same firm. Is one of them the "real" authority, or do they divide the responsibility for the firm, or what?
You would think that there are several different arrangements they could make; and in fact there are; but there are things that cannot be avoided based on the nature of entrepreneurship in a complex firm.
When many entrepreneurs join in partnership, they may divide the authority and the profits among themselves as they see fit, but each partner is fully responsible for what goes on in the firm.
That is, partnership does not divide the responsibility connected with entrepreneurship; no matter how many partners there are, their responsibility for the firm is joint: that is, each one is fully responsible.
Hence, if one partner shirks his duties, it is up to the other partners to see that they are fulfilled; if one, for instance, takes the cash and disappears, the fact that he had a share in the firm does not mean that the other partners are absolved from meeting the full obligations of the firm. Hence, if they have to use their own personal assets to do this, they are obliged to do so.
The reason for this is that the entrepreneur is not the "owner" of the firm; he has agreed to serve it as the one who acts as investor and as the authority--or the one who acts as responsible for what the firm does. If the firm is to meet its obligations, the fact that one of the other partners has failed simply means that the responsibility devolves upon the others--since the firm is capable of serving the public (including its creditors) by means of the service of the remaining entrepreneurs.
We saw earlier that difficulty in serving the public does not free the entrepreneur from doing what he has contracted to do, since the consumer and creditors have contracted for the results, not for the effort connected with producing the results. Thus, when there is a problem, the partners remaining must fulfill the contracts and shoulder the difficulties--if possible, as we saw in discussing bankruptcy earlier.
18.104.22.168. The corporation
This assumption of joint responsibility is not always very attractive, especially if you don't know your partner very well; and so there has been devised a way of getting round it: the limited liability company, or the corporation.
DEFINITION: A corporation is a firm whose entrepreneurs have each a responsibility proportionate to the investment of each in the firm.
The basic idea here, legally at least, is that the shareholders in a corporation are financially "liable," or responsible (in the sense that they can be forced to pay) only to the extent that they have sunk money into the firm. If the firm has debts, the assets they have put into the firm can be used to pay them; but their personal assets cannot. Hence, if the corporation is mismanaged or suffers reverses, they do not risk everything they own.
To the extent that the firm is a corporation, to that extent the entrepreneur also loses authority in it; his service to the firm becomes (as the number of shareholders becomes larger) increasingly just that of investing money in it; and his share of the profits, then, has to be divided (a) among all the other investors, and (b) among those who actually are in authority.
That is, especially in the modern corporation, the notion that shareholders are "part owners" is a complete fiction. First of all, no entrepreneur, as I have so often said, is an owner. Secondly, investors in the stock market invest, not so that they can have anything to do with running the firms they invest, but often in the hope that the price of the stock will rise and they can sell at a gain (so they aren't really even interested in "dividends," which are their shares in the profits). Thirdly, the share which any given investor has in modern firms is so minuscule as to make it laughable to assume that he can have any say in the firm's policy.
Now of course, not all corporations are this way. In fact, sometimes a single entrepreneur finds it advisable to make himself a corporation, so that if his business fails, his personal assets will remain intact. And there are small corporations that are in effect partnerships, where the shareholders actually do, by some arrangement, control the operations of the business, but choose not to have the legal responsibilities that partnerships entail. There is nothing special about them, morally, that we have not already mentioned.
But in the modern, large corporation, there are several things to note.
First of all, the authority of the firm is actually in the hands of management, not the shareholders.
Stockholders' meetings are part of the fiction of "ownership," as if there were a kind of democracy among all the stockholders, with the will of the majority (i.e. the majority of "shares," now, not the majority of people) exercising authority and responsibility for the firm.
But this is unrealistic, as everyone in top management (and most stockholders) recognizes. Hence, in the modern corporation, the stockholders have given up authority along with the liability that is connected with it.
That is, when something goes wrong in a modern corporation, it is management, not the stockholders, who are to blame--as we can see in the recent Chrysler mess, as well as in other cases. It is also management, not the stockholders, who decide what the policy (even the basic policy, by means of the Board of Directors) of the firm is to be, how resources are to be allocated, and the rest of it.
The implication of this for management is
Management is serving the firm by acting as its authority; its first obligation, therefore, is to the firm, not to the stockholders.
That is, management is not supposed to be doing the "will" of the stockholders, not even the majority of them; they are not the owners of the corporation, they are other servants of it. The firm has obligations to its investors; but it has other purposes as well--and management's function is to see to it that the firm acts consistently with itself, not simply that it makes money for the stockholders.
Any firm, including a corporation, has several purposes: (a) it serves the public; (b) it provides employment; (c) it generates profit (now to be divided among stockholders); (d) it is a part of society, and (e) it exists in this world, using the things of this world.
All of these purposes have to be fulfilled; and it is management's task to see to their fulfillment. If it costs money to avoid polluting the environment, and if this means that the stockholders have to forego profits this year to get the anti-pollution devices in place, then, using the Double Effect, management has to decide to permit one evil to correct the other, weighing the danger to the profits of the stockholders (and to the company if they withdraw their money because of poor profits) against the danger to the environment (and to the company if people get up in arms at their polluting the world).
Since it is management that has the authority in the firm, including the authority to allocate resources, it is morally wrong for management to "demand" enormous salaries for themselves.
The reason, of course, is that, if they demand such salaries, they are the ones who have power to accede to or reject the demand; and the rest of the firm (including, really, the stockholders) has very little to say about it. Hence, they are in the position of the single entrepreneur, who can let the firm deteriorate unless he makes money. But they have the interesting twist on this that they can even let the investors suffer as long as they themselves are making their millions.
Like the individual entrepreneur in this position, their "responsibility" does not justify a "reward" which takes resources away from the actual purposes of the firm as such. If they are not producing the best possible product at the lowest possible cost (and how could it be lowest if they are making a million a year?), with the best working conditions and good salaries for the employees (including themselves, of course), a decent profit to the stockholders, and socially and environmentally sensitive activity, then they have no right to allocate to themselves funds that could be better spent in meeting these goals.
Once again, we must not let "the market" be a fetish, allowing injustice in the name of "free enterprise." The fact that top managers get enormous salaries does not justify these salaries, because top management has control over its own salaries, and so inordinately high salaries are to be expected if you let "the market" rule, with no check by morality or even common sense.
The seller-value of management's service is what goals the person has; but since management has control over its salary, managers may not morally have the goal of becoming the richest in their field. Prestige is to be sought, not from how much money you can squeeze out of the firm, but from how well you do your job.
This is even truer if the corporation is providing a necessity to the public. Then managers, like doctors must allocate to themselves only a decent, modest income, so that the cost of the service to the public may be kept at a minimum.
It is, in other words, possible and even desirable for top management of corporations to be "public-spirited," and be subservient neither to the putative greed of the stockholders nor to their own greed. Both the stockholders and management deserve a reward for their services; but those who exercise control over the allocation of the firm's resources need not make this reward disproportionate.
And there are many instances when this is in fact done by managers who are really interested in the firm and how it can serve the public. They do not have to be selfless; but they don't have to be purely selfish either.
Now then, as to the stockholders, since they do not have the responsibility for the operation of the firm, then they are almost in the position of bondholders: they have put money into the firm, and deserve a return for this service. But since this is now their only service to it, then the return on their investment does not have to be as great as the return for the service of the single entrepreneur or partner.
Hence, profit is legitimately figured in as a "cost" by management, when they decide what is a decent return on investment for the company, given its position in the business world.
Note that the justification of profit by the "risk" the entrepreneur takes is another fiction. It might be that the single entrepreneur or partner takes a risk; but the investor in the modern corporation does not run any more of a risk than an employee in the same company (who might be laid off or have his salary cut if the company is not doing well).
No, the investor deserves a return on his investment because his money is serving the firm, not because he is "risking" it--even if he is risking it. And the amount of return is again a compromise between the seller-value of his investment (what the investor is giving up by not being able to use the money) and the buyer-value (how much the firm needs it).
And the "market," in this case the stock market, also establishes its "normal" price, which is subject to all kinds of vagaries which have nothing to do with profitability or desire for investment in a given firm.
The point is that it is legitimate for management to decide what the return to the investors is to be, based on considerations of the various functions of the firm.
Then how is an investor different from a person who holds bonds in the same company? The bond holder has lent money to the company, and has made a contract with it to be paid back his loan at a certain interest. He is a creditor of the company, not part of it.
The investor, on the other hand, is part of the company, even though he is not really a "part-owner." He is performing a service within it, and therefore he shares in the prosperity--and unfortunately, the adversity also--of the company. He is the one to whom profits belong; and if the company does very well, then he reaps the benefit, while the bond holder just gets back his principal and interest.
One of the great evils of the modern world is supposed to be bureaucracy, with its mechanical, inhuman, inexorable operations. Actually, there is nothing wrong with it in itself, though like anything else, it can be abused. In fact, it is in itself the most human way of structuring a large organization, and for practical purposes the only way.
DEFINITION: A bureaucracy is an organizational structure such that the most specific commands are dealt with on the lowest level of authority, and as the levels go up, the commands cover broader and broader areas, up to top management, which sets the general policy.
What this means is that each level of authority has its own area where it can exercise freedom of judgment in commanding the level below it, though it must follow the orders of the level above. The idea is that those on the higher levels do not snoop into what commands lower-level authorities are actually issuing, so long as they get their task done well. Hence, top management actually has nothing to do with day-to-day details of the organization, unless some information comes up that there is mismanagement somewhere down the line, and that it can't be dealt with at lower levels. As long as their policy is being followed, they are supposed to be content.
Thus, the various levels of authority in a bureaucratic organization function almost like entrepreneurs to the level above them: the level above says what it wants, and concerns itself basically with the results, leaving it up to the lower level to figure out how to get the results.
Why is this a human way of doing things? Because it precisely leaves the lower levels with real authority; that is, free to make decisions within the carefully defined sphere of their authority. When the top level of management oversees everything, then those who are supposed to have lower levels of authority actually have none; they are simple slaves of the top management, who are constantly looking over their shoulders and "correcting" them.
Why is it the only practical way of doing things in a large organization? Because top management cannot possibly know all that it would need to know to manage the day-to-day operations of the organization; and so the attempt to supervise everything that is going on would inevitably result in foolish decisions.
Of course, since higher levels of management do not in fact know the details of what is going on below them, this allows for abuse, in that those on lower levels can take advantage of the higher-level ignorance and get the results necessary by underhanded methods.
For this reason, it is even more imperative in a bureaucracy than in other organizations that there be channels of communication that bypass immediate superiors and have access to higher levels, so that abuses at lower levels can be known and corrective measures taken.
If you can't get to the Vice President in charge of production except through your immediate supervisor, who is abusing his freedom, then it is clear that the Vice President will never know what is going on--even though, as in authority over your supervisor, he is responsible for what he does.
Hence, "whistle-blowing" is to be encouraged here, but with the idea that it is not a question of spying on lower levels, but is the condition for them to be free to act responsibly.
Those in lower levels of authority in a bureaucracy are to act freely within the limits of their authority, and not take orders from higher up as rigid rules which must slavishly be obeyed.
That is, the rules from higher up are guidelines which are supposed to indicate the results desired and the basic method of getting them, but which are supposed to be modified at the discretion of the lower authority, as he takes into account the actual situation he finds himself in, including the human reality of those he himself commands.
If this is done, bureaucracy can be flexible and a truly human way of doing business or running the government. I have myself seen this sort of thing in action in, of all places, the United States government, where the bureaucracy turned out to be helpful to me in an odd situation, rather than "sticking to the rules" and ignoring my human plight. This attitude of flexibility in the huge structure of the government, in fact, is one of the things that makes America so distinctive, and why our nation works.
13.5. Footnote on macroeconomics
Let me end this book with something that could form a book in itself, if we were trying to deal with economics itself, and not its moral dimension: what is called "macroeconomics," and how the government can affect the economy by its fiscal and monetary policy.
The idea here is that when, for instance, the government taxes people, it draws money out of the economy, and when it borrows money (paying it back with interest), it injects money into the country's economy; and either one of these operations is multiplied because (for instance) money the government borrows, it pays government employees, who spend it to buy things, and whose recipients use it to buy other things, and so on; and then when the holders of government bonds receive their interest, they spend this extra money, and that gets multiplied--and so the result is that there is more money around. With more money and the same amount of what can be purchased, prices tend to go up. And when government, by not going into debt and mandating high interest rates (by using the Federal Reserve's "discount rate"), takes money out of the economy, there's less money to buy things, and--"other things being equal"--prices tend downward.
Obviously, the ramifications of this are quite complicated, as can be seen from the difficulty the government has had in making things go the way it wants by using fiscal and monetary policy; things tend to happen as much because of what people in general think is going to happen as by what the government does that supposedly is going to make them happen.
But the point here is not whether this works or not, still less how it works and why, but whether the government has any right to be messing with the economy this way. And this can be stated rather briefly, I think.
Tinkering with the economy of the country can be justified only as a last resort to correct injustices that are widespread and for which no other solution seems available.
The reason for this is twofold. First of all, the effects of this tinkering are very large and very unpredictable--and almost impossible to control, once the machinery has been set going. The national debt, which was thought to be a good thing, and was deliberately induced for prosperity's sake, has now grown to such proportions even the liberals are worried and don't know what to do.
Secondly, it is not the government's job to bring prosperity to the nation: that is the job of the private sector.
We saw that a stable currency was one of the government's major functions with respect to money, since otherwise, it can't perform its function. But the macroeconomic activity precisely does things with the general value of money; that is in fact what it is all about: raising or lowering the value of money in general, by increasing or decreasing its supply. But that is unjust either to buyers or sellers, who are getting less (or paying more) than they had a right to expect.
Hence, this sort of thing can possibly be used to correct blatant evils in the economy, when the private sector has got itself into a mess that it can't get out of, either by itself or by legislation that corrects specific injustices. Using the Double Effect, the dangers and injustice to citizens may be less by using a Keynesian remedy than by letting things alone; and so it would then--but only then--be permitted, morally.
It is to be noted that ordinary government activities, such as providing help for the needy, regulating industry to correct injustices, and so on, also have a Keynesian effect, because the government needs to raise taxes to do these things, and has to employ people to run its programs, and so forth; and so there will be removals of money from the economy and injections of money into it, and thus there will be effects on the whole economy over and above the specific effect of the programs themselves.
These macroeconomic effects must also be taken into account by government when it does its work, so that it is not inadvertently making things worse by its legitimate activities. Welfare programs must not take so much money that they create an ever-increasing welfare class; and they must not create economic disincentives to work; they must not levy such taxes that those who can pay with the least demand being put on them will put their money into tax shelters instead of productive activity--and on and on.
Obviously, the whole thing is extremely complicated, and I don't envy any governmental official who is trying to do the right thing by the citizens. But the complications are really a matter of what is called "prudential judgment," and are not really something that belongs in an ethics textbook. The general principles that govern the morality of governmental action are fairly clear: the Principle of Subsidiarity and the Principle of Least Demand.
Let this suffice, then, for an overview of the moral dimension of human economic life.
Summary of Chapter 13
If an entrepreneur hires an employee to work for him in his firm, we have a special situation. The entrepreneur is engaged in serving the public; now the employee is serving him in his service of the public. The employee therefore has duties both to the employer and the public served. It is therefore immoral for the employee to obey orders which may be not wrong in themselves, but which lead to a disservice to the consumer (such as producing shoddy merchandise).
A firm with employees has three purposes, irrespective of the reason for which the firm was founded: since it serves the public, it has the purpose of performing the service; since it enables the entrepreneur to lead a human life, it has the purpose of providing profit; since it uses employees, it has the purpose of providing work for their livelihood. There are also several common goods (rights to be respected): the rights of potential employees, the rights of the public served, and the rights of the larger society the firm is in.
Since the firm is hiring employees, it has an obligation to provide work for the people. This means that it cannot look solely to what it needs to maximize profit--because without employees, it could not function. Therefore, it is not completely independent of them. Hence, it must take "giving people work" as one of its concerns.
Government should create a climate where the private sector can provide jobs for those who need and want to work; as a last resort, it can itself create jobs for those who cannot find them privately. But this must be a last resort, because it is taxes that must pay these wages, and to the extent that they are "make-work" jobs, they dehumanize those who must do useless work for handout pay.
Once the employee has been hired and found satisfactory, he may not be arbitrarily fired; and the longer he works for the firm, the stronger must be the reasons for firing him. The reason is that he must work, and he becomes less capable of working for other firms the longer he works in a given one. Since work is a necessity for the employee but not the firm, he may leave if he gets a better offer.
The employees are adults cooperating in a society whose purposes are those of the firm; they are not possessions of the entrepreneur; they therefore have the obligation to pursue all the purposes (common goals) of the firm. Channels of communication must be open so that they can give information to those in authority about how the firm and they can best serve the public, about working conditions, etc.
The firm must see to it that there are no unnecessary dangers in the work. Employees must be willing to be exposed to the dangers; this means that they must be informed of them, and not suffer if they refuse to face them; they should be given greater rewards for taking on the dangerous work (so that they can use the Double Effect to offset the danger). But since this lures people toward accepting the work, then the firm may morally forbid people from bringing risks on others, such as fetuses, from taking such jobs.
Working conditions must not be any more uncomfortable or unpleasant than necessary. The workers are human beings and have a right to perform their service under human conditions.
Unions in theory, with adversarial relations with management, would be detrimental to a firm; but since employees must work by necessity, employers can take advantage of this, and so employees have the right to band together to protect themselves. This must be permitted by government. But unions cannot advance their own interests at the expense of any of the three purposes of the firm (any more than management can). The "union shop" (where all employees must join the union) is not morally wrong, using the Double Effect, because the union protects the workers from exploitation, and all workers benefit from this.
Government may set minimum standards for working conditions and also minimum wages; it may prevent firms from "breaking" unions; and it may correct abuses of power either on the part of the entrepreneur or unions.
The entrepreneur is now serving the complex firm, and profit is his compensation for his service. He serves the firm (a) by investing his money--which he could be using for his own goals--and (b) by taking responsibility for what the firm as such does. But he does not "own" the firm, because (a) you can't own a service, and (b) you can't own people. He has authority, but once he hires people it is now the society called the firm which serves the public, and he becomes a member of it (the one in authority).
If the entrepreneur is one person, then he performs both of the services to the firm above. Profit, therefore, belongs to him; and, supposing the employees to be well paid (more than the minimum) and the service to the public to be well performed, there is no limit to the profit he can make; he has no moral obligation to distribute it to the employees. If, however, the firm is providing a necessity, he must cut prices so that his profit is only decent, and cut costs and leave out unnecessary frills in the firm. In all cases, whether with necessities or values, he must see to it that neither the public nor the employees suffer because of his desire to make profit.
If entrepreneurs join in partnership, they have joint responsibility for the firm, making each fully responsible for it, so that if one absconds, the other takes on all the consequences of what they other has done.
A corporation is a firm in which each entrepreneur has a responsibility only proportionate to the investment he made. Thus, if the firm goes bankrupt, his personal assets cannot now be used to pay its debts. The entrepreneur in a corporation also has authority only proportional to his investment, and if the number of investors is large, the actual authority is delegated to management, a kind of employee whose role is to carry out the general policy of the firm (determined by vote of the investors). Since management serves the firm, its primary obligation is to the firm as a whole, not the stockholders. Since management holds authority, it is morally wrong to exploit this by paying itself excessive salaries for its service. In a complex firm, profit is figured as a cost of the firm for the services investors have done in investing money in it. Their profits would be proportionately less insofar as their service in merely investing money is less than a single proprietor or partner (who have authority also).
A bureaucracy is an organization in which authority is divided into levels from the more general to the more specific; and the idea is that each level is free (within limits) to do what it wishes to fulfill the goals set for it by the level higher up. This implies that channels of communication must be more open than in other organizations, because abuses can take place at any level, and those beneath one level must have ways to bypass the abusing immediate superiors. Slavish obedience contradicts the essence of bureaucracy; it is supposed that those on lower levels will "use their heads."
The government can affect what the whole economy of the country will do. But since the government's function is simply to see to it that no rights are violated, this tinkering with fiscal and monetary policy must only be done with great discretion and to correct abuses, not "to make life better" for the citizens.
Exercises and questions for discussion
NOTE: These questions are to be answered on moral grounds, not legal ones. We are not interested in what the law is here.
1. Can entrepreneurs test potential employees for drug use on the grounds that if they are hired, they will perform less well if they are drug users? If your answer is that they can't in general, are there ever situations when they can?
2. If a firm hires employees beyond the law of diminishing returns (i.e. the amount of money the employee's work produces is less than what it costs to employ him), is this morally wrong on the grounds that the stockholders are losing money because of this redundant worker?
3. If dangers to fetuses can occur from certain jobs, doesn't this mean that the firm has to remove these dangers rather than preventing women of child-bearing age from taking the job?
4. Do hospitals have a right to advertise their services? How about on television? What is to be done about the fact that in the hospitals of Cincinnati there are more magnetic resonance imagers than in the whole of Canada?
5. Should investors be pressuring firms to take their business out of South Africa, because of its policy of racial segregation?