Ethics versus reality

This profile of Harvard Professor Howard Gardner in the business magazine Strategy+Business is inspiring and a little depressing at the same time. Here's a man who is immensely well motivated and clearly a force for the good; for decades he's been writing books and talking to corporate leaders, trying to bring ethics into the corporate world. Yet he's clearly been encountering a deeply held view that sees ethical behavior as an "expensive luxury." The received wisdom glorifies the business importance of "hard-nosed" decision-makers who focus only on "the bottom line," and who know that greed is ultimately good.

Gardner argues that this is an illusion and that ethical behavior is just as important, perhaps more important. Why should business aspire to anything more than maximizing shareholder returns? The article expresses Gardner's views as follows:

The very survival of business may depend on a more widespread benefit. Just as the church of latter-day Europe lost its influence when the mass of society began to doubt its relevance, so too could corporate enterprises be rejected by the body politic — consumers, employees, and even shareholders — if they fail to generate wealth for more than a privileged few. If given a choice, he believes, knowledge workers will flock to companies that embrace high standards of excellence and that allow them to feel engaged with society, leaving other firms with the less talented, less motivated members of the workforce.

Many of today’s young entrepreneurs... know that a company culture of ethics, engagement, and excellence is more likely to nurture the innovation that markets reward. Thus, the companies that win in the marketplace will be those that enable good work: work that is well executed, contributes to society, and is personally enjoyable to perform. For when ethics atrophy, so does the ability to execute and lead. And when ethics are well developed, people have an inner gyroscope they can rely on for guidance as they confront the complexities of the business environment.

I do think he has a good point, and the idea of improving business ethics as a way of doing better business has been emphasized by many management theorists in the years after the last wave of corporate scandals at Enron, Arthur Anderson, World.com, etc. There's some good evidence that current education in economics and business does make people more likely to be greedy and to act unethically. But there's maybe also a little wishful thinking here, and especially a lack of attention to the heterogeneity of human kind. Sadly, some people really are greedy in a deep way, and they're not likely to be changed by further education or being made to voice oaths of ethical behavior. Moreover, what we know of the dynamics of collective cooperation suggests that only a few such people can have a corrosive influence on an entire group.

One of my favorite experiments exploring human cooperation involves so-called "public goods" games. The idea is simple. You have, say, ten volunteers in the experiment who start out with $10 each. The game proceeds through a series of rounds, in each of which each individual decides how much they'd like to contribute to a "public fund." The reason you might contribute is that you might get something back from it. The experimenter makes it clear that, after everyone has made their contribution, he or she will take the total in the fund, multiply it by two, and then distribute it back to everyone equally.

So, if everyone contributes their full $10, you'll have $100 in the middle. The experimenter will double that to $200, and then return $20 to each person, giving each a profit of $10 (the $20 minus the $10 they put in). Everybody wins! But there's trouble lurking, because each individual might be able to make even more by cheating. Suppose, for example, that everyone but me contributes $10, and I put in nothing. The total will then be $90, yielding a double of $180, with $18 being then returned to each person -- including me. Now I've made a profit of $18 rather than just $10. (The name "public goods" comes in because the experiment mimics the situation we face collectively in trying to build roads, support an army etc. If we all pay our taxes, we can all have excellent schools and good roads; but if I can avoid paying taxes, I can still enoy those things, and more money too.)

What happens in real experiments (such as those conducted a few years ago by economists Ernst Fehr and Simon Gachter) is fascinating. In the first round, almost everyone does contribute a large share of their money. Instinctively, we're prepared to be generous and to do our part in helping the group. But the cooperation doesn't last. Not everyone is so cooperatively minded, and in round one a few people do cheat. In doing so, they set the seeds for the demise of the entire group. For in the second round, some of those who gave generously in the first round, seeing that some others did not, refuse to be cheated again. They don't contribute as much. As the game continues, more and more of participants see others cheating and adopt the same behavior -- after all, who wants to by one of the few supporting the cheating many? After about ten rounds, no one any longer contributes anything.

What the experiment implies is that cooperation in such a scenario is not stable. It won't last, even though most people are cooperative and ethical, because some people cheat. The direct consequence of their existence (at least in the very simple setting of the public goods experiment) is a classic tragedy of the commons, doubly tragic because the cooperative get dragged down to the lowest level by the actions of the greedy.

This kind of experiment explores something akin to the basic physics of collective cooperation. And while it's obviously immeasurably simpler than any business organization, it also shares some important elements. A business is an enterprise of many people who, by working together, can gain more than if they all were working apart. It's successful functioning requires that most people contribute their efforts honestly, without shirking or trying to cheat their way to an unequal share. Unfortunately, the actions of the greedy is precisely what orthodox economics has been counseling (at least implictly) for many years.

In Ultimatum Game experiments with graduate students from different disciplines, for example, economist Robert Frank and colleagues found that graduate students in economics were markedly less likely to act in a cooperative manner than students in other disciplines. (For example, see the paper Do Economists Make Bad Citizens? available here.) The researchers explanation is that the students had absorbed the "self interest" model of human behavior in their education, and take it as a guide for how other people will behave. They act more greedily because they expect others to be greedy.

Getting back to Gardner, then, what he says makes sense, but I don't think goes far enough. He's right to attack the current style of education in business and economics, which doesn't adequately stress the cooperative aspects of business success. Improving education could give us more humane and rounded business leaders, yet I don't think we can rely only on better education alone. Indeed, some recent experiments in psychology suggest that about 2% of the population act more or less like sociopaths, with no feeling whatsoever for others (I can't now recall where I saw this, but I'm seeking the link). No amount of education, I suspect, will weed out this 2% who feel no compunction about cheating and stand ready to kick off the inexorable slide toward collective non-cooperation.

Of course, this is in large part precisely why we have laws and regulations, both within companies and in society, to control those not adequately constrained by internalized social norms. Indeed, Fehr and Gachter, in their experiments, explored variations in which the participants, after each round, could pay a small fee in order to punish anyone who they thought hadn't contributed adequately (the punishment was a fine against that person). Although orthodox economics would say that no one would ever choose to act this way (paying out personally, to punish someone else, while getting nothing directly in return), many people were in fact willing to do so. Consequently, cheating became more costly and those tempted to cheat ceased doing so. With the possibility of punishment in place, the group's level of cooperation remained high indefinitely.

Obviously it is difficult to draw any conclusions about the real world from such simple experiments. But they stress how useful and effective the mechanism of transparency (each person being able to see how much others are contributing) can be, especially when coupled with means for punishment of those who transgress social norms. Howard Gardner may achieve a great deal with education, and with calls for a great commitment to ethical behavior, but the realist in me says that nothing will really change unless those who cheat -- and there will always be such people -- have a high chance of being caught and punished.