Why we need an Australian Institute for Applied Ethics
Capitalism depends on government to provide a trusted framework of rules around it. But when politics turns into reality TV, we must ask the ethical questions ourselves.
Ken HenryContributorThe capitalist model, detailed in Milton Friedman’s 1962 classic, Capitalism and Freedom, is often criticised by non-economists for celebrating the pursuit of self-interest. Yet capitalism’s claims to moral legitimacy come not only from its promotion of liberty, but also from its impressive claims to aggregate economic efficiency. Specifically, capitalism claims to produce community outcomes that are Pareto optimal, meaning that no one person can be made better off without at least one other person being made worse off.
Capitalism is about harnessing the energy of self-interest. AP
Except as required by the law of the land, individuals in a capitalist system are not obliged to attend to the interests of another. They are free to pursue persistently divergent interests, as workers, investors and consumers. And those who run businesses have no social responsibility beyond the pursuit of profit.
But while the capitalist model is founded on the pursuit of self-interest, it will not function in the absence of trust. Mutual confidence in the functioning of the capitalist system is critical to its claimed efficiency benefits. A lack of trust means a suboptimal number and size of transactions, and underinvestment in innovation, with significant implications for the level of aggregate economic activity, productivity and real income growth. Moreover, a sudden loss of trust can have catastrophic social consequences, as the global financial crisis of 2008-09 illustrates.
A recent report by Deloitte Access Economics, commissioned by The Ethics Centre, explains how large gains in economic activity can be achieved with modest improvements in levels of trust.
Readers of this journal have observed how trust in business has been undermined by apparent failures to meet community expectations in the treatment of customers in many sectors of the economy, including through impenetrable information disclosures, automated customer call centres and store closures. And, like all other Australians, they would be wondering about their capacity to cope with the many ways in which businesses and governments might make use of advances in AI and robotics in the years ahead.
In the capitalist system, businesses are not to concern themselves with meeting community expectations, except to the extent that doing so increases profit. Ensuring that business meets community expectations is the responsibility of government.
As Friedman puts it, capitalism relies upon a functioning democratic system that both enables and obliges its citizens to elect governments to “determine, arbitrate and enforce … a framework of law” to ensure “free and open competition” and protection from “fraud or deception”. And Friedman goes on to explain, if somewhat grudgingly, that government also has responsibility for attending to negative externalities and making adequate provision of public goods.
Capitalism casts business and “the rest of us” (Friedman’s expression) as adversaries, and government as our protector.
So, it is something of a paradox that, year after year, surveys of “the rest of us” report that, among the principal institutions affecting our lives – businesses, not-for-profit entities, government and the media – it is government that enjoys the least trust.
Capitalism demands a lot from government. Mostly, our political leaders fall short. Instead of attending to frameworks of law and enforcement, many have preferred the role of business-bashing critic, pointing an accusatory finger at business executives, not themselves, for having failed the pub test or for failing to meet community expectations.
It may be the case that the 24/7 reality TV show, through which citizens get to observe the workings of modern politics, encourages this sort of spectacle. Yet, no matter its explanation, it is corrosive of effective governance, which depends upon elected officials having some detachment from outrage and mania, not seeking energetic immersion in it.
We have a problem.
Following the global financial crisis, serious thinkers around the world began questioning whether the adversarial contest at the core of the capitalist system might not be its Achilles heel.
Capitalism proposes a system in which business is motivated by nothing other than profit, and its executives by nothing other than self-interest, and leaves it to the rest of us, also motivated by nothing other than self-interest, to elect politicians to protect us with laws that we cannot possibly comprehend and regulatory bodies with which we can have no meaningful contact. This is not an arrangement designed to build trust.
Recent global efforts to make more transparent the social and environmental impacts of business activity, and to have business leaders accept accountability to the community for these impacts, seem to me to be steps in the right direction.
But these will only take us so far. The big problem we have is that, as individuals and as a community, we confront a set of ethical questions that are just damned difficult. And we have not invested sufficiently in respected institutions that might help us think them through.
In all democracies, there is a compelling case for centres of expertise that facilitate sober reflection. This is why we fund universities, a professional public service and, within the public sector, institutions that enjoy a higher level of independence, such as the CSIRO and the Productivity Commission.
Yet, when you reflect on the recent and emerging causes of a loss of trust in democratic capitalist systems, and the economic and social gains that would come from addressing them, you have to think that something is missing. That is why I have come to the view that it is time for us, as a community, to invest in an Australian Institute for Applied Ethics. This is a modest investment, promising very large rewards.
Ken Henry is a former Treasury secretary, and one of 1600 signatories of an open letter calling for federal funding for an Australian Institute for Applied Ethics.