Does Economic Competition Destroy Ethical Behavior?

Does economic competition destroy ethical behavior? I ask because I came across in my reading today this insightful short paper by Harvard economic Andrei Shleifer in which he argues that, yes, in some cases, competition destroys ethical behavior, but, in the long run, competition promotes such behavior.

The argument for the first proposition is that, in some cases, unethical behavior can lower a firm’s costs (e.g., using child labor) or increase its revenues (e.g., universities commercializing faculty research), and so, once one firm in a market begins engaging in such behavior, other firms must follow suit, even if the people controlling them regard the behavior as wrong. If they don’t, they will suffer a competitive disadvantage that could eventually put them out of business.

Why do people who regard certain behavior as immoral nevertheless engage in such behavior under competitive pressure? A moral theologian would say that they are succumbing to avarice. Scheifer, as an economist, puts the point differently. He writes, “I assume that the proprietor of the firm values ethical behavior, but that such behavior is a normal good,” meaning that, the higher the cost of the good, the less of it people will buy. He continues, “When sanctioned behavior by competitors reduces their costs, it also reduces prices in the market, and as a result the proprietor’s income falls. When his income falls, so does his own demand for ethical behavior, leading to the spread of censured practices.”

On the other hand and for quite the same reason, competition will raise ethical standards in the long run. Shliefer writes, “Competition is the fundamental source of technological progress and wealth creation around the world. The very same market forces that might encourage unethical conduct also motivate firms to innovate and create new products, leading to economic growth. As societies grow richer, their willingness to pay for ethical behavior, through both government enforcement and private choice, increases as well. As a consequence, both moral and regulatory sanctions work better in the richer countries,” and so “competition is likely to promote ethical behavior in the long run.”

By the way, regarding the idea that being wealthy is a bulwark against wrongdoing (or, in Shleifer’s terms, when you have more money, you’re more willing to pay a price to be ethical), compare Cephalus in Plato’s Republic . Asked by Socrates what was the greatest blessing he reaped from his great wealth, Cephalus answers, “The greatest blessing of riches . . . is that [a man] has no occasion to deceive or to defraud others, either intentionally or unintentionally, and when he departs to the world below he is not in apprehension about offerings due to gods or debts which he owes to men.” ( Republic , 330d-331b).