insightlmu RESEARCH Competition facilitates more solidarity than sharing h u m a n i t i e s a n d c u lt u r a l s t u d i e s

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1 insightlmu RESEARCH I s s u e h u m a n i t i e s a n d c u lt u r a l s t u d i e s I N T E R V I E W B Y M A X I M I L I A N G. B U R K H A R T Competition facilitates more solidarity than sharing Ethics are a resource in the competitive environment states business ethics expert Professor Karl Homann. He urges companies to include frequently overlooked ethical risks as a factor in their calculations, and considers it their duty to take responsibility for the framework of business rules. Within this framework, runs his thesis, profit motives also enhance general welfare. Given these premises, he believes that competition facilitates more solidarity than sharing. Maximilian G. Burkhart: Professor Homann, the world is currently experiencing a unique financial crisis, which is already impacting on the real economy. Automobile manufacturers are curtailing or halting production. What should we be ready for? Are we facing another great depression like that of the 1930s? Karl Homann: I hope that won t be the case. I m encouraged by the fact, though, that political crisis management of a kind never seen before has been set in motion at both national and international level. I believe this crisis management has worked well, and that the worst effects can therefore be staved off. Burkhart: In Germany, nevertheless, approval for the capitalist economic system has fallen to an all-time low. Whose fault is this crisis? Homann: There are so many players involved in the current crisis that you can hardly assign fault to individuals any more. Modern society is characterized by structures which systematically produce undesired, negative results and no one wants these of course. No bank manager wanted this crisis to happen, and no one wants to see unemployment, environmental pollution, child mortality, poverty or hunger in the world. We therefore have to ask ourselves why, without underlying motives, we systematically produce these negative effects. In market economies we generally benefit from competition. In this competitive environment suppliers produce ever better and more innovative products at ever cheaper prices. Our prosperity is based on this. Producers do not however wish to increase people s prosperity but rather to maximize their own profits. But because of competition they facilitate mass prosperity and compared with the year 1820 also doubled life expectancy. 01

2 Burkhart: Yet at present it is so-called Joe Public who mainly has to pay for the collapse of the markets as long as Joe Public is still in work. Managers and bankers, on the other hand, are still getting their golden handshake, even when their performance is worse than useless. In the past 20 years, in contrast to workers and employees, their incomes have multiplied exponentially. Porsche boss Wendelin Wiedeking, for instance, is estimated to earn 100 million euros a year. Is this just? Homann: If we want a market economy, we can t fix prices by state decree. Managers wages are the going price for the work of managers. The scarcest resource is human capital. If you want good managers you have to pay the market price. But you can legitimately ask whether the market for managers is functioning as it should. Currently it doesn t. But there are signs that the managers market is going the right way also at international level. Burkhart: We owe our standard of living to the market economy. The prime impetus behind this market economy is human greed, which many regard as a negative quality and prefer to distance themselves from. You, on the other hand, say that greed is necessary and ethically neutral. What do you mean? Homann: Well first of all I must contradict you. Greed is not the prime mover of the market economy, but a consequence of competition. The logic of competition compels even the best-willed and most humane entrepreneur to engage in a race. He has to increase his resources as a preventive measure, since he never knows from one day to the next when another company will overtake him. This was crystal clear to Thomas Hobbes as long ago as Competition as system imperative is the prime impetus of the market economy. To put this plainly, companies profit motives are a result and not a precondition of competition. This is something I too have only been aware of for a year or so. I always used to speak of the market economy with profit motive leading to competition, where profit motive appears as an anthropological constant. But this is not the case. And that is why I have now reversed the sequence and say: market economy with competition leading to profit seeking. The profit seeking arises from the logic of competition. Karl Marx rejected competition precisely for this reason. If we want competition and its benefits, we also have to accept the profit motive. Burkhart: But nevertheless, the profit motive seems to be getting completely out of hand. The Italian writer and journalist Roberto Saviano has authored a striking study of the Calabria-based Camorra company, and has received death threats in consequence. In his book Gomorrah, Saviano describes Camorra as a perfect example of market-economy business. How can we defend ourselves against a downward slide into mafia-like structures, and at the same time preserve the market economy? Homann: This is the key question of business ethics. I am not by any means urging unlimited profit seeking. In the market economy profit motives are subject to two core restrictions, though these don t include self-limiting moderation. The first restriction is the regulatory framework of the market economy. I have to adhere to the laws and rules of play. On the one hand, such rules legislate to ensure that competition cannot exceed certain bounds as in bribery, theft, predation, environmental pollution or lack of protection for workers. 02

3 On the other hand, we aim to free up the competitive drive through parameters such as innovation, better and more economical products, and more efficient and environmentally friendly production processes. In other words, a market economy only functions within a system of rules. Even football would degenerate into a free-for-all if you abolished its rules and removed the referee from the playing field. The market economy only produces the desired results, such as general prosperity, when certain rules hold sway. The problem in the current financial crisis is that we have innovative finance products but no framework of rules to govern them. In retrospect it is therefore hardly surprising that the system collapsed. The regulatory framework is thus one constraint on profit seeking. The other is competition with its threat of loss of market shares. You could see this clearly 15 years ago when the Deutsche Post [German post office] was deregulated. Today we have competition in the telecommunications market and prices are falling. Only now has it become clear how much money the Deutsche Post as monopoly took from its customers pockets also and primarily from poor people! Today, therefore, we can see the cost to every individual of lack of competition. We encourage profit but at the same time limit it: with the regulatory framework prohibiting certain parameters, and by competition, so that growth doesn t shoot up endlessly, unpruned, and so that the activities of companies are aligned to people s preferences. Burkhart: But the energy market illustrates a problem. Energy resources are finite and are in the hands of a few. For example, Russia has the world s biggest gas reserves and is clearly using this advantage for political ends. How could one get Russia to adhere to market economy rules such as the prohibition on monopoly? Doesn t the globalized energy market run up against national boundaries here? Homann: In imperial Germany and during the Weimar Republic we had circumstances similar to those that currently prevail in Russia. At the time when industrialization was taking off, cartels and state monopolies were allowed. After three attempts we secured anti-cartel legislation in 1958, and this stabilized competition. Competition is not a God-given, natural phenomenon. It needs to be supported by the regulatory framework of the market economy within which it operates. We have to prohibit cartels just as we forbid collusion on the football field, for state monopolies lead to grave inefficiency. The first banks that collapsed here were the government-controlled banks. The state is a poor entrepreneur. At some point or other Russia will have to dissolve its monopolies since they lead to less innovation, provide less effective management and are burdened by less economic cost structures. But you have to remember that we had state-approved cartels in Germany from 1870/71 right up to For years the Federal German Industry Association threw all its weight against Ludwig Erhard s plans to introduce an anti-cartel law [Ludwig Erhard, economics minister from 1949 to 1963, was the chief architect of West Germany s postwar economic recovery.]. What emerged in 1958 was a hybrid that promoted competition to some extent but which certainly does not reflect the purer doctrines of competition. The EU is helping us to get further with this now, but it takes time. Burkhart: You promote competition within certain limits yet we live in a global world 03

4 The fundamental principles of traditional Christian ethics, as well as of Kant s ethical system, are intentionality, moral motivation and conscience, Karl Homann notes. Nowadays, under the terms of competition, profit maximation is the immediate motivation driving people s actions. Profit maximization is the system imperative of the market economy and, within a regulatory framework, serves the general welfare. The picture shows the German Stock Exchange at Frankfurt. Source: Deutsche Börse where capital knows no boundaries. Companies always move to the locations with the fewest rules and the least restrictions. Italy, despite being a member of the G8 and a founding member of the EU, is unable to enforce essential business rules in its own country. Large-scale non-payment of taxes occurs, broad swathes of the government apparatus are corrupt, and the mafia marches triumphantly onward. How can a framework of rules be applied at global level to make capitalism function properly in the first place? Homann: It took us at least 200 years to achieve a reasonably functional capitalist system. If you consider the inclusion of human rights in this framework, it even took us 500 years or more. Now we have a global economy but no global framework of rules. There are fragments of this to be found in the UN Charter, in the WTO [World Trade Organization] and in the ILO [International Labor Organization]. But all we have here are fragments and nothing more! One task of this century will be to draw up a sensible framework of rules for the global economy. But what should we do in the meantime, and how can international companies conduct their affairs in the global economy without this agreed global framework? One thing companies cannot do is risk their survival in competitive markets for ethical reasons. We cannot insist that they adhere to higher, anticipatory moral standards unless they are at least compensated for this by their yields. Otherwise less ethical competitors can exploit them. So what can an ethically minded company do? It can, for example, investigate whether its integrity and responsible conduct might not be self-rewarding in the long term. Reputation is one of the most important forms of capital on the world market, and ethics are therefore a competitive resource. In this globalized market economy, companies have to calculate economic, technical and political risks. But what they really haven t yet understood and Siemens, for instance, has overlooked this are the ethical risks. The corruption affair will cost Siemens at least three billion euros, and that s not something it can brush aside lightly. One has to pro-actively manage these ethical risks but risks are always also opportunities. If you manage them properly, ethics become a production factor. There s something else too: for a long time I ve been arguing for companies to take responsibility for the framework of business rules. Companies in the industrial-ized nations are spoilt. Here we have a functioning framework of rules that is lacking in developing countries. Companies have an obligation in such countries, for they have two resources which governments there don t have: capital and know-how. They know how to organize complex 04

5 interaction processes efficiently. They have to use this, and it will benefit the countries where they operate. Burkhart: Could you specify the actual nature of these potential international rules based on business ethics? Homann: The fundamental principles of traditional Christian ethics, as well as of Kant s ethical system, are intentionality, moral motivation and conscience. Nowadays, under the terms of competition, profit maximization is the immediate motivation driving people s actions. Profit maximization is the system imperative of the market economy and, within a regulatory framework, serves the general welfare. Thus ethics lie in the framework of rules and not in individual motivation for action. This leads to ethical statements such as that by Adam Smith, who says: It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest. This leads to counter-intuitive statements which at first sight seem incompatible with our moral views: firstly, that competition actually facilitates more solidarity with others than sharing not just greater efficiency but more solidarity! And secondly, that prosperity does not depend on the benevolence of market players. In a market economy companies serve people for their own interests and not out of ethical considerations. Traditional moral philosophy, which focuses on people s individual actions, inevitably finds these counter-intuitive statements contradictory, since it does not take account of the competitive environment. Western ethics invoke measure in all things and moderation. But if you adhere to this principle today you ll be overtaken by your competitors. And such competition is no operational accident but a program. That is why traditional ethics need further elaboration to include market economy perspectives. Philosophical and theological ethics have not yet tackled this, and the field of business ethics needs to do so. Burkhart: You say that pre-modern societies are in a zero-sum game. Since there is no increase in commodities, the accumulation of wealth always involves the exploitation of others. This is why pre-modern societies focus their ethical considerations on equalization and redistribution. This does not apply to the modern, competitive society however, which need no longer redistribute since it lives by growth. Yet growth depends on resources, and resources are finite and thus growth too must be finite. Doesn t this mean that business ethics based on capitalism s assumption of growth will at some point become obsolete? Homann: In pre-modern societies the ethics of moderation are entirely plausible and appropriate. In the growth society, in contrast, the situation of the poor can be improved by the rich getting richer. In developing countries it is true that the lot of the poor will only im-prove through investments made there. But capitalists will only invest if they can expect reasonable returns. Urban society is a non-zero-sum society. In the long term, downturns and decreases may be the best alternative. Take the example of mineral oil: in the next 50 years we will have to accept dramatic decreases in oil consumption. Our only choice is whether these processes will unfold along ordered political lines or whether we will face oil wars. Decline from the current status quo undertaken in peace and by nego- 05

6 tiation is always better than a cutback imposed by wars. Even a general downturn can leave everyone in a better situation, therefore, than the relevant alternatives. Prof. Dr. Dr. Karl Homann held the chair of Philosophy and Economics at LMU from 1999 to He is co-editor of the publication series Die Einheit der Gesellschaftswissenschaften ( The unity of the social sciences ) and was consultant to the German Research Foundation (DFG), the Volkswagen-Stiftung and the Fritz-Thyssen-Stiftung. 06