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Bernie Sanders. Photo: Bloomberg
Bernie Sanders. Photo: Bloomberg

The ethics of economic fairness are important

Whether a business organization is fair and ethical should be determined by how it treats people at the bottom of its pyramid

The young Indian sitting next to me on the intercontinental flight to Delhi was a successful entrepreneur. He told me how large he had made his company in just four years. He had found a niche, and his company was very profitable too, he said. I congratulated him for his achievements. I asked him how many people he employed; 1,200, he said. Out of curiosity, because concerns about employment and income security are in the air in India, I asked him how many of the 1,200 were on contract and how much they were paid. His reply was sharp. “I am not into socialism," he said. “I am a capitalist." I assured him that I was not a communist. What was on my mind, I said, was an ethical question of fairness, which should bother capitalists too.

“This is very unfair," an upcoming star in a US investment bank complained to me many years ago after his boss told him his annual bonus would be a million dollars. He was unhappy because the guy in the next cabin had been given more. One’s personal view on how fair an organization or society is depends on who one compares oneself with. Here was a young person, just over 30, complaining about unfairness when in one year’s bonus he got what many people in his country would not earn in their whole lives!

Leaders of business organizations must be seen to be fair when they compensate their executives to keep them motivated. Therefore, they benchmark what executives at similar levels are being paid in other companies to ensure that they pay as much. Executives at these levels are already earning crores of rupees a year. Compensation experts report that average annual increases in executives’ salaries are 10%. So, the company increases its executives’ compensation by 10% or it will lose them to competitors. Thus, benchmarking with peers has contributed to the upward drift in incomes at the top of the pyramid for many years.

Meanwhile, the pressure to keep costs down slows incomes at the bottom from rising as fast. Contract workers are not paid as much as regular employees even when they do the same work. This is as unfair as not paying executives the same for the same performance. Such distorted application of the fairness principle has contributed to the stretching apart of incomes and wealth in organizations and societies. According to Oxfam and others’ reports, the top 1% have got separated from the rest and the wealth of the very top 0.1% has drifted into outer space from the perspective of the
masses below.

There are many causes for the rise of populism along with anti-globalization and anti-liberalization forces. The perception that the “establishment", consisting of government and businesses along with their intellectual supporters, did not care about the people below while increasing and celebrating its own incomes and wealth, fuelled the opposition. In the US, Bernie Sanders rallied a lot of support for his ‘socialist’ and anti-establishment views, and President Donald Trump vowed to bring back jobs to America and to drain the Washington swamp. In the UK, Brexit got support from those who felt they were being left behind while the City prospered, and the Labour party is on an upsurge. In India, economists who had hoped Narendra Modi’s government would accelerate the liberalization of the economy, which had stalled with the “socialist" policies of its predecessor, are dismayed by the “populist", pro-common man programmes of the government, such as the forgiveness of farm loans, and its reluctance to reform labour laws to make hiring and firing easier. Modi has the pulse of the people, and he must have their support to win the next election.

Sales of Karl Marx’s Das Kapital surged in the US after the financial crisis. Mark Carney, the governor of the Bank of England (and a former Goldman Sachs executive) warned that with wage stagnation and unemployment, which will increase with automation, Europe could turn to Marxism within a generation. “You have exactly the same dynamics as existed 150 years ago — when Karl Marx was scribbling The Communist Manifesto," Carney noted.

However, Jeremy Corbyn and the Labour Party’s ideas are more strongly influenced by another Karl, according to The Economist. Corbyn follows Karl Polanyi, author of The Great Transformation, who was part of a group loosely known as moral economists. The moral economists’ critique was socialist, but in a different way to those socialists who believed that the state should play the dominant role in running the economy. They focused on something abstract and difficult to measure: the spiritual and moral decline that is said to accompany capitalism. Polanyi said liberal economists’ belief that “self-interest" is the governing principle of economies and societies was flawed. Principles of reciprocity and honour too have strongly shaped societies. If societies focus just on market exchange and free trade, resistance (what he calls the “counter-movement") inevitably follows, he said.

Reciprocity implies fairness. The essential requirement for fairness is equality of opportunity, even if the outcomes are not equal. The golden rule in all religions is, do unto others as you would have done to yourself. We must expand the circle of others to whom we apply this principle, from our peers and “people like us" to people not like us who may follow different religions, belong to other classes and castes, and did not have the same opportunities we had. The principle for regulating international trade must not be merely more freedom. It must be an ethical principle of more fairness which, due to unequal power among nations, it is not. And whether a business organization is fair and ethical should be determined not by whether its top executives are fairly compensated, but by how fairly it treats people at the bottom of its pyramid, and how much it improves the world for the people left behind.

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