MORALITY, COMPETITION AND THE FIRM: THE MARKET FAILURES APPROACH TO BUSINESS ETHICS by Joseph Heath

Oxford University Press USA 2014. ISBN 978-0199990484

Joseph Heath's new book needs commitment and it isn't for beginners,but it has to be the best expression that this reviewer has seen of new trends in 21st Century economics.

A principal source for the book comes from efficiency arguments around Canadian healthcare, with a basic observation that the Canadian single payer system delivers more or less the same results as the US system at about half the cost.

The interesting point is that the Canadian system is almost always defended for its equality rather than its efficiency, which Heath finds curious since from an efficiency viewpoint, the system directly saves billions of dollars that can be put to more productive use elsewhere (by government or privately). The point here is that the state is intervening in the health insurance market to correct a market failure just as much as it is intervening to ensure distributive justice. In fact the efficiency gains are so great that they benefit everyone without considering distributive justice at all.

Heath defines "market failure" as the failure in a market to reach a Pareto Optimum (someone can gain without someone else losing) with higher levels of organization (e.g. corporations, governments, legal frameworks etc.) needed to capture efficiency gains and reach the Pareto Optimum. Sometimes optimality can be obtained by government action and sometimes through private markets.

The "Market Failures" approach is a truly interesting viewpoint and he develops it showing the basic tension in a competitive free market that generate Pareto optimality (higher efficiency, better quality and lower prices) with the continuous conflict between market players and its evident winners and losers.

Result that some see free market competition as unfair and unethical (never mind the efficiency gains) and an abandonment of common morality.

The author doesn't accept this. He shows quite convincingly that most societies have a basic morality that exists without the threat of sanction and that this basic morality extends naturally to the economic sphere despite decades of "anti-normative" economics tuition. Normative factors such as loyalty, committment, ethics and fairness are a significant part of economic life. (top)		 So what we are left with is something like a government licensed sanction to compete in the interests of Pareto optimality, which he compares to a competitive football league with games played within the rules to get the best performance. Of course players can cheat, but so can corporate employees (eg. at Enron, Hollinger etc.) and these are local market failures (breaking the rules) rather than a basic fault in the game itself.

The papers in the book search around these themes in an exceptionally interesting way but in the opinion of this reviewer, the author could perhaps have extended the analysis into a couple of other areas:

The papers are realistic and evidence based but outsourcing doesn't get a mention. In terms of the sports metaphor, what happens if the winning team in the US league is mostly made up of Chinese players? Isn't the league developing the skills of the Chinese players and crowding out/weakening the skills of American players? or does this matter? In economic terms outsourcing seems to flatten and lower the supply curve shown on page 188 to such an extent that US suppliers can't compete, whatever technology they use, so US consumers perhaps get the doubtful utility gain of flat screen televisions en every room and boxes full of unused toys at the expense of US industries and jobs. Outsourcing would also seem to be very divisive within corporations as managers and shareholders gain at the expense of production workers.

The text also takes "society" for granted. Heath quotes Rawls saying that society is a, "cooperative venture for mutual advantage" which is fine except that countries like the US have nothing like the cohesion that they used to as they segregate along social, racial and economic lines. Continue this long enough and "society" no longer really exists except for fake cooperation taking place just long enough to allow defection with advantage.

All the same, the book is highly recommended, and the reader gets some interesting discussion regarding the similarity of the 20th century's large corporate bureaucracies and centrally planned bureaucracies (the same "scientific management" fashion) + Durkheim's view that hunter gatherer groups can easily split and separate but settled societies can't, so it seems that we are pressured to find an equitable way to live together.