v5n5: Steinberg on Heath on Non-Ideal Markets

The Inapplicability of the Market-Failures Approach in a Non-Ideal World by Etye Steinberg

A COMMENTARY ON Joseph Heath (2014), Morality, Competition, and the Firm: The Market Failures Approach to Business Ethics (Oxford: Oxford University Press)

Joseph Heath (2014) argues that the contribution of competitive markets to Pareto-efficiency generates moral constraints that apply to business managers. Heath argues that ethical behavior on the part of management consists in avoiding profit-seeking strategies which, under conditions of perfect competition, would decrease Pareto-efficiency. I argue that because (1) such conditions do not obtain; and (2) the most efficient result – under imperfect conditions – is not achieved by satisfying the largest possible set of the remaining conditions; it is (3) impossible to draw any substantive ethical guidelines from Heath’s approach.

To download the full PDF, click here: Steinberg on Heath

Etye Steinberg is a PhD candidate in Philosophy at the University of Toronto. He holds a BA in Philosophy, Economics, and Political Science (PEP), and an MA in Philosophy, both from the Hebrew University of Jerusalem, where he has also been a lecturer.

3 Comments on “v5n5: Steinberg on Heath on Non-Ideal Markets”

  1. Xavier Landes says:

    Interesting reading. But few comments.

    A comment on the following part (p.30) that directly bears on the strength of Steinberg’s argument.

    “In fact, satisfying the remaining set of [first-best] conditions is guaranteed to be worse than at least one situation in which one further condition is violated—the different violations may “cancel each other out,” so to speak, and lead to a more efficient outcome than if only one condition had been violated”.

    And Steinberg directly refers to Lipsey-Lancaster theorem at the end of the quote. The second-best theorem actually reads:

    “The general theorem for the second best optimum states that if there is introduced into a general equilibrium system a constraint which prevents the attainment of one of the Paretian conditions, the other Paretian conditions, although still attainable are, in general, no longer desirable.”

    Steinberg is not clear about whether he argues that a constraint on a first-best condition necessarily or generally creates a second-best issue. And that actually matters when used as an argument against the MFA.

    1. In the excerpt above, he suggests that pursuing the remaining first-best conditions when one first-best condition is constrained ‘is guaranteed to be worse’ than a departure from further first-best conditions (which is an additional reserve: according to Lipsey and Lancaster, the departure should be general, see below). This claim is not supported by the theorem of the second best, since Lipsey and Lancaster write that the remaining conditions are “in general”, no longer desirable.

    Therefore, the fact that the constraint on one first-best condition does not necessarily creates a second-best problem suggests that the MFA may have still something to say in some cases. In short, the strongest blow against MFA is not grounded on Linsey-Lancaster’s theorem.

    2. But Steinberg defends a more moderate interpretation in the same paragraph from which the first quote is extracted.

    “Whenever any one of the conditions for perfect competition is violated, it is not true that satisfying all the remaining conditions necessarily produces the most efficient result possible under the circumstances.”

    Thus real world imperfections do not necessarily create second-best problems. Therefore, approximating the first best by pursuing the remaining conditions may be the way to go for Pareto improvements. This suggests that the MFA has still something to say to managers in some situations. As the first best may have still something to say in welfare economics under some circumstances. By the way, it is the reason why Lipsey endorses a piecemeal approach to welfare economics.

    To be sure: Steinberg’s point is still a serious one, but less definitive than the start of his article suggests.

    An additional remark about the way Steinberg uses the second best theorem: the theorem imposes a general departure from all remaining first-best conditions. Here it reads (in the same paper referred to by Steinberg):

    “The general theorem of the second best states that if one of the Paretian optimum conditions cannot be fulfilled a second best situation is achieved only by departing from all other optimum conditions.”

    Therefore, in the sweatshop example used by Steinberg on page 30, advocating for dropping only one additional first-best condition equates to remain, according to Lipsey and Lancaster within a first-best approach, not a second-best approach, since not all first-best conditions have been dropped. So to remain in a situation where the first best has still something to say about Pareto improvement, which preserves some relevance for the MFA to business ethics.

    A last point: it could be convincely claimed that first-best/second-best issues are different from ideal/non-ideal issues (Juha Räikkä, ‘The Problem of the Second Best’).

    • Etye Steinberg says:

      Thanks for the detailed reply! I definitely have more to learn about the difference between second-/first-best problems and non-/ideal markets, and this comment is very encouraging in this respect. I would love to know more as I am rather new to this specific topic.

      I should note that I really like the MFA. I think it captures a lot about business ethics that other approaches do not. I also think that it teaches us quite a lot about how we should best approach certain questions and dilemmas regarding the behavior of firms and corporations.

      This comment, therefore, is not supposed to be taken as an attempt to deliver ‘the strongest blow against the MFA’. Perhaps just a nagging finger poking at its shoulder.

      • Xavier Landes says:

        Thanks for your piece! The theorem of the second best is very interesting, but unfortunately under-explored topic. I would like to read more on that from you if you decide to give it another try.

        For the blow thing, I misinterpreted your intention then. But you are on something anyway, it is worth pursuing.

        Don’t hesitate to contact me on my professional address (SSE Riga) if you want to continue at some point this exchange.

        Good luck!

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