Restructuring Donaldson’s typography of ethical factors

To align Donaldson’s typography with this research and our institutionalized values thesis, we restructure his ethical factors by embedding them in a tripartite framework of political, economic and cultural institutions. Political institutions provide the democratic systems of governance that establish the legal and regulatory conditions for economic prosperity, and include Donaldson’s ethical factors related to fairer distribution of goods and better government. Economic institutions, such as markets and corporations, are responsible for the production and distribution of the goods and services that create economic prosperity, and include Donaldson’s ethical factors related to ingrained social cooperation and inculcated economic duties. Cultural institutions constitute the structures of civil society that govern social life and shape and articulate the civic relationships, values and norms that underpin both political and economic institutions. We propose one ethical factor important to this sector, respect for civil society.

A final insight from our review of the institutional economics and sociology research emphasizes the complexity and fragility of this institutional moral ecology that enables economic prosperity and constitutes the good society. As human constructions, these institutions are highly imperfect. They often fail to function effectively and the values they embody are often in conflict and at risk of displacement, attenuation and corruption from a variety of forces, both external and internal to the institutions themselves (Heclo, Reference Heclo2008; Selznick, Reference Selznick1992). Indeed, Ferguson (Reference Ferguson2013) argues that systemic institutional tensions and conflicts within Western societies are causing what he calls “the great degeneration” characterized by: political regression in the debilitating expansion of government combined with a lack of fiscal discipline and increasing public debt; economic regression in the erosion of the rule of law and the ability of certain business elites to exploit the economic system to their own advantage; and social regression in that for the majority of people income is stagnant and social mobility greatly diminished. In the following sections, we critically examine Donaldson’s ethical factors and propose additional ethical values important to preserving and protecting this fragile institutional moral ecology. We begin with the political sector, followed by the economic sector and end with the cultural sector.

Fairer distribution of goods: Fairer access to economic opportunity

Donaldson points out that “some data” and research by the World Bank suggest that increased distributional fairness is an ethical factor that enhances economic productivity. According to Donaldson, distributional fairness involves a reasonably equitable distribution of what Rawls (Reference Rawls1971) called society’s “primary goods”—income and wealth, healthcare, as well as basic rights and liberties such as property rights and economic freedom and opportunity. Large distributional inequities imply that a few people receive a disproportionate share of the economic rewards while a greater share of the population gets little or no reward. Under such circumstances, the economically disadvantaged find it difficult to develop their talents and skills and succeed in the market. Thus society develops less human capital and achieves less optimal economic development.

Democratic societies, which tend to value equality in all its forms, view such economic inequality as a kind of social injustice to be addressed by political institutions. However, government efforts to ensure the fair distribution of wealth can instead have negative implications for economic performance and important values related to economic freedom and independence. One way that government may seek to ensure a fair distribution of wealth, for example, is through progressive taxation. Yet, beyond certain levels, this can undermine incentives for business investment and entrepreneurial activity, which in turn can reduce employment and wealth creation (Zingales, Reference Zingales2012). Another way that government attempts to promote a fair distribution of wealth is through the provision of welfare benefits such as unemployment, food stamps, disability and various entitlement programs. However, these redistributive programs have an inherent “moral hazard” which incents economic dependence that can also undermine human capital development and economic productivity (Schuck, Reference Schuck2014: 145). Overall, when government wealth redistribution is pushed too far, it can have significant regressive effects that undermine productive economic activity and compromise important values related to economic freedom and independence.

Towards a fairer access to opportunity. This is not to suggest that distributional equality has no place in the political economy. It is to suggest, however, that government efforts to promote the value of a fairer distribution of economic rewards and benefits can become a cure that is worse than the disease, and so must be restrained by a countervailing value that avoids the adverse effects of government wealth redistribution. To preserve the incentives that underlie business investment, development of people’s talent and skill, and productive economic activity, we propose what we call the value of fairer access to opportunity, which refers to economic opportunities and rewards that are widely available to all, and access to which is not determined by birth, political connections, economic or social class or status (Schuck, Reference Schuck2014; Zingales, Reference Zingales2012). Whereas government wealth redistribution can distort economic incentives and undermine economic freedom and self-development, fairer access to economic opportunities and rewards incentivizes individuals to take personal responsibility for their economic well-being and encourages self-reliance, which is integral to economic freedom and independence. This in turn promotes human capital development and greater economic productivity and prosperity.

Allowing institutions to embody fair access to economic opportunity implies that the resulting distribution of economic rewards may not be perfectly equal. Real differences in individuals’ endowments of intelligence, talent, effort, aspiration, industry, etc., will inexorably differentiate people economically (Gregg, Reference Gregg2007). Yet in a market economy that values wide and nondiscriminatory access to economic opportunities, such distributional inequalities are not necessarily unfair. Indeed, given human diversity, no economic system can possibly achieve equal distributional outcomes. Some distributional inequality is therefore justified if, as we assume, a just society is one that balances distributional equity with fair access to opportunity. For fair access to opportunity is itself a moral value insofar as it is part of a conception of justice that prohibits discriminatory access to economic opportunities, and favors fair access to positions that are not only economically rewarding, but allow individuals to achieve economic self-reliance and independence that comes from developing and employing one’s own endowments. To deprive individuals of fair access to these would be to deprive them of one of the main forms of human good (Rawls, Reference Rawls1971: 84).^{Footnote 1}

What does the value of fair access to opportunity imply for political institutions? We highlight two requirements that are widely recognized as essential. Foremost is formal equality before the law, which refers to laws that are applied without regard to the person(s) involved, especially with regard to property and contract rights (Gregg, Reference Gregg2007; North et al., Reference North, Wallis and Weingast2009). Related to this is the absence of legally privileged or protected social classes based on race, religion or social status or preferential treatment given to any special interests. Equality before the law reflects the democratic moral animus against unfairly privileging any particular social class or special interest group. The law’s impartiality can also promote greater economic freedom by enabling more people to take advantage of economic opportunities and rewards, and thereby also reducing extreme distributional inequalities.

A second requirement for fair access to opportunity is government policies that support the kind of educational system that enables more people to take advantage of the economic opportunities and rewards available to them. Education is widely recognized as the key to economic opportunity and prosperity, especially in the modern technology-driven economy. It also helps promote what Sandel (Reference Sandel1998: 68) called “fair meritocracy” in which socio-economic disadvantages are mitigated by educational opportunities. Indeed, Piketty (Reference Piketty2014) highlights education as a critical driver of economic growth and the most effective way to reduce inequalities of income and wealth.

Better government: Better executed government

Donaldson points out that some economists have claimed that democratic forms of government are not only better in that they promote political participation and transparency in political processes, but also in that they can correct market failures and promote the kind of economic freedom that is a catalyst for economic growth. However, democratic governments with their separation of powers and complex systems of checks and balances are notoriously inefficient and prone to imperfections that can render public policies ineffective. Indeed, a significant majority of studies of government performance highlight the ineffectiveness of public policies in correcting market failures (see Winston, Reference Winston2006). In a recent comprehensive analysis of US federal government performance, Schuck (Reference Schuck2014: 4) concludes that “the federal government does in fact perform poorly in a vast range of domestic programs” (italics in original).

Government policies that fail impose economic as well as social costs. Schuck (Reference Schuck2014) highlights four major categories: (1) wasting scarce social resources; (2) suffering by those who depend on government programs for primary goods; (3) reducing future economic growth, especially through accumulation of public debt; and (4) compromising government’s legitimacy through a loss of public trust and confidence. Moreover, these costs often exceed the costs of market failure. Winston (Reference Winston2006: 3-4) in his review notes: “Thirty years of empirical evidence on the efficacy of market failure policies . . . suggests that the welfare cost of government failure may be considerably greater than that of market failure.” Bok (Reference Bok2001: 120-1) in his review concurs: “Again and again . . . , the operative legislation is burdened by unrealistic objectives, inadequate funding, clumsy implementing machinery, and poor targeting of funds. The costs in terms of waste, frustrated expectations, and harmful side effects are virtually incalculable.”

The virtues of better executed government. Though democratic forms of government are better than say, authoritarian regimes, such chronic poor performance suggests that badly executed democratic government can create serious social and economic liabilities. As Alexander Hamilton said: “A feeble execution is but another phrase for a bad execution; and a government ill-executed, whatever it may be in theory, must be, in practice, a bad government” (cited in Light, Reference Light2008: 1). To become a social and economic asset and to realize the values intrinsic to democratic institutions, government—as the institutional designer, implementer and enforcer of public policies—must embody certain institutional virtues that enable it to close what we call the “execution gap”—the gap between the benefits of better government and the costs of government failure. Such virtues constitute what we classify as better executed government, an extension to Donaldson’s notion of the values that make for better government.^{Footnote 2}

Schuck’s (Reference Schuck2014) analysis, which focuses on the U.S. federal government, found that the causes of government failure are many and systemic. However, he stresses that the legislative branch—Congress—is “the single greatest institutional source of government failure” (Schuck, Reference Schuck2014: 380, italics in original). He attributes this failure to what he calls the “dysfunctional aspects” of legislative policy-making (Schuck, Reference Schuck2014: 34). We highlight three institutional virtues important to Congress whose absence creates the dysfunctional aspects of legislative policy-making and prevents democratic government from closing the execution gap. These three are: restraint in policy-making, commitment to the public good, and discipline in fiscal spending.

First, closing the execution gap requires the exercise of political restraint in the economic policy-making agenda. A fundamental value of democracy is the idea that political authority cannot rightly dominate the full range of human life (Galston, Reference Galston, Faulkner and Shell2009). A restrained government is not only instrumental to a productive economy, but also integral to preserving the values of economic freedom and independence (Galston, Reference Galston, Faulkner and Shell2009). Yet, Wilson and DiIulio (Reference Wilson and DiIulio2011: 467-8) identify a fundamental institutional change from what they call the “Old System” of government characterized by a small federal policy agenda in which checks and balances restrained legislators from starting new programs, to a “New System” characterized by a large and growing policy agenda in which the threshold for government expansion is markedly lower. This expansion of the legislative policy agenda is driven in part by external pressure from the public who demands that government “do more” to solve social and economic problems (Schuck, Reference Schuck2014), and by the proliferation of highly organized and well-funded special interest groups dedicated to active policy advocacy (Heclo, Reference Heclo, Faulkner and Shell2009). Moreover, due to defective incentives internal to the institution (which we discuss below), legislators have responded to these expansionary pressures by giving in to them, thereby expanding the reach of the federal government so it has become increasingly interventionist over time (Schuck, Reference Schuck2014).

The lack of institutional policy restraint not only compromises the value of limited government and threatens the values of economic freedom and independence, but also contributes to government failure in several ways. First, it leads policy makers to intervene in markets when no real market failure exists. Winston (Reference Winston2006) found that legislators often exaggerated the extent of market failures and adopted corrective programs that created government failures of greater magnitude. Second, government expansion has a crowding out effect not only on market solutions, which can be more efficient and more conducive to an inclusive and open access economy, but also policy solutions by sub-national government bodies—e.g., states, counties, municipalities—which are often more efficient and vital to effective democratic governance (North et al., Reference North, Wallis and Weingast2009; Schuck, Reference Schuck2014). Moreover, federal policy expansion has caused business to depend increasingly on lobbying and “rent-seeking” rather than on competing in the market, which is a major driver of crony capitalism (Zingales, Reference Zingales2012).

The expansion of government can lead it to intrude not only into the market but into all aspects of social life, such as education, health care, housing, transportation, urban development, environmental protection, human and civil rights, consumer affairs, gender relations, etc. (Heclo, Reference Heclo, Faulkner and Shell2009). Such an expansive policy agenda results in more comprehensive and complex policies that are difficult for administrative agencies to manage. Indeed, bureaucratic mismanagement—including muddled policy implementation (e.g., the initiation of the Affordable Care Act), debilitating rules and “red tape” (e.g., the accounting requirements of the Sarbanes-Oxley and Dodd-Frank Acts), poor policy enforcement and systemic fraud, waste and abuse (e.g., the Medicare reimbursement system)—is an endemic source of policy failure that imposes significant social and economic costs (Schuck, Reference Schuck2014). In addition, the moral hazard inherent in these programs contributes to the proliferation of what we call an “opportunistic dependence”—the tendency of people to “game the system” by taking undue advantage of free or low cost government benefits at the expense of productive economic activity. Opportunistic dependence helps explain, for example, why federal disability insurance has expanded sixfold since 1970 and tripled since 1990—and much of this involves young people (in their thirties and early forties) despite a much healthier working age population (see Eberstadt, Reference Eberstadt2012: 52-58).

The second institutional virtue critical to closing the execution gap is a strong commitment to the public good. Democratic government, for all its advantages, subjects legislators to incentives that can undermine this virtue. One set of such defective incentives involves election cycles. Congress is populated for the most part by career politicians who seek to maximize their chances of reelection and so have strong incentives to court the support of groups with money and resources necessary for their re-election campaigns (Wolf, Reference Wolf1979). This can lead to what political scientists call “client politics” where legislators adopt policies whose benefits target a narrow group but whose costs are borne by the broad public (Wilson, Reference Wilson1995).

Reelection also creates powerful incentives for legislators to devise policies that benefit their constituents—i.e., “bring home the bacon”—to the neglect of more systemic, longer term issues that affect the broader public. Further, given voters’ reluctance to pay for programs through higher taxes, legislators’ incentive is to exaggerate benefits of such programs while hiding costs. Indeed, legislators use an array of cost-hiding techniques including: simply ignoring the costs or delaying or delegating cost decisions to executive agencies; disguising or concealing costs as off-budget programs or deferring costs with deficit financing; and using unfunded mandates and pork barrel projects to shift the costs to non-constituent or future taxpayers (Schuck, Reference Schuck2014). In short, defective institutional incentives related to election cycles cause legislators to yield to the short-term demands of narrow interest groups and neglect broader long-term problems and costs, resulting in policies that compromise the public good and increase federal spending and public debt (Schuck, Reference Schuck2014). Indeed, federal spending has grown fivefold since 1960 and tripled in just the last two decades, accounting for the highest share of gross domestic product since World War II (Ferguson, Reference Ferguson2013; Schuck, Reference Schuck2014).

This leads to the third and arguably the institutional virtue that is the most important factor to closing the execution gap: fiscal discipline. The deleterious effects of fiscal profligacy are well known. We highlight that failure to avoid excessive spending and debt not only undermines efficient government functioning now by increasing interest payments needed to service the debt—public money that might otherwise be spent for more productive uses. But it also imposes an unjust economic burden on future generations, such as the massive unfunded entitlement liabilities, which represent a vast taxation and redistribution of wealth from future generations to the current generation (Ferguson, Reference Ferguson2013).

In sum, external expansionary pressures and defective internal incentives combine to undermine three institutional virtues—policy restraint, commitment to the public good, and fiscal discipline—important to effective government policy making and closing the execution gap. The decline of these institutional virtues contributes to policies that compromise the value of limited government; crowd out markets, sub-national governments and civil society; redistribute wealth in ways that favor narrow short term special and localized interests at the expense of broader long term public good; incentivize economic dependence and undermine economic freedom; and contribute to unjust spending and debt. To this end, Heclo (Reference Heclo, Faulkner and Shell2009) argues that the decline of these virtues represents a gross failure in the institutions of democratic government.

Social cooperation, economic duties and market imperfections

Donaldson’s “ingrained social cooperation” includes a disposition among market participants to cooperate with others by behaving in socially responsible ways. Relying on the work of Robert Frank (Reference Frank, Messick and Tenbrunsel1996), he claims that such a disposition to “take ethics seriously” can avoid common forms of self-destructive market interactions and thereby, will increase economic productivity. Donaldson makes a similar argument for the value of inculcated economic duties, which can remedy imperfections inherent in market systems. Donaldson lists eight such duties including: the duties to avoid bribery, anti-competitive behaviors, nepotism and “crony capitalism” as well as duties to respect intellectual property and environmental integrity, provide accurate information to the market, and honor contracts, promises and other commitments. Donaldson claims that several economists have argued that failing to take these market-related duties seriously negatively affects economic performance.

Underlying Donaldson’s analysis of the necessity of social cooperation and economic duties are neo-classical economic assumptions that attribute self-interest and competition to market participants and presume no preexisting cooperation among them. These assumptions create important theoretical and practical problems. Theoretically, they imply an inherent opposition between the self-interested competitive motivations assumed to operate in markets, and the ethical values of social cooperation and economic duties that are assumed to provide external moral restraints on these market motives. But as external restraints, ethical values are seen as costly to self-interest in the short run and as causing socially responsible individuals and firms to lose out to less scrupulous competitors in the long run (Quinn & Jones, Reference Quinn and Jones1995; Frank, Reference Frank, Messick and Tenbrunsel1996). Consequently they are weak and susceptible to displacement (Selznick, Reference Selznick1992).

The practical problem is that the ethical values Donaldson identifies have indeed been weakened and displaced in recent decades by the institutionalization of neo-classical economic assumptions in a new form of “investor capitalism” (Useem, Reference Useem1996). Investor capitalism emerged in the 1980s in response to investor demands for market returns that had languished throughout the economic crisis of the 1970s. By the 1990s, it became the dominant institutional logic governing the way corporations were managed and is widely acknowledged to be an important cause of the corporate scandals that have since plagued the economy (Ordonez, Schwietzer, Galinsky, & Bazerman, Reference Ordóñez, Schweitzer, Galinsky and Bazerman2009).

First, investor capitalism narrowed the purpose of the corporation to the singular goal of maximizing shareholder value and displaced other important corporate ends and stakeholder interests. Second, to align corporate executives’ interests with that goal, it institutionalized a new system of stock option performance incentives that increased pressure on executives to produce short term results, e.g., achieving quarterly earnings targets, and decreased attention to the longer term investment purposes for which the corporation was designed. Third, the narrow focus on maximizing shareholder value and short term performance incentives combined with intense global competitive pressures distorted executives’ risk preferences and encouraged riskier business strategies. And fourth, because riskier strategies are likelier to fail, executives tended to adopt unsound business practices—e.g., earnings management, financial engineering, and moving risks off balance sheets—that ultimately led many executives to violate ethical standards (Schwietzer, Ordonez, & Douma, Reference Schweitzer, Ordóñez and Douma2004).

Ordonez et al. (Reference Ordóñez, Schweitzer, Galinsky and Bazerman2009) refer to this combination of effects—narrow focus on maximizing shareholder value, short term performance incentives, inappropriate strategic time horizons, and excessive risk taking culminating in unsound business practices and unethical behavior—as “goals gone wild.” It is the practical effect of the distorted logic of investor capitalism organized around neo-classical economic assumptions about profit maximization as the singular purpose of business, self-interest as its primary motive force, and the primacy of competition as the spur to business success. As these assumptions became widely institutionalized in corporate governance, they altered the “rules of the game” for business such that ethical considerations were significantly weakened. Indeed, in some high profile corporate scandals such as Enron, they were rendered moot, as a recent speech by convicted former Enron CFO Andy Fastow illustrates:

Fastow’s opportunistic understanding of “how the game is played” illustrates the kind of ethical drift that the logic of investor capitalism injected into the business world. It reveals how a great deal of destructive behavior in business originates from an institutional logic that renders ethical values extraneous to business. But the more insidious effect was how investor capitalism contributed to the emergence of what Hambrick (Reference Hambrick2005: 106) described as a “new breed” of top corporate executive. Not only was this new breed more obsessed than their predecessors with shareholder value, but Hambrick claims they were fundamentally different kinds of people—“more money-minded, self-interested, and emotionally detached from their companies as living, breathing institutions” (2005: 106). He notes that this obsession with shareholder value was due to the new rules of investor capitalism and executives’ narrow and ethically detached qualities merely reflected the qualities that it encouraged and rewarded.

Towards an alternative institutional logic for capitalism

Ideas have consequences and ideas about capitalism institutionalized in the market not only establish the “rules of the game,” but shape in significant ways the beliefs and behaviors of market participants, including their disposition to take ethics seriously. Investor capitalism institutionalized a narrow set of neo-classical economic ideas that proved to be socially and economically destructive, moving the corporation from an institution for long-term value-creating investment and sustainable economic growth for the benefit of many, to an instrument for extracting short term profits out of the economy for the benefit of a privileged few. The problem, however, is not that neo-classical economic assumptions are wrong: profit is a desirable and indeed essential outcome of business, self-interest is an important motive force of capitalism, and competition is vital to a healthy and productive economy. The problem is that these ideas alone do not constitute the whole of capitalism; and by themselves, they created a false institutional logic, what Ghoshal (Reference Ghoshal2005: 82) described as an “ideology-based gloomy vision,” that compromised the institutional foundations of capitalism and weakened the role of ethical values to curb its destructive tendencies.

What is needed to restore the institutional foundations of capitalism and strengthen the role of ethical values in the economy is a richer, more holistic and more compelling institutional logic: one in which ethical values are not externally superimposed upon business, but internally emergent from within business itself; one in which those values do not serve only as negative restraints on destructive economic activity, but serve as a positive catalyst for constructive economic activity; and one that does not just enforce a minimal morality of obligatory duties to ensure that the market system functions efficiently, but embraces an aspirational morality that inspires those excellences and virtues that contribute to the realization of the system’s ideals and the flourishing of people individually and collectively within it (Fuller, Reference Fuller1969; Solomon, Reference Solomon1993). This is what we mean by internalized aspirational morality as an ethical factor necessary to restore the institutional foundations of capitalism and strengthen the role of ethical values in the economy. Such a morality if institutionalized would help promote and preserve business and the market system in general as an inclusive institution for long-term value-creating investment and sustainable economic growth for the benefit of many.

What would such an internalized aspirational morality for business look like? Though investor capitalism is the dominant logic of capitalism, it is not the only logic. In recent years, a countervailing logic has been institutionalized by many leading companies. It finds its most compelling expression in a movement championed by John Mackey, co-CEO of Whole Foods Market, called conscious capitalism (see Mackey & Sisodia, Reference Mackey and Sisodia2013). Conscious capitalism is not grounded in abstract economic theory, but in Mackey’s personal experience in which he started out in the non-profit food co-op movement as an anti-business “progressive” and went on to become a business entrepreneur and “free market libertarian” (Mackey & Sisodia, Reference Mackey and Sisodia2013: 2, 11). One defining moment from Mackey’s experience illustrates three insights important to our notion of aspirational moral logic for capitalism.

A turning point for Mackey occurred towards the end of Whole Foods’ first year when a record flood nearly wiped out the nascent business. Destroyed were all the equipment and the inventory and with no warehouse inventory, no savings and no insurance, the business was financially bankrupt. To survive this disaster, the business needed help. Mackey describes how an “avalanche of support” poured in from a “volunteer army” of Whole Foods’ stakeholders (Mackey & Sisodia, Reference Mackey and Sisodia2013: 6): employees worked for free to clean up the store, suppliers offered to resupply on credit, investors provided urgently needed capital, even customers and neighbors from the surrounding community pitched in to help clean up the store. All these stakeholders gave help in the form of time, labor, inventory and capital without any assurance that their investments in rebuilding the business would payoff. This had a galvanizing effect and in less than a month after the flood, the store reopened and Whole Foods has since gone on to become an enormously successful corporation with over $11 billion in annual sales.

The successful rebuilding of Whole Foods after the flood raises a question central to our analysis: Why would a business “attract a volunteer army” of stakeholders to help it in its “hour of need” without any assurance that their efforts would payoff? To derive our insights about an aspirational morality for business, we contrast neo-classical economic assumptions with Mackey’s own answer to this question.

First, neo-classical economics assumes that maximizing profit is the singular purpose of business. But for Whole Foods profit was a means to serving what Mackey calls a “higher purpose” —the positive “difference you’re trying to make in the world” (Mackey & Sisodia, Reference Mackey and Sisodia2013: 47). Whole Foods is dedicated to the higher purpose of bringing whole foods to people to help them to eat well, improve the quality of their lives, and increase their lifespan. This higher purpose was institutionalized in the business through what Mackey calls “core values”: selling the highest-quality natural and organic products available, satisfying and delighting customers, supporting team member happiness and excellence, creating wealth through profits and growth, caring about communities and the environment, creating ongoing win-win partnerships with suppliers, and promoting the health of stakeholders through healthy eating education (Mackey & Sisodia, Reference Mackey and Sisodia2013: 43). This higher purpose and core values infused the business with a value beyond the instrumental requirement of making profits (Selznick, Reference Selznick1957). The more a business is “infused with value” in this way, the more it is valued for the higher purpose and values it serves which in turn, evokes a willingness to invest and sacrifice to support the business (Selznick, Reference Selznick1992).

Second, neo-classical economics reduces the motive force of capitalism to rational self-interest. But this does not seem to capture the stakeholders’ motives at work re-building Whole Foods. Indeed, the stakeholders gave help not out of some rational self-interest calculation, but because they “passionately believed in what [Whole Foods] was doing”—its higher purpose and core values. Mackey calls this motive force the “power of love”—the capacity of stakeholders to form close relationships with the business, to sympathize and empathize, and to care and commit intensely (Mackey & Sisodia, Reference Mackey and Sisodia2013: 7). Adam Smith in his Theory of Moral Sentiments recognized the importance to capitalism of similar motivations, including sympathy, empathy, friendship, love and the desire for social approval. Gilder (Reference Gilder1981) went so far as to propose that such altruistic motives rather than self-interest are indeed the “essence of capitalism.”

Third, whereas neo-classical economics assumes competition among market participants (buyers and sellers) and presumes no pre-existing level of cooperation, the rebuilding of Whole Foods points in the opposite direction: a community of stakeholders with a pre-existing shared commitment to the purpose and values embodied by Whole Foods and the absence of competition among them. Indeed, rebuilding the business required the investors, employees, suppliers, even customers and members of the community to cooperate towards that end. Stakeholders’ commitment and loyalty in rebuilding the business in turn, inspired a reciprocal commitment and loyalty from Mackey: “These [stakeholders] love us so much and they have given us so much that we owe it to them to do everything possible to reopen and to serve them as well as humanly possible” (Mackey & Sisodia, Reference Mackey and Sisodia2013: 6). Mackey’s sentiment is not an impersonal kind of abstract obligation to “support the system,” but a more personal kind of duty emergent from a deeply felt moral debt owed his stakeholders. Moreover, this mutual spirit of cooperation was not imposed as an external restraint to avoid commitment problems, but emerged spontaneously from a shared value-laden attachment and loyalty to Whole Foods.

Suggestive in our analysis of Whole Foods is an aspirational morality that points toward the possibility of an institutional logic for business that contrasts sharply with neo-classical economic assumptions of investor capitalism. In this aspirational morality, the central unifying purpose of business is not narrowed to maximizing profit, but profit is understood as a necessary and beneficial means by which the business can fulfill a socially valued higher purpose. The dominant motive force is not limited to rational self-interest, but includes a full range of moral, even altruistic motivations. And the backbone of business success is not reduced to zero-sum competition among market participants, but mutually beneficial cooperation among a community of stakeholders. This kind of aspirational morality is gaining traction in the economy and can be found in several other companies, including, for example, Apple, Federal Express, Patagonia, Starbucks, Google and Genentech. These companies have institutionalized moral ideas similar to Whole Foods that involve a commitment to a higher purpose that inspires stakeholder commitment and cooperation.

In sum, the point of our analysis is not to falsely idealize business and capitalism, but to suggest an alternative to the institutional logic of investor capitalism that better integrates and strengthens the role of ethical values important to economic prosperity and a good society. One in which business is not reduced to an economic instrument for shareholders to maximize profit, but is a social institution for a community of stakeholders to realize intrinsically valued purposes; and one in which business as an institution has social and moral legitimacy not because it somehow transmutes base self-interest through competition into economic prosperity, but because it catalyzes noble moral qualities through social cooperation into a higher and more inclusive economic prosperity and human flourishing. In short, it is an institutional logic that can, not only, “deliver the goods” instrumental to economic prosperity, but also “deliver the Good” intrinsic to a good society.

Respect for civil society

Civil society refers to the diverse array of private relationships, associations and institutions established to serve some valued social purpose or solve some social problem for reasons other than profit (Ferguson, Reference Ferguson2013). It includes marriage and family, church and school, and the full range of voluntary private charities and other non-government associations. Such civil society institutions provide the environment in which the social relationships, moral values and norms of civic life are nurtured—what researchers term “social capital” (North et al., Reference North, Wallis and Weingast2009: 7). The social capital that participation in civil society generates in turn nourishes and supports the market and government institutions vital to a flourishing economy. Fukuyama, for example, emphasizes the centrality of social capital to the development of economic and political institutions (Reference Fukuyama1995: 356-7): “A healthy capitalist economy is one in which there will be sufficient social capital in the underlying society to permit business, corporations, networks, and the like to be self-organizing. . . . The same propensity for spontaneous sociability that is key to building durable businesses is also indispensable for putting together effective political organizations.” Similarly, Knack and Keefer (Reference Knack and Keefer1997: 1252) found in their empirical study of the economic effects of social capital in 29 market economies, that “trust and civic cooperation are associated with stronger economic performance.” A flourishing civil society, then, that generates high levels of social capital, will in turn promote a more productive economy.

A civil society that is flourishing affords citizens the social space to associate and manage their social relationships and problems as they choose. On the other hand, in an “uncivil society,” political or economic forces encroach on this social space, crowding out civil society and the relationships, moral values and civic norms it nourishes (Ferguson, Reference Ferguson2013). Civil society can flourish only if its domain is respected as one into which governments and markets should not encroach. This is what we mean by respect for civil society. Respect for civil society implies that the domain of civil society is not allowed to become the province of markets or government.

In recent decades, the vitality of civil society in the United States has diminished. Putnam (Reference Putnam2000), for example, documented a marked erosion of civic engagement since the 1960s, including high double-digit percent declines in attendance at public meetings or town or school affairs, service on a committee for a local organization or as an officer of a club or organization, membership in national chapter-based associations, and membership in parent-teacher associations. Concurrent with the erosion of civic engagement is the expansion of government and markets into the domain of civil society (Sandel, Reference Sandel2012; Schuck, Reference Schuck2014). This is not coincidental but reflects a twofold market and government crowding out of civil society. We briefly analyze the effects of this twofold crowding out on the values of civil society and its implications for economic prosperity and a good society.

Market crowding out. In recent decades, markets and market incentives have increasingly been used to deal with issues once reserved for civil society. Sandel (Reference Sandel2012: 3-5) in his analysis of the moral limits of markets illustrates. He highlights, for example, some “things money can buy” including a prison cell upgrade, the services of an Indian surrogate mother to carry a pregnancy, the right to immigrate to the United States, and admission of your child to a prestigious university. He also highlights some controversial “ways to make money” including fighting in Somalia or Afghanistan for a private military company, standing in line overnight on Capitol Hill to hold a place for a lobbyist who wants to attend a congressional hearing, and buying the life insurance policy of an ailing or elderly person, paying the annual premiums while the person is alive, and then collecting the death benefit when he or she dies. Sandel’s concern is not the usual complaint about the corrupting effects of greed, but a broader and deeper concern about the remaking of social relations into market relations. He claims that we have drifted “from having a market economy to being a market society” (Sandel, Reference Sandel2012: 10; italics in original). He raises several moral concerns about the expansion of the market into the domain of civil society. We focus on his concern that certain social goods are degraded by their commercialization.

Standard economic analysis assumes that commercializing an activity does not change it (Radin, Reference Radin2001). If a previously untraded good is made tradable, no harm is done. On the contrary, benefit is generated. However, following Hirsch (Reference Hirsch1976), Sandel (Reference Sandel2012: 120-1) argues that the introduction of market incentives for certain social goods can result in “commercialization effects” that change people’s attitudes and crowd out civic values (see also Costa-Font, Jofre-Bonet & Yen, Reference Costa-Font, Jofre-Bonet and Yen2013; Radin, Reference Radin2001; Titmuss, Reference Titmuss1970). For example, slavery commercialized human beings by treating them as commodities to be bought and sold. Such treatment fails to value human beings appropriately—treating them as instruments of gain and objects of use and utility rather than as persons with inalienable rights and inherently worthy of dignity and respect.

When social goods are bought and sold, it implies that it is appropriate to treat them as commodities—instruments of profit and use. Sandel argues that some social goods are not properly valued in this way because it corrupts them; they cease to be social goods exchanged on the basis of civic relationships, and become economic commodities exchanged in the market. This suggests that in a civil society there are certain goods that money should not be allowed to buy because they embody civic values and norms important to civil society that can be crowded out by market values and norms. This objection challenges the expansion of markets and market incentives into many aspects of social life, including motivating performance in education, healthcare, voluntary associations, civic life, and other settings in which moral commitments to civic values matter. To the extent that economic performance depends on social capital—the values and social relationships that civil society nourishes, it is indeed diminished, then, by the expansion of markets into the domain of civil society.

Government crowding out. We noted earlier how the expansionary dynamics of government have led it to intrude into all aspects of social life. Here we will only note the damaging effect this intrusion has had on civil society. Fundamental to civil society, especially as it emerged in America, is a civic character defined by a spirit of civic cooperation. This social trait provided the moral impulse that shaped our approach to civil society (Novak, Reference Novak1991). Tocqueville, for example, in his visit to America in the 1830s, observed:

Important is Tocqueville’s observation that when faced with life’s difficulties, the moral impulse of Americans was not to look for help to “a pre-existing authority,” i.e., government. On the contrary, it was first to cooperate with one’s fellow citizens to solve the problem themselves. This spirit of civic cooperation that takes personal responsibility for solving social problems underlies the development of the associations and relationships of civil society and is precisely what government expansion into the domain of civil society has crowded out.

Civil society depends on civic cooperation fueled by a strong sense of public spiritedness and the willingness of citizens to exercise their civic duties. But this traditional emphasis on civic duty has given way in recent decades to rights-based activism aimed at compelling government to solve social problems. Indeed Finkel and Moghaddam (Reference Finkel and Moghaddam2005: 4) note that the clarion by which a multitude of groups have tried to get government to effect social change is “rights”—human rights, civil rights, Black rights, women’s rights, gay rights, children’s rights, employee rights, the rights of the mentally ill, disabled persons rights, patients’ rights, and even animal rights. The cultural hegemony of rights over duties contributes to what Kagan (Reference Kagan2003) calls an “adversarial legalism” in dealing with social problems that undermines civic cooperation.

First, the two cultural impulses are fundamentally different: civic duty affirms the public order over the freedom of individuals; rights affirm the freedom of the individual (or group) against the social system. Second, the very concept of a right has an inviolable quality that permits little compromise and makes social problems harder to resolve. Third, the adversarial impulse redirects civil society energies to using lawsuits and advocacy politics to force government to solve social problems through regulatory coercion or judicial fiat (Fukuyama, Reference Fukuyama2013). This results in the government expansion into the domain of civil society. Indeed, Rauch (Reference Rauch1998: 2153) notes that “Never before has the government concerned itself so minutely with the detailed interactions of daily life.”

But the most significant cost of such rights-driven adversarial legalism is the weakening of civic bonds. People come to see themselves more individualistically and atomistically—less morally bound to work with their fellow citizens for the benefit of the “commonwealth.” People may feel linked with select others in certain causes, such as an ethnic minority community or environmentalism, but these do not represent the holistic sense of community. Taylor (Reference Taylor1991: 112) called this a “fragmentation of society” in which people become less capable of forming a common purpose and carrying it out, which is the essence of the civic cooperation at the heart of civil society. Rights-based political activism has thus induced government expansion into the domain of civil society, weakening the bonds of civic cooperation. And just as the intrusion of markets into the domain of civil society can affect economic performance, so too can the intrusion of government damage the social capital that a prosperous economy and good society requires.