The Immoral Investment: A Kantian Moral Constraint of Free-Market Enterprise

2151-805X/12/$35.00 © 2013 by Begell House, Inc. 47

Ethics in Biology, Engineering & Medicine - An International Journal, 4(1): 47–57 (2013)

The Immoral Investment: A Kantian Moral Constraint of Free-Market EnterpriseBrett D. Steele

Institute for International and Civil Security, P.O. Box 127788, Khalifa University, Abu Dhabi; Email: [email protected]

ABSTRACT: This article introduces the concept of avoiding immoral investments as a fun-damental Kantian categorical imperative for free-market enterprises that produces goods, services, or knowledge. Related to the concept of an economic externality, an immoral in-vestment is defined as a sacrifice or loss that a firm imposes on non-shareholders without their consent to boost its profitability from both supply-side and demand-side investment perspectives. Furthermore, these victims are also denied the financial entitlements of formal shareholders or owners. The utility of this concept will be demonstrated by analyzing cases from biomedical, engineering, and business ethics from the perspective of product design and production investment on the supply-side, as well as marketing and advertising invest-ments on the demand-side. The article concludes by discussing the value of this approach by offering a more systematic, rigorous, and deductive approach to ethical reasoning in a business context.

KEY WORDS: Kantian ethics, categorical imperative, immoral investment, economic externality, prod-uct design, R&D, production, advertising, marketing, biomedical ethics, engineering ethics, free-market enterprise

I. INTRODUCTION

For all the attention that Kantian deontology receives in business, engineering, and biomedical ethics, it remains a difficult concept to integrate with utilitarian or profit-seeking reasoning. This challenge is manifested by the divorce between the teaching of business strategy and business ethics in MBA programs. At the very least, they are taught in separate courses by professors from different departments. Such a lack of integration can also be seen in Michael Porter’s influential monograph on competitive business strategy: not a single word appears devoted to deontological constraints.1 Some economists, on the other hand, acknowledge the relevance of deontological constraints, especially through their concept of negative externalities.2 Also known as a spill-over effect, Arthur Pigou developed this concept extensively in 1920.3 A firm generates a negative externality when it imposes involuntary and uncompensated costs on parties outside the firm in a manipulative, deceitful, or unjust manner to en-hance its profitability. From a utilitarian macroeconomic perspective, the object is not to eliminate these externalities, but rather to minimize them to maximize the net utility gain or welfare of society. As a result, economists routinely calculate optimum levels of air pollution, safety hazards, and other such externalities. As Barnett and Yandle argue, however, externalities remain a problematic concept from both logical and pol-

Ethics in Biology, Engineering & Medicine - An International Journal

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icy perspectives. They are especially troubled by the calls for enormous government interventions in the economy to eliminate them, as Pigou originally recommended.4 Barnett and Yandle therefore consider the concept to be bankrupt and recommend the problem of public goods instead. As a result, such macroeconomic and political rea-soning discourages the use of negative externalities to integrate deontological ethical and utilitarian strategic reasoning.

While neoclassical economists generally avoid the formal consideration of the de-onotological ethics of Kant, given the utilitarian universe they occupy, the same can-not be said for economics-oriented philosophers. Prominent examples include Norman Bowie and Mark D. White, who engaged in rigorous Kantian analyses of business and economics, respectively.5 They reveal how never treating customers, employees, and clients only as means to the firm’s ends lies at the heart of sustainable business enter-prise. Yet for all their convincing analysis, they remain unable to articulate the specific ethical constraints or categorical imperatives for free-market business enterprise. This lack of clarity certainly affects biomedical ethics, in which Kantian imperatives and Rawlsian norms of justice are often only implicitly assumed and interspersed in an ad hoc manner between utilitarian and even quasi-Marxist moral appeals to share profits and halt capitalist exploitation.6 Pursuing a more systematic ethical analysis, in which deontological constraints are well integrated yet clearly distinguished from utilitarian strategic reasoning is therefore a much-needed objective.

This article offers one approach toward achieving this objective by introducing the concept of the immoral investment. It involves an involuntary cost or loss that a firm imposes on people with whom it lacks a formal contractual relationship to minimize its investment resources. Avoiding immoral investments represents a fundamental categori-cal imperative of free-market enterprise, which includes both commercial manufacturers and service providers, as well as university-based and research organizations that com-pete for government funding. As a result, it is especially well-suited to the community of biomedical engineering. To satisfy the categorical imperative of avoiding immoral investments, an organization must only accept investments from shareholders who are making them consciously, voluntarily, subject to their free will, and without coercion or manipulation from the firm. Likewise, the returns these investors receive must conform to the prior contractual agreement. In a for-profit corporation, for example, the share of the profits the investor receives through dividends is typically proportional to their “share” of ownership—hence the concept of shareholders. Charitable foundations and governments may have very different contractual arrangements as investors in an aca-demic research project. Instead of financial returns, they may opt to receive only public acknowledgements and formal accountability reports.

To argue for the benefits of using the concept of an immoral investment, especially in biomedical-engineering ethics, I will first unpack the concept of an investment from an economics perspective. Then I will show how preventing immoral investments rep-resents a central categorical imperative of free-market commercial and research enter-prises. Finally, I will demonstrate its practicality by interpreting a basic spectrum of cases from the biomedical industry and research domains.

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The Immoral Investment: A Kantian Moral Constraint of Free-Market Enterprise 49

II. INVESTMENT

An investment is typically associated with a transfer of resources from the owners or shareholders to the control of the business firm’s managers to increase its capabilities. Accountants and economists often call this an indirect or fixed cost. To compensate for their investment, the shareholders typically receive an ownership stake in the firm in di-rect proportion to the investment made. This resource then gives the firm the opportunity to enhance its performance in designing, producing, and marketing goods or services to become more profitable and therefore enhance its value. The shareholders, however, as-sume a risk that this change in their share of the firm’s value will not surpass the initial investment made, and therefore deliver a negative investment return.

Many shareholders seek returns of a non-financial nature. When a government agency or private foundation awards research grants to an academic researcher, they are not demanding a share in the profits that might emerge from the publishing royal-ties or commercial application of the results. The typical return they are seeking is documented compliance with the proposed research plan and public acknowledge-ment of their support. Many donors to charitable organizations also fall under the category of investors when their resources are used to enhance the capabilities of the organization. Making a donation to Médecins Sans Frontières so its physicians can upgrade their medical equipment represents an investment. On the other hand, many donors gladly act in a non-investing mode by paying the direct production costs of the charitable services—an action that seeks to enhance the value of the organization’s product rather than that of the organization itself. The central point is that both for-profit and non-profit firms rely on shareholder investments. The difference lies in what the investment returns deliver.

Based on the analysis originally presented in “An Economic Theory of Techno-logical Products” (1995), we can unpack the concept of an investment systematically.7 Two basic categories of investments exist: those that enhance the organization’s ability to supply its goods or services, and those that enhance the perceived value of such out-put in the market. They may be defined as supply-side and demand-side investments, respectively.8 Within the domain of supply-side investments, two basic categories exist. The first is the design investment that seeks to create new designs of products or services, either through innovative new approaches or incremental changes. This might involve conducting basic R&D processes, developing detailed specifications and production diagrams, or programming new software. It may also involve highly advanced academic-research studies to enhance existing performance levels or reduce the complexity and therefore the cost of existing processes. The second category is the production investment that seeks to create or improve the production process of the product or service in question. From a factory perspective, this might involve purchasing new machine tools or conveyance systems; from a hospital perspective this might involve purchasing a new software system for registering incoming patients more rapidly or acquiring more maneuverable beds. Within the domain of demand-


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side investments, two basic categories also exist. The first is the marketing investment that seeks to create a sales argument to convince prospective customers that their utility will be enhanced or even maximized by purchasing the organization’s product or service. This could range from developing a highly technical sales presentation for engineers or physicians to highly subjective manipulations of desires for prestige or romance. The second is the advertising investment that seeks to distribute the sales argument to prospective clients or customers. This could range from formal face-to-face sales presentations to individuals or mass-media distributions to a global market via the Internet or television. Many other investment categories might exist in a firm, such as accounting procedures or financial manipulations to enhance the perceived value of the firm. Plenty of managers also spend shareholder investments in political maneuverings that only enhance their power or prestige at the expense of the share-holder’s ROI. Economists associate such actions with the “principal-agency problem” in their theory of the firm. Nevertheless, these four formal investment categories go far in addressing the critics of business ethicists for being too focused on management issues to the neglect of marketing and engineering.9

The fundamental objective of an investment is to increase either the organization’s supply-side or demand-side capabilities, or both. As shown in “Unifying the supply-side and demand-side of business strategy with an ROI objective function,” this can be achieved by decreasing the unit-production cost of the product or service as a function of its production rate and product-performance level.10 It can also be accomplished by increasing the unit-sales price of the product or service as a function of its performance level and sales rate. Figure 1 displays how an effective design investment, D, should decrease the unit-production cost as a function of product performance level. Likewise, Figure 2 shows how an effective marketing investment increases the unit-sales price as a function of product performance level. Similar relationships exist with the production and advertising investments. These graphs represent the supply-side and demand-side capabilities of the firm in terms of utilizing its investment resources in a wide range of product-performance options, where the production or sales rate is fixed.

An effective design investment may therefore allow the organization to either enhance its product’s performance while holding its unit-production cost constant or decrease the unit-production cost while holding the product’s performance constant, or any variation between these extremes. Likewise, an effective marketing investment may permit the organization to either increase its sales price while holding the product’s performance constant or increase the sales price to a much higher extent for an increase in product performance level than would otherwise be possible without such an invest-ment, or any variation between these extremes. The point here is that investments, when successful in pushing down the production-cost function and pushing up the sales-price function, have the potential to increase the profits associated with the product in ques-tion, and therefore increase the firm’s value for the shareholders.

Just because an investment reduces the production-cost function or increases the sales-price function does not always guarantee the profits or return-on-investment (ROI)



associated with the product will increase, however. Profitability depends on more than the difference between the total sales revenue and total production cost. To calculate to-tal profit over the lifetime of the product, one must also subtract both the supply-side and demand-side investments from this difference. Therefore, executives and managers can face overwhelming pressure to manipulate people who are not formal shareholders into assuming risks, making sacrifices, or giving up resources to decrease the production-cost function or increase the sales-price function and thereby boost the investment returns

FIG. 1: Unit production cost as a function of product performance level and increasing levels of design investment, D.

FIG. 2: Unit sales price as a function of product performance level and increasing levels of mar-keting investment, M.


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of the formal shareholders. Nevertheless, it remains an unethical action from a Kantian deontological perspective that directly threatens the sustainability of that capitalistic or free-market enterprise.

III. IMMORAL INVESTMENT

As described famously by Immanuel Kant, a categorical imperative represents actions that people cannot engage in if they want to avoid treating other humans only as means to their ends, thereby violating their status as fully rational and autonomous beings. From the perspective of shareholders or investors, a central categorical imperative exists in free-market enterprise or capitalism. An organization or enterprise must never have shareholders who have made their investments unintentionally, under false pretenses, or in an involuntary manner. The basic integrity of free-market enterprise, whether in a factory or a research lab, involves individuals who freely elect to become investors, as well as customers and suppliers. This is manifest in the political controversy over Obamacare’s mandate provision, where it appeared to many that citizens are forced by the federal government to become customers of private-insurance companies. From a Kantian perspective, another categorical imperative must be that investors can never be denied their rightful share of the firm’s profits or net worth, based on prior contractual agreements. The firm’s management, in other words, cannot arbitrarily decide which shareholders are entitled to a share of the investment returns and which are not. Hence, the institution of stock markets emerged in early modern Europe, especially with the trade of shares in the Dutch East India Company in the early 17th century. This system sought to guarantee that such a central categorical imperative of capitalist enterprise never gets violated. Numerous other institutions have emerged to ensure that poten-tial investors are not manipulated, including modern accounting standards and contract laws. The Sarbanes-Oxley Act, passed in response to the ethical debacle of Enron, is a more recent example. The emergence of modern product-liability law in the 1960s gave consumers the right to sue for punitive damages when the firm’s negligence can be proven. It represents an especially prominent attempt to prevent customers from becom-ing victims of immoral investments. It effectively provides them with a just share of the investment return their involuntarily losses helped achieve.

Despite numerous institutional safeguards, firms continue to secure resources in-voluntarily from people who are not formal shareholders. Again, their loss has the same functional effect of a formal investment in terms of either lowering the unit production-cost function or increasing the unit sales-price function. The resulting increase in profits or firm value is likewise not shared with them. To better appreciate the full scope of such immoral investments, let’s review how they are commonly pursued from the supply-side domain of design and production investments, as well as the demand-side domain of marketing and advertising investments.

An immoral design investment involves a firm making an individual involuntarily endure financial or resource losses, or suffer pain or hardship, including having their legal rights violated. This action allows the firm to avoid making the necessary design



investment required to prevent such unethical action. Common examples include patent infringements and copyright violations. Instead of making a substantial in-house R&D investment, the firm elects to solve a particular design problem using the solution pre-sented in an active patent without compensating the patent’s owner. Employees can also be subject to immoral investments. Take the example of an engineer who is promised a promotion for leading a product-development project and then devotes a consider-able amount of uncompensated time in the evenings and weekends to complete it suc-cessfully. That extra labor becomes an immoral-design investment when the company reneges on the commitment and promotes a more politically astute employee instead.

Firms may also be guilty of immoral design investments when they deliberately ig-nore safety standards or knowingly allow a hazardous condition to persist in the design to save money on the development costs needed to eliminate it. Consumers who injure themselves as a consequence of using the defective product then effectively become involuntary investors. Their pain and suffering represents the resource that reduced the effective relationship between the product’s cost and performance without the firm hav-ing to increase the actual design-investment budget.

Immoral-design investments occupy a great deal of attention in biomedical ethics. Manipulating people into agreeing to participate in the testing of new medical products or procedures by failing to disclose the true risks or conflicts of interest is a prime example. Examples include the gene-therapy testing on Jesse Gelsinger and in Woo-Suk Hwang’s embryonic cloning experiments. An honest disclosure of the risks to the test subjects would have generated a higher design investment in terms of fewer volunteers or even an outright ban on human testing. Hence, the pressure on biomedical researchers to engage in such unethical conduct can be as severe as those faced by business manag-ers. Other examples include statistical manipulations of test data to convince regulators that the product is safer than it actually is, or using incoherent psychiatric patents to test new drugs that induce severe emotional states.11

Biomedical ethicists have offered a number of solutions to minimize the risks of im-moral design investments in synthetic biology and microbial engineering. For example, Arthur Caplan has argued that synthetic microorganisms need to be branded with genetic “watermarks,” as Craig Venter demonstrated in practice.12 Should a researcher elect to save on R&D costs and fail to maintain sufficient safety processes, thus allowing the bug to escape and cause harm, such branding would ensure that the research could be held financially accountable in product-liability lawsuits. Caplan also essentially argued that such immoral-design investments could be minimized by making researchers increase their R&D budgets to ensure that the synthetic organisms are designed with a “duty to die” in environments beyond their intended domains.

If preventing immoral-design investments should concern biomedical researchers, preventing immoral production investments should preoccupy hospitals and clinics. Af-ter all, they are in the business of manufacturing cures and healing, where production rates, unit-production costs, and production investments are as significant strategically for them as for manufacturers. Likewise, heavy organizational pressures also act on them to improve their profitability by engaging in immoral production investments,


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especially in this era of inevitable limits to medical spending.13 For example, a hospi-tal’s unwillingness to invest in maintaining adequate sanitation standards effectively manipulates its patients into making immoral investments due to their increased risk of staph infections. The failure of physicians to follow established safety guidelines in an effort to speed up the production rate of surgeries is another example. These might include neglecting to visit with the patient before a procedure or failing to check the functionality of instruments before a surgical procedure.14 Rushing patients out of re-covery rooms before they can function safely at home is another example. Patients are not the only people subject to immoral-production investments in hospitals, however. Pressuring medical interns to work excessively long and grueling hours without any overtime pay significantly reduces production costs without any significant investments for the hospital. They become subject to immoral investments in terms of degredation in their health, welfare, and judgment. Some may argue that these physicians voluntarily work under these conditions to secure the investment return of gaining professional credentials. Nevertheless, I maintain that this remains an immoral investment because the primary motivation is to save on costs, not to provide valuable medical experience to the relatively powerless intern.

Biomedical-engineering ethics is heavily oriented toward analyzing immoral supply-side investments, especially those of a design nature. This is evidence by the strong concern over the development of new cures involving genetic engineering, tissue engineering, biomaterials, biomedical imaging, and neural engineering.15 However chal-lenging and important it is to devote ethical attention to such issues, immoral demand-side investments are just as threatening. Immoral-marketing investments have become prominent, especially in this era of an economically disastrous inflation of medical costs. This involves manipulating or deceiving people who are not formal shareholders into enduring pain and suffering, assuming a risk, or transferring valued resources without compensation to increase the firm’s sales price function in terms of sales rate and prod-uct performance. Therefore, presenting a misleading statistical analysis of testing data to convince a physician to purchase a new diagnostic machine represents an immoral marketing investment. The physician becomes an involuntary investor through the loss of a professional reputation or even a malpractice lawsuit by using this new device with false expectations. His or her patients may also become victims of this immoral investment when they receive a false diagnosis that could permit a disease to worsen or encourage unnecessary treatment. This issue has become especially serious, given how many academic research papers have effectively become marketing investments. Many universities receive research funds from industry or government to secure competitive advantages in commercial markets.16 The resulting bias of biomedical-engineering re-searchers has become so extreme in the field of orthopaedics that a strong correlation has emerged between favorable findings in knee-implant and hip-implant research papers and industry sponsorship.17

Physicians themselves can be guilty of making immoral-marketing investments when they recommend a test or procedure that is needlessly expensive to boost their profits. While an insured patient in this case is not necessarily the victim of such an im-



moral marketing investment, their insurance company or even the federal government (in Medicare cases) is. Patients routinely suffer from immoral marketing investments when their physicians only consider highly profitable invasive options and neglect far less profitable nutritional options. This attitude is imbedded in the mechanistic or Car-tesian culture of Western medicine that privileges treatment of conditions instead of preventing their occurrence in the first place. Equally serious is the trend in the phar-maceutical industry to construct new diseases out of previously unproblematic condi-tions to justify having medical insurance companies pay for their treatment.18,19 On the other hand, some psychiatrists have now adopted the policy of never prescribing drugs to their patients before conducting a thorough investigation of their eating habits and environmental-living conditions to avoid making immoral marketing investments for drug companies. Let’s also consider the growing trend in Western medicine to prescribe relatively unprofitable Asian techniques such as hatha yoga, mindfulness meditation, and tai chi.

The prescription of drugs raises the issue of immoral advertising investments. This category refers to unethical practice of making non-shareholders involuntarily assume some of the costs of distributing the organization’s sales argument without receiving a commensurate share of the resulting investment return. Prominent examples include mounting political campaign posters on private property without securing prior permis-sion, generating excessive noise pollution during a promotion event, and flooding email accounts with spam. An immoral advertising investment could occur whenever a prospec-tive customer is deceived into devoting time and energy, and therefore opportunity cost, to receiving a sales pitch in disguise. One of the most serious immoral advertising invest-ments from a biomedical perspective is the practice of pharmaceutical companies in pro-viding physicians with incentives to prescribe particular drugs to their patients. This could involve providing free samples, gifts, or even illegal financial kickbacks, which many physicians believe is not unethical.20 This practice transforms the physician into a sales agent for the pharmaceutical firm and therefore subjects patients to an involuntary sales pitch because the physician almost never voluntarily discloses his incentive to prescribe this particular drug. Avoiding immoral advertising investments is why it has become an important ethical duty of researchers to disclose any financial relationship with firms who have a vested interest in their scientific conclusions before presenting their findings at aca-demic conferences. This allows audience members to decide whether they want to invest the effort in listening and thinking critically about the sales argument that may follow. As Arthur Caplan recently stated in a talk at NYU-Abu Dhabi, getting researcher to disclose routinely such information is the greatest single achievement of biomedical ethics.

IV. CONCLUSION

The purpose of this article is not to suggest that new domains of business or biomedical ethics exist. The examples I provided by applying the concept of the immoral invest-ment are quite familiar. A great deal of modern society is organized from a Kantian deontological perspective to prevent such unethical conduct from occurring. This can be


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seen in stock markets, contract law, professional ethics codes, regulation of commerce in particular and public policy in general, as well as “best” business practices. What this article shows is how business ethics in general and biomedical ethics in particular can be approached in a more deductive and systematic manner, relative to the ad hoc approach-es typically presented in papers and textbooks. And unlike such utilitarian concepts of externalities or public goods, the notion of the immoral investment helps encourage rigorous utilitarian strategic reasoning for managers and practitioners with its focus on both the supply-side and demand-side domains of investments, while simultaneous in-culcating basic Kantian moral reasoning. Finally, it encourages “brave new” innovations to proceed, even when the risk of unintentional immoral investments might occur, pro-vided the means exists to hold the responsible organizations accountable for compen-sating victims. In the case of strict liability, such compensation allows them to recover their losses; in the case of negligence, such compensation is more oriented towards a fair share of the ill-gotten investment returns. In cases where the immoral investments generate damage far beyond the means of guilty firms to compensate, societies must invest in political institutions to prevent such violations from occurring in the first place.

ACKNOWLEDGMENT

The author thanks Mark D. White for his critical insights and encouragement.

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The Immoral Investment: A Kantian Moral Constraint of Free-Market Enterprise

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