Social Contract Theories in Business

According to social contract theory, moral and ethical codes are the principles all rational people would adopt as rules of life if they could count on others to do the same. Social contract theory can be used to examine questions in business ethics.

The Social Contract

The social contract is a concept in the philosophy of ethics and political science that has more recently been applied to the study of business ethics. According to this theory, valid and universally applicable moral rules can be determined by asking what rules people would voluntarily make if there were no rules. Not everyone would agree on the best type of music or the best books, so these cannot legitimately be the subject of universal moral rules. Everyone would agree to outlaw theft, fraud and murder, so these can be. The social contract is an unwritten and strictly hypothetical agreement not to violate moral rules. All members of society are said to agree to this contract simply by participating in the society.

Theories of Business Ethics

As of publication, there are three mainstream theories of business ethics. The stockholder theory holds that a company has no ethical obligations to society other than to earn the largest possible profit for its stockholders or owners within the limits of business ethics and the law. The stakeholder theory holds that a company is morally obligated to all parties with a stake in the outcome of its activities, including employees, the community and the environment as well as stockholders. Social contract theory holds that all businesses operate under an unwritten contract with the society as a whole, in which the society allows the company to do business under the condition that its actions benefit society.

Application

Ethical decisions in business can be strongly affected by which theory of business ethics informs the decision-making process. For example, if a small business owner receives a buyout offer from a major company, stockholder theory would support whichever decision was most profitable to the owner. Stakeholder theory would require the owner to consider the impact of selling the company on the employees and community. Social contract theory would require the owner to consider the impact of the decision on society as a whole, not just those immediately affected.

Controversy

Social contract theory is a controversial concept in the study of business ethics, because it is tied in to broader political issues about which many people disagree. People who believe strongly in the laissez faire model of capitalism usually argue that companies benefit society by creating wealth, providing services and employing people. According to this view, companies can do the most good by concentrating on making profits rather than on difficult and subjective ethical concerns. People who believe in the concept of corporate social responsibility argue that companies receive substantial benefits from society and should reciprocate by acting in the common interest.