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A Critique of Social Contracts for Business

Published online by Cambridge University Press:  23 January 2015


This article evaluates the social contract theorizing of Professors Thomas Donaldson, Thomas Dunfee and Michael Keeley. This theorizing is tested with G.E. Moore’s concept of moral authority, with moral psychology, and by managerial utility. Both strengths and weaknesses are found in the theories and the author concludes that while there is great potential, much work in theory development remains.

Copyright © Society for Business Ethics 1995

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1 Jean-Jacques Rousseau is popularly regarded as the father of social contract theory. See, J. Rousseau, Emile (1762) (citations are to the Allan Bloom translation, Basic Books, 1979); J. Rousseau, The Social Contract (1762). But of course, Rousseau drew on the thinking of Hobbes. And social contract theory has been an integral part of philosophical, political and religious thought from their beginnings. See infra, note 71.

2 J. Locke, The Second Treatise On Government at 4 (Bobbs Merrill, 1952).

3 Id. at 63.

4 T. Hobbes, Leviathan at 64–65 (1651) (hereinafter Leviathan).

While Rousseau is popularly regarded as the chief proponent of the social contract method, it was in use long before him. In Crito, Socrates articulates a vivid social contract:

SOCRATES: Look at it this way. Suppose that while we were preparing to run away from here (or however one should describe it) the Laws and Constitution of Athens were to come and confront us and ask this question:… ‘Was there provision for this in the agreement between you and us, Socrates? Or did you undertake to abide by whatever judgements the State pronounced?’

6 Emile supra, note 2.

7 Rousseau’s regimen of education is radical. Emile is shielded from society (amour-propre) in early life. Books are banned; opinions of others are suppressed; imagination is discouraged. Emile is tutored to acknowledge his self interest and self esteem (amour-de soi) and to use them to confront nature, necessity, and achieve his desires. Science is a tool to achieve his desires; knowledge of astronomy is not a badge of social standing but a tool to guide him home at night. By relying on his self interest he becomes self sufficient. Necessity is the focus of his life. Emile has no desire to manipulate others and cares not for their opinions. He is autonomous. When he is introduced into society he is able to see the important things, to reject vanity and concern for the opinions of others. The plight of those less fortunate provokes pity in him so that he does not take advantage of them.

8 Emile supra, note 2; The Social Contract supra, note 2.

9 Locke sees the role of different moral orientations in his state of nature. Those who deviate from the dominant orientation, who act selfishly, make government necessary.

10 The author acknowledges that many readers do not classify psychoanalytical theory as a social science.

11 S. Freud, The Ego And The Id (The Standard Edition, 1923).

12 L. Kohlberg, Essays On Moral Development, VOL.IIThe Psychology of Moral Development (1984); Empirical research on moral development is summarized in three books. They are J. Rest, Moral Development—Advances in Research and Theory, (1986) [hereinafter Rest, 1986]; J. Rest, Development In Judging Moral Issues (1979).

13 J. Loevinger, Ego Development (1976).

14 See, Gilligan, In a Different Voice: Women’s Conceptions of the Self and Morality, 47 Harvard Education Review 481 (1977). See also C. Gilligan, In A Different Voice (1982); Lyons, Two Perspectives: On Self, Relationships, and Morality, 53 Harvard Education Review 125 (1983).

15 G.E. Moore, Principia Ethica (1902) (citations are to the Prometheus Books Edition, 1988).

16 Id. at 114.

17 Hobbes jurisprudence flows naturally from both his personal experience and the history of his time. Born and educated in England, his life spanned the period of turmoil which focused the attention of serious thinkers on the source of legitimacy for the sovereign. During his life England moved from the concept of the divine right of kings, to legitimacy justified by the consent of those governed, to Cromwell’s legitimacy derived only from the barrels of muskets.

18 Leviathan supra note 4.

19 Moore, like Bentham, asserts that the intrinsic goods are self evident, not subject to proof. Moore, supra note 14 at 181–188.

20 Leviathan supra note 4.

21 Leviathan is even broken into two parts, Of Man and Of Common-Wealth. Leviathan supra, note 4 at vii.

22 See generally, D. Gauthier, The Logic of Leviathan: The Political Theory of Thomas Hobbes (1969).

23 This may not be universally true. Several features of Hobbes’ sovereign/subject relationship apparently are not logically related to human nature, but rather are logically related to the method by which a sovereign is created, specifically by the grant of power from the subjects to the sovereign. For example, Hobbes writes, “[N]o man that hath Soveraigne power can justly [sic] be put to death, or otherwise in any manner by his Subjects punished. For seeing every Subject is Author of the actions of his Soveraigne; he punisheth another, for the actions committed by himselfe. [Emphasis added]. This right of a sovereign then seems to flow out of how the sovereign came to be rather than out of human nature.

But this is a somewhat superficial analysis. On a deeper level, it should be clear that Hobbes’ harsh view of human nature has determined the quality of the grant to the sovereign. Thus the grant is irrevocable and dissenters to the selection of a particular sovereign may be killed. These conclusions cannot flow merely from a grant by the subjects to the sovereign. They can only be derived from such a grant in the context of the state of nature (and related human nature) where, “if any two men desire the same thing … they become enemies ….” The grant of power by subjects in a state of nature to a sovereign, is not by itself determinative of the nature the subject/sovereign relationship. So arguments that the character of Hobbesian government flows from the grant are illusory whether made by Hobbes or others.

24 Leviathan supra note 4 at 90–96 (Of the Rights of Sovereigns by Institutions) and 110–117 (Of the Liberty of Subjects).

25 Id. at 115.

26 Id. at 116.

27 T Donaldson, Corporations And Morality (1982).

28 For an excellent analysis of Donaldson, see, Kultgen, Donaldson’s Social Contract for Business, 4 Business & Professional Ethics Journal 28 (1985).

29 Donaldson (1982) supra, note 26 at 32.

30 This point is not made explicitly by Donaldson, but can be implied from his distinction between classes of obligation.

31 Donaldson (1982) supra, note 26 at 36.

32 Donaldson uses the term “productive organization” but much of his analysis is based on corporate status rather than merely “productive organization” status. For example, he writes, “the productive organization requires special status under the law …” Donaldson (1986) supra note 26 at 43.

33 Donaldson (1982) supra, note 26 at 44.

34 Id. at 48.

35 Id. at 49.

36 Id. at 49.

37 Id. at 52.

38 Id. at 52.

39 Id. at 54.

40 Id. at 54.

41 T. Donaldson, The Ethics of International Business (1989).

42 Id. at 47–52.

43 Id. at 47–52.

44 Id. at 54.

45 M. Keeley, A Social-Contract Theory of Organizations (1988).

46 “From a contractual perspective, organizations are seen to be sets of agreements for satisfying diverse, individual interests.” Id. at 11.

47 March & Simon, Organizations 4, (1958).

48 “The key insight of a contractual view is that organizations normally exist by virtue of agreement on the activities alone—which activities constitute joint means to separate purposes (possibly profits for some person, wages for others, goods or services for another group, and so on).” Keeley supra, note 44 at 11.

49 Keeley supra, note 44 at 32.

50 Keeley uses the term rights in two senses. One is the opposite of duty contained in the idea that, “for every right there is a corresponding duty.” The other conception is the one most relevant here, a basic claim not amenable to the claims of others. This Keeley sometimes calls a “moral right” or a “human right.” Keeley supra, note 44 at 19.

51 Keeley supra, note 44 at 182.

52 Keeley supra, note 44 at 183–184.

53 Keeley supra, note 44 at 116. The author recalls a conversation with a former executive of a large corporation now located in Denver. When asked why it moved there, the executive said, “More important than all the consultant’s studies was the fact that the CEO likes to ski.”

54 Dunfee, Business Ethics and Extant Social Contracts, 1 Business Ethics Quarterly 23 (1991).

55 Id. at 35.

56 Dunfee leaves specification of which formal theory, even which responses to dealing with groups of formal theory, open. His focus is almost exclusively on the role of the ESC’s in relation to any reasonable formal theory.

57 Id. at 33. Although he does not dictate a method for determining whether a standard conforms with moral theory, Dunfee appears to test the standard against all the major ethical theories. If it is found wrong under any of the theories, it is rejected as an “ethical norm.” This is the approach developed in Cavanaugh, Moberg & Valasquez, The Ethics of Organizational Politics, Academy of Management Review 363 (1981).

58 Id. at 37.

59 Dunfee does not specify any priority rule, he only gives potential examples, such as consistency with other ESC’s, and suggests that further research may define the priority rules.

60 This focus is also justified by work which demonstrates that a high percentage of the population, particularly those who are college educated, look to a group for moral authority. Work groups usually express their views with norms. Robert Jackall’s ethnographic study, Moral Mazes also suggests this reality.

61 Donaldson & Dunfee, “Connecting the Two Worlds of Business Ethics: Integrative Social Contract Theory” (1992). Working Paper Series Ref. # 92-8-167, Department of Legal Studies, University of Pennsylvania. [Hereafter cited as Donaldson & Dunfee (1992)].

62 Id. at 10.

63 Id. at 7.

64 Id. at 10.

65 Id. at 14.

66 Id. 12–19.

67 Id. at 24.

68 Moral psychology could be accounted for in social contract theory in a variety of ways, such as: 1) assuming some mix of people on the egoism-altruism scale, or 2) assuming everyone is at the highest or lowest level. Such assumptions would, of course, need to be justified and the analysis adapted to particular situations consistent with the assumptions.

69 Paul Hodapp takes this position. He argues that if I have a right to private property, you cannot modify my right simply because you and others think I should exercise my property rights in ways which benefit everyone rather than just myself. Hodapp, Can There Be a Social Contract with Business? 9 Journal of Business Ethics 127 (1990).

70 However, it is clear that there are many oughts which could be implied from the general structure of Keeley’s model.

71 Locke’s state of nature was fine until man mixed his labor with the things of the earth to create private property. Then fraud and force became profitable and majoritarian government became necessary to protect private property. Contemporary business can be viewed as an extension of the right to private property. Since Locke viewed this as a right, it is arguable that as a right, many thinkers (e.g. Dworkin) would conclude it cannot be modified by a contract entered into by a mere majority. So we are left with ideas of contract and rights which sometimes conflict; but the social contract with business doesn’t provide ways to resolve the conflict.

72 Crito, at 47D.

73 This is a central point made by Keeley in his chapter on freedom. M. Keeley, A Social Contract Theory of Organizations (1989).

74 Totem Marine v. Alyseka Pipeline 584 P.2d 15 (1984).

75 Donaldson and Dunfee appropriately, as applied ethicists, use examples to illustrate and buttress their conclusion about strongly bounded rationality. But the choice of examples is revealing. Insider trading, choosing team members for informal basketball games, and the choice of who to save when one’s wife and a stranger are drowning are examples which purportedly demonstrate the “strongly bounded rationality” of business ethics. But building ethical systems on these examples is like building a legal system by focusing on exceptions to general legal rules; it is like trying to craft a rule of law applicable to taking the life of another by examining cases where a police officer shoots in self defense, where a soldier shoots in aggression and where the state deliberately electrocutes a criminal. These cases would hardly support the law’s general prohibition against the taking of life.

Choosing team members for a noontime basketball game can, as the authors point out, involve selection procedures which are arbitrary, based on player skill, or based on equal opportunity for playing time. But this is an example of a decision that is quite insignificant. Everyone understands that debating the decision method could consume all the time available for playing. So the example is not morally persuasive. While insider trading has been treated quite differently in different markets, this again is an exceptional example, one not representative of the whole range of business ethics issues. It is, as presented by the authors, what lawyers would call a “hard case.” And again, the conflict between duty to a drowning spouse, and the conflicting duty to be impartial, is a very difficult ethical dilemma. Judges sometimes say, “Hard cases make bad law.” Along parallel lines, weak examples make weak ethical theory. Kant recognized the mine field associated with the choice of example.

76 Donaldson deviates somewhat from the traditional approach. His apparent good of social welfare is used to look at the intersection between productive organizations and society. A parallel analysis would be for Hobbes to declare what the costs and benefits of government are and then from this derive a social contract for government. Donaldson therefore nearly skips over human nature.

77 T. Donaldson, The Ethics of International Business at 48 (1989).

78 These views are not the author’s. They are presented here to only to demonstrate indeterminacy in Donaldson’s social contract.

79 Donaldson appropriately uses intuition to generate philosophical hypotheses. What is being questioned here is the extent of reason’s role in his theory development.

80 T. Donaldson (1989), supra note 75 at 47.

81 The is the writer’s view. Dunfee’s holds a different view.

82 Generally, this discussion focuses on the heart of utilitarianism, act utilitarianism.

83 Bentham acknowledges this feature of measurement in the following language.

Sum up the numbers expressive of the degrees of good tendency, … with respect to each individual … whom the tendency of it is good upon the whole: do this again with respect to each individual in regard to whom the tendency of it is bad upon the whole. Take the balance; J. Bentham, An Introduction to the Principles of Morals and Legislation 139 (1789).

84 Richard Epstein, Takings (1985).

85 Mill acknowledges this basic problem when he writes:

The object of this essay is to assert one very simple principle, as entitled to govern absolutely the dealings of society with the individual in the way of compulsion and control, whenever the means used be physical force in the form of legal penalties or the moral coercion of public opinion. That principle is that the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number is self-protection. That the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. J.S. Mill, On Liberty at 13 (1859) [hereafter Mill’s on Liberty, citations are to the Bobbs-Merrill edition, 1956]. Notice that his solution to the problem is not one which arises from within the utilitarian framework.

86 Rule utilitarianism can be viewed as an attempt to bound act utilitarianism.

87 Bickel articulates this problem well.

Elections, even if they are referenda, do not establish consent, or do not establish it for long. They cannot mean that much. Masses of people do not make clear-cut, long range decisions. They do not know enough about the issues, about themselves, their needs and wishes, or about what those needs and wishes will appear to them to be two months hence. “The will of the many and their interests must often differ”an echo here of Rousseau …. [citing Burke] A. Bickel, The Morality of Consent at 16 (1975).

88 When moral communication is more than one stage above the listener, the moral weight of the statement is much more difficult to appreciate. In moral psychology this is called the Blatt effect.

89 The utility of this field is concealed to the casual reader. Its contributions are scattered and sporadic. To be blunt, this author reacted with laughter when first reading some of the work in this field. The overview of the body of work is what persuaded me that it is serious and has great potential.

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