Our article contributes to the recurring debate on whether and how firms in competitive markets should pursue objectives other than purely financial ones. Two competing approaches dominate this debate: one favors profit maximization as a single objective; the other favors multiple, partly social objectives. This debate has been going on for decades without approaching consensus. Our article offers an explanation for this intellectual stalemate and proposes a constitutional perspective that reconciles and improves the two seemingly antagonistic approaches. At the core of our proposed solution lies the distinction between the sub-constitutional level of action (choices within constraints) and the constitutional level of rules (choices among constraints). Using this distinction, we argue that both single-objective and multi-objective theories of the firm play equally important, but categorically different roles.
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In fact, individual profit maximization does not always maximize social welfare, of course. But—in terms of our framework—this is the result of imperfect markets which we will discuss in greater detail below.
To be sure, the fiduciary argument has been widely criticized on various grounds (Hart and Zingales 2017; Stout 2012). Note, however, that the aim of this section is neither to criticize nor to defend single-objective or multi-objective theories. The aim of this section is to analyze each perspective’s arguments and background assumptions in order to explore opportunities to resolve the debate between them.
To quote Manne once more: “Without this feature as a starting point we are left with nothing significantly different from Adam Smith's unseen hand, which, by virtue of selfish individual behavior, guides all economic resources to their socially optimal use.” (Manne and Wallich 1972: 4).
Since our understanding of “general welfare” and “social optimum” rests on both economic and non-economic reasons, our analysis assumes a broad conceptualization of externalities in the sense of positive or negative (material and immaterial) effects on human flourishing.
Sometimes, it is not the quantity but the quality of products that meets ethical criticism. A graphic analysis of such problems would require a different model and hence a different diagram. However, the logic of our argument would remain the same: It would (1) demonstrate a gap between market equilibrium and social optimum, and it would (2) raise the crucial question how to bridge this gap. Hence we think it is appropriate to settle for the analytically most simple exposition of imperfect markets.—In likewise fashion, it is possible to handle another limitation of our model. Here, we concentrate on the firms’ output markets. With regard to input markets, e.g. for labor, our analysis could be applied accordingly. The moral reorientation of priorities, proposed by multi-objective theories of the firm, would then not refer to the supply curve but to the demand curve.
“Ordo” is the Latin word for institutional order, the framework of rules, and thus captures nicely the crucial distinction we want to draw between the action level of a game (choices among moves with given rules) and the constitutional level (choices among rules for improving the game). For the concept of “ordo responsibility”, see Beckmann and Pies (2016). For a discussion of a classic precursor, see Pies (2017).
We would like to reiterate that our assumption of profits as the overriding corporate goal is a methodological ascription, not an ontological statement. We neither claim that companies have motives in an empirical sense; nor that all companies, let alone founders and managers, are predominantly driven by the desire to make money. What we argue is that for the sake of theoretical consistency, it is legitimate and useful to make this assumption (cf. also Schreck et al. 2019).
We thank an anonymous reviewer for pointing out limits that refer to all kinds of contracts, including endogenously set rules in the market. Ex ante defined rules are systematically incomplete and cannot account for all ex post contingencies. Hence, ordo-responsibility entails the responsibility to continuously reflect on the rules’ adequateness and seek reform where necessary. Sometimes, the incompleteness of rules even justifies the call for companies to compensate for regulatory deficits (Homann 1995: 17–25).
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We acknowledge comments from Juliane Reinicke, Andreas Suchanek, Dominik van Aaken, participants of the Strategic Management Society Annual Meeting 2016, and the 2017 Zicklin Center Normative Business Ethics Workshop at the Wharton School, and the Academy of Management Annual Meeting 2018. We would also like to thank two anonymous reviewers for their valuable suggestions and helpful criticisms that were very conducive to improving the form and substance of this article.
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Pies, I., Schreck, P. & Homann, K. Single-objective versus multi-objective theories of the firm: using a constitutional perspective to resolve an old debate. Rev Manag Sci 15, 779–811 (2021). https://doi.org/10.1007/s11846-019-00376-x
- Business ethics
- Constitutional economics
- Corporate political responsibility
- Corporate social responsibility
- Strategic management