Download evolutionary perspectives on business and ethics

THE MODERN CORPORATION AS A COMPLEX ADAPTIVE
SYSTEM: SCIENTIFIC AND MORAL IMPLICATIONS
Ronald F. White, Ph.D.
Professor of Philosophy,
College of Mount St. Joseph
ABSTRACT
Scholarly research into nature of the corporation and business ethics is currently
occupied by the “Nexus-of-Contracts theory.” However, as evolutionary theory worms its
way into our theoretical understanding of human social organization, longstanding
assumptions concerning the nature of Truth and Value have come under fire. Throughout
the twentieth century, Darwinian Revolution has been reshaping our theoretical beliefs
concerning the nature of modern corporations, corporate management, and business
ethics. One of the more recent focal points of this “revolution” has been “Complex
Adaptive Systems Theory” or CAS. The question, therefore, arises to what degree CAS
elucidates the theoretical issues raised by the prevailing orthodoxy, the Nexus-ofContracts Theory.
In this presentation I will explore the descriptive (scientific) and prescriptive
(moral) dimensions of both the Nexus-of Contracts Theory and CAS and the implications
for the Modern Corporation, management, and business ethics.
CORPORATIONS:
DESCRIPTIVE AND PRESCRIPTIVE DIMENSIONS
Before we get too far, it’s important to set the epistemological stage. Human
inquiry, according to the proponents of evolutionary epistemology, concerns the
intergenerational process of asking questions and posing answers. They call the end
products of inquiry beliefs or theories.1 There is a lot of disagreement among
philosophers as to the precise purpose of scientific theories, but most will agree that
theories or beliefs enable inquirers to explain, predict, and/or control natural phenomena.
Most philosophers will also agree that there are two lines of inquiry: descriptive inquiry
and prescriptive inquiry. Descriptive inquiry involves questions of “Truth” or “Fact,”
while prescriptive inquiry explores questions of “Value” or “Goodness.” The
epistemological relationship between the two has always been problematic.
Since the twentieth-century, inquiry into the descriptive “nature” of the modern
corporation and its management has been dominated by social scientists, primarily
economists. The underlying assumption has been that scientific inquiry (as opposed to
non-scientific inquiry) can discover this nature through the application of empirical
and/or rational methodologies; that is, via the “Scientific Method.”
Economic theorists have always been prone to a certain degree of heterodoxy and
pluralism, as evidenced by the various schools of economic thought: Neoclassical School,
Austrian School, Post-Keynesian School, Institutional School, and the Marxist School.2
The theories generated by these schools of thought reflect the kinds of questions and
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answers engaged by their respective communities of inquirers. “Orthodoxy” today in
economics is usually associated with adherence to neoclassical theory. However, the
epistemic status of the other “schools of economic thought” is subject to debate.
Orthodox economists, often argue that the “schools” actually reflect internal debate
within the broad dictates of the neoclassical framework and that economists really agree
on the basics of their science. On the other hand, the proponents of the various opposing
“schools” often portray their own orientation as “revolutionary” and indicative of a whole
new paradigm. All of this suggests that economists even disagree over whether or not
they disagree. Evolutionarily, a certain degree of internal disagreement is regarded as a
precondition for scientific innovation and advancement. The sociology of science can be
messy at times.
Despite this internal debate over the nature and extent of heterodoxy, there’s some
general agreement that there are at least two alternative lines of descriptive inquiry (or
paradigms) that have dominated the economic literature since the early twentieth century:
the “neoclassical theory” and the “institutional theory.”
Twentieth-century neoclassical economic theory is usually regarded as the
progeny of the eighteenth-century “classical theorists,” led by Adam Smith. The main
difference between the two is attributed to the “Marginalist Revolution” in economics
championed by William Stanley Jevons, Leon Waltras, and Irving Fisher. In contrast, the
“new institutional theory” (or evolutionary economic theory) is the progeny of the
“institutional theory” as outlined by Thorsten Veblen, Wesley Mitchell, Walton
Hamilton, and John Commons in the early 20th century. The most obvious bones of
contention between the two alleged paradigms have to do with the nature of economic
change, the use of equilibrium theory and Newtonian mathematical models (linear
calculus), and how the paradigms deal with social relationships. But again, economists
tend to disagree over the nature and extent of the differences between neoclassicism and
institutionalism.3 And, that there are also important differences between old institutional
economics, new institutional economics, and their relationship to the classical and
neoclassical frameworks.4
So much of the descriptive debate between neoclassicism and institutionalism has
been over the nature of “economic change” and the larger question of whether the human
sciences should be modeled after a Newtonian Worldview, based on physics; or, a
Darwinian Worldview, based in biology; and, whether the human sciences are about
individual behavior (individualism) or group behavior (collectivism). Neoclassicists
focus on the decision-making strategies of individual entrepreneurs, and institutionalists
tend to focus on collective behavior manifest in the organizational structure of a society,
or, institutions (E.g. conventions, routines, and procedures).
In general, the so-called Darwinian worldview, embraces change as the natural
state of economic reality (process-based ontology); irreducible, infinite complexity; and
the emergence of properties of the system that the separate parts do not have.5 The
Darwinian influence upon scientific inquiry was clearly evident in early twentiethcentury physics via quantum physics and relativity; in philosophy via Peirce’s
pragmatism and Karl Popper’s evolutionary epistemology. Beginning in the 1970s, the
Darwinism influenced psychology and the social sciences via sociobiology, however it’s
more lasting impact came in the 1980s. In twentieth-century economics, Darwinism was
clearly evident Austrian economics thought, via F.A. Hayek; and Joseph Schmpeter,
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whose evolutionary insights later contributed to “new institutional economics” or
“evolutionary economics” as described by Nelson and Winter.6
In the early twentieth century, the descriptive theory of the corporation (or “the
firm”) was clearly dominated by, neoclassical economic theory and the Newtonian
worldview, which really “had no place for the entity called the firm.”7 Or to be more
precise, the firm was treated as a “unitary agent: the personification of the entrepreneur
and firm behavior is equated with the behavior of the entrepreneur.8
It is probably fair to say that the much of the current interest in extending the
Darwinian Worldview into economics and management theory can be attributed to the
influence of mainstream institutional economists such as Coase and Williamson. Since
1984, the Santa Fe Institute, a private, non-profit, multidisciplinary research and
education center, has been especially influential in its defense of CAS and institutional
economics as seen through the lens of Complex Systems Theory.
Now it is important to acknowledge that many neoclassical economic theorists do
not accept this Newtonian-Darwinian distinction and the characterization that they are
stalwart Newtonian positivists resistant to evolutionary change. After all, economic
theory was, indeed, evolutionary long before Darwin ever stepped foot on the Beagle.
EFFICIENT VS. MORAL MANAGEMENT OF CORPORATIONS
One of the more obvious empirical “facts” that underlie the nature of the modern
corporation is that it is created and “managed” by human beings. Of course, knowledge
of how to manage a corporation is contingent upon descriptive knowledge of the “ends”
or “purposes” that a corporation is intended to serve; and knowledge of the means by
which managers can realize these ends. In the United States, orthodox economic theory
implied management in the service of the “efficiency” of the means of enriching the
entrepreneur. In the 1920s, Scientific Management or “Taylorism,” integrated the
Newtonian scientific worldview with management theory by treating the modern
corporation as a cash machine subject to mechanical laws of efficiency. Management
was, was seen as a form of engineering and therefore subject to the mechanical laws of
nature. Good corporations survive market competition because good managers armed
with scientifically-based engineering skills maintain or increase efficiency. Bad
corporations are inefficient corporations that are led into oblivion by unskilled managers.
Ethicists, however, must also explore not only efficiency, but also the morality of
ends and the morality of means. Hence, much of the descriptive and prescriptive analysis
of corporations can be summarized in terms of three basic questions:
1. Whose ends (or interests) are in fact served by corporate managers? (E.g.:
stockholders, consumers, employees, managers, suppliers, etc.) AND, whose ends
(or interests) ought to be served by corporate managers?
2. By what means can managers employ in order to efficiently realize these stated
ends (or interests) AND, what means can managers employ within the bounds of
morality?
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3. What role does government in fact play in the realization of these various
corporate ends AND, what role government “ought” to play in this process.
In terms of the management of corporations worldwide, contemporary scholars
have identified three alternative roles for managers: Managers as Economic Actors, or
agents of shareholders; Managers as Trustees, or agents of stakeholders; and Managers
as Quasi-Public Servants, or agents of society.9 The concept of a “good manager,”
therefore, is contingent upon how well he/she fulfills obligations to shareholders,
stakeholders, and/or society. But despite the idealistic ruminations of various “win-win”
strategies, in the real world, what is “good” for shareholders may or may not be “good”
for other stakeholders, and/or society; what’s “good” for stakeholders may or may not be
“good” for stockholders and society; and, what’s “good” for society as a whole, may or
may not be “good” for stakeholders and stockholders. Any theory of the corporation must
take into account the reality of “win-win,” “win-lose,” and “lose-lose” outcomes.
FACTS, VALUES, AND CORPORATIONS
One of the most perplexing questions in the history of philosophy has to do with
the relationship between descriptive “facts” and prescriptive moral “values” (or, the “is”
and the “ought.”). Many eighteenth-century scientists (including Adam Smith) were
“natural law theorists” that believed that moral values could be deduced from scientific
facts. However, Plato, David Hume, Kant, and a raft of 20th century philosophers, most
notably, G.E. Moore argued that facts (how humans act) and moral values (how humans
ought to act) are incommensurable. They argued that any attempt by natural law theorists
to close the “is-ought gap” and derive “values” from “facts” commits the “naturalistic
fallacy.” So, at least in terms of the history of philosophy we must acknowledge that the
logical relationship between “facts” and “values” has been problematic and that any
theory of the corporation that tries to blurs that line runs the risk of being accused of
committing the “naturalistic fallacy.”
The moral inquiry in the philosophical tradition has always been steeped in
theoretical pluralism. Today, most philosophers agree that there are three competing
models of moral theories. There are deontological theories (divine command theory and
egalitarian and libertarian social contract theory), which construe morality in terms of
rights and duties; teleological theories, which construe morality in terms of the pursuit of
pleasure and the avoidance of pain (egoism and utilitarianism); and virtue-based theories,
which see morality in terms of the pursuit of excellence. Since the 1970s, under the
influence of John Rawls’ Robert Nozick’s libertarian theory, most moral philosophers
have embraced one of the two deontological models. However, utilitarianism and virtue
based ethics still attract many adherents. Proponents of contemporary evolutionary ethics
also seek to close the “is-ought gap,” but tend to gravitate toward utilitarianism10 and
virtue based theories.11 In terms of naturalism, there may be compelling philosophical
reasons for preferring utilitarian and virtue based theories over deontology.
In recent years, the communitarian movement has offered a broad-based critique
of the foundations of deontological theory. Communitarians basically argue that the two
opposing deontological theories that constitute Western Liberalism are not universal
moral theories, but political theories embedded in Western democratic ideology.
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Therefore, neither egalitarianism nor libertarianism can distinguish between the political
“Right” and the moral “Good.” Some scholars also argue that Rawls and Nozick’s rightsbased theories fail differentiate between “moral persons,” “legal persons,” and “political
persons.”12
So there are two basic kinds of questions we can ask about the modern
corporation and its management: “What is a corporation?” and “What is a “good
corporation?” Orthodoxy in business ethics strives to close the “is-ought gap” with a
single universal theory that is both descriptive and prescriptive. Critics of this strategy
tend to uphold the “is-ought gap” and “fact-value incommensurability.”
NEXUS-OF-CONTRACTS THEORY
Orthodoxy in business management and business ethics is currently occupied by a
deontological “Nexus-of-Contracts Theory,” whereby: “each constituency or stakeholder
group bargains with the firm over a set of rights that will protect the firm specific assets
that it makes available for production.”13 Within that broad framework, two opposing
sub-theories can be identified and contrasted: “stockholder theory” (which is grounded in
libertarianism) and “stakeholder theory” (which is grounded in egalitarianism). Boatright
convincingly argues that the debate between stockholder and stakeholder theories is
elucidated by this more general “Nexus-of Contracts” approach and that stockholder
theory wins that head-to-head competition.
Let’s start with a few general observations on the “Nexus-of Contracts Theory.”
First of all, the theory is based on the basic Enlightenment concept of a “social contract,”
which builds on the idea that we can forge social theory based on how, rational, self
interested, individuals would, hypothetically, bargain with one another in the absence of
coercive forces. In short, under certain objective circumstances, rational self-interested
agents will chose cooperation over predation.
The Nexus-of-Contracts Theory claims to be both descriptive and prescriptive. It
is descriptive in so far as it accurately depicts the nature of the corporation. Indeed, the
most casual empirical observation reveals that corporations are, in fact, comprised of
groups of interacting human beings (“bargaining”) stakeholders (stockholders,
consumers, managers, employees, consumers etc.). It is also evident that these
relationships are shaped by both the “invisible hand” of the market and the “visible hand”
of corporate law as enforced by sovereign governments. The “Nexus-of-Contracts theory
holds that corporations are actually “legal fictions” that are “socially constructed” in
order to minimize “contracting costs” associated with cooperatively negotiating the
conflicting interests of contractors, most notably the cost of monitoring compliance.14
But it is also empirically evident that, worldwide, corporate laws vary between the
“microsocial contracts” of national or state governments. This, of course, suggests a
degree of descriptive relativism.15 Therefore, one of the puzzles facing the Nexus-ofContracts Theory is whether business ethics is hopelessly mired in cultural relativism or
whether there are, at least some, “hypernorms” that constitute the basis for universal
human rights.16
Now in order for the Nexus-of Contracts Theory to be both descriptive and
prescriptive (or normative) it must do more than explain how the various classes of
stakeholders (stockholders, consumers, managers, employees, consumers etc.) in fact
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bargain (or would bargain) in the real world within various environments. It must also
prescribe “moral and/or legal rules” that govern how stakeholders ought to bargain,
prescribe impartial rules dictating whose interests “ought” to prevail under various
competitive conditions, and prescribe what role markets and national governments, and
international governing bodies ought to play in this process.
All human societies enforce prescriptions through both legality (laws enforced by
the coercive power of government) and through morality (rules enforced by tradition,
convention, and/or social learning). For most philosophers, there are important
distinctions between “legality” and “morality,” and between “legal rights” and “moral
rights.” Much of this debate focuses on the use of “coercion” in the enforcement of legal
and/or moral rules. Kant, for example, distinguished between a “good citizen” (who
obeys the law out of fear of getting caught) and a “good person” (who obeys the law out
of love and respect for the law itself). So much of the distinction between “legality” and
“morality” hinges on the use of the coercive power of the state. Both the egalitarian and
libertarian wings of Western liberalism take the view that there at least some universal
moral rules that all rational contractors will uphold in the absence of coercion.
The most serious challenges to a naturalistic closure of the “is-ought gap” has
come from a motley crew of philosophical realists. Some realists point out that,
empirically speaking, human beings that occupy the so called “real world” do not always
act rationally, do not always act out of individual self-interest, do not always cooperate,
rarely act out of impartiality, and often do not make decisions in the absence of coercion.
Moreover, human beings do not always know the Truth and if they do know the Truth,
they often conceal it or distort in order to advance self-interest. Therefore, at least on the
surface rationality, individuality, self-interest, free will, impartiality, and Truth appear to
be more prescriptive than descriptive. Other realists point out that there is a lot of
perfectly natural human behavior that runs counter to our most basic moral intuitions:
predation of the weak by the strong, male violence, war, ethnocentricity etc. But the most
daunting challenge to closing the “is-ought gap” is the “fact” that when human beings do
“naturally” pursue rational self-interest, they all too often do it at the expense of the
rational self-interest of others. Hence, it may be perfectly “natural” for human beings to
violate contractual obligations, and reconstruct the Truth out of self-interest. But that
doesn’t mean that this behavior is good!
The classical and neoclassical economic traditions argue that the “natural” pursuit
of rational self-interested atomic individuals axiomatically leads to the social good.
However, Machiavelli, Hobbes, and the realists emphasized the essential role of coercive
legality as a bulwark against the unbridled pursuit of self-interest by predatory, powerful
individuals and groups. The Nexus-of-Contracts approach takes realism seriously by
emphasizing legality, but can it also deal with morality?
In the real world, bargaining position between self-interested constituencies is
naturally determined on the basis of an unequal distribution of “power,” which is to say
that it takes place under conditions of “unequal liberty.” Hence, in the real corporate
world there are times and places where the interests of power-wielding stockholders
prevail over the interest of employees and managers (CEO’s); there are times and places
where power-wielding unionized employees prevail over the interests of stockholders and
CEO’s; and there are times and places where the interests of power-wielding CEO’s
prevail over the interests of both stockholders and employees. If a manager hopes to
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redistribute the prevailing distribution of power he/she must do so from a position of
superior power. The key here is that there are important differences between
“Knowledge” and “Power.” In terms of ethics, there is a big difference between
“Knowing” what’s right and “Doing” what’s right.
A close reading of Machiavelli suggests that bargaining in the real world is not a
simple matter to be resolved based on linear calculus. Distributions of power are
invariably influenced by not only background institutions, information (and
misinformation), and the aggregated (and often irrational) decisions of other selfinterested stakeholders, but also by raw chance, or emergence. In terms of management
theory, this makes short-term planning very difficult and long-term corporate planning an
exercise in futility wrought with unanticipated consequences. Evolutionarily-based
political theorists, including Machiavelli, emphasize the reality of chance variation
(emergence) and its implications for the long-term and short-term management of nations
and corporations.
Moreover, according to Machiavellian theory, any manager that hopes to maintain
power over other self-interested stakeholders, and preserve the corporation, would have
to resist the lure of self-interest and partiality and manage the corporation as a social
utilitarian. Of course, any social utilitarian must not only possess “knowledge” of what
constitutes the “public good” (over the short term and/or the long term) and “knowledge”
of the means to achieve it; but also the “power” to alter the status quo. Moral intervention
and the upending of the status quo, therefore, imply both Knowledge of a more justified
distribution and the Power to execute that distributional scheme.
So, if we expect managers, stockholders, consumers, managers, and/or employees
to cooperate and transcend their own atomic (or collective) self-interest, and pursue the
larger “social good” they’ll need both knowledge and power. Any leader that aspires to
manipulate or control the relations of power between self-interested stakeholders will
need to possess not only knowledge of ends and means, but also possess superior firepower, and the willingness to occasionally utilize that coercive power (or as Machiavelli
put it: “enter into evil”) and employ immoral means in order to serve the greater good and
insure the survival of the corporation or the nation. However, the most serious lacunae in
the Machiavellian formula is that evolutionary biology casts doubt on whether we can
reasonably expect to cultivate altruistic utilitarian behavior in corporate and political
leaders, in the absence of coercive governmental institutions. In short, morality alone
may not be an efficient bulwark against corporate corruption among powerful leaders.
So any contractarian prescriptive theory of the modern corporation must account
for the realities associated with bargaining over “conflicts of interest” when there is
natural inequality of bargaining power between the various stakeholders via a rightsbased moral theory. Although “real world” managers (and other stakeholders) are
described as natural egoists in pursuit of self-interest, Machiavellians prescribe that
managers “ought” to be utilitarians that serve the interests of the corporation over their
own personal self interest. But moral prescriptions are notoriously weak in the absence
legal prescriptions backed by coercive force. As, the Enron Scandal graphically
illustrates, in the real world, the most powerful corporate stakeholders (in Enron’s case it
was upper management) will “naturally” pursue self-interest at the expense of the least
advantaged stakeholders unless they are constrained by legal sanctions enforced by “well
armed” external private regulators (auditors) and public regulators (SEC). Hence, the
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Nexus-of-Contracts Theory must take into account the ever-changing power relationships
between contracting stakeholders and government.
STOCKHOLDERS AND STAKEHOLDERS
Within the contractual constraints set by the Nexus-of Contracts framework there
are two opposing theories that offer different strategies for dealing with “conflicts of
interest” and “natural inequality:” stockholder theory and stakeholder theory.
Stockholder theory states that the best (most efficient) way to serve the interests
of all stakeholders is to always manage the corporation to serve the interests of
stockholders. A corollary to the theory is that the interests of the other stakeholders are
morally relevant, but are best met via the impersonal “invisible hand” of the market.
All real world contractors go to the bargaining table armed and/or burdened with
natural inequalities. Hence, we have the political question concerning the role of
government in mediating the process. Based on stockholder theory, and libertarian
ideology, all rights are “negative rights” in the sense that bargainers are guaranteed the
equal right to bargain, but there can be no “positive rights” guaranteeing that any one
stakeholder or stakeholder group will emerge victorious as a result of the competitive
process. According to libertarian stockholder theory, government ought to be “impartial”
or “neutral” in the determination of winners and losers. The primary purpose of
government, therefore, is to simply enforce contracts between rational self-interested
bargainers. This includes providing a legal framework that includes the monitoring and
enforcement of impartial rules of fair play.
From the standpoint of stockholder theory, the challenge is how to manage
corporations in such a way that the pursuit of self-interest by stockholders benefits the
other stakeholders. The traditional natural law approach suggests that Mother Nature
prefers equilibrium, which tends to “floats all boats.” The stockholder theory is
“naturalistic” in the sense that it is based on “reciprocal altruism,” which if left to its own
devices can settle into equilibrium; whereas, utilitarianism requires a degree of otherworldly “ideal altruism.” Therefore, stockholder theory avoids the problem of how to
cultivate ideal altruism (utilitarianism) into a system naturally populated with selfinterested bargainers. But it also requires a bit of altruism. Not on the part of the
contractors themselves, but on the part of the governmental institutions responsible for
maintaining free market competition and monitoring corporations to insure contractual
compliance.
Edward Freeman’s “Stakeholder Theory” is management to serve the interests of
the multiple constituencies that ‘have a stake in’ management decisions including:
stockholders, employees, customers, managers, suppliers, and the local community.17
Stakeholder theory observes that serving the interests of stockholders does not always
maximize the interests of the other stakeholders, and that managers (and/or government)
must at least occasionally abandon impartiality and intervene on behalf of the “leastadvantaged” stakeholders, or those that find themselves bargaining under conditions of
unequal liberty. Hence, there are at least some “positive rights” associated with
stakeholder theory.
A recent book by Robert Phillips suggests that stakeholder theory implies a
Rawlsian moral foundation.18 The argument against Rawls’ account of the prescriptive
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bargaining process as the pursuit of an “overlapping consensus” conducted under a
hypothetical “veil of ignorance” is that it’s not clear how real world bargainers could go
about bargaining under that veil, given that in the real world we all come to the
bargaining table armed with our “natural advantages” and/or burdened with our “natural
disadvantages.”
Again, in the real world stakeholder theory must provide an explanation as to why
the “most advantaged” would bargain with the “least advantaged.” One typical Rawlsian
response is that rational, self-interested bargainers would sacrifice their short-term
“advantages” for long-term “security.” After all, even Donald Trump gets sick, and will
eventually suffer the infirmities of old age. But when an agreement is forged between the
“advantaged” and “least advantaged,” there is always the question of whether the
contractors can “Trust” each other to keep their promises. For a realist, this uncertainty
once again underscores the need for external monitoring of contracts by government and
the use of coercive force to punish non-compliance. Of course, then the bargainers have
to idealistically “Trust” the impartiality of government. So although, the Nexus-ofContracts Theory embraces realism’s naturalistic critique of corporate altruism, it
invariably raises the question: “Who is monitoring the monitors?” In the end, Nexus-of
Contracts Theory ultimately requires trustworthy international monitors, or governmental
altruism.
Finally, it is important to point out that all collective moral and legal decisionmaking involves leaders and followers, which raises the problems related to “agency
relationships,” and therefore requires “agency theory.” In its simplest terms, agency
raises the question is how corporations and the nexus of stakeholders can develop
strategies that induce self-interested “agents” (such as CEOs) to act in the interest of
“principals” (such as stockholders). Stockholder theorists try to arrange incentives in
order to align the interests of agents with principles. Stakeholder theorists tend to rely
heavily on the coercive power of government to align those interests. Of course, the main
point of contention between the stockholder and stakeholder theories is how government
ought to manage legality and morality in order to minimize the ill-effects of coercive,
predatory, self-interested corporate behavior. I have argued that the Nexus of Contracts
Theory, in both the stockholder and stakeholder traditions, require altruistic governmental
institutions, although stockholder theory requires less because government is expected to
do less.
Boatright argues that the descriptive claims made by stockholder and stakeholder
theory are empirical matters that can be resolved based on scientific methods within the
larger context of the Nexus-of-Contracts Theory. I’ll simply suggest that Complex
Management theory elucidates Nexus-of-Contracts Theory, but it does not resolve the
“stockholder-stakeholder debate.” It simply dissolves it, by acknowledging the
descriptive fact that both power and knowledge (or information) evolve over time relative
to an enormously complex and rapidly evolving social and intellectual environment. So
although, stockholder theory still reins supreme in the United States, given the
complexities raised by the Nexus-of-Contracts Theory, there is no guarantee that it will,
in fact, maintain its status as orthodoxy, nor can there be any moral basis for arguing that
it “ought” to prevail in the future or that it “ought” be adopted by other socio-political
environments.
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In sum, realism identifies five theoretical puzzles that the Nexus-of-Contracts
Theory must address: the inequality of bargaining power, the relationship between
“Power” and “Knowledge,” the “is-ought gap,” the distinction between “legality and
morality,” and the alignment of the interests of “agents and principles.” But does CAS
shed any light on these issues?
COMPLEX MANAGEMENT THEORY
Well, what exactly does “Complex Management Theory” say about all this, and
does it elucidate the five problems stated above?
First of all, management theory is a lot like economic theory in the sense that
there both bona fide competing paradigms and non-scientific pseudo-scientific theories.
The difference between the two is not always clear. The Internet is a prolific source of
innovation, which includes a lot of quackery. The primary question here is whether CAS
represents legitimate science or mere quackery. The short answer is that much of the
CAS agenda is not all that controversial and has already been introduced into economic
debate via its various “schools of thought,” most notably, Austrian Economics and its
approach to management.
“Complex Management Theory” is the extension of “Complex Adaptive Systems
Theory” to management theory and economic theory. Admittedly, there is not an awful
lot of consensus among CAS theorists, although the basic principles of CAS have been
more-or-less crystallized in the recent writings of scientists associated with the Santa Fe
Institute, including Brian Arthur, David Stark, and Kenneth Arrow. It is also important to
note that other scholars have opened similar lines of evolutionarily-based research, most
notably Robert Axelrod, at the University of Michigan, who has examined the bargaining
process via “game theory” as an “iterated Prisoner’s Dilemma.”19 It is also significant
that many of the descriptive claims of the CAS agenda were raised in the twentieth
century within the context of the debate between “neoclassical economics” and “new
institutional economics” or “evolutionary economics.” What is unique about CAS is its
application of “systems theory” to the real world problems of management.
According to its proponents, systems theory provides a theoretical framework for
analyzing complex, disparate phenomena that have been regarded as incommensurable
and associated with different disciplines, such as star systems, ecological systems, social
systems, language systems, and economic systems. Systems theory is often referred to as
the most recent “Theory of Everything,” or T.O.E. There is still a lot of variation in the
terminology, however most theorists still distinguish between: relatively simple closed
(Newtonian) systems and complex open (Darwinian) systems.
Brian Arthur offers the following summary of the critique of orthodoxy offered by
institutional economists and CAS:
“Economic agents, be they banks, consumers, firms or investors, continually
adjust their market moves, buying decisions, prices, and forecasts to the situation
these moves or decisions create. But unlike ions in a spin glass which always
react in a simple way to their local magnetic field, economic “elements” –human
agents- react with strategy and forethought by considering outcomes that might
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result as a consequence of behavior they might undertake. This adds a layer of
complication to economics not experienced in the natural sciences.
Conventional economic theory chooses not to study the unfolding of the
patterns its agents create, but rather to simplify its questions in order to seek
analytical solutions.”20
The common denominator between institutional economics and CAS is their
portrayal of neoclassical economics as embracing an outdated Newtonian Worldview that
has been more or less abandoned by most other lines of inquiry: including, physics,
biology, psychology, and even philosophy. Therefore, it’s about time for economists to
abandon that sinking ship. In terms of management theory CAS argues that managers
cannot manage a complex real world corporation based on overly simplistic Newtonian
economic models and agent-centered managerial theories. For evolutionarily based
management, the most salient points of contention involve how chance variation and
emergence shape the nature of information and the role of experts.
If there is a single point of contention between Newtonian and Darwinian systems
it is their opposing views on the nature of “chance.” Newtonians see chance as an
epistemological problem, a reflection of our ignorance of the deterministic laws that
govern complex phenomena. They insist that in the future, complexity will be simplified
via reductionism and the illusions of chance and mysterious emergence will disappear.
But Darwinians see chance and emergence as ontological realities, attributes of the real
world that must be reflected in any complex system, including the T.O.E (Theory of
Everything).
Complex adaptive systems are neither “mechanical” nor “chaotic” but naturally
poised on “the edge of chaos” “between two poles: two much order and too much
chaos.”21 This means that all human knowledge, including corporate knowledge, is
imminently fallible. From a Darwinian perspective, fallibility is not a sign of systemic
weakness, but a prolific source of systemic innovation. This means that the traditional
notion of “expert” as “philosopher-king must be revised.
Expert corporate management, therefore, is not about wise and impartial
“philosopher-kings” applying timeless axiomatic principles to a freeze-framed
corporation. It’s about harnessing the natural principles of self-organization by allowing
innovation to occur within the lower levels of the corporation and managing via “trial and
error.” But again this is nothing new. Since the 1940s, F.A. Hayek and the Austrian
school of economic thought have been touting self-organized systems theory and its
implications for leadership. 22
One of the attractive features of systems theory in general is that it encourages
inter-systemic analysis. CAS, therefore, applies to all complex systems including:
biological systems, information systems, social systems, and economic systems. Here’s
how some of the scholars at the Sante Fe Institute frame their theory.
John Henry Holland outlined four properties (aggregation, nonlinearity, flows,
and diversity) and three mechanisms (tagging, internal models, and building blocks) that
outline the CAS agenda.23 John Henry Clippinger III gives the following description of
those properties and mechanisms:
11
The properties identify the key formative characteristics of any self-organizing
system. They represent those things that managers should look for, work on, and
influence. Aggregation refers to the fact that collections or groupings display
properties that are more than the sum of their parts. The property of nonlinearity
is displayed when small increments of change can cause enormous unexpected
threshold changes. Flows are webs or networks of interactions such as resources,
orders, goods, capital, or people. Diversity is a measure of variety; in general, the
more diverse and organization, the more fit and adaptable it is, up to the edge of
chaos, beyond which too much diversity precludes the formation of order or
organization.
Techniques that managers can use to effect changes in the properties are
the three mechanisms. Through these mechanisms managers can initiate
sustainable self-organizing processes to achieve specific organizational and
strategic goals. Tagging . . . refers to the naming, or labeling, of a thing or quality
so as to give it certain significance or link it to action. Prices, job titles,
reputations, and definitions of all kinds are tags. Internal models are simplified
representations of the environment that anticipate future actions or events.
Stereotypes are types of internal models that simplify complexity of the
environment to anticipate specific behaviors. Building blocks are components that
can be endlessly recombined to make new components or actions; think of the
four proteins that make up all DNA . . .24
Without going into the details of CAS, the main issue whether a descriptive TOE (theory
of everything) generate moral prescriptions? If systems theory can generate moral
prescription across disciplines, we should be able to justify universal moral rules that all
complex systems including: economic systems, political systems, legal systems,
informational systems and even biological systems.
NEXUS-OF-CONTRACTS THEORY, CAS, AND THE “IS-OUGHT GAP
First of all, let’s reiterate that much of what CAS has to say about economics and
leadership is neither new nor all that controversial. Much of the CAS agenda was
introduced into economic thought during the twentieth century via institutional and
Austrian economics. The main contribution of CAS seems to be the theoretical structure
and vocabulary of complex systems theory. Nevertheless, I would argue that CAS really
does elucidate the descriptive component of the Nexus-of-Contracts Theory. However,
both the stockholder and stakeholder interpretations of the Nexus-of-Contracts approach
require, impartial laws governing economic competition, impartial legislators serving the
“public good,” and impartial enforcement of those laws. But in the real world, the
persons and institutions that constitute economic environments are not, in fact, impartial.
They are deliberately designed to advance the self-interest of competing stakeholders at
various times in various places. Although CAS accepts self-interest as a reality, it also
raises serious doubts concerning the efficiency of these “designs.”
Moreover, in the real word, “agents” that represent groups of stakeholders that are
unrestrained by legality may not necessarily serve the interests of their “principals.” This
agency conundrum also applies to governmental officials acting as “agents” for the
12
“public good.” Therefore, Nexus-of -Contracts Theory requires altruistic CEOs,
Chairmen of the Board, Union Presidents, Accountants, and governmental regulators.
The basic problem with CAS is that it does not elucidate the prescriptive
component of the Nexus-of-Contracts Theory. It certainly does go a long way toward
explaining how legal institutions within and between nations are shaped by complex
evolutionary forces. But CAS contributes little of substance to the closing of the “isought gap.” If the Nexus-of-Contracts Theory is to fulfill both its stated descriptive and
prescriptive functions it must be able generate universal moral prescriptions that apply in
the real world without relying on coercive force. If the Enron and WorldCom debacles
are at all indicative of the prevailing balance of power in corporate America, it would
appear that in recent years, one group of highly paid stakeholders (that is, upper
management), has held power over other stakeholders and governmental regulators.
However, based on CAS it is hard to argue that this particular distribution of power
makes any “better” in the prescriptive sense than any other possible distribution.
But this essay will not end on that sour note. There are two alternative
conclusions. First, it may be the case that descriptive and prescriptive inquiry are, in fact,
incommensurate and that the deontological Nexus-of-Contracts vision of closing the “isought gap” is simply untenable. I tend to lean toward this position. Or, second, it may be
the case that the utilitarian and/or virtue-based moral theories might prove to be more
compatible with evolutionary ethics and therefore, offer a more plausible strategy for
closing the “is-ought gap.”
CONCLUSION
In this essay, I have argued that CAS management theory elucidates the
descriptive dimension of the Nexus-of-Contracts Theory of the modern corporation. A
consistent systems approach to the descriptive and prescriptive dimensions of the modern
corporation implies that the same evolutionary principles that elucidate the descriptive
nature of corporate institutions must also elucidate governmental institutions. But does
not CAS really elucidate the prescriptive dimension.
I have suggested that there are really four theoretical puzzles that continue to
haunt evolutionary approaches the business ethics, and indeed ethics in general: “is v.
ought,” “legality v. morality,” “power v. knowledge” and “agents v. principles. I would
argue that CAS does shed light on the descriptive inequality of bargaining power between
stockholders, stakeholders, and society; the descriptive variation and relativity between
microsocial moral and legal systems; and the descriptive inefficiency of moral sanctions
in comparison to legal sanctions. But it cannot morally justify any one distribution of
power. In short, CAS is morally neutral.
In sum, the Nexus-of-Contracts theory explicated in terms of Complex Adaptive
Systems Theory appears to be promising as a descriptive theory of the nature of the
modern corporation, but it is not a very promising as a prescriptive theory. In the real
world, evolution is a messy process that may not “float all boats” at all times and in all
places. The vision of deducing moral rules from the laws of nature remains problematic.
13
REFERENCES
See: Charles Sanders Peirce, “The Fixation of Belief; ” and Karl Popper, Conjectures and Refutations.
David L. Prychitko, ed. Why Economists Disagree: An Introduction to Alternative Schools of Thought
(Albany: SUNY Press, 1998) pp. 1-13.
3
David Hamilton, Evolutionary Economics: A Study in Economic Thought (New Brunswick, Transaction
Publishers, 1991) p.9
4
David L. Prychitko, Why Economists Disagree: An Introduction to the Alternative Schools of Social
Thought (Albany: SUNY Press, 1998) pp.156-160
5
Robert Axelrod, Harnessing Complexity: Organizational Implications of a Scientific Frontier (New York:
Basic Books, 2000) p.15
6
Lars Magnusson, Evolutionary and Neo-Schumpeterian Approaches to Economics (Boston: Kluwer
Academic Publishers, 1994)
7
Gunnar Eliasson, “The Theory of the Firm and the Theory of Economic Growth: An Essay on the
Economics of Institutions, Competition, and the Capacity of the Political System to Cope with Unexpected
Change” (in) Evolutionary and Neo-Schumpeterian Approaches to Economics (ed) Lars Magnusson
(Boston: Kluwer Publishers, 1993). p.173.
8
Jack J. Vromen, Economic Evolution: An Enquiry into the Foundations of New Institutional Economics
(London: Routledge, 1995) p. 41
9
John R. Boatright, Ethics and the Conduct of Business, 4th ed., (New Jersey: Prentice Hall, 2003) p. 21
10
Peter Singer, A Darwinian Left: Politics, Evolution, and Cooperation (New Haven: Yale University
Press, 1999).
11
Larry Arnhart, Darwinian Natural Right: the Biological Ethics of Human Nature (SUNY Press, 1998)
and William D. Casebeer, Natural Ethical Facts: Evolution, Connectionism, and Moral Cognition
(Cambridge: MIT Press, 2003)
12
Rainer Forst, Contexts of Justice: Political Philosophy Beyond Liberalism and Communitarianism
(Berkeley: University of California Press, 2002) pp. 283-292.
13
John Boatright, Contractors as Stakeholders: Reconciling Stakeholder Theory with the Nexus-of
Contracts Firm” Journal of Banking and Finance 26 (2002) p. 1837
14
John R. Boatright, “Justifying the Role of Shareholder” (in) The Blackwell Guide to Business Ethics, ed.
Norman Bowie (Oxford: Blackwell Publishers, 2002) pp. 40-42.
15
Thomas W. Dunfee and Thomas J. Donaldson, “Untangling the Corruption Knot: Global Bribery Viewed
through the Lens of Integrative Social Contract Theory” (in) The Blackwell Guide to Business Ethics, ed.
Norman Bowie (Oxford: Blackwell Publishers, 2002) p. 64.
16
Ibid p.66
17
Tom L. Beauchamp and Norman E. Bowie, Ethical Theory and Business, 6th edition (Prentice Hall:
2001).
18
Robert Phillips, Stakeholder Theory and Organizational Ethics (San Francisco: Berrett-Koehler
Publishers, 2003)
19
Robert Axelrod, The Complexity of Cooperation: Agent-Based Models of Competition and
Collaboration (Princeton: Princeton University Press, 1997).
20
W. Brian Arthur, “Complexity and the Economy” Science Vol. 284 (April 2, 1999) p, 107
21
John Henry Clippinger III, ed. The Biology of Business: Decoding the Natural Laws of Enterprise (San
Francisco: Jossey-Bass Publishers, 1999) p.8.
22
See: F.A. Hayek, Individualism and Economic Order (Chicago: University of Chicago Press, 1948).
23
John Henry Holland, Hidden Order: How Adaptations Build Complexity (Massachusetts: AddisonWesley, 1995).
24
John Henry Clippinger III, ed. The Biology of Business: Decoding the Natural Laws of Enterprise (San
Francisco: Jossey-Bass Publishers, 1999) pp 10-11.
1
2
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APPENDIX
Perfect Information
Imperfect Information
All stakeholders must know their short-term and long-term
interests, know how to advance those interests. All stakeholders
must tell the truth.
Stakeholders do not always know their short-term and longterm interests (Mistakes). Stakeholders do not always know
how to advance their short-term and long-term interests.
Stakeholders do not always know the Truth or tell the Truth.
When stakeholders forge a contract they must clearly understand
the terms of that contract (transparency).
When stakeholders forge a contract all parties do not always
clearly understand the terms of that contract. Language is
not always transparent.
Perfect Cooperation
Imperfect Cooperation
When there is a conflict of interest, powerful stakeholders must
cooperate with less powerful stakeholders, and perhaps sacrifice
their own interests for the interests of others.
Stakeholders cooperate only if they believe that cooperation
advances their own interests. (reciprocal altruism)
When stakeholders forge a "contract" all stakeholders must keep
their promise to abide by the conditions of the contract.
"Agents" serve the interests of their "principles" only if their
own interests coincide. Otherwise, they serve their own selfinterest.
All "agents" (managers, union leaders, politicians etc. ) must serve
the interests of their "principals" (stockholders, union members,
electorate).
Perfect Freedom
Imperfect Freedom
All stakeholders must have the freedom to accept or reject contract
offers based on their own self-interest.
Contract offers between powerful and less powerful
stakeholders can be coercive. "Take it or leave it."
15
Imperfect CompetitionPerfect Competition
Inefficient corporate governance forms will be weeded out by the
invisible hand of the market (natural selection) under the
competitive conditions of the bargaining process.
But corporate law is forged within a social and political
context and corporate law is often forged in in the interest of
the most powerful stakeholders. Hence, both efficient and
inefficient governance forms can be sustained by
governmental interference in the market via legality
(patents, licensing, credentialism, tax policy, tariffs,
criminal justice system, cronyism etc.) Therefore, the
invisible hand is often (if not invariably) thwarted by
powerful stakeholders that manipulate the rules of the game
via legality. So at any given time or place, governance
forms are not a reflection of "fitness" but a reflection of
"power or influence."
16