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Chapter 2:
A HISTORICAL PERSPECTIVE ON BUSINESS
ETHICS
CHAPTER 2 CHAPTER AND ADDITIONAL QUESTIONS
In studying this chapter, students should consider the questions below.
“CQ1” refers to “Chapter Question 1.” This question appears at the end of the textbook
chapter.
“AQ1” refers to an “Additional Question 1.” This is an “additional” question related to
the chapter. It is not listed at the end of the textbook chapter as a “Chapter Question”.
These items are numbered within the two categories based on the order in which the
answer appears in the chapter.
CQ1: What are several salient business ethics issues in pre-capitalist America?
CQ2: How did Adam Smith justify the ethics of capitalism?
CQ3: Describe how the U.S. economy grew between the Revolutionary War and World War I.
CQ4: What prominent labor issues challenged the fairness of free market capitalism?
AQ1: How have stakeholder rights been expanding since the 1960s?
CQ5: Explain the Federal Sentencing Guidelines and how a judge would apply them.
AQ2: What is a B Corporation?
AQ3: What is the Optimal Ethics Model?
CHAPTER 2 LEARNING OBJECTIVES
After completing this chapter, students should be able to:
Describe salient business ethics issues in pre-capitalist America
Understand the ethical foundation of capitalism as argued by Adam Smith in the
1700s
Appreciate the delicate balance between economic growth and stakeholder rights,
particularly labor issues, throughout U.S. history
Benchmark an organization to the Ethics Compliance Program best practices outlined
by the Federal Sentencing Guidelines
Conceptualize how to maximize ethical behaviors in organizations based on an
Optimal Ethics Systems Model
CHAPTER 2 OVERVIEW
Business ethics must be understood from an historical perspective to appreciate how the
current economic system and regulatory system has evolved over time. The movement of history
has been toward is toward the creation of a wealthy and just society, which requires balancing
economic growth and respect for people. Our current mix of ethical issues in the business sector
has grown out of the nation’s unique historical evolution.
Throughout the history of the United States, progress in business ethics has been
achieved by extending “rights” to an increasing number of stakeholders, and by the maturation of
democracy and the justice system.
This chapter describes the business dimension of Christopher Columbus’ arrival, colonial
settlements at Jamestown and Plymouth, and the build up to the Revolutionary War. The
philosophically-inclined founders of the United States, wanting to create the most just political
and economic system in the world, chose capitalism for the new nation’s economy because of its
emphasis on liberty. The nation’s historical struggle to develop an ethical business sector is
examined through the Industrial Revolution, formation of labor unions, wage issues, expansion
of stakeholder rights, and culminates in the 1991 Federal Sentencing Guidelines.
The chapter concludes with an Optimal Ethics Systems Model as a conceptual framework
for maximizing ethical behavior and reducing ethical risks in organizations.
CHAPTER 2 LECTURE OUTLINE
Teaching Objective: To recognize that unethical business activities have occurred throughout
history and laws and regulations are created to minimize harms.
Suggested Time: Two to three hours of class time is recommended to present this chapter.
I. Chapter Question 1: What are several salient business ethics issues in pre-capitalist
America?
Christopher Columbus’ Arrival
Roanoke and Jamestown Settlements
Plymouth Settlement
Build Up to the Revolutionary War
II. Chapter Question 2: How did Adam Smith justify the ethics of capitalism?
Adam Smith’s Capitalism
Smith on Labor Issues
III. Chapter Question 3: Describe how the U.S. economy grew between the
Revolutionary War and World War I.
The Industrial Revolution
Anti-Trust
Charters
Liabilities
IV. Chapter Question 4: What prominent labor issues that challenged the fairness of
free market capitalism?
Slavery
Strikes and Labor Unions
Wages and Compensation
Income Inequality
Minimum Wage
Living Wage
Executive Compensation
V. Additional Question 1: How have stakeholder rights been expanding since the
1960s?
Congress Under a Democratic Party Presidential Administration
Congress Under a Republican Party Presidential Administration
Economic Deregulation
Four Types of Social Responsibilities
VI. Chapter Question 5: Explain the Federal Sentencing Guidelines and how a judge
would apply them
Best Practices
Culpability Fine
VII. Additional Question 2: What is a B Corporation?
VIII. Additional Question 3: What is the Optimal Ethics System Model?
CHAPTER 2 SUPPORTING MATERIALS
Textbook Inserts
Ethical Dilemma Analysis
What would you do?
Let’s Build a Building
In the Real World: Enron
Exhibits
Exhibit 2.1: Ethical Foundation of Capitalism
Exhibit 2.2: Profile of a Union Organizer
Exhibit 2.3: Economic Class Structure in the United States
Exhibit 2.4: Median Personal Income by Educational Attainment
Exhibit 2.5: Best Practices for Compliance and Ethics Programs
Exhibit 2.6: B Rating System for Manufacturing Firm: Version 1.0
Exhibit 2.7: Optimal Ethics Systems Model
Thematic Boxes
Tips and Techniques
Best Practice in Use
CHAPTER QUESTION 1: WHAT ARE SEVERAL SALIENT BUISNESS ETHICS
ISSUES IN PRE-CAPITALITST AMERICA?
This section spotlights four pivotal historical periods leading up to the formation of the United
States: Christopher Columbus’ arrival, Roanoke and Jamestown settlements, Plymouth
settlement, and build up to the Revolutionary War.
These events were associated with economic growth and entangled in a web of ethical
issues prior to, during, and after their occurrence.
Their culmination led political leaders to choose capitalism as the economic system for
the newly formed United States.
CHRISTOPHER COLUMBUS’ ARRIVAL
Why did Christopher Columbus risk his life to be the first person to sail west to get to
India?
In 1453, the Ottoman Turks conquered Constantinople. The overland spice trade
routes linking Europe to India fell under the auspices of Ottoman government
officials who began charging European traders exorbitant taxes for business passing
through the city. Products were confiscated when Europeans resisted payment.
What was Columbus’ business arrangement?
Columbus secured financial funding for the never before undertaken risky adventure
from King Ferdinand and Queen Isabella, who had developed Spain into a
commercial leader and military power.
Ethical Issues?
Columbus concluded that the indigenous people would be relatively easy to conquer,
enslave, and Christianize.
ROANOKE SETTLEMENT
Creation of Charters
England, France, and the Netherlands competed with Spain to find riches in “America.”
In the 1580s, Queen Elizabeth I of England granted Walter Raleigh and his business
associates a charter to establish a colony in the area of modern-day Virginia and North
Carolina to trade, search for minerals, and plunder Spanish merchant ships.
Ethical Issues?
JAMESTOWN SETTLEMENT
Creation
King James succeeded Queen Elizabeth and chartered the Virginia Company of London
Ethical Issues?
The laborers consisted mostly of indentured servants required to serve their masters for
seven years in exchange for transportation, food, clothing, lodging, and eventual freedom.
Many Jamestown colonists died from starvation or in military battles with indigenous
tribes who opposed encroachment on their lands and the kidnapping of their children to
Christianize them.
PLYMOUTH SETTLEMENT
Background Information
The Pilgrim settlement at modern-day Plymouth, Massachusetts was also a business
venture. The Plymouth Company, an association of merchants in England, obtained a
charter to establish a trading colony on the northeast coast of America and recruited the
Pilgrims as its settlers. The Pilgrims were willing to take on the risk for religious and
economic reasons.
Ethical Issues?
The Mayflower eventually anchored in southeastern Massachusetts, near corn fields that
had been harvested by indigenous tribes for thousands of years. Peaceful relations with
BUILD UP TO THE REVOLUTIONARY WAR
Background Information
By 1774, more than 2.3 million European colonists participated in highly regulated
Ethical Issues?
Business and tax policies exacerbated anti-England sentiments. The British government
The Currency Act of 1764 restricted the power of colonies to issue paper money. The
Sugar Act of 1764 made colonialists accountable to judicial and tax administrators the
Wealthy colonial farmers and merchants protested that they wanted greater say in
self-government. Britain’s taxing polices were unethical, they claimed, because no
The Boston Tea Party was the result of the East India Company’s monopolistic business
practices. In 1773, a worldwide financial panic threatened to bankrupt the company.
In mid-December 1773, three British ships packed with tea cargo anchored in Boston
Harbor. A large mob of politically agitated colonialists demanded that the ships return the
tea cargo to England, which is what happened at harbors in Philadelphia, New York, and
Acts of civil disobedience intensified and, within two years, the colonialist declared war
DISCUSSION ACTIVITY
In small groups or as an entire class: The arrival of Europeans – Columbus, Roanoke, Jamestown
– created a clash of cultures where European traders with greater military technology initially
traded with indigenous people and then stole from their trading partners, raped the women, and
enslaved them. Was this inevitable or could there have been a more harmonious evolution of
business relationships?
DISCUSSION ACTIVITY
In small groups or as an entire class: The British established monopolies, a highly regulated
business system, and taxed colonists without giving them political representation. These actions
fueled the Revolutionary War. If you were an adviser to the British government in the mid-1700s,
how would you have managed the colonial complaints?
CHAPTER QUESTION 2: HOW DID ADAM SMITH JUSTIFY THE ETHICS OF
CAPITALISM?
ADAM SMITH’S CAPITALISM
James Madison, Benjamin Franklin, and Alexander Hamilton relied on the writings of
Scottish philosopher Adam Smith for the economic evidence and ethical justifications of
capitalism, a free market economy.
Background Info
Smith recommended abandoning mercantilist policies that sanctioned monopolies,
put quotas on imports, and regulated tradesmen. Key management positions were
filled based on family and political connections rather than individual merit. The lack
of competition under mercantilism, Smith argued, led to high prices, low-quality
products, and shortages.
Adam Smith’s ethical defense of capitalism rests on the following beliefs:
Freedom and liberty are essential values.
A free people naturally pursue their self-interests and respect the interests of others.
DISCUSSION ACTIVITY
Small group or whole class discussion: Adam Smith maintained that, if given the opportunity to
steal something without anyone looking, most of would not because of our conscience, belief in
God, we can be reasoned with, or fear of jail. Think about a time when you stole something or
cheated. Why didn’t Smith’s four moral restraints stop you from doing so?
Now think about a time when you could have stolen something or cheated, but decided not to.
Which of Smith’s four moral restraints convinced you not to steal or cheat?
Government intervention in the marketplace is only needed under three conditions:
oFirst, when contracts are violated
oSecond, when merchants abuse their freedom by committing injustices against
others, such as in the case of slavery, and
oThird, when the pursuit of self-interest does not generate highly desired social
welfare benefits, such as national defense and certain public works, such as
roads.
SMITH ON LABOR ISSUES
Smith highlighted three problems that could occur if owners, in pursuit of greater profits,
did not rely on moral sentiments when dealing with laborers.
First, due to an overabundance of labor, owners could drive wages below subsistence
amounts because of their ability to “hold out much longer” during wage conflicts.
Laborers would become ill-fed and sick.
Second, excessive application of piece-rate incentives, could increase productivity in
the short-term, but damage a worker’s health in the long-term.
Third, excessive application of division of labor could also increase productivity in
the short-term, but damage a worker’s intellectual abilities in the long-term.
DISCUSSION ACTIVITY
Choose the number that represents the extent to which you believe the United States’ version of
free market capitalism experienced right now is ethical.
#1: Very Ethical
#2: Ethical
#3: Slightly more ethical than unethical
#4: Slightly more unethical than ethical
#5: Unethical
#6: Very Unethical
Tally the votes, form groups with common beliefs, and have them list the reasons that support
their viewpoint. Then facilitate a discussion between the group that believes capitalism is the
most ethical and the team that believes capitalism is the least ethical.
What are common points of agreement? What are areas of disagreement?
