Need for developing a market for morality

Moral degradation is the result of failure to penalise immoral behavior.

LONDON: The profitability and success of a business is largely dependent on the behaviour and activity of its employees. Such dependence can lead to moral hazard as employees adopt an insouciant approach to work resulting in efficiency losses for the business.

Such moral hazard problems are rampant in societies marred with asymmetric information and market imperfections. This results in loss of productivity and financial loss running into billions on an annual basis. For example, according to a recent BBC report, the loss borne by businesses and public sector organisations in UK is estimated to be £13 billion per annum.

Many employees miss days off work, citing sickness as a reason. The main types of sickness are stated to be back pain and stress, two ailments that are notoriously difficult to independently verify, and hence there is – whether rightly or wrongly – a degree of scepticism as to the truthfulness of these excuses.

Yet, the moral hazard problem is not limited to sick leaves and absenteeism. In a country like Pakistan, employers are concerned with lower productivity and interest in work on the part of their employees even if they are on job. As a result, billions of rupees are spent on monitoring and supervision. Moral hazard is such a huge problem that no one (both businesses and households) leaves their contracted workers without close supervision.

This leads one to think that there must be a huge market for morality in Pakistan. There are two types of morality – intrinsic morality (which is by and large derived from religious beliefs) and induced morality (which may be an outcome of a legal framework, supervision and monitoring.)

In case of the latter, technology can play an important role. Due to social networking and a number of other advancements emanating from the information technology revolution, it should be easier for businesses, government authorities and other organisations to monitor morality of their employees. Social networking sites like Facebook, Twitter and others can be used to gather data about individuals. Tracking devices in smart phones are already being used by a number of businesses to check on their marketing and sales personnel who are supposed to be working in the field rather than being at the desk.

There is a need for developing a business in Pakistan to quantify individual morality and dissemination of information to businesses in the form of what could be called a morality score. The morality score, in the context of a business, could be based on an index that attempts to quantify an employee’s work ethics and social behaviour, with an objective to identify them as good, bad or neutral workers.

The morality score could be used by organisations to determine causes of productivity (or lack of it) of their employees. Businesses and other organisations can source out determination and calculation of morality scores for their employees to specialist morality consultants.

A lot has been written on the morality of the market, but there is a huge vacuum in the literature on the market for morality. This is primarily due to traditional thinking that morality is a virtue and not a commodity that can be bought and sold.

In a post-modern world, this notion of morality must be changed. Morality is an asset that has huge relevance to the business and its productivity. Hence, it must be rewarded and priced in the production process. If a distinct market for morality is not created, bad practices emanating from the moral hazard problem will not only marginalise moral behaviour but can also drive it out of the market completely. This is what the well-established economic principle of Gresham’s law suggests.

According to this law, bad money drives out good money in an economy that allows two currencies to circulate. A similar situation may emerge if there are two types of behaviour in an organisation – good and bad. If there are no effective mechanisms to penalise bad behaviour and reward good behaviour, the former is bound to push out the latter.

In fact, in a country like Pakistan huge moral degradation has resulted due to the failure to adequately penalise immoral behaviour in all sectors of the economy and all strata of the society. In the business context, this has resulted in decrease in productivity, human capital flight, decrease in competitiveness and emergence of adverse terms of trade. There is, therefore, a business-led need for developing a market for morality, which will definitely improve business ethics, helping both the suppliers of morality and its users on the demand side.

THE WRITER IS AN ECONOMIST AND A PHD FROM CAMBRIDGE UNIVERSITY

Published in The Express Tribune, July 16^th, 2012.