Economic opportunism

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Economic opportunism is a term related to the subversion of morality to profit. There exists no agreed general, scientific definition or theory of economic opportunism; the literature usually considers only specific cases and contexts.

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There is no agreement about why this is so. Oliver E. Williamson comments:

"Although there is growing agreement that bounded rationality is the appropriate cognitive assumption for describing economic organization, there is less agreement on how the self-interestedness of economic actors should be described. Transaction cost economics has proposed that economic agents be described as opportunistic where this contemplates self-interest seeking with guile. That has turned out to be a controversial formulation." [1]

Market trade supplies no universal morality of its own, except the law of contract and basic practical requirements to settle transactions, while at the same time legal rules, however precise in their formulation, cannot control every last detail of transactions and the interpretation (or implications) thereof. Since economic opportunism must be assessed against some relevant norm or principle, controversy about what that norm or principle should be, makes a general definition difficult. [2]

Adam Smith famously wrote in The Wealth of Nations that:

"By preferring the support of domestic to that of foreign industry, [every individual] intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it." [6]

If that Smithian view is accepted, then it is difficult to establish that "taking selfish advantage of an economic situation" can in any way be considered “opportunist”, because it does not transgress any moral principle or principle of trade. Indeed, the pursuit of self-interest is in this view beneficial for all, it is exactly what makes the market tick. Furthermore, it is in the interest of market actors to conduct their affairs properly, because if their trading reputation is destroyed, they will be out of business. If it is believed that markets gravitate spontaneously to an equilibrium state, so that price-levels ensure that everybody gets what they want, how can there be any “opportunism”? [7]

At best, one could draw a subtle distinction between “selfishness” and “self-interest”. For example, “self-interest” could be defined as a healthy concern with one's own wellbeing, necessary to survive and prosper, while “selfishness” could be defined as an exclusive or excessive concern with one's own advantage while disregarding the interests of others. Any trading relationship usually involves both cooperation between the trading partners, so that each gets what they want from others, and competition by each party to get the best deal for themselves. So the trading relationship is normally both self-directed and other-directed at the same time. The issue then is, just how far the concerns of the other party or parties to the trade are really taken into account, or to what extent the expectations of others are fully met or honored.

“Selfishness” would then denote a specific type of self-interest which violates a shared principle of trade (or some other principle) in a way that is illegitimate, unfair, unjust in some sense (such as unfair trade, negligence or unfair competition). Adam Smith does not rule out that possibility, acknowledging implicitly that the self-interest and the interest of society may not always be compatible, only “frequently”. Opportunism could then be thought of as an aberration, a "market imperfection" or a “gray area” that sometimes occurs in normal trading activity.

People would not normally trade, if they did not expect to gain something by it; the fact that they do trade, rather than simply rob each other, normally presupposes at least a respect for the basic rights of the party being traded with. Nevertheless, the gains or benefits of trading activity (and indeed the losses), although entirely legal, might be distributed very unequally or in ways not anticipated by previous understandings, and thus accusations of “economic opportunism” can arise nevertheless in many different settings. [8] The entitlement to make some economic gains is then considered to be illegitimate, in some way.

If this is the case, relevant trading obligations (or civil obligations) are usually considered as not being (fully) met or honored, in the pursuit of economic self-interest. Greed is frequently mentioned as a primary motive for economic opportunism. [9] Even so, people might just try to get the most out of a situation for themselves with the least effort they can get away with, disregarding the interests of others who also have a stake in the situation (see stakeholder). An editor of the Financial Times, Martin Wolf, remarked famously about the financial sector that "No [other] industry has a comparable talent for privatizing gains and socializing losses." [10] Some years later, he explained that "Today’s banks represent the incarnation of profit-seeking behavior taken to its logical limits, in which the only question asked by senior staff is not what is their duty or their responsibility, but what can they get away with." [11]

What exactly the rightful or correct obligations of trading parties are to each other, can be open to interpretation “in good faith” (bona fide) by those trading parties or other parties. It may depend on the “understanding” that exists in a business situation. [12] This creates the possibility that, even though — strictly speaking, or formally – everything is done “within the law”, economic actors nevertheless do not (or not fully) honor their trading obligations in some way, for selfish motives, and therefore commit what amounts to deceit, trickery or cheating, by utilizing a somewhat different “interpretation”, “intention”, “expectation” or “understanding”. Therefore, there is always much controversy about what these obligations really are, in the fine detail – it may be that “one man's opportunism is another man's opportunity”.

At issue here is, what one might legitimately expect a trading party to understand or comply with in a business deal, i.e. how the meaning of it is construed, which can differ between trading parties with a different stake or interest in the deal, and might itself change in the course of negotiations. [13] Whether a trading activity is viewed as “opportunist” might just depend on one's moral viewpoint or informal expectation, because “there is no law against it”. For this reason, institutional economics often evaluates economic opportunism in relation to those norms of acceptable human conduct that, though not necessarily stated in laws, are nevertheless implied by legislation or by jurisprudence.

Glenn R. Parker [14] claims that the five most discussed examples of economic opportunism are:

In transaction cost economics, opportunism means self-interest seeking with guile, involving some kind of deliberate deceit and the absence of moral restraint. It could involve deliberately withholding or distorting important business information, shirking (doing less work than agreed), or failing to fulfill formal or informal promises and obligations. It occurs in trading activities, especially where rules and sanctions are lacking, and where the opportunist actor has great power to influence an outcome by the attitude he assumes in practice.

However, others [16] argue that this reflects a narrow view of economic opportunism, because there are many more ways that economic actors can take selfish advantage of other economic actors, even if they do not violate the law. [17] For example, managers can tilt the details of financial reporting in such a way that it favours their own position. [18]

Related Research Articles

In ethical philosophy, ethical egoism is the normative position that moral agents ought to act in their own self-interest. It differs from psychological egoism, which claims that people can only act in their self-interest. Ethical egoism also differs from rational egoism, which holds that it is rational to act in one's self-interest. Ethical egoism holds, therefore, that actions whose consequences will benefit the doer are ethical.

In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companies, and unlike production costs, decision-makers determine strategies of companies by measuring transaction costs and production costs. Transaction costs are the total costs of making a transaction, including the cost of planning, deciding, changing plans, resolving disputes, and after-sales. Therefore, the transaction cost is one of the most significant factors in business operation and management.

Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. For example:

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The invisible hand is a metaphor used by the Scottish moral philosopher Adam Smith that describes the unintended greater social impacts brought about by individuals acting in their own self-interests. Smith originally mentioned the term in his work Theory of Moral Sentiments in 1759, but it has actually become known from his main work The Wealth of Nations, where the phrase is mentioned only once, in connection with import restrictions.

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<span class="mw-page-title-main">Opportunism</span> Taking advantage of circumstances

Opportunism is the practice of taking advantage of circumstances – with little regard for principles or with what the consequences are for others. Opportunist actions are expedient actions guided primarily by self-interested motives. The term can be applied to individual humans and living organisms, groups, organizations, styles, behaviors, and trends.

In economics, the profit motive is the motivation of firms that operate so as to maximize their profits. Mainstream microeconomic theory posits that the ultimate goal of a business is "to make money" - not in the sense of increasing the firm's stock of means of payment, but in the sense of "increasing net worth". Stated differently, the reason for a business's existence is to turn a profit. The profit motive is a key tenet of rational choice theory, or the theory that economic agents tend to pursue what is in their own best interests. In accordance with this doctrine, businesses seek to benefit themselves and/or their shareholders by maximizing profits.

<span class="mw-page-title-main">Ernst Fehr</span> Austrian economist

Ernst Fehr is an Austrian-Swiss behavioral economist and neuroeconomist and a Professor of Microeconomics and Experimental Economic Research, as well as the vice chairman of the Department of Economics at the University of Zürich, Switzerland. His research covers the areas of the evolution of human cooperation and sociality, in particular fairness, reciprocity and bounded rationality.

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<span class="mw-page-title-main">Financial law</span> Legal rules relating to financial instruments and financial assets

Financial law is the law and regulation of the commercial banking, capital markets, insurance, derivatives and investment management sectors. Understanding financial law is crucial to appreciating the creation and formation of banking and financial regulation, as well as the legal framework for finance generally. Financial law forms a substantial portion of commercial law, and notably a substantial proportion of the global economy, and legal billables are dependent on sound and clear legal policy pertaining to financial transactions. Therefore financial law as the law for financial industries involves public and private law matters. Understanding the legal implications of transactions and structures such as an indemnity, or overdraft is crucial to appreciating their effect in financial transactions. This is the core of financial law. Thus, financial law draws a narrower distinction than commercial or corporate law by focusing primarily on financial transactions, the financial market, and its participants; for example, the sale of goods may be part of commercial law but is not financial law. Financial law may be understood as being formed of three overarching methods, or pillars of law formation and categorised into five transaction silos which form the various financial positions prevalent in finance.

Intellectual opportunism is the pursuit of intellectual opportunities with a selfish, ulterior motive not consistent with relevant principles. The term refers to certain self-serving tendencies of the human intellect, often involving professional producers and disseminators of ideas, who work with idea-formation all the time.

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Spiritual opportunism refers to the exploitation of spiritual ideas : for personal gain, partisan interests or selfish motives. Usually the implication is that doing so is unprincipled in some way, although it may cause no harm and involve no abuse. In other words, religion becomes a means to achieve something that is alien to it, or things are projected into religion that do not belong there.

References

  1. ↑ Oliver E. Williamson, "Opportunism and its critics", in: Managerial and decision economics, Vol. 14, 1993, p. 97). A criticism of Williamson is provided in Geoffrey M. Hodgson, "Opportunism is not the only reason why firms exist: why an explanatory emphasis on opportunism may mislead management strategy." In: Industrial and Corporate Change, Volume 13, Number 2, pp. 401–418.
  2. ↑ Chao C. Chen, Mike W. Peng, Patrick A. Saparito, "Individualism, Collectivism, and Opportunism: A Cultural Perspective on Transaction Cost Economics". In: Journal of Management, Vol. 28 No. 4, 2002, pp. 567–583. "Archived copy" (PDF). Archived from the original (PDF) on 2013-09-03. Retrieved 2013-05-07.{{cite web}}: CS1 maint: archived copy as title (link)
  3. ↑ Lex Donaldson, American anti-management theories of organization: a critique of paradigm proliferation. Cambridge University Press, 1995.
  4. ↑ Thomas C. Leonard, "The price is wrong: causes and consequences of ethical restraint in trade." Journal des Economistes et des Etudes Humaines, Volume 14, numéro 4, Décembre 2004, pp 1–17.
  5. ↑ "...mainstream economics has become obsessed with the ‘irresponsibility’ of opportunistic politicians who cater to an economically uneducated electorate by interfering with otherwise efficient markets, in pursuit of objectives — such as full employment and social justice — that truly free markets would in the long run deliver anyway, but must fail to deliver when distorted by politics". – Wolfgang Streeck, "The crises of democratic capitalism". New Left Review 71, September–October 2011.
  6. ↑ Adam Smith, The Wealth of Nations, Book IV, chapter 2, paragraph ix.
  7. ↑ See: Charles W. L. Hill, "Cooperation, Opportunism and the Invisible Hand: Implications for transaction cost theory", in: Academy of Management Review, Vol. 15 No. 3, 1990, p. 500-513).
  8. ↑ Kurt Eggert, "Limiting abuse and opportunism by mortgage servicers". In: Housing Policy Debate (Fannie Mae Foundation), Vol. 15, Issue 3, 2004. Archived 2013-05-15 at the Wayback Machine
  9. ↑ Damian Saunders, "Mark Hurd and HP, economic opportunism and greed, one year on." Opinion, 30 January 2010. Dan Ackman, "Kozlowski Speaks!". Forbes Magazine, 28 April 2005. Ken Frost, "The Ongoing Trials of The Late Michael Jackson: Greed and Opportunism." 2 February 2005.
  10. ↑ Martin Wolf, "Regulators should intervene in bankers’ pay". In: Financial Times (London), 16 January 2008.
  11. ↑ Martin Wolf, "Banking reforms after the Libor scandal." Financial Times, 2 July 2012.
  12. ↑ Mitchel Abolafia, Making markets: opportunism and restraint on Wall Street. Harvard University Press, 2001.
  13. ↑ See e.g. Ravi S. Achrol and Gregory T. Gundlach, "Legal and social safeguards against opportunism in exchange." Journal of Retailing, Volume 75, Issue 1, Spring 1999, Pages 107–124.
  14. ↑ In his book Self-policing in politics: the political economy of reputational controls on politicians (Princeton University Press, 2004, p.21).
  15. ↑ See e.g. G. Richard Shell, "Opportunism and trust in the Negotiation of Commercial Contracts: Toward a New Cause of Action." Vanderbilt Law Review, Vol. 44, March 1991, pp. 221–282.
  16. ↑ Nicolai J. Foss and Peter G. Klein, "Critiques of transaction cost economics: An overview". Organizations and markets, September 2009
  17. ↑ See further Kuntara Pukthuanthong and Harry J. Turtle, "Legal Opportunism, Litigation Risk, and IPO Underpricing", January 2009 Archived 2013-05-17 at the Wayback Machine ; Paul J. Zak (ed.), Moral markets: the critical role of values in the economy. Princeton University Press, 2008).
  18. ↑ Lan Sun and Subhrendu Rath, "Fundamental Determinants, Opportunistic Behavior and Signaling Mechanism: An Integration of Earnings Management Perspectives." International Review of Business Research Papers Vol. 4, No. 4, Aug–Sept. 2008, Pp. 406–420.
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