Why the market failures approach (MFA) needs virtue

The second of our Hilary term R:ETRO webinars, hosted by Alan Morrison, Professor of Law and Finance, and Rita Mota, Intesa Sanpaolo Research Fellow at the Oxford University Centre for Corporate Reputation, Oxford Saïd. For more information about R:ETRO (Reputation: Ethics, Trust, and Relationships at Oxford), see https://oxsbs.link/3sT7ND5. Caleb Bernacchio, Assistant Professor, School of Business, California State University Monterey Bay, discussed his work on 'Why the market failures approach (MFA) needs virtue'. Abstract: The MFA aims to provide a succinct account of business ethics comprising a set of "efficiency imperatives." This chapter outlines two roles for the virtues that are essential to well-functioning markets but which have been ignored by proponents of the MFA. The first role concerns practical wisdom or the capacity for good judgment. To illustrate this, I reconsider the theorem of the second-best, noting the inadequacies of Heath's response to this problem and identifying several counterexamples that follow from a straightforward application of particular efficiency imperatives, including, for example, the imperatives to minimize negative externalities and reduce information asymmetries. I argue that it is impossible to refine these imperatives to avoid further counterexamples in a manner that is sufficient to provide guidance to agents engaged in exchange. As such, these limitations can only be addressed by appealing to a notion of practical wisdom as a capacity to recognise salient reasons within specific contexts, reasons related, for instance, to virtues such as justice and honesty. Second, proponents of the MFA have focused solely on the negative role of ethical rules in mitigating market failures, but the virtues also have a positive role to play in enhancing efficiency in exchange. Virtues such as justice or honesty may prevent market failures when they enable individuals to refrain from imposing costs on others or misleading them about t