Why Warren Buffett is Wrong: False Generalization

A false generalization occurs when a small sample or an individual sample is thought to represent all examples of the same type. If one energy company (Enron) is found to be corrupt, it is a false to conclude that all energy companies are corrupt. False generalizations are primary mistakes in critical thinking. All students in Business Ethics should be taught to avoid them.

Warren Buffett has complained on numerous occasions that the tax rates for the wealthy are not fair. Here is an account of one such incident, as reported by The Times, on June 28, 2007:


Speaking at a $4,600-a-seat fundraiser in New York for Senator Hillary Clinton, Mr Buffett, who is worth an estimated $52 billion (£26 billion), said: “The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.”


Mr Buffett said that he was taxed at 17.7 per cent on the $46 million he made last year, without trying to avoid paying higher taxes, while his secretary, who earned $60,000, was taxed at 30 per cent.

This may be an accurate account of his individual circumstances, but it is a gross misrepresentation of reality.  Buffett’s salary is $100,000 per year. It is reasonable to assume that his effective tax rate on this part of his income is near the median, approximately 25%. The rest of his income is from the sale of stocks, much of which may be taxed at a rate as low as 15%. The weighted average to salary tax and tax on other income makes his personal effective tax rate between and 17% and 18%.

As for his secretary’s rate, it is impossible under current law that anyone earning $60,000 per year is taxed at an effective rate of  30 per cent. If she is taxed near the average rates for similar incomes the effective rate of her taxes is 17-18%, essentially the same rate as her employer.

Buffett’s case does not demonstrate anything about the overall effective rates of top income earners in the United States. In fact, the top 1% have always been taxed at the highest effective rates. Since 1980, there has never been a year when the top 1% paid lower rates than any other group. Students can check this by researching CBO data.

Buffett’s kind of disinformation based on false generalization inclines us to make judgments and form opinions that have no basis in reality. These are the kinds of errors Business Ethics students should be on the look out for as they develop a critical stance toward the media.

Assignment: Find Examples of Kantian Thinking

Students should be encouraged to find examples of how Kantian principles are interwoven into news stories and current problems in business and international affairs.

Two recent examples:

1. Corzine's denials before congress in the MF Global case.
By stating that he did not "intend" to use customer funds, Corzine tries to appeal to our Christian/Kantian sensibilities that one's intent -- rather than what one actually actually does -- is the measure of morality. It sounds like he is admitting the he did it, but did not "intend" it.

2. The current negotiations in Europe regarding sovereign debt issues.
In Perpetual Peace, Kant warns against nations incurring debts: "Thus, forbidding foreign debt must be a preliminary article for perpetual peace, for eventual yet unavoidable national bankruptcy must entangle many innocent nations, and that would clearly injure them. Consequently, other nations are justified in allying themselves against such a nation and its pretensions." Currently, nations are forming a pact to follow the spirit of Kant's suggestion. This is also a good example of how Kant's Categorical Imperative, "willing that your maxim should be a universal law," has political implications. One country cannot will that it's monetary and fiscal policies should be an exception to sound policies that should be adopted universally.

Too often, students are given examples or case studies in textbooks and told to analyze them from a Kantian perspective. I have been guilty of this practice. Although this practice has some merit, in that some cases clearly work better for analysis along certain lines, students should be given the opportunity to find their own examples and cases. 

The Importance of Confidence and Certainty

"Why has this [failure to recover economically] happened? Simply because of the fear of American enterprise and the rules upon which it is to be conducted. ...Confidence must be reestablished on a firm foundation by demonstrated fact and understanding as to the objectives and methods before American business can go forward with confidence."

"At present, Mr. Dupont notes, there is uncertainty about the future burden of taxation, the cost of labor, the spending policies of the Government, the legal restrictions applicable to industry -- all matters affecting computations of profit and loss. It is this uncertainty rather than any deep-seated antagonism to government policies that explains the momentary paralysis of industry."

When were the above quotes written? Yesterday, perhaps? No. 1938. The first is by Alfred P. Sloan, Jr., then Chairman of GM. The second from an article in the Washington Post by Anna P. Youngmanis based on remarks by Lamont DuPont, then president of DuPont Chemicals.

Akerlof and Shiller reproduce both quotes on pages 71-72 of their excellent book Animal Sprits (Princeton UP, 2009).

These two quotes call for clarity in "the rules of the game." They do not call for fixing the outcome of the game. There is a big difference. Government's job is to establish the rules, not pick the winners.

For student discussion: Are confidence and certainty important in your own lives? Think about the course syllabus, for example! Is the syllabus clear? Are you confident that you can achieve your objectives in the course? How does the simple case of taking a course compare to the way businesses should deal with  government regulations?

As game theory is becoming more important in business ethics, I suspect that getting students to appreciate the importance of questions such as "what game are we playing and why?" will be helpful in teaching business ethics.

Student Life Objectives

If students were primarily motivated to attain a meaningful philosophy of life, both within the business world and outside of it, teaching business ethics would not be much of a challenge. Nor would "business ethics" be mocked as an oxymoron. As things stand, we must meet students "where they are." It is a mistake to try to move students to your point of view. As William James argued in defense of American pragmatism, the principles of philosophy must have practical application if they are to have any meaning at all.

(Chart: Santrock, John W. (2008) A Topical Approach to Life Span Development (4th Ed.) Boston: McGraw Hill.)

The practical value of moral principles is the same today as it was in Plato's time: although one cannot prove that the cynic is wrong in thinking that the best of all possible worlds is to fool all the people all the time, there are good arguments for believing that adhering to moral principles is much more likely to produce a successful life. Such principles correspond -- in Plato's view and in many contemporary views -- to the natural order of the world and the human soul. Just as in ancient times, the challenge for life is to serve human needs well. It is reasonable to expect to be well-off financially when meeting this challenge. Pointing this out without contentious fanfare might be an easy introduction to the principles of Business Ethics.

Conceptual Space of Financial Crises

Economic Motives - Rational Responses	Non-Economic Motives - Rational Responses
Economic Motives - Irrational Responses	Non-Economic Motives - Irrational Responses

Using business writers as sources, I have shown previously how mapping the conceptual space in Business Ethics can be a useful exercise. See http://teachingbe.blogspot.com/2008/08/gleanings-1.html

The above chart is based on an idea used in Akerlof and Shiller’s book Animal Spirits (Princeton UP, 2009). Their argument is that conventional economic theory concentrates on the assumptions indicated in the upper left box. Conventional economic theory assumes that people have only economic motives and only make rational choices based on these motives.

Akerlof and Shiller suggest that we ignore the other three logical possibilities in this conceptual space at our peril. We cannot explain economic boom-bust cycles by rational responses to economic motives alone.

For example, one can argue that the housing crisis of 2008 was caused by irrational responses (paying far too much for housing, under the irrational belief that housing prices would continue to increase dramatically) to the economic motive of obtaining shelter.

For teaching Business Ethics, it may be helpful to remind students that the economic models we use as explanations of current social, political, and moral dilemmas are important factors in making moral assessments. If entire systems of thought fall into the irrational response categories, how are we to assess blame? Do we blame irrational home-buyers, irrational mortgage bankers, or irrational buyers of mortgage-backed securities?

What moral and practical principles can we suggest to help avoid personal or corporate “boom-bust” cycles? These might be good topics of discussion in class, once students have been exposed to Kant and Aristotle.

Sampe Business Ethics Essay Question

This question is designed for my book Introduction to Philosophy, published by Florida State College at Jacksonville. Since the theme of the book is to show how philosophy applies to real-world problems, I thought it appropriate to include a business ethics question. The question is based on the Levi's plant closings that occurred throughout the U.S. and Canada during the 1990s, with the last plant closing in North America in 2003, as described in Shaw and Barry's book Moral Issues in Business. Also see http://stosselintheclassroom.org/video_activityJune08.html.

This would be a good discussion question or essay question for any Business Ethics course.

The Essay Question:

You are new Senior Manager at the Bakersfield plant owned by MM Brands, a major multi-national manufacturer of clothing. Bakersfield is a small city of 40,000 people. The factory employs 400 people most of whom earn low wages because of the low-skill work. At your initial meeting with the plant workers you promise that you will do everything possible to protect jobs at the plant, since everyone knows that there is pressure to outsource low-skill production work. Eight months later, you are told by upper management that the plant must be closed because MM Brands cannot stay in business unless it outsources production work. Competitors have been able to cut their prices by using outsourcing and are gaining against MM Brands. You will be offered a new job at the main MM Brands offices, but everyone else will lose their jobs. Due to your family responsibilities, you decide to accept the new job and you close the plant without fighting for the additional severance pay packages that the workers want. At the new factory in China, workers have 12-hour days and no health care benefits, but most are better off than they were as subsistence farmers. One year after the plant closing one-third of the previous employees report that they were challenged to improve themselves for the first time in lives and have found better, higher paying work. Another third are employed in similar low-skill, low-pay jobs, and the last third remain unemployed.

Evaluate whether or not your own actions and the actions of MM Brands were morally justified according to the theoretical provisions of the following moral perspectives: utilitarian, Kantian, Nietzschean, and Pragmatic. State the main theoretical provisions of each system, how these apply to the specific actions, and the reasoning used to decide whether or not these actions were morally correct according to each system. Next, using the theory of moral pluralism (the theory that each of the main moral systems may be partially true), reach a considered, rational, conclusion about the overall moral correctness of these actions. Finally, suggest ways that the actions might have been altered to ensure a better moral outcome. Based on reasoning derived from a pluralistic approach, suggest several moral rules that should guide the practice of outsourcing in general.

You may find it helpful to research the moral theories in conjunction with the key words "business ethics."

Comments on the question: Obviously, I have stacked the deck toward some very specific kinds of approaches that I would like to see in the answers. I want students to be "forced" to view problems from several perspectives, using the information in the textbook, as well as external sources. For a helpful article on Nietzsche, see http://findarticles.com/p/articles/mi_m1038/is_n3_v40/ai_20141971/?tag=mantle_skin;content

Truthfulness and Traditional Virtues Rank High

I have posted a number of survey results in this blog. Here is another, done for an Intro Phil course at Florida State College at Jacksonville. Students were asked to select up to four virtues from a list of about 15 virtues. They also rated their agreement or disagreement with a number of other statements. Below are some of the results and my comments, as posted in an announcement to the class. (SA = strongly agree, A = agree)

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Values chosen by this class:

Truthfulness  81%
Humility      52%
Wisdom        48%
Courage       48%
Justice       33%
Care          29%

The following statements showed clear favorites for answers:

You should not criticize the values of another culture. 67% SA or A
Certain acts are intrinsically morally wrong.           95% SA or A
It is wrong to treat a  person like a thing.             96% SA or A

The answers to the remaining questions presented to the class, such as those about homosexuality or morality being based on God showed a broad spread of views, reflecting uncertainty about the issue.

Comments: The philosopher Huston Smith has written a number of books about universally-shared values. He came to the conclusion that truthfulness, humility, and charity are the three most common values supported by the world's major religions. Charity got 19% in our survey. The virtues at the top of our list show a strong preference for the traditional Seven Virtues.

Most of you fully agree with Kant that it is "wrong to treat a person like a thing."

On the other hand, if you agreed that "you should not criticize the values of another culture," you are disagreeing with many, if not most, philosophers. Western philosophy started as a criticism of culture! Socrates and Plato sought to question the values of all cultures, their own included.