The conventional economic wisdom predicts that ethical behaviour (non-narrowly profit maximizing behaviour) should negatively affect the competitiveness of the firm. Such behaviour, therefore, would not be sustainable. I argue that ethical behaviour is consistent with competitive market economics and, from a microeconomic perspective, with the efficient operation of the firm and with its capacity to successfully compete. A key modelling assumption made in this chapter is that ethical behaviour contributes to increased production efficiency, technical change and consumer loyalty. But such positive attributes of ethical behaviour do not imply that there is an imperative towards ethical firm behaviour. Unethical firms can survive and even thrive on the market based on ‘low wage’ strategies to remain competitive, low quality, imperfect and misleading information (bounded rationality), government protection, and mental models on what makes firms competitive. One has a multiple equilibrium with respect to ethical and unethical firms co-existing on the market. Ethical behaviour is a function of micro and macro power relationships, mental models, culture, norms, decision-makers’ preferences and government policy. These can shift the balance towards ethical behaviour. But market forces and a socio-cultural-political environment favourable to capitalist free market production are no guarantee that ethical market behaviour will evolve and persist over time. This chapter contributes towards demonstrating the superiority of an ethical economy, whilst explaining why such economies need not dominate the economic playing field.

Contrary to some of the leading critiques of neoclassical theory, I argue that this theoretical framework can incorporate the moral dimension into the modelling of economic agents when the consequences of their choices are not answerable to market forces. Neoclassical theory, broadly defined, simply stresses the potential trade-off that exists between altruistic or ethical behaviour and the material wellbeing of the individual. Nevertheless, the behavioural assumptions of neoclassical theory are too narrow to deal with the potential ramifications of introducing the moral dimension into the objective function of workers, managers and owners. The conventional wisdom predicts that moral or ethical firms cannot survive in a competitive market since it is assumed that such firms must produce at relatively higher unit costs. However, higher cost firms can survive as demand is restructured towards the output of the relatively ethical firms. Moreover, modifying mainstream economic theory by introducing more realistic behavioural assumptions into the modelling of the economic agent allows for the simultaneous survival over time of both unethical and ethical firms that are cost competitive and profitable. These revisions of the conventional wisdom have important implications for public policy as well as for an understanding of the actual scope that is afforded to firm decision-makers with regards to altruistic or ethical behaviour.

A revised model of the preference function is presented incorporating utility maximizing acts of material self-sacrifice. This model incorporates neoclassical and behavioural arguments, allowing for the stylized fact that economic agents are motivated by both material and non-material incentives. Given such a preference function, choice behaviour is modelled as a function of relative opportunity costs (price) and real income. Preferences are determined by a variety of variables inclusive of social capital and education. There is, therefore, a core preference based upon non-economic variables and a ‘marginal’ component which is a function of conventional economic variables. The relative importance of these two components in determining choice behaviour is an empirical question. Building upon conventional tools, a demand curve for moral acts is derived and underlying income and substitution effects discussed. Empirical evidence from the tipping literature is used to illustrate the model.