Honesty in Business Dealings

Dr. Meir Tamari

In Judaism there are far reaching ethical aspects relating to full disclosure in buying and selling that need to be considered. There is no Jewish basis for the “let the buyer beware” concept that lies behind much free market philosophy. Such philosophy presupposes that all the players in the market possess the same access to information regarding price, quality and comparative markets. They are able and are required to ascertain the truth of the state of the playing field, and if they do not, that is their problem. However, in reality no such market exists. Rather one party, usually the seller, has greater knowledge and therefore the other parties need protection against fraud, exploitation or oppression. Since Judaism’s concept of justice is symmetrical, where it is the buyer who possesses the superior knowledge, the same following concepts apply.

“It is forbidden to cheat people [Rambam specifically includes Jews and Gentiles] in the market place [lit. in buying and selling] and to defraud them [lit. to steal their minds]. If there is a flaw in the goods [or services] one is obliged to reveal it to the buyer. If one did not do so then this is a Mekach Taut and the sale is cancelled [the buyer cannot be forced to accept a discount in lieu of the defect. Mekach Taut is normally translated as a fraudulent sale, however I have not translated it since halakhically there does not need to be any intent to defraud; even if sold in good faith, the seller still bears responsibility and the sale may be cancelled. Furthermore, any lack of a warranty also does not help, as this lack is considered as an oversight. The example of geneivat daat is “it is forbidden to sell non-kosher meat to an idolater, as if it were properly slaughtered” ( Shulchan Arukh, Choshen Mishpat, section228, subsection6).

If we keep these two concepts, ramaut [cheating] and geneivat da’at, separate from each other, we will highlight important ethical insights even though halakhically they are usually treated the same. The cheating refers to selling flawed goods or services that differ from the invoice, the proposal of sale or the advertisement, and the disguising of flaws or blemishes. These are simply forms of theft. Most markets would ban or legislate against such practices, even if only on ground of efficiency; the alternative transaction costs involved in the constant need to verity or to examine the quality, quantity and price of each article or service, would create inefficient markets. There is an additional perspective provided by the halakha when it places the responsibility for the disclosure on the seller [or the possessor of the knowledge], rather than the buyer.

However, halakha not only forbids disguising flaws, but also creating a false impression. There is no difficulty in making one’s goods, services or even ones personality or C.V. as attractive or appealing as possible through presentation, packaging or advertising. What is required is the assurance that there is no intention to create a false image and thereby defraud. “It is forbidden to beautify a man, for example to dye the beard so that he appears younger, or to give bran water to cattle since this causes them to appear fatter by firming the hair or to paint old utensils so as to hide their blemishes [as distinct from painting them to make them more attractive]” (Section 228, subsection 9). Here there is no flaw in the goods or services sold, rather they are presented in such a way as to create a geneivat daat, as in the example of the treif meat given by the Shulchan Arukh. It is forbidden to cheat the non-Jew as we know from the first halakhah of Hilkhot Geneivah in the Shulchan Arukh, but geneivat da’at is a stage beyond this. The example applies even though the idolater is not bound to eat kosher meat and therefore for him there is no flaw or loss involved, only the false impression. The advertising that suggests that goods carry with them some additional qualities beyond their real ones would seem to qualify for geneivat daat. For example the cowboy in cigarette ads, the newspaper that advertises itself as the paper for people who think, or cosmetics and clothing ads that suggest that purchasing them will make the buyer look like the model.

Geneivat daat has applications not only in regard to goods and services but also in the information field. In the latest scandals involving Enron and WorldCom, the financial statements presented a false picture both of the debt structure and of profitability, that were meant to steal the minds of shareholders and regulatory authorities alike. Insider trading not only involves the use of data unavailable to others but also the withholding of such information which thereby alters the public perception of the corporations affairs. When stock is bought or sold under such conditions there could also be a mekach taut since the data that the other parties possessed was flawed.

Dr. Tamari is the former chief economist of the Office of the Governor at the Bank of Israel, and the founder of the JCT Center for Business Ethics and Social Responsibility.