IDH 3134 Dynamic Tensions Fall 2019


Case Analysis #2 DUE November 7, 2019 by 5:00 pm (Canvas upload) 5-page maximum (double-spaced) 100 points (10%) Instructions: Please read and analyze the following case, Ford Pinto: Is Cost-Benefit Analysis Allowed in Ethical Decision Making? using the case analysis outline we have been working with. Be sure to link/discuss relevant concepts from our discussions/readings and consider/address the following questions within your case analysis:

1. Why did Ford not install the protective rubber bladder? Was it wrong not to? Should it have been obvious to Ford that it was wrong not to install it?

2. Is the use of cost-benefit analysis allowed at all? Under what circumstances?

3. Is it ethical under all circumstances to try to be more cost conscious than competitors? Are there limits?

4. What types of “cost” should companies consider?

5. Discuss the general question of the compatibility of ethics and profits.


Ford Pinto: Is Cost-Benefit Analysis Allowed in Ethical Decision Making?

Ford Pinto – The Problem and Background In May 1968, Lee Iacocca, vice-president of Ford at the time, had the company develop a new subcompact car. The major reason for this decision was the increased popularity of smaller Japanese cars (and others, like the Volkswagen Beetle) in the US market. The new Ford model Pinto was developed within two years and introduced into the market in 1970. It was produced until 1980 and eventually sold fairly well (approximately 3.1 million cars sold over the entire life span of the model). During product development, several conditions had to be met. The car was meant to cost no more than $2000, which led to a tight calculation (approximately $12,000 in 2017; to compare prices in the 1970s to today, multiple by six). In order to save money, the design was to be kept as simple as possible. One consequence was the design of the gas tank, which was located behind the rear wheel and neither isolated nor protected against leakages caused by accidents. This problem in the structural design meant that in rear-end collisions at relatively low speed (around 30 mph), gas could leak, catch fire, and cause explosions. This type of accident with a resulting fire happened

IDH 3034 Dynamic Tensions Fall 2019


numerous times and was also covered widely in the media at the time (there are several videos on YouTube showing exploding Ford Pintos, e.g., gRqt3g). For further information see Birsch and Fielder (1994). The Ford Cost-Benefit Analysis The decision-making heuristic of a cost-benefit analysis can roughly be summed up as follows: first, you gather possible solutions to a particular situation. Second, you list potential consequences of each alternative solution and subsequently compare and evaluate them on a scale. Those evaluated negatively will be costs, and those evaluated positively will be benefits. Third, you sum up costs and benefits on a balance sheet and choose the solution with the highest balance. The problem of the gas tank was known to the company before production of the car began. Ford engineers had identified this weakness and come up with a solution: The tank could have had a rubber bladder installed, which would have cost $11 per car. However, Ford managers and statisticians calculated that 12.5 million Ford Pintos were planned to be produced, and at an additional cost of $11 per car would have meant a total additional expense of $137.5 million. On the other hand, if the rubber bladder was not installed, Ford statisticians calculated the following “cost”: they estimated that 2100 burnt vehicles would yield 180 dead and 180 seriously injured people. Their “value” was also calculated, in the following way: a dead person was given a value of $200,000 (an official value used by the US government, not exclusive to Ford). Ford was believed to have referred to a study released by the National Highway Traffic Safety Administration (NHTSA), where a “social cost” of fatalities by components was calculated at $200,725 per fatality. For seriously injured people, a value of $67,000 used by insurance companies was calculated, and a burnt car was given an average value of $700. Thus, this calculation yielded a total cost of $49.5 million dollars. So Ford drew the conclusion that not installing the protective rubber bladder would be $88 million cheaper – and indeed made this decision. The Aftermath Estimates of deaths caused by Pinto vary across investigations. In a 1977 article that greatly increased the negative publicity of Ford Pinto, the journalist Mark Dowie gave an estimate of between 500 and 900 fire-related deaths in total. Reports from Ford itself and NHTSA calculated about three to seven unnecessary deaths per year, which amounted to a total of between 30 and 70 deaths, as well as around 120 serious injuries over the entire planned production time of the car. Ford went through a series of lawsuits and declining sales due to bad publicity, which was to some extent also caused by the pictures of burnt-out Pintos in the media. Still, the company did not recall the defective Pintos to improve the tank safety until after implementation of a new safety regulation as well as a public investigation by the NHTSA in 1977 and 1978. Thus, the company faced legal as well as ethical problems: Ford was the first US company to be charged with manslaughter, in 1978. No verdict was issued; however, half a million Pintos were recalled in 1978 and upgraded, with an estimated cost of between $20 million to $40 million. In

IDH 3034 Dynamic Tensions Fall 2019


1980, five months after the manslaughter trial, Ford decided to terminate the production of the Pinto, just a few months ahead of its scheduled end. Problems during Product Development It was believed the product development of Pinto was significantly shortened in order to compete with other car producers from Japan and Germany. The fact that the gas tank could easily be damaged in rear-end collisions, leading to explosions, was known to Ford engineers. However, preparations for production were already underway and considerably advanced; therefore, managers at Ford decided to deliver the Pinto to the market anyway. Officially, Ford denied possessing such information prior to production. It has also been asserted that Ford actually held a patent for safer gas tanks that they had already used in the Ford Capri, produced at the time of development of the Pinto, and that such a design was rejected for the Pinto because it occupied too much space that could otherwise be used for luggage. On the other hand, the Pinto tank system was standard for similar cars during its time and was also later officially accepted (after improvements) as being adequately safe. Documented reports from Ford revealed that crash tests had actually been performed on Pinto cars and that these tests provided Ford engineers with enough information to both inform their managers about safety issues as well as about relatively cheap remedies. The question is then why, despite all this information, Ford did not upgrade the Pinto cars until 1978. Mark Dowie accused Ford of having conducted an unethical cost-benefit analysis (cited above), putting monetary values on human lives, and then deciding against recalling and upgrading the defective Pinto cars. Facts to Take Into Account Intuitively, many would probably judge the cost-benefit analysis undertaken by Ford as unethical. However, some points should be considered:

• First, it should be clear that Ford did not break a law nor violate a standard for gas tanks. Regulation at the time said only that a gas tank had to remain intact in case of collisions at a speed of 20 mph or slower. This regulation was met by the Pinto, and there were no further rules with regard, for example, to non-flammability in case of collisions at a higher speed.

• Second, while $11 seems a small amount at first glance, in sum these costs would have amounted to 0.5% of the total revenue for the entire Ford Motor Company – which is significant.

• Third, Ford insisted that statistically, the Pinto was as safe as other cars of its category, meaning that it was not involved in a higher-than-average number of accidents. (It is, however, safe to say that the Pinto accidents often turned out to be much more spectacular and deadly than those of other cars.)

• Before claiming that valuing human lives with monetary costs is unethical under any circumstances, it should be noted that this valuation is performed regularly (for example by assurance companies) and to some extent is unavoidable. The reason is not just that it is efficient from an economic point of view, it is also the consequence of a situation where conflicting (ethical) goals must be weighed against each other. Two examples: first, beginning in the 1990s, all new cars were required to be fitted with airbags. However, regulation (usually) did not require older cars to be fitted with airbags, too, although it

IDH 3034 Dynamic Tensions Fall 2019


certainly would have substantially increased their safety. Second, it would certainly reduce the number of accidents to virtually zero if a maximum speed of, say, 10 mph were introduced. However, this would conflict with other goals such as increased mobility.

What alternative decision criteria could Ford have followed? First, it could be argued that Ford should have unconditionally respected rights to life and met reasonable safety expectations from consumers, either by upgrading defective tanks immediately after its discovery or by informing consumers about the defects. It is, however, debatable what reasonable safety expectations are, beyond those stated in the regulations. Another view could be put forward, suggesting that the harms and benefits to all parties involved in a recalling decision should be enumerated in an ethical decision-making process. In the case of Ford, not recalling could have saved millions of dollars, but it resulted in many unnecessary deaths and injuries, while costing the company millions of dollars to settle the lawsuits. It also earned them a great deal of bad publicity and a tarnished reputation, and in the end millions of dollars were spent on recalling vehicles anyway. However, it could be answered that Ford could not have anticipated the actual consequences accurately. Concluding Remarks For Ford, a major reason for the 1978 recall of the Pinto certainly was the massive loss of reputation the company experienced, even if it could not be properly quantified at the time, due to the cost-benefit analysis having become public. It is open to debate whether this means rejecting calculating “costs” of human lives at all, or whether this merely means rejecting a certain way of calculating them, taking into account more and greatly different types of “costs.” In any case, the Ford Pinto, along with a number of other similar scandals, marked the beginning of the discussion about business ethics and corporate social responsibility. This debate continues to evolve, but often comes back to a central question of the Pinto case: are ethics and profits compatible in general?