The Skeptical Economist

Revealing the Ethics Inside Economics

Jonathan Aldred

• Publisher: Routledge
• Year: 2012
• Print ISBN: 9781849712095
• eBook ISBN: 9781136552236
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Economics is unavoidably central to any attempt to improve our quality of life, but most people do not know why, or how to question its underlying assumptions. The Skeptical Economist rejects the story told by other popular economics books. Responding to Western malaise about quality of life, and a growing curiosity about economics and its relevance to these concerns, Jonathan Aldred argues that economics is not an agreed body of knowledge or an objective science. In reality economics is built on ethical foundations - distinctive and controversial views about how we ought to live, what we value and why. This revealing and entertaining book exposes these hidden assumptions, and opens up the black box of modern economics to reveal that conventional wisdom is not what it appears to be. The Skeptical Economist will challenge us all to examine the assumptions behind the economics of our current way of life. It rediscovers the ethics at the heart of economics.

Chapter One

Introduction: Ethical Economics?

Morality, it could be argued, represents the way that people would like the world to work – whereas economics represents how it actually does work. Economics is above all a science of measurement. (Levitt and Dubner, Freakonomics)

Few of us associate economics with ethics. Economics is a hard-nosed, pragmatic, ‘dismal science’; ethics is philosophical daydreaming. And the quote seems to confirm the view that economics and ethics are strangers to each other. Freakonomics is perhaps the best-selling economics book, ever.¹ But its authors are wrong. Economics is not what it appears to be. Economics is an odd kind of science (if it is a science at all) and it is not just about measurement.

This book is not a conventional introduction to economics, although it will try to give an insight into how economists think. But a major obstacle to gaining that insight is that many of those who call themselves economists peddle a narrow or simplistic view of economics to serve vested interests and political ends. These people are better described as policy entrepreneurs.² Alongside the policy entrepreneurs stand others who are more naively confused in their misrepresentation of economics, but equally dangerous. Between them, these groups do a good job of misunderstanding, misrepresenting and misusing economics, with consequences from which we all suffer.

Policy entrepreneurs preserve their special claim to expertise by encouraging the myth that economics is a mysterious science whose workings are unintelligible to the uninitiated. Economics emerges in public debate as though out of a black box: we are supposed to accept various statements about economics as scientific facts, but the reasoning behind them remains hidden. ‘Trust me, I’m an economist’ seems to be the slogan. The effect of this black box presentation of economics is that its assertions become unchallengeable to outsiders. Skepticism is ruled out. We just have to accept on trust the ‘inescapable economic logic’, or similar threatening phrase, which leads to a particular conclusion, however unpalatable. Black box economics is not just the creation of policy entrepreneurs. Serious economists who make a virtue of their political neutrality can also unintentionally reinforce the black box image, because of their astonishing arrogance. For instance, Diane Coyle, formerly of The Independent, concludes her book with ‘ten rules of economic thinking’, one of which is ‘where common sense and economics conflict, common sense is wrong’.³ This imperious tone does not encourage people to embrace the wisdom of economists. People feel they are being told what to think, rather than encouraged to understand. Besides, common sense is sometimes wiser than economics. Traditional economic analysis recommends paying doctors according to the number of procedures or tasks they perform, in order to ‘incentivize’ them to increase productivity. Common sense points out that doctors will then stop doing anything for which they do not receive a financial incentive, and start claiming additional payment for activities they previously undertook freely out of a sense of professional duty. And traditional economic analysis recommends deciding what to do about climate change by adding up the costs and benefits of reducing carbon emissions, all measured in terms of money. But common sense suggests that not all costs and benefits of climate change can be measured in monetary terms, especially those costs which concern the loss of human lives, and the dramatic upheaval and dislocation of others. It is hard to escape the conclusion that economic analysis in these cases depends as much on value judgements and political and psychological assumptions as it does on neutral science. I do not object to value judgements and political beliefs creeping into economic arguments: I think they are inevitable. But then I do not claim economics is a science.

A close cousin of black box economics is veto economics, where assertions about economics are used as a kind of veto to rule out new ideas and proposals without further discussion. The veto is absolute because the assertions emerge from the black box: they are presented in a way that makes it extremely hard for the non-economist to dispute them. In its most extreme form, veto economics rejects ideas and proposals with just one word, offering no further explanation. Favourite veto words include ‘inefficient’, ‘irrational’, and ‘anti-competitive’. For readers of the more specialist economics and business press, rejecting proposals on the grounds that they are ‘suboptimal’, ‘time-inconsistent’, or lack ‘incentive-compatibility’, has also become fashionable. And as a last resort there is always the plain but vacuous condemnation ‘uneconomic’.

Veto economics serves to protect the economic orthodoxy. In some ways the orthodoxy has served us, in rich economies, quite well. For a brief period after the fall of the Berlin Wall, some even talked of ‘The End of History’. Our economic problems were solved, and something called ‘The New Economy’ had arrived, promising endless prosperity – or at least an endlessly rising stock market. Although these fantasies are now largely forgotten, a more humble but still confidently optimistic orthodoxy prevails. The orthodoxy says that the role of governments is to maximize economic growth by providing a stable economic environment of low inflation and generally moderate levels of unemployment. And whatever the problem, markets are almost always the solution. This orthodoxy is not directly discussed in what follows. But a recurring theme is that the orthodoxy leaves something crucial out. Economic growth is not an end in itself. We should focus instead on our quality of life, our well-being, or to rehabilitate an embarrassing word, our happiness.

In rich countries the experience of recent years has been that increased material wealth has not led to improvements in quality of life. On the contrary, people report being less happy than 40 years ago. We seem to suffer from a kind of ‘affluenza’, a condition in which people become preoccupied with acquiring money and possessions, and gaining social status from them. A large body of psychological research suggests that these preoccupations are associated with increased rates of mental illness, including depression, substance abuse, anxiety and personality disorder.⁴ Less dramatically, and anecdotally, we can live in a prosperous economic environment, and still discover that modern life is rubbish. So how can a better understanding of economics help?

Talk of improving quality of life might provoke expectations that the following chapters include detailed discussions of integrated transport policies, pension reforms and endogenous growth theory. In other words, the kind of policy wonkery which few of us care passionately about. But we do care about the principles at stake – whether it is fair to tax the rich more highly, whether environmental damage can be boiled down to a sum of money, whether surveys can really measure our quality of life or happiness. This book is about these principles. Black box economics obscures them. It takes certain views about these principles for granted, rarely mentioning them explicitly. In the two examples mentioned briefly above we have already seen that black box economics assumes:

• Employees are essentially selfish, and should be managed accordingly.

• The value of life can be measured in monetary terms.

Other presumptions include:

• What we buy always makes us better off.

• People respond predictably to financial incentives.

• Taxation damages the economy, and is morally wrong.

• Economic growth increases happiness.

Together, these assertions and many others form a web of beliefs which constrain and shape our economics and politics, affecting us in ways that extend beyond our economic lives as consumers and workers. These assertions are the subject of this book. Some might wonder whether they are about economics at all. It is true that these issues lie on the boundary between economics and philosophy – ethical economics – but that boundary is much more fragile than it seems.

Consider that favourite veto word of economists, inefficient. Efficiency is a core economic idea, one that to many seems like the core economic idea. The efficiency or otherwise of some proposal or outcome is often presented as a fact. In very rough terms, we do something more efficiently if we obtain the same desirable outcome using fewer valuable inputs of time, effort or resources more generally. Or instead, we can obtain a bigger or better outcome using the same inputs. So efficiency seems unambiguously a good thing, and also a scientific concept, referring just to the measurable relationship between inputs and outputs.

Unfortunately for this perspective, economics affects people. The scientific purity attributed to the efficiency idea is disrupted by people, because people are affected by actions taken in the name of efficiency. For example, economists and policy entrepreneurs use efficiency to make claims such as:

Cutting the regulatory burden facing employers makes the labour market work more efficiently.

These regulations might concern working hours, overtime rules or minimum wages. The argument boils down to the idea that the same output can be produced using fewer workers, or produced by people who are paid less. Or perhaps instead, a greater output can be produced. Economists sometimes argue in support of reducing labour market regulations by pointing to the increased national output (economic growth) in countries which have adopted such policies. My aim here is neither to agree nor disagree with these policies. The crucial point is simply that, in almost all cases, there will be both winners and losers. If national output has risen then materially we are richer; conventional economics deduces that some consumers must be better off. And shareholders should benefit from firms making higher profits. But some workers may suffer from lower pay, or longer working hours, or an unpleasant increase in work intensity. Whether, on balance, the changes taken together represent an overall improvement depends on, among other things, ethical views about the relative priority we should give to impacts on the rich and poor, and ethical concepts of need, justice, entitlement and just deserts. So the ‘efficiency gain’ in this example is not an objective improvement; if it is regarded as an improvement, that is an ethical judgement. Efficiency is not an ethics-free concept.

Still, it seems there might be occasional exceptions to this rule. In the last paragraph I wrote that there will be both winners and losers in almost all cases. But what if everyone gains? Surely that would effectively count as an objective improvement – an unambiguous gain for everyone. Consider the common argument that free trade makes the economy more efficient. Some economists argue that, at least in the long run, everyone will be better off from freer global trade. Suppose this is true. A sympathetic reading of the evidence on recent trade liberalization suggests that, roughly, rich countries have gained moderately, recently industrialized countries such as China have gained the most, while very poor countries have gained the least. And within countries, the gains are very uneven too, with the poorest in India and China gaining much less than others in their countries. Even though ‘everyone’s a winner’, it is clearly reasonable to regard this outcome as not representing an objective, unambiguous improvement, because inequality has increased. The poor may be literally better off, but not relative to the rest of us. Again, whether we view the ‘efficiency gain’ from freer trade as an overall improvement is an ethical judgement. Even if everyone wins, ‘efficiency’ still comes laden with ethical baggage.⁵ So when veto economics invokes the word as though it were a neutral factual concept to which no one could reasonably object, we are misled.

It is worth stressing that the misrepresentation here is often unintentional. Few economists, if any, set out to deceive (even if the same cannot be said of policy entrepreneurs). Instead, many economists believe that economics can be ethics-free for the noblest of reasons – they are loathe to foist their own ethical views on other people. So they try to make their economic advice ethics-free. But as I have already indicated, ethics is unavoidable in economics. We should simply be open and explicit about it. Besides, these economists need not worry. They should follow the example set by their greatest forebears.

The great economists of the past saw economics and ethics as inextricably entwined; one example of this is their emphasis on the limits of economic prosperity in bringing about broader improvements in the human condition, and hence the relative insignificance they attached to economic prosperity alone. Adam Smith was dismissive of economic success as an end in itself: ‘if the trappings of wealth are viewed philosophically, they will always appear in the highest degree contemptible and trifling’.⁶ John Maynard Keynes, the most influential economist of the 20th century, shared similar concerns. In ‘Economic possibilities for our grandchildren’, Keynes described the ‘love of money as a possession’ as ‘one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease’.⁷ Keynes accurately predicted British average income per head in the early 21st century, and went on to anticipate the problems of affluenza, and the renewed importance of an ethical framework once society ceases to be focused solely on economic growth.⁸ In all this, he was remarkably prescient: the essay was written in 1930.

Clearly, the early great economists would have rejected the belief that economics deals solely with material prosperity and financial wealth. But this belief, a contemporary variation on the illusion that ‘economics and ethics don’t mix’, can be seen in action every day in the news media. Economics is discussed as if it were just concerned with the business and financial aspects of an issue, narrowly defined. If an airport expansion is being proposed, for example, the effects on the local economy and on the airline industry are included under the ‘economic’ heading, along with the construction cost, but all the other impacts are treated separately. Impacts such as carbon emissions, and the effect on quality of life for those living near the airport – and those able to go on holiday more easily and cheaply – are relegated to the ‘non-economic’ category. The same intellectual apartheid system continues in government.⁹ ‘Non-economic’ impacts are all too easily regarded as less important, especially if they are not quantifiable in terms of money. If impacts cannot be measured in monetary terms, they are seen as soft, fuzzy, ephemeral… No wonder some economists begin to doubt if they are really there at all.

So those who believe that economics can be separated from ethics have forgotten its history. And quality of life impacts, such as those arising from a new airport, are just as much the subject of economics as inflation, unemployment and economic growth, even if they cannot be quantified in terms of money.

Many people, economists and non-economists alike, resist this conclusion because they fear it leads to an ‘anything goes’ dead end. In other words, they object to ethical economics because they believe that ethical debate is a waste of time. Some economists themselves have helped perpetuate this myth. Regarding disagreements about ethical values, Milton Friedman believed that ‘men can ultimately only fight’.¹⁰ Skepticism about ethical reflection has been popular throughout history and is likely to remain so, because it saves people from having to bother to defend their beliefs. But that does not mean it is right. Even if ethical judgements cannot be literally true or false, almost all of us regard some judgements as better than others. Although some ethical questions are plagued by doubt and disagreement, others suggest ethical agreement is possible. There is widespread condemnation of slavery or torture, and most of us will willingly defend our objections to these practices against those people who disagree. We do not regard this kind of ethical debate as pointless or meaningless. Finally, some people worry that it is intolerant or illiberal to advocate a particular set of ethical values, particularly when these values have implications for the conduct of others. But this worry is not compatible with the idea that ethical reflection is futile: t...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Contents
• Acknowledgements
• 1 Introduction: Ethical Economics?
• 2 The Sovereign Consumer
• 3 Two Myths about Economic Growth
• 4 The Politics of Pay
• 5 Happiness
• 6 Pricing Life and Nature
• 7 New Worlds of Money: Public Services and Beyond
• 8 Conclusion
• Notes
• References
• Index