Ethics and Economics

An Introduction to Free Markets, Equality and Happiness

Johan Graafland

• Publisher: Taylor & Francis
• Year: 2021
• Print ISBN: 9781032020624
• eBook ISBN: 9781000416619
• Edition: 1
• Topic: Business
• Subtopic: Business Ethics
• Index: Business

This textbook applies economic ethics to evaluate the free market system and enables students to examine the impact of free markets using the three main ethical approaches: utilitarianism, principle-based ethics and virtue ethics.

Ethics and Economics systematically links empirical research to these ethical questions, with a focus on the core topics of happiness, inequality and virtues. Each chapter offers a recommended further reading list. The final chapter provides a practical method for applying the different ethical approaches to morally evaluate an economic policy proposal and an example of the methodology being applied to a real-life policy.

This book will give students a clear theoretical and methodological toolkit for analyzing the ethics of market policies, making it a valuable resource for courses on economic ethics and economic philosophy.

The Open Access version of this book, available at http://www.taylorfrancis.com, has been made available under a Creative Commons Attribution-Non-Commercial (CC-BY-NC) 4.0 license.

1
Introduction

DOI: 10.4324/9781003181835-1

1.1 ECONOMIC ETHICS

What is ethics?

Ethics is the study of morality. But what is morality? Velasquez (1998) gives the following definition: “Morality concerns the standards that an individual or a group has about what is right and wrong” (Velasquez, 1998: 8). Moral standards are imperative in nature and may imply moral duties. They do not refer primarily to what people actually do or how the world is, but rather what people ought to do, how the world should be.

Besides moral standards there are many non-moral normative standards, e.g. standards in successful marketing of products. Moral standards differ from non-moral standards in several aspects. First, as already noted earlier, moral standards are prescriptive statements. They are action-guiding imperatives that do not describe states of affairs but what people ought to do. Second, we feel that moral standards should overrule other, non-moral standards. Even if it is in our personal interest to cheat at a certain moment, moral standards tell us that we should not do so. A third and related characteristic is that moral standards should be impartial. That means that moral standards are evaluated from a point of view that goes beyond the interests of a particular individual or group to a universal standpoint in which everyone’s interests are impartially counted. Morality sets rules for everyone’s conduct. A moral judgment must, for any person who accepts the judgment, apply to all relevantly similar circumstances. Fourth, moral standards deal with issues that have serious consequences for the welfare of human beings. This criterion focuses on the moral content. Moral action guides have some reference to the welfare of others or human flourishing, or are at least concerned with serious harm and benefit to other persons.

Moral standards include the values (or ideals) we place on the kinds of objects we believe are morally right or wrong, as well as the norms we have about the kinds of actions we believe are right or wrong. Values concern ends or ideals that persons pursue and give content to how they define the good life. They are sustainable convictions of persons about what makes certain acts or a certain way of life valuable. Examples of moral values are freedom, respect for other people and justice. Values can be both intrinsic and extrinsic in nature. One intrinsically values something when one values it in itself, that is, apart from valuing anything else. Extrinsic values are values that are merely good as a means to something else. Money, for example, is for most people only extrinsically valuable: it is usually valued not for the sake of having stacks of money, but because the money can be used to purchase goods and services that have intrinsic value (Beauchamp, 1982). Extrinsic values are therefore also called instrumental values.

Norms are the rules or conventions that should be followed up in order to realize moral values. They relate to values as means relate to ends. If norms do not serve any value, they are meaningless. On the other hand, without norms, values remain unattainable.¹ Norms give an answer to the question: What should we do? For example, in order to respect a person, one should not offend other persons. Other examples of norms are: Don’t cheat; don’t steal. Whereas values are rather global in nature and hold in most situations, moral norms are often dependent on the context of the situation. For example, whereas in a democratic political system politicians respect the general public by being transparent about their decisions, a doctor respects his or her patient by being confidential. Furthermore, whereas values motivate persons, norms regulate the behavior. They are often structured as ‘Thou shall …’ or ‘Thou shall not …’. Besides moral norms, behavior can also be regulated by social norms (etiquette) or legal norms (De Beer and den Hoed, 2004). All three types of norms oblige to a certain type of behavior. Moral norms judge behavior as good and evil, legal norms as legal or illegal and social norms as proper or improper. Often the three types of norms overlap. For example, stealing is bad, illegal and improper. As argued earlier, the moral dimension is in most cases of greater importance than law or etiquette. Laws are often grounded in certain moral convictions that have led legislators to enact them.

Moral dilemmas

A moral dilemma can be seen as a conflict between different moral standards, including values (Anderson, 1993), ideals (Railton, 1996) and duties (Brink, 1996; Donagan, 1996). In order to classify dilemmas according to the standards that generate them, we draw a distinction between two types of standards: moral standards and practical standards. Examples of practical standards include, for example, profitability, self-interest and pride. Dilemmas, conceived of as a conflict between different standards, can therefore be divided into four categories, as shown in Table 1.1.

TABLE 1.1 Classification of dilemmas

	Moral standard	Practical standard
Moral standard	Moral dilemma	Motivational dilemma
Practical standard	Motivational dilemma	Practical dilemma

A dilemma arising from a conflict between two moral standards is classified as a moral dilemma. Situations in which these dilemmas occur are particularly challenging, because one has to weight two important standards. A dilemma that arises from a conflict between a moral standard and a practical standard is classified as a motivational dilemma. This dilemma confronts an individual with the problem of moral motivation: what motivates people to act in accordance with their moral standards (Crisp, 1998). A dilemma that results from a conflict between two practical standards is classified as a practical dilemma. A wide range of practical dilemmas are conceivable, from the dilemma of deciding on the color of the new company vehicles to the dilemma of deciding what amount of money should be invested in the next year.

Economics

Economics is the study of the economy. The neoclassical definition of economics is often based on the definition offered by Robbins (1935) in his famous book Essays on the Nature and Significance of Economic Science. He defines economics as “the science which studies human behavior as a relationship between ends and scarce means which have alternative uses” (Robbins, 1935: 16). The core element of this definition is scarcity: if a person would have ample time and ample means, all ends can be realized and the agent does not have to economize. Robbins argues that economics is not only concerned with material production and consumption. The domain of economics exists in all aspects of human behavior in circumstances of scarcity. Any human act has an economic aspect insofar as persons must make a choice between scarce material and/or non-material means.

Positive and normative statements

Whereas economics is a social science that engages in a descriptive study of the economy that attempts to describe or explain the economy without reaching conclusions about what ought to be done, ethics is a normative study that attempts to reach normative conclusions about what things are good or bad. The task of economics is to provide knowledge of ‘what is’ that can be used to make correct predictions about the consequences of any change in circumstances. Like other sciences, economics helps us to understand the world and to act within the world. Any economic policy conclusion necessarily rests on economic predictions about the consequences of doing one thing rather than another.

The conclusions of positive economics are therefore immediately relevant to questions of what ought to be done and how any given goal can be attained (Friedman, 1953). But any policy advice does not only relate to facts but also to values. Indeed, economic policy advice about what policy makers should do is derived from these two elements: a value statement that prescribes the goal of economic policy (e.g. what desired state of affairs we aim at) and a description of how different policies affect the economy and to what extent they help realize this desired state of affairs:

1. Value statement: the government should foster goal x
2. Positive statement: application of economic policy instrument y will improve the realization of goal x
3. Policy conclusion: the government should apply policy instrument y

The first statement is derived from normative theory that is concerned with values and says what ought to be, the second statement is derived from positive theory that describes facts and the third statement is derived from the combination of positive theory and normative theory.

According to Friedman (1953), differences about economic policy derive predominantly from different predictions about the economic consequences of taking action (statement 2) rather than from fundamental differences in values (statement 1). An obvious example is minimum wage legislation. Most economists would probably agree to the goal of diminishing poverty for people at the lower end of the labor market. However, they do not agree whether minimum wages will contribute to this goal. Whereas some argue that higher minimum wages will diminish poverty by raising the wages at the lower end of the labor market, others believe (predict) that higher legal minimum wages increase poverty by increasing unemployment.

Economic ethics

The application of ethics to a certain field is to be distinguished from general normative ethics. General normative ethics is the philosophical attempt to formulate and defend basic moral principles. Parts I to III of the book describe several general normative ethical principles: utilitarianism, duty ethics, rights ethics, justice ethics, virtue ethics and care ethics. These principles can be applied to a range of fields. The application or further specification of moral action guides to a certain field is commonly referred to as applied ethics. Examples are medical ethics, engineering ethics and journalistic ethics. This book is about economic ethics. Economic ethics reflect on the moral standards that apply to economic phenomena. Economic ethics thus has the same domain as economics. However, the perspective from which economic phenomena are studied differs: whereas economics explains the relationships between economic phenomena, economic ethics evaluates them from a moral point of view.

Kouwenhoven (1981) distinguishes between two strands of economic ethics: micro-and macroeconomic ethics. Microeconomic ethics encompasses both individuals and individual households and businesses and evaluates the actions of these individual entities given the economic structures or institutions. How should the individual economic agent behave on the market? The macroeconomic ethics considers the morality of economic structures. Does the economic order respect ethical standards? This book is mainly about macroeconomic ethics, because it will evaluate the institution of the market. However, the distinction between micro-and macroeconomic ethics is not very sharp. Macroeconomic ethics cannot do without microeconomic ethics: the evaluation of the institution of the market often reverts to the micro-ethical roots, i.e. the way how individuals should behave. On the other hand, microeconomic ethics can also not be studied in isolation from macroeconomic institutions. The microeconomic ethics should take account of the moral incentives from economic structures on individual behavior. For example, if competition is fierce, companies that engage in (costly forms of) corporate social responsibility (CSR) may see their costs increase and risk losses in market shares that might eventually result in bankruptcy. Fierce competition therefore can be a mitigating factor that lessens a company’s moral responsibility depending on how serious the wrong is.

Macroeconomic ethics belongs to the broader category of social ethics. The domain of social ethics is the morality of the societal relationships and structures. It studies the collective decisions of groups (families, action groups, states) and the structural relations (social systems) that connect these groups. In Part II we discuss several social philosophers such as Rawls and Nozick. Since our interest is mainly in economic ethics (and not in other applications of social ethics), we will pay particular attention to those parts of social philosophy that are useful to evaluate the institution of the market. Likewise, microeconomic ethics belongs to the broader category of individual ethics that studies the individuals as the subject of ethical considerations and actions, often in direct relations with other individuals.

1.2 DEFENSE AND CRITIQUE OF FREE MARKETS

In this book we apply economic ethics to evaluate the free market system. The free market system is an economic system in which the economic decisions and the pricing of goods and services are guided solely by the interactions of individual citizens and businesses (Voigt and Kiwit, 1998), that means, free from government regulations. Markets are regulated by institutions that shape and regulate the coordination of economic behavior of persons and enterprises in the marketplace. Institutions can be defined as “systems of established and prevalent social rules that structure social interactions” (Hodgson, 2006: 2). Kostova (1997) distinguishes three types of institutions: regulatory, normative and cognitive. Regulative elements include rules, sanctions and regulations which tend to codify socially accepted behavior and promote certain types of behavior and restrict others, such as government regulations. Normative elements are values, social norms, beliefs and assumptions about human nature and human behavior that are socially shared. Cognitive elements include cognitive structures and social knowledge shared by people in a given country that shape inferential sets that people use when selecting and interpreting information.

In this book, we particularly focus on regulative institutions. The regulative institutions that shape the free market system can be characterized by the concept of economic freedom. Economic freedom means that individuals are free to use, exchange or give their property to another as long as their actions do not violate property rights of others (see also Chapter 4). Economic freedom implies low taxes (and hence small size of government); protection of individual property rights; absence of restrictions on free trade; and no government interference in credit, labor and product markets. In a free market system, government intervention is thus limited to providing legally secured property rights and acquisition procedures.

Traditional defense of the free market system

The most well-known moral defenses of the free market system go back to John Locke and Adam Smith. John Locke, an English political philosopher (1632–1704), based the market system on a theory of moral rights. The two rights that free markets are supposed to respect are the right to freedom and the right to private p...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Contents
• List of figures
• List of tables
• List of boxes
• Author biography
• Preface
• 1 Introduction
• Part I Free markets, welfare and happiness
• Part II Free markets, rights and inequality
• Part III Free markets, virtues and happiness
• Part IV Consolidation and integration
• References
• Index