Economics, Ethics and the Market

Johan J. Graafland

• Publisher: Routledge
• Year: 2006
• ISBN:
  9781134133246
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The primary aim of the text is to introduce the reader to the relationship between economics and ethics and to the application of economic ethics in the evaluation of the market. The reader will gain insight into:

• The ethical and methodological strategy of economics and criticism of the core assumptions that underpin the economic defence of free market operation.
• The characteristics of different ethical theories (utilitarianism, duty and rights ethics, justice and virtue ethics) that can be used to evaluate the free market.
• How to apply economics in conjunction with ethical theories to evaluate economic trends and policies that promote the free operation of the market and are subject to public debate.

These insights will help to develop the reasoning and analytical skills needed to criticize economic analysis as well as to apply ethical concepts to moral issues in economic policy.

1 Introduction

On 20 January 2004 a Dutch television program showed an interesting interview with Dr H.O.C.R. Ruding, vice-president of Citibank/Citicorp in New York and former Minister of Finance in the Netherlands. The interview contained, among others, the following statements:

Ruding: There is not much that is equally divided in the world …. Sometimes I have the impression that rich people cooperate.

Interviewer: You have said that self-interest is the engine of the economy.

Ruding: Yes, that is still true, but there should be more supervision that there be sufficient competition … it is not bad to have advance knowledge (in the trade of stocks), you only should not use it … I believe in self-regulation.

Interviewer: What can be a guarantee that prevents people from abusing their power, money and position?

Ruding: There is no guarantee, I admit. Abuse regularly occurs. You must try to prevent that by rules. If you let people free … the human being is inclined to be evil, unfortunately.

Interviewer: How do we steer that in good channels?

Ruding: That is a very difficult question. The best way is that people try to improve their own norms and values. That does not happen of itself. It requires training and education. Also in business, leaders should explain to the co-workers: that is allowed and that is not allowed.

Interviewer: But everybody knows that! Ruding: Yes, but the flesh is weak, it is not so easy.

Interviewer: But is it sufficient?

Ruding: It is not sufficient, but you must make a start with it. People should develop good customs by self-discipline.

This interview is about morality and economy. It touches upon several issues of economic ethics and market operation. How can markets work efficiently? What if powerful people cooperate and frustrate competition? How persistent are market imperfections and how is that related to the human nature? Does self-interest contribute to welfare or not? What can we expect from the human nature and what must change in order to prevent accounting, stock market and other scandals? And what is the relationship between market operation and a fair income distribution? How do we define fairness? These and other relationships between economics, ethics and market operation is the subject of this book.

In this chapter we first give an introduction to the concepts of economics and ethics and the link between these disciplines. Next, we present a brief overview of economic and ethical thought about the institution of the market, which will be more extensively discussed in the rest of the book. Section 1.3 concludes by presenting an outline of the book that explains how the themes are worked out.

1.1 Economics and ethics

At the outset of a book about economics, ethics and the market, some discussion is needed to explain economics and ethics, the objectives of these disciplines and the link between economics and ethics.

What is 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). This definition rests on four axioms with respect to the conditions of human existence:

1. The ends of human beings are various.
2. The various ends have different importance and are capable of being distinguished in order of importance.
3. The time and the means for achieving these ends are limited. Life is short and nature is niggardly.
4. The time and means are capable of alternative application for different ends.

Each of these conditions is necessary to obtain economic behavior. If a person would have only one end, or if various ends are of equal importance, decisions boil down to solving the merely technical problems of how alternative means can be optimally used to meet this end. On the other hand, if a person would have ample time and ample means, all ends can be realized and the agent does not have to economize. Furthermore, if means would have no alternative use or could not be exchanged for something else, then they may be scarce, but they cannot be economized.

Robbins develops his definition as a reaction to the standard definition of economics in his days, namely the study of the causes of material wealth.¹ According to Robbins, this definition does not capture immaterial means (e.g. services) or immaterial ends (e.g. the enjoyment of leisure). Robbins argues that economics is not only concerned with material production and consumption. The domain of economics exists of all aspects of human behavior in circumstances of scarcity. Any human act has an economic aspect in so far as persons must make a choice between scarce material and/or non-material means. Recent efforts to apply economics to non-material decisions like legal, political or social decisions illustrate this. This explains why economics is sometimes viewed as an imperialistic science.

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.

When students realize this, their first reaction is sometimes one of incredulity. They believe that what is right to do is up to each person to decide for themselves. This kind of subjectivism about ethics may be pervasive, but it is not confirmed by daily practice. Nearly everyone will criticize a person who deceives others, who does not keep his promises or willingly harms the interests of others. If one believes that moral standards are merely subjective, one has no good argument to criticize someone who has gone beyond the moral pale. One can only say, ‘I do not like your acts,’ or start yelling or become angry, but there is no reason to say to the other, ‘You should have known better,’ because one cannot argue about tastes.

Several disciplines, such as religion, law, economics and politics, use terms as good and bad to evaluate human endeavors. Indeed, besides moral standards there are many non-moral normative standards, e.g. standards in art to judge the beauty of a painting. In principle, everything can be subjected to evaluation: cars, chairs, cultural inheritance, relations between people, personal characteristics, group characteristics such as respect and trust, characteristics of societal systems such as justice and freedom. Evaluative standards may thus concern material, economic, moral, political, religious, scientific or professional values. So, what is distinctive about morality?

Moral standards differ from non-moral standards in several aspects. First, as already noted above, 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. We will see in Chapter 8 that Kant also maintains that moral principles impose unconditional imperatives. 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. Many virtues such as honesty, courage and justice have something to do with the welfare of others.

Beauchamp (1982) shows, however, that morality cannot be given a single, exhaustive definition in terms of criteria of the moral. First, as noted above, moral statements are often distinguished from other statements by their prescriptive form. Beauchamp shows, however, that not all moral statements can be interpreted in this way. For example, the statement ‘He is morally virtuous’ is a straightforward moral statement, but does not clearly prescribe any action. Second, a judgment, principle or ideal is moral only if a person or society accepts it as a supremely authoritative or overriding guide to action, including the self-interest, political affiliation, religious heritage and the like of the persons involved. However, in reality moral demands do not always take precedence over other kinds of demands, such as religious or legal demands, or personal interests. The third criterion for moral judgments, principles and ideals proposed above is universalizability. However, some kinds of actions, such as exceptional generosity, are by their very nature not universalizable. We do not expect such actions of everyone. Yet these acts are part of the domain of the moral. Beauchamp therefore concludes that there is no single set of criteria that must always be present to classify a certain judgment as a moral judgment. On the other hand, if all four conditions mentioned above are present, then it is highly likely that we have a moral judgment. Thus, if some judgment prescribes a course of action, has overriding social importance, is universalizable and pertains to the general welfare of a social group, it is most likely to be a moral one.

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. Examples of non-moral values are aesthetic values and friendship. Values can both be 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.² 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 shalt …’ or ‘Thou shalt not …’. Besides moral norms, behavior can also be regulated by social norms (etiquette) or legal norms (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 above, 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.

In many circumstances dilemmas can arise if one has to choose between conflicting principles that seem to obligate a person to perform two mutually exclusive actions. In ethical theory, moral dilemmas arise if there is a conflict between moral obligations or different supererogatory ideals (Railton, 1996). If a person is faced with a moral dilemma, he has an obligation to do A and an obligation to do B, but cannot do both (Brink, 1996). For example, a physician should tell the truth to patients, but also avoid harm to innocent persons. What should a physician do when telling the truth to a patient will make that patient extremely nervous immediately before a dangerous operation? People must intuit as best they can which potential duty has the greater weight in the case of two conflicting obligations (Donagan, 1996; Marcus, 1996). When such intuitively satisfying principles come into conflict, as they often do in life, we want to appeal to some higher principle to resolve the problem. You have only the duty to act in accordance with the duty with the highest weight (the so-called all-things-considered duty). Several ethical theories have been developed to fulfill this role. Different ethical theories thus give different answers to the question which moral standards are reasonable and should have priority and how these standards apply to our lives.

Ethics and emotions

The plurality in ethical theories raises the question about the status of ethical arguments. Are ethical statements not sophisticated rephrasings of expressions of arbitrary feelings? That would, at least, explain why it is so difficult to arrive at clear conclusions: you don’t argue about different tastes. The proponents of emotivism defend this position. Emotivism is the doctrine that all evaluative judgments and more specifically all moral judgments are nothing but expressions of preference, attitudes or feelings. They are neither true nor false. Therefore, agreement in moral judgment is not to be secured by any rational method (McIntyre, 1985).

As a theory of the meaning of a certain type of sentence emotivism plainly fails: the statement ‘That is bad’ is not the same as ‘I disapprove of this; do so as well’ (Brümmer, 1989). The kind of objectivity attached to the former statement does not hold for the latter. But as a theory of the use of moral judgments emotivism is still very popular and indeed one of the arguments for disconnecting economics from ethics. If ethical statements are only expressions of preferences, then these statements are not falsifiable and therefore not rational. If emotivism is true, the objectivity implied by the first sentence ‘That is bad’ cannot be justified by reasons but merely by reference to personal preferences. Then, moral language suggesting a certain kind of objectivity or inter-subjectivity would be seriously misleading.

Emotivism is an attractive theory, because it gives a simple explanation for the plurality in values and norms. However, the price of accepting this theory is very high, because it implies moral relativism. If we accept emotivism, we have no moral grounds to address one’s responsibility. Although we can be outraged about extreme forms of exploitation or violence, we cannot give reasons why the exploiting or violent person should not have acted in that way, except that his behavior is not in accordance with our personal preferences. This will lead to an individual form of relativism that one ought to do what one personally believes to be right.

Moreover, if emotivism is widely believed to be true, ethics runs the risk of becoming a manipulative instrument. If ethical statements are only expressions of personal feelings or preferences, one cannot appeal to impersonal criteria, for there aren’t any. Ethical debates then boil down to trying to change the preferences of other people. The moral debate becomes an arena in which one attempts to align the attitudes, feelings or preferences of others with one’s own. Moral authority would be nothing other than successful power over others.

Positive and normative statements

Science has two major uses: to understand the world (to explain it) and to help those who act within the world (to provide a framework for decision and policy making). 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.³ 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. Any policy conclusion necessarily rests on such predictions about the consequences of doing one thing rather than another. The conclusions of positive economics are therefore immediately relevant to important normative problems, 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, what policy makers should do is derived from these two elements: a description of a state of affairs and a value statement that prescribes the desired state of affairs:

1. Value statement: the government should foster goal x.
2. Positive statement: if the government intensifies the use of instrument y, x will increase.
3. Policy conclusion: the government should intensify the use of instrument y.

The second statement is derived from positive theory that describes facts, the third statement is derived from the combination of positive theory and normative theory that is concerned with values and says what ought to be.⁴

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 on the goal of diminishing poverty for people at the lower end of the labor market. However, they do not agree whether a minimum wage will contribute to this goal. Whereas some argue that a minimum wage will diminish poverty by raising the wages of those receiving less than the minimum wage, others believe (predict) that legal minimum wages increase poverty by increasing unemployment.

Can economics do without ethics?

Robbins argues that it does not seem logically possible to associate economics and ethics (Robbins, 1935: 148). This disconnection between economics and ethics can be illustrated by three implications of Robbins’s view. First, as the neoclassical economist does not want to make value judgments about the preferences of individual agents, neoclassical economics merely accepts all preferences as given. Economics is entirely neutral as between ends (Robbins, 1935: 24). Various individuals may have different rankings of preferences over a ...