Ethical Codes and Income Distribution

Guglielmo Forges Davanzati

• Publisher: Routledge
• Year: 2006
• ISBN:
  9781134215843
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

In contemporary non-mainstream economic debate, it is widely thought that the functioning of a market economy needs a set of rules (i.e. institutions) which bind agents in their behaviour, allowing efficient outcomes. This idea is contrary to the General Equilibrium Model (GEM) where markets are pictured as working in an institutional vacuum and where social and historical variables play no role. However, in more recent times, a large group of economists have begun to insert social and moral variables into standard models based on the rational choice paradigm, following the increasing interest – on the part of firms – in the possible positive effects of adopting ethical codes.

In this key new text Guglielmo Davanzati studies this burgeoning view that ethics and economics can be compatible. Does 'morality' affect income distribution? And, if so, what are the effects of the widespread adoption of ethical codes on the functioning of the labour market? Central to Davanzati's efforts is the thesis that the roots of these new developments can be traced back to the pioneering work of Thorstein Veblen and John Bates Clark. Utilizing their contrasting works, Davanzati's text illuminates the propagation of ethical codes within the two opposing frameworks i.e. the neoclassical and the institutional.

Davanzati's important book will be an invaluable reference for readers interested in history of economic thought, economics and moral philosophy.

1 The genesis and the spread of ethical codes

The inside-the-market versus the outside-the-market approach

In charity there is no excess.

(Sir Francis Bacon, Of Goodness, and Goodness of Nature, 1625)

The world has achieved brilliance without conscience. Ours is a world of nuclear giants and ethical infants.

(General Omar Bradley)

A man’s ethical behavior should be based effectually on sympathy, education, and social ties; no religious basis is necessary. Man would indeed be in a poor way if he had to be restrained by fear of punishment and hope of reward after death.

(Albert Einstein)

1.1 Introduction

The basic assumption underlying this book is that moral norms significantly affect agents’ behaviour and, therefore, the functioning of a market economy. The ‘single-spot interaction paradox’ provides an example supporting this assumption.¹ Suppose that individual A, finding herself in a city where she knows she will never return, acquires a good x and that, in the shop considered, payment is due ex post (i.e. after the purchase). A is anonymous, that is, completely unknown to the seller, and has to choose whether to pay or not. Non-payment should produce a level of utility higher than the opposite solution, under the condition that – being anonymous – the probability of receiving a formal sanction is approximately nil. Accordingly, a purely rational agent should choose not to pay, but evidence shows that people tend to behave differently. This paradox can be solved only by inserting some moral rules (e.g. ‘the duty to pay’) into the paradigm of economic behaviour.²

In line with this example, three questions are in order. First, what is the nature of a moral norm? Second, what are the possible causes that can generate the emergence of a norm? Third, what are the effects that the widespread adoption of a norm is likely to produce?

This chapter is devoted to providing answers to these questions, and the focus will be on questions relating both to income distribution and, more generally, to justice.

The first question is a purely philosophical question and, for the purpose of this book, it does not need a definite answer. The main theoretical positions in the contemporary debate can be summarized as follows.³

The French School

Its major exponent – Sartre (1936) – believes that a moral act is simply an act of freedom. In this sense, art, in that it is a creative act, constitutes the highest expression of creativity and therefore of morality. Freedom is essentially liberation, and it is the only basis of values. Moreover, in Sartrean thought, political commitment is the natural corollary (or specification) of moral commitment: this is because since freedom is liberation, it belongs both to the individual sphere and above all to the sphere of social organization. From this point of view, freedom as liberation stands for the freeing of the proletariat from its subjection to capital (hence its proximity to the positions of the French communists in the first half of the 1900s). The ethic of freedom therefore translates into the ‘ethic of commitment’ (see Faracovi, in Viano 1990, pp. 23 ff.).

Utilitarianism

Its first and main exponents – in particular, Bentham, at the beginning of the 1800s, and Sidgwick, at the end of the 1800s – embrace the (Benthamite) argument that

Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do as well as to determine what we shall do. On the one hand, the standard of right and wrong, on the other the chain of causes and effects, are fastened to their throne.

(Bentham 1970 [1789])

It follows that the morality of an act is determined by the consequences that the act itself produces in terms of social welfare. In other words, an action can be considered morally acceptable if, even unintentionally, it produces an increase in the utility of the community.⁴

While contemporary utilitarianism accepts the basic approach just mentioned, it is divided by convention into two main stances: act utilitarianism (Smart) and rule utilitarianism (Harsanyi). Smart, the main exponent of the first position, re-propounds a radical form of utilitarianism, taking up the ‘progressive’ Benthamite view that what is needed in the question of ethics is to set ethics (and individuals) free from all ties with traditions, customs and habits (see Bentham 1970 [1789]). This viewpoint ends up denying any difference between pleasures and denying that an intrinsically bad pleasure can exist (see Viano in Viano 1990, pp. 54 ff.). Harsanyi’s rule utilitarianism places greater emphasis on the effective dimension of social actions, stating that the ethical rule amounts to maximizing utility under uncertainty (see Selten 2001).⁵ As Carlo Augusto Viano argues (in Viano, 1990, p. 55, my translation), ‘Harsanyi believes that effective behaviour must rely on a system of social roles considered equally probable, with each of which the humanitarian spectator could identify.’ Consequently, unlike that of Smart, his theory ultimately proves to be a hypothetical theory of social action (based, that is, on a model of society) not a descriptive theory.⁶

Neo-contractualism

Its main exponent, John Rawls – author of the widely discussed work A Theory of Justice (1971) – takes up the hypothetical model of modern contractualism (Locke, Rousseau, Kant), postulating a state of nature (original position) in which individuals – covered by a veil of ignorance – make a hypothetical rational choice about the distribution of resources in the final position; in other words they decide the norms of the society in which they will live. Rawls shows that, given the hypothesis of aversion to risk, and adopting the maximin principle,⁷ the optimal choice is such that a fair distribution of income is achieved in the final position. The rationale of this conclusion lies in the statement that since the chooser fears being classified as ‘poor’, he tends to minimize the gap between the resources of the potentially ‘rich’ and the potentially ‘poor’ in the final position.⁸ For the purposes of our discourse, what counts most is the neo-contractualist idea that justice equals fairness and, even more, that a moral action is one that guarantees the maintenance of a ‘well-ordered society’. The latter is defined by Rawls as a society in which each person accepts, and knows that the others accept, the same principles of justice, and in which the social institutions respect, and are known to respect, these principles.

The liberal ethic: Nozick

Author of a work which, like that of Rawls, has had a great effect on the philosophical, political and economic debate about moral norms – State, Anarchy and Utopia (1974) – Robert Nozick does not consider Rawls’ attempt to find a scientific basis for the ‘common sense of morality’ starting from a hypothetical state of nature to be productive. This is due to the fact that there exists nothing that can be unambiguously called ‘social justice’, unless one presupposes the existence of something that is entitled to establish the criteria for the sharing out of the resources produced. Moreover, even if this thing exists, the most it can do is to establish how to distribute, but not how much to distribute, since production must obviously take place first. Discarding Rawls’ thesis obviously means starting from a different hypothesis. According to Nozick, it is perfectly reasonable to start from the assumption that in every socio-historical context and independently from the distribution of income, individual rights are granted, and these cannot be purely negative: reference is made in particular to the rights of non-aggression and non-interference. It follows that all the existing distributions resulting from processes in which no individual right has been violated must be considered fair (the so-called theory of entitlement). It also follows that a moral action is one that respects the rights of others to non-aggression and to non-interference and, on the political plane, that the state – being non-omniscient and not having been officially appointed to establish distribution criteria – must confine its operation to the defence of legitimately acquired rights, with particular reference to private property (the so-called minimum state).⁹,¹⁰ One may argue that the normative prescriptions of Nozick’s approach can lead to his thought being classified under the label of libertarian, more than liberal.¹¹

Christian morality

Although there are a variety of theoretical and theological positions,¹² the basic value here can be said to be constituted by the dignity of man (see Banner 1999). It is therefore understood that an action is to be considered moral as long as it promotes, or at least does not injure, the dignity of an individual, whatever may be his political affiliation, religion and social status. The economic policy rules – or rather, the order of priorities to assign to the final goals of political action – deriving from this approach are basically the following.

1. Full employment. The full employment of the workforce is seen as the foundation of a fair economy, because the work of man possesses a special dignity and is the key to the achievement of justice in society.
2. A fair wage and dignity in conditions of employment. In Christian economic theory, it is believed – and this is a widespread conviction – that the wage cannot be determined solely by market forces.

While respecting the freedom of private enterprise and the rules of the market, and precisely because work is not goods, it cannot and must not be subjected to the criteria governing price-setting for goods. In particular, it is believed that the wage must not only take labour productivity into account (as the market would establish it) but also, and above all, some at least of the workers’ subsistence needs, which are socially and historically determined. Similarly, it is believed that the employer’s freedom to organize production within his/her own firm cannot and must not be unlimited. This is due to the different bargaining power held by employers compared with their employees. The resulting guidelines aim to ensure – also within the production process, which is more than a mere technical event – that the dignity of the worker is respected and promoted, in that it is the dignity of man.

On the economic plane, the different views of the market within this approach are worth noting. Blank (in Blank and McGurn 2004, pp. 22–26) argues that five theological imperatives contrast the support for market economies. First, from the point of view of Christian ethics, the idea that individuals are solely self-interested is unacceptable: ‘concern for others’ is the cornerstone of Christian morality and egoism is its opposite. Hence, insofar as the operation of market economies rests on self-interested behaviours (and economic models – accepting this assumption – show that self-interested behaviours lead to the best outcomes), the political support for them is not admissible in the light of the principle of ‘concern for others’. Second, for Christians the model of behaviour is based on ‘self-giving love’, which is outside both the actual functioning of market economies and the economic models. Third, while economics takes for granted that more is better, Christian ethics conceives ‘abundance’ not as abundance of material goods but as ‘abundance of the Spirit’ (ibid., p. 24). Fourth, while economics sees that more choice is better, Christians cannot support some choices, such as the production/ consumption of pornography, prostitution or abortion. Finally, Christian teachings emphasize the ‘concern for the poor’ and this clashes with economics on two levels: first, this principle establishes that certain choices (those that assist the poor) have a greater value than other choices; second, it leads to not supporting the idea – and/or the fact – that workers are paid according to their (marginal) productivity. In Blank’s view, these considerations do not lead to a moral rejection of the market: ‘The key question’ – she clarifies (ibid., p. 13) – ‘is not “Should there be a market?” but “What are the limits to markets as an organizing structure for economic life?” ’ Her response advocates public intervention moulded on Christian principles and devoted to promoting ‘the common good’ and ‘human development’, by inducing individuals to behave according to ‘prosocial’ values and by limiting the access to goods and services (and by regulating contracts) which conflict with human dignity: ‘When market values (efficiency, productivity, incentives)’ – she writes (ibid., p. 52) – ‘become core secular values, the church needs to serve as a counterweight.’

The position of William McGurn is very different from that of Blank. His approach to the issue is twofold, involving the empirical level and the theoretical grounds. In what follows, the main arguments will be presented. McGurn starts by assuming that ‘economic freedom is a good’ (ibid., p. 62) and that work is the instrument by which the dignity of man is preserved. Hence, without external intervention, the joint operation of capital and labour generates constant increases in social wealth, which, although unintentionally, guarantees an increase of well-being for all individuals who take part in market mechanisms. Accordingly, ‘the worker also contributes to the wealth of [his/her] neighbor’ (ibid., p. 62). Since the market is assumed to be the mechanism which generates the maximum level of production, and since production is also distributed in favour of the poor, it produces the twofold positive effect of increasing revenues and, strictly linked with this, of promoting freedom. Moreover, the increase in revenues and the greater degree of individual freedom acts, in turn, as a disincentive to dishonest behaviour: in this sense, the market is moral.¹³

Marxist ethics

Although Marx did not write directly on problems of moral philosophy, ‘the relationship between Marxism and ethics is often alluded to’ but rarely explored (Kamenka 1972, p. 1). Kamenka emphasizes Marx’s distinction between man’s universal essence – Wesen – and his existence as a particular (factual, empirical) being. Alienation, in the capitalist system, both in the form of worker’s alienation from the product of his/her work and in the form of the degradation of his/her personal life to the sole dimension of producer, becomes ‘alienation from his own universal being’ (Kamenka 1972, pp. 75–76). Moreover, insofar as money is the very essence of alienation, morality is outside the realm of the capitalist system: people honour money and hence its possessor even if dishonest. Man’s universal essence results in a ‘rational State’, where freedom is not only apparent but true and no privileges and differences exist.¹⁴ In the ‘truly human’ society – that is, Communism – human activity ‘is not subordinated to ends outside the activity’ (Kamenka 1972, p. 110); it is inherently creative and no hierarchical relationship is admitted. Within the Marxist theoretical framework, and with particular regard to the space for ‘justice’ in labour relationships, Engels’ contribution is worth noting. In his article on the ‘just wage’, published in ‘The Labour Standard’, 7 May 1881, Friedrich Engels defines the just wage in a purely descriptive sense: a wage is just if it ...