ECONOMICS AND ETHICS

by

CHARLES K. WILBER

for

THE ELGAR HANDBOOK TO ECONOMIC METHODOLOGY eds.

John B. Davis, D. Wade Hands and Uskali Maki

There are three ways in which ethics enters economics. First, economists have ethical values that help shape the way they do economics. This builds into the core of economic theory a particular view of how the economy does work and how it should work. Second, economic actors (consumers, workers, business owners) have ethical values that help shape their behavior. Third, economic institutions and policies impact people differentially and thus ethical evaluations, in addition to economic evaluations, are important.

Economists have Ethical Values

The issue of ethical value judgments in economics is at least as old as the John Neville Keynes argument which divided economics into three areas: positive (economic theory), normative (welfare economics), and practical (economic policy). The first deals with 'what is', the second with 'what ought to be', and the third with how to get from one to the other. Although the majority of economists admit that ethical values permeate welfare economics and economic policy, they proceed with some confidence in the belief that their work in pure and applied economic theory is ethically neutral. Methodologists studying the question are more cautious.

In recent years there has been a flurry of literature calling into question economics' scientific character. Part of that literature deals explicitly with the impact of ethical value judgments on economics as a science-- value-neutrality versus value-permeation.

There are two pervasive tenets to the value-neutrality argument. The first is a reliance on the Humean guillotine which categorically separates fact ('what is') from value ('what ought to be'). The second basic tenet strongly supports the first by claiming that since we have objective access to the empirical world through our sense experience, scientists need not concern themselves with 'what ought to be'. This second tenet is the crucial point and the one which critics have sought to undermine.

One of the recent criticisms of the value-neutrality thesis, Kuhnian (Kuhn, 1970)in character, is convincing to many. Kuhn's rejection of the second tenet that we have objective access to the empirical world through our sense experience is important for those opposed to the value-neutrality position. He argues that the empirical world can be known only through the filter of a theory; thus, facts are theory-laden. A major argument of those who build on Kuhn's approach runs as follows: A world view greatly influences the scientific paradigm out of which one works; value judgments are closely associated with the world view; theories must remain coherent with the world view; facts themselves are theory-laden; therefore, the whole scientific venture is permeated by value judgments from the start. This world view, or Weltanschauung, shapes the interests of the scientist and determines the questions asked, the problems considered important, the answers deemed acceptable, the axioms of the theory, the choice of 'relevant facts', the hypotheses proposed to account for such facts, the criteria used to assess the fruitfulness of competing theories, the language in which results are to be formulated, and so on (see Wilber and Hoksbergen, 1986).

Thus, it is argued, the paradigm or research program of any scientific community is circumscribed by boundaries laid out in a world view which, while not perhaps individually subjective, is nevertheless empirically untestable, or metaphysical as Boland and others would say (See Boland, 1981; McCloskey, 1985). The defense of value-neutrality still stands, but the pillars seem to be weakening. Blaug concedes that both 'factual' and 'moral' arguments rest 'at bottom' on certain definite techniques of persuasion, which in turn depend for their effectiveness, on shared values of one kind or another' (Blaug, 1992, p. 115).

Economic Actors have Ethical Values

Eeconomists recently have been thinking through the implications of one of Adam Smith's key insights: Self-interest leads to the common good if there is sufficient competition and if most people in society have internalized a general moral law as a guide for their behavior (see Evensky, 1993). Smith believed most people, most of the time did act within the guidelines of an internalized moral law and that those who didn't could be dealt with by the police power of the state.

One result of this re-thinking is the recognition that (1) people act on the basis of embodied moral values as well as from self-interest and (2) the economy needs that ethical behavior to be efficient.

Hausman and McPherson recount an experiment in which wallets containing cash and identification were left in the streets of New York. Nearly half were returned to their owners intact, despite the trouble and expense of doing so to their discoverers (Hausman and McPherson, 1996, p. 58). The effort expended and apparently unselfish behavior demonstrated by those who returned the lost goods may, as Hausman and McPherson assert, reflect a manifest commitment to societal norms over egoistic desires. Many researchers have found the same phenomena (Dawes and Thaler,1988; Elster, 1990; Frank, 1988).

It is not solely for the sake of accuracy that economists should pay attention to evidence that human actions are guided by concerns not solely self-interested, but also because there are real economic consequences. Self-interest in a competitive environment is not sufficient to yield the common good. Pushed to its logical extreme, individual self-interest suggests that it would usually be in the interest of an individual to evade the rules by which other players are guided.

Under conditions of interdependence and imperfect information, rational self-interest frequently leads to socially irrational results unless that self-interest is constrained by an internalized moral code. A classic example is the situation where both the employer and worker suspect that the other one cannot be trusted to honor their explicit or implicit contract. For example, the employer thinks the worker will take too many coffee breaks, spend too much time talking with other workers, and generally work less than the employer thinks is owed. The worker, on the other hand, thinks the employer will try to speed up the pace of work, fire her unjustly if given the chance, and generally behave arbitrarily. When this is the case the worker may tend to shirk and the employer increase supervision to stop the expected shirking. If the worker would self-supervise, production costs would be lower. Thus this distrust between employer and worker reduces efficiency.

What constrains individuals from seeking solely their self-interest? One answer is that our tendency to maximize our material welfare at the expense of others is inhibited by a deeply ingrained set of moral values.

There are a number of approaches used to formally represent the relation between moral values and the standard utility framework of economic theory. We must distinguish between altruistic desires and moral norms, the former being more readily incorporated into an individual's utility function. The latter might better be modeled as metapreferences or conceived of as constraints on maximization. There are difficulties with each of these approaches which leaves the subject an unsettled one.

One approach to formally incorporating moral values is to treat them as preferences comparable to preferences for goods and services. An individual's compliance with a moral norm generates a sense of satisfaction adding to the agent's welfare. Concurrently, defying a norm held as important creates disutility for the individual. This formulation appears more appropriate in modeling altruistic behavior, such as purchasing a gift for one's child, than it does for an ethical norm like honesty or a commitment like duty.

Amartya Sen (Sen, 1987) has proposed an approach in which rational individuals would have both metapreferences and ordinary preferences. Moral values regarding fairness, liberty, and honesty among others make up the metapreference function and it in turn shapes the ordering of ordinary preferences. So, for example, a person who has a strong preference to consume grapes still doesn't buy any because of a commitment to justice for farm workers. This approach is also helpful in capturing in formal terms the internal conflict surrounding such personal choices as whether or not to smoke. An individual may simultaneously desire a cigarette (ordinary preference) and desire not to smoke (metapreference) in the first place.

Rather than conceiving of ethical values as preferences included among others in a standard utility function, or as metapreferences guiding the preference rankings of common goods, norms might also be seen as constraints on choices. As in a budget constraint, norms could be seen as externally imposing (presumably from the conscience or superego) limits on available choices. However, unlike their fiscal counterpart, norms may be violated; therefore, the limits they impose are not rigid. Also, attempts to distinguish norms-as-constraints from norms-as-preferences is often a muddy task.

Economic Policies and Ethical Outcomes

In measuring economic success by a policy's ability to satisfy individual consumers' preferences, several important issues must be dealt with (see Cowen, 1993). Welfare economics downplays issues of distribution to varying degrees, depending on the proposed criteria for policymaking. Sometimes it is argued that only those policy changes should be made that represent Pareto improvements. The Pareto Rule is of limited use, however, for policy evaluation. Since interpersonal comparisons of utility are ruled out, the only thing that can be said is that a policy which benefits someone without hurting anyone is an unambiguous gain for society. Because this type of policy is almost never possible, economists have been forced to fall back on the concept of potential Pareto improvements, for instance, in cost-benefit analysis. This is where winners gain more than losers lose and therefor, potentially, are able to make compensation so that no one loses. Compensation schemes are very difficult to design, however, because it is so hard to identify the winners and losers. If the losers are not compensated by the winners then interpersonal comparisons of utility have been made, violating the foundational position of welfare economics. The result is that the ethical guideline becomes a straight-forward consequentialist utilitarianism-- the greatest good for the greatest number.

One possible definition of consequentialism is the belief that the morally relevant features of an action are its consequences, the events which result from it. Potential Pareto optimality is a special case of consequentialism, because it restricts its attention to one particular set of consequences-- effects on the utility of agents (in practice, income becomes a proxy for utility). However, it is widely recognized by moral philosophers that a wide variety of potentially important considerations are inappropriately excluded by consequentialism. Here we note only one: agent-centered restrictions.

The importance of agent-centered restrictions can be seen in the means-ends controversy. First, focusing only on the consequences ignores the fact that the means used might be morally unacceptable. A reduction of consumer goods prices by the use of child labor cannot be evaluated only by looking at consequences. Also arguing that the consequences will not change doesn't justify the agents actions. For example, in the mid-1980s many colleges and universities were considering divesting their portfolios of securities of companies that did business in South Africa. Many economists argued that this well-intentioned effort would be ineffectual, since other investors from around the world would provide any needed capital. This argument clearly neglected the possible relevance of agent-centered restrictions.

Another kind of problem overlooked by the focus on individual preference satisfaction concerns what Anderson has called the social conditions of delivery of a good (Anderson, 1993, Ch. 7). Economists look at the economy as instrumental for obtaining other goods, such as utility. Thus, for example, one can evaluate the desirability of free market arrangements by examining their impact on the utility of individual agents. The market itself, in this view, has no intrinsic value or disvalue. But in some cases this may be an erroneous assumption. There may be cases in which agents have a preference not just for certain commodities but over whether those commodities are provided by a market or by some other means. The supply of blood is one example (see Titmuss, 1970). Another example is commercial surrogate motherhood. Anderson argues that this practice of putting motherhood on the market in effect treats children as commodities, with possibly baleful psychological effects on both the parents and the children. Such arguments counter the notion that we can determine whether the market is best simply by checking to see if it allocates goods efficiently; the market itself may be the object of preferences and norms, which must be taken into account.

Another problem of individual preference satisfaction is where preferences are in some way based on error. Desires can spring from erroneous belief, a sense of resignation, acculturation that leads to the repression of actual needs, or a lack of information. Economists attempt to come to grips with only the last of these. They claim that it is paternalistic to argue that people make wrong choices. However, they are beginning to understand that the appeal to individual preferences has its limits. It begs the question of how these preferences are formed and it also sidesteps the reality that preferences are dependent on unreliable beliefs. People may believe that a new steel mill won't hurt the health of those downwind but if they are mistaken should their preferences still guide policy? Finally, there is a gap between what I prefer and what I actually do. I prefer not to smoke but my addiction leads me to buy cigarettes anyway. The question must be dealt with: Should individually and socially undesirable preferences guide policy decisions?

Charles K. Wilber

University of Notre Dame

REFERENCES

Elizabeth Anderson, Value in Ethics and Economics (Harvard University Press, 1993).

Mark Blaug, The Methodology of Economics: Or How Economists Explain, 2nd ed. (Cambridge University Press, 1992).

Lawrence Boland, The Foundations of Economic Method (Allen & Unwin, 1982).

Tyler Cowen, "The Scope and Limit of Preference Sovereignty," Economics and Philosophy, Vol. 9, No. 2 (October 1993), pp. 253-269.

Robyn M. Dawes and Richard H. Thaler, "Cooperation," Journal of Economic Perspectives, VOL. 2, No. 3, PP. 187-97.

Jon Elster, "Selfishness and Altruism," in Jane J. Mansbridge (ed.), Beyond Self-Interest, (University of Chicago Press, 1990), pp. 44-52.

Robert H. Frank, "Beyond Self-Interest," Passions Within Reason: The Strategic Role of the Emotions (Norton, 1988), pp. 1-19.

Jerry Evensky, "Ethics and the Invisible Hand," Journal of Economic Perspectives, Vol. 7, No. 2 (Spring 1993), pp. 197- 205.

Daniel M. Hausman and Michael S. McPherson, Economic Analysis and Moral Philosophy (Cambridge University Press, 1996).

Thomas S. Kuhn, The Structure of Scientific Revolutions, 2nd ed. (Chicago University Press, 1970).

Donald N. McCloskey, The Rhetoric of Economics (University of Wisconsin Press, 1985).

John J. Piderit, S.J., The Ethical Foundations of Economics (Washington, D.C.: Georgetown University Press, 1993).

Amartya Sen, On Ethics and Economics (Oxford: Basil Blackwell, 1987).

Charles K. Wilber and Roland Hoksbergen, "Ethical Values and Economic Theory: A Survey," Religious Studies Review, 12:314 (July/October, 1986), pp. 205-214.

[Return to Recent Publications]