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Ethics in Economics
An Introduction to Moral Frameworks
By Jonathan B. Wight STANFORD UNIVERSITY PRESS
Copyright © 2015 Board of Trustees of the Leland Stanford Junior University
All rights reserved.
ISBN: 978-0-8047-9453-4
CHAPTER 1
Why Ethics Matters
Economics is thought to rely on the hardheaded calculation of rational self-interest; ethics is often portrayed as mushy do-goodism. Is there any useful connection between these subjects? This chapter makes the central bonds between these topics clearer and shows why critical thinking in economics can sometimes rely on a pluralist understanding of ethics. In addition to concern for an efficient outcome, people are motivated by considerations of justice and principles of duty and virtue. Different ethical frameworks offer complementary insights for positive and normative economic analyses.
THE MORAL ECOSYSTEM
O. J. Simpson—a flamboyant former professional football star and actor—was acquitted of double homicide in one of the twentieth century's most contentious jury trials. In 2006, publisher Rupert Murdoch planned to release Simpson's quasi-autobiographical account, If I Did It, of how he "might" have killed his ex-wife Nicole and Ronald Goldman. The public reacted to this news with outrage, and the book and a related television show were ultimately canceled amid widespread mockery.
But why should there be outrage? Many people wanted to read the book! Those who did not would not be forced to buy it. Standard economic logic would say that efficiency is enhanced when consumers get to buy the products they desire. So what was the problem? Clearly, a majority of citizens were repulsed by the notion that Simpson and his publisher were attempting to cash in on his notoriety as a potential murderer. Simpson's flirtation with a blockbuster confession was morally repugnant because moral norms were being violated.
In 2014 another celebrity, billionaire Donald Sterling, owner of the Los Angeles Clippers basketball team, was caught on tape making derogatory comments about his African American players and fans. The comments went viral over the Internet, causing widespread condemnation. Within days, major corporations withdrew their endorsements, and the National Basketball Association imposed a lifetime ban on Sterling. Violating moral norms (not showing proper respect for others) can have profound impacts in the marketplace.
Moral norms change, of course, so what was considered outrageous fifty years ago (selling on Sundays) is now widely acceptable in the United States. And an action that was considered by many to be proper three centuries ago (selling other human beings) is now considered abhorrent. Markets operate within a moral ecosystem—but that environment is not well understood by economists. The incorporation of ethical reasoning is as essential for economists as it is for anyone else seeking a liberal education—that is, as a preparation for tackling complex, diverse, and changing problems in real-world settings.
Ethics Defined
There are many ways to define what is meant by ethics. One working definition is:
Ethics is the study of one's proper interactions with others: It is the analysis of right and wrong.
Ethical beliefs and practices constitute a vast and unseen institutional force. A famous example is the generous tip that a satisfied traveler leaves at a highway restaurant—an eatery to which she never intends to return. Why would anyone leave a tip when there is no expectation of future reward? The typical diner shrugs and says it is customary to show generosity for good service; giving a tip is simply the "right thing to do." However, we can imagine deeper answers than this. Economic actors may leave a gratuity because they are altruistic; or diners may not want to incur the social stigma of not tipping; or they may believe that they have a duty to act in certain ways; or they self-consciously act in ways thought to be virtuous. A pluralist account of why we tip captures the complexity of ethical motivation. Of course, not everyone tips, so the simplistic account of the consumer as a selfish miser—Homo economicus or economic man—is correct much of the time. But the selfish actor model cannot fully explain highway tips or help us fully understand why O. J. Simpson's book was booed out of the market before production.
Enlightened Self-Interest
Human nature is thus complex and contradictory: sometimes selfish, sometimes altruistic, and sometimes just. Ethical egoism—the norm of doing best by "looking out for number one"—should never be underestimated. George Washington, camped at Valley Forge, Pennsylvania, during the harsh winter of 1778, learned this the hard way. Washington inspired his officers and troops to great personal sacrifices under the patriotic banner of independence. He called on them to fulfill their duties. At the same time, the Pennsylvania legislature adopted price controls on food that caused widespread shortages. Many farmers reacted to the law by selling their grain on the black market at higher prices to the rival British army while Washington's troops starved. Washington stoically observed:
We must take the passions of men as nature has given them, and those principles as a guide, which are generally the rule of action. I do not mean to exclude altogether the idea of patriotism. I know it exists, and I know it has done much in the present contest. But I will venture to assert, that a great and lasting war can never be supported on this principle alone. It must be aided by a prospect of interest, or some reward.
Washington, an astute observer, notes that different men, at different times, are moved by different motivations. No one size fits all, and in marshaling an army he had to understand these differing motives and instincts. Stereotypes of the greedy banker or the completely selfless saint do not help much because few people operate at these extremes. Most people, according to one recent theory, are "strong reciprocators" who are predisposed to cooperate and willing to incur costs on themselves to punish those who violate moral norms, even when it is difficult to conceive that such investments will recoup in the future. To some extent, people are pliable, and customs or rituals that evoke and bolster public-spirited motives can sway individual preferences toward prosocial aims.
Economists do not assume that people are always selfish because people may have preferences that are other-regarding. Being self-interested is not the same as being selfish (as elaborated in Chapters 8 and 9). Adam Smith's great work, The Wealth of Nations (1776), explores the workings of markets under the assumption that people are motived by self-interest. He notes:
... man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only.... It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantage.
Looking after oneself is instinctual, Smith observes, and following this instinct under the right circumstances can be virtuous in terms of one's own responsibilities and can also produce desirable outcomes for society as a whole.
The mistake some people make is to think that Smith thereby adopts the moral lens of ethical egoism. As discussed more fully in Chapters 8 and 9, Smith denounces egoistic behaviors. His first book, The Theory of Moral Sentiments(1759), shows how moral norms would arise to constrain selfish instincts. Far from being anonymous and autonomous agents, people are social creatures with strong instincts for sociability. Even the "greatest ruffian, the most hardened violator of the laws of society" is not altogether without social feelings. Feelings, rather than rational calculations, are the mechanism through which nature adapts humans for successful cooperation in society, according to Smith.
The Social Ethical Lens
Reaching emotional equilibrium with our peers is one of our strongest passions. This forms the basis for the development of ethical norms that lower the transactions cost in trade. Using Smith's model, Charles Darwin observes that the greatest distinction between humans and other animals is not our rational minds but our moral capabilities, which undergird our widespread cooperation. These capabilities are honed instinctual responses. In his conclusion to The Descent of Man (1871), Darwin notes, "Any instinct, permanently stronger or more enduring than another, gives rise to a feeling which we express by saying that it ought to be obeyed."
The social instincts work initially through the human capacity to sympathize with others but are strengthened by instruction, exercise, and habit. Ethical beliefs and practices make up the formal and informal rules that generate trust, promote interdependencies, and spur work productivity in a myriad of ways. In everyday economic life there is a vast arena in which economic behavior is shaped by social instincts and ethical mores (as elaborated in Chapters 7 to 12).
In 1943 Norman Rockwell painted a famous illustration for the Saturday Evening Post entitled, "Freedom from Want." It depicts an extended family crowding around the dining room table, eagerly awaiting the arrival of a plump roasted turkey. The painting highlights the desire for material outcomes (the turkey), and the individuals, whose stomachs are no doubt growling, hope that they will receive a large serving of the bird for their own personal enjoyment. Yet the painting also demonstrates commitment to concepts beyond the individual, in the sharing of sympathies and mutual sacrifice. The country at that time was pulling out of the Great Depression and fighting wars on two fronts. Although economic behavior is surely in part about self-interest and material enrichment, Nancy Folbre astutely observes, "Markets cannot function effectively outside the framework of families and communities built on values of love, obligation, and reciprocity."
Families are more than collections of atomistic economic agents; members specialize and make investments with a larger focus than the self. Women in particular take on roles of caregiving that are poorly acknowledged or modeled by standard economic theory. Authentic emotional commitment, as opposed to utility maximization, is often a significant decision driver and determination of quality. Everyone who eats at Rockwell's dinner table implicitly (and often unconsciously) accepts the basic ethical norms of the social group, which extends beyond the family to considerations of civic and national duties. People are bound together in a shared endeavor and celebrate togetherness in ritual feasts like Thanksgiving. Although people may be selfish, they restrain themselves because of ethical commitments that do not fully rely on a calculation of gains and losses. Building on this notion, Kenneth Boulding entitled his presidential address to the American Economic Association in 1968, "Economics as a Moral Science." It advances the idea that traditions and motives beyond enlightened self-interest are at work in economic life:
In facing decisions, especially those which involve other people, as virtually all decisions do, we are faced with two very different frameworks of judgment. The first of these is the economic ethic of total cost–benefit analysis.... It is an ethic of calculation.... This type of decision-making, however, does not exhaust the immense complexities of the human organism, and we have to recognize that there is in the world another type of decision-making, in which the decision-maker elects something, not because of the effects that it will have, but because of what he "is," that is, how he perceives his own identity.
If standard economics relies on the winds of self-interest, ethics in economics offers a complementary understanding of hidden currents and tides that move actors on the commercial stage—workers, suppliers, managers, and customers. Ethics provides the institutional framework within which economic activity unfolds, intertwined with concepts of personal meaning, duties, virtues, and social feelings of moral equilibrium.
Positive and Normative Ethics
The study of how people actually reach ethical decisions is called positive ethics. Proposing a preferred method of how people ought to make ethical decisions is called normative ethics. A good theory of normative ethics would likely contain an implicit notion of how people actually can make ethical judgments (positive ethics). When Adam Smith argues that humans learn to moderate their selfishness through aligning moral sentiments, he is making claims about both how people can make ethical decisions and how a properly socialized person ought to make ethical decisions. Knowing something about human capabilities, both biological and psychological, plays a part in the evaluation of a moral theory: Ought implies can.
Positive and Normative Economics
Positive economics is the study of the economy, as it currently exists (for example, the discernment of facts). Positive economics can be used to make predictions, based on models of how the world works. Predictive statements take the form, "If this happens, then this would be the outcome." A thesis of this book is that economists can better understand and predict when they consider ethical beliefs and commitments (for example, when they better understand positive ethics).
Normative economics entails a judgment about the kinds of actions that ought to be taken. A second thesis of this book is that economists can provide sounder policy advice when they consider a broader ethical landscape (for example, when they better understand normative ethics). The division between positive and normative economics is not precise. It is not possible to develop a science of facts and objective theories alone because value judgments play a critical role in the selection, collection, and analysis of information. Moreover, the act of carrying out economic research can change the facts, with ethical repercussions. Accordingly, science progresses better when practitioners adhere to ethical norms of truth seeking and honesty, themes developed in Chapter 12.
The following section demonstrates why using economic logic in the absence of complementary ethical frameworks proves to be an expensive lesson for General Motors.
THREE ETHICAL FRAMEWORKS
Economists typically posit that decisions should be made by comparing costs and benefits at the margin. Following this blindly can produce problems unless the wider ethical landscape is considered. To illustrate, this section uses a case study of automobile safety to introduce three different ethical approaches.
The Chevy Malibu Case
In July 1999, a jury assessed $4.9 billion in damages against General Motors (GM) for selling the Chevrolet Malibu, a car with a dangerous fuel tank placement that was implicated in a number of fiery crashes. The reason the award was so large is that the jury discovered that GM managers had known about the problem and had done nothing to correct it. This case provides an informative window into the world of ethics and economics.
Here are the facts: A GM engineer's secret memorandum calculated that fixing the known fuel-tank problem would cost $8.59 per car. But leaving the car as it was would cost even less, only $2.40 per car (based on settling the product liability lawsuits, with an average expected payout of $200,000 per life). Every car not fixed earned GM an expected additional profit of $6.19 per car. In considering the costs and benefits for the company, GM managers decided not to fix the fuel tank. Nor did they inform consumers about the issue.
The engineer's memorandum represents a standard way of thinking at the margin about economic costs and benefits. The premise for this viewpoint is that people make voluntary trades that satisfy their own preferences and thus improve their own welfares. Hence, people evaluate what they will gain and what they will lose, and they choose the outcome that maximizes their own individual gain or minimizes their individual loss. In this mind-set it is rational and desirable to take an action as long as the incremental benefits of that action exceed the incremental costs. It is not only GM engineers who make such economic calculations; consumers do also. Some consumers do not want the safest car possible, because that would make the car prohibitively expensive. Through trial and error, the market discovers the "correct" amount of safety by finding the point at which the marginal private cost (MC) of safety equals the marginal private benefit (MB) of safety.
From the perspective of GM, the $8.59 cost to fix the fuel tank represents the "opportunity cost" to the company of fixing each tank. The value of the lives saved represents the benefit. In wrongful death settlements, courts generally measure the dollar value of a life saved by what the person would have earned had he or she remained alive and working for a normal time period. Hence, not all lives are valued the same in legal cases. The economic analysis of whether to fix the fuel tank thus relies on a theory that low-income people would prefer to buy an inexpensive car—even if it is more dangerous—than no car at all. Because there are many cars to choose from, consumers who prefer a safer car can choose that option.
(Continues...)
Excerpted from Ethics in Economics by Jonathan B. Wight. Copyright © 2015 Board of Trustees of the Leland Stanford Junior University. Excerpted by permission of STANFORD UNIVERSITY PRESS.
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