The Symbiotic Relationship of Ethics and Economics
Can economics be ethical? Are these two fields of study mutually exclusive? According to Hausman and McPherson, there are those who deny completely that the two have any bearing on the other besides their combined utility in formation and execution of public policy. Whereas ethics determines the end, economics determines the means. This is a massive question for which the answer may have similarly massive implications. Before attempting to reach any sort of conclusion, the broad terms of the initial question must be defined. Of the two, economics and ethics, the former is relatively easy to define. Simply put, economics is the study and analysis of how scarce resources are allocated for production, distribution, and consumption. This discipline can be practiced at any level of social hierarchy whether that be down to the individual person or firm (microeconomics) all the way up to the national or international scale (macroeconomics). There is obviously an obscene amount that definition does not cover, but it will suffice for the purpose of answering the initial question of whether or not economics can be ethical. That brings us to the more difficult half of this conundrum. What is ethics?
This is a definitively harder concept to pin down with varying views from many scholars and philosophers. Aristotle argued that an ethical life is one lived virtuously through the development of good habits such as wisdom, courage, and temperance, among others (Virtue Ethics). A more recent addition to philosophical study is environmental ethics which challenges people to examine closely our ethical relationship with the environment and the consequences of our actions on it. For example, Rachel Carson’s 1962 Silent Spring is concerned with the increased use of chemical pesticides and the consequences of that overuse being decreased public health and destruction of wildlife. Kant, along with other fellow deontologists, would argue that ethical behavior is based upon foundational principles that we have a duty to uphold regardless of the outcome. By virtue of having certain inborn properties (reason, sentience, etc.), Kant believes that each of us is necessarily always an end and never a means to some end. Bentham, on the other hand, would argue that ethical behavior is determined by the positive or negative consequences of said behavior (Consequentialism).
To illustrate these two opposing frameworks in action, consider the “trolley problem”. You may already be familiar with it, but allow me to set the scene. Imagine a trolley whose brakes have failed and which is now barreling down the track at breakneck speed toward a railroad switch. On the track which the trolley is currently headed, there are four people tied down to the track. On the other track which splits off, there is only one person tied down. Now imagine you are a casual observer unlucky enough to find yourself within reach of the railroad switch lever and thus thrust into this moral dilemma. What do you do in this situation?
Perhaps the easiest way to initially approach this is through the application of ethical theory already mentioned. Bentham’s theory of Utilitarianism argues that the ethical course of action would be the one that results in the best consequences. For Utilitarians, there is essentially no dilemma! They can pull the lever, in good conscience, to divert the train from the four toward the one. This operates under the assumption that sacrificing the one for the many results in a higher overall net utility. A Deontologist, however, has a much trickier time in this instance. The ends do not justify the means, and so the consequence of saving the four will not matter at all to them when determining the most ethical course of action as doing involves the death of the one. It is decidedly a more complex approach than Utilitarianism, but an ethical justification could perhaps be reached through application of the Principle of Double Effect.
The above situation and justifications therein are perhaps too simplistic to truly convey the complexity of the ethics involved, but they were meant only to display the essentially abstract nature of ethics. Any singular situation may be approached in a multitude of ways; each may be able to be justified in one way or another as ethical, with some justifications being stronger than others. In this way, ethical principles used to determine what is right can also be used to determine how an economy can operate ethically.
Hausman and McPherson maintain that there are at least four essential reasons that economists should care about ethics. First, economic outcomes are influenced by the morality of economic agents through differing courses of action. In order to understand the outcome, economists must take even a small interest in ethics. Second, welfare economics generally rests upon strong and contestable assumptions that require knowledge of morality and ethical theory in order to assess and further develop such policy. Third, economic conclusions must be linked to the moral commitments that drive public policy. Understanding the relationship between economics and policy thus requires an understanding of morality. Fourth, understanding the moral relevance of positive economic requires an understanding of general moral theory.
To provide a practical example displaying the important relationship between economics and ethics, the authors refer to the work of Richard Titmuss on systems for acquiring and distributing blood transfusions. The study concludes that voluntary systems (e.g. Great Britain) are more efficient than commercial systems and embody and cultivate altruistic communitarian values. This conclusion by Titmuss came to spark heated discussion among economists about the adverse effects of incentivising behavior that came to be known as motivational crowding-out. This term was not specific to blood donations, and was generally meant to refer to the economic phenomenon wherein higher incentives lead to lower supply.
Thomas M. Jones, in his Instrumental Stakeholder Theory, sought to integrate the stakeholder concept, economic theory, behavioral science, and of course, ethics. At the center of this theory is the use of contracts which represent the relationships between stakeholders and businesses. These can vary from informal relational contracts to formal contracts such as that between a bondholder and the company. The essential problem inherent in such contracts is the opportunism of one party at the expense of another. This can manifest itself as an agent acting in their own self-interest before addressing the interest of the principal (such as a real estate agent trying to find a house outside your budget so that they may gain the highest commission), social loafing, or sellers misrepresenting prices to consumers (such as leading a potential buyer of a car to believe the car has new brakes when they are in fact 15 years old). The most efficient contracting system is the one which minimizes opportunistic behavior. To this end, economists and moral philosophers since Adam Smith have observed that competitive market economies operate more efficiently where values of honesty and integrity are prevalent throughout society than where they are not. If that holds true, are we then supposed to completely throw our own self-interest to the wind? Or market performance and efficiency be enhanced through enlightened self-interest?
To answer this, consider the Prisoner’s Dilemma. It demonstrates how two hypothetical agents acting in their own self-interest (“Don’t Cooperate”) result in both parties ending worse off than they had begun. The typical prisoner’s dilemma is set in such a way that each party is incentivized to protect themselves at the expense of the other. A real-world prisoner’s dilemma manifests itself in Brexit. In leaving, Britain hopes to reap the advantages of the single EU market with none of the costs of being included in that market. The EU, however, has called for consequences should Britain leave. Britain is just one country of many in the EU, so it must be perceived as burdensome and inefficient to leave it. In this way, both are incentivized to pursue their own self-interest.
Examine the figure above. If both Britain and the EU refuse to cooperate and instead pursue their own self-interest, both will end up worse off than they had been before. By cooperating to come up with an agreement, both will benefit. The opportunism inherent in any society is manifested in the payoff matrix through the other two cases wherein one of the parties does not cooperate yet benefits at the expense of the cooperating party. It is through ethics that each of the parties draws conclusions and decides what they want to do.
It is clear that, as Hausman and McPherson argued, the disciplines of ethics and economics are two which should not be mutually exclusive. When formulating policy, it is not enough to simply gather the facts and run a cost-benefit analysis toward the most “efficient” outcome. Doing so requires first a determination of what is “efficient”. Is it what generates the most wealth for the most amount of people or the greatest environmental well-being? Or maybe being efficient entails measuring some abstract concept such as happiness? Technical-economic analysis would not suffice and utilization of ethical study is called for. On the other hand, it would somewhat misguided to base public policy entirely off of the value and norms which constitute our society’s ethical framework. Doing so ignores the objective facts and analyses that would lead to more effective policy. Whatever the case may be, it is clear that any economic scholar who is serious about his study should also have at least a small window into the expansive world of ethical theory. Economists can devise as many conclusions and models as they want, but it is only through the application of their own ethical frameworks and the theories of philosophers before them that those conclusions and models are directed toward some end.
Hausman, Daniel M., and Michael S. McPherson. "Taking ethics seriously: economics and contemporary moral philosophy." Journal of economic literature 31.2 (1993): 671-731.
Jones, Thomas M. "Instrumental stakeholder theory: A synthesis of ethics and economics." Academy of management review 20.2 (1995): 404-437.