Philosophy Of Economics & Economic Ethics For ECO (30L210B6)
Institution
Tilburg University (UVT)
This is a summary of the course Philosophy of Economics & Economic Ethics for ECO from Tilburg University. It contains a summary of the mandatory reader 'Markets and Morality: On Economic Freedom, Happiness, Inequality and Virtues', written by the lecturer Johan Graafland and the lectures. The su...
philosophy of economics amp economic ethics for eco
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tilburg university
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Tilburg University (UVT)
Bedrijfseconomie
Philosophy Of Economics & Economic Ethics For ECO (30L210B6)
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Summary Phil.of Eco. & Economic Ethics for ECO
Chapter 1 Introduction
1.1 Economic ethics
What is economics?
Economics is the study of the economy. Here we use the neoclassical approach. This is the science
which studies human behavior as a relationship between ends and scarce means which have
alternative uses. Ends are given (ethics have no effect on that) and all means are tradable and have
instrumental value. (Robbins, 1935)
What is ethics?
Ethics: The study of morality. Morality is the standards that an individual or a group has about what is
right and wrong. Moral standards are imperative in nature and may imply moral duties. There are
many non-moral normative standards as well. They differ in a few aspects:
• Moral standards are prescriptive statements or value statements. This means that they are
action-guiding imperatives that do not describe states of affairs, but what people ought to do. A
prescriptive statement is a recommendation that, if a course of action is taken, then a desirable
outcome will likely occur.
• We feel that moral standards should overrule other, non-moral standards
• Moral standards should be impartial. This 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. This also means that they are
equal for everyone.
• Moral standards deal with issues that have serious consequences for the welfare of human
beings
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 kind of actions we believe are right or wrong.
• Values: (Happiness, justice, freedom). Concern ends or ideals that persons pursue and give
content to how they define the good life. They are sustainable beliefs of persons about what
makes certain acts or certain way of life valuable. They can be both intrinsic and extrinsic in
nature. Intrinsic values are values that have value, apart from valuing anything else. Extrinsic
values (also called instrumental values) are values that are merely good as means to something
else with an intrinsic value (money). Intrinsic values are those which are inherently rewarding,
such as creativity, social justice and connection with nature. Extrinsic values are centered on
external approval or rewards, for instance wealth, social status, self-image and personal security.
• Norms: Concrete behavioral rules that should be followed up in order to realize moral values
(thou shall not steal). They relate to values as means relate to ends. A principle of right action
binding upon the members of a group and serving to guide, control, or regulate proper and
acceptable behavior.
• Virtues: (Honesty, prudence, industry). An acquired disposition that is socially valued as part of
the character of a morally good person being exhibited in the person’s habitual behavior. In
other words, it is a behavior that shows high moral standards. This behavior can then enable a
person to realize certain values.
Moral dilemmas
A moral dilemma is a conflict between different moral standards including values, ideals, and duties
,(responsibilities). Dilemmas are classified based on the type of standards that are conflicting with
each other. This is illustrated in the following table.
Conflicts between: Moral standard Practical standard
Moral standard Moral dilemma Motivational dilemma
Practical standard Motivational dilemma Practical dilemma
Statements
• Economics make descriptive or positive statements about the economy. They try to explain the
economy without reaching conclusions what ought to be done. They need to provide knowledge
on “what is”, which can be used to make correct predictions about the consequences of doing
one thing rather than another. They are based on empirical evidence, can be tested, and involve
no value judgements. An example is “X is the most efficiently realized by using policy instrument
Y”.
• In ethics men uses prescriptive or value/normative statements. Such a statement expresses a
value judgment about whether a situation is desirable or undesirable. They describe what people
should do based on a value judgement. An example is “The government should foster goal x”.
• A policy conclusion is derived from a prescriptive statement and a descriptive statement. The
prescriptive statement describes what need to be done and the descriptive statement explains
how this can be obtained. When we combine the previous two examples, we get the following:
“The government should apply policy instrument Y”.
Economic ethics
The application of ethics to a certain field should be distinguished from general normative ethics.
General normative ethics is the philosophical attempt to formulate and defend basic moral
principles. These principles can be applied to a range of fields and this is referred to as applied ethics.
Economic ethics reflects on the moral standards that apply to economic phenome. This is the same
domain as economics, but economics explains the relationships between economic phenomena
while economic ethics evaluates them from a moral point of view. There are two strands of economic
ethics.
• Microeconomic ethics: Evaluates the actions of individual economic agents given the
economic structures or institutions. How should the economic agent behave on the market?
Belongs to the broader category of individual ethics.
• Macroeconomic ethics: Considers the morality of economic structures. Does the economic
order respect ethical standards? Belongs to the broader category of social ethics.
The distinction between the two is not very sharp. Macroeconomic ethics cannot do without micro
economic ethics because the evaluation of the institution of the market often revert to the micro
ethical roots. On the other hand, micro economic ethics can also not be studied in isolation from
macro-economic institutions. There are also other ethics that are mentioned before or are
important.
• Business ethics: Can be interpreted as a further specialization of economic ethics. It’s the
study of moral standards that apply to business only given the institutional setting of the
market.
• Social ethics: The morality of the societal relationships and structures. It studies the
collective decisions of groups and the structural relations that connect these groups.
• Individual ethics: Studies the individuals as the subject of ethical considerations and actions,
often in direct relations with other individuals.
1.2 Defense and critique of the free market
,Traditional defense of the free market
The most well-known moral defense of the free-market system goes back to John Locke and Adam
Smith
• John Locke: He bases his defense of the free market system on a theory of moral rights. The two
rights that free markets are supposed to respect are the right to freedom and the right to private
property. There can be a government, but the government is only allowed to preserve the above
rights and not more than is needed to preserve these rights.
• Adam Smith: The free-market economy will produce the greatest benefits. Adam Smith is an
utilitarianist and defends the free market on the utilitarian argument that market institutions will
produce greater benefits than any other institution that coordinates the demand and supply of
goods. A free market creates competition and reduces the prices to the lowest possible value,
and it also generates an efficient allocation of the resources of an economy (capital and labor).
The efficient allocation also facilitates division of labor, which generates a higher productivity
and more innovation. This contributes to maximizing total welfare. An interesting aspect of
Smith’s theory is that this optimal situation is realized by self-interested actors. Motivated by
their own micro-goals of maximum utility or maximum profits, consumers and producers carry
out plans that serve the macro-goal of maximal economic utility of the society at large. This is the
theory of unintended consequences (invisible hand), which states that the greatest benefits are
realized by self-interest of economic agents.
• Other economists supplemented to this theory by stating that it is impossible for the government
or any human to allocate resources with the same efficiency. In the free market the price can do
this job.
Criticism on free market economy
Economic objections
• Market economy only forces prices down with perfect competition between great number of
producers. In reality there are many market imperfections that distort the operating of the
market. For example, companies have an incentive to reduce competition in order to raise their
profitability. They do this by merging, which creates monopolies and oligopolies. Here they can
set higher prices and increase profitability. Anti-trust polices can counter this.
• Self-interest is not always socially efficient. It can cause negative externalities (pollution).
• Free market assumes people are rational, but in reality, the rationality of people is bounded.
Ethical objections
• From a justice ethical point of view, perfect markets allow large inequalities. If you are wealthy, it
is easier to accumulate more wealth. Without government intervention, the gap between the
rich and the poor will widen until large disparities of wealth emerge.
• Locke takes the assumption that people have rights to liberty and property as self-evident, but
this assumption is unproven. Markets only respect certain negative rights. Sometimes these
negative rights can be overridden
• From a virtue ethical point of view, it can be argued that free markets ignore the demands of
caring. The dominant attention to efficiency may foster character traits that maximize individual
well-being but may neglect character traits associated with building close relationships with
others. This will crowd out the community and ultimately the happiness of individuals partaking
the community.
Two models of capitalism
• Anglo Saxon model (UK, US)
, – Free market operations
– Government secures private property and contract rights, but does not intervene or
regulate the economic process
– Shareholder model for companies: maximize stock value (bonus system for managers)
• Rhineland model (Germany, France)
– Market operation, but within some limits
– Government regulates the market and provides for welfare state
– Stakeholder model for companies: balance of interests of stakeholders
Chapter 2 Utilitarianism
2.1 Characteristics of utilitarianism:
The basic principle of utilitarianism is “the greatest happiness for the greatest number’. An action is
right if and only if the sum of total utilities produced by that action is greater than the sum total of
utilities produced by any other action the agent could have performed. Utilitarianism as a principle
can be seen as a combination of the three following elementary requirements.
1. Consequentialism states that actions must be judged in terms of consequent effects. The
outcome matters not the process. The structure is at follows. First one needs to decide what is
intrinsically valuable. Then one assesses the consequences or contribution of an action to these
valuable goals. If an action is better than any alternative, then it is morally obligatory. Expected
outcome is used instead of actual outcome, since the consequences of an action are almost
always uncertain.
2. Welfarism states that the only goal is utility or welfare for individuals. Different people have
different meanings of welfare or utility. We use the formal theory.
• Bentham states that the net sum of pleasure and pain is utility. This is called hedonism.
According to Bentham all values can be measured on the scale of pleasure and pain, Mill
says that there are different levels of pleasures and pain. He takes into account quantity
and quality. The greatest happiness principle: the best balance of pleasures over pain,
both in quantity and quality. The quality and rule of measuring it against quantity is to be
assessed by competent judges.
• Economists say that utility is satisfaction of actual preferences. They assume individual
sovereignty, which states that individuals are the best judges of their own welfare. This
means they prefer a formal theory of welfare. This specifies how one finds out which
things are intrinsically good for people, but not what those things are. What is
intrinsically valuable is what each individual prefers to obtain
• Opposed to this is a substantive theory of well-being. This theory states which things are
intrinsically good for people. This is in line with paternalism, which states that third
parties know better wat serves an individual’s interest.
3. Sum ranking states that societal welfare is the sum of all individual utilities. The total sum of
utilities should be maximized with equal weight to utility of different individuals. This means one
should be impartial.
• Maximizing total welfare means that the marginal utility of different persons should be
equalized. Assuming declining marginal utility from income, utilitarianism implies that
income should be redistributed until the marginal utility from additional income is equal
for all persons.
• Singer illustrates the social implications of utilitarianism by considering the moral duty of
it. Utilitarianism implies that you should help everyone who needs it, no matter what, up
to the point you will suffer more than that the other would benefit.
• Utilitarianism implies a high degree of equality in income, but taxes and social benefits
systems can also reduce the incentive to work and reduce the total welfare. So, it implies
equality up to the point that welfare no longer increases.
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