Economics is the study of the economy. Neoclassical approach: the science which studies human
behavior as a relationship between ends and scarce means which have alternative uses.
Core element is this definition is scarcity
What is ethics?
Ethics: The study of morality. Morality = 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 (recommendation that, if a course of action is
taken, then a desirable outcome will likely occur.): Ethics make prescriptive or value
statements knowledge about “what ought to be done”
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.
Moral standards deal with issues that have serious consequences for the welfare of human
beings
Moral standards include:
Values: (Happiness, justice, freedom). Concern ends or ideals that persons pursue and give
content to how they define the good life. They can be both intrinsic and extrinsic in nature.
Intrinsic values are values that have value in itself, apart from valuing anything else. Extrinsic
values (also called instrumental values) are values that are merely good as a means to
something else (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. A virtue is a trait or quality that is deemed to be
morally good and thus is valued as a foundation of principle and good moral being. Personal
virtues are characteristics valued as promoting collective and individual greatness. In other
words, it is a behavior that shows high moral standards.
Conflicts between: Moral standard Practical standard
Moral standard Moral dilemma Motivational dilemma
Practical standard Motivational dilemma Practical dilemma
,Statements
Descriptive statement: Economics make descriptive statements about the economy
knowledge about “what is”.
Normative statement: A normative statement is one that cannot be tested or verified and is
based on a value judgment. For example, stating that the price of housing is 'too expensive' is
a normative one as it is based on a value judgement and cannot be tested to be 'true' or
'false'.
Value statement: Same as a normative statement. “The government should foster goal x”
Positive statement: “X is the most efficiently realized by using policy instrument Y” Positive
statements are based on empirical evidence, can be tested, and involve no value
judgements. Positive statements refer to what is and contain no indication of approval or
disapproval. When values or opinions come into the analysis, then it is in the realm of
normative economics.
Policy conclusion: “The government should apply policy instrument Y”
Economic ethics
General normative ethics = philosophical attempt to formulate and defend basic moral principles
Kouwenhoven distinguishes between two 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? Belong to the broader category of social ethics
Macroeconomic ethics cannot do without micro economic ethics: 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.
Other ethics:
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. Business
ethics can thus be understood as the study of professional practices, i.e., as the study of the content,
development, management, and effectiveness of the codes of conduct designed to guide the actions
of people engaged in business activity
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.
General normative ethics: The philosophical attempt to formulate and defend basic moral principles.
These principles can be applied to a certain field the application or further specification of moral
action guides to a certain field is commonly referred to as applied ethics.
Economic ethics: Reflect on the moral standards that apply to economic phenomena.
,1.2 Defense and critique of the free market
Traditional defense of the free market
On what values are the classical defenses of the free markets based?
John Locke: The free market economy respects the right to freedom. Locke based the
market system on a theory of moral rights. The two rights that free markets are supposed to
respect are:
- Right to freedom
- Right to private property
Moral principles hold that no one ought to harm another in his life, health, liberty or
possessions. Each has a right to liberty and a right of ownership over his own body, own
labor and the products of his labor.
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. . Adam Smith praises the high specialization and division of labor that is
made possible by capitalism. Competition will then efficiently allocate the resources of the
economy among the various industries of a society.
- 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. Theory of unintended consequences:
greatest benefits are realized by self-interest of economic agents invisible hand.
Economic objections
Criticism on free market economy:
Market economy only forces prices down with perfect competition between great number of
producers -> in reality: many market imperfections, by merging -> oligopolies or monopolies:
they can ask higher prices to increase profitability. Companies do have incentive to reduce
competition.
Many market imperfections (entry barriers, corruption)
Free market = rational people, but in reality people are bounded rational
Ethical objections
From a justice ethical point of view, perfect markets allow large inequalities. 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.
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.
, Chapter 2 Utilitarianism
Basic principle of utilitarianism the greatest happiness of the greatest number (act is right when
the sum of total utilities produced is greater than any other agent could have performed)
Characteristics of utilitarianism:
1. Consequentialism: actions need to be judged in terms of the resulting
Structure: decide intrinsic value rate consequences or contributions if better than
alternatives than morally obligated to do
Most consequences of actions are uncertain, so utilitarian express their actions in expected
outcome
2. Welfarism: the goodness only functions in utility or welfare obtained by individuals
themselves
Bentham pleasure contributes to experiences and pain has a negative effect on
experiences, with this you can calculate the net sum of total utility of an experience.
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.
The greatest happiness principle: the best balance of pleasures over pain, both in quantity
and quality.
Substantive theory of well-being says which things are intrinsically good for people and that
it isn’t paternalism (third parties know better what serves an individual’s interests)
3. Sum ranking: social welfare considered to be the sum of all individuals utilities.
Utilitarianism should do whatever maximizes the sum of total utilities
Mill says treat people the way you want them to treat you
Singer illustrates the social implications of utilitarianism by considering the moral duty.
Utilitarianism implies that you should help everyone who needs it, no matter if you know the
person or not. there is not limit for Western countries to help the poor
Utilitarianism also implies a high degree of equality in income, however if this is executed the
total welfare will decrease
Cost benefit analysis
In utilitarianism utilities need to be able to be measured and other people’s utilities can be added.
There are some problems with making interpersonal comparison of welfare, according to economist
preferences are subjective and hard to test. Also it is hard to compare one’s preference with another
one’s preference. According to Hausman and McPherson it is impossible to compare two people’s
preferences. Sen argues that it is hard to compare two people’s desires with different circumstances,
some people are faster satisfied than other, because of their past. It is also according to Sen not
ethically correct to compare people with different backgrounds on their value of things.
Interpersonal comparison isn’t impossible, it can happen by ordering values, in this way an effect is
dominated but not more than that.
The compensation test is the basis of the cost benefit analysis. Here they introduce a kind of
interpersonal utility comparison by relating it to the price individuals are willing to pay for a certain
measure.
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