Lecture 1: Introduction
Why study the link between markets and morality?
• Purpose of the course: To study the morality of markets by applying ethics to the evaluation of
market institutions
• Concepts and tools that help you develop your own view on the relationship between morality and
markets
– Major economists, from Adam Smith to John Maynard Keynes and Nobel Prize winner Joseph
Stiglitz have clear views on the morality of markets
– “To educate a person in mind and not in morals is to educate a menace to society” Theodore
Roosevelt
– Awareness is precondition for integrating ethics in own reflections and choices
What is economics?
– Neo-classical approach (definition of Robins): the science which studies human behavior as a
relationship between ends and scarce means which have alternative uses
• Ends are given disconnection with ethics
• All means are tradable and have instrumental value
What is ethics?
• Study of morality (standards that individual/group have about what is right and wrong)
• Morality: standards that an individual or a group has about what is right and wrong
– Values / ends (happiness, justice, freedom)
– Norms: concrete behavioral rules (thou shall not steal)
– Virtues (honesty, prudence, industry)
Moral dilemma:
Volkswagen faced a dilemma: they wanted the
costs of production as low as possible, with
values of highest profit as possible and the value
of honest (think about Volkswagen scandal!)
This is a moral value of being truthful and
practical value of making more profits. So this
was a motivational dilemma
Economics vs ethics: descriptive vs prescriptive statements
• Economics makes descriptive or positive statements about the economy knowledge about ‘
what is’
• Ethics: makes prescriptive or value/normative statements knowledge of ‘what ought to be done’
• Both are connected. Any policy advice is derived from:
– Value statement: the government should foster goal x
– Positive statement: x is most efficiently realized by using policy instrument y
– Policy advice: use policy instrument y
,Example 1: (this supports Friedman statement, economic is more important)
• 1 Value statement: human happiness is an important goal
• 2 Positive statements:
• - unemployment has a strong negative impact on human happiness.
• - Abolishing tax on dividends will attract multinational companies and reduce unemployment
• 3 Policy advice: The tax on dividends should be cancelled
Example 2: (here value is more important)
• 1 Value statement: child labor is legitimate if it contributes to welfare in the long run (Norberg)
• 2 Positive statements:
• - child labor reduces the cost of production and increases the competitiveness of developing
countries.
• - In the long run, the resulting rise in welfare will diminish child labor
• 3 Policy conclusion: Western companies should not force their suppliers in developing countries to
refrain from using child labor
Economic ethics:
Economic ethics has the same object of study as economics. It reflects on moral standards that apply
to economic phenomena.
General ethics is about developing good
moral standards
Individuals are also individual
companies. Micro ethics do not have
the power to change the economic
structures our course is mostly about
macro-ethics because we are going to
evaluate the economic institutions
Macro ethics is part of a broader field which is called social ethics (concerns ethical evaluations of
societal structures, like market institutions or political institutions (democracy)).
On what values are the classical defenses of the free market based?
• John Locke: the free market economy respects the right to freedom and the right to private
property (people own their own body, so product they make with it via labor should be owned by
them) so the free market economy is a good institution because it fits very well with important
natural rights
• Adam Smith: the free market economy will produce the greatest benefits (in terms of welfare):
– Market allows labor division. Labor division generates higher productivity and innovation
– Prices tend to the lowest possible level in competitive market
– Competition generates efficient allocation through price signals
• “No society can surely be flourishing and happy, of which the far greater part of the members are
poor and miserable.” (WN, I, 8)
Was Adam Smith right? (YES)
,• Success of the market
– France 1780: life expectancy was 25 years
– 4/5 of French families devoted 90% of their income to bread
– income has risen by 1500% since then (so since the market developed so much, also income has
been rising dramatically)
Theory of unintended consequences:
• Greatest benefits are realized by self-interest of economic agents Smith was also a
philosopher, but mainly due to this citation he was set in the corner of an economist. With this
statement he defends that if a business man only aims at this self-interest, then these benefits for
society will come about.
– The businessman ’neither intends to promote the public interest, nor knows how much he is
promoting it.... he intends only his own gain, and he is in this, as in many other cases, led by an
invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the
society that it was not part of it. By pursuing his own interest he frequently promotes that of the
society more effectually than when he really intends to promote it.’ (Adam Smith, Wealth of Nations)
what was the end that was no part of his intention?: The wealth of nations, so the wealth of
all/society. The business man does not aim to increase the welfare of society, he only cares about his
own wealth. Buy by doing this, as by an invisible hand, he still contributes to the benefits of all.
Adam Smith basically says that a company should only be busy with its own profit because ‘by
pursuing … promote it’. SO; BASICALLY HE SAYS THAT SELF-INTEREST IS GOOD FOR SOCIETY
Discussion question:
He would say that B is the answer.
Before Adam Smith, people saw
self-interest as a damaging
phenomenon to society. Now, not
anymore. Example: think about a
company that out of self-interest
has a big innovation. After a
while, society will benefit from
this innovation which was at first
made out of self-interest. D is also
possible, because out of self-interest people and companies can do something destructive for
society. It depends on the statement of the market: if the market has lots of imperfections, for
example it is not transparent, then a company that is self-interested may abuse these imperfections
and aim to raise profits by actually hurting others. In that case also intrinsic motivation contributes to
society may be a counter force that makes a company to diminish its harm by trying to improve its
operations
Criticism on free market economy (so also criticism on Adam Smith):
• Lack of efficiency
– Companies have an incentive to reduce competition (because then they can raise prices to make
more profit)
– Negative externalities (e.g. pollution) self-interest is not always socially efficient
, • Lack of other ethical values
– Injustice: free markets generate unequal income distribution (Piketty)
• Oxfam Nobib: 1% richest own twice as much as the rest of world population
Two models of capitalism:
• Anglo-Saxon model (UK, US)
– Free market operation
– 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 (so not only for the interest
of the company, but for more stakeholders!)
Shareholders / Employees / Customers / Suppliers / Governments / Society
Greenspan (president of central bank USA) on free markets and the credit crisis in 2008:
• “I made a mistake in presuming that the self-interests of organizations, specifically banks and
others, were such that they were best capable of protecting their own shareholders and their equity
in firms.” this makes clear that our economic view is not just a technical view, it is mixed with all
kinds of assumptions and beliefs and even with certain values (like values of freedom, belief that self-
interest will lead to a good outcome). This leads to the debate on capitalism. In USA this debate is
hard because views are so much polarized (so no room for open debate).
Purpose and learning goals of the course:
• Purpose: To study the morality of markets by applying ethics to the evaluation of market
institutions
• Learning goals:
1. Knowledge of main ethical theories: memorize and define / compare and contrast / distinguish
- Utilitarianism
- Rights and justice ethics
- Virtue and care ethics
2. Apply ethics to critically reflect on economic institutions and policies: apply concepts, combine
with results of economic research, analyze
3. Develop and argue an own moral position on market institutions and policies: evaluate and
appraise, synthesize
4. Communicate the results of the reflection in a scholarly, clear, and comprehensive way: write,
present, defend
Method: combine moral standards and
economic knowledge
