Summary for P Eco. & Economic Ethics for ECO.
Includes all lecture slides, explanations from the lectures and extra explanation from the book
according to the book “Markets and Morality: On Economic Freedom, Happiness, Justice and Virtues”
Phil. of Eco. & Economic Ethics for ECO
What is economics?
Neo-classical approach: the science which studies human behavior as a relationship between
ends and scarce means which have alternative uses.
- Ends are given disconnection with ethics ( new wc )
- All means are tradable and have instrumental value (kill crocodiles for in your car)
What is ethics?
Study of morality
Morality = standards that an individual or a group has about what is right and wrong
- Values ( happiness, justice, freedom)
- Norms = concrete behavioral rules ( thou shall not steal)
- Virtues (how people are/what they tend to do: honesty, prudence, industry)
Moral dilemma
Moral standards = comply to the law, firing/hiring employees
Practical standards = make more profits
What is economic ethics? has the same object of study as economics. It reflects on moral
standards that apply to economic phenomena.
Micro = evaluate the behavior of an induvial given a ( market ) structure
Macro = evaluating the structure itself ( institutional environment)
Social ethics = societal structures ( economic / political, is voting systym oke )
Difference and link between descriptive and prescriptive statements
Economics makes descriptive statements about the economy positive/knowledge about “what is”
Ethics makes prescriptive or value statements normative/knowledge of “what ought to be done”
or “what should we aim at”.
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
How their goal can be raised most efficiently with an instrument
– Policy advice: use policy instrument y
,Example 1
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
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
On what values are the classical defenses of the free market based?
John Locke: the free market economy respects the right to freedom. Earn the money they make and
spend the money in the way they want.
Adam Smith: the free market economy will produce the greatest benefits:
– Labor division generates higher productivity and innovation ( competition)
– prices tend to the lowest possible level
– competition generates efficient allocation
“No society can surely be flourishing and happy, of which the far greater part of the members are
poor and miserable.”
Was Adam Smith right? 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
Theory of unintended consequences
Greatest benefits are realized by self-interest of economic agents
– 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)
Criticism on free market economy
With self-interest nobody will care about negative externalities. Only me driving a car does not have
a big effect but all together do have an global effect.
Efficiency
– Companies have an incentive to reduce competition
– Negative externalities (e.g. pollution) self-interest is not always socially efficient
Other ethical values
– Justice: 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 should not intervene in the market with min.
prices or assistance. Government should only protect the freedom in the market.
– 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)
– Goal is to aim at shareholders and maximizing stock value. Interest of manager and
shareholders are in line.
• Rhineland model (Germany, France)
– Market operation, but within some limits. Bigger role for government.
– Government regulates the market and provides for welfare state
– Stakeholder model for companies: balance of interests of stakeholders
• Shareholders / Employees / Customers / Suppliers / Governments / Society
– Continuity of the firm most important because then people will hold their jobs.
Greenspan on free markets and the credit crisis ( president)
“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.”
Philosophical source of inspiration of Greenspan: Ayn Rand ( writer in US)
• Ayn Rand: Atlas Shrugged ( book)
• The world takes away the freedom of the entrepreneurs.
– Only self interest is rational
– Solidarity is a vice and leads to injustice ( community of feelings, bad habit)
– “Never live for another and never ask others to live for you”
– Laissez-fair capitalism
, Utilitarianism
Should polluting industries be concentrated in 3rd world countries?
Note of Lawrence Summers
- Poor countries have low wages earnings foregone from increased mortality is lowest
- Costs of pollution are progressive
- Rich countries value clean environment more than poor countries
- High pollutive industries go to poor countries
What is the criterion for right in utilitarianism
- The greatest happiness of the greatest number ( Jeremy Bentham)
All people together
- An action is right if and only if the sum total of utilities produced by that act is greater
than the sum of total of utilities produced by an other act the agent could have
performed in its place
3 characteristics of utilitarianism
1) Consequentialism: judges the ethical valuation of a policy in term of consequent
effect/resulting
- Not the process but look at the consequences/outcome that will happen after we
implement the policy.
- How high should the fine be for environmental damage. Consequences if the fine high
enough so that firm will comply to the law in the future but the fine should not be to
high so the firm will be bankrupted.
- The question whether they deserve to pay compensation will not be taken into account
2) Welfarism: the only goal is utility/welfare ( what kind of consequences?)
- Bentham: utility is pleasure/happiness ( hedonism/monism), calculated the pleasure and
the cost
- Economist: let people decide themselves how much utility they receive from an outcome
Utility is satisfaction of actual preferences ( individual sovereignty: individuals are the
best judges of their own welfare. Individual utilities are the sole base for evaluating an
action or policy)
3) Sum ranking: total sum of utilities should be maximized with equal weight to utility of
different individuals.
- Evaluate the utilities of the poor and rich equally
Applying utilitarianism by cost benefits analysis
Cost benefit analysis: determine for all policies to be investigated
1) Who is affected and how?
2) How much are they willing to pay for each policy? If they are negatively affected: how much
compensation would they require?
- Ask people how much compensation they need so they aren’t harmed
- Evaluate in prices
3) Determine the sum of these individuals valuation and select the alternative with highest net
benefit
Not only the economic effect but also attention to happiness of the people
Advantages of utilitarianism/cost benefit analysis:
- Systematic analysis of all consequences
- Includes utility effects that are not priced by the market
- It links to current interest in happiness research
, Trade in waste: from window 7 to window 10 a lot of other things on your computer could become
inefficient and you need a new computer.
Cost benefit analysis
Criticism on utilitarianism
1) Consequentialism
Can violate individual right of local population because they don’t have a say in it. They are
forced into it. It violates their right
2) Welfarism
- Preferences of leaders can be perverse. Are these preferences good and acceptable? Can
leaders use the money for their own power. It accepts also perverse preferences
- Happiness is not the only relevant argument in evaluating an action. Sometimes doing
something moral or good is important too like not selling the business of your mother’s
generation although you don’t like it.
- Commensurability states than an agent can compare all values. Tradeoff between
different values hard ( praying vs working)
- No rationality = sexual preference to rape someone
3) Problems of sum ranking
Utilities are difficult to compare
- Are dependent on circumstances the rich can pay higher prices for improving their
utility than poor people their interest count more than the interest of the poor cost
benefit analysis would reproduce the inequality of the status quo in its results
- We ask people to value the outcome in terms of money. How much are you willing to pay
or do you need for the harm. People in Africa value wealth lower than rich people. Their
interest counts less in the total sum than the rich.
Correction is needed: equivalent scale to count more equally for the poorer people
involves moral judgement
- How should we weight the utility effect on animals. Difficult to weight the consequences
for animals. How much money to spend on animal welfare
Peter Singer is a writer on animal welfare, book: Animal displays
intelligence
Their suffering should receive equal consideration. Their rights should be
as high as human rights.
Experiments for medicine on animals oke?
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