Principles of Economics and Business 2: Moral Limits of Markets
Lecture 1: Do Markets Shape our Morals? ____________________________________________________ 2
Lecture 2: Do Markets have Moral Limits? ___________________________________________________ 5
Chapter 24: Asymmetric Information ________________________________________________________ 7
Lecture 3: Poverty & Inequality ___________________________________________________________ 10
Chapter 21: Economics, Ethics, and Public Policy ______________________________________________ 14
Lecture 4: Incentivising Morality in Markets _________________________________________________ 16
Chapter 22: Managing Incentives _________________________________________________________ 19
,Principles of Economics and Business 2: Moral Limits of Markets
Lecture 1: Do Markets Shape our Morals? 6 Jan. 20
Are morals inherent to markets?
• The Wallet Experiment → our values interact with our actions
• In our (market) interactions, we often act morally, even if it is not required from us
o Six day care centres in Haifa (Gneezy & Rustichini 2000. ‘A Fine is a Price’)
▪ More parents were late to pick up their children after the fine was imposed – they
felt less guilty because the fine changes it so parents are paying for a service (less
of a moral incentive)
• For markets and businesses to function optimally, we need “managers that are duty-bound to
respect the rights of owners” (Wight)
o Without such mechanisms, we cannot fully explain coordination or cooperation in markets
• Markets cannot function if the principles and agents
o Only take the outcome into account
o Only maximize a single value (e.g. utility)
• For markets to function optimally, they require balancing
o Virtue, duties/norms and outcomes, and
o Maximization of justice, well-being, self-realisation, happiness etc.
Three Normative Frameworks – Vertical Pluralism
• Virtue Ethics
o (Aristotle, Confucius, Elizabeth Anscombe)
o Moral character counts
o Judges decisions by the moral character of the agent
o When acting as a virtuous being, one’s actions will be the morally right actions
o Aristotle: virtue is the middle between two opposite extremes (e.g. cowardice vs. hubris)
o In order to be able to act morally right, one has to cultivate one’s virtue
▪ One must be a rounded person to make good decisions
• Deontological Ethics
o (Immanuel Kant)
o Principles / duties count
o Judges decisions by the duties they obey
o Non consequentialist
o The actions themselves are right or wrong
▪ Even if an action causes a better state of affairs, it is not necessarily the right action
o Kant: the principles on which one acts should be capable of being willed as a universal law
▪ E.g. killing innocent people is never right; lying is never right
o Problem – conflicting obligations
• Utilitarianism
o (Jeremy Bentham, John Stuart Mill)
o Only the outcome counts
o Consequentialist (teleological) form of ethics
o Judges decisions by their outcome
o Hedonist utilitarianism: only pleasure and pain count
▪ Those choices are morally right that give the greatest level of pleasure over pain
o Pluralist utilitarianism: many values count
▪ Pleasure, pain, beauty, truth etc. etc.
o Problem – weighing all the outcomes based on different values
▪ E.g. Trolley/train problem → utilitarianism: pull the level, save five people, kill one
• But what if the single person is your relative? What if the five people will
die tomorrow anyways? → deontological ethics
Horizontal/Lateral Pluralism
, Principles of Economics and Business 2: Moral Limits of Markets
• Within ethical theories, there are different views on what should be the guiding principle of value
• Utilitarianism: pleasure/pain vs- multiple values
• Deontological ethics: keeping promises vs. telling the truth
Attention Economics
• Businesses used to compete for our money, now they compete for our attention
• E.g. YouTube (makes money the more videos and ads you watch)
• Draw attention based on positive or negative emotions
o Negative emotions are easier to stimulate and manipulate
Do material interests influence our morals?
• Separability Thesis
o Two views:
▪ Morals have no place in markets (Wight)
▪ Morals play a role in markets but do not interact with out material interests in
markets
o Material interests and moral sentiments have separate effects on (market) behavior
o They are addictive, not interactive (Bowles 2008)
o “the effects of each [is] independent of the levels of the other” (Bowles & Huang 2008)
o If the separability thesis holds, as a consequence,
▪ Business decisions are considered to fall outside the domain of the moral
▪ Material interests and moral sentiments are believed to be separable in the sense
required by the conventional economic approach to policymaking
• Non-separability Thesis in business and economics
o Regarding their effects on (market) behavior, material interests and moral sentiments
interact with one another (Bowles 2008)
▪ Every business decision is also (in part) a moral decision
▪ Material interests and moral sentiments are not separable
o Bowles bases this claim on an extensive review of research on the effects of incentives on
out (market/business and moral) behavior
▪ Framing
• Incentives may (incorrectly) signal what behavior is considered appropriate
• Call something an ‘exchange’ and our ‘fair-minded’ behavior diminishes
▪ Endogenous preferences
• Incentives may cause us to internalize certain preferences
• Six day care centres in Haifa
▪ Self-determination
• Incentives may reduce the pleasure we get from performing a certain
action for its own sake if we are incentivized to perform that action for
monetary sake
• Maintenance & enhancement of intrinsic motivation depends of social and
environmental conditions surrounding the individual
• Competence, autonomy, and relatedness
▪ Conveying of Information
• Incentives may convey important information about the person setting the
incentives (government, chairperson of the board, CEO, etc.)
• This may lead agents to lose trust in the principle
• Nuclear waste in Switzerland
o Granting money → less people were willing to have this disposable site next to their village
▪ More people were willing when no money was offered
o Government is conveying information about what they think this is worth (when you may
think this sacrifice is worth more)
