Ethics and Economics
By Stephen R. C. Hicks
Is capitalism good? Should we admire hard workers who are motivated to make large profits? Does competition bring out the best in people? These questions juxtapose practices and institutions that economists study (capitalism, profits, competition) with concepts that ethicists use (good, admirable, best).
Ethics studies values and virtues. A value is a good to be achieved or a standard of right to be followed, while a virtue is a character trait that enables one to achieve the good or act rightly. For example, a list of core goods might include wealth, love, and freedom. A corresponding list of virtues—or character traits—might include the productiveness that enables one to achieve wealth, the honesty that enables one to enjoy loving relationships, and the self-responsibility that enables one to live in freedom.
Ethical issues connect intimately with economic issues. Take the economic practice of doing a cost-benefit analysis. You could spend one hundred dollars for a night on the town, or you could donate that one hundred dollars to the reelection campaign of your favorite politician. Which option is better? The night on the town increases pleasure. A politician’s successful campaign may lead to more liberty in the long term. We regularly make decisions like this, weighing our options by measuring their likely costs and likely benefits against each other.
This connects economics directly to a major issue in ethics: By what standard do we determine what counts as a benefit or a cost? A list of competing candidates for the status of ultimate value standard includes happiness, satisfying the will of God, long-term survival, liberty, duty, and equality.
Economists implicitly adopt a value framework when beginning a cost-benefit analysis. Different value commitments can lead to the same item being considered a cost from one perspective and a benefit from another. For example, those whose standard of value is increasing human happiness would count a new road to a scenic mountain vista as a benefit, while those whose standard is maintaining an unchanged natural environment would count it as a cost.
The results of economic analysis also lead directly to ethical issues. For example, one result of the nineteenth- and twentieth-century debate over capitalism and socialism is a general consensus that capitalism is effective at producing wealth and socialism is effective at keeping people poor. Advocates of capitalism use these results to argue that capitalism is good; others might respond that “socialism is good in theory, but unfortunately it is not practical.” Implicit in the capitalist position is the view that practical consequences determine goodness. By contrast, implicit in the position of those who believe socialism to be an impractical moral ideal is the view that goodness is distinct from practical consequences.
This connects economics to a second major issue in ethics: Is goodness or badness determined by real-world practical consequences or by some other means, such as revelations from God, faith in authorities or authoritative institutions, appeals to rational consistency, felt senses of empathy, or an innate conscience? The point for economic analysis, most of which is a matter of understanding and predicting the consequences of various actions, is that the relevance of economic analysis to policymaking depends, in part, on what one believes is the final source of value standards.
So far, we have two questions of ethics that bear directly on economics: (1) What is the standard of good? and (2) How does one establish that something is good?
A third relevant question of ethics is: Who should be the beneficiaries of the good? A common assumption of economic analysis is that individuals are rational and self-interested. The third question focuses on self-interest. Is self-interest moral, amoral, or immoral? Is morality a matter of individuals taking responsibility for their lives and working to achieve happiness? Or is morality a matter of individuals accepting responsibility for others and being willing to forgo or sacrifice for them? This is the debate in ethics between egoism and altruism.
Strong forms of egoism hold that individuals should be self-responsible and ambitious in their pursuit of happiness, that they should treat other individuals as self-responsible trading partners, and that those who are unable to be self-responsible should be treated through voluntary charity. Strong forms of altruism argue the opposite, holding that morality is primarily a matter of helping those who are in need, that charity is more moral than trade, and that the most moral individuals will be motivated by a spirit of self-sacrifice.
For example: Carly worked hard and earned $10 million by the time she was forty. She is now in semiretirement, enjoying the good life of travel, building her dream home, managing her investments, and spending time with her family and friends. Jane, by contrast, inherited $10 million at age forty, gave $9.9 million away to charity, and lives frugally on the remaining money. Which woman is more morally admirable?
Or consider the debates over rent control and minimum wages. Economists, by a large majority, agree that such policies are not merely zero-sum, as their advocates intend, but rather negative-sum. In this encyclopedia, Walter Block (see rent control) argues that rent controls cause landlords a loss—and also cause housing shortages that harm some of the poorest renters the most. Linda Gorman (see minimum wages) argues that minimum wages cause employers a loss—but also destroy jobs for unskilled laborers. These unintended consequences are well known among economists, but there is little sign that rent controls and minimum wages will be abandoned anytime soon.
Why so? In the case of rent controls, part of the explanation involves the political dynamics of urban areas, in which many voters are renters: renters believe that rent control is good for them, and politicians sometimes listen to their constituents.
Yet another major part of the explanation has to do with an altruistic ethic that says that the self-interest of landlords and employers counts for little morally and may be sacrificed to help tenants and employees. The thinking is that landlords and employers are richer, and tenants and employees are poorer, and thus rich people should be willing to sacrifice profits to help out the poor if necessary. But if we cannot expect the rich to do the right thing voluntarily, then an altruistic ethic will help justify the government’s mandating the sacrifice by law.
The moral difference between egoists and altruists on these economic policy issues is between those who see employers and employees as win-win trading partners and those who see employment as exploitation; and between those who see landlords and tenants as trading value to mutual benefit and those who see poor tenants vulnerable to being taken advantage of by rich landlords.
Generalizing from debates over particular policies to evaluations of economic systems as a whole, Adam Smith’s famous statement about self-interest from The Wealth of Nations is directly relevant to our contemporary debates about the morality of capitalism:
It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.
Smith is working out a middle ground between traditional ethical theories that have been altruistic in principle and his new (at the time) economic theory that is optimistic about the power of egoistic individuals in a free market. Smith’s position is modern and egoistic in accepting that self-interest is natural and beneficial in making capitalism work well; at the same time Smith is traditionally altruistic in reserving his highest praise for those who take a disinterested perspective on their own interests and are willing to sacrifice their interests.
Bracketing Smith’s view on one side is a traditional view of self-interest, one still held by most of capitalism’s contemporary opponents: Self-interest is amoral or immoral because it is essentially antisocial; and because it is based on self-interest, capitalism must be a system of conflict and zero-sum transactions. And because the good of society as a whole is the standard of value, it follows that self-interest and capitalism must be restrained or sacrificed.
Smith’s economic insight is to see that self-interest and capitalism do not generate social conflict. His analysis led him to see that self-interested individuals would mostly engage in win-win transactions—that the profit motive, property rights, divisions of labor, competition, and other features of capitalism would lead to individual prosperity and social harmony. But Smith retained the traditional ethical belief that the good of society as a whole is the moral standard of value.
Bracketing Smith’s view on the other side is the view—held by neo-Aristotelians and Ayn Rand, for example—that self-interest is moral and that what justifies capitalism is its protection and enabling of individuals in the pursuit of their individual lives and happiness. This position agrees essentially with Smith’s economic analysis of capitalism as a network of win-win transactions, but not with his primary ethical justification.
Both ethical and economic analysis quickly become complex, and the three questions noted above provide a starting point for integrating the two fields.
Our contemporary debates over environmental values and policies can help illustrate the complex interplay. Environmental debates are about two categories of human action: resource use and waste disposal. For example, whether we are running out of trees and whether we should drill for oil in Alaska are issues of resource use; and whether toxic chemicals are poisoning a water supply and whether greenhouse gases are causing global warming are issues of waste disposal. Some issues, such as recycling, are issues of both resource use and waste disposal.
We end with the case of recycling of metal drink containers as a working example. Part of the motivation for recycling may be a belief that the world is running out of a natural resource—in this case, aluminum. In part this belief depends on strictly scientific information: How much aluminum is available from the Earth? How much are we currently using? As mining and processing techniques improve, what effect will that have on the available stock of aluminum? Depending on the scientific data, one might conclude that aluminum is becoming more plentiful or scarcer (see natural resources).
Another part of the recycling issue integrates economic considerations. Recycling can increase the available stock of aluminum and save space in landfills, but it also has costs: the costs of making and installing recycling bins for empty cans, the monetary and pollution costs of having recycling trucks travel through neighborhoods and businesses to collect the recyclables, the time cost of putting the cans in the right bins, the cost of reprocessing the cans to extract the raw aluminum, and so on. Whether the benefits of recycling outweigh the costs depends on the results of number crunching by economists.
Another part of the recycling issue turns on general political commitments. Given that using resources well and putting trash in its place are valuable, what social institutions should we rely on to achieve those values? Should recycling be voluntary and a matter of market incentives? Or should the government mandate recycling as part of a broader mandate to manage society’s resource use and waste disposal practices? (see tragedy of the commons and free-market environmentalism).
Governing how we approach the above scientific, economic, and political issues is a set of presuppositions of ethical values. Those who think egoistically see the environment as a set of resources for humans to use for their benefit. Humans use the environment for a variety of economic and aesthetic purposes, and it is important to human health that certain standards of cleanliness are maintained. On that assumption, it makes sense to ask scientists to investigate the stock of resources and to develop techniques for extracting them. It also makes sense to ask economists to do cost-benefit analyses comparing mining and recycling to determine the most cost-effective methods of producing aluminum. The egoistic goal is to preserve, change, or use the environment in ways that increase human wealth, health, and experiences of beauty.
By contrast, strong forms of altruism when applied to environmental issues dictate different scientific and economic priorities. Altruism with respect to the environment requires that humans subordinate or sacrifice their interests to the needs of other species or to the environment as a whole. Given this perspective, the environment is something to be preserved rather than used by humans. Human self-interested values are a lower priority than the well-being of other species or the environment as a whole. Scientifically, asking researchers to find out how much aluminum is available for our use then becomes a morally suspect activity. And economically, recycling then becomes not a matter of a practice worth doing if the cost-benefit numbers work out for us but rather a duty that humans should accept no matter what the economic consequences to themselves.