Arnold Kling  

Economics and Moral Intuition

Economic Education... Foreign Aid and Growth...

Here's one for all those with a philosophical bent, from Robin Hanson via Tyler Cowen. How does economics, which talks about the positive effects of self-interest, square with moral intuition?

we economists...seem to be constantly giving people excuses and social support for violating what most people see as moral boundaries. And we seem to have weak consciences ourselves. So we seem to be a big cause of evil people.

I believe that Armen Alchian once wrote an essay in which he argued that altruism is scarce, and that economists show how to economize on its use. Thus, unlike Robin Hansen, quoted above, Alchian treats the supply of moral intuition as fixed and views markets as a way of keeping people from having to waste it.

I think this is on the right track. I like to start with Alan Fiske's anthropological model, in which there are four modes of human transactions: authority ranking; communal sharing; equality matching; and market pricing.

Of these, communal sharing is the one that requires the greatest moral intution. I believe that communal sharing is a good idea in familes and in other small groups where people know one another. But when it is extended to larger groups, and particularly to entire countries, it seems to degenerate into authority ranking, i.e., dictatorship.

Market pricing requires little moral intuition. However, as Hanson points out, it does little to reinforce moral intution. Thus, if you were to raise your children on a purely economic model, you might very well dull there moral sensibilities.

My feeling is that there are enough market opportunities to exercise one's intution for calculation and impersonal exchange; and there are enough family and small-group opportunities to exercise one's intution for communal sharing. I don't think that economists need to worry about whether we are dulling the sense of morality. On the contrary, I believe that the moral sense is dulled in situations such as the Soviet Union, in which the market was replaced by Communist Party corruption.

UPDATE: See also this article by Jerry Z. Muller.

Self-interest is linked to mutual concern every time a sales clerk asks, "Can I help you?" That phrase is often derided as phony and manipulative--except by those who have lived in societies where sales clerks ignore customers. The sales clerk's commercially motivated solicitude does lack true charity and altruism. But, seen historically, the market's ability to create a self-interested regard for others is surely preferable to the alternatives.

For Discussion. Is there a case for Hanson's concern that economists are undermining moral intuition by what we teach?

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CATEGORIES: Economic Philosophy

COMMENTS (8 to date)
Tom Dougherty writes:

Economics and morality

Could some concrete examples be provided where economics undermines morality? Economics is supposed to be value free and not a system of ethics. Complaining that economics is bad for morality is sort of like complaining that physics causes tooth decay or calculus isn’t nutritious.

The law of association says that cooperating with my fellow man will raise my standard of living. Even if I produce everything more efficiently than my neighbor, it will benefit both of us to exchange with each other. If I produce what I have a comparative advantage producing and he produces what he has a comparative advantage producing relative to me, then total output is increased and both of us will be better off through exchange.

The war of all against all will not lead to an increase in output between us and we will be worse off. Economics does not tell you which end to choose (cooperation or total war). It does tell you that if your goal is to raise total output and increase welfare, then you will not achieve it with total war but you will with cooperation. The economist as citizen may advocate cooperation as a mean to increase welfare, but economics itself is not ethics and is silent on the ends one chooses.

Economics shows that socialism leads to an irrational allocation of resources, a lack of economic calculation, losses and poverty. With capitalism, on the other hand, resource are allocated rationally, economic calculation is possible, and losses and poverty are much less under capitalism than with socialism. Economics doesn’t says which economic system one should choose merely that if one’s goal is to pick the system that rationally allocates resources and increases the welfare of the people then one must pick capitalism. A socialist may say that his goal is to make everyone equally miserable. Economics is silent on the socialist goal. Economics does not argue that it is immoral to make people miserable. That is up to ethics.

Lawrance George Lux writes:

The denial of Self-Interest is, in itself, immoral! It becomes simply a demand that Oneself, or Others, effectively operate under some form of Slavery. I have yet to understand such pretentious claims of altruism. lgl

gerald garvey writes:

Here is a counterexample I often encounter. By focusing on efficiency, we often really clarify and improve both the basis and delivery of things like charity. For example, about a decade ago I had a long talk with an Aussie student who had done work with aborigines in the Northern Territory. Turns out his main frustration was the inefficiencies programmed into the gov'ts systems for delivering care. He simply could not get approval to spend about $5 per person to set up simple tin shelters. His view (and unlike his overseers, he was actually there on the ground) was this would have made a huge difference to quality of life at very little expense. Notice also that the focus on efficiency also focuses you on the welfare of the unfortunates you are trying to help. Other, noneconomic approaches to the problem often end up serving the egos of the caregivers

Ronnie Horesh writes:

Economists do tend to assume that an economic system that maximimises certain [relatively] easily measured aggregate numbers is best for society. But a complex economy, while it generates enormous wealth, relies on extreme specialisation of labour, which makes it more difficult for people to identify with each other.

Monte writes:

“Is there a case for Hanson's concern that economists are undermining moral intuition by what we teach?”

No more so than for the mentors of any other profession. Knowledge obtained from any discipline can be used for good or evil. It is the individual that must ultimately bear the responsibility for intent. Hanson’s idea that self-interest must be suppressed in order to avoid the potential for human conflict is misguided. On the contrary, as Ayn Rand so eloquently observed, “…[man] must work for his rational self-interest, with the achievement of his own happiness as the highest moral purpose of his life.”

Roger D. McKinney writes:

It's true that the emphasis on self-interest in modern economics can thwart efforts at teaching altruism. So partially for that reason I think the emphasis on self-interest should be removed from economics. But mainly we should abandon self-interest because it focuses attention on an issue that is peripheral to capitalism. Capitalism never has glorified self-interest; but it does promote individual freedom. In the age of A. Smith, people asked how they might rein in the human tendency toward selfish behavior if every man was free to do as he wishes. (Until capitalism, individual freedom was limited by the church and state.) The obvious answer is that real morals come from religious instruction. But Smith responded that we need not worry about selfish behavior, or self-interest, because the market will limit its effects on society and can turn it around for the general welfare. So I propose that we quit talking about self-interest and instead promote individual liberty as the hallmark of capitalism.

William K. Black writes:

Two related real life examples. First, a George Mason Law School law & econ. professor reacted to a comment I had made discussing the high percentage of real estate developers (v. "traditional" S&L owners) who entered the S&L industry between 1981-84 who became frauds by responding that there was no need to inquire into the differences between the two groups of managers because "we know what caused the S&L failures." (I was a senior S&L regulator at the time; the professor had no particular expertise in the field.)

I asked him what he thought caused the failures. He said that it was a classic case of moral hazard, the S&Ls that failed were already insolvent due to the 1979-82 interest rate crisis and failed catastrophically while "gambling for resurrection" in higher (credit) risk activities. I said that one difficulty with his explanation was that every S&L was insolvent by mid-1982 but only a small percentage of those that continued under their prior managers (roughly five percent) became "high fliers" and seriously increased credit risk.

He then gave me the look reserved for the dullest of undergraduates and asked: "Did it ever occur to you that the rest were just stupid?" (That is an exact quotation.) I said that the stupidity hypothesis had occurred to us, but because every "high flier" failed while failures among the traditional managers were infrequent we had rejected the hypothesis that the high fliers were smart and the traditional managers were stupid.

His comments represent the perfect reductio ad absurdum of this branch of law and economics -- if you have an incentive to engage in abusive behavior but you do not do so you are not ethical, but "stupid".

Similarly, by recasting "moral hazard" in the S&L debacle context as maximizing the value of the deposit insurance "put" option, economists have taken the "moral" out of moral hazard. It becomes "irrational" (not "moral") for the owner not to optimize the value of the option by engaging in fraud or high risk gambling.

By the way, beyond the ethical issues, the failure to consider ethical and social restraints against abusive behavior means that economic models generally greatly overpredict economic crimes by firms. These predictive failures should trouble economists regardless of their normative views about economics and ethics.

Bill Black
Assistant Professor, LBJ School of Public Affairs, University of Texas at Austin
Interim Director, Institute for Fraud Studies, University of Texas at Austin

Scott M. Harris writes:

The problem with marginalist economics is that it is based on allocating resources efficiently. The concept of efficiency presumes a fixed stock of knowledge. This presumption tends to be self-fulfilling. Thus, marginalist economics tends to blind us to the possibility of solving our problems by creating knowledge.

The bottom line is that marginalist economics should never be used to help us formulate alternatives. It should only be used to help us evaluate alternatives. This is completely consistent with Friedman's book on methodology, Essays in Positive Economics.

Despite the fact that Essays in Positive Economics is the most cited work in economic science, few economists, to say nothing of their students, are clear about the need to distinguish theories that predict, which help us evaluate alteratives, from theories that explain, which help us formulate them. Until economists are clear, they will tend to misuse marginalist economics.

Is Paul Samuelson’s definition of economics as the study of how societies choose to allocate resources efficiently “value free”? Is it truly positive? I don’t believe so. Samuelson's definition is based on the same prevailing concept of justice that John Rawls’s theory of justice is. It is positive only in that it reflects prevailing values. Are prevailing values "value free"?

Rawls asks us to imagine what theories we would choose if we were ignorant of the circumstances of our birth. For this imagined original position of ignorance to produce a complete theory of justice, we must consider what rules we would want to guide intelligent life if we were completely ignorant of the circumstances of our birth, which includes ignorance of what species we will be and into what era we will be born. Under these conditions we would want intelligent beings to satisfy their needs efficiently as this minimizes killing and suffering. We would also want intelligent beings to devote themselves to helping other life survive and thrive (with preference given to other intelligent life). In short, we would want intelligent life to pursue Schweitzer’s normative end of reverence for life.

Samuelson's definiton of economics is based on the prevailing concept of "social justice." I prefer to think of it as founded on "tribal justice" in that this term reminds us of how exclusive it is.

The alternative is to define economic science as the study of the ever-evolving process of discovering, testing, and applying knowledge useful in living good lives. Until all of us act wisely, managing this process well requires distinguishing between theories designed to help us predict, which help us evaluate alternatives, and theories designed to help us explain, which help us formulate alternatives.

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