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Ethics
And Economic Actors
Charles K. Wilber (University of Notre Dame, USA)
© Copyright 2003 Charles
K. Wilber
Introduction
Economics and ethics are interrelated because both economists (theorists and
policy advisers) and economic actors (sellers, consumers, workers, investors)
hold ethical values that help shape their behavior.
In the first case economists must try to understand how their own values
affect both economic theory and policy. In the second case this means
economic analysis must broaden its conception of human behavior.
In a previous article in this journal I dealt with the first issue. In this
article I will focus on the importance of the second issue-- economic theory,
with its myopic focus on self-interest, obscures the fact that preferences
are formed not only by material self-interest but also by ethical values, and
that market economies require that ethical behavior
for efficient functioning.
Values of Economic Actors
It is important to recognize that though Adam Smith claimed that self‑interest
leads to the common good if there is sufficient competition; he also, and
more importantly, claimed that this is true only if most people in society
have internalized a general moral law as a guide for their behavior.1 This means that the efficiency claims that
economists make for a competitive market system require that economic actors
pursue their self-interest only in "fair" ways. Smith believed most
people, most of the time, did act within the guidelines of an internalized
moral law and that those who didn’t could be dealt with by the police power
of the state.
One result of this recognition must be the acknowledgment that a better
conception of human behavior is needed. Thus, I
argue that (1) people act on the basis of embodied moral values as well as
from self-interest and (2) the economy needs that ethical behavior
to be efficient.
Hausman and McPherson recount an experiment in
which wallets containing cash and identification were left in the streets of
New York. Nearly half were returned to
their owners intact, despite the trouble and expense of doing so to their
discoverers.2 It could be
argued that altruistic motives-- modeled as the
concern for another’s utility as an element within one’s own utility
function-- ultimately are an extension of self-interested behavior. Such an argument is substantially weakened
in this case because the discovered wallets belonged to persons unknown to
the finders. Hence, the personal
satisfaction and pleasure stemming from the wallets’ return ought to be
significantly diminished, as altruistic sympathies are usually weaker with a
lack of personal familiarity. The
effort expended and the apparently unselfish behavior
demonstrated by those who returned the lost goods may, as Hausman
and McPherson assert, more likely reflect a commitment to societal norms than
a reflection of egoistic desires.
Similarly, it usually is argued that the provision of such goods as public
broadcasting and church services will be hobbled by the classic free-rider
problem that accompanies public goods.
Many consumers of these goods do indeed fail to respond to funding
appeals or shirk as the collection plate passes. This, however, does not
explain the motivation of the many who do give. Are we to attribute irrationality to those
who contribute to public broadcasting, for example, knowing that their gift
offsets the free-loading of others? In
the case of public church collections, it might be argued that the
anticipated approval of fellow church-goers entices contributions and their
threatened opprobrium dissuades stinginess.
Masking the amount of one’s gift in a closed fist or a sealed envelope
are effective and relatively costless, however, and suggest that perhaps a
sense of duty, obligation or gratitude might be more important in compelling
contributions to church collections.
It is not only for the sake of accuracy that economists should pay attention
to evidence that human actions are guided by concerns not solely egoistic,
but also because there are real economic consequences to non-egoistic behavior. Robert Solow has suggested that “principles of appropriate behavior” among workers may explain why labor markets are not fully clearing. Appropriate behavior
dictates that one not undercut a peer in order to get that person’s
position. As Albert Hirschman argues,
this example of seemingly non-self-interested behavior
may entail market inefficiencies and resulting costs, but most in society
(with the exception of many economists) would deem the portrait of human
interaction it paints as more than worth it.3
A Case in Point: The Supply of Blood
An example of the problem
of relying solely on self-interest is given by a comparison of the system of
blood collection for medical purposes in the United States and in England. In
his book, The Gift Relationship, Titmuss
questions the efficiency of market relationships based on purely monetary
self-interest principles.4 Instead he hypothesizes that in some
instances, such as blood giving, relying on internalized moral values (in
this case, altruistic behavior) results in a more
efficient supply and better quality of blood. Kenneth Arrow's response to Titmuss questions the extent to which altruism or other
internalized moral values may be counted upon as an organizing principle yet
acknowledges that there may, indeed, be a role for altruistic giving.5
The following covers some of the more salient points in the debate and
reflects on these issues in an attempt to clarify the role that embodied
moral values may play in the economy.
Titmuss focuses on the blood supply system in Great
Britain and the United States. The United States system has moved toward a
commercialized market system in which suppliers of blood are paid for the
service while in Great Britain the supply of blood depends on voluntary and
unpaid individual blood donors. Titmus argues that
the commercialization of blood giving produces a system with many
shortcomings. A few of these shortcomings are the repression of expressions
of altruism, increases in the danger of unethical behavior
in certain areas of medicine, worsened relationships between doctor and
patient, and shifts in the supply of blood from the rich to the poor.
Furthermore, the commercialized blood market is bad even in terms of nonethical criteria.
In terms of economic efficiency it is highly wasteful of blood; shortages,
chronic and acute, characterize the demand-and-supply position and make
illusory the concept of equilibrium. It is administratively inefficient and
results in more bureaucratization and much greater administrative,
accounting, and computer overheads. In terms of price per unit of blood to
the patient (or consumer), it is a system which is five to fifteen times more
costly than voluntary systems in Britain. And, finally, in terms of quality,
commercial markets are much more likely to distribute contaminated blood; the
risks for the patient of disease and death are substantially greater. It is
noteworthy that since the AIDS crisis started in the United States,
physicians regularly recommend that patients scheduled for non-emergency
surgery donate their own blood in advance.
Arrow attempts to restate Titmuss' arguments in
terms of utility theory. Thus the motivation for blood giving is reduced and
reformulated in the form of a utility function. One such form is (1) the
welfare of each individual will depend both on his own satisfaction and on
the satisfactions obtained by others. We here have in mind a positive
relation, one of altruism rather than envy. Another form is (2) the welfare
of each individual depends not only on their own utility and of others but
also on one’s own contribution to the utilities of others. By representing
altruism in this way, the incommensurability of self-interest and altruism
that is crucial to Titmuss' analysis is ignored.
However, the commercialization of certain activities that historically were
perceived to be within the realm of altruism results in a conceptual
transformation that inhibits the expression of this altruistic behavior. Contrary to the commonly held opinion that the
creation of a market increases the area of individual choice, Titmuss argues that the creation of a market may inhibit
the freedom to give or not to give. If this is true then Arrow's model that
treats apparent morally based behavior as a simple
addition to an ordinary utility function, seriously misrepresents these
issues. What is only mentioned in passing and downplayed by Arrow is that
market relations may often drive out non-market relations. Material
incentives might destroy rather than complement moral incentives.
The supply of blood provides a clear illustration of the problem. A person is
not born with a set of ready-made values, rather the individual's values are
socially constructed through being a part of a family, a church, a school and
a particular society. If these groups expect and urge people to give their
blood as an obligation of being members of the group that obligation becomes
internalized as a moral value. Blood drives held in schools, churches, and in
Red Cross facilities reinforce that sense of obligation. As commercial blood
increases, the need for blood drives declines. Thus, the traditional
reinforcement of that sense of obligation declines with the result that the
embodied moral value atrophies. In addition, the fact that you can sell your
blood for, say, $50 devalues the donation from a priceless gift of life to
one of a small monetary value. Finally, there is an information problem. As
blood drives decline it is rational for an individual to assume that there is
no need for donated blood. The final outcome is that a typical person must
overcome imperfect information, opportunity costs, and a lack of social
approbation to be able to choose to donate blood. The tremendous outpouring
of blood donations after September 11 indicates the latent altruism
available.
Economists often claim value neutrality in their analysis. But value neutrality
cannot be achieved merely by focusing on the efficiency results of a policy
recommendation derived from a theoretical model. The motivations on which the
results are based are also important, that is, how we achieve these
results needs to be addressed.
This problem arises because economists take preferences as given--they
neither change over time nor are affected by the preferences of other
individuals or society. Consequently, the process of preference formation and
the nature of the preferences that people have are ignored. That the
distribution of beliefs and behaviors at time t
influences individual beliefs and behaviors at time
t+1 is, however, the single most basic finding of the voluminous
research within sociology on the behavior of
groups.6
Beliefs and preference structures are important because they are the basis
for individual motivation. An understanding of these also gives us a notion
as to what are and what will encourage the continuation of certain valued
feelings. When economists look to self-interest to solve social problems they
are placing a higher value on and promoting their own beliefs about what is
proper motivation.
Even though neo-classical economists are seldom interested in why people
behave the way they do, society usually places a high value on motivations.
This is readily evident if one looks at the legal system. Consider a
situation in which a person shoots and kills someone else. The end result is
the same but depending on the motivation the act may be judged to be murder,
justifiable homicide, or even just an accident.
In short, three conclusions can be derived from our discussion of issues
raised by the Titmuss-Arrow debate. First, economic
policies have a direct effect on both market outcomes and individual values. Second,
economists should drop their narrow approach to human behavior
and join the rest of society in giving attention to the effect that policies
have upon values. How we achieve results is important. Finally,
economists must recognize that the policy impact upon values exerts its own
influence on future market activity. Thus, over time the type of values
promoted by public action has significance even within the `efficiency' realm
of traditional economic analysis.
Economists are often reluctant to depend on ethics. Ethics are perceived to
be a less stable attribute of human behavior than
self-interest. As Arrow states: “I think it best on the whole that the
requirements of ethical behavior be confined to
those circumstances where the price system breaks down... Wholesale usage of
ethical standards is apt to have undesirable consequences.”7
Certainly individuals, with particular needs and abilities, motivated by
self-interest do create consequences that often are benevolent. But there is
also a role for ethically based behavior. In
response to Adam Smith's “it is not from the benevolence of the butcher, the
brewer, and the baker that we expect our dinner, but from their regard to
their own interest,” the reality is that more than half of the American population
depend for their security and material satisfaction not upon the sale of
their services, but rather on their relationships with others. There are many
occasions on which reliance on the good will of others is necessary and more
reliable.
Internalized Moral Behavior vs. Self-Interest
I do not want to leave
the impression that ethically based behavior and
self-interest are necessarily mutually exclusive. Proximity to self-interest
alone does not defile morality. Moral values are often necessary counterparts
in a system based on self-interest. Not only is there a “vast amount of
irregular and informal help given in times of need”8; there is
also a consistent dependence on moral values upon which market mechanisms
rely. Without a basic trust and socialized morality the system would be much
more inefficient.
Peter Berger reminds us that “No society, modern or otherwise, can survive
without what Durkheim called a `collective
conscience,' that is without moral values that have general authority.”9
Fred Hirsch reintroduced the idea of moral law into economic analysis:
“truth, trust, acceptance, restraint, obligation‑‑ these are
among the social virtues grounded in religious belief which...play a central role in the
functioning of an individualistic, contractual economy....The point is that
conventional, mutual standards of honesty and trust are public goods that are
necessary inputs for much of economic output.”10
The expectation that public servants will not promote their private interests
at the expense of the public interest reinforces the argument that the
economy rests as importantly on moral behavior as
self‑interested behavior. As Hirsch wrote:
“The more a market economy is subjected to state intervention and correction,
the more dependent its functioning becomes on restriction of the
individualistic calculus in certain spheres, as well as on certain elemental
moral standards among both the controllers and the controlled. The most
important of these are standards of truth, honesty, physical restraint, and
respect for law.”11
Attempts to rely solely
on material incentives in the private sector, and more particularly in the
public sector, suffer from two defects. In the first place, stationing a
policeman on every corner to prevent cheating simply does not work.
Regulators have a disadvantage in relevant information compared to those
whose behavior they are trying to regulate. In
addition, who regulates the regulators? Thus, there is no substitute for an
internalized moral law that directs persons to seek their self‑interest
only in `fair' ways. The second
shortcoming of relying on external sanctions alone is that such reliance can
further undermine the remaining aspects of an internalized moral law. The
Enron case might be an example of the decline of those embodied moral values
in the market place. As discussed above, by promoting solely self-interest
society encourages that type of behavior rather
than ethical behavior. The argument is not that
there is no role for self-interest, but rather that there is a large sphere
for morally constrained behavior. To distinguish in
which sphere self-interest should be used and in which sphere altruism should
be promoted is very important and sends signals to society as to what we
value.
Conclusion
In conclusion, I claim that (1) self-interest alone does not adequately
explain actual economic behavior because economic
actors are also motivated by internalized moral values, such as trust and
honesty and (2) self-interest does not lead to efficient outcomes in the absence
of these moral values. The irony of mainstream economic theory is this: on
the one hand it is permeated, despite repeated denials, with ethical values
imported from its governing world view; on the other hand it fails to fully
understand that economic actors are motivated by more than material
self-interest and need to be if a market economy is to function
efficiently.
Endnotes
1. See Adam Smith, Theory of Moral
Sentiments (London: Henry Bohn, 1861);
A.W. Coats, ed., The Classical Economists
and Economic Policy (London: Methuen, 1971); and Jerry Evensky, "Ethics and the Invisible Hand," Journal
of Economic Perspectives, Vol. 7, No. 2 (Spring 1993), pp. 197-205..
2. Daniel M. Hausman
and Michael S. McPherson, Economic Analysis and Moral Philosophy
(Cambridge University Press, 1996), p. 34. It is interesting that
experimental studies by psychologists indicate that people are concerned
about cooperating with others and with being fair, not just preoccupied with
their own self-interest. Ironically, these same studies indicate that those
people attracted into economics are more self-interested and taking economics
makes people even more self-interested. Thus economic theory creates a
self-fulfilling prophecy. See Robert H. Frank, Thomas Gilovich,
and Dennis T. Regan, `Does Studying Economics Inhibit Cooperation,' Journal
of Economic Perspectives, 7, 2 (Spring 1993), pp. 159-171.
3.
Albert O. Hirschman, “Morality
and the Social Sciences: a Durable Tension,” in The Passions and the
Interests: Political Arguments for Capitalism before Its Triumph(
Princeton: Princeton University Press, 1977), pp. 304-5.
4. Richard M. Titmuss,
The Gift Relationship: From Human Blood to Social Policy (London:
Allen and Unwin, 1970).
5. Kenneth Arrow, “Gifts and Exchange,” Philosophy
and Public Affairs, I, 4 (Summer 1972), pp.343-362.
6. Steven Kelman,
What Price Incentives? Economists
and the Environment (Boston, MA: Auburn House Publishing Company, 1981),
p. 31.
7. Kenneth Arrow, “Gifts and Exchange,” p.
355.
8. Kenneth Arrow, “The Gift Relationship,”
p. 345.
9. Peter Berger, “In Praise of
Particularity: The Concept of Mediating Structures,” Review of Politics
(July 1976), p. 134.
10 Fred Hirsch, Social Limits to Growth
(Cambridge, MA: Harvard University Press, 1978), p. 141.
11. Fred Hirsch, Social Limits to Growth, pp. 128‑129.
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SUGGESTED
CITATION:
Charles K Wilber, “Ethics and Economic Actors”, post-autistic economics
review, issue no. 21, 13
September 2003, article 3, http://www.paecon.net/PAEReview/issue21/Wilber21.htm
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