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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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