Why Ethics Matters

Economics is thought to rely on the hardheaded calculation of rational self-interest; ethics is often portrayed as mushy do-goodism. Is there any useful connection between these subjects? This chapter makes the central bonds between these topics clearer and shows why critical thinking in economics can sometimes rely on a pluralist understanding of ethics. In addition to concern for an efficient outcome, people are motivated by considerations of justice and principles of duty and virtue. Different ethical frameworks offer complementary insights for positive and normative economic analyses.

THE MORAL ECOSYSTEM

O. J. Simpson—a flamboyant former professional football star and actor—was acquitted of double homicide in one of the twentieth century's most contentious jury trials. In 2006, publisher Rupert Murdoch planned to release Simpson's quasi-autobiographical account, If I Did It, of how he "might" have killed his ex-wife Nicole and Ronald Goldman. The public reacted to this news with outrage, and the book and a related television show were ultimately canceled amid widespread mockery.

But why should there be outrage? Many people wanted to read the book! Those who did not would not be forced to buy it. Standard economic logic would say that efficiency is enhanced when consumers get to buy the products they desire. So what was the problem? Clearly, a majority of citizens were repulsed by the notion that Simpson and his publisher were attempting to cash in on his notoriety as a potential murderer. Simpson's flirtation with a blockbuster confession was morally repugnant because moral norms were being violated.

In 2014 another celebrity, billionaire Donald Sterling, owner of the Los Angeles Clippers basketball team, was caught on tape making derogatory comments about his African American players and fans. The comments went viral over the Internet, causing widespread condemnation. Within days, major corporations withdrew their endorsements, and the National Basketball Association imposed a lifetime ban on Sterling. Violating moral norms (not showing proper respect for others) can have profound impacts in the marketplace.

Moral norms change, of course, so what was considered outrageous fifty years ago (selling on Sundays) is now widely acceptable in the United States. And an action that was considered by many to be proper three centuries ago (selling other human beings) is now considered abhorrent. Markets operate within a moral ecosystem—but that environment is not well understood by economists. The incorporation of ethical reasoning is as essential for economists as it is for anyone else seeking a liberal education—that is, as a preparation for tackling complex, diverse, and changing problems in real-world settings.

Ethics Defined

There are many ways to define what is meant by ethics. One working definition is:

Ethics is the study of one's proper interactions with others: It is the analysis of right and wrong.

Ethical beliefs and practices constitute a vast and unseen institutional force. A famous example is the generous tip that a satisfied traveler leaves at a highway restaurant—an eatery to which she never intends to return. Why would anyone leave a tip when there is no expectation of future reward? The typical diner shrugs and says it is customary to show generosity for good service; giving a tip is simply the "right thing to do." However, we can imagine deeper answers than this. Economic actors may leave a gratuity because they are altruistic; or diners may not want to incur the social stigma of not tipping; or they may believe that they have a duty to act in certain ways; or they self-consciously act in ways thought to be virtuous. A pluralist account of why we tip captures the complexity of ethical motivation. Of course, not everyone tips, so the simplistic account of the consumer as a selfish miser—Homo economicus or economic man—is correct much of the time. But the selfish actor model cannot fully explain highway tips or help us fully understand why O. J. Simpson's book was booed out of the market before production.

Enlightened Self-Interest

Human nature is thus complex and contradictory: sometimes selfish, sometimes altruistic, and sometimes just. Ethical egoism—the norm of doing best by "looking out for number one"—should never be underestimated. George Washington, camped at Valley Forge, Pennsylvania, during the harsh winter of 1778, learned this the hard way. Washington inspired his officers and troops to great personal sacrifices under the patriotic banner of independence. He called on them to fulfill their duties. At the same time, the Pennsylvania legislature adopted price controls on food that caused widespread shortages. Many farmers reacted to the law by selling their grain on the black market at higher prices to the rival British army while Washington's troops starved. Washington stoically observed:

We must take the passions of men as nature has given them, and those principles as a guide, which are generally the rule of action. I do not mean to exclude altogether the idea of patriotism. I know it exists, and I know it has done much in the present contest. But I will venture to assert, that a great and lasting war can never be supported on this principle alone. It must be aided by a prospect of interest, or some reward.

Washington, an astute observer, notes that different men, at different times, are moved by different motivations. No one size fits all, and in marshaling an army he had to understand these differing motives and instincts. Stereotypes of the greedy banker or the completely selfless saint do not help much because few people operate at these extremes. Most people, according to one recent theory, are "strong reciprocators" who are predisposed to cooperate and willing to incur costs on themselves to punish those who violate moral norms, even when it is difficult to conceive that such investments will recoup in the future. To some extent, people are pliable, and customs or rituals that evoke and bolster public-spirited motives can sway individual preferences toward prosocial aims.

Economists do not assume that people are always selfish because people may have preferences that are other-regarding. Being self-interested is not the same as being selfish (as elaborated in Chapters 8 and 9). Adam Smith's great work, The Wealth of Nations (1776), explores the workings of markets under the assumption...