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Economics Is Crucial for Ethics

Economics / Economic Theory Apr 21, 2010 - 11:49 AM GMT

By: Art_Carden


Best Financial Markets Analysis ArticleI assume that we all want to use the lives we've been given to make the world a better place. This isn't as straightforward as it seems at first. It is insufficient merely to think globally; and depressingly many kinds of acting locally are positively destructive. I have been asked to consider a handful of questions: I'm supposed to discuss the most pressing issue in the world, whether it is getting better or worse, and what we can do about it. I have also been asked what we can do to reduce infant mortality in Memphis. Finally, I've been asked what "thinking globally and acting locally" means to me. I will discuss each in turn.

Poverty is the most important issue in the world, because it is the ultimate arbiter of who lives and who dies. We have made a lot of progress in the last two decades, particularly with the continued integration of India and China into the global economy and increases in economic freedom in both. We have made a lot of progress, but there are still a lot of problems. The most important problems, I think, are unreflective activism and uninformed dissent. These stand in the way of our development as ethical people.

Come again? Did I, an economist, say "ethical"? Yes, I, an economist, said "ethical." I tell my students that economics as such cannot tell you which values to have, but I would argue that endeavoring to understand what careful economic reasoning can say about the world is an important part of being an ethical person because the unintended consequences of policies that fly in the face of basic economic reasoning have been tragic. The cruel irony is that poverty can be institutionalized by policies supported by allegedly well-meaning activists who don't understand the ramifications of the policies they advocate.

I encourage you, therefore, to take steps toward developing a good ethos. Avoid the presumption that other people need you to act as their moral surrogate. In one of the most famous passages in Adam Smith's Theory of Moral Sentiments, Smith speaks of "the man of system." It is worth quoting him at length:

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder. (paragraph VI.II.42)

In modern parlance, don't be "that guy." When you identify a source of social tension, realize that the source of the tension might not be the ignorance, idiocy, or venality of the people you want to control but your desire to control them.

Don't think that you have all of the answers, and avoid being motivated by self-congratulation. Sincere good wishes will not prevent a policy's consequences (both desirable and undesirable). We're all sincere, presumably, but you can't get justice and prosperity merely by wishing for it. Again, this is a deadly serious issue.

Part of becoming a responsible adult — a status that a lot of people fail to achieve, sadly — is dropping the expectation that you will be let off the hook for the consequences of your actions because you meant well or because you didn't intend to do harm. Economists are criticized sometimes because we don't consider ethical issues in economic analysis per se, but a similar charge is perhaps more accurately cast at our critics. Here is Steven Horwitz on the intersection between ethics and economics:

It might be more accurate to say that ethicists ignore economics than that economists ignore ethics. To the extent that good economics shows what we can and cannot do with social policy, it is engaged with ethics. After all, if the point of saying we ought to do X is that we think it will achieve some set of morally desirable goals, then knowing whether or not doing X will actually achieve those goals is, or at least should be, a key part of moral inquiry.

Sheldon Richman from the Foundation for Economic Education has described a similar tendency — to focus on moral goals without considering whether the policies we advocate will achieve those goals — as the intellectual equivalent of drunk driving. No drunk driver gets behind the wheel of a car intending to cause damage or death. Similarly, no one advocates an increase in the minimum wage intending to cut the bottom off the economic ladder and make it harder to escape poverty.

When a drunk driver causes a highway death, whether he or she intended to kill someone is irrelevant to the fact that it happened. When raising the minimum wage shuts poor people out of the labor market, whether advocates of the minimum wage intend for that to happen is also irrelevant.

Economic reasoning helps us expose absurdities in seemingly noble moral pronouncements. Here are two examples. The Queen of England excoriated economists for being unable to see the financial crisis coming. William Easterly pointed out that we actually did better than predict the crisis. We predicted that we wouldn't be able to predict it. Hindsight is 20/20, and saying "yes, asset prices were wrong" is not an indictment of economics or of financial markets.

We can theorize about the general conditions under which recessions occur, but we can't systematically predict the specifics of crises, panics, and other disasters, because anyone who can has an incentive to act on and profit from his or her superior insight. If you are making money hand over fist exploiting inefficiencies in the market, then I will believe you and listen to your criticisms of efficient markets. Until then, I've seen nothing to suggest that markets are systematically inefficient in a knowable, predictable way.

Here is a second example. You have perhaps heard a commentator say that the problem with business is that it only thinks about the short run. Executives only care about the next quarter's earnings report. This is wrong.

Companies and corporations are bound to have long-run time horizons because the price of a stock represents the discounted present value of earnings accruing to the firm's assets. Making decisions that increase short-run profitability at the expense of long-run profitability will lower the value of the firm's assets and, therefore, reduce the price of the firm's stock. If you think that you have correctly identified such a situation, then the proper response is not a condemnation of the firm and its unethical executives but a leveraged buyout.

If markets are allowed to function, the notion of an undue focus on the short run is not a valid criticism of businesses. It is, however, a valid criticism of political action, because political actors and profit-maximizing firms face different incentives.

I am a residual claimant to the profits generated by the firms in which I hold stock. I am not a residual claimant to anything held by the government. I have an incentive to see that the firms in which I am a stockholder manage my money wisely. I have less-powerful incentives to see that the government does not waste resources.

"When you identify a source of social tension, realize that the source of the tension might not be the ignorance, idiocy, or venality of the people you want to control but your desire to control them."

Further, the principal-agent problem inherent in any hierarchy is less pronounced in the private sector than it is in the government. Executives and mid-level managers who mismanage my money can be fired and replaced without too much difficulty. It is much more difficult to get rid of politicians and bureaucrats, who have vague objectives and who cannot engage in rational economic calculation because they are not disciplined by prices, profits, and losses.

Prices, profits, and losses send clear signals. To adopt a vivid but not-entirely-correct metaphor, losses are the blood in the water of shark-infested financial markets: stop bleeding, or you will be devoured.

So what of "thinking globally" and "acting locally"? The best thing you can do "locally" is to try as hard as you can to understand the world around you. I would argue that this requires intensive and careful study of economics (which is the logic of choice) and probability (which is the language of science). In everything, remember to do justice, love mercy, and walk humbly with your God. The operative word here is not justice or mercy, but "humbly." A lot of people have failed to walk humbly. In the process, they have caused untold suffering.

My outlook is not based on naive assumptions about human goodness, nor on Pollyannaish ideas about markets producing utopia, but on my conviction that I haven't the wisdom to claim the right to substitute by force my judgment for someone else's. Those who have claimed this prerogative historically have been the source of great pain and suffering.

The world today is richer than it has ever been. Nonetheless, governments which were "very wise in (their) own conceit" killed about a quarter of a billion people in the 20th century. History gives lots of space to the great thinkers and innovators of the last couple of centuries, and I don't want to take away from their achievements. But how many great thinkers and innovators perished in the gulags? How many died in slave ships? How many are buried in mass graves somewhere? We will never know.

Let's get specific and consider infant mortality. Make sure you have your facts straight, and make sure you are comparing apples to apples. International infant mortality comparisons can be adulterated by different definitions of infant mortality across countries. What is counted as a live birth in the United States might be counted as a stillbirth in (say) the United Kingdom. Thus, our ability to draw meaningful inferences from international infant mortality data is limited.

Furthermore, you can construct an example in which everyone is strictly better off but in which measured infant mortality increases while measured life expectancy falls. If maternal health improves slightly, babies who would have been miscarried will be carried to term, where they might die early. This will increase infant mortality and reduce life expectancy at birth. Furthermore, these infants are likely to be more susceptible to disease, which means that disease prevalence will likely increase. If the debate over healthcare has taught me anything, it is that we do not know enough about demography to be able to make the kinds of statements so many people are making so cavalierly in the national media.

So what do we do about it if we wish to "think globally" and "act locally"? Fortunately, there is a lot of low-hanging fruit. We spend a lot of time in Econ 101 talking about the unintended negative consequences of different policies. Policies that should be fought and repealed include pretty much any interference with the market process: minimum wages, price controls, taxes, and subsidies should all be repealed.

Why? One reason is that we can show how they waste resources by encouraging activities for which the costs exceed the benefits and discouraging activities for which the benefits exceed the costs. Further, to the degree that they put piles of money on the table that are just up for grabs, they encourage wasteful expenditures trying to get those piles of money, not by creating value, but by securing political advantage. At this point it no doubt seems like economists are the wet blankets of the world, but one of the most important implications of careful economic reasoning is that often, your schemes and programs will not just be ineffective, they will be positively destructive.

Art Carden is assistant professor of economics and business at Rhodes College in Memphis, Tennessee and an adjunct fellow with the Oakland, California–based Independent Institute. He was a summer research fellow at the Ludwig von Mises Institute in 2003 and a visiting research fellow at the American Institute for Economic Research in June, 2008. His research papers can be found on his Social Science Research Network author page. He is also a regular contributor to Division of Labour and The Beacon. Send him mail. See his article archives. Comment on the blog.

© 2010 Copyright Ludwig von Mises - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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