Home > economics profession, ethics > Ethics, goals, and well-being

Ethics, goals, and well-being

from Neva Goodwin

Twentieth century economics supported, implicitly when not explicitly, the idea that neither ethics nor history nor the institutions of law or culture were of much economic importance – as long as these things did not get in the way of “free” market functioning. This case was pressed with special vigor from about 1970 to the end of the 20th century by economists from what was known as the Chicago School.

Even early on in this period there began to be concern that individuals acting solely to achieve their personal goals could not be counted on to operate a business in ways that would be good for the business itself. This real-world concern, combined with the dogma that people only act on the basis of self-interest, resulted in various efforts to motivate business leaders by offering rewards for specific markers of success (such as the price of the company’s stock). These efforts had the unintended consequence of escalating compensation of top management in the United States to levels that were many times greater than anything that had previously been considered normal (or were normal in other countries). They also resulted in an increasingly short-term vision on the part of business leaders. Very large scale frauds, Ponzi schemes, tax evasions, and environmental and human costs that businesses externalized during this period have made it increasingly evident that society cannot afford to encourage a culture of economic activity that ignores all normal human motivations except the selfish pursuit of personal gain.  With the advent of behavioral economics, and the various streams of psychology that have fed into it, there is increasing recognition for an alternative position, that a well-functioning economy cannot rely only on self-interest. The notion of “social capital”,[1] which began to gain traction in the 1990s, formalized the idea that, without ethical values that promote trust, inefficiencies would overwhelm any economic system.

Absent such values as honesty, for example, even the simplest transaction would require elaborate safeguards or policing. Imagine if you were afraid to put down your money before having in your hands the merchandise you wished to purchase – and the merchant was afraid that as soon as you had what you wanted you would run out of the store without paying. Such a situation would require police in every store – but what if the police themselves operated with no ethic of honesty? If everyone in business cheated whenever they thought they could get away with it, business would grind to a halt. If everyone in the government worked only for bribes, meaningful governance would disappear. And it is hard to imagine how the human race would survive if altruism was not common enough so that people would be willing to make sacrifices of time, convenience and resources to meet the needs of those who cannot take care of themselves, such as children or sick people.

Among economists some attention is again being paid to the fact that many real-world problems would be difficult, if not impossible, to solve if there were not in fact a reasonable number of people willing to work for the common good – the general good of society, of which one’s own interests are only a part. Fortunately, recent experiments on human behavior demonstrate what most people who are not blinded by models of “rational economic man” have realized all along: That people really do pay attention to social norms, and they are willing to reward those who follow these norms and to punish people who violate them, even when this has a cost in terms of their narrow self-interest.[2] This point has great importance for a discipline that has the potential for affecting social norms. People who have studied economics in recent decades have carried away from those studies, into the wider culture, messages that only selfishness is rational, altruists are suckers, and one does not need to think about goals or values to know that private enterprise is always more efficient than – and therefor preferable to – any kind of collective action, including government. [3] 

Economics, over the last 60 years, has set itself directly at odds with the basic ethical concerns of all major philosophical and religious teachings. In this respect economics is an inferior guide. From the point of view of society as a whole, purely selfish behavior will often fail to promote social well-being. Economists are finally beginning to recognize this reality, first with the reluctant admission that externalities do exist, such that market outcomes (often equated with the invisible hand) do not reflect all the impacts of market behavior, as they would do in the ideal, perfectly functioning market. Even the economic actors themselves – whether they are business people, individuals acting in their family or community roles, or governments – may lack the information needed to make what 20th century economics assumed as the rational decisions that would lead to social optima.

Economic theory, and the textbooks through which the theory is summarized and passed on, need to catch up to these realizations. A good start would be to broaden the debate on goals. In the 21st century it is increasingly evident that ecological problems and constraints are coming into serious conflict with the goal of maximizing GDP, for any one country, and especially for the world as a whole. A more appropriate goal for our time could be stated as: To maintain and increase human well-being, without further harm to the ecosystem. (The final clause of that goal statement could be rephrased as …without increasing consumption of the high-end goods now typical in rich countries.) This may be followed with a further proposition: An important goal of the discipline of economics should be to help people understand how to move their economy toward its goals.

If or when such a shift in goals occurs it will dramatically alter a good deal of what is taught in economic textbooks. Among other things, if the well-being that we would aim to support cannot be defined concretely and quantitatively enough to lend itself to the use of the calculus, can or should we be talking about maximizing well-being? Or is a subtler approach required – one that does not posit objectives that can be weighted into a single maximand, but that is prepared to use judgment to deal with tradeoffs? (The issue of judgment will be discussed in the last section of this paper.) Other questions raised by the adoption of more complex goals include: What kind of economic growth or development can promote present well-being while preserving productive resources for the future? Can we imagine changes in values and in the economic culture, as well as the broader culture, that will make it easier to promote the most well-being-serving growth or development? How are the answers to these questions different for rich vs. poor countries?

These difficult questions are not discussed, but are glossed over by an implicit assumption discernable in 20th century economics texts: That an economist has, and can turn to, a client – whether this is an individual or a maker of national policy – who has a clear idea of his or her goals. In real life, outside of textbooks, macroeconomists do frequently have clients, who present them with questions into which goals may be read – but often the client (such as President Obama in 2008) is hoping that the economists will help to clarify the goals and the priorities. If the overriding goal is “Get the country out of this mess!” should the first priority be to save the banking system, or to protect jobs, or to keep people from losing their homes? Is there a necessary order in which these problems must be tackled? Obama’s team came up with one set of answers and priorities; a different group of economists would have defined the question, the goals, and the priorities, differently.

This means that economists are not off the hook. Their values, and the goals that arise from them, are inevitably relevant, not only for the advice they give to heads of state, but also for many smaller tasks – and, importantly, for how they teach economics in schools and institutions of higher education. Unless they have a client whose goals are unusually well-defined, macroeconomists still need to ask, Who speaks for society? When democracy is working well, there are discernable answers to that question; when it is not, the economist will more often be left to define a large part of the question, as well as the answers.

There is a tradition in microeconomics of assuming that individuals are the best judges of what will provide them with well-being, with the exception of young children and the mentally ill, who often fail one test of rational goal selection: that is, to select goals such that, when they achieve them, they will be glad in the long run that they have done so. Overall, even while assuming that more consumption is always more desired than less, economists have been wary of commenting on the goals people set. Yet recent research has indicated that the happiness people experience in life is strongly related to the goals they set. This is relevant to economics if happiness, as a component of well-being, is a goal for an economy. Anthropologist Tim Kasser, economist Robert Frank, and others working in the area of hedonic psychology show happiness and mental health to be negatively correlated with strongly materialistic goals, especially when the goals are set in relation to others’ achievement (i.e. the goal is to have something more or better than ones reference group).

This idea is not new. Alfred Marshall assumed that the moral structure which is part of the foundation for individual motivations is, or should be, one of society’s most important ends: The ultimate public good lies in a kind of progress wherein human wants are educated so that individuals will increasingly want what is good for them. What is good for people, Marshall felt, is to want the kind of reward that a good person wants: i.e, distinction, honor, and the pleasure, for its own sake, of serving others. If the moral structure of society and of its individual participants can gradually be brought to this orientation the whole society will be better off, for honor could partially replace pay as the reward at the higher levels of work effort, permitting an evener distribution of income without loss of productivity; and consumers as well as workers will be better off, as individuals at every level take more pride in the quality of their work.[4]

Tibor Scitovsky, in The Joyless Economy, contrasted Americans’ pursuit of pleasures that do not require effort to Europeans who, as he saw them (from a mid-20th century perspective) expected to put in effort to learn to enjoy, for example, challenging works of art, whether in music, writing, or other forms. Amartya Sen attempted to formalize this notion in his concept of a “two stage utility function” wherein he imagined that first people decide what kinds of utility are involved in a given problem (i.e., are we after the utility we will feel by doing our duty; by that associated with self-improvement; or is it simply hedonistic pleasure?) Having made this choice, we then choose the activity that will maximize the preferred type of utility.[5]  Albert Hirshman cogently remarked that:

Men and women have the ability to step back from their “revealed” wants, volitions and preferences, to ask themselves whether they really want these wants and prefer these preferences, and consequently to form metapreferences that may differ from their preferences.…

When a change in preferences has been preceded by the formation of a metapreference… it typically represents a change in values rather than a change in tastes. (“Against Parsomony: Three Easy Ways of Complicating some Categories of Economic Discourse” 1984.  Italics in the original.)

Behavioral economics derives its view of human nature from observations of behavior, often under carefully controlled experimental conditions. The neoclassical view derives all expectations of human behavior deductively from the rationality assumption. For a period in the 20th century it seemed that evolutionary theory gave scientific support for the latter approach, when early writings in sociobiology suggested that the individual survival imperative would always prevail over any other motives. In the latter decades of the century this simplistic view was strongly rebutted by other sociobiologists who pointed out that even the most “selfish gene” operates so as to promote the future continuance of the group that carries this gene. This may be seen in action, for example, when birds court danger as they try to lure a predator away from their young. But other-regarding behavior goes beyond simple gene preservation, as in the many stories of human heroism which illustrate human choices to sacrifice individual survival for the sake of other people, whether or not they are genetically related.

Notes

[1] See Goodwin, “Five Kinds of Capital”; also “The Limitations of Markets: Background Essay.” It is worth noting that one of the most famous institutionalists, Gunnar Myrdal, was co-awarded a Nobel Prize in 1973 for explaining why values are always with us. The current lack of attention to insitutionalists, including those who have received such attention, is another example of the ability of neoclassical economics to marginalize ideas, and their proponents, that do not fit within the rigid neoclassical paradigm.

[2] A well-known example from behavioral economics is the “Ultimatum Game” in which two people are told that they will be given a sum of money to share, say $20. One player gets to propose a way of splitting the sum. This person may offer to share $10 with the second person, or only $8 or $1, and plan to keep the rest. The second person cannot give any input to this decision but can only decide whether to accept the offer or reject it. If the second person rejects the offer, both people will walk away empty-handed. If the offer is accepted, they split the money as the first person indicated. If the two individuals act only from narrow financial self-interest, then the first person should offer the second person the smallest possible amount – say $1 – in order to keep the most for him or herself. The second person should accept this offer because, from the point of view of pure financial self-interest, $1 is better than nothing. In fact, however, researchers have found that deals that vary too far from a 50/50 split tend to be rejected. People would rather walk away with nothing than be treated in a way that they perceive to be unfair. In the context of social relations, even the most selfish person will gain by serving the common good and thus walking away with somewhere around $10, rather than just looking at his or her own potential personal gain and quite possibly ending up with nothing.

[3] A number of studies have shown that economics students and faculty are less altruistic than others. In one example, economics students expressed a lower willingness to contribute money to pay for public goods than other students. The same was found of economics faculty, in spite of their average pay being higher than the faculty in the other disciplines to which they were compared. (Bauman, Yoram, and Elaina Rose, 2011.) Similarly, “…researchers who undertook a number of free rider/prisoner’s dilemma games, found students with a training in economics to be more aggressive, less cooperative, more pessimistic about the prospects of cooperation, and more prone to cheating than students who had not undertaken any economics subjects (note that selection bias was controlled for in these experiments). The characteristics that developed as a result of taking these economics courses persisted long after their education had finished.” (Frank, Gilovich & Regan 1993, 1996, cited in  Thornton, 2013.

[4] Alfred Marshall, 1907, “The social possibilities of economic chivalry”

[5] Amartya Sen, 1977, “Rational Fools”

Neva Goodwin, “The human element in the new economics:
a 60-year refresh for economic thinking and teaching”,
real-world economics review, issue no. 68, 21 August 2014, pp. 98-118,
http://www.paecon.net/PAEReview/issue68/Goodwin68.pdf

  1. Macrocompassion
    November 2, 2014 at 11:09 am

    Fine words and beautiful explanations but no practical use. This is because much as as we like to try to be ethical, we generally tend to make immediate money our prime goal. And nobody can see ahead….well perhaps a few can. These are the people who see that taxation can be made not only to be ethical but also to greatly stimulate the progress of the economy too.

    They are known as Georgists, because they follow the ideas and philosophy of Henry George, an American economist whose works were widely read 100 years ago and who was eclipsed by the school of John Bates Clerk which deliberately chose to call land owners capitalists, thereby hiding the different functions played when the investment is either in goods or in a natural resource, particularly the land. George wanted all taxes to be collected from the value of the land as rent, and since these resources were a gift of Nature (if not of God) to Mankind, the strong ethics of sharing fairly this opportunity should be obvious.

    By taxing land values there will be no more speculation in its value because holding it unused would cease to be worthwhile. More available land would result in the competition for it to be eased and thus its cost of access. Then there would be less expense in the production of goods and services and with the greater employment and the redistribution of the tax payers to those who collect rent rather than wages, there would be a great benefit in national progress.

    TAX LAND NOT PEOPLE; TAX TAKINGS NOT MAKINGS!

  2. davetaylor1
    November 2, 2014 at 10:47 pm

    Well, I’ll echo Mac’s “Fine words and beautiful explanations” and would like to thank our Editor for having presenting Neva’s REWR 68 paper to us piecemeal, so that we can dwell on what she is saying rather than move on (as I confess I did) to her practical proposals.

    I don’t agree with Mac’s criticism, much as I admire Henry George and Keynes. He has not asked himself WHY “we generally tend to make immediate money our prime goal”. Back 3000 years ago in the Moses period, Exodus 32 tells the story of the worship of the Golden Calf, still evident today in the label “Fool’s Gold” and the proverbial reminder, “All that glitters is not gold”. We all start life as children and are taken in by glitz and glitter. Those who have never managed to grow up still think gold valuable, while many of those who have, take advantage of this innocence by selling trash packaged in glitter and puppets wearing crowns, requiring them to be paid for in paper priced as if it were gold. In short, people have been taught to value money, and because they have been forced to need it, will work, beg, cheat, steal and even kill in order to acquire it. Fatally for Mac’s argument, this is also what is liable to happen if you take it off them by the logically sound method of taxation. Which is why I am arguing for recognition that of the truth: that money is merely a form of information, accounting not for our own worth but for how much we become indebted to society when we buy something with it. The reasonable response to that is gratitude to our benefactors reflected in willingness to act likewise, creating an ethos of generosity rather than fear and mores of cooperation rather than of competition for livelihoods. Among thinking humans, competition should be between ideas, unruly emotions and their imperfect expression and communication, hence the wisdom of education in understanding and self-discipline.

    Going on to read Neva’s conclusions in RWER 68 p.11 about normal economic behaviour: between 1. The social context and 2. The ethical context, I believe it necessary to insert (let us say) 1a. The development context. We start life as dependent consumers, contribute to it traditionally as male producers and female distributors, and those with more time, e.g. when the children have flown the nest, perform the “gardening”, social maintenance and technological development tasks which seem to be absent from today’s neoclassical “industrial commodity production” understanding of economics. The point to be made is that each of these roles has its own instrumental goals, behaviourally evident in youthful self-development, adult commitment and experienced reflection. The “virtual” ways of dealing simultaneously with different goals are by parallel processing and time-sharing priorities.

    Her “reasonable definition of rational behaviour” is also much like mine, with perhaps something to be learned from the comparison.

  3. Macrocompassion
    November 3, 2014 at 7:03 am

    David: the reason why I claimed we are a money-seeking life form should be obvious and George at least claimed that it is an economic truth which he expressed by the two axioms:

    1. Man seeks to satisfy his desires with the least amount of effort.
    2. Man’s desires are unlimited.

    One may cynically say that this shows us to be both slothful and greedy, but it also shows the opposite, that we try to be as energy efficient as possible whilst laboring hugely. This according to George defines economics. So the reason why money comes into the picture is simply that it provides a useful and convenient medium for doing this kind of business activity. Money is not the root of evil and there is no good cause for us to condemn it and to think that the world would be better without us putting such big emphasis on it. The religious ideal which suggest that a more perfect world world be one without money, goes back to the time when life was so simple and earthly bounty so greatly manifest that one’s living was easy compared to us today. But there is no going back. This also should encourage us to think about ethics along different and more practical lines.

  4. November 3, 2014 at 6:08 pm

    A good moral compass is to once again recognise many scales of achievement instead of just one. For example recognise that achievement of honour, personal satisfaction, self betterment, lifestyle pleasure, etc. are alternatives to the one-dimensional pursuit of monetary net worth and are not invalidated by it.

    We need to live in a world where people once again pursue multiple, subjective, and non-comparable scales of achievement. Otherwise, if we reduce every goal to a monetary equivalent, that creates a mindless competition with gratuitous waste of utility, a small class of outlandish winners, and a broad population of losers.

    As for a step forward, it would be to separate wealth as consumption from wealth as the power to invest. For example insist that CEOs take a salary to live on and hold capital gains in an audited account for investment only. That would shift the pursuit of wealth from an atavistic urge to “have more” to a more honourable goal of directing the new projects of society.

    • davetaylor1
      November 5, 2014 at 8:57 am

      Yes, Pavlos, both to the calibration of your “moral compass” and conclusion about what’s needed in practice. A compass, though, is not a “recognition”, it is an instrument which helps one to recognise, which in morals is legislation. The present ownership and company legislation is arse over tit (tete?): as if the manufacturers of the pointer didn’t know which was North and which was South.

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