Ethics, Moral

Philosophy and
Economics1

1 Hausman, Daniel M. and Michael S. McPherson (1993).

“Taking Ethics Seriously: Economics and Contemporary
Moral Philosophy.” Journal of Economic Literature.
Volume XXXI (June 1993). pp. 671-731
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Why Should Economists be
Interested in Moral Questions?
 The Economic Importance of Morality. The morality of
economic agents influences their behavior and hence
influences economic outcomes. Moreover, economists’
own moral views may influence the morality and the
behavior of others in both intended and unintended
ways. Because economists are interested in the
outcomes, they must be interested in morality
 What commodities can be transacted in the market
economy?
 There is no assurance that in the presence of multiple
equilibria, a cooperative solution that achieves a
Pareto improvement is ensured.

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 Why Should Economists be
Interested in Moral Questions?
 Morality and Standard Welfare Economics.
Standard welfare economics rests on strong and
contestable moral presuppositions. To assess
and to develop welfare economics thus requires
attention to morality.
 When a cost-benefit analysis has to be done, the final
decision is usually defended not only in terms of
Pareto optimality or improvement.
 Why? Equity and Efficiency objective sometimes
conflict

3
 Why Should Economists be
Interested in Moral Questions?
 Making Economics Relevant to Policy. The
conclusions of economics must be linked to the
moral commitments that drive public policy. To
understand how economics bears on policy thus
requires that one understand these moral
commitments, which in turn requires attention to
morality.
 Example: How should resources be allocated in order
to improve health? Manner? Cash or Kind?
Channels?

4
 Why Should Economists be
Interested in Moral Questions?
 Intermixture of Positive and Normative
Economics. Positive and normative economics
are frequently intermingled. To understand the
moral relevance of positive economics requires
an understanding of the moral principles that
determine this relevance.
 Prescription drives description and vice versa.

 Problems of moral agency are resolved not by

economics but by virtue ethics, i.e. virtue as a
motivation towards economic behavior.

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Contribution of Philosophy
 Economics and philosophy have shared their
tools with each other in order to come up with
systematic generalizations
 Common in utilitarian and contractualist
theories, i.e. consequentialism
 Consequentialism refers to the belief that social
choices should be evaluated by their outcomes and
not by the processes by which they are reached.
 Positive economics has looked into
philosophical ontology, i.e. understanding the
nature of the agents and the transaction. Virtue
ethics taken from Aristotle in order to determine
the exchange value in a market transaction. 6
Morality and Rationality
 Moral and rational are both normative and
expressive terms. Caution in expressing choices
as irrational and immoral when they are related to
economics
 Why? Economics has a specific characterization
of what is rational conduct. These
characterizations make economics committed to
certain norms of rational individual choice.
 It will be useful to review briefly the main features
of the standard view of economic rationality.

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What is Economic Rationality?
 Economics portrays agents as choosing rationally.
Economists make generalizations and claims
about how agents ought rationally to choose. This
fact distinguishes economics from the natural
sciences.
 Economists take choice as arising from
constraints, preferences and expectations or
beliefs. Choice is rational when it is determined or
explained by a rational set of beliefs and
preferences. The rationality of sets of preferences
and beliefs is defined within utility theory.
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Economic Rationality: Certainty and
Ordinal Utility

 In circumstances of certainty, agents are

conventionally taken to have rational preferences
if their preferences are complete and transitive,
and to choose rationally if their preferences are
rational and there is no feasible option that they
prefer to the chosen option.
 Preferences can be identified by the agents
(completeness), they are also consistent and
transitive. In topology, when preferences are said
to be complete, then they are also continuous.

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Economic Rationality: Certainty and
Ordinal Utility

 To be a utility maximizer is merely to choose the

available option one most prefers. This means
that individuals, through their manner of choice,
aim to maximize utility or that they seek more
utility. The minimum that is needed is that agents
are able to make an ordinal representation of their
preferences, i,e. ranking.
 A weak ordering is enough in order to have
revealed preferences. This means that one can
assign numbers to options so that preferred
options get higher numbers and indifferent
options get the same number. 10
Economic Rationality: Certainty and
Ordinal Utility
 Major note: Although the utility language was
inherited from the utilitarians, some of whom thought
of utility as a sensation with a certain intensity,
duration, purity or propinquity (i.e. Jeremy Bentham)
there is no such implication in contemporary theory.
Utility theory is detached from any hedonistic
psychology.
 Utility theory places no constraints on what
individuals may want. To define what rational
preference and choice are, is ipso facto to say how
one ought rationally to prefer and to choose. From
there we can see that utility theory has a much wider
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scope than economic theories.
 Economic Rationality: Expected Utility
Theory

 It is a thin theory of rational choice but it can be

extended to cover cases of risk and uncertainty.
 Situations are risky when outcomes have known
probabilities and situations are uncertain when the
probabilities of the outcomes of actions or even the
range of outcomes is not known.
 Preferences have a cardinal representation. These
representations are independent of the scale chosen.
 The probabilities are objective frequencies (whether
or not they involve objective or subjective
probabilities) but the degree of beliefs of individuals
are subjective. 12
Economic Rationality: Expected Utility
Theory

 Importance of learning and laundered preferences.

Influence of beliefs, levels of risk aversion
 Are there conflicts with previously defined
preferences? Do these preferences conflict with
metapreferences or preferences for preferences.
Metapreferences give rise to motives for action. It
goes deep into the complexity of human action.
 These questions have given rise to the use of non-
expected utility theories as both a normative and
descriptive explanation for rational choice.

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 Incorporating Moral Behavior into
Economic Theory: Effects of Moral
Commitments
 Research on fairness in business exchanges gave
way to a deeper study on the role of gifts, trust,
efficiency wage
 Moral conduct is embedded into economic theory
from the point of view of its effects. Instrumental
assessment of moral conduct. Viewpoint of
improving or achieving social welfare.
 This way of looking at moral rules broaches deep
questions about the relation between rationality and
morality. This instrumental outlook takes moral
dispositions as means to advance the satisfaction of
given preferences. 14
Incorporating Moral Behavior into
Economic Theory: Effects of Moral
Commitments
 Problematic Situation: Where does the
inclination to follow moral rules fit into the
actor’s preferences? If it is part of their
preference system, then there seems to be an
element of circularity in influencing the strength
of the inclination (preference) for following
moral rules as part of a strategy for maximizing
overall preference satisfaction.
 Which causes what?

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 Incorporating Moral Behavior into
Economic Theory: Effects of Moral
Commitments
 Central question is whether there is any
inconsistency between economically rational action
and morally motivated conduct. There seems offhand
to be no inherent incompatibility between utility
theory and the demands of morality. For utility theory
places no demands on the objects of preferences.
 For rational choices to be moral, values inevitably
constrain which descriptions of the objects of
preferences are “eligible”, i.e. an apple pie that is
stolen vis-à-vis one that is given as a gift would not
be treated as the same object when rational moral
choices have to be taken into account. 16
 Incorporating Moral Behavior into
Economic Theory: Modeling Moral
Commitments
 Utility theory places no constraints on the objects of
preferences. This makes utility theory very flexible
from the point of view of mathematical modeling.
 Transitivity and completeness require that people
have a clear view of what is the right thing to do in
every situation and of how much weight to give
moral concerns in every choice.
 As problems of moral backsliding, of weakness of
will, and of doubt are familiar features of everyone’s
moral experience, it is hard to believe that the
choices of actors who are influenced by moral
concerns can be rationalized by a complete and
transitive preference function, nor is it obvious that
it is reasonable to demand that they can be. 17
Incorporating Moral Behavior into
Economic Theory: Modeling Moral
Commitments
 Utility theory may be formulated in such a way
that it is either too demanding or too structured.
In the final analysis, it is important that the
vocabulary in which preferences and choices
are described be enriched.
 For example, distinguishing self-regarding or
egoistic preferences vis-à-vis other-regarding or
altruistic preferences. Main question: Who is
solving the problem? What is the concern:
improve the purchasing power of the poor or is
it a concern to help alleviate the poor from their
state of poverty. 18