Tuesday, February 11, 2014

Economics is applied morality

The ignorance of many highly experienced economists to the moral foundations of their work is quite alarming. As a group, economists typically internalise the utilitarian morality embedded in their methodology to such a degree that they are happy to promote economic theory and practice as an objective scientific approach.

To set a more honest course for the discipline I pushed hard during the development of Australian Learning Standards in Economics to include criteria for the teaching of moral foundations, in addition to professional ethics. Indeed, I have argued previously for adopting standards of professional ethics in economics. You know, to cover the usual expected standards of professionalism such as not making comments in public forums without disclosing financial interests. 

I couldn’t get the actual words morals and ethics into the new learning standard. But the result was very good I think, with the fifth learning standard being called Reflection, and containing the following
Bachelor graduates will be able to reflect on the:
  • nature and implications of assumptions and value judgments in economic analysis and policy
  • interactions between economic thinking and economic events, both historical and contemporary
  • responsibilities of economists and their role in society.
You wouldn’t believe it, but one concern was that there may be insufficient expertise within the cohort of university professors to achieve this standard. So in the interests of raising awareness, I want to provide a very brief comment on the moral foundations of economics.

Utilitarianism is the moral foundation of economics. The idea of the greatest good for the greatest number is intuitively appealing. But applying a utilitarian framework relies on value judgments about the desires, and a comparable measure of their intensity, of every individual. Some of the defining debates in economics over the past century have centred around the measurement and comparability of utility between individuals.

Thus any application of economics requiring estimation of costs or benefits is applying a judgment about the worthiness of competing desires of the population at large. That judgment is necessarily a moral one.

Further, most economic analysis applies utilitarianism in an ad hoc manner, by considering only the population within national borders. Unless you are a ‘national utilitarian’ (a distinct moral position), it can never be appropriate to consider domestic policy in terms of the utility of local residents while ignoring effects on the utility of those abroad. 

A truly utilitarian analysis must always and everywhere adopt a global perspective, which would make it exceeding difficult to justify any domestic policy in the developed world that didn't entail a massive redistribution from that country’s wealthiest to the world’s poorest. 

Then there’s the moral position that only the utility of humans counts.

Other times economic analysis is more clearly a case of applied morality. In analysis of public health economists usually appeal explicitly to the idea of utils, or some metric of quality-adjusted life years. The adoption of this metric relies on a moral judgement, for it implies that the elderly are less deserving of health resources than the young. But an equally valid moral position is that the elderly are more deserving as a repayment for their lifetime of work contributed to the community. Another moral position is that the young are easily and cheaply replaced, while the wisdom held in those elderly bodies has a high value and is costly to replace.

In more general terms we face the morality problem when measuring progress. Economists prefer GDP because their utilitarian framework implies that more consumption leads to greater utility. Apart from the obvious problem that GDP only includes goods traded in markets, ignores household production and externalities, it also contains a compositional problem.

What I mean is that many of the ‘goods’ that people trade are actually what we would call precautionary spending and increase utility only because they compensate for a loss of utility arising from outside of the market. Home security is one example.

Isn’t it better to not need to have home security, than for people to feel the need to spend 5% of their income on security, including locks, alarms, surveillance, insurance and so forth?

Other measures of progress have been proposed to overcome these issues. Each of these simply reflects and alternative moral judgment.

Lastly, there are the moral positions surrounding the degree of wealth distribution, the degree of community support to offer the unemployed, the elderly, and so forth that are perennially topical. These are all moral judgements, which are easy enough to see when we get down to the nitty-gritty debate and words such as worthy come out.

There is of course much more to the story of morality in economics than can be covered in this short post. One important thing to remember is that in practice utilitarianism can be, and has been, applied to justify almost every policy position.

What we need to remember is that you can’t escape morality in economics. But understanding the moral foundations of economics is the best way to properly grasp the limits of economic reasoning. It is my hope that the next generation of economists will learn to discuss and criticise the moral foundations of economics, and by doing so see policy debates as far more complex than is typically realised when alternative moral perspectives are ignored.


  1. Call me paleo, but I prefer Adam Smith's work in Theory of Moral Sentiments to any of the later century's morality headiness. Getting in people in touch with their feelings. It's the same stuff but less preachy,

    1. I was close to adding a discussion of that book. But wanted to keep it brief and stick with some basic intuitive examples.

  2. "Isn’t it better to not need to have home security, than for people to feel the need to spend 5% of their income on security, including locks, alarms, surveillance, insurance and so forth?"

    Sums it up perfectly. Nice piece :-)

  3. Morality in economics? What next? History of economics taught to students should be good. Especially if they are economic students.

    Naturally if you want economics as a science or as a moral question Henry Geoge said it all. And those who have made their living from their immorality since George have merely waffled.

  4. Utilitarian ethics became "moral foundation" of modern economics and politics for two simple reasons: appearance of absolute morality and "ease of bias manipulation" (I will explain this later).

    Utilitarianism (like all other consequentialisms and "risk based calculations") relies on few important requirements: existence of absolute "a priori knowledge" about an event, all the possible alternative events and effects on all the people directly or indirectly involved, certainty of that a priori knowledge, availability of complete and true information about current state and computational power required to perform calculations in real time (before decision has to be made). As such, exact utility calculation is completely impractical in all socio-economic applications. It is more than clear that for any practical application calculation must be (and it always is) simplified by making assumptions that are by their nature uncertain and thus biased. This is leaving decision maker with no option but to make assumptions based on it's own believes, experiences, interests and emotions. This opens the door for almost limitless manipulation and ability to bias decision making.
    In simple terms, utilitarian ethics can be used to make almost any decision if adequate assumptions are made - in many historical instances utilitarian approach created decisions with catastrophic results for almost everybody - in all instances in the name of "greater good".
    This impracticality of utilitarianism is the reason why utilitarianism must not under any circumstances be moral foundation of economics or politics.

    Economic and other "large effect" decisions must be based on some other practical moral principles that do not provide such ability for manipulation, even if these principles and their ability to deliver "the best decision" are theoretically inferior to "ideal utilitarianism".

    Almost all of the largest problems we are facing today (local, national and global problems) are nothing else but problems created by ethical decisions. Economic collapse, corruption, inequality, hunger, water supply, climate change, unemployment, misery, wars, energy supply, pollution, homelessness, traffic jams ... are direct result of the way how we make (ethical) decisions. These problems are not imposed by some greater power or result of limited resources around; there are also not result of our inability to make better decisions but rather the morality of decision making. It's the morality of the decision making that created these problems while arguing exactly the opposite.

    For example, world hunger is NOT result of insufficiency of food for everyone, not result of our inability to produce and deliver the food, but direct result of but our moral decisions about the way how food should be produced and distributed. These decisions are always justified to produce the greatest good (food supply) as possible for as many people as possible.

  5. Another great post! Should be required reading for basically everyone. I will be using these arguments the next time some high-horsed economist says everything is very simple and all we need to do is cut the corporate tax rate.