Adam Smith (1723-1790) is famous for founding economics as an independent field of study by synthesising and systemising classical economics in The Wealth of Nations (1776). But he was also a significant moral philosopher in his own right who saw economics as a branch of moral philosophy, and he viewed capitalism as an ethical project whose success required political commitment to justice and freedom, not merely an understanding of economic logistics.
The following questions juxtapose practices and institutions that economists study (capitalism, profits, competition) with concepts that ethicists use (good, admirable, and best). Is capitalism good? Should we admire the hard workers who are motivated to make large profits? Does competition bring out the best in people?
Smith's economic analysis was thoroughly based on a deeply humanistic ethical perspective. The picture of the real Adam Smith reveals a true 'friend of commerce', supporting its achievements and potential, but constructively critical about the shortcomings of the mercantilist society he lived in and commerce in general. He justified commercial society for its tremendous contribution to the prosperity, justice, and freedom of its members, and most particularly for the poor and powerless in society. But he was no naive ideologue for free markets and profits. He criticised the political machinations and moral character of the merchants and manufacturers who, he acknowledged, were driving economic development. He not only told them that they should act better, but also argued for institutional measures to restrict their worst proclivities particularly by getting the government out of the business of economic micro-management. Though its promise was great, the rise of commercial society also meant the loss of valuable old ways and posed new challenges of its own. Its success was not predetermined, but had to be worked for. That is a lesson modern economist and politicians would do well to relearn.
We have two questions of ethics that bear directly on economics: (i) What is the standard of good? and (ii) How does one establish that something is good? A third relevant question of ethics is: Who should be the beneficiaries of the good? A common assumption of economic analysis is that individuals are rational and self-interested. The third question focuses on self-interest. Is self-interest moral, amoral, or immoral? Is morality a matter of individuals taking responsibility for their lives and working to achieve happiness? Or is morality a matter of individuals accepting responsibility for others and willing to forgo or sacrifice for them? This is the debate in ethics between egoism and altruism.
Strong forms of egoism hold that individuals should be self-responsible and ambitious in their pursuit of happiness, that they should treat other individuals as self-responsible trading partners, and that those who are unable to be self-responsible should be treated through voluntary charity. Strong forms of altruism argue the opposite, holding that morality is primarily a matter of helping those who are in need, that charity is more moral than trade, and that the most moral individuals will be motivated by a spirit of self-sacrifice.
For example: consider the debates over rent control and minimum wages. Economists, by a large majority, agree that such policies are not merely zero-sum, as their advocates intend, but rather negative-sum. It may be argued that rent controls cause landlords a loss-and also cause housing shortages that harm some of the poorest renters the most. It may also be argued that minimum wages cause employers a loss-but also destroy jobs for unskilled labourers. These unintended consequences are well known among economists, but there is little sign that rent controls and minimum wages will be abandoned anytime soon. Because in the case of rent controls, part of the explanation involves the political dynamics of urban areas, in which many voters are renters: renters believe that rent control is good for them, and politicians sometimes listen to their constituents.
But another major part of the explanation has to do with an altruistic ethic that says that the self-interest of landlords and employers counts for little morally and may be sacrificed to help tenants and employees. The thinking is that landlords and employers are richer, and tenants and employees are poorer, and thus rich people should be willing to sacrifice profits to help out the poor if necessary. But if we cannot expect the rich to do the right thing voluntarily, then an altruistic ethic will help justify the government's mandating the sacrifice by law.
The moral difference between egoists and altruists on these economic policy issues is between those who see employers and employees as win-win trading partners and those who see employment as exploitation; and between those who see landlords and tenants as trading value to mutual benefit and those who see poor tenants vulnerable to being taken advantage of by rich landlords.
Generalising from debates over particular policies to evaluations of economic systems as a whole, Adam Smith's famous statement about self-interest from The Wealth of Nations is directly relevant to our contemporary debates about the morality of capitalism: "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages".
Smith works out a middle ground between traditional ethical theories that are altruistic in principle and his new (at that time) economic theory that is optimistic about the power of egoistic individuals in a free market. Smith's position is modern and egoistic in accepting that self-interest is natural and beneficial in making capitalism work well; at the same time Smith is traditionally altruistic in reserving his highest praise for those who take a disinterested perspective on their own interests and are willing to sacrifice their interests.
Then what about justice? Justice in economics is a subcategory of welfare economics with models frequently representing the ethical-social requirements of a given theory. Some ideas about justice and ethics overlap with the origins of economic thought, often relating to distributive justice and sometimes to Marxian analysis. In early welfare economics, 'justice' was little distinguished from maximisation of all individual utility functions or a social welfare function. As to the latter, Paul A. Samuelson (1915-2009), expanding on work of Abram Bergson (1914-2003), presents a social welfare function in general terms as any ethical belief system required to order any hypothetically feasible social states for the entire society as "better than", "worse than", or "indifferent to" each other.
Amartya Sen, Kenneth Arrow, Serge-Christophe Kolm and others have considered ways in which utilitarianism as an approach to justice is constrained or challenged by independent claims of equality in the distribution of primary goods, liberty, entitlements, opportunity, exclusion of antisocial preferences, possible capabilities, and fairness as non-envy plus Pareto efficiency. Alternate approaches have treated combining concern for the worst off with economic efficiency, the notion of personal responsibility and (de)merits of levelling individual benefits downward, claims of intergenerational justice, and other non-welfarist/Pareto approaches.
A broad reinterpretation of justice from the perspective of game theory, social contract theory and evolutionary naturalism is found in the works of Ken Binmore and others. Arguments on fairness as an aspect of justice have been invoked to explain a wide range of behavioural and theoretical applications, supplementing earlier emphasis on economic efficiency (Konow, 2003).
The writer is a retired Professor
of Economics. [email protected]
© 2024 - All Rights with The Financial Express
