Does Morality Have a Place in Economics?

There is a joke that whenever someone asks an economist about the prospective effects of a policy in question, a good economist should always reply with: ‘it depends’. Why? Because the number of outcomes in theory are limitless. Let’s take a simple example: an increase in taxes. If we want to oversimplify, an increase in taxes – ceteris paribus – will demand taxpayers to pay more money, which decreases their disposable income, in parallel with increasing the government’s tax revenue. One could argue that if the government invests this tax revenue, for example, into education or healthcare – thus increasing the citizens prospects for higher social standing or for longer and healthier life – ‘lifetime utility’ can increase. However, a problem arises: higher taxes can result in higher tax evasion, therefore creating a free-rider problem, while also potentially decreasing the tax revenues of the state.

The purpose of this example was to demonstrate that economists’ take on a problem very much depends on their assumptions on society. You want to use tools for policymaking that concurs with your view on how the economy and the respective agents would react to it. But how can we define what’s good for society? Is it fair to overtax the rich to support the poor? Should we pursue a more egalitarian approach, or should we just go with ‘every man for himself’?

The values that define us

From the earliest days, economics and philosophy have been intertwined when dealing with complex problems. The economy operates between people, therefore interpersonal connections, fairness and justness are key when deciding on what is acceptable and what is not. Ancient Greek philosophers, such as Aristotle or Socrates, gave great importance to what should be the goal of economic decisions or transactions. For example, how should we approach the problem of money lending? Aristotle says that there should be no interest on money lent, not just from a moral point, but also from a metaphysical one. By asking for an interest, we price the time-value of the money lent by us, however, time itself does not belong to us.

The core problem arises from intrinsic and extrinsic values. We can consider something as intrinsically good based on whether it has value on its own. On the contrary, we can assign extrinsic value to things that are valuable for the sake of something else. This brings up one of the greatest questions in philosophy (and thus comes up in economics as well): is there such a thing as intrinsic value at all?

Some philosophers argue that, by the world being so complex, nothing has wholly intrinsic value, and there may be a possibility where something has only extrinsic value. Beardsley (1965), however, argues that nothing has intrinsic value. According to him, whatever has value has extrinsic value, but also nothing has intrinsic value by itself. He argues that intrinsic value is “inapplicable”, so even if something has such a value, we would not be able to distinct it. This may be a strong statement, but it could be right in economic terms. For example, regarding prices: Assuming that we’re not historians, we do not know the value of 10 drachmas from ancient Greece. However, if we have information on the purchasing price of it – we know the amount of goods it could buy – then we are on the right track.

Is there even a morality-problem in economics?

Bentham assumes that anyone can estimate the pleasure they experience based on factors such as intensity, duration, certainty, propinquity and purity. Bentham stated that the intensity of pleasure cannot be measured, thus interpersonal comparability is limited and cannot be based on facts; however, he insisted that institutions should try to evaluate these regardless.

According to Bentham, every person shares certain vital concerns, such as certainty, abundance or equality between people, thus making higher utility inseparable from legal codes (e.g. right to sustenance or right to have disposal over one’s goods (property laws)). He argued that property rights should support egalitarian distribution of income and wealth; however, Bentham gave priority to security (as to secure one’s consumption, sustenance) over equality. This should be achieved in a way where incentives guide society to maximize general welfare of the society as a whole. Sidgwick (1877) concluded that, according to Bentham, self-interest and self-centered behaviour should be in harmony with moral goodness and virtue, thus creating a better society.

Mill believed that cooperation with others and the pleasure that comes from the “security” or “sense of freedom” of the cooperation, which generates a certain moral sentiment of justice, is one of the highest pleasures. This high pleasure can be such a powerful motive that it can even subdue selfishness.

Immanuel Kant stated that if our ‘moral’ decision was built on quasi-rational basis of economic calculus, based on our expectations of later pleasure coming from it, the morality of the action is lost. The increase of our well-being (expected or experienced) negates the morality of our acts. If we accept this reasoning, then consequently, true altruistic behavior should be such that does not calculate with pleasure coming from the consequences of our actions, but it should have strictly intrinsic value to it.

In the 1930s the ordinalist revolution began, spearheaded by Lionel Robbins, John Hicks, Paul Samuelson, Abram Bergson and R.G.D. Allen. They redefined the concept of utility in a more simplistic way: utility represents only what the economic agent chooses, similar to a numerical ordering of choices (which are to be consistent), without taking into account the reasoning behind it. In short: utility represents the preferred choices in order, without taking into account morality or psychological explanations. This makes the calculations easier, and also allows useful ways to gather information regarding preferences. However, one might argue that with this simplification, we lost a lot of meaningful information on the processes behind decision-making.

A mathematician, a statistician and an economist all apply to a job. The interviewer calls in the mathematician and asks him: ‘what does two plus two equal?’ The mathematician asks for a paper and pen, begins to calculate, and says: ‘There exists a solution to the problem.’ Then the interviewer asks for the statistician, and proceeds to ask him the same question. The statistician replies ‘with a certainty of 95% I can state that the solution is somewhere between 3 and 5’. Finally, the economist comes in, and is given the same problem. He stands up, approaches the interviewer, and whispers: ‘What do you want it to equal?’