Presentation on theme: "In an Edgeworth Box MARKET ETHICS STEVE SURANOVIC THE GEORGE WASHINGTON UNIVERSITY."— Presentation transcript:
In an Edgeworth Box MARKET ETHICS STEVE SURANOVIC THE GEORGE WASHINGTON UNIVERSITY
Neoclassical Assumption – Self interested Agents Consumers maximize utility Firms maximize profit Homo Economicus Greed is good.. Greed is right. (Wall Street movie) Conflicts with conventional sense of morality No room for “other-regarding” preferences This creates suspicion that economics is not practical (or not moral) (LACK OF) ETHICS IN ECONOMICS
Historical Socialist Critique Reactions to economic inequality Rise of Marxism/Communism Social Democratic Systems Redistribution – progressive taxes Need for government regulation – Health and Safety Codes Protect less fortunate people – minimum wages Promote compassionate outcomes Popular Negative Portrayals of Business Hollywood movies – Wall Street, Wolf of Wall Street, etc. BUSINESS IS ‘BAD’ THESIS
Occupy Harvard – Mankiw’s Ec10 Walkout in 2011 Protest against neoclassical/conservative bias in economics principles CORE Project – University College London Students need a wider range of approaches to succeed New online textbook emphasizes economic history and data Introduce Historical overviews Emphasize inequalities and class struggles Persistent poverty Labor unions ECONOMIC PRINCIPLES BACKLASH
Introduce Ethical underpinnings of the neoclassical system Move towards an Intermediate/Moderate solution Demonstrate how the classical system can fail and how appropriate regulations can improve the system. Also show how regulations can cause the system to fail MAKE ECON 101 MORE RELEVANT
Introduce Ethics via an Edgeworth Box Key Assumptions Two traders: Smith and Jones Endowments: Smith has 10 oranges; Jones has 10 apples Both know their preferences over oranges and apples perfectly Both believe: A) more is better than less B) diminishing marginal utility Describe standard indifference curves CONSTRUCTING THE EDGEWORTH BOX
Trade into the lens raises utility for both Smith and Jones Trade is win-win; no one loses Variety is desirable due to diminishing marginal utility Note if DMU lower; lens becomes smaller. Many mutually beneficial outcomes are possible Surplus might be shared equally Surplus might accrue more to one agent RESULTS FROM THE EDGEWORTH BOX
A Unique Trading Equilibrium Define the set of Pareto Optimums: Green Line Profit Maximizing Condition: MU O /P O = MU A /P A Extra utility per $ spent on oranges = Extra utility per $ spent on apples P O /P A is the slope between E (the endowment) and S MU O /MU A is the slope of both traders’ indifference curves STANDARD ECONOMICS APPROACH: UTILITY MAXIMIZATION
Self Interest/Greed is needed to assure gains for both Change the assumptions/Changes the results Suppose Smith is self interested Suppose Jones believes in self-sufficiency (a different ethic) In this case no trade occurs Smith loses surplus Jones is happier w/o trade since he chooses it voluntarily Self-sufficiency is better than surplus value Opportunity cost of different ethic is lost surplus value THE NEED FOR GREED
What point in the Edgeworth Box maximizes Smith’s utility? Point K What point maximizes Jones’ utility? Point A How could these points be realized? Use of Force Threats of force (Armed robbery) Surreptitiously (burglary, trickery) These violate the model assumptions These actions may be inspired by Greed EXPLORING ALTERNATIVE ASSUMPTIONS
Respect for Property Rights Smith owns oranges; Jones owns apples FREEDOM to trade or not NO FORCE and No THREATS of Force Agents do not inflict injury ; don’t intimidate to get better terms; No THEFT MUTUALLY VOLUNTARY TRADE
Homogeneous goods All apples the same All oranges the same Good qualities are known to both Preferences are known perfectly Promises are kept in intertemporal trades PERFECT INFORMATION
No Lying or Deception Agents represent their products accurately PROMISES ARE KEPT Agents follow through and complete transactions Contracts are fulfilled PERFECT INFORMATION
Standard Econ Assumptions Agents are self interested (greedy) Perfect information is available Trade is mutually voluntary Implied Ethical Assumptions Agents are self interested (greedy) Greed has Limits Respect for Property Rights No Theft No threats or intimidation No violence Freedom to trade or not No Deception Promises are kept MARKET ETHICS
Questions for Reflection Have you ever purchased a product willingly and been satisfied with the outcome? Does it always occur? For what percentage of transactions does that occur? Think of examples when it does not occur … Car Repair – Used cars Online scams Markets work better with Ethics ARE ETHICAL ASSUMPTIONS SATISFIED IN THE REAL WORLD?
Moral Codes Religion, Philosophy, Upbringing.. Etc Don’t steal, don’t lie, don’t hurt others, keep promises, etc. Private Defenses Fences; Gates; walls Locks, safes Public Defenses Local Police National Military Laws Against violence and threats Against theft Against deception in business Judicial systems Determine guilt or innocence Determine penalty Collect fines or incarcerate HOW DO SOCIETIES ENCOURAGE ETHICAL BEHAVIOR?
Monopoly vs. competition Externality corrections Public goods provision Altruism Voluntary redistribution Household Charity Government in social contract OTHER MARKET ETHIC CONSIDERATIONS
Ethical Behavior is Assumed in Neoclassical Models Best to emphasize in Teaching Econ principles Self Interest (Greed) is necessary Greed + Ethics => Positive outcomes for all Greed + Unethical Behavior => Negative Outcomes Institutions/Government inhibit unethical behaviors CONCLUSIONS
Your consent to our cookies if you continue to use this website.