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In an Edgeworth Box MARKET ETHICS STEVE SURANOVIC THE GEORGE WASHINGTON UNIVERSITY.

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Presentation on theme: "In an Edgeworth Box MARKET ETHICS STEVE SURANOVIC THE GEORGE WASHINGTON UNIVERSITY."— Presentation transcript:

1 In an Edgeworth Box MARKET ETHICS STEVE SURANOVIC THE GEORGE WASHINGTON UNIVERSITY

2  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

3  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

4  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

5  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

6  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

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8  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

9  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

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11  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

12  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

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14  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 

15  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 

16  No Lying or Deception  Agents represent their products accurately  PROMISES ARE KEPT  Agents follow through and complete transactions  Contracts are fulfilled PERFECT INFORMATION 

17  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

18  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?

19  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?

20  Monopoly vs. competition  Externality corrections  Public goods provision  Altruism  Voluntary redistribution  Household  Charity  Government in social contract OTHER MARKET ETHIC CONSIDERATIONS

21  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


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