1. 1 Ethics, Moral Philosophy and Economics 1 1 Hausman, Daniel M. and Michael S. McPherson (1993). “Taking Ethics Seriously: Economics and Contemporary Moral Philosophy.” Journal of Economic Literature. Volume XXXI (June 1993). pp. 671-731

2. 2 Why Should Economists be Interested in Moral Questions? The Economic Importance of Morality. The morality of economic agents influences their behavior and hence influences economic outcomes. Moreover, economists’ own moral views may influence the morality and the behavior of others in both intended and unintended ways. Because economists are interested in the outcomes, they must be interested in morality What commodities can be transacted in the market economy? There is no assurance that in the presence of multiple equilibria, a cooperative solution that achieves a Pareto improvement is ensured.

3. 3 Morality and Standard Welfare Economics. Standard welfare economics rests on strong and contestable moral presuppositions. To assess and to develop welfare economics thus requires attention to morality. When a cost-benefit analysis has to be done, the final decision is usually defended not only in terms of Pareto optimality or improvement. Why? Equity and Efficiency objective sometimes conflict Why Should Economists be Interested in Moral Questions?

4. 4 Making Economics Relevant to Policy. The conclusions of economics must be linked to the moral commitments that drive public policy. To understand how economics bears on policy thus requires that one understand these moral commitments, which in turn requires attention to morality. Example: How should resources be allocated in order to improve health? Manner? Cash or Kind? Channels? Why Should Economists be Interested in Moral Questions?

5. 5 Intermixture of Positive and Normative Economics. Positive and normative economics are frequently intermingled. To understand the moral relevance of positive economics requires an understanding of the moral principles that determine this relevance. Prescription drives description and vice versa. Problems of moral agency are resolved not by economics but by virtue ethics, i.e. virtue as a motivation towards economic behavior. Why Should Economists be Interested in Moral Questions?

6. 6 Contribution of Philosophy Economics and philosophy have shared their tools with each other in order to come up with systematic generalizations Common in utilitarian and contractualist theories, i.e. consequentialism Consequentialism refers to the belief that social choices should be evaluated by their outcomes and not by the processes by which they are reached. Positive economics has looked into philosophical ontology, i.e. understanding the nature of the agents and the transaction. Virtue ethics taken from Aristotle in order to determine the exchange value in a market transaction.

7. 7 Morality and Rationality Moral and rational are both normative and expressive terms. Caution in expressing choices as irrational and immoral when they are related to economics Why? Economics has a specific characterization of what is rational conduct. These characterizations make economics committed to certain norms of rational individual choice. It will be useful to review briefly the main features of the standard view of economic rationality.

8. 8 What is Economic Rationality? Economics portrays agents as choosing rationally. Economists make generalizations and claims about how agents ought rationally to choose. This fact distinguishes economics from the natural sciences. Economists take choice as arising from constraints, preferences and expectations or beliefs. Choice is rational when it is determined or explained by a rational set of beliefs and preferences. The rationality of sets of preferences and beliefs is defined within utility theory.

9. 9 Economic Rationality: Certainty and Ordinal Utility In circumstances of certainty, agents are conventionally taken to have rational preferences if their preferences are complete and transitive, and to choose rationally if their preferences are rational and there is no feasible option that they prefer to the chosen option. Preferences can be identified by the agents (completeness), they are also consistent and transitive. In topology, when preferences are said to be complete, then they are also continuous.

10. 10 To be a utility maximizer is merely to choose the available option one most prefers. This means that individuals, through their manner of choice, aim to maximize utility or that they seek more utility. The minimum that is needed is that agents are able to make an ordinal representation of their preferences, i,e. ranking. A weak ordering is enough in order to have revealed preferences. This means that one can assign numbers to options so that preferred options get higher numbers and indifferent options get the same number. Economic Rationality: Certainty and Ordinal Utility

11. 11 Major note: Although the utility language was inherited from the utilitarians, some of whom thought of utility as a sensation with a certain intensity, duration, purity or propinquity (i.e. Jeremy Bentham) there is no such implication in contemporary theory. Utility theory is detached from any hedonistic psychology. Utility theory places no constraints on what individuals may want. To define what rational preference and choice are, is ipso facto to say how one ought rationally to prefer and to choose. From there we can see that utility theory has a much wider scope than economic theories. Economic Rationality: Certainty and Ordinal Utility

12. 12 It is a thin theory of rational choice but it can be extended to cover cases of risk and uncertainty. Situations are risky when outcomes have known probabilities and situations are uncertain when the probabilities of the outcomes of actions or even the range of outcomes is not known. Preferences have a cardinal representation. These representations are independent of the scale chosen. The probabilities are objective frequencies (whether or not they involve objective or subjective probabilities) but the degree of beliefs of individuals are subjective. Economic Rationality: Expected Utility Theory

13. 13 Importance of learning and laundered preferences. Influence of beliefs, levels of risk aversion Are there conflicts with previously defined preferences? Do these preferences conflict with metapreferences or preferences for preferences. Metapreferences give rise to motives for action. It goes deep into the complexity of human action. These questions have given rise to the use of non- expected utility theories as both a normative and descriptive explanation for rational choice. Economic Rationality: Expected Utility Theory

14. 14 Incorporating Moral Behavior into Economic Theory: Effects of Moral Commitments Research on fairness in business exchanges gave way to a deeper study on the role of gifts, trust, efficiency wage Moral conduct is embedded into economic theory from the point of view of its effects. Instrumental assessment of moral conduct. Viewpoint of improving or achieving social welfare. This way of looking at moral rules broaches deep questions about the relation between rationality and morality. This instrumental outlook takes moral dispositions as means to advance the satisfaction of given preferences.

15. 15 Problematic Situation: Where does the inclination to follow moral rules fit into the actor’s preferences? If it is part of their preference system, then there seems to be an element of circularity in influencing the strength of the inclination (preference) for following moral rules as part of a strategy for maximizing overall preference satisfaction. Which causes what? Incorporating Moral Behavior into Economic Theory: Effects of Moral Commitments

16. 16 Central question is whether there is any inconsistency between economically rational action and morally motivated conduct. There seems offhand to be no inherent incompatibility between utility theory and the demands of morality. For utility theory places no demands on the objects of preferences. For rational choices to be moral, values inevitably constrain which descriptions of the objects of preferences are “eligible”, i.e. an apple pie that is stolen vis-à-vis one that is given as a gift would not be treated as the same object when rational moral choices have to be taken into account. Incorporating Moral Behavior into Economic Theory: Effects of Moral Commitments

17. 17 Utility theory places no constraints on the objects of preferences. This makes utility theory very flexible from the point of view of mathematical modeling. Transitivity and completeness require that people have a clear view of what is the right thing to do in every situation and of how much weight to give moral concerns in every choice. As problems of moral backsliding, of weakness of will, and of doubt are familiar features of everyone’s moral experience, it is hard to believe that the choices of actors who are influenced by moral concerns can be rationalized by a complete and transitive preference function, nor is it obvious that it is reasonable to demand that they can be. Incorporating Moral Behavior into Economic Theory: Modeling Moral Commitments

18. 18 Utility theory may be formulated in such a way that it is either too demanding or too structured. In the final analysis, it is important that the vocabulary in which preferences and choices are described be enriched. For example, distinguishing self-regarding or egoistic preferences vis-à-vis other-regarding or altruistic preferences. Main question: Who is solving the problem? What is the concern: improve the purchasing power of the poor or is it a concern to help alleviate the poor from their state of poverty. Incorporating Moral Behavior into Economic Theory: Modeling Moral Commitments