Ethics and Economics
Jonathan B. Wight
Contact Information:
Professor of Economics
University of Richmond
Richmond, VA 23173
(804) 289-8570
jwight@richmond.edu
© Jonathan B. Wight
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Economics
Economics is a “way of thinking” to help students
understand the ramifications of actions. It is a tool to help
students make more informed judgments.
One of the most powerful concepts in economics is
thinking at the margin
when evaluating costs and benefits.
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Chevrolet Malibu
But a jury fined General Motors $4.9 billion in
punitive damages (July 1999) –
for thinking at the margin!
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GM’s private calculation:
* MC to fix the faulty fuel tank: $8.59 per car.
* MB to fix the faulty fuel tank: $2.40 per car
(savings from wrongful death and disfigurement lawsuits
@ $200,000 on average)
The “efficient” solution was chosen not to fix the faulty
fuel tank.
(Does this pass the ethical smell test?)
Source: http://www.safetyforum.com/gmft/. The punitive damages against GM were later
lowered by a judge to $1 billion.
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Economists have extolled short-run profit
maximizing—in a moral vacuum.
http://www.sciencecartoonsplus.com/gallery/ethics/eth06.gif
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Ethics is the consideration of
“right” and “wrong.”
It is penny-wise and pound foolish
to ignore ethical considerations.
Yet the American Economic Association complains that graduate
schools keep turning out “idiot savants, skilled in technique but
innocent of real economic issues” (Barber 1997, p. 98)
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Is our commercial
system based
on ...
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Economics
or ...
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...Greedonomics?
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Wall Street
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Wall Street
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Wall Street
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Arthur Andersen
Enron
East Asia
WorldCom
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Walter Williams
(Former chair, Dept. of Economics,
George Mason University)
“Free markets, private property rights, voluntary
exchange, and greed produce preferable outcomes
most times and under most conditions.”
--“The Virtue of Greed in Promoting Public Good,”
Richmond Times-Dispatch, October 6, 1999, p. A15)
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“[G]reed is healthy. You
can be greedy and still
feel good about
yourself.”
--Commencement address, May 18,
1986, School of Business Administration,
University of. California, Berkeley.
Ivan Boesky, leaving a federal halfway house in 1989.
Six months later Boesky was
convicted of insider trading …
…and received a sentence of
three years in prison and $100
million fine.
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Gordon Gekko in Wall Street (1987)
“[G]reed is good.... Greed works. Greed clarifies, cuts through
and captures the essence of the evolutionary spirit....”
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Video
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Is Adam Smith to Blame?
Adam Smith, “gave a new dignity to greed,” and sanctified “predatory impulses”
(Lerner, 1937, x).
More than 250 years ago, Smith wrote:
“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.”
Visual 2.1
(Adam Smith, The Wealth of Nations, Indianapolis: Liberty Press, 1981 [1776], 26-27)
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Do we really
understand
Adam Smith?
What would he
say – if he came
back to life?
A novel
Jonathan B. Wight, Saving Adam Smith: A Tale of Wealth, Transformation,
and Virtue (Prentice Hall, 2002).
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Smith’s bottom line:
It is appropriate to be self-interested.
But moral considerations generate self-restraint, and
beyond that, a concern for justice.
Greed is self-interest… without the moral restraint.
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Ethical people generate the social capital that
lubricates the wheels of commerce and society.
“When the happiness or misery of others depends in any respect upon
our conduct, we dare not, as self-love might suggest to us, prefer the
interest of one to that of many.” (TMS, pp. 137-8)
“[B]y acting according to the dictates of our moral faculties, we
necessarily pursue the most effectual means for promoting the
happiness of mankind….” (TMS, p. 166)
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The Invisible Hand
Self-interest is a tremendous force for
individual self-betterment.
In “many” cases, self-interest also advances the
interests of society 
The example Smith gives is of a businessman who prefers to
keep his investments domestically because, “He can know better
the character and situation of the persons whom he trusts...”
(Wealth of Nations, 1981, 454).
Social capital thus creates a bias in favor of domestic investments.
This strengthens the domestic economy and creates spill-over
benefits for society at large.
See: Jonathan B. Wight, “The Treatment of Smith’s Invisible Hand,”
Journal of Economic Education (forthcoming).
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Thus:
“By preferring the support of domestic to that of foreign
industry, [the entrepreneur] intends only his own security;
and by directing that industry in such a manner as its
produce may be of the greatest value, he intends only his
own gain, and he is in this, as in many other cases, led by an
invisible hand to promote an end which was no part of his
intention.”
Sociability and trust—along with competitive
markets and a system of justice—create
conditions in which self interest promotes the
broader interests of society.
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Lesson 2
Play the Ultimatum Game
(p. 24)
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VISUAL 2.2
THE ULTIMATUM GAME: DIRECTIONS
You are about to play a famous game called the Ultimatum Game. In this
game players negotiate the division of 10 rewards items. The teacher will
define the specific rewards to be allocated. Read these rules, but don’t begin to
play until your teacher says “Go.”
1. You play this game in pairs; one player is the Proposer and the other is the
Responder.
2. If you are the Proposer, your job is to propose an allocation, or division, of 10
rewards items between yourself and a Responder. You may not use fractional
amounts, so you must propose a whole number between 0 and 10 rewards for
yourself, with the remainder of the 10 rewards going to the Responder.
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VISUAL 2.2
THE ULTIMATUM GAME: DIRECTIONS (con’t)
3. If you are the Responder, your job is to accept or reject the Proposer’s
proposal. If you accept the proposal, both of you will get the proposed number
of rewards at the end of the lesson. If you reject the offer, neither of you will get
anything for this round.
4. Proposers will randomly pick Responders for each round (try not to pick
your close friends). Players must switch partners after each round. Do not
repeat partners.
5. Half the class will start the game as Proposers and half as Responders.
You will play two rounds, with a new partner for each round. After the second
round, you will switch roles: Each Responder becomes a Proposer, and each
Proposer becomes a Responder. You will play two more rounds — again, with
a new partner for each round.
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VISUAL 2.2
THE ULTIMATUM GAME: DIRECTIONS (con’t)
6. Record your results after each round on the score sheet below. At the end of
the game, calculate the total rewards you earned.
7. All rewards will be distributed at the end of the lesson.
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Visual 2.2
THE ULTIMATUM GAME
This is the record sheet each student keeps.
1. In the column marked (P), circle the number of rewards you earned as a Proposer.
2. In the column marked (R), circle the number of rewards you earned as a
Responder.
3. Add up the total rewards you earned as both a Proposer and Responder.
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The Bottom Line
Self-interest may lead people to make aggressive
offers, but greed can often lead to earning nothing.
In the Ultimatum Game and in life, people dislike
unfairness and will incur costs to punish it.
Human nature includes the instincts for social
cooperation and justice.
Questions or comments?
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Positive economics – the study of what “is”
Positive economic models become more powerful when we consider
that human beings are partially motivated by sociability and morals.
Examples
* Highway tips
* Doctor and patients
* Auto mechanics and customers
* Employees and fiduciary duties
Ethical norms and judgments are pervasive—including in economics!
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Example from Lesson 1 – Does
Science Need Ethics?
Maria’s research project
•
•
•
•
•
Picking a professional field
Picking a subject for study
Perception and model-building
Methodology and data collection
Analysis, Dissemination and Impact
Text, p. 11
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Ideology = the characteristic thinking or beliefs of a
particular group, culture or class at a point in time.
Worldview = Ideology plus random knowledge
(pre-analytical)
World view and ethical judgments permeate
research at every step.
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PROVIDE FACTUAL ANSWERS TO THESE QUESTIONS:
1. What is the current time?
2. What is this? 
3. Does this animal pictured here eat:
a) carrots from the garden
b) fish from the lake?
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1. What is the current time?
A. Did you answer “9:50”?
Why didn’t you say, “It is exactly 9:50:43:50 a.m.”?
You likely put the question of fact determination into a
context. How important is the exact detail? You
automatically filtered the question and added a value
judgment about how much detail to add.
B. Did you answer based on time in Las Vegas, NV?
Why didn’t you say, “It is 6:20 pm in London, England?
[Again, you put the question of fact determination into a
context.]
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What is the current time?
C. More importantly, where does the concept of time and its
measurement come from?
Why is each day broken up into 24 segments called “hours” and not
into 12 or 15 or 30 segments?
Where does each day “officially” start on the globe, and why there?
What is Greenwich Mean Time, and how did this arise?
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2. What is this?
A.
Did you answer “an apple”?
Why not manzana (Spanish) or apfel (German) or 苹果 (Chinese) ?
Language is a human construct. Words that exist for concepts in
one language may not exist in others, or may have multiple
interpretations (e.g., “love”). What are the “facts” about
what this thing is?
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2. What is this?
B. Moreover, this is NOT factually an apple in any
language. It is a two-dimensional representation
of something you interpret to be an apple.
Technically it is a spectrum of light particles
bouncing off a reflective surface.
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KUHNIAN WORLDVIEW: Is this a duck or a rabbit?
Around Easter, more children see the animal as a rabbit.
Context determines the “facts” collected.
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Conclusion:
It is hard to construct a “fact” in
isolation from context, theory,
worldview, and human
judgment.
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Example from Economics
The study of unemployment
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1. Where do research
questions come from?
(worldview, vision)
Key issue: Who is paying for the research?
Do research payers always ask the most
important questions? What biases enter in?
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2. Model-Building
* Market wage clearing model
* Keynesian wage rigidity model
* Marxian class conflict model
(worldview, ideology, institutions)
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3. Data Collection
a) How do we define the data to be
collected? That is, what is
“unemployment”?
Any answer we give requires a judgment
about why we are collecting the data and
what goal its collection will serve.
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3. Data Collection
b) How much data do we
collect?
Data is not free. There are opportunity costs
of acquiring data. How much is the “right”
amount?
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3. Data Collection
c) Collecting the data is constrained by
ethical considerations in addition to
economic limitations.
For example, is it possible to collect data by kidnapping
people and torturing them?
[Think of Hitler’s concentration camp experiments in the
further of science.]
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3. Data Collection
d) Collecting the data might CHANGE
the data!
For example, surveying households about who’s actively looking for
work might stimulate someone to start searching!
Asking consumers about their confidence in the economy could
introduce uncertainty into their minds that didn’t previously exist!
This is called the “Observer” problem, also in physics known as
“Heisenberg’s Uncertainty Principle.”
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4. Data Analysis
a) Statistical significance
* Type I error
* Type II error
b) Economic significance
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Statistical Significance
Spending on Childhood Intervention vs. H.S.
Graduation Rates (after 12 yrs.)
Graduation Rate
100
90
RAW DATA
80
70
60
50
40
30
20
10
0
$0
$500
$1,000
$1,500
$2,000
Per Capita Annual Spending
Does spending on childhood intervention programs
increase high school graduation rates?
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Statistical Significance
Spending on Childhood Intervention vs. H.S.
Graduation Rates (after 12 yrs.)
71
RAW DATA
Graduation Rate
69
67
65
63
61
59
57
$400
$600
$800
$1,000
$1,200
$1,400
Per Capita Annual Spending
Eyeballing the curves is not helpful—because changing
the scale will alter the perception of slope.
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Spending on Childhood Intervention vs. H.S.
Graduation Rates (after 12 yrs.)
80
REGRESSION LINE ESTIMATION
Graduation Rate
75
70
65
60
Is the slope of this line bigger than
zero?
55
50
$400
$600
$800
$1,000
$1,200
$1,400
Per Capita Annual Spending
So we have to test statistically to see whether there is a high
probability that these data reflect a rising slope. But what
probability is “high enough” for certainty?
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Type I Error (false positive) – we accept the independent variable as
significant when it is not. Hence we fund childhood intervention programs
when really they are not effective.
Type II Error (false negative) – we reject the independent variable as
significant when it really is. Hence we cut off funding for childhood programs,
even though they are effective.
Most econometric studies select a 95% confidence level for estimating
regression coefficients (5% chance of making a Type I error). This
determination of what is acceptable or “scientific” level of certainty is purely
judgmental, which is to say normative.
Economic Significance: Moreover, even if the correlation is statistically
significant, is it “economically” significant? Does it have “oomph”?
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5. Research Dissemination
a) Truthtelling
Why don’t scientists simply lie about their results?
Example: Suppose your results don’t support your
research funding agency’s agenda. Should you fabricate
results so as to get more future grants?
Science entails the absolute ethical judgment that “truth” matters
– more than careers and money.
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5. Research Publication
b) External financing
c) External evaluation
“Funeral by funeral, science progresses.”
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6. Economic Knowledge
Research changes public policy
(reform of welfare laws, changes in
unemployment compensation)
John Maynard Keynes: “Practical men, “who believe themselves to be
quite exempt from any intellectual influences, are usually the slaves of
some defunct economist.”
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SUMMARY
Whether a researcher desires it or not
-- or is even conscious of it or not -the act of carrying out positive economics entails
numerous value judgments.
Researchers cannot escape from making ethical
choices in doing positive economics.
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“Positive” economics is a mix of:
“science” and “normative values”
(analytical effort and judgments)
Absolute ethical standards are required of researchers
(honesty, fiduciary behavior to subjects).
Questions or comments?
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Lesson 6:
What Should We Do About Sweatshops?
Normative economics – the study of
what “ought to be.”
When economists analyze public policies they are
engaged in ethical deliberation.
Critical thinking about public policy includes an
understanding of alternative moral frameworks.
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WHAT ETHICAL APPROACH IS THE SPEAKER ENDORSING?
WHAT LOGICAL FALLACY DOES THE SPEAKER
PROMOTE?
http://www.sciencecartoonsplus.com/gallery/ethics/eth06.gif
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Answers: When the speaker says the “real world kicks in”, doesn’t he
imply that the CONSEQUENCES have to be considered? Considering
consequences is what consequentialists do, but they are ALSO doing
ethics when they do this. So, the speaker is speaking nonsense, by
implying that ethics lies OUTSIDE of consequentialism. Many
economists and business people think that ethics should be kept out of
the discussion—without realizing that they are already doing ethics
whether they realize it or not!
Remember: normative economics (e.g., analysis of welfare and
consumer and producer surpluses) is a type of ethical analysis. It is
ethical if you accept this method as the correct ethical approach.
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Alternative Ethical Approaches
Outcomes-based ethic: focus on results
Utilitarian ethics – pleasure and pain to all feeling creatures: Jeremy Bentham
and J.S.Mill
Economic ethics – dollar costs and benefits to consumers and producers
Duty-based ethic: focus on process and rights
Religious ethics – duty to divine commandments.
Kantian ethics – duty to rational rules or principles
(Some things are just wrong no matter how many people benefit.)
Virtue-based ethic: focus on character
Aristotle, Adam Smith – pursuit of excellence
McCloskey – The Bourgeois Virtues: Ethics for an Age of Commerce
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Visual 6.3
Approaches to Sweatshops
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What Should We Do About Sweatshops?
Options:
1. International Treaty
2. Markets and Monitoring
3. Take No Action
Activity 6.3
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Conclusion
1. Economic theory does NOT provide the final answer
to complex public policy questions.
2. Critical thinking implies students must make
decisions for themselves.
3. Critical thinking can be cultivated:
* by focusing on the normative elements of good
science; and
* by expanding the moral framework of analysis.
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