Political Economy Students' Journal

Introduction

 

Modern Economics as an academic discipline was developed with the aim in mind of making it autonomous from other fields of study. Via condemning practices involving certain “normative” characteristics, economists sought to create distinct separation between their theories and methodologies and the social sciences.  This was done with the purported goal of making economics “value-free” and thus safeguarding the technocratic policy-making process from being influenced by broader social and ideological trends and concerns. Consequently, we came to see a continuously growing cleavage between most of contemporary applied economics and those disciplines concerned with analysis of society through vastly different lenses (e.g., sociology, philosophy, anthropology, ethics).

 

In the words of Lionel Robbins, “Economics deals with ascertainable facts; ethics with valuations and obligations” (Robbins, 1935). The seemingly irreconcilable goals of ethics and economics subsequently led to clashes between the views of major economists, like Stigler (1981), with the subsequent defeat of “ethical values” in economic theory development. This state of affairs, although dominant, is not,  however always adhered to, nor is it entirely consensual among all economists.  Going back to founding thinkers like Adam Smith, it is easy to discern an evident connection between the study of economics and that of ethics. More recently,  authors like Amartya Sen have encouraged going “back to the origins”, arguing that in doing so, this would enrich both fields. This might particularly be the case when taking into consideration the issue of human behaviour, which, while it is essential to descriptive and predictive economics, can suffer from not including insights generated in other fields. Meaning that, rather than continuing with the general assumptions about economic behaviour on the grounds of rationality, self-interest, which are based on utility measures, such as Pareto Optimality, economics should perhaps extend its analytic scope beyond mere cost-efficiency.  Delving into Amartya Sen’s ideas on the subject, the present essay will seek to firstly, delineate the inherent linkage between ethics and economics and then secondly, follow with a critical assessment of the problems this has produced for modern economics, by combining insights and articles tackling the theme. I thus intend to shed light on the importance of bringing back ethical considerations into economic analysis, concomitantly decreasing the effectiveness of some mainstream perspectives exhibited by figures such as Stigler.

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The Ethical "Embeddedness" in Economics: Historical Interconnectedness in Adam Smith 

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The modern study of economics prides itself on its “amorality”, whereby market actors are visualized within a framework of rationality, modelled on costs-benefit calculations. Economics, however, has not always been studied as this distinct of  a phenomenon, typically having been integrated into the study of philosophy. The supposed “father of economics” himself, Adam Smith, did in fact teach and write on issues of Moral Philosophy in Glasgow and spent many years studying literature on social philosophy. It is unsurprising then, that his writings themselves contain many ethical considerations. Popular belief, even within economics, tends to associate Smith with the larger argument for unfettered free enterprise as if detached from non-economic issues (Sen, 2010), even though Smith put as much weight on questions of unequal economic relations and social inequity.  Analysing Smith’s work further can serve as an illustrative aim for demonstrating that economics, historically, contains ethics. His seminal “The Wealth of Nations”,  is famously often cited for the idea of self-interest as most potent motif behind productive market exchange. As Smith writes, “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” (Smith, 1789). What seems to get lost in the discussion of his work,  however, is the constraints he sees for this self-interest, or “self-love” as Smith  refers to it, imposed by what he calls our “moral sentiments”. From his earlier  philosophical work on the “Theory of Moral Sentiments” (TMS), we can see how  Smith tried to explain human morality through the recourse of various qualities,  beyond motivations of self-gain or prudence, such as “humanity, justice, generosity,  and public spirit” (Smith, 1759). In other words, Smith argues that human actions are not solely guided by the benefits one directly gains from them, but also, for instance, by the legitimacy imbued in the receiving of appraisal for a given action.  As he puts it, we seek “fellow-feeling with all the emotions of our own breast” (1759).  Individuals, he argues, want to be truly praiseworthy, a judgement call that can only honestly be assessed by way of an “impartial spectator”, who perceives the situation from a critical distance, equipped one with social impartiality (Sen, 2010).  Although only briefly explained here, Smith’s thoughts on human motivations, reveal a conceptualization of ethical and economic relations as coexisting, if not,  codependent. According to him, Individuals are not, as conceived by modern  economists, just a “homo economicus”, but rather, are also influenced by ethical  considerations. Authors like Amartya Sen tend to emphasize this idea, arguing in  favour of altering the practice of economics (Sen, 1987). Later, considerations of problems originating from the isolation of economics will be examined. However, first it is important to understand how and why this division has occurred.

 

The Autonomization of Economics from Ethics 

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At any given time, the development in the study of economics seems constrained  by the contextual realities that engulf the discipline at any given time. A good  example of that can be seen in the literature of Political Economists, wherein the  focus on attacking the remnants of the feudal and mercantilist periods permeates.  Consequently, much attention is given to correlations of societal change and economic development in economic analysis, “concerned with processes extending over substantial time, taking on their pace, direction, and forms because of the connections between the economy and the larger society: thus ‘political economy’.” (Dowd, 2000, p. 82).  By the same token, the development of neoclassical economics was influenced  by the era it took place in (Dowd, 2000). With industrial capitalism maturing and  fully establishing itself as central to modern society, particularly in Great Britain,  emerging economists redirected their interest to explain the system as a whole.  As a result, the capitalist economy was abstracted from particular realities, thus  enabling its overall characterization. Even the personal background of some marginalist economists seems to have influenced it (Sen, 1987). Leon Walras, for instance, was an engineer, which gains relevance, since these authors were more accustomed to forms of mechanical and logistical analysis, as well as methodology from the natural sciences. From this, they sought to apply that logic to economics and developed what Sen (1987) calls an “engineering-approach” to the  study of economics. Put shortly, the “engineering-approach” adopts “positive  economics”, shunning elaborations of normative analysis (Sen, 1987). Modern economics has thus been developed with the aim of factual descriptions, as opposed to prescriptive, and value-based statements (Morris, 2009). With the adoption of these new methods, economic analysis inevitably departed from ethical  arguments. Instead of the more differentiated reasoning found in Smith, economics started viewing human motivation as solely based on the maximization of  profit. It became implied that economic agents always behave rationally, as this was understood to be at the core of the pursuit of self-interest. Consequently, many concluded that aiming along ethical motifs would prove irrational to individuals. The baseline assumption of rational self-interest as the determinant of human action eventually led to the adoption of utility-based functions, such as Pareto Optimality and “economic efficiency”. Interestingly enough, these presuppose the acceptance of a particular moral philosophy (utilitarianism), as an ethical basis for economic theory, albeit excluding ethical concerns in its utility measures.  By juxtaposing the Smithian perspective presented above with that of neoclassical analysis given in this section, one can recognize the divergence in views on human motivation. The next segment will seek to delineate the problems with the separation of economics from ethics, while proposing a return to connecting the two.

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Limitations of Modern Economics

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With its departure from ethics, Economics opted for a different, arguably much narrower methodology, according to which well-being and utility were devised under the rational self-interest framework of economic agent and rooted in the utilitarian dichotomy of “is-ought”. From this, subsects of economics, like Welfare  Economics, went on to adopt Pareto Optimality as criteria by which economic well-being should be measured. By doing so, Welfare Economics was essentially relegated to a position wherein it was influenced by predictive economics, but without having any recourse of being able to influence it in return (Sen, 1987).  This became the case, because of most economists embracing of the premises of  “self-interest-seeking behaviour” and the judging of social achievement by measures of “utility-based criterion”. Before digging further into the problems associated with the adoption of this “engineering-approach” to economics, it should be noted that what will be condemned is not the approach as a whole, but rather the limitations it puts on itself. 

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Rational Self-Interest and “Welfarism”  

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As developed so far, modern economics’ departure from ethical considerations led to abrupt changes in the way the field came to look at economic agents and their behaviour. The espousal of the “homo economicus” hypothesis soon led economic analysis through increasingly limited channels, while at the same time,  raising important questions about its legitimate use. The first issue that can be brought up is to do with the methodology behind the measuring of utility, or more particularly, behind the choice for such a criterion as the Pareto one. This forces us to go back to the theoretical background of the application of utilitarian logic in economics. As a moral principle, utilitarianism essentially entails a combination of three “more elementary requirements”, those being “welfarism”, “sum-ranking”, and “consequentialism” (Sen, 1987). This means that utilitarianism revolves around the equating of goodness with utility and with information (welfarism), only being assessed by the sum-total of utilities (sum ranking), while also requiring the determining of choices by the consequent goodness it produces (consequentialism). Whether or not utilitarianism stands as a suitable philosophical approach is not to be discussed here, but its adoption by economics generates an important question: Neoclassical economics views utility as “well-being” (Broome, 2019), but if, at the same time, it purports economic agents to be purely rational self-interest maximisers, does this not exclude a priori, altruistic goals? In other words, is it not the case that it restricts “well-being” to the pursuit of egotistical aims? It would seem so (Annett, 2018), hence my first contention with modern economics.  Personal welfare, or interests, do not seem to be restricted to benefits gained from a given action. As demonstrated by myriads of social research, sacrificing personal gains within a group can, oftentimes, help the overall interest of each of the group’s elements (Becker, 1983). A more nuanced understanding of this can be reached by taking into consideration how “well-being” is conceptualized differently across different societies, cultures, and historical periods. In the case of Japan, for example, an emphasis on group loyalty and the promotion of selfless behaviour is visible to this day and often economically beneficial (Dore, 1983). However, by following the neoclassical logic, such actions should be viewed as  “irrational”, resulting in less efficient results. If so, it becomes hard to explain such findings, suggesting the theory does not quite add up with reality. Individuals are not atoms; they live and thrive in collective settings. This was something the so-called “classicals”, for instance, understood and incorporated into their theories.  Neoclassicals, in contrast, by departing from ethics seem to have forsaken this,  modelling their theories on the assumption that what is good for the individual ultimately shapes his or her actions. Thus, when confronted with apparent selfless aims that increase the positions of individuals, it leaves us with an insufficient explanation of the reasons behind it.  

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Utility as Value  

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Even if we were to assume that the premise behind the definition of “well-being”  as the linking of rational self-interest to efficiency, was correct, we would still find a problem behind the idea of utility. In economic theory, “utility” is identified with the value of a function that represents someone’s preferences (Broome, 2019), or,  in other words, it is viewed as representing one’s personal advantage. However,  value does not seem to be derived exclusively from utility, something highlighted in the works of modern philosophers like Nozick or Rawls. Instead of arguing for  “welfarist”, “sum-ranking”, or “consequentialist” aims, they focus their attention on the intrinsic value one gets from rights and liberties.  Drawing on the famous “utility monster" from Nozick (1974), the treatment of utility as the only measure of value leads to the admittance of maltreatment of some. This general criticism of utilitarianism is unsurprisingly embodied in Pareto  Optimality, which demonstrates this. As Sen puts it, “A state can be Pareto optimal with some people in extreme misery and others rolling in luxury, so long as the miserable cannot be made better off without cutting into the luxury of the rich.” (Sen, 1987, p. 32).  Consequently, utility-based analysis such as Pareto Optimality fails to describe anything of substance regarding distributional matters, limiting itself to the mere assessment of overall socioeconomic achievement.  

Whereas freedom constitutes the central value in the theories of Nozick and  Rawls, in utilitarianism it remains only secondarily instrumental as something from which one derives more particular goals. This being the case, there is no reason for the Pareto criterion to follow any other measure than that of utility, hence accepting situations popularly viewed as being unfavourable to social well-being.  As such, modern economics again suffers from a narrowness of scope in analysis,  limiting the overall practicality of its evaluative criteria. 

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Positive-Normative Dichotomy

 

A more profound issue regarding modern economics goes back to the discourse among figures like Robbins or Stigler, that self-interest and morality inevitably clash, thereby one has to accept their incompatibility. The reasoning behind such claims throws us to another, broader, debate: the dichotomization of “is-ought”.  Rooted in David Hume’s works (Davis, 2019), the term “is” primarily applies to descriptive aims, as opposed to “ought” statements aimed at evaluative ethics.  The former rests on factual claims, like the retelling of historical accounts, or mere characterizations of certain objects, while the latter goes on to ascribe subjective qualities to something. In essence, one corresponds to what is normally ascribed as “positivism” (is), while the other to normative assessments (ought).  

With the evolution of sciences, a multitude of disciplines came to assume these approaches as being opposites, consequently rejecting one of the two. Economics ended up adopting an approach closer to positivist reasoning, grounding its choice on the idea that values are highly subjective and arbitrary, while facts are intersubjective and objective (Davis, 2019). If one had in mind logistical and technical problems, this non-normative thinking was thought to be the preferable route, as economic theory development should strive to be “value-free”.  However, what economists failed to realize was that the “is-ought” debate was not,  as some claimed, a dichotomy. Rather, as explained well by Hilary Putnam (2002),  descriptive and valuative statements are inherently entangled. To understand his point, it is important to focus on what are called “thick” ethical concepts. These typically are terms that express evaluative concepts, as well as being substantially descriptive (IEP, n.d.). Take the use of the word courageous: When talking about someone else, one is doing two things: evaluating them in a positive light and describing their character as being willing to face risks. Putnam goes on to argue that prior to developing theories, there is selection of terms that are “thick”. He points to the ideas of coherence, simplicity, or even explanatory power, all of which express a positive as well as a descriptive valuation. With this, the idea of creating theories “value-free” crumbles. Instead, he suggests the supplementation with normative values, what he calls “entanglement thesis” (Angelides, 2004).  Following this, there should not be any dichotomy of positivist and normative assessments, and assuming one, argues Putnam, invariably leads to illogical and incompatible sets of goals with malfunctions in areas like Welfare Economics. As illustrated above, be it in the failure of explaining personal welfare beyond an egotistical framework, or in the consideration for distributional issues.  How then can this be resolved? Perhaps through Sen’s “capabilities approach”.  Similarly, to Rawls and Nozick’s theories, Sen approaches questions beyond value-utility (poverty, welfare, global- & social justice), but in a differing vein, by proposing the evaluation of social arrangements according to the extent to which people have the freedom to promote and achieve functions they value (IEP, n.d.).  As one can note, this presupposes normative propositions, in addition to positive ones, thus adhering to entanglement. By applying this to economics, key concepts which have so far been discussed pertaining to human agency, personal welfare,  or what constitutes a value, are extended beyond the traditional borders of the subject. In this manner, areas such as Welfare Economics or even Developmental  Economics are enriched (Sen, 1987, 1999) from a new angle of study, far more concerned and equipped to deal with ethical considerations.

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Conclusion

 

As shown, the pretence of a separation of economics from ethics not only diverts from its historical tradition, but also opens problems with key concepts utilized in neoclassical analysis. Even though modern economists like to hark back to figures such as Adam Smith as a similar-minded defenders of the free market, the truth is that the latter analyse economic activity very differently. Apart from the idea that “self-interest” is what guides individual behaviour, Smith considered other sources which inform one’s actions, in his “Theory of Moral Sentiments”. This signifies that, at some point, economics started a process of separation from ethics.  Explainable in part by the historical context surrounding this development, and some theorists’ biographical background. The “engineering-approach” gained momentum and came to dominate the discipline. Assuming itself to be “value free”, economics described individuals as rational self-interest agents, with only utility aims. In so doing, it sacrificed much of the scope of the discipline, excluding everything besides the simple mathematical concepts it is based on. However,  reality is more complex. Human behaviour is not limited to economics but is in fluenced by group-interests or abstract values like freedom. The field should thus expand its horizons, in line with the “entanglement-thesis”, and Sen’s “capability approach”. In doing so, it and the world would certainly profit from a more comprehensive, and arguably more humane, analysis of human activity and its motivations.

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