PHILOSOPHY OF
ECONOMICS &
ETHICS:
SUMMARY
@ECOsummaries
→ 20% discount
1
,Table of contents
Week 1_________________________________________________page 3-4
Week 2_________________________________________________page 5-8
Week 3_________________________________________________page 9-13
Week 4_________________________________________________page 14-17
Week 5_________________________________________________page 18-21
Week 6_________________________________________________page 22-25
Week 7_________________________________________________page 26-29
Week 8_________________________________________________page 30-33
Week 9_________________________________________________page 34-38
2
,Week 1 – Economics and ethics
Introduction (Ch. 1)
What is economics?
Neo-classical approach: human behaviour as a relationship between ends and scarce means.
→ Disconnection with ethics
What is ethics?
- Morality: standards that an individual or a group has about what is right and wrong.
* Values: happiness, justice, freedom.
* Norms: behavioural rules (not stealing).
* Virtues: honesty, prudence, industry.
Moral dilemma:
Descriptive vs. prescriptive statements:
- Descriptive/positive: knowledge or prediction on ‘’what is’’.
→ Economics uses this.
- Prescriptive/normative: knowledge of ‘’what ought to be done’’
→ Ethics uses this.
Example: both connected.
* Value statement: the government should foster goal X.
* Descriptive statement: X is most efficient by doing etc.
* Prescriptive policy advice: use policy instrument Y.
- Friedmann: most of the debate is on the descriptive statement.
Economic ethics:
3
,Values of a free market:
- John Locke: the free market respects the right of freedom and private property.
- Adam smith: the free market economy will produce the greatest benefits:
* Labour division → higher productivity and innovation.
* Low prices.
* Price signals → efficient allocation of goods.
→ Invisible hand: market will find a solution to equilibrium itself without
intervention from e.g., the government
- Theory of unintended consequences: greatest benefits are realised by self-interest of
economic agents.
→ Focus on own gain also leads to gain for the whole society.
Criticism on free market economy:
- Lack of efficiency: negative externalities → self-interest is not always socially efficient.
- Lack of other ethical values: injustice → free markets generate unequal income
distributions.
Two models of capitalism:
- Anglo Saxon model (UK, US):
* Free market
* Government protects private property and contract rights, but no intervention by
government.
* Shareholder model for companies: maximize stock value.
- Rhineland model (Germany, France):
* Market operation, but within limits.
* Government regulates the market and provides for welfare state.
* Stakeholder model for companies: balance of interests of stakeholders.
Institutions:
Definition: systems of established and prevalent social rules that structure social
interactions.
Regulative institutions: rules, sanctions, try to promote certain type of behaviour and
condone others.
Normative institutions: values, norms, beliefs, etc.
Cognitive institutions: social knowledge shared by people in a country that is used when
selecting and interpreting information.
4
, Week 2 – Utilitarianism & market system
Utilitarianism (Ch. 2)
Criterion for right in utilitarianism:
- ‘’The greatest happiness of the greatest number’’ (Jeremy Bentham)
→ An action is right when the total sum of utilities produced by that act is greater than the
total sum of utilities of another act instead.
3 characteristics of utilitarianism:
1. Consequentialism
- Only the consequence matters, and not the intrinsic features they may have.
→ The outcome matters, not the process.
2. Welfarism:
- The only goal is utility/welfare.
- Bentham welfarism: utility is pleasure (hedonism/monism).
- Economists welfarism: utility is satisfaction of actual preferences
→ Individuals can judge their own welfare best (=individual sovereignty).
3. Sum ranking:
- Total sum of utilities should be maximized with equal weight to utility of different
individuals.
→ Your own utility has an equal weight as any other individual → no discrimination as well.
- There is no max in giving. Utilitarianism says that you should give as much to the point that
the individual will hurt himself.
- Equality of income.
Cost benefit analysis:
1. Who is affected and how?
2. What is their WTP for each policy? How much compensation if needed?
3. Select alternative with the highest net benefit.
Advantages of utilitarianism/cost benefit analysis:
1. Systematic analysis of all consequences.
2. Includes utility effects that are not priced by the market.
3. Links to happiness research.
Capability approach (Amartya Sen):
- Broader than consequentialism.
- Focusses on the capability of people and what they can achieve.
- Example: with a bike you are able to move places, which gives you freedom and
happiness. Utilitarianism would only look at the value of the bike, and not what you
can do with it and achieve with it.
5
ECONOMICS &
ETHICS:
SUMMARY
@ECOsummaries
→ 20% discount
1
,Table of contents
Week 1_________________________________________________page 3-4
Week 2_________________________________________________page 5-8
Week 3_________________________________________________page 9-13
Week 4_________________________________________________page 14-17
Week 5_________________________________________________page 18-21
Week 6_________________________________________________page 22-25
Week 7_________________________________________________page 26-29
Week 8_________________________________________________page 30-33
Week 9_________________________________________________page 34-38
2
,Week 1 – Economics and ethics
Introduction (Ch. 1)
What is economics?
Neo-classical approach: human behaviour as a relationship between ends and scarce means.
→ Disconnection with ethics
What is ethics?
- Morality: standards that an individual or a group has about what is right and wrong.
* Values: happiness, justice, freedom.
* Norms: behavioural rules (not stealing).
* Virtues: honesty, prudence, industry.
Moral dilemma:
Descriptive vs. prescriptive statements:
- Descriptive/positive: knowledge or prediction on ‘’what is’’.
→ Economics uses this.
- Prescriptive/normative: knowledge of ‘’what ought to be done’’
→ Ethics uses this.
Example: both connected.
* Value statement: the government should foster goal X.
* Descriptive statement: X is most efficient by doing etc.
* Prescriptive policy advice: use policy instrument Y.
- Friedmann: most of the debate is on the descriptive statement.
Economic ethics:
3
,Values of a free market:
- John Locke: the free market respects the right of freedom and private property.
- Adam smith: the free market economy will produce the greatest benefits:
* Labour division → higher productivity and innovation.
* Low prices.
* Price signals → efficient allocation of goods.
→ Invisible hand: market will find a solution to equilibrium itself without
intervention from e.g., the government
- Theory of unintended consequences: greatest benefits are realised by self-interest of
economic agents.
→ Focus on own gain also leads to gain for the whole society.
Criticism on free market economy:
- Lack of efficiency: negative externalities → self-interest is not always socially efficient.
- Lack of other ethical values: injustice → free markets generate unequal income
distributions.
Two models of capitalism:
- Anglo Saxon model (UK, US):
* Free market
* Government protects private property and contract rights, but no intervention by
government.
* Shareholder model for companies: maximize stock value.
- Rhineland model (Germany, France):
* Market operation, but within limits.
* Government regulates the market and provides for welfare state.
* Stakeholder model for companies: balance of interests of stakeholders.
Institutions:
Definition: systems of established and prevalent social rules that structure social
interactions.
Regulative institutions: rules, sanctions, try to promote certain type of behaviour and
condone others.
Normative institutions: values, norms, beliefs, etc.
Cognitive institutions: social knowledge shared by people in a country that is used when
selecting and interpreting information.
4
, Week 2 – Utilitarianism & market system
Utilitarianism (Ch. 2)
Criterion for right in utilitarianism:
- ‘’The greatest happiness of the greatest number’’ (Jeremy Bentham)
→ An action is right when the total sum of utilities produced by that act is greater than the
total sum of utilities of another act instead.
3 characteristics of utilitarianism:
1. Consequentialism
- Only the consequence matters, and not the intrinsic features they may have.
→ The outcome matters, not the process.
2. Welfarism:
- The only goal is utility/welfare.
- Bentham welfarism: utility is pleasure (hedonism/monism).
- Economists welfarism: utility is satisfaction of actual preferences
→ Individuals can judge their own welfare best (=individual sovereignty).
3. Sum ranking:
- Total sum of utilities should be maximized with equal weight to utility of different
individuals.
→ Your own utility has an equal weight as any other individual → no discrimination as well.
- There is no max in giving. Utilitarianism says that you should give as much to the point that
the individual will hurt himself.
- Equality of income.
Cost benefit analysis:
1. Who is affected and how?
2. What is their WTP for each policy? How much compensation if needed?
3. Select alternative with the highest net benefit.
Advantages of utilitarianism/cost benefit analysis:
1. Systematic analysis of all consequences.
2. Includes utility effects that are not priced by the market.
3. Links to happiness research.
Capability approach (Amartya Sen):
- Broader than consequentialism.
- Focusses on the capability of people and what they can achieve.
- Example: with a bike you are able to move places, which gives you freedom and
happiness. Utilitarianism would only look at the value of the bike, and not what you
can do with it and achieve with it.
5
