Lecture 1 - 2 February
What do you need to know from the book?
- Part 1 - 4 and the introduction
Why study the link between markets and morality?
- Purpose of course = to study the morality of markets by applying ethics to the
evaluation of market institutions
- Major economists have clear visions on the morality of markets
What is economics?
- Neo-classical approach: the science which studies human behavior as a relationship
between ends and scarce means which have alternative uses
- Ends are given: disconnection with ethics
- All means are tradable and have instrumental value
What is ethics?
- Study of morality
- Morality = standards that an individual or a group has about what is right or wrong
- Values/ends (justice, happiness, freedom)
- Norms: concrete behavioral rules (thou shall not steal)
- Virtues (honesty, prudence, industry)
Moral dilemmas:
Economics vs ethics: descriptive vs prescriptive statements
- Economics makes descriptive or positive statements about the economy →
knowledge about ‘what is’
- Ethics: makes prescriptive or value/normative statements → knowledge of ‘what
ought to be done’
- Both are connected. Any policy advice is derived from:
- Value statement: the government should foster goal x
- Human happiness is an important goal
- Positive statement: x is most efficiently realized by using policy instrument y
- Unemployment has a strong negative effect on human happiness
- Abolishing tax on dividends will attract multinational companies and
reduce unemployment
- Policy advice: implement policy instrument y
- Tax on dividends should be canceled
1
,On what values are the classical defenses of the free market based?
- John Locke: the free market economy respects the right to freedom and the right to
private property
- Adam Smith: the free market economy will produce the greatest benefits:
- Market allows labor division. Labor division generates higher productivity and
innovation
- Prices tend to the lowest possible level in competitive market
- Competition generates efficient allocation through price signals
- Was Adam Smith right? → huge success of the market
Theory of unintended consequences - Adam Smith in Wealth of Nations
- Greatest benefits are realized by self-interest of economic agents
- The businessman only intends his own gain, and by this he is led by an invisible
hand to promote an end which was no part of his intention. By pursuing his own
interest he frequently promotes that of society more effectively than when he really
intends to promote it.
Criticism on free market economy
- Lack of efficiency
- Companies have an incentive to reduce competition
- Negative externalities (pollution) → self-interest is not always socially efficient
- Lack of other ethical values
- Injustice: free markets generate unequal income distribution (Piketty)
Two models of capitalism:
- Capitalism = an economic system that combines private property of productive
enterprises that aim at profit and a competitive environment
- Anglo saxon model (UK, US)
- Free market operation
- Government secures private property and contract rights but does not
intervene or regulate the economic process
- Shareholder model for companies: maximize stock value (bonus system for
managers)
- Rhineland model (Germany, France)
- Market operation, but with some limits
- Government regulates the market and provides for welfare state
- Stakeholder model for companies: balance of interests of stakeholders:
- Shareholders/employees/customers/supplies/governments/society
2
,Chapter 2 Utilitarianism
2.1 Utilitarianism = the greatest happiness for the greatest number of people
- An action is right if the sum of total utilities produced by that act is greater than that of
any other act the agent could have performed in its place
3 requirements:
1) Consequentialism:
Actions, choices or policies must be judged exclusively in terms of the resulting effects rather
than any intrinsic features it may have. Outcomes, not processes, matter.
- One needs to decide what is intrinsically valuable. Then one assesses actions,
policies and institutions in terms of their consequences or contribution to these
valuable goals.
- Real outcome is often not known, so you use the expected outcome
2) Welfarism:
Welfarism: the only goal is utility/welfare. Welfarism requires that the goodness of a state is a
function of utility or welfare obtained by individuals in that state. It excludes all non-utility
aspects of the situation.
But what is welfare?
- Jeremy Bentham - hedonism/monism: mental state of happiness or pleasure:
greatest happiness for greatest number.
- Pleasure and pain determine behavior. It is therefore possible to calculate a
net sum of total utility
- Individual sovereignty. A third party cannot know what serves someone's
interests. Let individuals decide what is best, because they know their own
circumstances the best.
- Economists: utility is satisfaction of actual preferences. Taking the satisfaction of
actual preferences as a measure for welfare; that can be criticized from a
philosopher’s point of view. Individual sovereignty: individuals are the best judges of
their own welfare
- John Stuart Mill: distinction in higher/lower pleasures (intellect vs eating). One cannot
conclude that a satisfied pig is happier than an unsatisfied human being. A beast’s
pleasures do not satisfy a human being’s conception of happiness.
3) Sum ranking
Sum ranking = total sum of utilities should be maximized with equal weight to utility of
different individuals. Utilitarianism implies that income should be redistributed until the
marginal utility from additional income is the same for everyone, because maximizing
welfare means that the marginal utility of different persons should be equalized.
- Social implication of utilitarianism: the moral duty that you should help the poor, no
matter if it is your neighbor or a Syrian refugee. From the utilitarian principle, it
follows that I ought to give as much as possible to the point at which by giving more
one would begin to cause more suffering for oneself one’s dependent than one
prevent for the receiver of the gift.
2.2 Cost benefit analysis
Utilities can be measured, however there are some problems:
3
, - Comparability: how can you compare how well-satisfied preferences are?
- Kaldor and Hicks: compensation test that tests whether the winners can
compensate the losers. For each policy, ask winners how much they would
pay for this policy (willingness to pay) and how much the losers would need to
receive to compensate for their loss. This way, you do not need interpersonal
comparisons.
- Example with valuation of your life and investing in safety for airplanes
Steps in cost-benefit analysis:
1) Investigate the relevant alternatives
2) Trace the consequences and who are affected
3) Determine the numerical value of these consequences by the individuals
4) Reduce the change in the total social welfare by adding up the changes in individual
welfare.
Advantages of cost-benefit analysis:
- Systematic analysis of all consequences
- Includes utility effects that are not priced by the market
- It links to current interest in happiness research
Problems with cost-benefit analysis:
- Measurement: how do you know people reveal their true preferences?
- If the losers are not in fact compensated, is it really a social improvement? Especially
if the losers are already the most miserable in society.
2.3 Problems of utilitarianism
1. Problems of consequentialism
No intrinsic value of rights: As only consequences are important, the fulfillment of rights is
not taken into account. Therefore, utilitarianism can imply that certain actions are morally
right even if they violate someone’s rights. It could be right in this view to withhold medical
care for old, unhealthy Dutch people to reallocate that saved money to help and save African
children who will then have a lifetime of utility, even if that violates Dutch people's rights to
life and healthcare.
- Utilitarianism accepts the torture of an innocent person if the torturer gains more than
the tortured loses. But must we want to accept torture?
Intentions: consequentialism does not consider the intentions of people, only the outcomes.
⇒ contrast in ch. 5 Kant: an action is only good if the intention of that person is good
(Gesinnungsethik). The outcome of that action does not matter.
Disregards retributive justice: utilitarianism only looks at future outcomes, it does not look
at the past. Utilitarianism suggests that a penalty for a crime should not be higher such that
more additional unhappiness for the criminal than would reduce the unhappiness of the
victim. It does not take into account the harm done to the victim in the past.
Difficulty to predict and uncertainty: it is often difficult to predict the costs and benefits
and there is always a lot of uncertainty.
4
What do you need to know from the book?
- Part 1 - 4 and the introduction
Why study the link between markets and morality?
- Purpose of course = to study the morality of markets by applying ethics to the
evaluation of market institutions
- Major economists have clear visions on the morality of markets
What is economics?
- Neo-classical approach: the science which studies human behavior as a relationship
between ends and scarce means which have alternative uses
- Ends are given: disconnection with ethics
- All means are tradable and have instrumental value
What is ethics?
- Study of morality
- Morality = standards that an individual or a group has about what is right or wrong
- Values/ends (justice, happiness, freedom)
- Norms: concrete behavioral rules (thou shall not steal)
- Virtues (honesty, prudence, industry)
Moral dilemmas:
Economics vs ethics: descriptive vs prescriptive statements
- Economics makes descriptive or positive statements about the economy →
knowledge about ‘what is’
- Ethics: makes prescriptive or value/normative statements → knowledge of ‘what
ought to be done’
- Both are connected. Any policy advice is derived from:
- Value statement: the government should foster goal x
- Human happiness is an important goal
- Positive statement: x is most efficiently realized by using policy instrument y
- Unemployment has a strong negative effect on human happiness
- Abolishing tax on dividends will attract multinational companies and
reduce unemployment
- Policy advice: implement policy instrument y
- Tax on dividends should be canceled
1
,On what values are the classical defenses of the free market based?
- John Locke: the free market economy respects the right to freedom and the right to
private property
- Adam Smith: the free market economy will produce the greatest benefits:
- Market allows labor division. Labor division generates higher productivity and
innovation
- Prices tend to the lowest possible level in competitive market
- Competition generates efficient allocation through price signals
- Was Adam Smith right? → huge success of the market
Theory of unintended consequences - Adam Smith in Wealth of Nations
- Greatest benefits are realized by self-interest of economic agents
- The businessman only intends his own gain, and by this he is led by an invisible
hand to promote an end which was no part of his intention. By pursuing his own
interest he frequently promotes that of society more effectively than when he really
intends to promote it.
Criticism on free market economy
- Lack of efficiency
- Companies have an incentive to reduce competition
- Negative externalities (pollution) → self-interest is not always socially efficient
- Lack of other ethical values
- Injustice: free markets generate unequal income distribution (Piketty)
Two models of capitalism:
- Capitalism = an economic system that combines private property of productive
enterprises that aim at profit and a competitive environment
- Anglo saxon model (UK, US)
- Free market operation
- Government secures private property and contract rights but does not
intervene or regulate the economic process
- Shareholder model for companies: maximize stock value (bonus system for
managers)
- Rhineland model (Germany, France)
- Market operation, but with some limits
- Government regulates the market and provides for welfare state
- Stakeholder model for companies: balance of interests of stakeholders:
- Shareholders/employees/customers/supplies/governments/society
2
,Chapter 2 Utilitarianism
2.1 Utilitarianism = the greatest happiness for the greatest number of people
- An action is right if the sum of total utilities produced by that act is greater than that of
any other act the agent could have performed in its place
3 requirements:
1) Consequentialism:
Actions, choices or policies must be judged exclusively in terms of the resulting effects rather
than any intrinsic features it may have. Outcomes, not processes, matter.
- One needs to decide what is intrinsically valuable. Then one assesses actions,
policies and institutions in terms of their consequences or contribution to these
valuable goals.
- Real outcome is often not known, so you use the expected outcome
2) Welfarism:
Welfarism: the only goal is utility/welfare. Welfarism requires that the goodness of a state is a
function of utility or welfare obtained by individuals in that state. It excludes all non-utility
aspects of the situation.
But what is welfare?
- Jeremy Bentham - hedonism/monism: mental state of happiness or pleasure:
greatest happiness for greatest number.
- Pleasure and pain determine behavior. It is therefore possible to calculate a
net sum of total utility
- Individual sovereignty. A third party cannot know what serves someone's
interests. Let individuals decide what is best, because they know their own
circumstances the best.
- Economists: utility is satisfaction of actual preferences. Taking the satisfaction of
actual preferences as a measure for welfare; that can be criticized from a
philosopher’s point of view. Individual sovereignty: individuals are the best judges of
their own welfare
- John Stuart Mill: distinction in higher/lower pleasures (intellect vs eating). One cannot
conclude that a satisfied pig is happier than an unsatisfied human being. A beast’s
pleasures do not satisfy a human being’s conception of happiness.
3) Sum ranking
Sum ranking = total sum of utilities should be maximized with equal weight to utility of
different individuals. Utilitarianism implies that income should be redistributed until the
marginal utility from additional income is the same for everyone, because maximizing
welfare means that the marginal utility of different persons should be equalized.
- Social implication of utilitarianism: the moral duty that you should help the poor, no
matter if it is your neighbor or a Syrian refugee. From the utilitarian principle, it
follows that I ought to give as much as possible to the point at which by giving more
one would begin to cause more suffering for oneself one’s dependent than one
prevent for the receiver of the gift.
2.2 Cost benefit analysis
Utilities can be measured, however there are some problems:
3
, - Comparability: how can you compare how well-satisfied preferences are?
- Kaldor and Hicks: compensation test that tests whether the winners can
compensate the losers. For each policy, ask winners how much they would
pay for this policy (willingness to pay) and how much the losers would need to
receive to compensate for their loss. This way, you do not need interpersonal
comparisons.
- Example with valuation of your life and investing in safety for airplanes
Steps in cost-benefit analysis:
1) Investigate the relevant alternatives
2) Trace the consequences and who are affected
3) Determine the numerical value of these consequences by the individuals
4) Reduce the change in the total social welfare by adding up the changes in individual
welfare.
Advantages of cost-benefit analysis:
- Systematic analysis of all consequences
- Includes utility effects that are not priced by the market
- It links to current interest in happiness research
Problems with cost-benefit analysis:
- Measurement: how do you know people reveal their true preferences?
- If the losers are not in fact compensated, is it really a social improvement? Especially
if the losers are already the most miserable in society.
2.3 Problems of utilitarianism
1. Problems of consequentialism
No intrinsic value of rights: As only consequences are important, the fulfillment of rights is
not taken into account. Therefore, utilitarianism can imply that certain actions are morally
right even if they violate someone’s rights. It could be right in this view to withhold medical
care for old, unhealthy Dutch people to reallocate that saved money to help and save African
children who will then have a lifetime of utility, even if that violates Dutch people's rights to
life and healthcare.
- Utilitarianism accepts the torture of an innocent person if the torturer gains more than
the tortured loses. But must we want to accept torture?
Intentions: consequentialism does not consider the intentions of people, only the outcomes.
⇒ contrast in ch. 5 Kant: an action is only good if the intention of that person is good
(Gesinnungsethik). The outcome of that action does not matter.
Disregards retributive justice: utilitarianism only looks at future outcomes, it does not look
at the past. Utilitarianism suggests that a penalty for a crime should not be higher such that
more additional unhappiness for the criminal than would reduce the unhappiness of the
victim. It does not take into account the harm done to the victim in the past.
Difficulty to predict and uncertainty: it is often difficult to predict the costs and benefits
and there is always a lot of uncertainty.
4
