Ethics and Economics Research Paper

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Can markets and market interactions be viewed as ethical? This is a crucial consideration inasmuch as it calls into question the entire discipline of economics and every human action within each market. Markets might very well afford individuals opportunities to choose among a variety of options and to choose rightly. If so, then markets are neither moral nor amoral, yet they create occasions for each individual to make ethical decisions.

But markets are more than this from the viewpoint of the broader society. Although it is true that an individual market participant may be thinking of only his or her own family in deciding whether to purchase a quart of milk, individual participation in market interactions nevertheless leads to outcomes that—over time—lead to the mutual benefit of all, even to those not directly involved in the exchange component of given market trade. This was the point made when Adam Smith conducted his inquiry into what leads to the growing wealth of nations. Though it is no one person’s job to make sure that societal wealth and opportunities evolve, improve, and grow over time, market systems accomplish it anyway. And in the view of Smith and his successors, this great feat of the enrichment of humanity can hardly be thought unethical—though individuals may nevertheless be tempted by and succumb to occasional fits of pure selfishness. Moreover, in Smith’s view, indeed it is individuals’ own self-interest that leads them to behave in ways that are for the betterment of others, inasmuch as they value the esteem of others in their reference groups. So self-interest can reinforce rightful actions, letting individuals measure up in their own eyes as well as in the eyes of others.

Yet critics of markets and market systems accuse markets themselves of rewarding only selfish behaviors. In this brutish view, the most selfish person gets farthest ahead, at the expense of others. And according to this story, a sort of market Darwinism happens wherein those who quickly appreciate that the system rewards the selfish and opportunistic will adapt, behave still more selfishly, and eventually dominate the others as the natural selection process unfolds. This is also why some charge that the study of economics leads to more selfishness: Better understandings and appreciations of markets systems—so the argument goes—lead to more selfish thoughts and actions.

Even in the face of these doubts about markets and the science of their study—economics—most economists are hopeful that markets enrich the lives and work of everyone, including governments, private citizens, nongovernmental organizations, places of worship, and private organizations of all kinds. Indeed, the most rapid path out of poverty and early death is one that passes through a system of law that treats each human being as an equal and one that leads to a fully flourishing system of markets.

To stay on task, this research paper is organized in the following manner. The next section summarizes linkages between economics and ethics prior to Adam Smith, a period influenced by ancient philosophers such as Aristotle, as well as Scholastics trained in the tradition of St. Thomas Aquinas.

Next, the research paper turns to the modern era in economics, using the writing of Adam Smith as the threshold. Building on the tradition of Aristotle and the Scholastics, Smith explicitly linked the interactions of markets to the ethical motivations of human beings, making the case that morals and markets need each other for the good of all members of society.

Following a careful accounting of this period, which persists into the present day, the research paper summarizes critiques of modern economic thinking where ethics is concerned.

Critics of modern economic thinking, on ethical grounds, come from both inside and outside the profession. Outsiders are often theologians and moral philosophers who attempt to knock down an unfair characterization of modern economics, misunderstanding what economics says (and does not say) about human motives and not firmly grasping Smith’s position on self-interest. Further, the theologians often claim the moral high ground, inasmuch as they have been to seminary while most economists have not.

Finally, because one of the accusations leveled at modern economics is that studying it leads to more self-interested behavior on the part of its students, this research paper examines this charge. There is limited empirical evidence on this question, though, and the findings are mixed.

Early Economists and Ethicists

Since the very beginning, economic thinking has been closely linked to ethical thinking. This linkage derives from the intellectual backgrounds and interests of the first economists. Beginning with early philosophers such as Aristotle, the first economic thinkers were also moral philosophers. Centuries later, Scholastics—educated in the tradition of Thomas Aquinas—brought their expertise as moral theologians to the choices people face and the decisions they eventually make. Throughout most of this rich, historical tradition—entwining morals and market considerations— economic decision making and behavior simply were not thought to be in conflict with ethical conduct. On the contrary, for both Aristotle and the Scholastics, human actions and choices within markets make living a good life possible.

Plato and Aristotle

Little regarding economics and ethics exists prior to Plato (ca. 427 B.C.E.-327 B.C.E.). In his defining and best-known work, The Republic, Plato outlines both his understanding of economics as well as his personal insights into the ethical limitations of trade. The Republic analyzes both political and economic life, and in it, Plato outlines his views of economy. According to Robert Ekelund and Robert Hébert (1990), though, Plato stopped short of developing any sort of economic theory of exchange; he was more concerned with the resulting distribution of wealth, rather than any specific theory behind trading goods or services. In Plato’s view, trading was likely to be a zero-sum game, rather than a means through which the mutual benefit of all might result.

Because Plato saw all profit-seeking activities as potentially corrosive to society, Plato championed a significant role for the state as a regulator and administrator in chief. The state would need to intervene in order to maintain civility, as well as to oversee the resulting distribution.

Though Aristotle was foremost among Plato’s students, Aristotle’s conception of humanity and its place in the world differed considerably from that of his teacher. For Aristotle, humanity’s highest aspiration is to live a good life: a life that is moral and one that thus requires the exercise of virtue.

In his writings, Aristotle outlines a collection of social sciences that he calls practical sciences, ones that lead to living a good life. Included among Aristotle’s practical sciences are both ethics and economics.

Ricardo Crespo (2008) provides a particularly clear linking of economics, oikonomike, and ethics in Aristotle’s writings. Where economics is concerned, it may simply be thought of as the study of the ways in which individuals use the things around them in their pursuit of a good life. Inasmuch as individuals take actions in pursuit of a good life, there can be nothing necessarily immoral about such behaviors. In fact, one might regard each action taken in pursuit of a good life as a moral action, inasmuch as pursuing the good life is indeed moral.

To not oversimplify, it is worth considering Crespo’s (2006) earlier essay, in which he spells out four different possible meanings for oikonomike as used by Aristotle. According to Crespo, the economic is actually an analogical term, meaning that it has multiple interpretations, though one of the meanings is central and forms a core around which other related meanings for the same term may be identified. Crespo sees the central meaning of the economic as the human actions taken with the eventual goal of a leading a virtuous—that is, so-called good—life.

Surrounding this central definition of oikonomike as human action lie three other orbital definitions, according to Crespo. First, the economic can refer to one’s capacity, ability, or talent for the pursuit of good things. Second, the economic can also refer to the habits individuals develop in their pursuit of virtue. That is, through their repeated practice of individual moral actions, each develops a discipline to practice virtue. And third, the economic may also be the practical science of economics itself: the study of human actions in the pursuit of good lives.

As a consequence, then, Aristotle envisioned a much smaller role for the state: one that is limited in scope, predictable, and reliable in relation to the choices made by individuals. A heavy-handed state, such as that suggested by Plato, would steal from each individual the freedom and opportunity to exercise wise judgment in the pursuit of lives that are good. Thus, Aristotle championed private property among all classes of humanity, operating within a market-based economy in which each individual engages in trades that prove beneficial to both parties in a voluntary exchange. In this way, society will become more efficient in its use of resources, enjoy peace and civility, and develop good moral habits.

This is not to say that Aristotle favored no government at all. On the contrary, civil institutions potentially could play two very important roles. First, institutional arrangements could reassure citizens that they were truly equal under the law, regardless of class. An important role of the state, then, is to establish the rights to private property, as well as to ensure that all property transfers are exclusively voluntary. In this way, society’s economic habits are free to emerge, and one will thus be able to study the economic as a practical social science. Second, a predictable and reliable institutional arrangement enhances efficiency. One need only consider any of the modern nations governed by ruthless and arbitrary dictatorial regimes to appreciate that economies do not grow and flourish when the people do not have reasonable assurances about what really belongs to them. Working hard to create even a little wealth might be a terrible bet if the ruling class can take whatever it likes from the rest.

When one puts together Aristotle’s thinking on economics and ethics, it is easy to conclude that Aristotle’s vision for economic life is one in which actors have sufficient freedom to make their own moral decisions in hopes of living virtue-filled lives. Freedom itself gives each individual constant opportunities to choose well and to develop well-formed habits of doing so.

The Scholastics and Natural Law

Europe during the Middle Ages bore a much stronger resemblance to the Platonic view of a hierarchical order and state than to the world Aristotle envisioned in which all were equal under the law and the primary role of the state was to establish and maintain the rights to private property. Indeed, Ekelund and Hébert (1990) describe the period as one in which most people belonged to (a) the peasant class, (b) the military, or (c) the clergy. Because it was the clerics who spent time in solitude and contemplation, thinking deep thoughts about the moral order of things, it was these clergy—working throughout a period from roughly 1200 to 1600—who advanced Aristotle’s thought linking ethics to economics. As men of faith who were also well-educated men of letters, the Scholastics quite naturally brought their theological and moral thinking to all parts of life.

Ekelund and Hébert (1990) identify five clerics who exemplify the Scholastic tradition that linked Aristotle’s economic and ethical thinking to moral thinking in Catholic Europe: Albertus Magnus (ca. 1206-1280), Thomas Aquinas (ca. 1225-1274), Henry of Friemar (ca. 1245-1340), Jean Buridan (ca. 1295-1358), and Gerald Odonis (ca. 1290-1349). Llewellyn Rockwell (1995) extends this list to include late Scholastics from the School of Salamanca. In sixteenth-century Spain, the University of Salamanca served as the center of Scholastic thought. Key economic thinkers from the School of Salamanca include Francisco de Vitoria (1485-1546), Martin de Azpilcueta Navarrus (1493-1586), Diego de Covarrubias y Leiva (1512-1577), and Luis de Molina (1535-1601).

Playing a key role in the linkage of the thinking of the Scholastics to Aristotle is a concept known as natural law. Though Aristotle is sometimes viewed as the father of natural law, it is not a term he explicitly used himself.

Nevertheless, it is clear that his thinking informed the concept of natural law for the Stoics and later the Scholastics.

The natural law tradition holds that there are certain moral rules or obligations, established in the fundamental nature of things, that apply to all individuals at all times and in all places. These universal truths govern all men and women and cannot be usurped by the laws of humankind. They are inviolable and establish the basic ground rules with which human beings are to conduct themselves in their dealings with each other. In this tradition, all men and women are equal under the natural law. One could think of natural law as an undeniable, unavoidable force like gravity: Regardless of wealth or lineage, if one jumps from a tall building, one is just as likely as anyone else to get seriously injured.

To further illustrate the notion of natural law, it is helpful to refer to the famous second sentence of the Declaration of Independence of the United States. Its authors were surely writing in the natural law tradition when they wrote, “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.” For the framers of the Declaration, it required no argument that “all men are created equal” or that each individual is born with some fundamental human rights that cannot be sold or taken away. These claims were thought to be entirely obvious to all: They were “self-evident.”

Natural law ideas are clearly present in the writing of Aristotle, though not explicitly stated. Instead, Aristotle contrasts particular laws that might be written by humankind with common laws that have bearing everywhere. And certainly the equality of humans and their right to private property in the pursuit of a moral life may be viewed as part of the common—rather than particular—law.

Because the Scholastics served as the moral umpires for the church during the period, their main interest in economics derived largely from its potential to distribute justice. That is, the Scholastics were more interested in the potential for justice following from economic actions than they were in any specific details about exchange mechanisms. So they employed their reason in the search for universal, transcendent ideas that govern everyone. And certainly economic laws govern individuals’ interactions with each other and also apply equally to all people in all places. So the Scholastics’ study of economics was driven by their desire to discern universal truths—natural law—that give insight into the nature of the universe in which individuals live and interact. Of course, although Aristotle did not ascribe the origin of natural law to a higher being, it was easy and obvious for the Scholastics to read Aristotle and see God as the ultimate source of the natural law under which everyone lives, and economic forces as part of God’s natural law. So the Scholastics studied economics in order to better understand God’s created order.

Given that the Scholastics followed in the natural law tradition begun by Aristotle, they also viewed all humans as equal, both in the sight of God and in the sight of each other. And viewing economic forces as ones that are blind to the specific plight of a given person, the Scholastics followed Aristotle’s lead and viewed economic decisions and actions as opportunities to act morally. Thus, like Aristotle, the Scholastics viewed the proper role of civic institutions as a limited one designed to defend, predictably and reliably, the fundamental rights of all.

Rockwell (1995) gives a few specific examples of the economic thought of the late Scholastics, illustrating how the work of the School of Salamanca clearly follows from Aristotle and also anticipates well the modern study of economics that begins with Adam Smith. Each is especially intriguing in light of modern antipathy from theologians toward economics and economists, which is discussed later in the research paper.

According to Rockwell (1995), Luis de Molina was among the first of the Scholastics in the Jesuit order to think very carefully about theoretical topics in economics. In his defense of private property, he simply pointed to the commandment that says, “Thou shalt not steal.” But Molina went farther and began to explore modern economic arguments for private property, including what is now called the tragedy of the commons: that when everyone owns a resource, then no one has the correct incentive to care for it. Good stewardship of a resource comes only when the steward is also the owner; only then are incentives correctly aligned. Molina also saw government—the king—as capable of great moral sin against the good of the people when government’s powers are either broad or arbitrarily applied.

Covarrubias took private property ownership to the extreme, making the case that the owner of a piece of land is the only person who has the moral right to decide what to do with its fruits. In fact, Covarrubias claimed that government could not intervene even if a landowner were growing some kind of medicine but refused to sell. If the landowner were forcibly made to do something against his or her will with property he or she rightly owned, even if it might be beneficial to others, such an action would constitute violation of the natural law.

Orthodox Views of Ethical Behavior Within Markets

Adam Smith, Wealth of Nations, and Theory of Moral Sentiments

Modern thought on ethics and economics begins with the work of Scottish professor Adam Smith (1723-1790). All students of economics should spend at least some time reading Smith in order to see for themselves what Smith says—and what he does not say—regarding self-interest, selfishness, and the market. In particular, students should be sure to look closely at Smith’s best-known work, An Inquiry Into the Nature and Causes of the Wealth of Nations (1776/1981), as well as his earlier Theory of Moral Sentiments (1759/1982). As this research paper shows, Smith did not view morals and markets as conflicting forces. On the contrary, Smith viewed market behavior and moral behavior as cooperative activities, following from similar views regarding what motivates each individual to action or inaction. Although many practicing modern mainstream economists have forgotten much of Smith’s thinking on ethical behavior, remembering instead only his treatment of self-interest in The Wealth of Nations, modern economics nevertheless gets exactly right the Smithian conclusion regarding markets and their tremendous potential for improving the good of all.

Smith represented the synthesis of the natural law tradition begun by Aristotle, then articulated by the Stoics, the Scholastics, and later the French Physiocrats, following the tradition of their countryman and forebear Pierre le Pesant de Boisguilbert. The Physiocrats, led by François Quesnay, had believed that the natural law served as a reflection of the creator. In their view, then, natural law needed to take precedence over laws created by humankind. Further still, the laws of humans were certainly not as good as the natural laws of the creator. After all, the creator is the Supreme Being. In this light, the Physiocrats thought that the laws enacted by humans (called positive law)—flawed as they are—should be kept to a minimum. Society would be much healthier and in greater harmony with the mind of the creator if it learned to lean on natural law more and on positive law less.

In this light, the stage had been set for the laissez-faire (natural liberty) views articulated by Smith in his writings. And to grasp clearly how Smith integrated ethics, economics, and natural law to form a seamless natural theology— which owes much indeed to the natural law tradition—one must consider together The Wealth of Nations and The Theory of Moral Sentiments. To focus on only The Wealth of Nations, which is certainly what most economists do (if they read it at all), is to miss the primary articulation of Smith’s natural theology. Indeed, The Theory of Moral Sentiments is a theory of how and why individuals each act in a largely moral way in their affairs. The Wealth of Nations is merely an extension of Smith’s theory to individuals’ interactions in markets and the power of each of those actions to have a cumulatively beneficial impact on society as a whole. Or to state it another way, The Theory of Moral Sentiments is Smith’s statement of his ethics; The Wealth of Nations is the application of Smith’s ethics to economics.

But this discussion begins the way most students of economics begin: first with The Wealth of Nations (henceforth WN), then working back to Smith’s earlier Theory of Moral Sentiments (henceforth TMS). In looking at WN, the main goal is to grasp accurately what Smith said—and did not say—about the role of self-interest (or self-love) in WN and whether it is indeed ethical to afford a role to self-interest in people’s economic dealings with each other. Then, in looking at TMS, this research paper attempts to work out what has been referred to as the Adam Smith problem: that the same fellow who articulated the role of self-interest in economic dealings had put forward an entire theory of our moral feelings and actions just 17 years earlier.

Although much of WN is widely known (e.g., the pin factory as an illustration of the production efficiency gains possible from specialization of tasks and the division of labor), the concern here is with only the passages relevant to the relationship between ethics and economics. The most famous idea relevant to the present purpose is the role that self-interest plays in market dealings. And unfortunately, the most common telling of the story of self-interest misses much of Smith’s point. To clarify, this research paper first reviews this common telling that mischaracterizes Smith’s articulation of the role of self-interest in markets.

The common story proceeds like this. Economic agents—people and firms—are self-interested; they like to be happier (or wealthier or both). Seeking greater happiness, they pursue opportunities that leave them happier than they currently are. And in a decentralized market system with no central planner, potential trading partners will discover each other and execute trades that leave them both better off. These mutually beneficial exchanges improve the lot of both traders; if this were not the case, they would not trade, because trade is voluntary. Also, no one—neither the traders nor any bystander—is harmed as a result (in most circumstances). Much as in Aristotle’s view, each person is at liberty to pursue a personal course of action leading to a good life as he or she sees it, and mutually beneficial trades are small steps making the good life possible. Even greater still, when many such actions are repeatedly taken over time, across an entire society, the end result is a better life for all. Indeed, markets and their workings help build the wealth of nations, even though no central planner or planning committee is in charge.

What this story leaves out is what Smith actually wrote in WN. True, Smith did make the final point in the preceding paragraph: Decentralized, mutually beneficial exchange ultimately grows the wealth of nations. But a common misunderstanding (or misrepresentation) of Smith is the role that self-interest plays in a market transaction. To consider this more carefully, look at the key passage in WN, found in Chapter 2 of Book 1. Smith writes,

In civilized society [man] stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons. In almost every other race of animals each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature. But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. … 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. (Smith, 1776/1981, pp. 26-27)

Reading this passage makes clear what many—including many economists—misunderstand about Smith’s view of the role of self-interest. Suppose, for example, that one feels a strong need to acquire some pencils in the progress toward a good life. Without market exchange, how could one get them? Well, one could try to make some pencils, but as Leonard Read (1958/1999) makes thoroughly clear, one person working alone might not be able to complete even one pencil in a lifetime, if one must rely on no one but oneself for every single input and production step required.

Assuming one needs pencils relatively soon, or at least before death so that they can be of some help in a good life, what other possibilities are there? A second avenue might be to become great friends with someone who currently possesses some pencils and hope that the friend’s affection is so great that he or she will simply give away some pencils. But again, working at sufficiently ingratiating oneself with another person so that he or she will give one gifts requires time, effort, and energy. Moreover, attempting to acquire all of the goods and services one needs throughout one’s life in this way—appealing to the good nature of others in the hope of receiving gifts—is a dubious undertaking indeed.

A third possible strategy for obtaining pencils would be simply to beg for them—and to beg for everything else one needs for a good life. One could go around town on bended knee, with a tin cup in hand, and beg, attempting to convince anyone one meets that one’s need for pencils is more pressing or more important than the pencil owner’s needs are. But as Robert Black (2006) points out, begging for what one needs would clearly violate the idea of natural law. Begging is dehumanizing and reduces the value and sense of self-worth of the beggar. One who has even a single experience of begging in one’s life probably remembers how miserable it felt to be forced by life’s circumstances into that situation. In the natural law tradition, all human beings are of equal value, regardless of class, and are entitled to maintain their dignity as human beings.

A fourth option is force. One could simply steal pencils. But that option falls short because it involves taking another person’s property, which is clearly at odds with the natural law tradition.

Having exhausted (a) making pencils, (b) ingratiating one’s self with others who have pencils, (c) begging for pencils, and (d) stealing pencils, what remains? For Smith, only one possibility remained that maintained the dignity of all, and it also smoothly and quickly moved goods and services from less- to more-valued uses. If a person wants pencils, it might be simplest for him or her to appeal to the self-interest (self-love) of those who have pencils or make pencils and convince them how much better off they would be if they traded away some of their pencils. That is, a highly efficient way to get others to do things one wants, which also lets everyone keep their dignity, is to appeal to others’ self-interest. If individuals do this well, then others will happily trade with them, thereby making the individuals’ lives happier and easier also.

Simply put, it is not mere selfishness that makes one better off in Smith’s view; it is one’s appeal to the self-interest of others. In fact, everyone’s lives depend on it.

Having clarified what Smith said and did not say in WN regarding self-interest, this research paper turns to the reconciliation of WN with Smith’s earlier TMS. As discussed previously, scholars have struggled for many years with the Adam Smith problem: reconciling Smith’s moral theory in TMS with the role of self-interest in WN.

James Otteson (2002) provides one of the clearest answers to the Smith problem. For Otteson, both TMS and WN share a common theme: Natural law and self-love work together as a powerful force to explain and predict human behaviors and interactions, whether those interactions are in the marketplace or in social settings. Either way, even with no one person in charge of either markets or morality, there is a natural ordering that results when men and women everywhere have the freedom to live a good life. In markets, people engage in trades that prove mutually beneficial to both parties. And in relationships with each other, people learn to act in ways that are humane and that preserve the dignity of everyone.

By what mechanism does one discover what is appropriate in social contexts? Smith argues in TMS that everyone craves sympathy of feeling from others. People want others to share in their joys, sorrows, pleasures, and pain. People want to be viewed with dignity at all times and to be taken seriously as fellow human beings. So Smith makes the case that just as individuals and firms can learn through market interactions which goods and services are valuable in the marketplace, individuals also learn, through social interactions, which behaviors will be rewarded with sympathy of feeling in the social realm.

Consider two specific examples from TMS, in which someone might misunderstand how to express appropriately his or her feelings to others in a social setting: someone who wails over some small hurt and another who laughs inappropriately long at a joke. In both cases, Smith (1759/1982) suggests that others will like the person less because the behaviors are out of proportion to the circumstance:

If we hear a person loudly lamenting his misfortunes, which, however, upon bringing the case home to ourselves, we feel, can produce no such violent effect upon us, we are shocked at his grief; and, because we cannot enter into it, call it pusillanimity and weakness. It gives us the spleen, on the other hand, to see another too happy or too much elevated. … We are even put out of humour if our companion laughs louder or longer at a joke than we think it deserves; that is, than we feel that we ourselves could laugh at it. (p. 16)

What hope is there, then, for each of us—even social clods—to learn how to behave appropriately in society? How can one learn to behave in ways that others will find appropriate yet remain true to one’s own inalienable rights? Smith’s answer is that throughout people’s entire lives, even when they are young, they all are students at the school of self-command. And people are in class at the school of self-command anytime they find themselves interacting with other human beings. So for example, if people are in the bad habit of laughing too long at a joke, presumably they will catch on from the feedback they receive (eye rolling, fewer social invitations, gentle admonitions from friends) about their inappropriate behaviors and modify them, throughout their lives, accordingly.

A very young child has no self-command; but… [w]hen it is old enough to go to school, or to mix with its equals, it … naturally wishes to gain their favour, and to avoid their hatred or contempt. Regard even to its own safety teaches it to do so; and it soon finds that it can do so in no other way than by moderating, not only its anger, but all its other passions, to the degree which its play-fellows and companions are likely to be pleased with. It thus enters into the great school of self-command, it studies to be more and more master of itself, and begins to exercise over its own feelings a discipline which the practice of the longest life is very seldom sufficient to bring to complete perfection. (Smith, 1759/1982, p. 145)

And who is to help give instruction and guidance to each individual? Smith (1759/1982) envisioned that each person has a conscience, an “impartial spectator” who recalls all of the lessons one has learned during study at the school of self-command and holds one accountable for all of those lessons:

The man of real constancy and firmness … has never dared to forget for one moment the judgment which the impartial spectator would pass upon his sentiments and conduct. He has never dared to suffer the man within the breast to be absent one moment from his attention. With the eyes of this great inmate he has always been accustomed to regard whatever relates to himself. This habit has become perfectly familiar to him. He has been in the constant practice, and, indeed, under the constant necessity, of modelling, or of endeavouring to model, not only his outward conduct and behaviour, but, as much as he can, even his inward sentiments and feelings, according to those of this awful and respectable judge. He does not merely affect the sentiments of the impartial spectator. He really adopts them. He almost identifies himself with, he almost becomes himself that impartial spectator, and scarce even feels but as that great arbiter of his conduct directs him to feel. (pp. 146-147)

Thus, just as market order is spontaneously driven by people’s appeals to others’ self-love, a mutually beneficial social system can result spontaneously as long as individuals crave sympathy of feeling with others and desire to hold personal views that are in accord with those of others. Barring the occasional clod or sociopath who simply cannot learn from the school of self-command, humans learn from each other how to behave appropriately and, more to the point, they learn how to behave morally in regard to others, while nevertheless doing so out of their own self-love: their desire to be liked and esteemed by others. Further, their personal impartial spectator is ever present, reminding them of all of the lessons they have studied over the years at the school of self-command and exhorting them to choose rightly in all things.

Putting WN together with TMS leads to a fascinating solution to the Adam Smith problem: Smith’s overarching view is that human interactions, though motivated by self-love, can nevertheless lead to thoroughly pleasing outcomes, whether the outcomes are economic or social. As long as the dignity of humankind is preserved in the freedom to make choices, individuals will all ultimately be motivated to actions that not only benefit themselves but also benefit the other individuals they know and encounter; with time, society’s overall economic wealth will grow, as will its capacity for great moral good.

Ethics and Economics Since Adam Smith

Even though economics has deepened in terms of economic understanding and broadened in terms of the range of topics it explores, economics has never tossed out Smith’s famous invisible hand: By constantly directing resources from less- to more-valuable uses, market forces lead to the eventual betterment of all, even though all individuals are primarily focused on living good lives for themselves, their families, and their friends.

If there is tension in modern economics along ethical lines, it comes mainly from the distinction between efficiency and fairness in the allocation of resources. Efficiency in the allocation of resources refers to Pareto efficiency, named for Italian economist and sociologist Vilfredo Pareto (1848-1923). According to the Paretian standard of efficiency, economists describe an allocation of resources as efficient when it is impossible to make one person better-off without harming someone else in the process. Economists are always on the lookout for Pareto-improving possibilities: situations in which one or more persons may be made better-off (in whatever sense that means to them) at no expense to others.

The Paretian standard of efficiency is not in conflict with the market system described by Smith, because an obvious way to make two people better-off without harming others is to let the two people execute any voluntary trades they like. Once all possible potentially Pareto-improving trades in a society have been exhausted, then there will be no way to improve the lot of one without causing another to surrender something involuntarily. Because the Paretian standard is difficult to argue against on moral grounds and because it is consonant with Smith’s self-love and natural law ideas, Pareto efficiency is the primary way in which allocations of resources are assessed in welfare economics.

Yet some argue that in its simplicity, Pareto efficiency leaves something out: fairness. That is, they contend that market outcomes, even if Pareto efficient, may not be fair if the outcomes are too unequal. So economists working in welfare economics consider alternative measures of societal welfare besides the Paretian standard. The two most common are utilitarianism (following the work of Jeremy Bentham and other utilitarian thinkers) and Rawlsianism (named for Harvard philosophy professor John Rawls). Because these two alternative measures of society’s well-being lie beyond the scope of this research paper, they are not discussed in detail here. Nevertheless, it is important to note that though drawn from different ideological starting points, both utilitarianism and Rawlsianism yield the same clear policy recommendation: Regardless of the unfettered market outcome, all resources need to be redistributed until each member of society is equally well-off. To do otherwise would not be fair. Of course, because such redistributions (a) reduce incentives for high-income earners to create more jobs that lead to greater societal wealth (i.e., a slower growing pie), (b) may prove very costly to administer and control, and (c) encroach on the rights of individuals to maintain private property and surrender it voluntarily, most economists prefer efficiency to fairness as an assessment tool. If nothing else, the Paretian standard is clearly defined. In contrast, fairness is always murky; what appears fair to one usually depends on where one happens to be sitting.

Modern Suspicions and Critiques of Ethical Views in Economics

Owing largely to the shifting focus from Smith’s companion views of morals and markets to one centered on mere human self-interest—frequently misinterpreted as selfishness— modern critiques of economics have come from both within the profession and without. Most critics who are economists try to gently point out that the profession needs to expand its focus to remember what Smith really said. They care deeply and passionately about the great issues of our day, especially global poverty, the environment, and basic human rights. Amartya Sen and William Easterly represent the very best of this movement in modern economics.

But the harshest attacks on economics come from outside the profession. These attacks are mounted on ethical grounds, charging that the models, theories, and policy prescriptions of the social science are driven by a view that selfish, greedy behavior is both perfectly acceptable and to be expected. Stated another way, these critics are somewhat guilty of setting up a straw-man argument: critiquing a caricature of modern economics, rather than economics as economists actually think about it and talk about it among themselves. And these critics attempt to position themselves as coming from morally high ground—perhaps from out of theology or from the environmental movement.

The remainder of this section considers briefly the interactions of theologians with economics since Smith. And as this section shows, the antipathy of theologians toward economics and economists is a relatively recent phenomenon. Until at least the mid-nineteenth century, clergymen—at least in the United States—embraced economics and its study as a powerful tool to uplift humanity. The late Paul Heyne (2008) gives an excellent overview of this period in Part 4 of Are Economists Basically Immoral?, a posthumously published volume of his works.

According to Heyne (2008), in the years before 1800, Christian thinkers had not fully integrated economics and their faith. True, Smith had followed in the natural law tradition of the Christian Scholastics in his thinking on economics and the moral order. Yet Smith was hardly more than a deist: someone who believes that a supreme being created the universe and its natural laws, set the universe in its course, yet left humankind to do what it will.

But the publication of the Reverend Francis Wayland’s (1837) Elements of Political Economy united the laissez-faire economics of Smith with a distinctly Christian articulation of the natural-law tradition. Wayland’s book, which became the most widely used economics textbook in the United States on its publication, echoed WN. Wayland claims that the rules for wealth accumulation were part of God’s providence (a gift) and that individuals who honestly worked toward improving their own lots would thereby promote the welfare of humanity. Heyne (2008) argues that Wayland and other Christian thinkers were inclined to link the optimism of Smith to their own faith inasmuch as markets gave great promise for dramatic improvement of the human condition. And Heyne considers the Reverend Arthur Latham Perry, professor of history and political economy at Williams College, as the clergy’s foremost defender of laissez-faire economics during the period. Indeed, when the American Economic Association was founded in 1885, several Protestant clergy were among its charter members.

Yet as the century drew to a close—and as the association quickly shook off its Christian roots—the clergy quickly grew critical of the promise of markets to do much of the heavy lifting in the transformation of society. Such a quick reversal, from an embrace of economic thinking by the clergy to full-throated criticism of it, is indeed puzzling. By way of explanation, Heyne (2008) posits that it is no coincidence that academic clergy began to grow tired of Smithian economics at the same time that the surrounding academic culture began to grow critical as well. For Heyne, prevailing political and academic cultural winds, far more than any deeply informed change of course, were the main reason that academic clergy moved from fans to foes of the promise of markets.

Lamentably, this division between economics and theologians persists into the present day, and finding theologians who are critical of modern economics is not a difficult task. And more often than not, their criticisms are likely to be founded on a caricature of economics, rather than a richer depiction of it. For example, William Cavanaugh (2008) writes this regarding scarcity:

The standard assumption of economists that we live in a world of scarce resources is not based simply on an empirical observation of the state of the world, but is based on the assumption that human desire is limitless. In a consumer culture we are conditioned to believe that human desires have no end and are therefore endless. The result is a tragic view of the world, a view in which there is simply never enough to go around, which in turn produces a kind of resignation to the plight of the world’s hungry people. (p. xii)

Similarly, Christine Hinze (2004) states, “When they reduce the meaning and purpose of ‘economy’ to market exchange, or human agents to self-interest-maximizing Homo economicus, mainstream economists fall prey to a category mistake bound to distort both analysis and policy recommendations” (p. 172).

And D. Stephen Long (2000) claims, “As a discipline, economics has increasingly developed an anti-humanistic mode. … [E]conomics has become an increasingly abstract—mathematical—science” (p. 9). For two spirited book-length debates between market advocates and market critics, see Doug Bandow and David Schindler (2003) and Donald Hay and Alan Kreider (2001).

Yet many of today’s thinking clergy continue to have tremendous faith in markets both as mechanisms that can transform the lives of the global poor living in material poverty and mechanisms that afford individuals a wealth of occasions in which to choose to act morally. Particularly notable is the work of Father Robert Sirico, president of the Acton Institute in Grand Rapids, Michigan, as well as that of Michael Novak (1982), author of The Spirit of Democratic Capitalism. Though not theologians, Victor Claar and Robin Klay (2007) defend—from a faith perspective—the power of markets to effect tremendous good.

Does Studying Economics Change One’s Ethics?

A final intersection of ethics and economics concerns whether instruction in economics leads students and eventual economists to think or act in more self-interested ways, as some of the profession’s critics might assume. First, there does seem to be some evidence, including a study by Robert Whaples (1995), that taking even an introductory economics course influences students to view market outcomes as more fair. Whaples finds the strongest change in attitudes among women Second, empirical evidence concerning whether studying economics leads to changes in one’s behavior is mixed. For example, using laboratory-based experiments, John Carter and Michael Irons (1991) find little actual change in behavior between freshman and senior economics students, suggesting that studying economics did not change them. If so, perhaps students who gravitate to the study of economics are already different from other students when they arrive. This finding has been reinforced more recently by Bruno Frey and Stephan Meier (2005) and by Meier and Frey (2004). This more recent work calls into question the earlier finding of Robert Frank, Thomas Gilovich, and Dennis Regan (1993) that economics majors were less likely to cooperate in prisoners’ dilemma games than students in other majors. Further, Harvey James and Jeffrey Cohen (2004) find that including an ethics component in an economics program can reduce the tendency to not cooperate in laboratory games.

Nevertheless, there is considerable hope that students and practitioners of economics may perform at least as nobly as others in settings that are not known to be experimental. For example, one of the findings of Carter and Irons (1991) is that economics students stated they would be more likely to keep money that had been lost. Yet in a follow-up experiment using actual money, Anthony Yezer, Robert Goldfarb, and Paul Poppen (1996) discover that students of economics were significantly more likely to return money they had found. In the experiment, $10 was put inside stamped, addressed envelopes, and then the envelopes were dropped into economics classrooms, as well as classes in other disciplines. To return the money, all that was required was to seal an envelope and mail it. Though only 31% of envelopes were returned in business, history, and psychology classes, economics students returned 56% of the envelopes. And David Laband and Richard Beil (1999) find that practicing economists were less likely to cheat on their professional membership dues than professional political scientists and—especially—professional sociologists, suggesting practicing economists behave significantly more ethically than other professional social scientists.

of living for all. And the personal liberty available in a market system gives each individual ongoing opportunities to make wise moral and ethical choices. Moreover, in a market-based economy, the fastest way for individuals to make life better for themselves and their families is to meet the needs of others. Indeed, perhaps even without human feeling for another, each individual will nevertheless act humanely toward another, because the very means by which people enrich their own lives is by enriching the lives of others. And according to Smith, such relationships are borne out in the social realm as well: People behave decently to others in order to earn others’ respect and sympathy of feeling in exchange.

Though most modern theologians are critical of economics and economists, instead hoping for the arrival of a more so-called moral allocative system than the one Smith envisioned, their criticism is a relatively recent phenomenon. Even 400 years ago, Scholastics were working out an economic theory, in the belief that economic laws were among the natural laws given by their creator. They studied economic laws in order to better understand and appreciate their world. Only since the close of the eighteenth century have academic clergy grown harshly critical of the wisdom and ethics of market economics and economic science, perhaps owing to the influence of similar suspicions growing contemporaneously in other parts of academe. Yet the work of market-minded modern theologians such as Michael Novak and Father Robert Sirico of the Acton Institute have begun to renew the faith of the clergy in the power of markets to bring dramatic transformation of society, especially where global poverty is concerned.

Students of economics may perhaps be less cooperative than others, but the empirical evidence is mixed. Further, students selecting economics may already be different from others, suggesting that any perceived differences may be attributable to a selection effect, rather than to any specific treatment effect of studying economics. Further, in nonex-perimental settings, recent empirical evidence suggests that both students of economics and professional economists behave more ethically than their counterparts from other disciplines.


To this day, Adam Smith’s moral theory advanced in The Theory of Moral Sentiments and applied to economic interactions in his later Wealth of Nations constitutes the foundation and nucleus of all moral and ethical thinking in economics. Barring instances of market failure, market-based exchanges lead to Pareto improvements, because some members of society are made better-off through market exchange, and none are harmed as a result. Further, markets are the most powerful mechanism available for the perpetual redirection of society’s resources from less- to more-desired uses, leading to eventual transformation of entire nations as the resulting wealth accumulation leads to a higher standard


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