Ethics and Economics

Abstract

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. In this paper, we try to focus on the ethics and economics the fair distribution of goods, and work opportunities, wealth.

Ethics and Economics

Introduction

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.

Discussion

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 chapter, 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 ...