Ethical Economics

First and foremost, the title is not an oxymoron. We dismal scientists get a pretty bad rep for being dispassionate. In fact, I was recently asked to give the most soulless example of an economic judgement that I can think of. I put forward the following:

In Situation A, Starbucks has a cup of coffee and Mike buys it. In Situation B, Starbucks has a cup of coffee and Mike steals it. If we take a static snapshot of the resources involved, there is actually no net change on the aggregate level: two parties, one cup of coffee and a sum of money. The only thing that happened was that the asset was transferred from one party to another. It’s the law of conservation of energy but in economic terms.

This suggests that economics as a science actually condones thievery. In fact, if we compare the two situations in terms of utility, Situation B may even be deemed dominant to Situation A, since Mike is likely to enjoy a greater satisfaction out of the money than Starbucks will (DMU applies to money too). The allocation of resources may actually be more efficient(!) However, this goes against everything we’ve been taught, and it’s quite clear that there is a distinct breach of property rights. How does economics justify this? Well, if you take a more dynamic model and repeat each situation, the long-term Situation B breaks down. Mike continues to steal a cup of coffee a day until Starbucks realises what it is going on, and then stops offering its services. We end up with a missing market while Starbucks is willing to sell coffee and Mike is willing to buy – a grotesquely inefficient allocation of resources.

So economics only condemns thievery when the long-term consequences are extrapolated. In fact, economics may actually be one of the most just (depending on how you use that word) sciences since it discriminates against no-one: a thief is the same as a consumer, a terrorist the same as a freedom fighter.

A friend found an amusing link during her research, which is that there is an apparent negative correlation between studying economics and being ethical (ethics being measured on a subjective scale by willingness to lie). I might be just as unethical as I was before I studied economics, but personally I’ve actually been more exposed to moral dilemmas ever since, mostly through the political philosophy about the role of government.

In fact, ethics has become more and more prevalent in modern day economics. From corporate social responsibilities to climate change, businesses and entrepreneurs are continually asked to “give something back”. After the disasters of Enron and Worldcom, the previously-lauded MBA was being treated with scepticism and distrust, so Harvard Business School decided to introduce a compulsory business ethics course for their first-years.

[The concluding half of this two-parter can be read here. I will continue to give examples of my moral musings and see how far we’re willing to go for utilitarianism.]