Cost-Benefit Analysis and Social Welfare Functions

This chapter describes and compares the two most important policy-analysis methodologies in economics: cost-benefit analysis (CBA) and the social-welfare-function (SWF) framework. Both approaches are consequentialist and welfarist; both are typically combined with a preference-based view of well-being. Despite these similarities, the two methodologies differ in significant ways. CBA translates well-being impacts into monetary equivalents, and ranks outcomes according to the sum total of monetary equivalents. By contrast, the SWF framework relies upon an interpersonally comparable measure of well-being. Each possible outcome is mapped onto a list (vector) of these well-being numbers, one for each person in the population; the ranking of outcomes, then, is driven by some rule (the SWF) for ranking these well-being vectors. The utilitarian SWF and the prioritarian family of SWFs (each corresponding to well-developed positions in moral philosophy) are especially plausible. The case for using CBA rather than one of these SWFs is weak—or so the chapter argues.

Civil Rights, Employment, and Race

Why are there civil rights laws? What should their scope and coverage be? What are their weaknesses? How can they be improved? In answering these questions, I concentrate on employment and on race in the United States. Following Sophia Moreau, I argue that civil rights laws are ways of assigning rights that are needed when groups are victims of pervasive discrimination. Empirical economic work shows that blacks and Hispanics probably meet the relevant conditions for coverage under these laws, but whites (at least white males) do not. Civil rights laws are hard to enforce, and should cover as many different domains of life as possible because coverage in each domain is complementary with coverage in others. Existing laws do not seem sufficient to assure blacks and Hispanics of the deliberative freedoms that Moreau enunciates, and so I speculate on alternative approaches.

Humane Markets

Markets are often criticized for being amoral, if not immoral. The core of the “political economy” that arose in the eighteenth century, however, envisioned the exchanges that take place in commercial society as neither amoral nor immoral but indeed deeply humane. The claim of the early political economists was that transactions in markets fulfilled two separate but related moral mandates: they lead to increasing prosperity, which addressed their primary “economic” concern of raising the estates of the poor; and they model proper relations among people, which addressed their primary “moral” concern of granting a respect to all, including the least among us. They attempted to capture a vision of human dignity within political-economic institutions that enabled people to improve their stations. Their arguments thus did not bracket out judgments of value: they integrated judgments of value into their foundations and built their political economy on that basis.

Economy and Culture

Culture matters in the economy. An increasing number of economists acknowledge the role of culture in economic processes, yet they disagree on what that role is. This chapter reviews the most important contributions to the discussion about the interaction between cultural and economic phenomena on the basis of a five-spheres model. The conclusion stands: culture matters. Yet the complexity of the interaction renders causal claims almost impossible. Furthermore, culture is not an instrument to change at will in order to achieve certain results. The outcome of the discussion is rather a reorientation of what economics is about, and a realization that sense-making is part of the economic process. Economists may conclude that they pay better attention to the qualitative aspects of the economy, and adjust their mode of analysis to allow for such attention.

Evolution and Moral Motivation in Economics

Adam Smith argued that humans were motivated by both self-interest and moral concerns. Economics has since moved towards a contrasting utilitarian view where behavior is understood in terms of unifying preference functions. Also most economists have presumed that these preferences are “self-regarding.” Two major treatises in economics were published in 1871, with self-seeking economic man at their center. In the same year Darwin published The Descent of Man, which emphasized sympathy and cooperation as well as self-interest, and argued that morality has evolved in humans by natural selection. This stance is supported by modern research. This article reconciles Darwin’s view that developed morality requires language and deliberation (and is thus unique to humans), with his other claim that moral feelings have a long-evolved and biologically inherited basis. It also questions whether the recent addition of “other-regarding” preferences is adequate, and whether morality and altruism are reducible to preferences or utility maximization.

Morality as a Complex Adaptive System

This chapter focuses on Hayek’s analysis of morality as an evolved spontaneous order while updating and revising it, taking account of current research and models. While his path-breaking work requires revision, Hayek presents an analysis of a complex adaptive moral order that is far more in tune with current science than are the highly rationalistic analyses of contemporary political philosophy, which often seek to present utopian plans for the perfect justice. Yet, I argue, we need to rethink important claims. Hayek puts great weight on group-level selection to maintain the functionality of the complex adaptive system of social morality, a claim that has been buttressed by the recent work of David Sloan Wilson. I question this, showing how an “invisible hand” can maintain functional cooperation among current humans without strong group-level selection.

Economic Ethics and the Capability Approach

This chapter introduces the capability approach and discusses its role in economic ethics. More specifically, we discuss the concept of well-being and freedom underlying the general capabilitarian framework and argue that a number of characterizing features of the capability approach, such as its focus on ends instead of means or the conception of freedom employed in it, makes it particularly well suited for the evaluation of institutions and economic systems in economic ethics. The article concludes by pointing to a number of limits and constraints of the capabilitarian framework in economic ethics.

The Ethics of Money and Finance

This chapter gives an overview of the many compelling ethical issues and debates among moral philosophers that pertain to money in general and financial activities in particular. It gives some background by way of introducing ontological ideas about what money and finance is. Thereafter, the chapter starts by discussing some of the classic and sweeping criticisms to the effect that all (or at least most) financial activities are morally suspect, for example criticisms of usury and speculation. The following section assumes that the existence of financial markets can be acceptable and discusses some of the ethical issues involved in making them honest and fair, for example the challenges of deception and insider trading. Finally, the chapter discusses ideas to the effect that financial agents have social responsibilities that go beyond their role as market participants, for example an extended responsibility to promote social welfare. The overarching aim of the chapter is to help further establish the new field of “financial ethics.”

Economics, Ethics, and Health Insurance

Evaluating health care institutions and policies should depend on understanding the economic complexities of health care provision and on our values of compassion, choice, efficiency, fairness, and solidarity. These values may conflict, so applying them is difficult. We must also understand the problems with health care allocation, including employing markets. Regulations are needed first because of asymmetric information: doctors know more about treatments than patients and can exploit them. Second, health insurance is a better bargain for those who expect to be sick. Consequently, health insurance policies attract purchasers more likely to make claims. This adverse selection makes claims and premiums skyrocket, healthy people drop out, and private health insurance markets collapse, unless everyone is forced to buy insurance or insurers deny insurance to those with pre-existing conditions. Third is moral hazard: if insurance pays for a health problem, there is less incentive to avoid it or to economize on treating it. Health care policies must be economically sound and morally defensible.

Virtue and Economics, Horse and Cart

Assimilating ethics to the economic way of thinking is a mistake, and I explain an alternative in this chapter. Applying virtue ethics to economics allows us to explain how economic reasoning ought to be related to our own agency. With virtue ethics, we can endorse some market norms for their contribution to general welfare and ethically critique any particular market norm on the basis of ethics. Concepts from virtue ethics can resolve established tensions between ethics and economics. Oikeiosis, or standard moral development, leaves room, in an account of virtue, for empirical discoveries (such as those economists themselves find) concerning our actual motivations. “Due action” is behavior economists can recommend, without expectations of virtue. And finally, the category of “moral indifferents” allows us to regard economics as the study of indifferents: crucial but unmoralized inputs to our collective lives.