This book is not about ethics in economics, which can cover a vast range of topics, such as business ethics or the morally questionable behaviour of many of the actors in the world of business, or some important ethical aspects of economic theory. There are several excellent books that deal with such issues.
This book is very different. It is designed to do two things. First, it is designed to provide a simple method for breaking down the analysis of economic policy issues into what are matters of fact and what are matters of values. Second, for this purpose it highlights the main value judgements â mostly of an ethical nature â that tend to be ignored in the analysis of what policies contribute to societyâs economic welfare. Of course, the fact/value distinction is not as sharp as might be supposed. Even the âfactsâ are not totally objective. Many of the people involved in collecting and presenting the âfactsâ have their own agendas or biases. Furthermore, there is no value-free method of measuring most economic variables, such as the degree of income inequality or the level of unemployment or national income.
But for present purposes the fact/value distinction is useful and important. It should help people who hold conflicting views on economic policy issues â and any other issues for that matter â to identify how far their differences reflect different assumptions about the relevant facts and how far they reflect differences in values. Thus it should enable reasonable people to arrive at a peaceful agreement about what â if anything â they still differ about.
Economics is an applied science, like medicine or engineering. Few people would want to study medicine if there were no intention of improving peopleâs health. In the same way the study of economics would be far less attractive if it were not to be used to tackle the economic ailments of society. As Pigou, the father of welfare economics, put it, âIf it were not for the hope that a scientific study of menâs social actions may lead, not necessarily directly or immediately, but at some time and in some way, to practical results in social improvement, not a few students of these actions would regard the time devoted to their study as time misspentâ.
In order to understand how our bodies work, medicine has to call on many other disciplines, such as anatomy, physiology, biochemistry, pharmacology, psychology and so on. Similarly in order to find out how economies work, economics has to take account of many special disciplines, such as statistics, history, politics, sociology and psychology. But in order to judge how it ought to work it also has to take account of ethics. Indeed, it would be difficult to think of any important current economic policy question that did not raise questions about societyâs ethical values. These range from issues such as the concern with increasing economic inequality in society to relatively technical questions such as how much ought to be spent on improving transport facilities.
The first two chapters will explain the key to the method I believe is essential in the analysis of most problems of social policy. This method consists of making a clear distinction between questions of fact and questions of value. In spite of contributions to economics made by pioneers such as Bergson, Samuelson, Little and Graaff, the role of value judgements in economics is not always adequately recognised. Perhaps this is why economics has been described as âthe dismal scienceâ. Following the first two chapters in which the basic concepts used are explained there are a few chapters that discuss the role of value judgements in the general theory of welfare economics. This will include some discussion of what is meant by the âwelfareâ of individuals and of society as a whole. These will be followed by chapters in which some of the applications of the method to certain specific contemporary problems are examined in more detail, such as how we define the boundaries of the society in whose welfare we are interested, and what concept of âequalityâ we should be concerned with.
I assume that most readers of this book have some knowledge of elementary economic theory, or are prepared to acquire some in the course of reading it, if only by accident. For the analogy between medicine and economics goes further. Outside primitive societies one would not take much notice of a medical practitioner who did not have a basic medical training. Similarly, one ought not to attach too much importance to the economic pronouncements of pundits who have no basic economic knowledge, especially if they are politicians or businessmen who have their own axes to grind. Let me give one example.
Not long after I arrived as a Fellow of Balliol College, Oxford, in 1964, I was invited to attend some special College dinner at which most of the other guests were successful businessmen. (Any reader of this book can guess why.) At various points during the evening I was introduced to several of them as the new economist on the block. Every one of them quickly proceeded to explain to me what was wrong with the British economy at that time. What was interesting was that many of their diagnoses were totally contradictory. For example, one said that the trouble with the British economy was that it was too difficult to make a profit. And another said that the trouble with the British economy was that it was too easy to make a profit. Not one of them mentioned the real reason, namely that Britain was stuck with a fixed and uncompetitive exchange rate.
Today most âmen of affairsâ may be a little less confident about the way to solve the grave economic problems facing most developed countries. But this book is not directly addressed to those problems, although it is hoped that the method of analysis set out in this book will contribute to sensible discussion of them.
1 Value Judgements in Welfare Economics
Throughout this book emphasis is placed on the importance in economic policy analysis of the distinction between âpositive propositionsâ, which rely on facts, and âvalue judgementsâ, which do not. Between them they provide the basis for ânormative propositionsâ, which are propositions about what one ought to do, or what society ought to do. For example, the normative proposition that society ought to impose heavy taxes on tobacco could be defended on the basis of (i) a positive proposition that smoking is bad for peopleâs health and (ii) another positive proposition that better health makes people happier and, finally, (iii) the value judgement that being happy is intrinsically valuable, so that it needs no further justification (though it can still be disputed).
In this book I try to show how essential are these distinctions in welfare economics, which is about how a societyâs economy ought to work. The next chapter of the book explains how these concepts are used. Later chapters show how ubiquitous are value judgements in the analysis of economic policy problems. This might come as a surprise to most people, including even some economists. For it is probably widely believed that economics is all about facts and statistics.
Alas, if that were only the case! But it isnât. So here I shall summarise some of the most important of the value judgements that I shall highlight in the book.
2 The Welfare of the Individual
So let us start at the beginning, which is the âwelfareâ of the individual. Probably most people intending to read this book will already be familiar with a central concept in economics, namely the concept of âutilityâ. (Every student of the subject has heard about the âlaw of diminishing marginal utilityâ.) Individuals are assumed to derive utility from various goods, services and activities. And the structure of theoretical welfare economics begins with an analysis of how a ârationalâ consumer maximises his utility given his tastes, his income and the prices of the goods and services available on the market. It is generally assumed that he knows what he is doing and that the choices he makes really do contribute to his âwelfareâ.
But we have always known that this is not the case. We have always known that people often lack the necessary information to enable them to choose between various options according to how far they will actually add to their welfare. And we have all known a few people who we believe are incapable of always choosing as wisely as they should if their ultimate objective is to maximise their welfare. Consequently, in the last two decades or so a vast amount of evidence has been obtained, thanks to the work of behavioural psychologists and economists, that has confirmed in some detail the many reasons for the gap between peopleâs revealed preferences on the market and what is in the real interests of their welfare.
So right at the start of the analysis of any policy problems, we have to decide whether to accept (i) the normative proposition that society ought to accept consumer sovereignty as expressed in their market choices and the resulting pattern of prices, even knowing that this will often not promote their real welfare, or (ii) the normative proposition that we ought to take a paternalistic position and interfere with their market choices. This would depend on how much weight we attach to the value judgement that personal freedom to choose is intrinsically good as against the value judgement that raising peopleâs welfare is intrinsically good. This conflict of values is ubiquitous in policy. For example, ought society to impose heavy taxes on goods like tobacco, alcohol or fattening food? Or ought one oblige people to wear seatbelts in cars? And should there be safety regulations in places of work?
On top of all that we are faced with the fact that âwelfareâ is not an objective concept anyway. We may all differ about what constitutes the real welfare of an individual.
3 From the Individual to Society
However this is just the start of our problems. For what public policy is about is what promotes the welfare of society as a whole. It is true that most works on ethics â going back as far as Aristotleâs Nicomachean Ethics (about 330 BC) â focus mainly on how individuals ought to behave in order to be âmoralâ people and promote their welfare. But Aristotle also thought that âFor while the good of an individual is a desirable thing, what is good for a people or for cities is a nobler and more godlike thingâ.1 Hence, the subject of this book is welfare of societies, although, of course, this has to be related directly or indirectly to the welfare of individuals.
And we usually cheerfully assume that the welfare of society as a whole is just some sort of aggregate of the welfare of the individuals in that society. But this is a bit vague. And on examination it turns out that to go from the welfare of the individual to the welfare of society as a whole raises the need to make a lot more value judgements.
The reason for this is that society does not have a âmindâ in the same way that an individual does â at least most of them. Yet we would like to think that there is some method by which the preferences of all the people in society could be combined and that respected certain compelling criteria of rational choice. For example, if an individual prefers X to Y and Y to Z, we would expect him to prefer X to Z. Respect for this âtransitivityâ of preferences is assumed to be an axiom of rational choice.
And one could postulate other axioms of ârational choiceâ for a collection of individuals, such as that if the welfare of any one (or more) of them increases and none of them suffers a decline in welfare, then we can say that the welfare of the whole collection has risen.
But it has been famously shown by Ken Arrow that it is impossible to construct a rule for aggregating the preferences of a number of individuals in such a way that it will respect all the axioms that one would normally demand of rational collective choice. The significance of this problem has been disputed. For it has been argued that one should not expect the concept of rationality that we demand for individual choices to apply to a whole society. This may well be so. But, nevertheless, it leaves one very uneasy about the legitimacy of drawing conclusions concerning the âwelfareâ of a collection of individuals on the basis of any information about their individual welfares. Various constitutional methods have been adopted for this purpose, but the choice between them is ultimately a matter of value judgement, not simple logic.
4 Equality and the Distribution Problem
Anyway, few people would like to live in a society that simply maximised its aggregate welfare irrespective of the way that this welfare is distributed. Most people attach importance to the equality of its distribution. However, people differ greatly in the sort of equality that they think is desirable. The usual suspects are equality of opportunity, or of income, or of welfare, or of capabilities, or something else. Which one do you prefer?
And each of these concepts is subject to different interpretations. For example, should equality of opportunity mean only that jobs or other positions in society should only be given to the people who are best qualified for it by virtue of their talents and education? Or should society go further and seek greater equality in the opportunities open to people to attain such qualifications? And if one goes down this road where does one stop? People are born in different circumstances, in different countries, with different natural abilities and so on. Some people are just less careful than are others in the choice of their parents.
And when we have arrived at some value judgement as to what concept of equality we believe to be intrinsically âgoodâ, we still have to decide whether its âgoodnessâ depends on whether it is distributed equally over whole lifetimes, or during any one particular time period, such as a year? For example, suppose people have exactly the same total incomes over their whole life, but their incomes start from a low level when they are young, reach a peak in, say, late middle age, and then decline in old age. At any one point of time, therefore, incomes will be distributed unequally. Should this matter? Should we ignore the plight of some destitute old person simply because he had not saved enough when he was young? Are we not concerned with possible poverty of some old people?
In fact, are we really concerned with equality at all, rather than just poverty? If we lived in a society that was generally very well off and there was no...
