Why we need morality in economics.

In response to austerity measures implemented by Eurozone nations in 2011, Princeton economist Paul Krugman has lashed out by saying “economics is not a morality play”. This is a counter to arguments made by austerians that they have spent way too much in the past, and the way to get out of their colossal hurdle is to spend lesser in this generation. Economics, a mathematical based social science, prescribes a future based on models and evidences gained in the past. Because its paradigms are based on mathematics, economics project an objective stance without biases made on premises of individual differences. Yes, no one would fault with the argument that theory should be objective. However, one cannot forget that our values inform our economics, which in turn inform our politics that ultimately brings out the desired outcomes prescribed by this social science. We need to have morality in economics because it affect how we run our distribution systems and also the execution of policies.

Recent developments in many different parts of the world seem to paint a rather bleak reality: Money can now buy political influence; human organs are being sold in underground markets; the world today has made an ironic progress of becoming more divided and discriminated not in race but income levels; the pursuit of happiness based on premises of economic growth are themselves self-defeating.The list continues. You may have realised that each of the above-mentioned outcomes have resulted from the virtues of a completely functional market – the virtues of freedom, welfare and efficiency.

Let’s look at three cases in detail.

Putting a price on dignity.

A family living in destitute may offer to sell a kidney to a dying patient in dire need. If this is a decision based on consent, then both parties are exercising their rights of freedom in engaging in this voluntary transaction, which, in turn allows the poor to relieve their debt burdens and the dying to survive. That is maximisation of welfare. Some say that this market is also efficient because accepting a price based on consent and ability to pay equates the marginal cost of the seller to the price paid by the buyer, creating a socially optimal outcome. The application of economics here is perfect. But it wouldn’t take more than a layman to figure that something is wrong about this situation. Our economics has made transactions of sacred and invaluable organs possible purely for pragmatic reasons of survival. Does it then, imply that human dignity is is meaningless in the face of death?

How about measuring the value of human life using skills and talents?

Now, turn your heads to our dividing line of income inequality. We now live in an epoch characterised by high levels of inequality not only between developed and developing nations but also within developed nations themselves. And I am afraid that this will be carried into our future.

No one should be blamed for this inequality that divides us more than before, because everyone is but a player of the market making rational and justified choices that fulfills their own utility. But we cannot be blind to the fact that movements from globalisation and the establishments of trade links among us have both set in place a self-sustaining free-market mechanism that has bred, and will breed this inequality. The pursuit of efficiency has induced the exploitation of unskilled workers by companies that heinously drive prices of their goods down. On the basis of trade based on comparative advantage, global trades are fair and efficient: since you are endowed with resources to produce low-end goods, I’ll import your goods at an low price and in return I’ll focus on applying my skills onto high-end products. This is simply an act of mutual benefit in line with the theory of comparative advantage. But this application itself results in skilled workers gaining a higher share of the economic pie. Pundits may respond to this by saying that it is only fair and just for people who contribute the most based on their expertise to earn more in return. But in what sense are they right to measure the value of a human life using a person’s skills? And in today’s world where the playing field is seldom level, aren’t we denying people a prosperous future that could have been theirs? America, the free land of opportunities, ironically epitomises this inequality. For example, income of Americans are largely not determined by efforts but instead by the availability of assets. People with assets have seen their incomes skyrocket when asset prices rose in times of uncertainty, while those without assets have seen their wages stagnate, or even decrease in its real value due to inflation.

Paying for a right.

And finally, there’s the initiation of carbon trading systems which serve to promote efficiency and welfare. Companies who produce more carbon dioxide emissions may purchase the rights to do so from companies who don’t. This transaction grants the former with the right to pollute with the government’s approval, while the latter is better off with extra revenue which can be used to push prices down. This is an ingenious idea to increase efficiency. But, one cannot help but see that this pursuit of prosperity and efficiency has made environmental conservation an economic satire. The market mechanism here sends out perverse incentives to people, as they now have the right to pollute as much as they want as long as they can pay for it. Where is the morality here? Is this the right thing to do? As Michael Jackson has it, “Did you ever stop to notice this crying earth this weeping shores?”

The three examples that I have brought up above is a clear indication of injustice in outcomes decided by workings of the market. There is an element of injustice in the way things have came to be because of our markets. These examples are but the tip of an iceberg, and this is indeed a very bleak, but nonetheless realistic picture.

Where do we go from here?

To many, economics is a social science backed by statistics that prescribe what may happen according to models. Models, such as the price-mechanism and the interaction between demand and supply serve to distribute resources to places where people most need it, or where competition for it is high. Economic paradigms are but tools to facilitate a fair and just production and consumption. But at what costs should we follow economic doctrines, when we know that there is something morally unjust about the outcome? To what extent should we allow the free market to allocate resources, when its supposedly ‘just’ workings can force the poor and destitute to leave the market? Who is to say that human organs can be accompanied with a price tag and be put through the market?

What really matters?

Everyone – including economists, policy makers and those in academia – needs to be moral scientists. I’m not lashing out at the economics profession itself or criticising it in any way. Influential professors such as Harvard’s Michael Sandel has explored the theme of morality in his book Justice; Columbia’s Joseph Stiglitz fought for equality in his book The Price of Inequality. It has been commonly understood that economics cannot be purely utilitarian. The purpose of this commentary is instead to call for a change in the way that economics has been taught to us. This is because economics should serve to develop a mind in us capable of asking big questions that really matter, and this involves involving our fundamental values and principles. Markets are not morally neutral, and we should not simply follow our economic doctrines without injecting elements of justice into our decision-making process. Ultimately, as much as economics serves its pragmatic applications, it should serve to give everyone his or due: put in place a system where people can create value out of their skills and efforts, and in the process ensure survival and advancement of the human spirit. This is why capitalism exists. Yes, economics is a mathematical tool that prescribes, but there should be no reason why it shouldn’t be governed on the grounds of morality especially when it explores the basis of human decision-making. Leave morality out of the equation, and we’ll will be left with outcomes that haunt.

Economic history has taught us painful lessons of how amoral markets lead to disaster. The deregulation of the financial industry in the 1990s has made the rich lobby for laws that serve their own purposes, and earn at the expense of the poor through a plethora of financial instruments and rent-seeking services. This brought us to the 2008 financial crisis, which, uncannily made markets even more amoral as the rich continued to benefit from wealth increases from assets while the poor suffered. Suicide rates among the poor jumped that year by 3%.

In order for our economics to work today, we need to subjectively assess our underpinning values that define our very existence. We need to come to an universal accord on what kind of market outcome is acceptable, and also what kind of intervention should be made. We need to ask ourselves whether we are prepared to sacrifice some market efficiency for the greater purpose of preserving dignity. We also need to put in place laws that shape the social fabric needed for such trade offs.

Economics is inadequate, at least for now.

Of course, I recognise that too many expectations could have been demanded of economics. After all, it has its flaws. Many economies today are still based on outdated models that fail to account for elements of human behaviour that did not exist in the times of our forefathers. But we have not advanced enough to turn to alternatives. It is also understandable that as a model of thinking, economics has to hold “all other factors constant” in order to investigate relationships between X and Y. But a model not built on reality expectations will fail to deliver prescriptions that will work entirely. “Assuming every individual and consumer as rational and incentive driven, they will respond to… ” – this is one of the most important assumptions of economics. But this assumption itself devalues our human spirit because it implies that everyone is perfectly substitutable to each other in this world marketplace. How can its prescribed workings take a moral slant then? For progress to be made, we need to instead build our economic model on the basis of peoples’ differences and not similarities, or at least its conglomerates. And this model should incorporate certain moral compasses that are universal.

We need to rethink what is truly important to us. We should stop making GDP an universal gospel. We should focus on pursuing enough growth, not endless growth. As much as the no one should deny the poor the right to survival, no one should deny us the right to intervene with functional markets and change the destination of some of its resources and goods. We should stop following our theories as if they are our religions.

By showing a little more sympathy and valuing more dignity for the purpose of human life itself, we advance our human spirits. If there is a conflict of ideals between this and that of economics, then it implies that our economics has been informed by a wrong set of values.

We need to rethink what is truly important to us.