The Moral Dimensions of Economic Theory

by John MacBeath Watkins

It is sometimes obscured by the math, but economic theory is a theory of values. Adam Smith, author of The Wealth of Nations, was by profession a moral philosopher, which is why he was writing about values. He was certainly not a believer in the natural moral probity of successful businessmen.

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices," Smith wrote. He understood the need to regulate markets, that in fact, markets cannot survive without regulation. If property rights are not secure, trade becomes impossible and is replaced by banditry.

I have a theory that one of the problems with Russian capitalism is that they had spent decades describing capitalism as a criminal system. When they decided to become capitalists, this was still their understanding of what capitalism is. It didn't help that some of the western economists advising them had lived so long under societies with properly functioning legal systems that the need for such a thing was not uppermost in their minds, but without such a legal system, you don't get markets. You are more likely to get banditry or kleptocracy.

Because economic theories arise from systems of value, they are entangled in our moral outlook and our political urges. Those who prefer the moral outlook of that most moralistic of writers, Ayn Rand, can be expected to view success as evidence of moral superiority. And if you believe the rich are morally superior to the poor, your policies should reward that superiority. The advocacy of tax cuts to the top marginal rates was justified based on an economic theory that proved not to be true, that such cuts would lead to faster economic growth and would in fact produce higher revenues. Long after it had been shown that the Laffer curve does not function at American levels of taxation, the theory was still trotted out to justify the policy.

Those who think the success of the individual depends in part on the society that enables such success tend to think the successful should give something back in return.

And in the long twilight battle between conservative and liberal views on how to deal with recessions, we see what are clearly moral imperatives once again. Those who think success is a sign of virtue also view failure as a sign of moral inferiority. It is right, therefore, that people should suffer for their failures.

Therefore, those holding this view will naturally think unemployment benefits should not be extended, even though there are five job seekers for every job right now.

Those who think we ought to help those less fortunate -- and the key there is the term 'less fortunate,' a very different view of their moral situation -- will naturally think the benefits should be extended. Further, they are more likely to think society should do something to help those less fortunate to get a job. This moral outlook is compatible with Keynesian economics.

One would think that 74 years after John Maynard Keynes published The General Theory of Employment, Interest and Money, that the rightness or wrongness of the theory would have been tested, and we would know which policies governments should adopt. But the moral consequences of the theory are abhorrent to a large part of the population.

It reminds me a bit of the global warming controversy. Conservatives claim liberals only embrace the science on this because the policies required to fix it fit with the liberal agenda, but this is an obvious instance of projective identifications. Conservatives strive to find any chink in the science because they find the policies required to deal with the problem abhorrent. And of course, where moral arguments are made, self-interest is not far away. Carbon-producing industries have long given financial support for conservative politicians and think tanks.

If we were looking at these issues dispassionately, we would simply find the best policies for solving the problems. But there are few things we are more passionate about than our system of value.


  1. I think governments tend to adopt the policies that will benefit and solve the problems of the clique in power, and that people who are wealthy are more likely to adopt the view that wealth goes to the deserving, while those without tend to be aware of some of the factors that made the acquisition of wealth difficult for them.

  2. I think the situation is much more complicated. True, the wealthy are better at working the system and often more ruthless in pursuing their interest, but not all the people in any one class have the same moral code. Marxists try to explain this with the theory of false consciousness, essentially that workers are often deceived about what is in their interest. My theory is that people of any class can have a system of values that is not entirely self-interested. That's why you get philanthropy, and people like Bill Gates Sr. advocating taxing inherited wealth. It's also why you get people with no hope of great fortunes who think such a tax is a bad idea.


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