December 8th 2012

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Articles from this issue:

EDITORIAL: Defence Minister declares war on the services

CANBERRA OBSERVED: Labor celebrates surviving its fifth year in power

SCIENCE: Climate alarmism not justified by the evidence

NATIONAL AFFAIRS: AFA calls for wide-ranging inquiry into child sex abuse

NATIONAL AFFAIRS: New anti-discrimination bill threatens religious freedom

CANADA: Impact of same-sex marriage laws on free speech

INTERNATIONAL AFFAIRS: South Africa - flawed, but not yet fractured

ECONOMIC AFFAIRS: Radical bank reform that could help end economic instability

OPINION: Is economics a part of ethics?

QUOTATIONS: The wisdom of Wilhelm Röpke (1899-1966)

GREAT FIGURES: One of the 20th century's greatest humanitarians

LIFE ISSUES: Abortion's short-sighted solution delivers long-term heartbreak


CINEMA: Stellar cast in latest James Bond movie

BOOK REVIEW Reflection on arranged marriages

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Is economics a part of ethics?

by John Young

News Weekly, December 8, 2012

Is economics value-free? Peter D. Howard (News Weekly, letters, November 10) quotes authorities who say it is, and this is certainly the common position of economists. They deny that economics is a part of ethics.

I believe an essential distinction has to be made: we need to distinguish between the examination of economic phenomena and the examination of basic economic laws. The first is not a part of ethics; the second is.

The economist examines factual situations, such as unemployment levels, consumer behaviour, the effect of various levels of interest rates, economic trends and the impact of global factors on the national economy. We can call this empirical economics.

But there is a deeper level, which studies economic principles that must be followed if society is to be healthy, but which can be violated. They are economic principles and are at the same time ethical principles — because they are about what ought to be done.

Let us start by looking at the price system — which is the very soul of the economic order. Each one of millions of consumers wants particular goods, and generally the economy is able to provide them. This is not achieved by some superior authority with the knowledge and power to understand what each person wants, and then organise the delivery of the desired products to the individuals who desire them.

Leonard E. Read published an article in the American journal The Freeman in December 1958, in which he illustrated the working of the economy by imagining a lead pencil telling its life story. The article is titled I, Pencil.

The pencil makes the startling statement: “Not a single person on the face of the earth knows how to make me.” It goes on to explain how it came into existence, speaking of the tree it came from, the many tasks necessary to harvest the wood, the transportation process, the fashioning of the slat of wood, etc. Then there are the other ingredients: graphite, printed labelling, metal, eraser, and so on: each of which is the result of a long process from the original raw material.

Not only are there hundreds of people involved in the intricate process of bringing a single pencil to the market, but most of them don’t even know what the end result will be; some may not even know what a pencil is.

Yet there is no master planner who oversees the enormously complex task of getting the pencil to the consumer. In fact, the more complex the economy becomes, the more impossible is it for centralised planning to work. How, then, do millions of consumers get the vast variety of things they want?

This seemingly magical effect is achieved through the price system. The worker wants a high wage for labour, the investor wants a good return, the consumer wants a low price. Prices, then, are an inducement or a deterrent, pulling production in this direction or that. Prices coordinate production, and they do so by transmitting information, by providing incentives and by distributing incomes.

Transmitting information. When more of a commodity is wanted, the price tends to rise; when less is wanted, the price tends to fall. This information tells the market whether more or less of a commodity is wanted.

Providing incentives. Prices not only show where action is needed, but provide an incentive to producers. The higher the price, the greater incentive to produce more of that item; the lower the price, the less the incentive.

Distributing incomes. The return one receives is one’s income: the worker receives a price (a wage) for his work; the investor receives a price (a dividend) for his investment. The higher the return, the stronger the incentive to work or invest in that area; the less the return, the weaker the incentive. So the price system operates to adjust labour and investment in line with what is wanted.

Freedom of choice

For the system to function well it is essential that there be freedom of choice. Suppose, for example, that workers are forced to either labour for a pittance or starve. In those unjust conditions free choice is shut out. For the price system, as outlined above, to operate there must be a variety of opportunities for those involved: for the workers, the investors, the consumers.

In other words, there must be true competition: that is, a state of affairs where the people involved in the economy have a variety of opportunities open to them, thus giving them a real choice.

Reflection on the price system, as briefly outlined above, shows that it is natural: it is not just a convenient or optional way of arranging things, and which could be replaced by some other manmade arrangement. But it is not natural in the manner of a physical order, which exists independently of the human will. The price system, on the contrary, has to be implemented by the members of society.

That’s why it belongs to ethics: it is the natural way of achieving justice and prosperity in our economic activities, but it has to be implemented by us: it is the way society ought to act, but it can be interfered with through ignorance or selfishness. That is, it is part of the moral science of ethics or moral philosophy.

Other ethical principles

A corollary is the principle of subsidiarity: the principle that what can be done by individuals or smaller associations should not be done by larger bodies. If private enterprise, for instance, can achieve the desired result, the government shouldn’t undertake that function. This is an ethical matter — a question of personal rights and a just order in society, which is why the Popes have insisted on the importance of the principle of subsidiarity in Catholic social teaching.

In his encyclical Quadragesimo Anno, published in 1931, Pope Pius XI said subsidiarity is “a fundamental principle of social philosophy, unshaken and unchangeable”.

Then there’s the vitally important question of land prices (a topic I treated in an article in the News Weekly of May 30, 2009). We see many examples of fortunes being made from the sale of land, even though the owner did nothing to earn the fortune he gets. This is very definitely a question of ethics — that is, of moral philosophy.

If value attaches to a piece of real estate because of the benefits society produces — roads, public transport, shops, recreation facilities, etc — is it right that the landowner should appropriate that wealth? Shouldn’t it be taken by the government in place of taxes on earnings?

Closely related to this is the matter of usury, which is an ethical issue, not a neutral or value-free question, but is at the same time an economic question.

Private property is another essential constituent of a healthy economy, and is therefore an ethical imperative, as appears clearly if we look at the consequences when Soviet communism suppressed private property.

Socialism in any form represents an abnormality — which implies something normal that it suppresses; and the suppressed thing is a naturally functioning economy: an economy functioning in accordance with laws that are together economic and moral.

Philosophers and theologians in the Middle Ages, and especially in the Renaissance period, treated economic questions — such as the just price — and they saw these as part of moral philosophy. In 18th-century France the economists known as Physiocrats investigated natural laws (Physiocracy means the rule of nature), and sought to have these implemented. In Scotland in the same century Adam Smith developed his famous book The Wealth of Nations (1776) from lectures he gave as professor of moral philosophy.

But in recent times economists have moved right away from this perspective, opting for “value-free” economics. In doing so they have failed to understand the natural order they should be investigating and have left out the essential ethical dimension of the science of economics.

They’re right in regarding as value-free the investigation of economic phenomena such as consumer behaviour or the effect of adjustments in interest rates, as I noted early in this article. The day-to-day work of economists rightly concentrates on these phenomena.

They are wrong, however, in not recognising a natural economic order which should exist, but which has to be implemented by human intelligence and will. Failure to see and implement this is the explanation of the economic chaos in which the world is constantly immersed, with its unemployment, booms and busts, appalling gaps between rich and poor, crushing taxation and unaffordable housing.

John Young has dealt extensively with the question of economic ethics in his book The Natural Economy, and more briefly in his booklet Economics Is For Everyone. He is also author of The Scope of Philosophy. All these publications are available from Freedom Publishing. 

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