Ethics and Economics Craig Vincent Mitchell Ethics and

Ethics and Economics Craig Vincent Mitchell Ethics and Public Policy

Metaphysics and Ethics Metaphysical Realism Both types of realism are teleological Platonic- two world ontology There is a world of abstract forms, which are universals This is the world of concrete particulars which participate in the forms Aristotelian- one world ontology Forms are instantiated in the concrete particular 4 Causes- Formal (form), material, efficient, final (teleological) Metaphysical Nominalism Both types of nominalism lead to deontology Moderate nominalism Only concrete particulars Causal- admits the material and efficient cause, similar to teleology Extreme nominalism Only concrete particulars Rejects causes altogether

Ethics is inherent in Economics Ethics is the science of character and is focused on the individual Politics is about man as a community Economics is about the way that the community allocates its scarce resources Your metaphysics determines how these disciplines relate to each other Action Ethics Politics Economics

Metaphysical Realism Teleology If you are a metaphysical realist these disciplines are the parts of a greater whole A metaphysical realist approach is teleological The whole comes before the parts Action is the whole, the other disciplines are the parts Ethics Politics Economics

Types of Political/ Economic Systems Resource Allocation Resource Ownership Private Public Private Market Capitalism Command Capitalism Public Market Socialism Command Socialism

Types of Political/ Economic Systems Liberty Security Efficiency Market Capitalism Command Capitalism Equity Market Socialism Command Socialism

Types of Political/ Economic Systems Market Capitalism- Free Market economics ( teleological, provides economic growth) Command Capitalism- (The Third Way) seeks a path between free market and socialist approaches to economic governance, but chiefly stresses technological development, education, and competitive mechanisms to pursue economic. ( deontological, China? ) Market Socialism- economic systems where the means of production are publicly owned, managed and operated for a profit in a market economy. The profit generated in a market socialist system would be used to remunerate employees or go toward public finance. (deontological, France, Sweden) Command Socialism- Communism (deontological, provides no economic growth)

Pre-modernity, Realism and Teleology Aristotle was the student of Plato and a metaphysical realist He believed that man is a rational creature, who acts according to an end. Aristotle wrote a number of works from a teleological viewpoint. Nicomachean Ethics The Politics The Economics

Pre-modernity, Realism and Teleology St Thomas Aquinas combined theology of Augustine and the philosophy of Aristotle He wrote commentaries on all of Aristotle’s work’s, including: Nicomachean Ethics The Politics The Economics

Pre-modernity, Realism and Teleology The Salamanca School of Economics began in the 15 th century with Dominican Monks who relied upon the works of Thomas Aquinas They were followed by the Francisan and Jesuit orders The laid the foundation for much of modern political economy

Modernity Francis Hutcheson was a metaphysical realist who subscribed to moral sense theory His two most prominent students were not They were sentimentalists. They believed that there are no objective moral facts. They also believed that the moral sense is nothing more than the emotions Francis Hutchinson David Hume Adam Smith

Modernity, Nominalism and Deontology Frances Hutchinson was a Presbyterian minister and a professor of moral philosophy at the University of Glasgow. He developed a number of important ideas: Moral sense theory Division of Labor Utilitarianism

Modernity, Nominalism and Deontology David Hume was an empiricist and a metaphysical nominalist. He was a sentimentalist who inherited his utilitarianism from Francis Hutcheson His political economy resulted from Hutcheson’s division of labor

Modernity, Nominalism and Deontology David Hume is noted for his fact/value dichotomy, which is based on his nominalism. Hume believed that “reason is and ought always be a slave of the passions. Reason is good only for comparing and contrasting. Morality is based on the passions As a result of his ideas, positivism (the separation of values, or ethics from disciplines like law, politics and economics) began to flower

Modernity, Nominalism and Deontology Adam Smith was an empiricist and a metaphysical nominalist. Smith’s first book was Theory of Moral Sentiments Smith was a sentimentalist who inherited his utilitarianism from Francis Hutcheson His political economy resulted from Hutcheson’s division of labor. His second book was The Wealth of Nations

Modernity, Nominalism and Deontology Adam Smith (1723 -1790) Wrote the Wealth of Nations ( published 1776) He was a moral philosopher who argued that a free market economy with a laissez faire government was the system that ensured the greatest amount of virtue Those who are virtuous become wealthy Those who are vicious experience poverty

Modernity, Nominalism and Deontology August Comte was the first modern philosopher of science. He was the first to distinguish the physical sciences from the social sciences. Comte believed that the physical sciences had to come before the "Queen science" of human society itself. Comte’s concept of positivism is a rejection of theology and philosophy so that science can be effective.

Modernity, Nominalism and Deontology John Stuart Mill was an empiricist and a metaphysical nominalist. He was a close friend of Auguste Compte and an advocate of positivism. He developed rule utilitarianism. He wrote against progressive taxation and for a free market

Modernity, Nominalism and Deontology John Neville Keynes was a professor of political economy at Cambridge University Humean positivism caused him to separate economics from political economy. It also caused him to divide economics into three different types: positive, normative and applied.

Old Classical Economics Main Ideas Perfect Competititon Model Free markets require rationality (teleological) Walrasian autioneer Markets clear instantaneously Classical Business Dichotmy- an increase in nominal factors, like wages, prices and hove no impact on real factors like employment, economic growth and the interest rate. Everyone is a price taker (responds to price) Ease of entry and exit into marketplace (there are many firms) Perfect information (market failure results from assymmetrical information) No transaction costs No externalities (market failure caused by spillover effect)

Modernity Nominalism and Deontology Metaphysical nominalism emphasizes the parts rather than the whole. Metaphysical nominalism is deontological There is no order, but separate disciplines because of positivism. Law Economic s Politics Ethics

Free Markets and Virtue Free markets are teleological Free markets are consistent with natural law and virtue ethics Free markets emphasize property rights Free markets are most consistent with democratic republics Free markets are against government intervention Free markets are against inflation Free markets maximize freedom Free markets maximize economic growth

The Austrian School of Economics Carl Menger started the Austrian school of Economics Most of its members assumed a causal /realist approach to economics To the degree that it is realist it is also a teleological approach to economics It places little importance on mathematics because economics is a social science It combines law, politics, and economic theory

Austrian School of Economics: Praxeology In the late nineteenth century, the praxeological approach to economics and social science was embraced by Carl Menger. The term praxeology was first applied to this approach by the later Austrian economist Ludwig von Mises. Von Mises and his followers employed praxeological principles to show that much existing economic and social theory was conceptually incoherent.

Austrian School of Economics: Praxeology Ludvig Von Mises (pronounced meesess) was a leader of the Austrian school of economics. He argued that government control of the economy is always vicious He was an enemy of all forms of socialism and communism

Friedrich August von Hayek F. A. von Hayek (1899 -1992) was a student of Ludwig von Mises. A member of the Austrian school, he also taught at the Chicago school of economics. He won the Nobel prize in economics 1974. He wrote The Road to Serfdom

Austrian School of Economics: Friedrich Von Hayek He argued that free markets require freedom from government control. Free markets are compatible with democratic republics He argued that inflation is vicious behavior of governments Hayek emphasized spontaneous order as opposed to planned (or imposed) order, which minimizes human freedom He taught his ideas to Milton Friedman and others while a faculty member at the University of Chicago school of economics

Milton Friedman and Markets Milton Friedman (19122006) was the leader of the Chicago school of Economics. He was heavily influenced by Friedirch von Hayek He won the Nobel prize in economics in 1977. He was an advisor to Richard Nixon and to Ronald Reagan.

Chicago School of Economics: Milton Friedman is in some respects a model of contradiction Because of Humean positivism, Friedman subscribed to empiricism (both of which require metaphysical nominalism) He argued that economics as a scientific enterprise that must not consider normativity As he grew older, Friedman wrote about the political significance of free markets. He argued that free markets lead to free governments

Fresh Water Macroeconomics Fresh Water School Examples So named because of their proximity to the Great Lakes Monetarism-Came about in the 1950 s and advocated monetary (as opposed to fiscal policy). Ended in the 1970 s New Classical Macroeconomics(1970 s) Assumes a perfect competition model, instantaneous market clearing, and dynamic modeling Real Business Cycles- (1980 s) Assumes a perfect competition model, instantaneous market clearing, and dynamic modeling. Emphasizes the concept that government intervention should be avoided University of Chicago Carnegie Mellon University The University of Rochester The University of Minnesota

Free Markets and Virtue John Forbes Nash (1928 -) earned his doctorate in mathematics at Princeton University in 1950. His dissertation title Equilibrium Points in NPerson Games A mathematician at Princeton University. He was the winner of the 1994 Nobel Prize in economics which he shared with Reinhard Selten and John Harsanyi

Nash Equilibrium and Markets Adam Smith argued that the economy works when everyone acts out of his own self interest John Forbes Nash argued that Smith was wrong Nash employed game theory to prove that we must act in our own self interest, but with concern for the common good to produce the best outcome In other words, both entrepreneurs and governments have every reason to be virtuous and to act justly. Only when virtue and justice are exercised can the economy be successful

Free Markets and Cycles The Austrian school rejects the idea that economic cycles are an inherent part of an unregulated market. The Austrian school also argued that economic cycles result from government intervention in the money supply Milton Friedman and the Chicago school reject the idea of economic cycles altogether. The Chicago school believes that economic declines are more of a monetary phenomenon Economic cycles are nothing more than fluctuations

Free Markets and Cycles Louis Jean-Baptiste Alphonse Bachelier (18701946) wrote his Ph. D dissertation on Theory of Speculation (1900). This work served as the basis of the Black Scholes formula. He argued that fluctuations in the market are not the results of regular cycles Fluctuations in the market follow random walks

Social Welfare Theorems Significance 1. Market equilibrium is the Social Optimum Market equilibrium- the point at which demand is equal to supply 2. Market equilibrium is Pareto Efficient- Given an initial allocation of goods among a set of individuals, a change to a different allocation that makes at least one individual better off without making any other individual worse off is called a Pareto improvement. An allocation is defined as "Pareto efficient" or "Pareto optimal" when no further Pareto improvements can be made. Aristotle, Augustine and Thomas Aquinas argue that justice is the common good. At market equilibrium both buyers and sellers have sufficient reason to exchange, thereby achieving their own ends. The social optimum accomplishes justice as the common good Free markets are consistent with virtue ethics rather than utilitarianism.

Deontological Economic Theory Socialism Communism. Worldwide Socialism Fascism. National Socialism

Karl Marx Karl Heinrich Marx ( 18181883) was the father of communism. Along with Friedrich Engels, he wrote Das Kapital and A Comunist Manifesto He was an atheistic metaphysical materialist, who defined religion as “the opiate of the masses. ” He was convinced that entrepreneurs or capitalists were immoral because they enslaved the worker. He endorsed a violent overthrow of all governments urged their replacement with communism.

Deontological Economic Theory Socialism- the middle ground between capitalism and communism The state controls the means of production State planning leads to the common good. Divides the world between the owners of capital and workers Fascism- national socialism is wrong because it is limited and can only fail because of other nations. Communism- worldwide socialism is the best type of socialism because there is nowhere for capital to flee to.

Socialism

Keynesian Economics A deontological approach to economics Requires government intervention Compatible with socialist governments Allows for limited market Virtue is not required Requires some vice on the part of government (inflation is necessary) Limits economic growth Limits freedom

Keynesian Economics John Maynard Keynes (18831946) student of Alfred Marshall, was the father of macroeconomics. He wrote the General Theory of Employment, Interest and Money Keynesian economics assumes that there is no connection between ethics and economics He was a socialist who argued that the government should spend money to stimulate the economy He also believed that a certain amount of inflation is good for the economy

Keynesian Model Keynesian Ideas Markets are irrational- driven by animal spirits Wages and prices are “sticky” and markets do not clear by themselves in the short run. To make markets clear in the short run, government must exercise fiscal policy Some inflation is okay Monopolisitic Competitition Many firms Ease of entry or exit Product differentiation allows firms to set their prices Firms have market power subject to government regulation

Keynesian Economics Salt Water School So named because of their proximity to the oceans. Keynesian Economics- came about in the 1930 s and 1940 s Neo- Keynesians- attempted to combine macro and microeconomics. Came about in the 1940 -1950 s New Keynesians- combined ideas from the New Classical Macroeconomics with Neo Keynesians. Came about in the 1980 s Specific Examples Harvard University Massachusetts Institute of Technology University of California at Berkeley University of Pennsylvania Princeton University Columbia University Stanford University Yale University

The Keynesian Rejection of Nash Equilibrium Keynesians note that Nash Equilibriums sometimes appear irrational Keynesians ask “What if there is more than one Nash Equilibrium for every game? ” The rejection of Nash Equilibrium allows governments to do vicious acts like increase inflation and spend irrationally and irresponsibly This rejection is also based on the Keynesian rejection of rationality in the marketplace

Keynesian Economics and Cycles The Keynesian school accepts the idea of a business cycle that is inherently part of unregulated markets. The economic cycle includes: Recovery- a normal expansion in economic growth Prosperity- (boom) an expansion that continues past recovery, a period of extraordinary economic growth Recession- a contraction in economic growth Depression- (bust) an extraordinary contraction in economic growth Government regulation can slow the economic cycle and can avoid depressions

Economic Cycles

Economic Cycles

Keynesian Economics Alban William Phillips (19141975) was a professor at the London School of Economics. He is noted for the Phillips Curve which supports the Keynesian view that some inflation is required for low unemployment Both Keynes and Phillips were proven wrong during the Carter administration (19771981) when there was double digit inflation and double digit unemployment (stagflation)

Communism A deontological approach to economics This atheistic system is contrary to natural law This system of economics requires vice because it rejects property rights It also requires vice because it does not permit freedom and only offers government control of everything It is a system that is consistent with tyrannies, and oligarchies. It is employed by dictatorships and fascist states

Communism and Cycles Marxists believe that economic cycles are a problem in all capitalist societies Economic cycles are caused by democratic governments because they do not want to achieve full -employment. Communist societies do not have economic cycles, their system only moves downward. There is no upside because government control leads only to failure Marxist governments desire to achieve full employment, because they want to be a worker’s

Death by Communism 65 million in the People’s Republic of China 20 million in the Soviet Union 2 million in Cambodia 2 million in North Korea 1. 7 million in Africa 1. 5 million in Afghanistan 1 million in the Communist states of Eastern Europe 1 million in Vietnam 150, 000 in Latin America 10, 000 deaths “resulting from actions of the international communist movement and communist parties not in power. ”

Death by Communism 62. 9 million in the Soviet Union 32. 9 million in the PRC while in power, plus an additional 3. 5 million killed by the communist Chinese before taking control 2 million in Cambodia 1. 7 million in Vietnam 1. 5 million post-WWII Poland 1 million in Tito’s Yugoslavia plus a suspected 1. 6 million in North Korea

Death by Communism

Death by Communism

Conclusion: All Economic Systems are Inherently Moral Free market economics are the most moral because they demand individual freedom and virtue. Free markets result in economic growth and political freedom Keynesian Economics are less moral because they limit freedom, and encourage some vice (inflation and government control). The result is limited economic growth and less freedom Communism is the least moral of all economic systems because it eliminates individual freedom and requires complete government control. The result is no economic growth and no freedom for the individual