Step 4 The Moral Basis of Economic Theory

 To many it is a contradiction in terms.  However, the complete economic theory addresses ethical issues as well as economic precepts.  Profit maximization is one part of theory, and not the central focus.  Central focus: efficient utilization of resources to satisfy consumer wants and needs. Pareto Optimality: a condition in which the scarce resources of society are being used so effectively by the competitive markets that it would be impossible to make any single person better off without harming some other person.  With this concept, the economic theory becomes a means of achieving a social goal: maximum benefits of most wanted goods and services produced at min. costs of least wanted resources. Decision rule for proper balance between economic and social performance:  always be truthful (don't mislead)  honourable (observe contracts)  competitive (set prices costs at marginal levels)  always decide for the greatest financial return The question is: Can we use this decision rule when faced with an obvious moral problem in which some people are going to be benefited and others harmed?

For many economists, like James McKie and Milton Friedman, Pareto Optimality excludes any need to consider moral problems in management. Synopsis of this view:  ethical duties = irrelevant. Just don't lie, cheat, or steal.  Just maintain price-competitive markets + recognize full costs of production  market system will make sure scarce resources are used effectively to satisfy consumer needs  firms that do the above are operating most efficiently and profitably.  profit maximization leads automatically from the satisfaction of individual consumer wants to the generation of maximum social benefits.

The Moral Claims of Economic Theory

Five assertions. 1. Effective use of resources - price mechanisms in factor markets allocate scarce resources to their most effective uses - marginal productivity and cost determine the relative usage - at factor equilibrium, impossible to expand total production w/o increase in resource supply 2. Efficient conversion of resources into products - firms convert limited input factors into wanted output goods and services in efficient manner - long-term: firm's technology and capacity - short-term: operation rate - both are based on balance between MR and MC - internal personal harms and external social damages are included in marginal costs - at equilibrium, impossible to convert resources into products more efficiently and with less personal harm or social damage with an advance in technology 3. Effective distribution of products - price mechanism distributes wanted goods and services to their most effect uses - at market equilibrium, impossible to imrpove consumer satisfaction without increase in personal income 4. Complete inclusion of costs - all costs external to production process have to be identified, computed, and included in either an increased price

of output product or service or a decreased payment for the input resources - if consumer willing to pay increased price or if suppliers willing to accept decreased payment, it would be hard to claim that those choices do not reflect the overall values of society 5. Political adjustment of inequalities - if all costs still do not reflect overall values of society, political adjustment of personal incomes may be needed - redistribution of overall benefits of the economic system is a political process.

Pragmatic Objections to Economic Theory

1. Exclusion of segments of society - alleged that minorities and poor lack ownership of any factors of production beyond their unskilled labor thus, receive inadequate income to participate in product markets + cannot maximize their satisfaction in meaningful ways - microecon response: fault of the political process 2. Presence of injurious practices - alleged that managers of productive firms have excessive concern with maxing profits - micronecon response: would not occur if the theory was applied in its strictest form some claimed moral problems and theoretical solutions: - purchase bribes1: common overseas and not unknown in USA - in efficient market, they raise the cost function by an amount equivalent to the payment so, non-bribing competitors have a definite price advantage. microecon response: insist purchase decision be open and subject to public comparison ensure selection of lowest-priced proposal to supply comparative goods and services lowest-priced proposal would necessarily come from a non-bribing competitor - process pollutants2: obvious social cost in immediate and long-term. microecon response: companies should include these social costs in the pricing function. The results would show that investment in disposal equipment would become beneficial, or, if included in price of product, it would be overly expensive. Under either alternative, amount of pollution would be reduced. - workplace hazards3: chemical risks still remain; physiological and psychological problems will probably always be a part of mass manufacturing due to repetitiveness and time constraints of process. microecon response: non-factor costs should be recognized and influenced in final price. customer should have to pay for full costs of production, not partial costs subsidized by physical/mental health of workers - product dangers4: many failures and hazards come from decisions to differentiate products in slight or artificial ways to avoid discipline of price competition - costs are being charged back against manufacturing firms5 - can be assumed that product safety will soon be improved

1 Personal payments to influence purchase decisions 2 Many industrial processes result in toxic residues and inert materials as by-products and now either discharged as air or water pollutants or bired as liquid or solid wastes 3 Many mechanical hazards e.g. unprotected belts, open gearing, non-shielded presses, etc of industrial processing eliminated with state and federal labor laws 4 Mostly in automobile industry: poorly located gas tanks, radial tires poorly fabricated, automatic transmissions poorly designed; also, hair dryers with asbestors, teddy bears with sharp objects, packaged foods containing non-nutriests 5 through liability suits and jury awards

- minority employment6: economic analysis assumes all groups equal in perf capabilities microecon response: training to correct social injustices provided as public investment, determined by political processes. Cost-benefit analysis would confidently show economic return and social gain. 3. Absence of competitive markets - because of oligopolistic7 practices - companies are larger due to economies scale and scope in production and distribution products more differentiated slight distinction supported by heavy promotion - dominance of large firms and inability of customer to judge relative worth is said to have lead to administered8 rather than competitive prices, which destroys the market efficiency econ response: public policy changes to restrict competitor size and to ensure consumer information are need to reestablish the discipline of the market

Theoretical Objections to Economic Theory - here are a few operating decision in business to which the economic theory cannot be applied:
hiring workers, purchasing supplies, borrowing money to selecting technologies, establishing capacities, setting prices Assumptions about the Nature of Human Beings  the economic model is utilitarian9  and is based upon an exceedingly complex and unlikely view of nature of human beings  ultimate end is the greatest general good  defines that good as max benefits of consumer products and services at minimum costs of labour, capital, and material  problem: necessary to add political process to economic paradigm to ensure equitable distribution of benefits and allocation of costs  equitable is defined in theory as democratically determined pattern of distribution and imposition  pattern varies with collective opinions of society's members  also selfishly concerned with personal maximization of material goods and services in product markets and of financial wages, rents, and interest payments in the factor markets  it would be an extreme assumption to believe that people can concurrently be gneerously attentive to others in all political decisions and selfishly attentive to themselves in all economic activities and never confuse the two roles  Assumptions about the Value of Human Beings  the microeconomics model is impersonal  and is based on an exceedingly low and narrow view of the worth of human beings  no one acts as an individual human being, purusing personal goals that move beyond economic outcomes to personal desires for liberty, opportunity, dignity, worth, and pride  managers exemplify denial of worth as they must act solely as agents for financial interests of stockholders
 even though society as an economic system may have achieved Pareto Optimality with maximal benefits at minimal costs, does the individual develop any sense of dignity and pride?

Conclusion
The economic theory seems to be a logically complete and intellectually satisfying view of the world as a productive system
6 racial/sexual discrimination is self-defeating, workface limited to young or middle-aged white males would raise cost of labor; 7 Dominance by a limited number of large companies 8 Price level is set by the company to provide a set return above costs without reference to either supply or demand 9 Philosophical system of belief that focuses on outcomes rather than duties, with the understanding that larger outcomes are constantly better than lesser ones; the greatest good for the greatest number

but it is dependent upon these underlying assumptions: (a) all markets are competitive (b) all customers are informed (c) all external costs are included Markets vary in their degree of competitions customers vary in their extent of information almost all external costs vary in scope of inclusion. We need something to ensure that competition, to guarantee that information, and to require that inclusion, and that something more consists of legal requirements of the law. analytical method of economic outcomes 1. More is better than less 2. Specifically, more is better than less when that more consists of what people really want, as expressed through their preferences in the product markets 3. And even more specifically, that more of what people really want is better than less when that more is produced as efficiently as possible by using as little as possible of what people least want, as expressed by the preferences in the factor markets

Step 5 Moral and Legal Requirements

In simple terms, everyone should always follow the law, which represents societies minimal moral standards. Thomas Hobbes "always obey the law as written and fully meet al the legal requirements" Hobbes, in a summarized explanation, believed everyone "should have to obey the law because it is in everyones self-interest to have a stable and orderly society - while people give up their rights to obtain that stability and order." - Natural Law In a more complex approach: laws should reflect what people living in a state of nature would accept as the governing rules of society. This is know as the "Social Contract" where people don't know their position in society therefore no self-interest is influenced. This is important because there is a equitable distribution benefits, harms, and the rights denied and exercised. If people are unaware of their position, they are unable to act in self-interest and will not be ignorant of their position. In modern day, this is know as the "Veil of Ignorance" - where to reach a solution, the interest of the full community is important rather than an individual or group. The law is simply defined as a consistent set of universal rules that are widely published, generally accepted and usually enforced.

The Law as Collective Moral Standards

There is usually an overlap with moral standards and the law. Ex: Clearly, a person who violates the federal law against bank robbery also violates the moral standard against theft. However, some moral standards are not reflected as laws. Ex: Lying and Truthfulness is only obligated in court. The law also has negative injucnctions and tends to be negative. Ex. It shows what is forbidden, and not when we are required to help people. There is no law that suggests we should help someone drowning, but 99.9 percent of people would do it since the action is morally right. There are also lengthy delays, the law tend to lag behind apparent moral standards of society. Slavery - the most obvious, but sexual and racial discrimination, environmental pollution and foreign bribery can all be cited as moral problems that need to be address legally.

When doing legal requirements: Problems with Formulation of the Law

Moral standards - goals, norms, beliefs and values Inadequate Information - person moral standards cannot influence the law if information is missing

Incomplete Participation - if viewpoints are excluded, the law does not represent everyones moral standards Inarticulate Representation - it is difficult for personal moral standards to actively influence the formation of the law if groups cant convey their preferences effectively Inconsistent Formulation - a certain organization dominates the consensus on a larger scale. Laws are not formulated correctly if organizations are given preferences Indefinite Wording - the wording of the law must be clear. Cannot work to the advantage of a certain client

Step 5 Moral and Legal Requirements

y Simple rule: everyone should obey the law because in a democratic society like ours, it can be said to represent the minimum moral standards of society, and those minimal moral standards should recognize the nature and understand the worth of individual human beings. Thus, you can not really fault a person who obeys the law

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Much less complete and less explicit than economic theory Proposed by Thomas Hobbes (1588 1679) Claimed that periods of conflict led to presence of chaos, lack of security, and block to progress o 4 points of reasoning: I) equal ability men are equal despite of class, and since there are equal in ability, it leads to equal ambition (therefore a constant struggle by everyone for material gain and personal safety); ii) continual war Individual struggles between equals eventually become a war (war as is every man against every man); iii) depressed economy That resulted in lack of security, also decline in industry; iv) proposed solution to stop the continual war, Hobbes proposed two Natural Laws 1. Men who are engaged in a continual war, in order to gain the benefits of an enforced peace, will seek by all means available to them 2. The only true means available to them is for all men to surrender their rights to a central authority who will establish peace by force and decree (government) Hobbes proposal comes across as the rule that everyone should always obey the law because it is in everyones self-interest to have a stable and orderly society even though they have to give up their rights to obtain that stability and order Proposal of all laws should reflect what people living in a state of nature would accept as governing rules of society (impartial self interest) led to the idea of social contract o When people dont know what position they will hold in the eventual society that is to be formed, they dont know their self interests o Social contract lacked knowledge about self interest Ex: 100 people on an island with no food - A contraction (someone who believes in the social contract) would say that people on the island, being free and equal but facing loss, would go on to discuss the distribution of benefits, the allocation of harms, the acceptance and denial of some rights majority decision goes through in the making of the law (ensures equality and fairness and best for all its members) Veil of ignorance an advantage of the social contract in which that it forces people to think about issues from different perspectives to reach an equitable solutions that are more socially oriented (community) as opposed to material interests of individuals, groups, and organizations (self-interests) Therefore, laws can be the basis and guide of attaining equitable decisions to problems (moral) Definition of the law o Defined as a consistent set of universal rules that are widely published, generally accepted, and usually enforced (rules describing how we are required to act and must do) o Can be defined as a consistent (do not contradict), universal (applicable to everyone), published (in written form and easily accessible), accepted, and enforced set of rules o Laws are formed by legislations, explained by attorneys, interpreted by courts, and enforced by police. Note: none of these units ALWAYS act in the best interests of society Law as Collective Moral Standards Can we accept these rules, even though they are flawed, as collective moral judgements of society? 3 conclusions to the possible relationship between moral judgements and legal requirements: 1) Considerable overlap between legal req and moral standards some moral standards have no legal standing whatever, where truthfulness is not required by law except in court, under oath, accounting records, etc 2) Negative injunctions requirements of the law tend to be negative, while standards of morality tend to be more positive and 3) length delays law tends to lag behind moral standards (ex: slavery and discriminatory practices) Process for the Formulation of The Law (complex and interactive) 4 stages of explicit legal requirements through the inclusion of collective moral standards: o Individual persons sets of goals (what we want out of life leisure, family), beliefs (criteria of thought), norms (expectations and how we should act), and values (rankings and priorities when people establish goals, norms, and beliefs) that form individuals moral standards o Small groups people with similar GNBVs (goals, norms, beliefs, values) tend to associate with each as an informal group. also based on cultural and religious traditions can lead to exclusion and discrimination

Formal Organizations unions, businesses, agencies, etc, which they all share accepted goals, stated policies, and structured positions leading them to accepted standards of decision and action o Political institutions governmental units at federal, state, and local levels are the means by which goals, norms, beliefs, and values from the three stages are formalized into law Problems in the Formulation of the Law (thus not enough for a moral problem) o Inadequate information the GNBVs and moral standards of the members of society may be based upon a lack of information relative to issues of importance. o Incomplete participation Exclusion of moral standards of some members of society (in small groups that subsequently influence formal orgs and political institutions. Hard for personal moral standards to actively influence the formation of the law if viewpoints are left out o Inarticulate representation moral standards of some groups within society may not be fully represented or equally represented seen in NGOs such as hospitals and schools that cannot convey their preferences o Inconsistent formulation moral standards of some organizations within society may not be equally considered in the agreements of the political institutions that result in formulation of the law o Indefinite wording lawyers looking for omissions in the law to represent their clients in the best of their ability (positive law) o

Step 6: Moral Analysis and Ethical Duties, Hosmer pgs. 87-101

y Moral philosophy o Study of proper thought; that is how people normatively should think about issues that are important to themselves and to our society

The principle of self-interests y What constitutes a good life? y What should man strive for? y Protagoras: Man is the measure of all things o Measure that matters it eh life of an individual and the means by which that life can be made to be satisfying and fulfilling y Democritus: Better a good life than a pleasant dinner o Long term goal of a good life to be evaluated just prior to death that matters The principle of personal virtues: y Socrates o What is good life for both individuals and societies o first rule for a successful life : successful than meant happy; happiness only arrives when you know how to use each one (ownership of property) of those well y Plato o Need to have good society in order to have a good life y Aristotle o Need to have good men to have a good society The principles of religious injunctions y Do unto others as you would have others do unto you Golden Rule of Christianity Principle of Government Requirements y Hobbes o People are truly self centered

People equal in strength of body and mind, equality of ability leads to equality of hope in achievement of ends y Struggles arise for gain, safety, reputation y Every man is enemy to every man

Locke o Added rights to liberty and property to make a trio of the rights considered most critical Principle of Utilitarian Benefits y Bentham o Proposed that all individuals are governed by feelings of pleasure and pain  Act naturally to ease pain and increase pleasure: utility y Mill o Greatest good for the greatest number y Principle of universal duties y Kant: every member of society does not receive an equal share of benefits and harm y Every person should always treat others as ends, worthy of dignity and respect and never as means to his or her own ends y Never take any action that you would not be willing to see others, faced with the same or closely similar situation Principle of Distributive Justice y Rawls: understood that it would be impossible to compute impacts of all the inequalities in benefit distribution y Everyone should act to ensure a more equitable distribution of benefits y (treat others that you want other people to treat you) Principles of Contributive Liberty: y Nozick: No one should interfere with the self-development of other persons y Everyone should arrange their own voluntary exchanges to their own best advantage