The Moral Dimensions of Economic Theoryby 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. If you think individual

effort and individual genius should be rewarded, you will advocate high inheritance taxes, since the

virtue being rewarded dies with the person who earned the money. If you believe better people have

better children, that moral superiority is heritable and those who are of good breeding deserve more

power and wealth than those who are low born, you will think the inheritance tax should be eliminated.

Of course, there is another justification for elimination of the inheritance tax, that all private money

should be private, and people should be able to keep it. However, unless you believe government is

entirely parasitic and no tax should ever be collected, there must be taxes, and the only question is

which taxes are fair, and how much government we need to pay for. The dead have no more use for

wealth, unless you think grave goods will assist them in the next world, and should they take such

wealth with them, the question of inheritance does not arise. As a result, the question of inheritance

tax is not about the rights of the deceased, but about the income of the inheritors. One would think it

would be taxed as ordinary income, but instead the debate we have in our politics is about whether

inheritance should be taxed at all. But of course, I'm dealing with this philosophy as if participants in

the debate were operating with pure logic from simple premises. As Immanuel Kant once observed,

“out of the crooked timber of humanity, no straight thing was ever made.”

I believe this reflects the resilience of the structure of our society and our ways of thought. The

structure of our though grows deep and influences us on a level far deeper than conscious thought. We

have lived in a society structured largely on Hobbes' subjective system of value, but there is an older

system of value still operating that tells us that we strive not just for our own place in society but also

for our children's place. Striving for their future gives us longer horizons, and reason to take actions

that will benefit not just us, but future generations as well. Paul Ryan, an avowed acolyte of Ayn Rand,

proposes eliminating the inheritance tax, although Rand's theory locates moral virtue in the individual;

his stand on death dues, however, shows that he is also subject to ways of thought that come from an

older and more organic form of conservatism that locates virtue, and the goals we strive for, in the

clan. This is a form of conservatism that Edmund Burke might recognize more readily than Rand.

Striving for the success of the clan may even have biological roots that go deeper than the structure of

thought. Such an ancient behavior pattern will have been through numerous justifications, all of which

reflect a real human desire and most of which do not explain it.

Of course, striving to make your clan more wealthy is a way of making your clan more worthy,

since wealth is in some ways stored potential power. The wish to pass on wealth to one's offspring is

the wish to be the founder of a noble clan, an instinct toward establishing an aristocracy. Thorstien

Veblin, observing the rentier class that existed in the Gilded Age, called them the “Leisure Class,”

because to own property and not labor was evidence that one belonged to the economic aristocracy that

existed before the income tax and the inheritance tax made it more difficult for rentier status to be

passed down the generations.

“Abstention from labour is not only a honorific or meritorious act, but it presently comes to be a requisite of decency. The insistence on property as the basis of reputability is very naive and very imperious during the early stages of the accumulation of wealth. Abstention from labour is the

convenient evidence of wealth and is therefore the conventional mark of social standing; and this insistence on the meritoriousness of wealth leads to a more strenuous insistence on leisure.”1

So an ideology reveals itself to be a mere justification; the Ayn Rand acolyte shows that instead

of an advocate of rewards for meritorious effort of the individual, he strives for conditions that will

make possible an aristocracy that he can, perhaps, bequeath on new generations. Perhaps not even

bequeath on his own descendants, but on people who will run society the way that something deep in

him wishes to see it run, with the “better” families steering society for the lesser folk. And all in the

name of freedom.

Currently, justifications for those desiring a new Gilded Age and a new economic aristocracy

are entangled with our notions of freedom, a term which, like truth, can be surprisingly difficult to

define. Marx looked on it as “freedom from;” freedom from oppression, freedom from want. Jean-

Jacques Rousseau defined it in several ways. There is the natural liberty that exists in the state of

nature, the “unlimited right to anything which tempts him and which he is able to attain”2 which, sadly,

is limited by the state of nature which Hobbes so ably described, in which even the right to keep

breathing is uncertain because of the chaos that accompanies such unrestrained freedom. Rousseau

suggests that we gain considerably by civic liberty, in which the rights remaining to us are defended by

the entire community as part of a social contract. But he was unsatisfied with this Hobbesian state of

affairs in which our greatest freedom is from violent death. Rather, he felt that we should aspire to

moral liberty, “for the impulsion of mere appetite is slavery, and obedience to the law one prescribes to

oneself is freedom.”3

Ayn Rand saw it as freedom from restraints that sought to shackle the more able in the service

of the less able. In other words, like Marx, she saw it as freedom from oppression, having located a

1 The Theory of the Leisure Class, Throstien Veblin, Chapter III, Conspicuous Leisure.2 Rousseau, J. ‘Of the Social Contract’ in S. Cahn (ed.), Classics of Modern Political Theory, Oxford: Oxford

University Press, 1997, pg. 427.3 Ibid, p.427.

different form of oppression. While Marx saw labor create wealth that went to the oppressors like that

fellow Friedrich Engels who kept helping him out with money and editing his work, Rand felt that the

uncreative class was oppressing the creative class. In Anthem, she wrote of the more athletic dancers

being burdened with weights to make their performance more equal to less able dancers. I suppose in

tax policy, the moral equivalent is progressive taxation.

But arguments about freedom are not the only justifications offered for economic theories. Our

feelings about natural freedom and the obligations of the social contract can devolved into a rather

snarled web of the structure of thought. The Alexandrian solution to this Gordian knot is to propose

economic arguments based on efficiency. And what is more efficient than a perpetual motion machine?

The advocates of tax cuts to the top marginal rates justified them based on an economic theory

that proved not to be true, that such cuts would lead to faster economic growth that in the end means

they pay for themselves. 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 they also have an

argument for the efficiency of their desired taxation policies, that excessive inequity in a society leads

to economic troubles because there is insufficient demand.

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 as I write this.

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. Although it is difficult to run experiments in

macroeconomics, we can look at projections and see if they are correct. One group of economists, for

example, the monetarists, predicted that the stimulus package passed by congress in 2009 was too large

and would result in high inflation in short order. Another group, the neo-Keynesians, said the stimulus

was too small, and would not result in robust recovery and lower unemployment, concluding that

deflation was the real threat. One would think society would then take the advice of the economists

who came closest to getting it right, but as I write this, most policy makers seem to be following their

value system rather than their experience on this matter.

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 identification. 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.