Why Is Ethics Important in Economics

Orange County Public SchoolsMark C. Schug, Ph.D.

University of Wisconsin-MilwaukeeFlorida Council on Economic Education

Overview

• Unethical behavior in business and government

• Morality and the absence of markets

• Who is Adam Smith and what did he say about morality?

• TOC• Lesson 2

Why Ethics Is Important in Economics

What Is Ethics?

• Ethics is the consideration of “right” and “wrong.”

• Ethical decisions are hard to avoid in education and in the economy.

• Yet the American Economics Association complains that graduate schools keep turning out “idiot savants,” skilled in technique but innocent of real economic issues. (Barber, 1997, page 98)

What About Business?

http://www.sciencecartoonsplus.com/gallery/ethics/eth06.gif

Greed?

• Is our market economy based on economics?

• Or is our market economy based on greed-onomics?

Unethical Behavior = Bad News

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Unethical Practices in Business

• Enron?• Adelphia?• Bernie Madoff• MF Global

Unethical Behavior in Government

• Arrests in New Jersey, Milwaukee, Chicago…

• Disappearance of South Carolina Governor Mark Sanford

• Prosecution of Duke University students

Pork Anyone?

• In 2010, Congress had over approved over 10,000 earmarks worth nearly $20 billion.

The King!

Former Illinois Governor Rod Blagojevich who is about to go to prison

for 14 years

E = GB?

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Morality in the Absence of Markets

The Battle for the Overhead Bins

• Air travelers kiss their loved ones goodbye…

• And then transform into baggage warriors stuffing all sorts to oversized bags rudely into overhead bins.

• Why do they do that?• Bonus Question: How could

a change in the rules of the game influence their behavior?

Who Desegregated Major League Baseball: Jackie Robinson or Adam Smith?

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Jackie Robinson or Adam Smith?

• Branch Rickey, President of the Brooklyn Dodgers, signed Jackie Robinson in 1947 to be the first African American player in the major leagues.

• It took courage to make the offer and to sign the contract.

• Racial segregation in 1947 was widespread .

Supreme Court 1954

• In 1954, the U.S. Supreme Court declared state sponsored school segregation to be unconstitutional.

But, Little Changed Right Away

• It would take years and additional court decisions before schools and other institutions would take actions regarding desegregation.

Why Some and Not Others?

• Yet, some industries abandoned racial segregation well before the Civil Rights Act of 1964 and the Voting Rights Act of 1965.

• Why might some markets – like major league baseball – move more quickly to reduce racial segregation that others?

Welcome to Our Baseball Draft

Welcome to Our Baseball Draft

Mark Schug

Right Field Bats .12040 time: 8.0FAN APPEAL??

Welcome to Our Baseball Draft

Mark Schug

Right Field Bats .12040 time: 8.0FAN APPEAL??

Volunteer 1

Center Field Bats .18040 time: 7.8FAN APPEAL??

Welcome to Our Baseball Draft

Mark Schug

Right Field Bats .12040 time: 8.0FAN APPEAL??

Volunteer 1

Center Field Bats .18040 time: 7.8FAN APPEAL??

Volunteer 2

Short StopBats .35540 time: 5.5FAN APPEAL??

Which Player Would You Draft?

• The most productive player!• So, some club owners

wanted to hire the best players regardless of race but…

• They had an agreement to only sign white players.

Jackie Robinson or Adam Smith?

• Major League Baseball was a legal cartel.

• Owners refused to hire African American players.

• But, market forces - - competition and the desire to win - - and earn all that goes with winning - - caused them to break the race barrier.

Competition to Win In NYC

• Competition in big baseball markets like New York City was more intense then it was in smaller baseball markets.

• After World War II, New York City had three professional baseball teams - - the Brooklyn Dodgers, the New York Yankees and the New York Giants.

Competition to Win in NYC

• Fans love to follow winning teams.

• Mass transit allowed fans to shift loyalties easily from on club to another.

• Having a winning team was one way to attract fans.

• Having spectacular players was another.

Adam Smith and Greed

Adam Smith on Morality

• What was Smith’s most important book?

• Wealth of Nations, 1776?• Theory of the Moral

Sentiments, 1759?• TMS:

– A work on ethics and human nature.

– It was the sensation at the time.

Is Adam Smith the Blame? WN

• More than 250 years ago, Smith wrote:“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

(Adam Smith, The Wealth of Nations, Indianapolis: Liberty Press, 1981 [1776], 26-27)

Visual 2.1

John Stossel Gets a Steak

Adam Smith on Morality in WN

• “By preferring the support of domestic to that of foreign industry, [the entrepreneur] intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

Adam Smith on Morality

• Economics is a moral discipline founded by Adam Smith who was a moral philosopher, and much that is important about economics cannot be fully understood or appreciated without considering its moral dimensions.

Adam Smith on Morality

• Smith argued that people are born with a moral sense, just as they have inborn ideas of beauty or harmony.

• Our conscience tells us what is right and wrong.

• We have what Smith calls "sympathy."

Adam Smith on Morality in TMS

• “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.

• Of this kind is pity or compassion, the emotion which we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner.

Adam Smith on Morality in TMS

• That we often derive sorrow from the sorrow of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous and humane, though they perhaps may feel it with the most exquisite sensibility.

• The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it.”

Adam Smith on Morality in TMS

• “When the happiness or misery of others depends in any respect upon our conduct, we dare not, as self-love might suggest to us, prefer the interest of one to that of many.” (TMS, pp. 137-8)

• “[B]y acting according to the dictates of our moral faculties, we necessarily pursue the most effectual means for promoting the happiness of mankind….” (TMS, p. 166)

Adam Smith’s Bottom Line

• It is appropriate to be self-interested.

• Moral considerations generate self-restraint and a concern for the welfare of others.

• Greed is self-interest without self restraint.

Table of Contents

Table of Contents

1. Does Science Need Ethics?2. What Is the Difference Between Self-Interest and Greed?3. Do Markets Need Ethical Standards?4. Do Markets Make Us Moral?5. What Are the Moral Limits of Markets?6. What Should We Do About Sweatshops?7. Should We Allow a Market for Transplant Organs?8. Is Efficiency an Ethical Concept?9. Do Businesses Have a Social Responsibility?10. What Is Economic Justice?

Lesson 2

Play the Ultimatum Game (p. 24)

VISUAL 2.2THE ULTIMATUM GAME: DIRECTIONS

You are about to play a famous game called the Ultimatum Game. In thisgame players negotiate the division of 10 rewards items. The teacher willdefine the specific rewards to be allocated. Read these rules, but don’t begin to play until your teacher says “Go.”

1. You play this game in pairs; one player is the Proposer and the other is the Responder.

2. If you are the Proposer, your job is to propose an allocation, or division, of 10 rewards items between yourself and a Responder. You may not use fractional amounts, so you must propose a whole number between 0 and 10 rewards for yourself, with the remainder of the 10 rewards going to the Responder.

VISUAL 2.2THE ULTIMATUM GAME: DIRECTIONS (con’t)

3. If you are the Responder, your job is to accept or reject the Proposer’s proposal. If you accept the proposal, both of you will get the proposed number of rewards at the end of the lesson. If you reject the offer, neither of you will getanything for this round.

4. Proposers will randomly pick Responders for each round (try not to pickyour close friends). Players must switch partners after each round. Do notrepeat partners.

5. Half the class will start the game as Proposers and half as Responders.You will play two rounds, with a new partner for each round. After the secondround, you will switch roles: Each Responder becomes a Proposer, and eachProposer becomes a Responder. You will play two more rounds — again, with a new partner for each round.

VISUAL 2.2THE ULTIMATUM GAME: DIRECTIONS (con’t)

6. Record your results after each round on the score sheet below. At the end of the game, calculate the total rewards you earned.

7. All rewards will be distributed at the end of the lesson.

THE ULTIMATUM GAME

This is the record sheet each student keeps.

1. In the column marked (P), circle the number of rewards you earned as a Proposer.

2. In the column marked (R), circle the number of rewards you earned as a Responder.

3. Add up the total rewards you earned as both a Proposer and Responder.

Visual 2.2

The Bottom Line

Self-interest may lead people to make aggressive offers in the marketplace, but greed can lead to getting nothing. In the Ultimatum Game and in life, people dislike unfairness and will incur costs to punish it.