Economist or Ethicist?

  • February 20, 2017

“What’s an economist like you doing writing a column on business ethics?” readers might be thinking. What can economists, who are renowned for their celebration of self-interested behavior, add to the discussion on business ethics?

Economists, indeed, discuss and even laud self-interested behavior. Most of the time, they are using self-interested behavior as an assumption in their thinking. Famed economist Adam Smith recognized that markets work better, though, when economic actors follow some basic rules that temper sheer self-interest: don’t lie, cheat, or steal. Smith’s contemporaries knew him for his other great work, The Theory of Moral Sentiments. Many economists, including several Nobel Prize winners, have pondered the ethical implications of economic and business activity. Although the young practitioners in the profession sometimes seem more interested in showing off fancy mathematical models of economic behavior, such worthies as Milton Friedman took definite and controversial stances regarding business ethics.

Economists deal with scarcity; we live in a world with an abundance of scarcity. Because of scarcity, every decision you make that uses resources entails opportunity costs. Scarce resources can be used for something else. Economists are adept at identifying relevant opportunity costs (the cost of the best foregone alternative) and benefits. By identifying all of the relevant opportunity costs and benefits, a decision-maker is more likely to make a satisfying decision. Failure to identify relevant opportunity costs and benefits may waste resources. For instance, spending more money to improve commercial jetliner travel may not be a good use of scarce dollars; the same money spent for, say, freeway dividers might save even more lives.

Economists advocate weighing marginal benefits (the additional benefits) and marginal costs (the additional costs) of an action or a purchase when making a decision. Although people usually figure that only the involved parties’ marginal benefits and marginal costs matter, economists note that social efficiency occurs when external marginal benefits and costs are taken into account.

What is meant by external marginal benefits and costs? If a customer buys meat from a packing house and the packing house dumps the waste into the river, the resort owner downstream must pay extra to clean her beach. This is an external cost to the resort owner; economists argue that people should take external costs into account when making decisions. Weighing external marginal benefits and costs is, in effect, similar to the popular “stakeholder” approach to business ethics, where business decision makers consider other parties’ interests—labor, customers, suppliers, among others—when making decisions. The weighing of all marginal benefits and costs, is also conducive to the good stewardship.

Another intersection of ethics and economics arises in discussing income and wealth distribution. Economists are adept at explaining why some people are paid higher wages or salaries, or why some people amass greater amounts of wealth than others. We can stress the nuances involved in income distribution data, such as the need to control for age, education, region, and so on. Economists have studied the gender-gap in pay and found that a major contributory factor is job interruptions; any worker, male or female, who drops in and out of the labor force is likely to see their wages suppressed. Since women are more likely to have intermittent job records, this hurts their earnings across their lives.

Another truly interesting question is whether young people have much opportunity to exceed their parents’ income and wealth status. Iowa students, for instance, have the benefit of relatively good public K-12 schooling. Their chances for upward mobility are much better than, say, their contemporaries living in some of the southern states. Iowans generally have more evenly distributed incomes than residents of other states.

Are there ways to help impoverished people without creating disincentives to work or without imposing punitive taxes upon workers, especially as they enter the decade or two of their peak earnings (when they are likely to be paying for their children’s college education or saving for retirement)? Economists debate this complicated issue, but there are no definitive answers.

If the public views a business practice as unethical, voters may clamor for legislation. Economists are adept at analyzing the effects of regulation. Oftentimes, regulation goes awry, as affected parties figure out ways to mitigate the effects of the regulation. In other cases, affected businesses or industries “capture” the regulators. Beware of business executives seeking regulation; such regulation is usually self-serving, whether it lowers their costs, increases demand for their products, or deters entry by competing new firms or products.

Economists identify who wins and who loses from decisions and policies. Their analyses can help individuals and society make better decisions; they can also help quantify the costs of ethical positions. A little economic analysis can go a long ways when discussing ethics.

The views and opinions expressed are those of the author and do not imply endorsement by the University of Northern Iowa.

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