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11577 results in Macroeconomics

Page 207 of 579

  • 5 - Rationality and Morality in Positive Economics

  • from PART I - RATIONALITY, MORALITY, AND MARKETS
  • Daniel Hausman, University of Wisconsin, Madison, Michael McPherson, Debra Satz, Stanford University, California
  • Book:
    Economic Analysis, Moral Philosophy, and Public Policy
    Published online:
    28 May 2018
    Print publication:
    15 December 2016, pp 70-91

  • Summary

    Positive economics is concerned with the explanation and prediction of economic phenomena, while normative economics is concerned with their evaluation. It is hardly surprising that moral considerations are important in normative economics. But as the examples of involuntary unemployment and overlapping-generations models illustrate, moral considerations are important within positive economics, too. Rationality is itself a normative notion concerning how people ought to choose, prefer, believe, or reason and, as this chapter explains, it plays a very large role in positive economics. As we shall see later, rationality is also crucial to normative economics, and its use in both domains forges a deep connection between positive and normative economics.

    Rationality and Positive Economics

    Economists regard people's preferences as rational if they are complete and transitive, and economists regard choices as rational if they conform to people's preferences. If one adds to this theory of rationality the generalization that consumers are in fact rational and the assumption that they prefer more commodities to fewer, then one has the central principles of the theory of consumer choice. Similarly, the traditional theory of the firm maintains that firms or entrepreneurs are rational and that they combine inputs so as to maximize the difference between revenues and costs. Although the theory of consumer choice and the theory of the firm make additional claims concerning the motives of consumers and entrepreneurs, they both take the theory of rational choice to be the foundation of their accounts of actual choices.

    Positive economics on both the consumer and the producer side can be formulated without using the word “rational.” Rather than first defining “rational” and then stating that individuals are rational, economists can assert that the preferences of consumers are complete and transitive and that individuals choose whatever affordable bundle of commodities they most prefer. On the production side, economists can simply assert that firms aim to maximize profits. But the identification of what is actual with what is rational remains. This identification reflects the fact that economics simultaneously provides a theory of the causes and consequences of people's economic choices as well as a theory of the reasons for them.

  • 6 - The Ethical Limits to Markets

  • from PART I - RATIONALITY, MORALITY, AND MARKETS
  • Daniel Hausman, University of Wisconsin, Madison, Michael McPherson, Debra Satz, Stanford University, California
  • Book:
    Economic Analysis, Moral Philosophy, and Public Policy
    Published online:
    28 May 2018
    Print publication:
    15 December 2016, pp 92-106

  • Summary

    In Chapter 5, we considered whether moral norms constrain what people do and whether they constrain, or ought to constrain, what it is rational to do. In this chapter, we turn from questions about how morality affects individual behavior to questions about how morality limits and ought to limit the use of and scope of markets.

    Markets are, of course, the central institution that economists study. Despite this, there is little attention paid to explaining exactly what a market is: most introductory economics textbooks do not even bother to define it. Markets may seem simple – a set of easy equations that can be depicted by supply and demand curves – and natural – a spontaneous form of ordering relationships between people. But in reality, Adam Smith's “simple system of natural liberty” is a complex social institution. Any market presupposes property rights, so that trade and theft can be distinguished. All markets are governed by rules. These rules specify what the basic elements of a market are: Who counts as a trader? What counts as a commodity? What counts as a contract? These rules also specify how these elements may interact: How frequently may any one individual make trades? What kinds of actions may traders take against one another? In every developed economy that uses markets, law plays an important coordinating, regulating, and enforcing function (Satz 2010). The completely “free market” is an illusion.

    Most market transactions are also “arm's length” in that the players in a market are strangers to one another. Because of this, and because it is often hard to judge the quality of tradable goods (think of used cars), markets depend on the availability of information and on social norms demanding trustworthiness. While Homo economicus may be self-interested, he must not lie, cheat, or steal if markets are to function well. This point is often overlooked, but it is important, especially when exchanges are spread out in time and space. The creation of the more or less trustworthy, self-interested trader is a social achievement, which plays an important role in the functioning of contemporary markets; untrustworthy agents can undermine markets, especially when they have disproportionate market power.

  • 11 - Equality and Egalitarianism

  • from PART III - LIBERTY, RIGHTS, EQUALITY, AND JUSTICE
  • Daniel Hausman, University of Wisconsin, Madison, Michael McPherson, Debra Satz, Stanford University, California
  • Book:
    Economic Analysis, Moral Philosophy, and Public Policy
    Published online:
    28 May 2018
    Print publication:
    15 December 2016, pp 194-222

  • Summary

    Human beings differ in countless ways. These differences can be described as inequalities in particular traits, skills, circumstances, or resources. Most of these inequalities are not ethically troubling: indeed, it would be undesirable if everyone had the same skills or the same aesthetic tastes. The world is richer for the differences among people. Nor is there anything ethically objectionable in the fact that professional athletes are more fit than college professors. Indeed, many authors (confusingly) use the term “inequality” only for differences that are morally problematic.

    There are, unfortunately, many morally problematic inequalities. Consider that the median wealth of American families of African ancestry is just a bit more than one-twentieth (!) – that is, 5 percent – of that of families of European ancestry. In 2013, according to the World Health Organization, life expectancies were below age fifty in fourteen countries (all in sub-Saharan Africa, except Afghanistan). At the other end of the spectrum, in nineteen countries, life expectancies were above age eighty.

    Inequalities in wealth and income have been growing in the United States and abroad. According to Bloomberg News, in 2013, corporations in the Standard and Poor's 500 index paid their CEOs more than four hundred times the minimum wage, while in 1950 the ratio was 20:1. The bottom 40 percent of the U.S. population has only one-fifth of 1 percent of all the wealth in the United States. International inequalities are even larger (although with rapid development in India and China the proportion of the world's population that is desperately poor has declined). To give some idea of the magnitude of the global gap, in 2012 the income of the one hundred richest people in the world was greater than the combined income of half a billion of the world's poorest.

    These inequalities in income and wealth, along with inequalities in health and education, are now flash points for public debate. The ephemeral “Occupy Wall Street” movement was a massive protest against the income and power of the richest 1 percent. Some of the best-selling recent books in economics such as Joseph Stiglitz's The Price of Inequality (2013) Thomas Piketty's Capital in the 21st Century (2014), and Anthony Atkinson's Inequality: What Can Be Done (2015) scrutinize the sources and consequences of income and wealth inequalities and suggest ways to reduce them.

  • PART IV - MORAL MATHEMATICS

  • Daniel Hausman, University of Wisconsin, Madison, Michael McPherson, Debra Satz, Stanford University, California
  • Book:
    Economic Analysis, Moral Philosophy, and Public Policy
    Published online:
    28 May 2018
    Print publication:
    15 December 2016, pp 245-246

  • Summary

    Morality and mathematics may seem as unrelated as martyrdom and MTV. But it is possible to characterize moral notions formally and to prove theorems. Doing so does not banish controversy or replace moral argument, because abstract mathematical characterizations of moral notions require interpretation and defense. Just as there are disagreements concerning the formal definitions of rationality, so are there controversies about formal definitions of moral concepts and principles.

    Over the last seventy-five years economists, decision theorists, and game theorists have made exciting progress in characterizing features of human interactions and principles to govern them. This work is linked to moral philosophy. Formal models of rationality and game-theoretic studies of incentives hold out the hope of transcending ancient conundrums concerning the relations among morality, rationality, and self-interest. Concepts of envy-free allocations can facilitate the articulation of egalitarianism. Solution concepts in game theory may enrich the contractarian view that morality can be justified in terms of agreement. Theorems in social choice theory explore the implications of plausible moral axioms and test the consistency of traditional principles concerning how social policies should respond to individual interests. There is an embarrassment of riches in the work on these topics, and we can only comment on a few of these developments.

  • PART V - CONCLUSIONS

  • Daniel Hausman, University of Wisconsin, Madison, Michael McPherson, Debra Satz, Stanford University, California
  • Book:
    Economic Analysis, Moral Philosophy, and Public Policy
    Published online:
    28 May 2018
    Print publication:
    15 December 2016, pp 293-294

  • Summary

    We opened this volume with four examples that show the influence of ethical assumptions and commitments on work in economics. If this book has served its purpose as an analysis of the ethical presuppositions of economics and as an introduction to a range of ethical concepts and theories relevant to economic research, it should make the ethics implicit in these cases easier to understand. It should also suggest how economic analyses can benefit from subjecting their ethical presuppositions to reflective consideration. We have also – especially in the last two Chapters 13 and 14 – described some of the tools that economists have developed that may be of use to moral philosophers. In this last part of our book, Part V, we wish to consider ways that the insights of economists and philosophers can complement one another.

    Accordingly, in Chapter 15 we revisit the four cases discussed in Chapters 2 and 3. In Chapter 16, we present ways in which grasping both ethics and economics can help in identifying good policies and principles.

  • Preface to the Second Edition

  • Daniel Hausman, University of Wisconsin, Madison, Michael McPherson, Debra Satz, Stanford University, California
  • Book:
    Economic Analysis, Moral Philosophy, and Public Policy
    Published online:
    28 May 2018
    Print publication:
    15 December 2016, pp xvii-xviii

  • Summary

    This book is a heavily revised and retitled version of Economic Analysis and Moral Philosophy. We added “Public Policy” to the title to emphasize the relevance of this analysis to policy questions. The book is a descendant of a survey essay, “Taking Ethics Seriously: Economics and Contemporary Moral Philosophy,” which we published in the July 1993 issue of the Journal of Economic Literature. Though now dated, that survey essay may still be of use to readers for its extensive references to relevant literature. We would like to thank John Roemer for commissioning that essay and for the detailed criticisms he offered of several drafts. Others who were of tremendous help with the first edition were Richard Arneson, Henry Bruton, Nancy Cartwright, Marc Fleurbaey, John Kautsky, Eric Kramer, Philippe Mongin, Amartya Sen, Julius Sensat, Max Steuer, Hamish Stewart, Alain Trannoy, Gordon Winston, students at Williams College and the London School of Economics, and anonymous referees. Harry Brighouse, Henry Bruton, Lester Hunt, Andrew Levine, Patrick McCartan, Jonathan Riley, David Ruben, Larry Samuelson, and Daniel Wikler read drafts of chapters of the first edition and offered valuable assistance. The research and writing of the first edition were supported by a collaborative research grant from the National Endowment for the Humanities, and Hausman also gratefully acknowledges the support of a Vilas Associate Award from the University of Wisconsin–Madison.

    Since philosophical reflection on ethics continues apace, as does the development of economic concepts and tools that may be of use to moral philosophers, we thought that a new edition was called for. Although we have preserved the overall structure and many of the specific analyses, distinctions, and arguments of the first edition, we have brought the discussion up to date and added examples that we hope will further illuminate the issues we discuss. We aim to reach a large audience of those interested in economics and policy analysis, and we have tried to avoid unnecessary jargon and complexities.

    In preparing this revised edition, we were aided by and would like to thank Elizabeth Anderson, Mavis Biss, Richard Bradley, Harry Brighouse, Michel De Vroey, Jeffrey Friedman, Francesco Guala, David Hausman, Joshua Hausman, Bernd Irlenbusch, William Jaeger, Philippe Mongin, Colin Patrick, David Schmitz, Russ Shafer-Landau, William Thomson, Peter Vanderschraft, Joel Velasco, and David Zimmerman for detailed criticisms and suggestions for improvement.

  • 7 - Utilitarianism, Consequentialism, and Justice

  • from PART II - WELFARE AND CONSEQUENCES
  • Daniel Hausman, University of Wisconsin, Madison, Michael McPherson, Debra Satz, Stanford University, California
  • Book:
    Economic Analysis, Moral Philosophy, and Public Policy
    Published online:
    28 May 2018
    Print publication:
    15 December 2016, pp 109-125

  • Summary

    Consequentialism is the doctrine that one should judge things morally by their intrinsic value and by the value of their consequences. It specifies a particular structure for ethics. In a consequentialist framework one must first decide what is intrinsically valuable. Questions of intrinsic value are not necessarily the most important moral questions, but they must be answered first because everything else depends on their answers. Then one assesses actions, policies, and institutions in terms of their “results” – that is, their own value and the value of their consequences. Welfare economics presupposes a consequentialist moral theory in which only welfare has intrinsic value.

    Consequentialist assessment is always comparative: an action, policy, or institution is morally right or permissible if its net results are no worse than the results of any alternative. If the results of a particular policy are better than those of any alternative, then the policy is morally obligatory. Whether a policy or action is right or wrong depends on both what state of affairs will obtain if it is implemented and what the state of affairs will be if any feasible alternative is implemented. Nothing is absolutely impermissible. The right action may have terrible consequences when the consequences of all of the alternatives are even worse, and even a policy with terrific results is impermissible if there is a better alternative.

    A utilitarian is a consequentialist who says that what is intrinsically good is individual “welfare” or “well-being.” Is individual welfare a mental state like happiness, the satisfaction of actual preferences, the satisfaction of “rational” or “informed” preferences, or something else not tied to preferences or mental states? Different utilitarian theories disagree about what well-being is.

    The fundamental principle of utilitarianism is that one should do whatever maximizes overall welfare, taking everyone into account. This formulation masks a disagreement between those utilitarians who favor the maximization of total welfare and those who instead support maximizing average welfare. However, both average and total utilitarians agree that the distribution of welfare does not matter: all that matters is its total or average amount.

    Adding up or averaging well-being requires measuring the well-being of different individuals on the same scale. One must be able to compare the increases or decreases in one person's well-being to the increases or decreases in the well-being of others.

  • 9 - Welfare Economics

  • from PART II - WELFARE AND CONSEQUENCES
  • Daniel Hausman, University of Wisconsin, Madison, Michael McPherson, Debra Satz, Stanford University, California
  • Book:
    Economic Analysis, Moral Philosophy, and Public Policy
    Published online:
    28 May 2018
    Print publication:
    15 December 2016, pp 146-172

  • Summary

    Mainstream economists evaluate economic institutions, policies, and outcomes by asking whether they make people better off, and, as we have seen in Chapter 8, they measure whether people are better off by how well their preferences are satisfied. Although focused on welfare and consequences, few economists are utilitarians, because most deny that evaluations should rely on comparisons of how well satisfied are the preferences of different individuals. Following Robbins (1935, ch. 6), many mainstream economists have regarded interpersonal comparisons as untestable subjective value judgments, although this is changing.

    We grant that making interpersonal comparisons of the extent to which preferences are satisfied is difficult. On the other hand, appraising economic outcomes, institutions, and policies exclusively by their consequences for welfare without interpersonal comparisons would tie normative economists’ hands behind their backs. They need to be able to compare the consequences of policies for winners and losers in a nonarbitrary way, and they must make room for other important normative concerns, such as justice. This chapter examines how economists tackle these challenges, including the ethical assumptions they make along the way, and it discusses whether the form of economic appraisal that they construct – that is, welfare economics – succeeds.

    Without the possibility of interpersonal comparisons, it seems impossible adequately to encompass moral considerations that should influence policy such as justice, rights, and equality. Accordingly, traditionally normative economists have favored a division of labor whereby welfare economics confines itself to addressing only the welfare consequences of economic institutions and policies and leaves the appraisal of policies with respect to other normative criteria to others. This exclusive focus on welfare is by no means universal among economists, and in later chapters, we will review some of the work that economists have done developing other normative dimensions of assessment. In addition, as we noted in the Chapter 8, there is increasing interest among economists in measuring welfare in terms of happiness or life satisfaction. But in this chapter our focus is on standard welfare economics, which assesses outcomes, policies, and institutions exclusively by how much they enhance or diminish welfare, as measured by the extent to which preferences are satisfied.

  • 4 - Rationality and Utility Theory

  • from PART I - RATIONALITY, MORALITY, AND MARKETS
  • Daniel Hausman, University of Wisconsin, Madison, Michael McPherson, Debra Satz, Stanford University, California
  • Book:
    Economic Analysis, Moral Philosophy, and Public Policy
    Published online:
    28 May 2018
    Print publication:
    15 December 2016, pp 55-69

  • Summary

    Mainstream economics portrays agents as choosing rationally. Many generalizations in economics concerning how people do in fact choose are also claims about how they ought rationally to choose. If people are, to some reasonable degree of approximation, rational, then a theory of rational preference, belief, and choice will constitute an approximate theory of people's actual preferences, beliefs, and choices. The fact that economics is built around a theory of rationality distinguishes economics from the physical sciences, where quarks and polymers do not choose at all and whose theories have no comparable normative dimension.

    In common usage, someone is rational if and only if her motives, beliefs, and choices are appropriately sensitive to reasons. Spelling out this vague idea is a huge philosophical challenge. “Folk psychology” – the everyday theory of human rationality – takes actions to derive from constraints, beliefs, and a wide array of motivational factors such as urges, emotions, habits, and desires. So, for example, when one rainy Friday night a hungry student named Ellen takes a frozen pizza out of the refrigerator, unwraps it, puts it in her stove, and turns knobs on the stove, we folk psychologists explain Ellen's action by the constraints (pizzas do not get hot by themselves), Ellen's beliefs – including especially her beliefs that turning the knobs will cause the stove to heat the pizza – and her desire to eat hot pizza.

    This sort of explanation is familiar but not very satisfactory. Ellen might also like to eat her pizza frozen, or she might also have a desire to reheat some leftover meatloaf. Or she might rather skip dinner and keep studying decision theory. What explains her action is not merely wanting to eat hot pizza (plus possessing the requisite beliefs) but also wanting to do this as much as or more than she wants to carry out any of her feasible alternatives.

    The theory of rational choice that dominates economics is less ambitious than folk psychology: it aims only to specify formal conditions on preferences, beliefs, and choices. Economists tighten up the folk-psychological account of action by replacing the noncomparative notion of a “desire” with the comparative notion of a “preference.”

  • 3 - Ethics in Positive Economics: Two Examples

  • Daniel Hausman, University of Wisconsin, Madison, Michael McPherson, Debra Satz, Stanford University, California
  • Book:
    Economic Analysis, Moral Philosophy, and Public Policy
    Published online:
    28 May 2018
    Print publication:
    15 December 2016, pp 39-52

  • Summary

    Although some economists have envisioned the possibility of a value-neutral normative economics that merely investigates the consequences of policies for the satisfaction of preferences, most would be willing to concede that moral judgments do play a role in normative economics. For that reason, they might also concede that when evaluating policies economists should pay attention to matters of ethics. But when it comes to positive economics – the attempt to predict and explain economic outcomes and processes – few economists see any role for ethics.

    Although it is possible (even in economics) to investigate features of the world without evaluating them, it is often hard to do so. When matters of economics bear strongly and immediately on people's interests, those interests and the moral considerations that are relevant to them are likely to influence the questions economists ask and the answers they defend. Because of this, it is important to understand the values that are at stake.

    Familiarity with moral philosophy can help here. Although values will be most obvious in debates over practical policy questions – consider debates over energy policy, prescription drug benefits, agricultural policy, or tax policy – moral considerations can have a much broader influence. We shall show this influence in two examples. Both concern matters of fact about economies that bear on policy questions. The first example, which concerns whether there is any involuntary unemployment, is likely to seem odd to readers who are not familiar with economics. How, one might ask, could anybody doubt that some people are unable to get a job? We shall shortly see. Whether workers are unemployed voluntarily or involuntarily seems to bear on the question of what sort of unemployment compensation they should be paid, but its normative implications and presuppositions go deeper. The second example, which involves Paul Samuelson's overlapping generations model, might appear to have no bearing on policy; but as we shall argue, its normative implications have in fact driven what is purported to be a purely theoretical debate in positive economics.

    Is Unemployment Involuntary?

    “Macroeconomics” – which treats the institutions and processes governing the economy as a whole – was born during the worldwide economic depression of the 1930s with the publication of John Maynard Keynes's General Theory of Employment, Interest, and Money.

  • 15 - Putting Economics and Ethics to Work

  • from PART V - CONCLUSIONS
  • Daniel Hausman, University of Wisconsin, Madison, Michael McPherson, Debra Satz, Stanford University, California
  • Book:
    Economic Analysis, Moral Philosophy, and Public Policy
    Published online:
    28 May 2018
    Print publication:
    15 December 2016, pp 295-313

  • Summary

    We have repeatedly argued that a better appreciation of ethics can contribute to economic analysis, and the tools and distinctions that economists have fashioned can contribute to moral philosophy. We hope that the examples we have already discussed have shown that these are not empty slogans – mere reminders that more knowledge and more sensitivity are usually better than less. In this chapter, we demonstrate the ways that ethics and economics complement one another by returning to the examples with which we began. We begin by discussing how a better understanding of ethics clarifies the peculiarities of the examples presented in Chapter 3 concerning involuntary unemployment and the use of overlapping generations models to study retirement savings. Then we look again at the argument that the World Bank should facilitate the transfer of polluting industries to poor countries and the efficiency argument for school vouchers as examples of standard welfare economics. With the help of the concepts, distinctions, and arguments of this book, we can offer a more sophisticated appraisal of these policies.

    Our aim in returning to these examples is to make the case that the richer conceptual apparatus and arguments we have explored in this volume allows us to appraise these and other policy issues in a deeper and more illuminating fashion. Whether in understanding the differences and commonalities between welfare economics and utilitarianism, elaborating different theories of well-being, looking at various dimensions of freedom and the role liberty plays in alternative political philosophies, or clarifying the role of concepts such as equality, fairness, and rights in theories of justice, an essential goal for us has been to make these theories, concepts, and tools available to you, our readers, so as to assist you both in reflecting about abstract issues in ethics and economics and in interpreting and deciding about practical policy issues.

    Involuntary Unemployment and Moral Baselines

    We argued in Chapter 3 that controversies concerning the existence and analysis of involuntary unemployment result in part from conflating voluntary choice with rational choice and in part from normative disagreements among economists. The conflation leads some economists to regard as fully voluntary what are in fact generally considered paradigmatically involuntary choices, such as surrendering one's wallet to a robber who threatens death otherwise (Colander quoted in Snowdon and Vane 1999, p. 233).

  • 14 - Game Theory

  • from PART IV - MORAL MATHEMATICS
  • Daniel Hausman, University of Wisconsin, Madison, Michael McPherson, Debra Satz, Stanford University, California
  • Book:
    Economic Analysis, Moral Philosophy, and Public Policy
    Published online:
    28 May 2018
    Print publication:
    15 December 2016, pp 269-292

  • Summary

    Game theory was conceived as a tool to explain, predict, and guide the behavior of rational individuals in strategic interactions, and its main applications still lie in this domain. But game theory is not wedded to any particular domain, and it also applies to such disparate phenomena as computer programming and biological evolution. Game theory is as much a branch of mathematics as a theory of interactive decision making. However, in this chapter we focus exclusively on applications of game theory to strategic interactions among individuals. An interaction is “strategic” if the payoffs to some individuals depend both on their own choices and on the choices of others.

    What Is a Game?

    A game is defined by its players, the strategies the players can choose, the payoffs to the players from the combinations of different strategies, and the capacities of the players, including the knowledge each player has concerning features of the game (such as the other players’ available strategies). Each of the italicized terms has a technical meaning. In the case of the games we consider here, players are individuals. To keep matters simple, we shall for the most part discuss games with only two players. A player's strategy is a complete specification of the actions the player can take whenever the player might be able to act. The set of strategies available to a player defines all the possible actions that the player could take.

    Before explaining the other italicized terms, it will help to provide an example. One way to represent strategic interactions is via an “extensive form” or a game “tree,” like the one shown in Figure 14.1. This interaction involves two players, player I (Jill) and player II (Jack). Jill moves first at the node labeled a and plays Up or Down; these two moves are her two strategies.

    It is assumed the extensive form of the game is common knowledge. (A fact is common knowledge if all know it, all know that all others know it, all others know that all others know that all others know it, and so on.) So when player II, Jack, is choosing whether to play Left or Right, he knows whether he is choosing at node b or instead at node c.

  • PART II - WELFARE AND CONSEQUENCES

  • Daniel Hausman, University of Wisconsin, Madison, Michael McPherson, Debra Satz, Stanford University, California
  • Book:
    Economic Analysis, Moral Philosophy, and Public Policy
    Published online:
    28 May 2018
    Print publication:
    15 December 2016, pp 107-108

  • Summary

    Economic outcomes may be better or worse along several dimensions. They may make people better off or worse off, enhance or restrict freedoms, protect or threaten rights, and they may be just or unjust. All of these dimensions are important in evaluating outcomes.

    As illustrated in the World Bank memorandum, economists generally evaluate outcomes by their contribution to individual welfare. Other things being equal, one outcome A is better than another outcome B if and only if A makes people better off than B. Economists also evaluate institutions and policies, as well as outcomes, in terms of their welfare consequences for individuals. Economists thus focus on only one of the many evaluative questions they could ask about economic institutions, policies, and outcomes: “How well do they promote welfare?” Since the assessment of outcomes, institutions, and policies rests exclusively on their consequences for individual welfare, the theory of individual welfare is crucial to normative economics. Indeed, normative economics is often called “welfare economics.”

    Part II focuses largely on welfarism – the evaluation of outcomes, institutions, actions, and policies in terms of their effect on individual welfare (which we also refer to as well-being). Chapter 7 discusses consequentialism (which is concerned with outcomes but need not be welfarist), with a special emphasis on one consequentialist theory: utilitarianism. Utilitarianism claims that what is right to do is what maximizes total or average welfare. In focusing assessment entirely on consequences for individual well-being, utilitarianism resembles welfare economics; but unlike welfare economics, utilitarianism requires a notion of well-being that can be compared across persons. Otherwise, there would be no way to add up people's well-being.

    Utilitarianism preceded and influenced the development of contemporary economics. It purports to be a complete moral theory – assessing individual actions and characters as well as economic policies, institutions, and outcomes – and it is not necessarily wedded to any specific theory of what constitutes a person's well-being. The notion of well-being is the topic of Chapter 8. Chapter 9 concludes Part II with a discussion of standard welfare economics and the way it attempts to capture a part of utilitarianism while rejecting interpersonal welfare comparisons.

Economic Analysis, Moral Philosophy, and Public Policy
  • 3rd edition
  • Daniel Hausman, Michael McPherson, Debra Satz
  • Published online:
    28 May 2018
    Print publication:
    15 December 2016
  • This book shows through argument and numerous policy-related examples how understanding moral philosophy can improve economic analysis, how moral philosophy can benefit from economists' analytical tools, and how economic analysis and moral philosophy together can inform public policy. Part I explores the idea of rationality and its connections to ethics, arguing that when they defend their formal model of rationality, most economists implicitly espouse contestable moral principles. Part II addresses the nature and measurement of welfare, utilitarianism and cost-benefit analysis. Part III discusses freedom, rights, equality, and justice - moral notions that are relevant to evaluating policies, but which have played little if any role in conventional welfare economics. Finally, Part IV explores work in social choice theory and game theory that is relevant to moral decision making. Each chapter includes recommended reading and discussion questions.

  • 16 - Economics and Ethics, Hand in Hand

  • from PART V - CONCLUSIONS
  • Daniel Hausman, University of Wisconsin, Madison, Michael McPherson, Debra Satz, Stanford University, California
  • Book:
    Economic Analysis, Moral Philosophy, and Public Policy
    Published online:
    28 May 2018
    Print publication:
    15 December 2016, pp 314-336

  • Summary

    We have argued that a better appreciation of ethics can contribute to economic analysis, and at the same time held that the tools that economists have fashioned can be of use to moral philosophy. We hope that the many examples in this book and the detailed comments in Chapter 15 concerning applications of mainstream welfare economics have shown that these are not empty slogans or a mere reminder that more knowledge is almost always better than less.

    In this last chapter, we would like to do more to show how ethics and economics can complement one another; we wish to show that such a partnership is critically important. Our demonstration involves discussion of three central problems that societies today face. The first concerns the public obligation to provide health care in the face of improvements in technology and changing costs. The second concerns the rapid development of exchanges among individuals of goods and services brokered through Internet intermediaries such as Uber. These arenas of innovation have the potential to transform the character and conditions of modern life in ways that call out for economic analysis and ethical reflection.

    The last problem we discuss is as important as any that humans have ever faced. Solving it is crucial to the livelihoods, health, and even the lives of the whole of humanity. Economic growth and unrestrained consumption in wealthy nations combined with growing population and economic growth in the world as a whole have placed increasing strains on the environment and threaten massive climate changes with unknown but potentially devastating effects.

    Each of these problems demands of policy makers and citizens four things:

  • 1. (Recognition) Policy makers and citizens must recognize the problems. Otherwise, people will not search for solutions or be willing to tolerate the costs that solutions may require. One of the greatest barriers to progress on the problems of climate change is the denial that they exist by politicians currying the favor of those whose incomes depend on fossil fuel industries.

  • 2. (Will) Policy makers and citizens must have the will to address the problems. The peoples of the world must be willing to devote resources to studying and addressing them. Doing so might require sacrifice of some of their immediate interests in order to lessen the risks these problems create.

  • PART I - RATIONALITY, MORALITY, AND MARKETS

  • Daniel Hausman, University of Wisconsin, Madison, Michael McPherson, Debra Satz, Stanford University, California
  • Book:
    Economic Analysis, Moral Philosophy, and Public Policy
    Published online:
    28 May 2018
    Print publication:
    15 December 2016, pp 53-54

  • Summary

    When we say that it is morally right to relieve famine victims, we are expressing our approval of famine relief and at least suggesting that, all things being equal, people ought to go to the aid of those in danger of starvation. Morality is normative as opposed to merely descriptive. So is rationality – although, unlike morality, only conditionally so: actions are rational or irrational, given the agent's beliefs and desires. When we say that it is rational for individuals to have medical insurance, we are expressing approval of having it. Similarly, to characterize a choice as irrational is usually to condemn it, and not simply to describe it. Not only are morality and rationality alike in these ways, but “rational” is often used (as in the previous example) as a synonym for “prudent,” and prudence is a morally admirable character trait or moral virtue. At the same time, morality and rationality are not the same.

    How are morality and rationality related? Is it always rational to be moral? These general philosophical questions are critical to understanding the relations between ethics and economics, because economics is built around a theory of rationality. We explore the relations among economics and rationality, norms, and morality in Chapter 5.

    To prepare for this exploration, Chapter 4 presents the standard theory of rationality and its extensions to circumstances of risk and uncertainty; it also considers some of the objections to which the theory has been subject. Chapter 4 is the only technical chapter in the first three parts of this book.

    Chapter 5 examines the role of the standard theory of rationality in both positive and normative economics, and it explains how the theory ties positive and normative economics together and makes both appear to be more plausible than they otherwise would be. Chapter 5 also deals with questions raised by the effects of people's morals on their behavior. How (if at all) can economic theory take account of these effects? What is the relation between morality and preference? Can one (or should one) develop a conception of economic rationality that permits a distinction between acting morally and maximizing utility? If the two diverge, is it then sometimes irrational to act morally or immoral to act rationally?

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