Before it was a social science, economics was as a branch of moral philosophy. Economics was invested to be atool to ascertain justice, promote happiness, challenge traditional authority, and promote human cooperation:it was not about making money. Modern economics aspire to be a descriptive science of human behavior --focused on the positive is, instead of the normative ought. However, many of the original moral judgmentsand value-laden vocabulary persist in economic analysis. This opening chapter seeks to provide a basicbackground in economic thought to allow the reader to identify the moral squint of economics as youbecome familiar with its theory and applications.
While some economic ideas have long pedigrees, economics as a discipline developed in parallel with the riseof capitalism. As a result, one can read much of economic analysis as a commentary on the morality, immoralityand amorality of capitalism. Due to capitalisms protean nature, views of capitalism have evolved over time anddeveloped differently in different contexts. In short, there is no pure capitalism to be discovered, but differentcapitalisms in different places at different times. We can view the development of economic thought andanalysis as a conversation aiming to provide an ever more complete judgment on the value and operation ofcapitalism since 1800. This is an ongoing conversation, in part, because there is a fundamental tension --contradiction -- in economic thought. Economic journalist David Warsh has framed this as the battle betweenAdam Smiths parables of the Pin Factory (Division of Labor / increasing returns) and the Invisible Hand(competitive market / constant returns) in the Wealth of Nations. Logically, these ideas exclude each other, butthey exist side-by-side. The conversation about them has no resolution, because the balancing of these ideasmust be done in each specific application.
1.0 ECONOMICS TWO GREAT INSIGHTS1.0 ECONOMICS TWO GREAT INSIGHTS
Economics has two great insights. The first is being good (virtuous) is the same as being happy. The second isthat the public interest is not simply the sum of its component individual interests. In economics, the firstprinciple is more often known as the no free lunch principle. Prior to economics, it was widely held thatgoodness and happiness went hand-in-hand: only a good person could be happy and happy people were good.Goodness involved qualities such as honesty, charity, and honor that required individuals to sacrifice individualbenefit. For example, a good person, seeing someone suffering, would try to alleviate the suffering, i.e., byoffering them a free lunch. Economics noted that there was no free lunch -- every charitable action cameat the expense of someone, even if it only was some forgotten man. There was always a tradeoff. Therefore,doing things conventionally thought good would result in less happiness for someone, somewhere even if theidentity of that person was not immediately obvious. As a result, one could not be good and happy. Ultimately,there was only so much to go around, virtuous action simply redistributed the pie.
The second principle holds that the whole is either greater or less than the sum of its parts. Prior to economics,thinkers presumed that there was no inherent contradiction between individual interest and the social, orpublic, interest. To take the extreme case, it was sweet and proper to die for ones country because defendingthe community on which you depended was ipso facto good for the individual. Family, society, or the politywas the thing and each person was only a part of the larger entity. To make a medical analogy, each organ issimply part of a an organism and what is good for the organism is good for the organ. In terms of ecology, nospecies is more important than the ecosystem and what is good for the ecosystem is good for the species, evenif they are the prey for some predator. Aligned with the first insight, early economists imported this equation,but rather than see the individual as a part of a larger whole, it preached methodological and normativeindividualism. Only individuals make decisions and social welfare was the simple sum of the individualwelfare: what was not good for the individual could not be good for the group. Later economists showed thatthere are many instances, however, when the whole is not the sum of the parts whether due to the aggregativeprocesses, the role of money, increasing and decreasing return to scale, or the presence of positive and negativeexternalities.
MAMMON & MORALITYMAMMON & MORALITY
21.1 FRAMEWORK1.1 FRAMEWORK
One may classify economic thinkers by their answers to two basicquestions. The first, represented by the horizontal axis on thechart to your right, is which insight of the two insights listedabove is more fundamental. Those that embrace the first insight-- the no free lunch principle -- tend to view economics as astudy of equilibrium; the economy, left to its own devices, is inbalance. Broadly speaking, this includes the Classical School(and its modern scions, the Neo-Classical and RationalExpectations Schools) and also Libertarian economicphilosophies. Those that favor the second insight -- the whole isgreater/less than sum of its parts -- stress the possibility ofdisequilibrium, such as theories of over - and underconsumption,general gluts and the persistence of market failure due tonegative externalities. Keynesian economists, as well aseconomists who take a historical or institutional approach toeconomics. The vertical axis divides those economists who are mainly concerned with the economicconsequences of individual decisions and economic activity from those who are primarily concerned with thepolitical consequences. Some economic thinkers focus on the efficient economic operation of the economicsystem. Namely, they ask if factors -- labor, land and capital -- are employed and if they are employed mostefficiently. Others note the power implications of different distributions of resources. For example, a libertarianeconomist would prefer a decentralized system, even if efficient, to a centralized economy that used resourcesefficiently because it maximized the political value of freedom. In contrast, an institutional economist mighthave a problem with power-differences in production or consumption, even if resources are used efficiently,because it is inequitable.
If we look at the boxes, we find the major schools of economic thought. In the upper right quadrant, we findthe Classical school who, through doctrines such as Says Law and the Law of One Price -- exemplify the beliefthat the economic system tends toward equilibrium and the confidence that the stable equilibrium is also themost efficient equilibrium. In the upper left, we find the Keynesian (and proto-Keynesian) economists. Theyshare the Classical schools concern with economic efficiency -- and therefore share similar aims -- but disagreeabout the markets ability to reach efficient equilibria without assistance. Keynesian are keen to note marketfailures, but suggest economic solutions (i.e., working through economic processes) to these problems by fine-tuning the economy through fiscal and monetary policy, completing markets or providing public goods.
In the lower left, there are Institutional economists that include the diverse perspectives of Marx, Veblen, andSchumpeter. They differ from Keynesian economists because they all put a priority on the distributionalconsequences of political and economic policies and processes. Marxs theories put class conflict at the centerof his analysis; Veblen is famous for his description of conspicuous consumption of the leisure class and thebalance of power within corporations; Schumpeter on the transformative role of entrepreneurs. All emphasizethe role of history and institutions in shaping economic behavior and all focus on some imbalance driving theevolution of economic activity. For Marx, it was the accumulation of capital, while Veblen it wasunderconsumption driven by the displacement of engineers by managers in corporations. Schumpeter notedthe dynamic creative destruction of entrepreneurs driving unbalanced economic development. Finally, in thelower right quadrant are the pure laissez-faire perspectives of libertarian (Austrian) economists who oftencombine their economic analyses with a stress on the markets role in preserving individual freedom, especiallyfrom centralized state planning. They emphasize the role of markets as information processing mechanisms.While they hold different political values, they share the emphasis with Institutionalists on the implications ofeconomics for preserving or undermining political values.
32.0 ECONOMIC MORALITY2.0 ECONOMIC MORALITY
Economics began as moral philosophy and is still used to make moral judgments. We praise individuals fortheir work ethic, we elude judgment because its business, not personal, we praise frugality and gratitude(gratis = free, a price), we ration goods, services, and amenities by wealth, and use credit ratings to determinewhether a person will make a good employee or not. Debt has not lost its historical association with theconcept of sin and the phrase debt forgiveness echoes this connection. Worthy has the dual meaning ofhaving economic value and deserving. Economic decisions balance equity with efficiency. We eschewproviding assistance to the economic disadvantaged due to concerns about moral hazard and economicefficiency. Capitalism, more so than democracy, is Americas cardinal value of its public philosophy. Somecircles view inflation and taxes as theft and divide individuals into makers and moochers. We ask everyoneto pay their fair share of taxes, and if they do not, consider them free-riders. We call those without integritysel