The Philosophy in Economics

Introduction: It has been my constant endeavour to figure out and elucidate an inevitable role of philosophy in all walks of life. In my previous attempt, I’d tried to elucidate an inescapable interdependence between science and philosophy. In my present attempt, I’ve tried to bring out the necessary entanglement of economics with philosophy. Economics, in the present age, has been assuming the role of a behavioural science and markets have expanded into almost every sphere of human life. Expansion of economics into morally charged area of human life mandates the involvement of philosophy to prudently consider and guide our moral intuitions through the moral dilemmas that economic invasions pose before us. In the essay, several arguments have been considered and examples cited to elucidate the inevitable interdependence between economics and philosophy.

Principal of our college, Dr. Valson Thampu, was greatly worried about the growing number of disposable coffee glasses littered in the college campus. He had warned to disallow the purchase of coffee from the college café “if students fail to show sensitivity towards the college campus.” One of the economics students debated that it would be better if the Principal imposes a fine of Rs100 on the offenders instead of banning coffee altogether. His argument was grounded on two basic principles of economics: (1) This will provide the students a greater choice to exercise- whether to throw the disposable glasses in their proper places or to pay a fine of Rs 100 and thereby ensuring a greater the overall ‘utility’ or ‘welfare.’ (2) Because people think rationally and aim to maximize their own utility and welfare they will mostly choose to dispose of the glasses securely instead of paying the fine. Gregory Mankiw cites these two assumptions viz. people think rationally and they act to maximize their utility, as two of the ten basic principles of economics.

Suppose the Principal buys the argument and agrees to impose a fine instead of banning coffee altogether. The fine would work to a great extent to reduce the overall garbage being littered in the college. But suppose a wealthy friend of mine doesn’t like to exert himself to go the dustbin to throw his coffee glasses and is rather willing to pay the fine each time he shows ‘insensitivity to the college campus.’ He has not violated the rule. Also his actions are consistent with the standard economic theory of ‘maximizing one’s utility.’ But still we feel that such an action is unjustified and there is something wrong in it. But what exactly is wrong with it? To accentuate the ‘wrong’ involved, consider the question- is it right to use Taj Mahal as an expensive garbage disposal site by paying the government whatever fine it imposes for disposing of one’s domestic garbage in the Taj Mahal?

Let us consider another example. The college library imposes a fine of Rs10 each day the return of the book is delayed. One of my friends decided to retain the book as long as he wanted and pay the fine howsoever large it may be. Though he did not violate the library rules, we still feel that retaining the book beyond the due date is wrong. What is actually wrong in it? The answer to that lies in the appreciation of the difference between a ‘fine’ and a ‘fees’. When my friend decides to retain the book, he takes the fine on it as if it were a fee that he has to pay to retain the book unduly. In the previous example as well, the friend considers the fine of Rs100 as a fee that he has to pay to dispose his coffee glass in whatever way he wanted. What actually is the difference between a fee and a fine? If we think only in monetary terms, there is no difference. In order to appreciate the difference we have to examine the issue in the light of the moral philosophy. A fine is different from a fee because in a fine there is an inherent and implicit moral stigma associated which is not there in case of a fee. If we fail to take cognizance of the morality involved, as standard economic theories do, the difference between a fine and a fee blurs. So it is morally wrong to throw garbage at Taj Mahal. It is wrong to consider the fine imposed as a fee that we need to pay to dispose our garbage at the Taj Mahal because in that case we fail to respect the abstract ethics involved therein. Economics theories fail to appreciate the ethics involved in such acts, so they find it hard to distinguish between a fine and a fee. The distinction becomes vaguer for economics when the monetary values of fine and fees are at par. If the amount of fine imposed if you throw your garbage in Taj Mahal is same as the tax (fee) levied on its disposal at a government waste disposal site, then the economics theories would suggest that both the case scenarios are same for both of them change the utility by same amount. These examples demonstrate an inevitable entanglement of economics with moral philosophy. The inevitable involvement of philosophy is not just restricted to day to day spheres as in these examples. It gets manifested in our societies and nations at large and even transcends the national boundaries. Economics sans philosophy finds it difficult to answer such questions in every sphere including even the transnational sphere as the following example demonstrates.

At the Kyoto Protocol of 1990s, US asserted that if a nation wants to exceed its emission limits it should be allowed to do so provided that some other country or countries consent to reduce their emission by a commensurate amount. So if US decides to exceed its CO₂ emission by some units then it has to persuade some other nations, presumably the third world nations, to impose further restriction on their industries to reduce emission. To generate the consent, US will be obliged to pay a certain sum of money as ‘incentive’ to the third world nation. Is it justified? Economist would say that such a deal is an ultimate appreciation of the market virtue where even the right to pollute is up for free market competition. But in supplying such an explanation the economist would again miss the subtle ethical aspects involved. This case of trade of ‘pollution permits’ demonstrates the same idea of a difference between a fine and a fee. Instead of fining the American industries for polluting the environment, the US government is paying the third world nations a fee to allow Americans to pollute the environment. Economists would again argue that if it is easier to discourage a few kerosene lamps in India than to impose restrictions on American industries then why not grab this opportunity and maximize the overall utility. What is actually wrong in the marketisation of pollution permits?

Marketisation of pollution rights is wrong because it weakens the moral stigma associated with the act of polluting the environment. By paying to shrug away our moral obligations towards the environment we would undermine the sense of shared sacrifice to protect our environment. Assigning a dollar value to our moral duties corrupts them and infuses a belief that protection of our rivers, streams, biodiversity and environment is not a moral duty but a burden to be eschewed.

In order to bring out this argument of ‘corruption of morals’, let us consider another example. In our second year, we had developed a habit of coming late to class. One of the professors, Dr. Sanjay Kumar (popularly known as Dr. SK) took umbrage as the late turn ups did not subside. He scolded us. His argument was that the government of India was spending Rs50 on each student to attend each class. So to arrange for one lecture to be held, for a class of 50 students, government exchequer is impoverished by Rs2500. Was that a complete and justifiable explanation to attend classes? Students could not buy that argument. They felt there was something ‘wrong’ about the argument. But what was exactly wrong about Dr. SK’s explanation? Suppose a student decides to miss out on the next ten lectures. The eleventh day when questioned by Dr. SK, he may reply that he’d attended 10 extra classes the previous semester for which the government had not paid and since he did not want the government to run into a public debt and fiscal deficit, he sacrificed 10 lectures. He has thereby helped the government! His argument would have been consistent with Dr. SK’s explanation but there was something that Dr. SK had missed out while economizing the value of each lecture. What is actually wrong with Dr. SK’s explanation?

If we attempt to assign a monetary value to the act of imparting knowledge and assess the loss of a lecture in terms of its monetary value we shall miss the ethical crux of the situation and corrupt the morals involved therein. Commoditization of the process of learning by assigning it a price tag is wrong because it will corrupt the attitude of students towards learning. They will never develop a genuine interest in the process of education but will see it is as a market for barter of a service to study in lieu of government expenditure. It is just like paying to use Taj Mahal as an expensive garbage disposal site. We fail to appreciate the abstract value of Taj Mahal when we assigning a dollar value to the moral stigma associated with polluting the Taj Mahal and demean (‘corrupt’) the implicit moral obligation to respect the monument and value it for what it is. Dr. SK’s explanation failed to respect the process of learning as ‘an end in itself’ and appreciated its significance only in monetary terms.  Certain schools in America suffer from the same malice when they offer monetary incentives to second grade students to study.

Apart from the corruption argument there is another thing intriguing about such examples and that is about the consent. Put aside the corruption argument, the deal to pay the poor nations in order to shrug away the environment responsibilities is not a fair deal because it is not concluded under the conditions of ‘free will’ and ‘autonomy’ of the bargaining partners. The poor nations agreed to such a deal because their economic deprivation impelled them to do so. They did not do it out of an absolute free will or autonomy. This deal is arguably rejected on the grounds of lack of consent. The market invasion can thus be criticized on two grounds- corruption of morals and values and fairness of the deal. In order to examine these two arguments, let us take another example.

Practice of ‘buying’ people’s votes has often been noted in various pseudo democratic nations. The market in votes is wrong mainly on grounds of two arguments- corruption argument and the ‘fairness of the deal’ argument. Buying votes is wrong because it corrupts our democratic values and the aim of free and fair polls. It is also rejected on the grounds that a deal in votes is not a fair deal as the person who sells his right to franchise mainly does so out of his need for money. In a country like India, poor voters get influenced by the money power of the politicians only because they are in desperate need of money and their needs outweigh their morals. Buying the poor man’s vote does not tantamount to getting his adequate consent rather it is coercive because the deal is made possible only because of financial constraints of one party. So even if the corruption argument is set aside, a deal in votes is wrong because it is made without adequate consent. Such unfair deals without adequate of consent are seen in arguments against markets of kidneys, blood donation camps, surrogacy, in renting out the space on your forehead for commercial advertisements in lieu of financial incentives.

There is another aspect in the Kyoto Protocol example that we didn’t examine- the role of incentives. The third world nations were given incentive to reduce their emission so as to accommodate the American emission. The American students were incentivized to read and attain good marks. The idea of incentives has become central to economics. Mankiw mentions that one of the ten basic principles of economics is that ‘people respond to incentives.’ Incentive is relatively a new term in economics. Adam Smith and other classical economists had used the idea of incentives in their theories. The word was first used in an economic context during the World War II in Reader’s Digest. However, since the previous decade it has been in vogue. Let us examine the role of incentives in the light of political and moral philosophy. Consider the following real life example.

The Switzerland government was looking for a safe nuclear waste disposal site since a long time. They found a safe site near a mountain village. The government called for a local referendum in the village to ascertain the ‘consent’ of the local people. People approved the policy by a thin majority of 51%. Afraid of the loss of 49% of votes in the village, the government offered financial incentive to the people in a hope that the margin should increase. Instead the margin decreased to 25%. The margin kept decreasing as the incentives kept increasing. The economic principle of incentives stood failed. Why? An explanation can be ascribed by considering moral philosophy involved therein. In the case when no incentives were given, the people accepted the proposal out of a sense of solidarity, sacrifice for a greater good and patriotism. However, those values of solidarity, sacrifice and common good got dissociated as soon as the monetary parameters were ascribed to the policy. Incentives demeaned the moral good involved in the act. Incentive was seen as a bribe given to them which was ‘corrupting’ their civic duty. Hence the incentive failed.

This example also rebuts the classical dichotomy theory of economics (propagated by David Hume) which suggests that the nature and real value of goods and services don’t change with the change of monetary (nominal) value ascribed to them. Here the very nature of the service provided by the citizens changed as soon as price tag was attached to their morals. When the American Association of Retired Persons asked American lawyers to offer 30% discount to the needy retired people, they refused. When it asked them to do it for free, they agreed. Why? Their spirit for charity and solidarity were sensitized in only in the latter case. Thus the nature of services offered by the lawyers changed with the monetary value ascribed to it. The law of monetary neutrality and classical dichotomy did not hold good.

Economist on their end devised an explanation to these phenomena that appeared as exceptions to economic theories. They did not believe that incentivizing people to accept the nuclear waste disposal policy actually ‘corrupted’ their values of solidarity and civic duty. Rather they argued that depending on people’s values of solidarity and civic duty was not advisable. Arrow was one of the great American economists of his times. He argued that values of solidarity, charity, altruism and sacrifice for common good were rare and should be treated as ‘scarce resources’ just like non-renewable resources. These scarce resources diminish with extensive use just like our petroleum reserves. If government relies too heavily on people’s civic obligations and keep on opening new nuclear waste disposal sites everywhere, people’s sense of duty will tend to die down. We need to conserve the ethical behavior of people as a scarce resource for dire situations, said Arrow. If blood donation becomes the order of the day, the values of generosity and altruism associated with it will soon be over. Similar argument was put forth by the British economist and a student of Keyens- Sir Robertson. In his lecture at Cambridge titled ‘What do economists economize?’ he argued that virtues like love and altruism are scarce resources and need to be economized. He gave the example of a typical couple whose mutual affection and love goes on decreasing over years following their marriage. Thus love is a scarce resource needed to be at least conserved if not hoarded for future needs.

What would philosophers say to such intrusions of economics in morally charged areas of human life? Economic explanations are cold and flawed. Philosophers like Aristotle and Rousseau will rebut these ideas on the grounds that virtues and ethics are qualities that are developed and cultured in an individual and society. They are not scarce resources but are like “muscles- the more in demand, the stronger they get.” Patriotism in India, reached its peak only during the freedom struggle because the society demanded it and it did not get exhausted when ‘used’ extensively during that time. Patriotism during the Nazis in Germany heightened as the state demanded it and used it recklessly and got diminished only after the fall of Nazis when the state did not require it. So virtues like patriotism are developed in a society when they are demanded and carefully cultured and do not obey the laws of diminishing marginal utility as the economist claim.

These examples show that Economics and markets today have been expanding into almost every sphere of our lives. Unlike the classical economists like Adam Smith, Marshal and Robins, the modern economists like Mankiw have begun defining economics as a ‘behavioural science.’ Mankiw writes “Economy is a group of people interacting with each other as they go about their lives.” Adam Smith never talked about public interactions in their daily lives in his ‘invisible hand’ definition of economics nor did Robins talk of people’s behavior in his ‘scarce resources’ definition of economics. In those attempts to define human behavior within the parameters of economic theories and to provide economics legitimacy as a behavioral science, Economics finds itself inevitably entangled with moral and ethical question. Is it right to use trade in pollution permits? Is it justified to assign a price tag to virtues of learning? Is it alright to dispose of your garbage in Taj Mahal and pay the fine as a fee to do so?  How far do incentives work? Is it just to take moral virtues to be scarce resources and hence subject to laws of demand and supply? Do even moral virtues obey the law of diminishing marginal utility? Do Classical dichotomy and monetary neutrality work in human behavior as well? What are the ethics involved in economic policies like land acquisition, ‘social clause’ in the GATT, blue and green subsidies debate at the WTO, direct cash transfers? These are the questions that philosophy has to answer for economics. Even if economic theories attempt to provide answer, are we satisfied with those explanations which refuse to take into account an inevitable and abstract involvement of subtle and prudent philosophical analysis of moral dilemmas? It the job of philosophy to structure our moral intuitions and strengthen our ethical sensibilities so as to guide us through these moral dilemmas that economic situations pose before us. If we allow economics and markets to expand unbridled without the supervisory role of philosophy, we’ll end up in a society that would be increasingly dehumanized with moral intuitions restricted to just one principle- ‘maximization of utility.’ Why is maximization of utility the basic goal? How far should this principle of ‘utility maximization’ be stretched? What are the things that money shouldn’t buy? What are the moral limits of market? How far can economics traffic in morals? To answer these questions ‘Economics has to rely on philosophy.’

Note

In the essay several philosophical theories have been alluded to and applied in various examples. However no direct mention of the theory involved and the philosopher cited has been made. Through this note I intend to acknowledge the philosophers to whom the essay alludes.

1.      John Rawls- idea of veil of ignorance as referred to while discussing ‘consent’ argument.

2.      Immanuel Kant- idea of autonomy and heteronomy, idea of free will, idea of categorical moral judgments, idea of ‘end in itself’

3.      Jean Paul Sartre- free will, individualism as against determinism (derived through the idea of ‘existence precedes essence’)

4.      Tolstoy- arguments against determinism in the movement of individuals, societies and nations (War and Peace)

5.      Michael Sandel- Critique of utilitarianism and so many other examples and ideas.

6.      Plato- defining morality as “To know the good is to do the good”
7.      Aristotle- Ideas of morality and distributive justice, a belief in teleology.