Economic Graffiti: Why morality matters to economics

To deal with corruption, it is not enough to just get fiscal policies right. It is in our collective long-term interest to nurture individual values.

Written by Kaushik Basu | Published: April 13, 2018 2:25:21 am

corruption, fiscal policies, indian economy, The Wealth of Nations, world economy, indian express

Morality is the idea of doing good as an end in itself.

I went to an optometrist last week, who gave me one of those cards to read where the font starts out large and then gets progressively small, to test your reading capacity. In this case what was interesting was the content of the card. It was a primer on how to make money. It began, in large font, with “There are many ways to make money,” then, in medium-sized font, it was about “how much money you can make if you follow these rules” and then, alas, the font got so small, most people would not be able to read.

As I walked out of the store (without buying glasses), I thought it was quite a clever strategy. Money-hungry individuals would buy expensive reading glasses to get to those last lines, with the result the store would make money, not the customer.

I have to confess the thought of money-crazy people losing money was not entirely unpleasant. But, more importantly, this little example illustrates what is happening today — complex strategies are being designed by banks, corporations, and individual marketers to dupe ordinary people, poor workers and peasants. The rise in corruption and inequality, which have both risen to totally unacceptable levels, is largely due to this.

The belief held by market fundamentalists, that if the market is left completely free, such behaviour will get eliminated by competition has absolutely no basis, either in economic theory or in evidence. We do need well-meaning and well-designed regulation and we also need individual morality. The latter is the subject matter of this essay. Most economists treat economics as an amoral science. I believe this has done great damage not just to the economy but also to the overall quality of our lives and the nature of politics that we see around us. The origin of this error goes back to 1776, to the misreading of Adam Smith’s classic, The Wealth of Nations, published that year. There Smith wrote about the “invisible hand”, which was indeed a stunning discovery. Most of us, when we see order or pattern in life, assume that there must be someone in overall command executing this. Adam Smith’s insight was that that is not necessary. The butcher brings meat to your table and the tailor stitches your clothes because of neither kindness nor some command from the top, but because of their self-interest.

This was such a powerful idea that it drowned out the fact that while individual interest is an important driver for economic efficiency and growth, it is by no means sufficient. As Kenneth Arrow, who would later, along with Gerard Debreu, formalise Adam Smith’s idea of invisible hand into a theorem, pointed out in an essay published in Dissent magazine, in 1978, “The model laissez-faire world of total self-interest would not survive for 10 minutes”. The success of an economy depends on many other traits like honesty, compassion and the urge to reciprocate.

It is arguable that today’s advanced economies got to where they are because they managed to inculcate at least a modicum of these values. There are studies which show that societies where people are more honest and trustworthy are likely to grow faster. We, of course, need government to enforce contracts and provide certain basic necessities. But that is not enough. Modern economic life is so complex that it is impossible to have government enforce all contracts. We need a certain amount of adherence to codes of behaviour on the part of individuals for society as a whole to be successful. And self-enforcement comes from having certain basic moral norms.

Recent research on evolution and game theory by Ingela Alger and Jorgen Weibull, which complements the work in general equilibrium economics on selfishness and optimality mentioned above, has revealed a surprising result, namely, that while self-interested behaviour enables each individual to do better, a society that is devoid of morality is unlikely to survive the process of evolution. So a society that loses this trait is like a community of dinosaurs in the creature’s last days — it is headed towards extinction. Luckily, we human beings are creatures — probably the first such creatures on earth — that are not only subject to the laws of evolution but know this and are able to analyse their own predicament and make corrections. This research shows that it is in our collective long-run interest to nurture morality.

As we see one corruption scandal after another break in India, banks being looted, politics turning vile, with people being taught to hate others and guard only their own group interests, if we want to turn around the corner, it is not enough to just get our fiscal policies right, exchange-rate strategy right, and taxation policy streamlined. We also need to nurture certain individual morals. It is a failure in our education that we have missed out altogether on the importance of individual morality and values.

I should clarify that morality must not be equated with religion and certainly not with religious fundamentalism. A religious fundamentalist also has codes of behaviour which he expects will be rewarded by his being sent to heaven. But that is not morality; that is profit maximisation.

Morality is the idea of doing good as an end in itself, in being kind and inclusive, in remembering that others — be they of another religion, caste or race, be they gay, lesbian or transsexual — have the same basic needs as you and exactly the same rights as you. And we must be prepared to do unto them what we would not mind them doing unto us.

The writer is C Marks Professor at Cornell University and former chief economist and senior vice president, World Bank

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