Economic ethics is the combination of economics and ethics, incorporating both disciplines to predict, analyze, and model economic phenomena.
It can be summarized as the theoretical ethical prerequisites and foundations of economic systems. This principle can be traced back to the Greek philosopher Aristotle, whose Nicomachean Ethics describes the connection between objective economic principles and justice. The academic literature on economic ethics is extensive, citing natural law and religious law as influences on the rules of economics. The consideration of moral philosophy or a moral economy differs from behavioral economic models. The standard creation, application and beneficiaries of economic models present a trilemma when ethics are considered. These ideas, in conjunction with the assumption of rationality in economics, create a link between economics and ethics.
History
Ancient times
India Ancient Indian economic thought centred on the relationship between the concepts of happiness, ethics, and economic values, as connections between them led to the constituting description of human existence. The Upanishads' fundamental ideas of transcendental unity, oneness, and stability is an example derivative of this relationship. Ancient Indian philosophy indicates an understanding of several modern economic concepts, for instance, the regulation of demand when it exceeded supply as a means of avoiding anarchy. This was then achieved by stressing that non-material goods were the source of happiness, this being a reflection of Marshall's dictum of the insatiability of wants.
The Rig Veda illustrates an apprehension of economic inequality. In chapter 10, it states that, "the riches of the liberal never waste away, while he who will not give finds no comfort in them." This indicates that generating personal wealth was not considered immoral, but rather that hoarding this wealth was a sin. The Arthasastra formulated laws that promote economic efficiency in the context of an ethical society. The author, Kautilya, posited that building infrastructure, which was the responsibility of the king, was a key determinant of economic growth when constructed in an ethical environment.
Greece Ancient Greek philosophers combined economic teachings with ethical systems. Socrates, Plato, and Aristotle subscribed to the idea that happiness was the most valuable good humans could strive for. The belief that happiness could not be achieved without pleasure posed complications to the relationship between ethics and economics at the time. Callicles, for example, held that one who lived rightly should gratify all their desires by way of their courage and practicality, which presented an anomaly for the issue of scarcity and the regulation of consumption. This was reconciled by the division of labour, where basic human wants such as food, clothing, and shelter were efficiently manufactured, given each limited their production to their most productive function, thus maximizing utility.
Xenophon's Economicus, inspired by Socrates' concept of eudaimonia, necessitates that, since virtue is knowledge, one should understand how to use money and property well rather than merely acquire it for personal gain.
Middle Ages Religion was at the core of economic life during the Middle Ages; hence the theologians of the time used inferences from their respective ethical teachings to answer economic questions and achieve economic objectives. This approach was also adopted by philosophers during the Age of Enlightenment. The Roman Catholic Church altered its doctrinal interpretation of the validity of marriage, among other motivations, to prevent competition from threatening its monopolistic market position. Usury or loans with high interest was seen as an ethical issue in the Church, with justice being valued above economic efficiency.
The transition from an agrarian lifestyle to monetary commerce in Israel led to the adoption of interest in lending and borrowing, as it was not directly prohibited in the Torah, under the ideal "that your brother may live with you."
Economic development in the Middle Ages was contingent on the ethical practices of merchants, founded by the transformation in how medieval society understood the economics of property and ownership. Islam supported this anti-ascetic ethic in the role of merchants, given its teaching that salvation derives from moderation rather than abstinence in such affairs.
Classical economics
The Labour Theory of Value holds that labour is the source of all economic value. The distinction between "wage slaves" and "proper slaves" in this theory, with both being viewed as commodities, is founded on the moral principle that wage slaves voluntarily offer their privately owned labour power to a buyer for a bargained price, while proper slaves, according to Karl Marx, have no such rights.
Mercantilism, although advocated by classical economics, is regarded as ethically ambiguous in academic literature. Adam Smith, author of the Labour Theory of Value, noted that the national economic policy favoured the interests of producers at the expense of consumers since domestically produced goods were subject to high inflation. The competition between domestic households and foreign speculators also led to an unfavourable balance of trade, i.e. increasing current account deficits on the balance of payments.
Writers and commentators of the time employed Aristotle's ethical counsel to solve this economic dilemma.
Neoclassical economics The moral philosophy of Adam Smith founded the neo-classical worldview in economics, which states that one's quest for happiness is the ultimate purpose of life and that the concept of homo economicus describes the fundamental behavior of the economic agent. Such an assumption that individuals are self-interested and rational has implied the exemption of collective ethics. Under rational choice and neoclassical economics' adoption of Newtonian atomism, many consumer behaviours are disregarded, meaning that it often cannot explain the source of consumer preferences when not constrained by the individual. The role of collective ethics in consumer preference cannot be explained by neoclassical economics. This degrades the applicability of the market demand function, a key analytical tool, to real economic phenomena as a result. In principle, economists thus avoided, and continue to avoid, the assumptions of abstract economic models and the unique aspects of economic problems.
Contemporary history According to John Maynard Keynes, the complete integration of ethics and economics is contingent on the rate of economic development. Economists have been able to aggregate the preferences of agents, under the assumption of homo economicus, via the merging of utilitarian ethics and institutionalism. Keynes departed from the atomistic view of neoclassical economics with his totalistic perspective of the global economy, given that "the whole is not equal to the sum of its parts....the assumptions of a uniform and homogeneous continuum are not satisfied." This enforced the idea that an unethical socioeconomic state is apparent when the economy is under full employment, to which Keynes proposed productive spending as a mechanism to return the economy to full employment, the state where an ethically rational society exists.
Influences
Religion Philosophers in the Hellenistic tradition became a driving force to the Gnostic vision, the redemption of the spirit through asceticism that founded the debate regarding evil and ignorance in policy discussions. The amalgamation of ancient Greek philosophy, logos, and early Christian philosophy in the 2nd and 3rd centuries AD caused believers of the time to stray from moral principles. This led to the solution that they were to act in one's best interest, given appropriate reason, to prevent ignorance.
The Old Testament of the Bible served as the source of ethics in ancient economic practices. Currency debasement was prohibited given its fraudulent nature and negative economic consequences, which were punished according to Ezekiel 22:18–22, Isaiah 1:25, and Proverbs 25:4–5. Relationships between economic and religious literature have been founded by the New Testament. For example, James 1:27 states that "looking after orphans and widows in their distress and keeping oneself unspotted by the world make for pure worship without stain before our God and Father," which supports the academic argument that the goal of the economic process is to perfect one's personality.
The concept of human capital valuation is evident in the Talmud. The idea of opportunity cost is grounded in the "S'kbar B'telio" (literally meaning 'lost time') concept in Talmudic literature. In ancient Israel, a Rabbi was not to be paid for his work, as it would imply that he was profiting from preaching and interpreting the word of God, but would be compensated otherwise for the work completed as a Rabbi as a means of survival, given they are not involved in any other profession.
The Qur'an and the Sunnah have guided Islamic economic practice for centuries. For example, the Qur'an bans ribā as part of its focus on the eradication of interest to prevent financial institutions operating under the guidance of Islamic economics from making monopolistic returns. Zakat is in itself a system for the redistribution of wealth. The Qur'an specifies that it is intended solely for the poor, the needy, zakat administrators, those whose hearts are to be reconciled, those in bondage, those debt-ridden, those who strive for the cause of God, and the wayfarer. The use of Pension Loan Schemes (PLS) and other micro-finance schemes are exercised in this teaching through the inclusion of the Hodeibah micro-finance program in Yemen and the UNDP Murabahah initiatives at Jabal al-Hoss in Syria.
Culture Economic ethics attempts to incorporate morality and cultural value qualities to account for the limitation of economics, which is that human decision-making is not restricted to rationality. This understanding of culture unites economics and ethics as a complete theory of human action. Academic culture has increased interest in economic ethics as a discipline. This led to an increased awareness of the cultural externalities of the actions of economic agents, as well as limited separation between the spheres of culture, which has prompted further research into their ethical liability. For example, a limitation of only portraying the instrumental value of a piece of artwork is that it may disregard its intrinsic value and thus should not be solely quantified. Artwork can also be considered a public good due to its intrinsic value, given its potential to contribute to national identity and educate its audience on its subject matter. Intrinsic value can also be quantified as it is incrementally valuable, regardless of whether it is sacred by association and history or not.
Application to economic methodologies
Experimental economics
The development of experimental economics in the late 20th century created an opportunity to empirically verify the existence of normative ethics in economics. Vernon L. Smith and his colleagues discovered numerous occurrences that may describe economic choices under the veil of ignorance. Conclusions from the following economic experiments indicate that economic agents use normative ethics in making decisions while also seeking to maximise their payoffs. For example, in experiments on honesty, it is predicted that lying will occur when it increases these payoffs, notwithstanding the results, which proved otherwise. It is found that people also employ the "50/50 rule" to divide something regardless of the distribution of power in the decision-making process.