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Source link: http://archive.mises.org/12523/why-economics-is-crucial-for-ethics/

Why Economics Is Crucial for Ethics

April 21, 2010 by

The most important problems are unreflective activism and uninformed dissent. Economic reasoning helps us expose absurdities in seemingly noble moral pronouncements. You can’t get justice and prosperity merely by wishing for it. FULL ARTICLE by Art Carden

{ 47 comments }

Russell Munves April 21, 2010 at 9:36 am

If you want some evidence that the markets are not efficient and that they are systematically rigged by the financial industry, read Yves Smith/s ECONned. You can’t have an efficient market without tranparency.

And we don’t have transparency in many of the major financial markets. For example, Agency mortgage backed securites is a huge market. I have seen statistics indicating that Agency current insure more than 80% of the mortgages in the U.S. Yet they refuse to release loan level data so investors can judge the quality of a given pool of mortgages. They keep that information for themselves. The is also a significant lack of transparency in the non-Agency market. In fact, you have that problem with CDS and other over the counter financial products.

For the market to work efficiently, information is needed. Govenment needs to set the framework that fosters transparency by requiring it and enforcing that requirement. Then market participants can make their own informed decision on a level playing field.

Manuel Barkhau April 21, 2010 at 9:41 am

You must be new here ;-)

Russell Munves April 21, 2010 at 10:34 am

Sort of. But I have followed this site for a long time and have read Mises The Theory of Money and Credit cover to cover and Rothbard’s The Mystery of Banking as well as many other books on the subject. I basically agree with most of both. So I have developed some strong opinions what what works and doesn’t.

For example, I am against government control of the money supply. I am for a gold standard (even though I know it is not politically doable). I do not think the Fed is effective and should be abolished. I also believe fractional reserve banking is not healthy as it leads to the creation of excess credit feeding booms resulting in bigger busts.

Any money issued should be backed by a fixed amount of gold. No one should be allowed to create money or credit out of thin air. Banks should be required to have complete transparency so depositors or lender can see what kind of capital stands behind any of their money loaned to banks that is loaned out to third parties by the banks. If these conservative conditions were adopted, I believe we would see slower growth but more growth in the long run with smaller swings in the business cycle. But there will always be bubbles, it is human nature.

Under these conditions, everyone would sleep better at night. This is not a world I ever expect to see.

Michael A. Clem April 21, 2010 at 9:56 am

[sarcasm]And naturally, government is always transparent and never hides anything from its citizens… [/sarcasm]
Seriously, why do people keep expecting an agency that is notorious for its own biases and unfairness to make the market “fair” and maintain a level playing field? Serious cognitive dissonance going on.

Russell Munves April 21, 2010 at 10:19 am

Because there is no one else to do it. I don’t think government is particularly efficient or effective. But unless somehow you assure the market participants that the game is not rigged, then you will not have market or you won’t have a healthy creative market. You will have a lot of preditory actors accumulating wealth not based on making the economic pie bigger for everyone but rather, in essense, just fleecing them. I urge you to read ECONned to see what kind of dishonest and market inefficient behavior has been prevalent and see whether you think this resulted in an efficient market.

Michael A. Clem April 21, 2010 at 10:26 am

But unless somehow you assure the market participants that the game is not rigged, then you will not have market or you won’t have a healthy creative market.
Sure, that’s why you have the Better Business Bureau, credit agencies, Underwriter’s Laboratory, Merchant Law, Consumer Reports, private arbitration and mediation services, investigative reporters, and other such services and organizations. People who are concerned about the fairness of the market place value in a fair market, and where there’s value, there’s a profit to be made providing that value. No government necessary. If anything, government rules and regulations are what tend to rig the game in favor of special interests, or whoever has the most political power, to interfere in the working of voluntary transactions on the market. Government operates by coercion, the market works by cooperation. We want as little coercion as possible in the system.

Russell Munves April 21, 2010 at 10:39 am

I agree you want as little coercion as possible. But the institutions you have listed were clearly ineffective at preventing the fraudulent financial shenanigans that caused the crisis. They were incapaable of requiring the type of disclosure and transpanrency necessary to limit the size that these frauds achieved.

So how would you do it? Should government get out of the way and let everyone who feels wronged enforce their own market discipline like in the wild west. I doubt you would see an optimal economy.

Michael A. Clem April 21, 2010 at 11:01 am

Actually, the Wild West wasn’t nearly so wild (anyone got the link to that article or book?) as the movies make it out to be. Second, the financial crisis that we’re experiencing was, to a large degree, not due to “deregulation”, but to the Federal Reserve’s policies and the government’s rules and regulations, and government organizations like Fannie Mae and Freddie Mac. So no, the institutions I listed were not effective against government action and policies, but for the most part, they weren’t intended to be, either.
If government has any legitimate purpose at all (this in itself is a debatable point), it is to protect the rights of its citizens. That means police and courts to protect people from actual rights violations. Far too many regulations and laws don’t do that, but rather, interfere in voluntary transactions between people: tariffs, minimum wage laws, ant-trust regulations, licensing, mandatory requirements, etc., etc. In short, government is the greatest rights-violator in our society, much more so than your average crook or swindler.
Our economy is what it is because of government intervention, not some mythical free market or alleged deregulation. Getting government out of the way may not create a utopia (utopia is not a real option), but it certainly won’t cause the financial crisis and other problems that we have today.

Inquisitor April 21, 2010 at 3:09 pm

Perhaps the government’s own swindling is why they were unable to prevent it? I think Michael Clem already pointed out what in particular.

Peter April 21, 2010 at 6:35 pm

But the institutions you have listed were clearly ineffective at preventing the fraudulent financial shenanigans that caused the crisis.
So were the institutions you have listed (i.e., government). So what’s your point? “A doesn’t work, so clearly we must do B, even though B obviously doesn’t work either”?
(And did it occur to you that your institution might be the reason Michael’s institutions couldn’t do what you want?)

newson April 21, 2010 at 11:11 pm

benson deals with the “wild” west and other situations where private law prevailed until the state encroached. even true believers would have to admit that the state will promote its legal system as good, and all previous orders as bad.
http://mises.org/journals/jls/10_1/10_1_4.pdf

Inquisitor April 21, 2010 at 3:07 pm

This is a very, very poor answer. “No one else to do it” does not justify the govt’s interference and moreover borders on nonsense. There is no “economic pie”. I really am indifferent to what ECONned proscribes. Prove that no one else can. :)

Michael A. Clem April 21, 2010 at 3:21 pm

Oh, and as a counter-suggestion to Econned, I would recommend reading Thomas Woods’ Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse.

Russell Munves April 22, 2010 at 12:31 am

I have read both and Mises The Theory of Money and Credit and Rothbard’s The Mystery of banking. I agree that the Fed’s interference with market interest rates and quantitative easing totally screws up the market for credit and cause huge misallocation of resources. The same is true of fractional reserve banking which allows banks also to create credit out of thin air. All this exercerbates the business cycles. And yes, the bailouts made it worse all to the detriment of the taxpayers. We would be better off with a gold stantard, 100% reserve banking. You would have slower but more sustained growth and smaller business cycles. Money and credit should only be created with something of value to back it up that is contributed to the available economic pie so that it does not dilute the value of the other money an credit in existence that others have saved. Money or credit created out of nothing sends false demand signals into the economy resulting in a misallocation of goods or services to those who have contributed nothing to increase the economic pie themsleves.

There was no deregulation of the banking industry, only partial deregulation. The government failed to regulate credit default swaps and did not pay attention to bank leverage and fraud in the subprime mortgage market but continued to insure bank deposits so the bad actors could continue to obtain deposts to risk leaving the taxpayers on the hook. If there were truly no regulation of banks, then people would be very careful about where they put their money and competition could foster sounder banking. This is especially true if full transparency of assets and liabilities were required.

But you need government or some social structure to assure, as best it can, that private property is respected and that contracts are fulfilled or people will not cooperate in econonmic matters. We are clearly all better of if we cooperate than if we try to make everything outselves.

Joe April 21, 2010 at 5:23 pm

When you enter the market and don’t want to be scammed you have to have a brain and take the appropriate precautions. Over time people gravitate towards the resources that show they are reliable and honest. Even then you need to beware and watch your money. The only way is to be aware of what is going on and be a responsible participant. With markets there is always risk and reward. If you take a risk and lose don’t whine to government. Take your loss and learn from it. This is how responsible grown up people live. Government has the monopoly on force. Based on that you want them to stay away from most things a free people are involved in.

Jeremy April 21, 2010 at 8:50 pm

And think about who are the primary buyers of these mortgages – banks and investment banks who had TRILLIONS of dollars poured in as loans and outright gifts (gifts being the price above market value that the Federal Reserve paid for many toxic assets) by the Fed.

Do you really think if they had gone bankrupt and almost all of the mortgage backed securities had to be sold on the open market at fire sale prices that there would not have been much more research into and ratings of these things? The main reason they’re still so opaque today is that their primary buyer doesn’t care what’s inside them.

Jeremy April 21, 2010 at 8:53 pm

sorry this was supposed to be a reply to Russell up above

Russell Munves April 22, 2010 at 12:40 am

Jeremy,

I agree, they inclination is that they should have been allowed to go bankrupt. But there may be other factors. Factors like aside from mortgage backed security trading, Citigroup clears financial transactions in over 100 countries. If it had gone bankrupt, it could have paralized golobal trade. Of course, what we got was not much better. They could have saved Citigroup and not the rest. The bailout of AIG was a bailout of the banks on the other side of AIG’s credit default swaps. They they bailed out the banks further by letting the big banks borrow at .25% and buy Treasuries paying 3.25%. The government in essence just gifted the money to the banks so they could appear to pay back the government investment. In the meantime, the government ran up $2 trillion in debt to support the banks. The taxpayers will have to pay it back unless the Fed inflates our way out of it thereby erroding savings. This is a very bad transaction for the taxpayers.

Russell Munves April 22, 2010 at 7:05 am

If you wamt the most efficient market, you do things provide the market participants with the best information possible. That is why so many people are for market transpatency. It was buyer beware in the stock market during the 1920′s runup to the crash. Read about the practices allowed then and compare them to the market we have now. Because of SEC disclosure requirements and anti fraud provisions, we have a much more robust stock market than we had then. Regulation, if well designed and evenhandedly enforced, can result in more efficient and robust markets which encourage participation. I know that is a big “if” and that many regulations or poorly designed and enforces. Private right of action to obtain damages for violation of well designed rules can often provide more incentive for compliance than a poorly funded or politically influenced government regulatory agency. It is not a perfect world. But at the end of the day, we will end of with more efficient markets and better quality of life if government can provide some structure that guarantees, to the extent possible, property rights and honesty and fair dealing.

mr taco April 22, 2010 at 11:00 pm

individuals are more vigilant than any government

for example sec couldnt catch bernie madoff despite warning from Harry Markopolos ,who informed the U.S. Securities and Exchange Commission (SEC) that he believed it was legally and mathematically impossible to achieve the gains Madoff claimed to deliver. He was ignored by the Boston SEC in 2000 and 2001, as well as by Meaghan Cheung at the New York SEC in 2005 and 2007 when he presented further evidence.
better question yet who is going to regulate the government
wasnt it the government who encouraged sub primes mortages through the community reinvestment act and fair housing act

Bob McTeer, president of the Dallas Federal Reserve Bank from 1991 to 2004 quoting on the community reinvestment act , said “There was a lot of pressure from Congress and generally everywhere to make homeownership affordable for poor and low-income people. Some mortgages were made that would not have ordinarily been made.”

In a 2002 study exploring the relationship between the CRA and lending looked at as predatory, Kathleen C. Engel and Patricia A. McCoy noted that banks could receive CRA credit by lending or brokering loans in lower-income areas that would be considered a risk for ordinary lending practices. CRA regulated banks may also inadvertently facilitate these lending practices by financing lenders. They also noted that CRA regulations, as then administered and carried out by Fannie Mae and Freddie MAC, did not penalize banks that engaged in these lending practices. They recommended that the federal agencies use the CRA to sanction behavior that either directly or indirectly increased predatory lending practices by lowering the CRA rating of any bank that facilitated in these lending practices.

here is a better explanation
http://mises.org/daily/2963

Guard April 21, 2010 at 10:40 am

The central issue in this article is good intentions coupled with violent force. The underlying assumption that it is OK to force others to do right is so unexamined that it is practically invisible.
The comment by Mr. Munves above is typical: “Govenment (sic) needs to set the framework that fosters transparency by requiring it and enforcing that requirement.”
“Enforcing” here means police shooting people.
Almost always, the wonderful ideas on how to fix things involve the police shooting people who do not agree.
Considering the outcome of such good intentions, I’m afraid one must re-examine whether the intention to control others “for their own good” is really a good intention at all.

Gil April 22, 2010 at 12:19 am

‘Enforcing’ means to use force. Wow. Indeed, enforcing your home against a burglar means physical force too. There’s nothing wrong with force per se. I don’t why some people are apparently pacifists but then say “oh, you know what I meant”.

Russell Munves April 22, 2010 at 12:44 am

The comment about shooting people is not really a fair comment concerning the U.S. There is plenty of government abuse but there is little shooting of people going on. And how would you suggest people assure themselves that they will be able to keep the fruits of their labor if deal with other people? Shall we all arm ourselves and shoot anyone who comes near. Where will we get the guns without the type of cooperation necessary to make guns. You think you could make one from scratch yourself? I doubt it.

The right to vote and an educated electorate is the best protection against government tyranny.

UK ex-academic April 21, 2010 at 10:58 am

“I assume that we all want to use the lives we’ve been given to make the world a better place.”

Bad starting assumption. It doesn’t apply to me, for example. My own aim in life is very selfish: to do the best for myself that I can, subject to the rule “Do as you’d be done by”. If my actions make the world a better or worse place, that’s merely a side effect.

Ayn Rand would have approved.

Allen Weingarten April 21, 2010 at 12:00 pm

I concur with Ayn Rand’s aim of being ‘selfish’, although it would have been preferable to employ the term ‘self-enhancing’. I submit that this is the best way to build the world, and most important to prevent it from devastation. Yet whether or not we agree with her, the sovereign individual ought to decide upon his own destiny.

Perhaps surprisingly, Rand’s atheism is consistent with the Biblical view that the individual’s primary relationship is with his God, rather than with the world. Moreover, it is consistent with the Chabad (or Lubavitch) view that each individual has a mission that only he can fulfill. Moreover, whereas animals & insects evolve by what suits the species, man develops by what individuals create, which is often contrary to the desires of the collective. So I thank UK ex-academic, for challenging the premise of being worldly oriented, rather than individually oriented.

Russell Munves April 22, 2010 at 7:14 am

What you believe man is not driven by instinct? You are ignoring a lot of scientific evidence to the contrary. People do not always do what is optimal just for them. Otherwise people would not smoke and we would not have any alcholics or drug addicts or people wasting their earnings on gambling where everyone knows the odds are against them. Man’s instincts and predilections has been molded by the need to survive in the environment he evolved in. The are many instances of altruism which is attributable to the fact, at least in part, that man is a social animal. We can acheive a lot more with cooperation than we can by trying to create everything ourselves. So from that view, altruism is selfish behavior. Creating social mores that discourages suboptimal behavior like over drinking and drugs if better for family and society. Of course too much constraint depresses creativity, satisfaction and economic effort making life less satisfying than it might otherwise be. We need to strike a balance and especially guard our individual freedom because the state always has much more power than the individual. The vote and an educated consumer of government is the best way to assure that.

Bruce Koerber April 22, 2010 at 5:12 pm

People do what they do because it is how they get closer to what they desire. That is not the same as optimizing. It is like a moth being attracted to a light, sometimes the light is coming from a fire and the moth perishes. Each person makes that accessment subjectively which is not necessarily the same as ‘selfishly.’ In fact describing it as selfish is a poor scientific description because of the biases associated with the word ‘selfish.’

Barry Loberfeld April 21, 2010 at 11:54 am

From a review of New Republican Jonathan Chait’s The Big Con:

As for Friedman, he was by no means declaring (at the very beginning of Capitalism and Freedom) that “economic freedom” is the supreme value irrespective of its “practical effects” on people’s lives; rather, it is not only “an end in itself,” but “also an indispensable means toward the achievement of political freedom” (emphasis added). He rejected further the false dichotomy between freedom and “material welfare,” and libertarians today reject in turn that between morality and practicality — fundamentally, I would contend, between ethics and economics. That’s because the two sciences are studying merely different aspects of the same reality, the same nature — human nature. They can no more conflict than physics and chemistry. It is a “deeper belief” (explicit or implicit) in some standard of morality that determines both “intended goals” and the means to achieve them. As one liberal conscious of the need to account for the morality-practicality nexus, Kuttner subtitled another book False Choices Between Prosperity and Social Justice. Now, as to which ethic — individual freedom or “social justice” — truly coexists with economic abundance, one answer has long been clear: the contrast between the pro-prosperity Old Left and the pro-austerity New Left and its fellow travelers (e.g., affluence foe John Kenneth Galbraith, the Salieri of economics, now so irrelevant as to not even merit a mention from Chait). Here the supporters of “bigger government” continued to “back” it despite the demonstration of its actual relation to “growth.”

Allen Weingarten April 21, 2010 at 3:33 pm

Barry, when addressing ethics and economics, you write “the two sciences are studying merely different aspects of the same reality…” Did you mean to refer to ethics as a ‘science, which is usually understood to mean value-free (or Wertfrei)’? If so, what is your definition of ‘science’?

Barry Loberfeld April 21, 2010 at 4:04 pm

Hmmm … is science “value-free”? Can, say, dishonesty be a part of “science”? What is the scientific method itself but a guide to human action, a dictation of what should — and should not — be done? Or is science compatible with all behaviors (ethics) and beliefs (metaphysics and epistemology)?

Allen Weingarten April 21, 2010 at 8:05 pm

Barry, if the corruption of science by dishonesty means that science has nothing intrinsic to it, there is no need to have any definition at all. I won’t argue with that view, but will note that it is neither the view of scientists, of philosophers of science, nor of the Austrian economists. Moreover, whereas I thought your view was that both ethics and economics were sciences, it now appears that your view is that nothing should be viewed as science, or that everything should be so viewed.

Russell Munves April 22, 2010 at 12:49 am

If you are intersted in the so called objectivity of even hard science, you should read Kuhn’s The Structure of Scientific Revolution and you will see that self interst plays a big role in what is viewed as truth even by scientists. Economics does not come close to being science.

Allen Weingarten April 22, 2010 at 6:12 am

I have read “The Structure of Scientific Revolutions”, and Kuhn did not claim that the bias of scientists is part of its definition. Rather he correctly opposed that bias, and aimed at correcting it.

Apparently, Russell and Barry believe that the way a discipline is practiced constitutes its definition. So they might conclude that since mathematicians make errors, mathematics includes errors in addition and multiplication. I find it surprising that people on this blog are unfamiliar with why economics is a science, despite the fraud of some of its practitioners.

Barry Loberfeld April 22, 2010 at 8:14 am

“Barry, if the corruption of science by dishonesty means that science has nothing intrinsic to it, there is no need to have any definition at all.”

Indeed? I read my statement as affirming honesty as an intrinsic ethical component of science.

Allen Weingarten April 22, 2010 at 12:30 pm

Barry, how are you differentiating science from what is not science, when you refer to ethics and economics as two sciences?

Bruce Koerber April 22, 2010 at 5:24 pm

Consider: A model of economics that uses value-free (or Wertfrei) methods and also the subjective methodology. Discoveries made will be very valuable but the ability to convincingly address ethics are limited by definition.

Consider: A model of economics that recognizes the inseparability of ethics and economics and also the subjective methodology. Discoveries made will be very valuable but have the extra merit that ethics can be unabashedly and openly discussed.

Jacob Steelman April 21, 2010 at 4:22 pm

“how many great thinkers and innovators perished in the gulags…” One can assume alot because those politicians and bureacrats who control governments do not want great thinkers and innovators around who can see through the scam of governments and political parties. The first to go are business men and women and the great thinkers and innovators who are smart enough to see through the spin and thereby challenge the authority of the government. Then you burn the books. An ignorant and poor populace is the best insurance that a dictator has to maintain his or her power.

Joe April 21, 2010 at 5:28 pm

I think the point was more towards the waste of “human wealth” that was not realized. How many of the 10 million Stalin killed? How many the 6 million Hitler killed? How many that Mao, Pol Pot, and rest of the dictators? We will never know.

Anthony April 21, 2010 at 7:55 pm

Don’t forget all those killed by the “enlightened” governments in Western Europe and North America… let’s not ignore the evils done by democratic governments.

Promise April 21, 2010 at 6:52 pm

Thank you Art Crden for writing this article and Ledwig Von Mises Institute for publishing it. This article shares a great idea that gives deep insight on understanding the effects of ethics in economics- a valuable material to global economics students like me.

…”Policies that should be fought and repealed include pretty much any interference with the market process: minimum wages, price controls, taxes, and subsidies should all be repealed.
Why? One reason is that we can show how they waste resources by encouraging activities for which the costs exceed the benefits and discouraging activities for which the benefits exceed the costs.”
I´d love to read some fact instances of those activities and more about common government activities that show mismanagement of resources. Also what kind of resources are meant in the article and how do ethics affect the choices our goverment make on how they put the resources into use.
Thank you.

billwald April 21, 2010 at 6:54 pm

Stalin killed for political reasons. Hitler thought he was cleaning the gene pool. That makes Hitler a Libertarian with poor judgement?

mrlazare April 21, 2010 at 7:17 pm

If you initiate force against people, regardless of your motives, then you are ipso facto not acting as a libertarian. Hitler and Stalin were both about as un-libertarian as it’s possible to be. Arguing over who was less of one is a meaningless exercise.

Anthony April 21, 2010 at 7:57 pm

Which Libertarian scholar told you that “cleaning the gene pool” was a valid role of government? That’s a book I would be interested in seeing.

Bruce Koerber April 21, 2010 at 10:05 pm

I just published “ETHICAL ECONOMICS For Today And Tomorrow . . .” Go to http://www.knowledge-download.com/ethicalecon/ .

Russell Munves April 22, 2010 at 7:25 am

Allen said, “Apparently, Russell and Barry believe that the way a discipline is practiced constitutes its definition. So they might conclude that since mathematicians make errors, mathematics includes errors in addition and multiplication. I find it surprising that people on this blog are unfamiliar with why economics is a science, despite the fraud of some of its practitioners.”

Allen, you are misinterpreting what at least I am saying and what Kuhn was saying. Kuhn was saying that despite the scientific method, human bias and self interest prevents objective evalution of evidence to purpetuate worldviews that are wrong.

I am not suggesting that there are no underlying laws of nature that result in economic behavior. I can think of one obvious one, if you don’t work, you create anything of value. But that does not make it a science. In my book, a science has known invariable rules that are teased out using the scientific method of hypothesis and verification. Experiments using known factors that are repeated varying just one factor are used to verify hypotheses which, when enough evidence is accumulated, people regard as laws. The laws can then be used to make predictions about the world. Economics at bottom studies the behavior of human beings that is influenced by many variables of which many are unknown and unknowable that it is not suseptible to revealing underlying principles or laws following the scientific method. Yves Smith gives many very good examples of this problem in ECONned.

Bruce Koerber April 22, 2010 at 5:26 pm

What is clear is that there is no moral authority for economic intervention.

Adam Frost April 23, 2010 at 11:01 pm

“Economic reasoning helps us expose absurdities in seemingly noble moral pronouncements. Here are two examples. The Queen of England excoriated economists for being unable to see the financial crisis coming. William Easterly pointed out that we actually did better than predict the crisis. We predicted that we wouldn’t be able to predict it. Hindsight is 20/20, and saying “yes, asset prices were wrong” is not an indictment of economics or of financial markets.

We can theorize about the general conditions under which recessions occur, but we can’t systematically predict the specifics of crises, panics, and other disasters, because anyone who can has an incentive to act on and profit from his or her superior insight. If you are making money hand over fist exploiting inefficiencies in the market, then I will believe you and listen to your criticisms of efficient markets. Until then, I’ve seen nothing to suggest that markets are systematically inefficient in a knowable, predictable way.”

Wait what? Since when did Austrian economists subscribe to the EMH? Wasn’t this very quote blasted not too long ago on another article on here?

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