Defending Liberty: Essays in Honor of David Gordon

CHAPTER 9

Economics and Ethics: Neither Independent nor Intertwined

Jakub Bożydar Wiśniewski

The main achievement of economics is that it has provided a theory of peaceful human cooperation.

—Ludwig von Mises,

“Economic Freedom and Interventionism”

Treasures gained by wickedness do not profit, but righteousness delivers from death.

—Proverbs 10:2

Business ethics is a paradigmatic example of a discipline that straddles the domains of economics and ethics. Hence, appreciating its potential and making the most of it requires a clear understanding of the relationship between the aforesaid two fields, which, in turn, requires a clear delimitation of their respective areas of competence.

Despite many decades—if not centuries—of research having been devoted to this issue, it remains contentious and polarized between several entrenched orientations. The present paper is an attempt to move the discussion forward by offering a comprehensive overview of what is perhaps the most nuanced and least prevalent of the approaches to the subject at hand—namely, the contention that economics and ethics are neither strictly independent, nor inextricably intertwined, but mutually relevant.

The first popular approach to be discussed in this connection is that of strict value freedom.1 On this view, economics is a paradigmatically positive science, which describes the nature of economic phenomena and insists that this nature is entirely independent of the values endorsed by individuals who are subject to them. By implication, the argument goes, whenever an economist relies on his professional knowledge to bolster his normative arguments or pursue specific policies, he thereby ceases to act as an economist and assumes the role of an ethicist.

I regard the above perspective as essentially correct, but also regrettably incomplete. Its great achievement is the identification of the structure of cooperative action as a separate domain of scholarly investigation, parallel to the achievement whereby logic identifies the structure of valid thought as a distinct area of systematic inquiry. This intellectual feat allows for looking at the realm of human affairs from the point of view informed by “the economic way of thinking,”2 whereby concepts such as opportunity costs, incentive structures, and unintended consequences delimit both the boundaries and the potentialities of collaborative endeavors.

At the same time, however, strict adherents of this perspective have been perhaps somewhat too quick in dismissing ethical considerations as not only independent of, but also entirely irrelevant to economic theorizing. This, one might argue, has been causing them to arrive at economic conclusions that are deductively valid, but sometimes limited in terms of soundness, meaning that they are sometimes insufficiently cognizant of the broader normative framework that crucially conditions the emergence of the relevant economic phenomena.3 Furthermore, such conclusions can be said to fall short of their full explanatory potential insofar as they do not engage with the question of the extent to which robust economic development is a crucial prerequisite of equally robust moral development.

Another pertinent approach to the issue at hand suggests that economics and ethics are essentially connected, which amounts to an attempt to strip economics of its status of a value-free science. In this context, one sometimes encounters the name “social economics,” which seems to suggest that trying to decouple economic analysis from normative ambitions and presuppositions disqualifies economics as a social science in the full sense of the term.4

The fundamental problem associated with this perspective appears to be its denial of the distinction between the positive and the normative, which implies that the laws of economics are conditioned or modifiable by moral commitments. This, in turn, hints at the claim that economics is not an independent scholarly discipline capable of furnishing an objective description of the logic of cooperative action, together with all of its non-negotiable parameters. Consequently, on this view ethics runs the risk of turning into an exercise in wishful thinking, losing both its theoretical coherence and its practical import.

Finally, there is the approach, which I consider as the only truly fruitful one in this connection, that regards economics as value-free, but also value-relevant, hence seeing it as a strictly positive field of study that is nonetheless capable of illuminating various normative disciplines, including business ethics.5 By extension, one might argue that the perspective in question allows for viewing ethics as clearly value-laden, but also fact-relevant, hence recognizing the essential role of ethical capital in solving various operational problems described by pure economic theory.6 This take on the matter, one should notice, neither economizes ethics, nor ethicizes economics, nor yet keeps the two completely isolated from each other, but underscores their reciprocal pertinence and the corresponding gains from trade.

In what follows, I shall endeavor to demonstrate a broad range of analytical applications that this approach offers. First, I shall argue that there are two major ways—negative and positive—in which economics can benefit ethics, the former consisting in subordinating the “oughts” of human action to its logically viable “cans,” and the latter consisting in showing the extent to which cooperative efficiency can aid moral flourishing. Second, I shall argue that there are likewise two major ways—negative and positive—in which ethics can benefit economics, the former consisting in elucidating the normative preconditions of cooperative efficiency, and the latter consisting in illustrating the role of ethical resources in addressing various cooperative challenges. Finally, I shall conclude by suggesting that the key to the proper understanding of the relationship between economics and ethics may lie in regarding the former as the meta-ethics of cooperation—i.e., the positive science of normative coordination.

Before proceeding to the substantive sections of the present paper, let me finish with a methodological caveat. While I believe that the cogency of my arguments does not depend on the acceptance of any specific methodological tradition within economics, I intend to strengthen my contentions by adopting the perspective of the Austrian School,7 otherwise known as the causal-realist approach.8 Since Austrians view economics as the investigation of the immutable causal laws that govern the structure of human action, they are particularly devoted to emphasizing the strictly positive status of the discipline in question. In other words, on their view no purely empirical contingencies, including those relating to ethical commitments or moral customs, can impact the contents of economic principles.

Thus, my intention in following the above perspective is twofold. On the one hand, I wish to underscore the fact that there are good reasons—both methodological and substantive—to regard economics as a purely positive and analytically distinct field of inquiry with its own conceptual toolset and area of competence. On the other hand, however, I wish to indicate that even given such a strong assumption of positivity and analytical autonomy economics can be justifiably considered as both applicable to ethical theorizing and capable of being enriched by it.

Having made the preceding introductory remarks, let me move to discussing the aforementioned four specific ways in which economics and ethics can demonstrate their mutual relevance while keeping their respective conceptual distinctions intact.

THE NEGATIVE RELEVANCE OF ECONOMICS TO ETHICS

The fact that economics is concerned with investigating the logical essence of cooperation, while treating the specific values that animate concrete cooperative endeavors as given, endows it with a normatively unique character. More precisely, while the discipline in question is by itself positive rather than normative, its unique methodological place among other social sciences allows it to approach many crucial normative issues from a peculiarly nuanced angle.9

All economic values are firmly rooted in individual preference scales, thus being ineradicably subjective. On the other hand, the cooperative phenomena studied by economics, such as prices, contracts, and property titles, are intersubjective—that is, while not being entirely mind-independent, they are nonetheless independent of any single mind. In other words, their nature is perfectly encapsulated in the felicitous phrase “meeting of the minds,” which aptly accounts for their being the result of at least two subjective value rankings interacting in a mutually satisfactory manner.

This situates economics in a curious place, firmly at the intersection between individual values and the attendant social facts. One can plausibly argue that its foundational principle is the realization that the subjective value of personal satisfaction, filtered through the intersubjective value of transactional reciprocity, gives rise to the semi-objective value of social cooperation.10 I deliberately describe the value of social cooperation as semi-objective, since, on the one hand, it does not exist apart from the underlying subjective values of the cooperating agents, but, on the other hand, it embodies the indispensable core of virtually every major ethical tradition—that is, the notion that fulfilling the interests of others constitutes the ultimate source of moral self-actualization.

Hence, it appears reasonable to suggest that economics, though independent of any ethical presuppositions, is all the same uniquely capable of sharpening our ethical acuity. As indicated earlier, this is because it is singularly suited to describing the logical prerequisites, potentialities, and limitations of social cooperation.

Negatively speaking, it constitutes the most precise tool available for identifying existential errors, internal inconsistencies, and operational impossibilities in various schemes for moral utopias.11 But while guarding against the ruinous consequences of attempts at implementing such utopias may be the most important role of economics in this area, it is by no means the only one. More generally speaking, adopting the economic way of thinking allows for disabusing oneself of the notion that doing good is solely or even primarily a matter of exhibiting appropriate intentions and sufficient commitment. In fact, when unmoored from considerations of opportunity costs, marginal decision-making, and praxeological coherence, ethical passion can be positively dangerous and counterproductive, and this is the point that the science of cooperation regularly drives home.

For instance, one’s economically untutored moral intuitions may militate against the existence of sweatshops. Obviously enough, from an absolute standpoint sweatshop labor is an ethically deplorable phenomenon. However, as soon as the issue of opportunity costs is brought into the picture, it may turn out that, relatively speaking, sweatshop labor is the most satisfactory option available to large numbers of inhabitants of underdeveloped countries, an option vastly preferable to stealing, begging, prostitution, or starvation.12 Thus, in many cases, opportunity cost analysis can lead to the realization that accepting the best among ethically disagreeable alternatives may be the only way to advance towards future situations involving more ethically favorable choice sets.

Such a realization sheds important light on the ethical implications of the law of comparative advantage. More specifically, it demonstrates that a necessary ethical corollary of possessing a low-labor-cost comparative advantage is willingness to work under hard and exacting conditions. In other words, here both economics and ethics seem to underscore, each in its own way, the commonsense principle of “no pain, no gain,” whereby, in this particular instance, relatively low productivity has to be compensated by relatively high endurance and resilience.

What appears especially striking in this connection is the recognition that, in virtue of exhibiting the aforementioned characteristics, low-wage workers from underdeveloped regions possess the kind of human capital that gives them certain absolute (rather than just comparative) advantages over their high-wage counterparts from developed countries. On second thought, however, this recognition seems almost mundanely obvious—after all, it is only natural to assume that when one is poorly endowed in physical and organizational capital, one can make up for these lacks primarily by accumulating as much ethical capital as possible. In sum, in the absence of specialized knowledge and resources, general strength of character becomes all the more essential, and it is only a misguided understanding of the relationship between economics and ethics that can, and so often does, cloud this intuitive truth.

By the same token, engaging in various forms of well-intentioned consumer boycott can, for all practical purposes, be tantamount to rejecting the value of the ethical capital accumulated by sweatshop laborers. This not only deprives the boycotters of affordable goods and services, but also, more importantly from a purely ethical point of view, deprives their would-be beneficiaries of their most promising means of livelihood and economic advancement. In other words, failing to grasp the cooperative potential embedded in the law of comparative advantage is bound to make actions grounded in ethically laudable motives both economically and ethically counterproductive. Contrariwise, fully realizing the potential in question allows for making choices that tellingly demonstrate the natural harmony between economic and ethical benefits. In this particular case, buying and, better still, actively seeking out goods produced by sweatshop laborers can not only enrich all the involved parties in a broadly utilitarian sense, but also give the buyers the moral satisfaction of constructively supporting the most needy, and give the sellers the moral satisfaction of exercising their comparative economic advantage grounded in their aforementioned absolute ethical advantage.

To sum up, participating in market democracy and regularly “voting with one’s money” enables one to engage in the kind of consumer activism that is as ethically impassioned as it is economically informed.13 What is crucial in this context, however, is the realization that one’s ethical passion can be transformed into ethical efficiency only through the intermediation of sound economic knowledge, that is, knowledge concerning the cooperative capabilities of human action in a world of scarce resources and uncertain outcomes.

Another conspicuous illustration of the fact that solid economics is a necessary prerequisite of solid ethics is the counterproductive nature of so-called positive discrimination. One might initially believe that treating members of historically disadvantaged groups on preferential terms is a morally praiseworthy effort insofar as it compensates them for the injustices suffered by their ancestors. However, if one’s goal is to allow such individuals to fulfill their genuine economic and social potential, then employing unambiguously anti-meritocratic means for that purpose is more than likely to backfire, thus casting serious doubt on the moral worth of the whole enterprise.

Moreover, it appears that, once again, it is precisely economics that is singularly capable of highlighting the ethically self-defeating character of such endeavors.14 First of all, by underscoring the crucial role performed by price signals—that is, intersubjective, quantitatively precise expressions of exchange value—it demonstrates that genuine cooperation cannot flourish where such signals are falsified by non-meritocratic admixtures. More concretely, positive discrimination is likely to distort both its beneficiaries’ view of their qualifications’ real market worth and their prospective employers’ attempts at gauging such worth. Consequently, the former will end up deprived of reliable feedback to guide the development of their careers, while the latter will be unable to develop their businesses based on a reliably high-quality workforce.

Worse still, if the beneficiaries of positive discrimination manage to get away with being paid far above their productivity for a longer period of time, they might become demoralized and willing to adopt a generally non-meritocratic attitude, whereby resorting to outright fraud is viewed as justifiable in virtue of the historical disadvantages of one’s ancestors. On the other hand, if their employers decide to keep treating them on preferential terms on account of their well-intentioned but misguided moral views, this might erode their entrepreneurial ability, thereby undermining one of the cornerstones of the cooperative potential of a free economy.

An indirect analogy could be made here with the theory of business cycles originated by the Austrian school of economics. According to this theory, business cycles occur primarily as a result of artificial credit expansion, which falsifies interest rate signals and generates clusters of malinvestments.15 It is crucial to notice here that the credit in question is fiat credit, i.e., credit created out of thin air by central banks, which, as such, is not backed by any genuine savings and any corresponding capital goods liberated from less roundabout processes of production. Consequently, the majority of investment projects financed by such credit are bound to result in failure, thereby cutting the initial boom phase short and ushering in the unavoidable bust—i.e., a period of necessary liquidations, bankruptcies, and painful readjustments in the capital structure of production.

Likewise, it might be said that positive discrimination generates “fiat skills,” “fiat merits,” and “fiat human capital,” reliance on which can lead employers to undertake overly ambitious projects. Now, again, as soon as it turns out that the qualifications and competencies supposedly exhibited by the workforce employed on such projects are purely nominal, the endeavors in question turn out to be unsustainable. However, if even in the face of such failures employers continue to follow the policy of positive discrimination on account of fearing the loss of their purported moral sensitivity, then enacting the requisite restructuring procedures could become particularly onerous and time-consuming. To put it briefly, modifying relationships involving primarily physical capital is much easier than modifying those that involve primarily human capital, since repurposing inanimate matter is much easier than reforming human character.

More generally speaking, it might be suggested that, in an important sense, ethics divorced from economics—that is, the science of what is logically possible and impossible in the realm of human action—becomes “fiat ethics,” i.e., counterproductive wishful thinking based on free-floating normative abstractions.16 In this connection, one might argue that it is no wonder that every putative moral utopia that aims to overthrow the laws of economics has a much greater potential for destruction than sincere tyranny that pays at least lip service to them.17

Yet another telling example of the dangers of engaging in economically uninformed ethical theorizing centers on the destructive consequences of promoting certain versions of the so-called stakeholder theory of business ethics.18 According to the normative variety of this theory, businesses should be seen as responsible not only to their shareholders, but also to their stakeholders, defined as all those groups of individuals who are affected by corporate operations. It appears clear that putting matters this way is so ambiguous as to invite a host of different interpretations with vastly divergent ramifications. On the one hand, the stakeholder theory may be construed as an uncontroversial observation that caring about the goodwill of customers, increasing job satisfaction of employees, and maintaining good relations with the local community is a highly reliable way of establishing a stable competitive advantage and boosting the profitability of one’s enterprise. Such an observation, far from being an invitation to a reformulation of the normative role of business, is a natural complement to the centuries-old conclusion of classical economists like Adam Smith and Frederic Bastiat that in a peaceful commercial environment relations between various social groups are inherently harmonious.

If, on the other hand, one construes the stakeholder theory as suggesting that anyone even remotely influenced by the operations of a given company should be given the right to co-decide on its policies, then one may unwittingly support the politicization of business and the consequent loss of its distinct cooperative efficiency. After all, one of the major prerequisites of actualizing the cooperative potential of society is respect for and promotion of the division of labor, whereby not only particular individuals perform specific tasks within a given business structure, but business itself fulfills a distinct social role, different than the one fulfilled by, say, families, charities or religious organizations.

More specifically, the function of commercial firms is to supply scarce goods and services in the context of relationships involving relatively high transaction costs, relatively high information asymmetries, relatively high heterogeneity of preferences, and a fairly low degree of psychological intimacy. This is why, unlike some of the other classes of entities mentioned in the preceding paragraph, commercial firms need to rely on the common denominator of the market price system in order to evaluate their performance.19 This, in turn, implies that obliging them to adopt modes of operation and criteria of evaluation characteristic of fundamentally different social structures is bound to destroy their unique competitive advantage in facilitating large-scale, complex cooperation. To put the matter somewhat facetiously, a chess player cannot become a chess champion, let alone prove to others that he in fact is one, if at the same time he is expected to be a full-time athlete, charitable worker, and religious leader.

Worse still, if every potential stakeholder is to be thought of as capable of insinuating himself into the position of an uninvited de facto co-owner of the assets of a given company,20 then businesses may become paralyzed by a particularly troublesome form of regime uncertainty.21 In other words, they may become incapable of executing their unique business visions and utilizing their distinguishing competitive advantages on account of their activities being routinely intercepted by individuals who lack both the motivation and the skills to wield entrepreneurial judgment.22 Needless to say, such a situation is bound to erode the foundations of consistent economic growth and development, by the same token destroying social well-being. Thus, once again, it turns out that one cannot credibly promote the moral interests of stakeholders unless one understands their intimate connection with the positive economic consequences of unconditionally respecting the fiduciary duty to shareholders.

Finally, ethics cannot aspire to fulfill its role of mature, systematic reflection on moral matters unless its practitioners prove themselves able to grasp the nature of more abstract and complex forms of cooperative endeavors. Among endeavors of this kind one might include such oft-maligned financial activities as stock market speculation, “junk bond” dealing, leveraged buyouts, and “hostile takeovers.” Though certainly not immune from misuse, the phenomena in question hold vast potential for boosting the scale, scope, and intensity of large-scale social collaboration.23 However, in order to realize this fact and not to succumb to counterproductive moralizing, one needs to grasp the wealth-enhancing function of professional uncertainty bearing, value arbitrage, and intertemporal resource coordination. Furthermore, this kind of knowledge—which can be furnished exclusively by economics and related disciplines—is necessary to distinguish between the uses and abuses of the aforementioned financial tools. In other words, it is necessary to distinguish between those situations in which the tools under consideration are used to fortify the capital structure of production and those in which they are used as monopolistic, politically-backed leverage in an environment of institutionalized moral hazard.24

Absent such knowledge, an aspiring ethicist is not only destined to lose sight of the moral prerequisites of extended social cooperation, but, perhaps even more regrettably, he is likely to contribute to suppressing its creative unfolding and its developmental aptitude. In sum, while economics without ethics may be a caricature, ethics without economics is a fairy tale.

THE POSITIVE RELEVANCE OF ECONOMICS TO ETHICS

The preceding is an overview of the ways in which the economic point of view crucially supplements the ethical point of view from a negative angle: that is, by clearing it of infeasible ambitions and deceptive illusions. However, its equally important role consists in pointing out the extent to which economic development opens up great scope for ethically ambitious endeavors.

Let me begin exploring this subject by making a few general remarks about the moral status of enjoying the kind of disposable income that allows one to be choosy with regard to one’s desires. Here it might be said that familiarity with even the most fundamental precepts of sound economics is usually enough to quell one’s willingness to grumble about the supposed perils of “consumerism.” Since, technically speaking, consumption—that is, obtaining the psychic satisfaction that signifies moving from a less desirable state of affairs to a more desirable state of affairs—is the purpose of all human action, there can be no system of social cooperation that is not “consumerist.” To wit, no economic system could be meaningfully designated as “producerist,” since the goal of production is consumption—even in a society of die-hard workaholics production could not function as an end in itself, but would rather be a source of a specific consumer good: namely, the satisfaction of doing one’s work.

Admittedly, it might be perfectly justifiable to criticize excessive consumption understood as unsustainable utilization of the underlying capital structure. Since continued prosperity depends on the willingness of society to save and invest enough resources to replace depreciating capital goods on a continuing basis, consistent capital consumption can be rightly condemned as economically ruinous and thus immoral from a broadly utilitarian standpoint. By the same token, moral criticism of short-sightedness, wastefulness, reckless indebtedness, and other unsustainable financial practices—as well as institutional frameworks that promote them—can be seen as a cogent denunciation of insupportable patterns of consumer behavior.25 Such criticism, however, cannot be construed as aimed against “consumerism,” since its ultimate purpose is to restore the kind of mindset that allows for preserving, or, better still, enhancing the disposable income of all individuals.

Is voicing doubts about “consumerism” entirely misguided, then? Not necessarily. One might see at least a grain of utility in it insofar as it stimulates consumers not to rest content with low-quality offers, or, better yet, with low-quality desires that such offers are addressed to. In other words, the criticism under consideration may be entirely rejected as an attack on the wealth-enhancing nature of market cooperation, but, at the same time, it may be appreciated as a reminder of its qualitative potential.

Economics studies the logical structure of all human action, not the qualitative merits of its specific instances, but it clearly recognizes the evaluative nature of all intentional undertakings. Likewise, it distinctly appreciates the fact that, in a world of scarce resources and opportunity costs, such undertakings necessarily assume a hierarchical structure, whereby needs subjectively evaluated as more urgent are necessarily attended to before those subjectively evaluated as less urgent. Thus follows the well-known lesson of the law of diminishing marginal utility: each consecutive unit of a homogenous supply of goods brings less satisfaction.

Pure economic theory can only say that much, but it can imply rather more. For example, if any given good can be said to become increasingly less useful as its supply expands, the same can be said with respect to whole categories of goods, since the way in which any given agent categorizes his wants and the objects capable of satisfying them is ultimately an entirely subjective matter. Hence, to illustrate, one might say not only that each consecutive apple is less pleasing to his palate, but also that each consecutive piece of food is less conducive to his culinary well-being.

However, by the same token, we could easily imagine the above example to go in an entirely different direction. More specifically, instead of homogenizing all food items into a single category, the agent in question could just as well heterogenize them—not only in numerical terms, but also, and far more importantly, in qualitative terms. It must be borne in mind here that, in contrast to certain overly formalistic branches of neoclassical economics, more explicitly realistic traditions of economic reasoning do not in any sense regard instability of preferences as an indication of irrationality.26 On the contrary, they see such instability as a crucial sign of personal development and experiential dynamism. Thus, it is only to be expected that as soon as one’s wants are fully satisfied on a relatively basic level, one might become interested in exploring their deeper layers and their more refined dimensions.

To return to the aforementioned example, having been feeding on apples for a substantial period of time, and having fully grasped the essential difference between hunger and satiety, one might decide that the only way to maintain one’s culinary well-being is to experience the taste of more exotic fruits. In other words, while advancing from the state of hunger to the state of satiety can be rightly seen as a matter of first urgency, it can be argued that beyond a certain point preserving (let alone increasing) the enjoyment of satiety requires endowing it with successively novel properties.

Here we are dealing with a natural qualitative extension of the law of diminishing marginal utility: just as each consecutive unit of a given good brings less utility, the same goes for each consecutive instance of satisfaction belonging to a given qualitative category. And since economic laws, understood as deductions grounded in universal categories of action, apply both to the micro and macro levels, we can see the same principle operating in the area of economic growth and development. That is to say, beyond a certain level of division of labor only specialization can further increase the productivity of the economy, beyond a certain level of capital accumulation only innovation can do the same, etc. More generally speaking, beyond a certain level of quantitative growth only qualitative development can sustain (let alone increase) the productive potential of the economy. Besides, and quite interestingly, the principle in question applies not only to consumer and producer goods, but even to money, where ever greater levels of cooperative complexity can be reached exclusively with the use of ever more qualitatively solid means of exchange.27 All in all, as befits a regularity worthy of the name of an economic law, the phenomenon under consideration appears to be consistent across the individual and social perspective.

Furthermore, the qualitative ramifications of the laws of diminishing marginal utility and diminishing returns need not be restricted to the purely subjective dimension. As I pointed out at the beginning of the present section, social cooperation can be treated as a semi-objective value insofar as it allows humankind to actualize its specific inherent potential. To borrow a somewhat grandiose phrase, it is “a purposeful utilization of a universal law determining cosmic becoming.”28 This implies that there is no necessary tradeoff between the subjective values of personal comfort and individual gratification and the objective values of character development or communal flourishing. On the contrary, inasmuch as economic growth allows for attaining the former, it can also provide a huge boost in attaining the latter.

What seems particularly interesting to note in this connection is that even purely value-free social sciences, including economics, cannot meaningfully formulate any positive theoretical statements unless they implicitly acknowledge the existence of an objectively definable human nature.29 For instance, unless one views humans as inherently rational and cooperative creatures, one cannot regard voluntary transactions as Pareto-superior, and one cannot conceive of the division of labor or the market price system as efficiency-enhancing processes. If, however, one does recognize the essentially cooperative character of human nature, then one can justifiably view economics as a science that, while remaining value-free, describes the indispensable tools and processes whereby human beings can reach the normative heights of their social existence.

Economics, understood as a formal and deductive science, can at most prove that there is no necessary tradeoff between subjective and objective values, and that the same praxeological devices used to promote the former can also be used to promote the latter. On the other hand, more empirically-oriented social sciences, such as psychology, can credibly suggest that the non-existence of the tradeoff in question is not only a logical possibility, but also an actual fact.

Maslow’s hierarchy of needs—especially in its later formulations—is an illustrative example here.30 According to this hierarchy, satisfying one’s lower-order needs is a prerequisite of advancing towards their higher-order counterparts. Needless to say, such a conclusion is perfectly in line with the claim that narrowly understood economic development need not in any way impede the pursuit of cultural, spiritual, and other broadly understood “higher ends.”

In addition, it should be noted how Maslow’s model alternates between different categories of values in its consecutive tiers. The lowest tier comprises values that are physiologically objective, such as food, sleep, and warmth—i.e., phenomena without which no life can be sustained, and which are therefore automatically sought out by all non-rational life forms. The middle tier comprises values that are paradigmatically subjective, such as individual self-esteem and the feeling of accomplishment—i.e., psychological phenomena inseparable from the context of social cooperation. It is likely this category that, according to the critics of “consumerism,” can become too bloated and overwhelming, thereby arresting human development at the merely hedonic stage. And yet, while becoming overly fixated on personal comfort treated as the ultimate end in itself is a real possibility, Maslow’s model, as well as the aforementioned qualitative extension of the law of diminishing marginal utility, clearly indicate that becoming dissatisfied with remaining on the level of purely subjective satisfaction is a real possibility too. This is so especially given the fact that, according to the hierarchy under consideration, it is its topmost levels—those comprising the objectively defined values of self-actualization and self-transcendence—that correspond to the most genuine experience of personal fulfilment.

Another illustration of the abovementioned process is provided by Kohlberg’s theory of moral development.31 In many respects similarly to Maslow, Kohlberg suggests that moral development proceeds in a hierarchical manner. More specifically, he distinguishes between the pre-conventional, conventional, and post-conventional stages that need to be traversed if one is to attain full moral maturity.

One might argue that, with no loss of the relevant psychological insights, the stages in question could be reconceptualized as subjective, intersubjective, and objective. While operating on the purely subjective level, a human being follows rules out of unreflective conformity, fear of punishment, and the desire for narrowly understood self-preservation. Then, as its moral maturity progresses, it moves to the intersubjective level, which involves respecting the conventions of social cooperation and, consequently, allows for pursuing one’s “enlightened self-interest”—that is, promoting the interests of others so that others might promote one’s own interests.32 Finally, as one begins to realize that social cooperation is not just an institutional tool for bringing about mutual desire satisfaction, but also one of the principal schools of virtues, one begins to approach the objective level of moral advancement. Thus, once again, oversaturation with the more mundane effects of a healthy economic order turns out to pave the way to unlocking its full qualitative potential.

THE POSITIVE RELEVANCE OF ETHICS TO ECONOMICS

The foregoing remarks emphasize the fact that the greater the scale, scope, and depth of economic sophistication and collaborative complexity, the greater the prospects for undertaking concerted efforts aimed at the attainment of normatively desirable goals. However, it is also worth noting in this connection that as such sophistication and complexity grow, their maintenance requires increased ethical awareness even on the purely operational level.

For instance, as the organizational intricacy of business enterprises grows and as specialization and division of labor reach ever higher levels of arcane detail, it becomes increasingly difficult to evaluate the performance of managers and other high-level employees on the basis of their objectively defined technical expertise. Hence, firm owners are increasingly expected to raise such employees to the rank of proxy-entrepreneurs—i.e., agents capable of exercising “derived entrepreneurial judgment,” whose actions thereby become directly evaluable in terms of the profit-and-loss criterion.33 In other words, instead of following strict rules laid down by their bosses, such agents can freely manage parts of the company’s assets as long as they remain capable of boosting their long-term value. Since, however, they typically possess little to no ownership stake in the companies that employ them, giving them such broad discretionary powers generates substantial moral hazard. And while there exist numerous purely structural methods of addressing the issue of moral hazard within business firms,34 it would seem that none of them is nearly as effective as that which consists in relying exclusively on individuals who possess adequate ethical capital.

More specifically, it might be argued that only those individuals who can be verified as sufficiently trustworthy, responsible, and otherwise upstanding should be promoted to the position of proxy-entrepreneurs. Furthermore, it might be suggested that the best way to generate ethical capital among one’s employees is to immerse them in a value-oriented corporate culture solidified by the exemplary conduct of the firm’s boss. If the overall culture of a given company is oriented primarily towards professional mastery,35 with monetary profits serving chiefly as its proof rather than as its goal, then even the company’s non-owning staff might be immune to the temptation of sacrificing its long-term reputation for the sake of short-term ill-gotten gains. Thus, it turns out that focusing on ethical excellence may be necessary even in a merely instrumental sense if a sufficiently complex business entity is to retain its operational effectiveness.

Similarly, accumulating ethical capital may be rightly seen as the best method of generating genuine goodwill, which, in turn, helps in addressing transactional challenges associated with issues such as information asymmetry. Information asymmetry, far from being an exceptional circumstance of cooperative failure, can be plausibly regarded as a ubiquitous feature of market relations, where the seller typically knows far more about the nature of the sold product than the buyer does.36 Hence, there is nearly always an unbridgeable “quantitative” difference between buyers and sellers in terms of their possession of the relevant data, and its potentially detrimental effects can be neutralized only by the application of a predominantly qualitative solution—namely, by establishing durable bonds of trust with one’s prospective clients.37

It should be noted that the existence of such bonds can successfully address transactional difficulties related to various forms of information asymmetry, including not only those pertaining to product quality, but also those pertaining to the quality of customer relations. For instance, if a reputable entrepreneur suddenly finds himself confronted with a foreign dumper, who attempts to intercept his customers by offering ultra-low prices, then the reputation of the former may dissuade them from making the switch. After all, it is only to be expected that the dumper will raise his prices significantly as soon as he manages to drive his competitor out of the market, thereby getting rid of his now unneeded “quantitative” advantage and offering his newfound patrons no qualitative compensation. Thus, it is in the interest of the patrons in question to continue dealing with the original entrepreneur, who has already made himself known as a reliable and upstanding member of the market, unlikely to engage in bait and switch schemes.

In other words, projecting a credible ethos of “corporate social responsibility”—treated not as ideological window dressing, but as an honest commitment to creating a justifiably well-respected brand—can be seen as a crucial source of enduring competitive advantage,38 particularly in a global, highly specialized and organizationally complex market environment.

THE NEGATIVE RELEVANCE OF ETHICS TO ECONOMICS

Finally, it needs to be pointed out that ethical reflection allows for identifying various essential normative preconditions for the emergence of more advanced forms of social cooperation described by the principles of economics.

It needs to be noticed in this connection that while the most fundamental among those principles—such as the law of supply and demand or the law of opportunity costs—can be formulated even in reference to Robinson Crusoe isolated on his desert island, the more complex ones—such as the laws of absolute and comparative advantage—can manifest their operation only in an environment of extensive interpersonal interactions. For such interactions to take place, however, specific normative attitudes and the underlying ethical values need to be present, sufficient mutual trust being the chief among them.39 In other words, understanding economic theory is not a sufficient condition of reaping gains from trade—the presence of appropriate informal institutions that constitute the moral culture of a given society is equally important in this context. Absent such institutions, their formal counterparts aimed at facilitating beneficial economic processes are unlikely to exhibit “institutional stickiness”—that is, they are unlikely to be accepted as a permanent part of a spontaneously developing social organism.40

This, nonetheless, does not change the fact that understanding economic theory is a necessary condition of reaping gains from trade—even in view of their normative preconditions economic phenomena remain subject to the underlying causal laws, so regardless of its level of trust an autarkic society cannot reach the degree of cooperative efficiency and prosperity characteristic of societies that participate in the international division of labor.

Similarly, even if the members of a given community grasp the paramount role of deferred gratification and capital accumulation in the process of consistent economic growth and development, they cannot make practical use of it unless they acquire and deeply internalize the classical moral virtues of temperance and frugality. Furthermore, insofar as they allow these virtues to deteriorate in an already well-developed economy, for instance by increasingly relying on debt and leverage rather than equity, they expose the economy in question to systemic fragility, which can culminate in cascading bankruptcies and other manifestations of the debt domino effect.41

Yet another illustration of the negative relevance of ethics to economics consists in the significance of comprehending the normative core of the job of the entrepreneur. The logical effects of various kinds of entrepreneurial activity can be elucidated in purely economic terms—some entrepreneurs are conceptualized as revolutionary agents who upset the existing market equilibrium by introducing innovations, while others are regarded as coordinating agents who restore market equilibrium by engaging in price arbitrage, these two modes of operation sometimes being seen as complementary and mutually reinforcing.42 The same goes for the functional preconditions of entrepreneurial action—pure economic analysis can demonstrate that entrepreneurs, qua uncertainty bearers, cannot be cogently thought of as propertyless deliberators, but only as owners of capital structures of production, capable of earning profits and incurring losses.43

However, the above observations, while necessary, are nonetheless insufficient for creating and maintaining the kind of institutional and organizational environment in which entrepreneurship can flourish and serve as an essential engine of economic growth and development. An additional indispensable element in this setting is a widespread recognition of the dignity of the entrepreneurial class and other representatives of bourgeoisie professions.44 Only given the prevalence of such a mindset can a sufficient number of individuals be enticed into entrepreneurship and persistently strive for the development of relevant competencies. Moreover, it should be noted that the competencies in question contain a crucial ethical core in its own right, since they correspond directly to the classical moral virtues of courage and prudence, the former being necessary in the context of introducing innovations and the latter being necessary in the context of spotting unexploited profit opportunities and deploying scarce resources under conditions of uncertainty.

In sum, economics by itself can describe the immutable laws of social cooperation and their logical strictures, but it cannot fully anchor their concrete manifestations in the actual world of human affairs. To do this, it needs to partner with those disciplines that focus on the normative values and attitudes whose presence ensures that the aforesaid laws are productively utilized rather than vainly rebelled against—and in this category ethics stands as the most important field to consider.

CONCLUSION

To conclude, economics can be defined as value-free, but value-relevant. As such, it delimits the scope of what is logically possible in the realm of human action, thereby putting disciplining constraints on ethical thinking and allowing it to follow strictly the principle of „ought implies can.” By the same token, however, it reveals the ethical potential of social cooperation, which demonstrates a natural complementarity between utility and goodness, between prosperity and virtue, and between subjective satisfaction and objective flourishing. This is not to say that the complementarity in question obtains automatically—far from it, its establishment requires not becoming overly enamored with the low-hanging, exclusively hedonic fruits of the extended social order and not losing sight of its qualitatively deeper perspectives. Still, this realization too requires familiarity with the logical workings of such an order, which can be furnished solely by the study of economics.

Ethics, on the other hand, can be defined as value-laden, but fact-relevant. As such, it points out that various economic phenomena have their necessary ethical preconditions, thereby enriching economic analysis and making it institutionally and culturally realistic. To take a specific example, purely positive economic developments such as patterns of comparative advantage or capital accumulation are grounded in essential normative foundations such as sufficient mutual trust, diligence, and thrift. Furthermore, and equally importantly, ethics provides indispensable tools to solve organizational problems that inevitably appear in the context of managing complex structures of social cooperation.

In sum, economics and ethics complement and reinforce each other’s analytical potential, but only provided that they maintain their strictly defined methodological and substantive differences. Nevertheless, it appears that ethical analysis devoid of economic considerations is more likely to go astray than economic analysis devoid of ethical considerations.45 This is probably because ethics deals with a specific subset of cooperative endeavors, while economics deals with cooperative action as such. In other words, sound economic investigation, conscious of its professional logic, is less likely to fall prey to separating “oughts” from “cans,” since it inherently abhors praxeological impossibilities.

And yet, as I have tried to argue throughout the present paper, economics cannot be entirely decoupled from ethically relevant notions. Its elucidation of the intricacies of the market process, whereby self-interested mutuality engenders intersubjectively ascertainable efficiency, can hardly be regarded as having no moral import. Thus, one is almost tempted to designate economics as the meta-ethics of cooperation—i.e., the science that, while being strictly non-normative, nonetheless expounds the logical essence of normative coordination.

The difficulty of finding the right kind of terminology in this context testifies to the complexity and multidimensionality of the relationship between economics and ethics. However, it seems necessary to see this relationship in a clear light if the two disciplines under consideration are not to sabotage each other’s successes, serving instead as the twin pillars of materially and spiritually robust social development.

1Murray Rothbard, “Value Implications of Economic Theory,” American Economist 17, no. 1 (1973), pp. 35–9.

2Paul Heyne, Peter Boettke and David Prychitko, The Economic Way of Thinking, 13th ed. (Upper Saddle River: Prentice Hall, 2013).

3Deirdre McCloskey, Bourgeois Equality: How Ideas, Not Capital Or Institutions, Enriched the World (Chicago: University of Chicago Press, 2016).

4John B. Davis and Wilfred Dolfsma, eds., The Elgar Companion to Social Economics, 2nd ed. (Cheltenham, UK: Edward Elgar, 2015).

5Joseph Heath, “The contribution of economics to business ethics,” in The Routledge companion to business ethics, ed. E. Heath, B. Kaldis and A. Marcoux (New York: Routledge, 2018).

6Luigino Bruni and Robert Sugden, “Reclaiming Virtue Ethics for Economics,” Journal of Economic Perspectives 27, no. 4 (2013), pp. 141–64.

7Ludwig von Mises, The Ultimate Foundation of Economic Science: An Essay on Method (Indianapolis: Liberty Fund, 2006 [1962]).

8Joseph T. Salerno, “Menger’s causal-realist analysis in modern economics,” Review of Austrian Economics 23, no. 1 (2010), pp. 1–16.

9Gerard Casey, “Ethics and Economics: Friends or Foes?” in Human Destinies: Philosophical Essays in Memory of Gerald Hanratty, ed. F. O’Rourke (Notre Dame: University of Notre Dame Press, 2012).

10Insofar as the extent of social cooperation can be seen as a proxy for social welfare, and given the assumption of the impossibility of making scientifically meaningful interpersonal comparisons of utility, it is unsurprising that the only changes that the causal-realist tradition treats as genuinely Pareto-superior are the ones that are grounded in voluntarily demonstrated preferences. Consequently, a purely contractual system of market transactions is treated by the tradition in question as the only system that can be objectively identified as welfare-enhancing. See Jeffrey M. Herbener, “The Pareto Rule and Welfare Economics,” Review of Austrian Economics 10, no. 1 (1997), pp. 79–106.

11Peter Boettke, “Controversy: Is Economics a Moral Science? A Response to Ricardo F. Crespo,” Journal of Markets & Morality 1, no. 2 (1998), p. 215; Murray Rothbard, Man, Economy, and State: A Treatise on Economic Principles with Power and Market, Scholar’s Edition (Auburn, AL: Ludwig von Mises Institute, 2004 [1962]), p. 1297.

12Benjamin Powell, Out of Poverty: Sweatshops in the Global Economy (New York, NY: Cambridge University Press, 2014).

13John Tomasi, Free Market Fairness (Princeton, NJ: Princeton University Press, 2012).

14Walter Block, The Case for Discrimination (Auburn, AL: Ludwig von Mises Institute, 2010).

15Joseph T. Salerno, “A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis,” Quarterly Journal of Austrian Economics 15, no. 1 (2012), pp. 3–44.

16The definition of „fiat ethics” used here should be distinguished from that employed by Hülsmann (see Jörg Guido Hülsmann, “The Production of Business Ethics,” Journal of Markets & Morality 11, no. 2 [2008], pp. 275–99). The latter uses the term in question to designate ethical rules imposed by legislative fiat, while I use it to designate ethical rules adopted by means of “mental fiat,” i.e., without due consideration given to their logical viability. Nevertheless, it is fair to say that these two meanings are interrelated, since legislative fiat is often tantamount to mental fiat as far as the counterproductivity of its consequences is concerned.

17Rudolph J. Rummel, Death by Government (New Brunswick, NJ: Transaction, 1994).

18John Hasnas, “Whither Stakeholder Theory? A Guide for the Perplexed Revisited.” Journal of Business Ethics 112, no. 1 (2013), pp. 47–57.

19Ludwig von Mises, Profit and Loss (Auburn, AL: Ludwig von Mises Institute, 2008 [1951]); Art Carden, “A Note on Profit, Loss, and Social Responsibility,” New Perspectives on Political Economy 5, no. 1 (2009), pp. 1–8.

20Jörg Guido Hülsmann, “The Political Economy of Moral Hazard,” Politická ekonomie 54, no. 1 (2006), pp. 35-47.

21Robert Higgs, “Regime Uncertainty,” Independent Review 1, no. 4 (1997), pp. 561–90.

22Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge, UK: Cambridge University Press, 2012).

23Stephen Hicks, Defending Shylock: Productive Work in Financial Markets (CEE / Ockham’s Razor, 2010).

24David Stockman, The Great Deformation: The Corruption of Capitalism in America (New York: Public Affairs Press, 2013).

25Jörg Guido Hülsmann, “Cultural Consequences of Monetary Interventions,” Journal des Economistes et des Etudes Humaines 22, no. 1 (2016), pp. 77-98; Daniel J. Smith and Sean P. Alvarez, “The Demoralizing Trap of Keynesianism,” Journal of Markets & Morality 20, no. 1 (2017), pp. 55-68.

26Israel M. Kirzner, “The Entrepreneurial Market Process—An Exposition,” Southern Economic Journal 83, no. 4 (2017), pp. 855–68.

27Philipp Bagus, “The Quality of Money,” Quarterly Journal of Austrian Economics 12, no. 4 (2009), pp. 22–45.

28Ludwig von Mises, Human Action, 4th edition, revised. (San Francisco: Fox and Wilkes, 1996 [1949]), p. 145.

29Gerard Casey, “Ethics and Human Nature,” American Catholic Philosophical Quarterly 77, no. 4 (2003), pp. 521–33.

30Mark E. Koltko-Rivera, “Rediscovering the later version of Maslow’s hierarchy of needs: Self-transcendence and opportunities for theory, research, and unification,” Review of General Psychology 10, no. 4 (2006), pp. 302–17.

31Lawrence Kohlberg, Essays on Moral Development: Vol II. The Psychology of Moral Development: The Nature and Validity of Moral Stages (San Francisco: Harper & Row, 1984).

32However, as stated earlier, since engaging in social cooperation requires meeting certain objective conditions, such as displaying respect towards the bodily integrity and private property of others, the moral level under consideration might as well be called semi-objective rather than merely intersubjective.

33Kirsten Foss, Nicolai J. Foss, and Peter G. Klein, “Original and derived judgment: An entrepreneurial theory of economic organization,” Organization Studies 28, no. 12 (2007), pp. 1893–912.

34Eugene Fama and Michael Jensen, “Separation of Ownership and Control,” Journal of Law and Economics 26, no. 2 (1983), pp. 301–25.

35G. P. Manish and Daniel Sutter, “Mastery versus profit as motivation for the entrepreneur: How crony policies shape business,” Journal of Entrepreneurship and Public Policy 5, no. 1 (2016), pp. 95–112.

36Thomas DiLorenzo, “A Note on the Canard of ‘Asymmetric Information’ as a Source of Market Failure,” Quarterly Journal of Austrian Economics 14, no. 2 (2011), pp. 249–55.

37Daniel B. Klein, ed., Reputation: Studies in the Voluntary Elicitation of Good Conduct (Ann Arbor: University of Michigan Press, 1997).

38Michael E. Porter and Mark R. Kramer, “Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility,” Harvard Business Review 84, no. 12 (2006), pp. 78–92.

39Francis Fukuyama, Trust: the social virtues and the creation of prosperity (London, UK: Hamish Hamilton, 1995).

40Peter Boettke, Christopher Coyne, and Peter Leeson, “Institutional Stickiness and the New Development Economics,” The American Journal of Economics and Sociology 67, no. 2 (2008), pp. 331–58.

41Nassim N. Taleb, Antifragile: Things That Gain from Disorder (New York: Random House, 2012).

42Randall Holcombe, “Entrepreneurship and Economic Growth,” Quarterly Journal of Austrian Economics 1, no. 2 (1998), pp. 45–62.

43Joseph T. Salerno, “The Entrepreneur: Real and Imagined,” Quarterly Journal of Austrian Economics 11, no. 3 (2008), pp. 188–207.

44Deirdre McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (Chicago: University of Chicago Press, 2010).

45Helmut Schoeck, Envy: A Theory of Social Behaviour (Indianapolis: Liberty Press, 1987 [1966]).