The Ethical Economics
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AN ECONOMIC DEFINITION OF GREED

We can use the ethical behaviors embodied in the assumptions of the neoclassical model of markets to distinguish enlightened self-interest from greed.   Table 1 shows a list of ethical behaviors (stated positively and negatively, i.e., both what to do and what to avoid) that serve to promote economic efficiency. All of these are implicit in the standard model of perfect competition even though the neoclassical model is often portrayed as being devoid of ethical content.  In reality, the neoclassical model, while it clearly displays the self-interest motivation of producers and consumers to maximize profit and utility, does not as clearly highlight these implicit ethical constraints on self-interest needed to assure maximum efficiency. 

TABLE 1
Ethical Principles Important for Economic Efficiency
Do’s Don’ts
Be kind to others No violence; No coercion
Respect the property rights of others No theft or stealing
Be honest. Keep promises. Fulfill contracts No deception, No lying, No cheating
Allow market freedom No monopolization; No trade restraint; No discrimination
Share information No secrecy, No intellectual property
Be a good neighbor Control secondary external harm
Be loyal to family, community and country (in support of efficiency) No betrayal to your groups
Be courageous (in support of efficiency) No cowardice
Respect authority (in support of efficiency) No insubordination

 

Enlightened self-interest can be defined as the behavior of individuals or businesses who pursue profit and utility while adhering to these ethical principles.  This behavior, when adopted by everyone in the economy, promotes economic efficiency.  At the same time, income and wealth would be more equal since differences would be based solely on differences in economic contribution.  Resources would be allocated so that the resource costs of production were minimized.  Externalities would be compensated for under cooperative agreements.  Information would be widely shared, accurate, and made available to everyone who desires it.  Individuals would be loyal to others in their families, businesses, and countries, but only to facilitate the efficient operation of these units, not to take advantage of, or exploit other groups.  When in need of self-defense, individuals would courageously sacrifice themselves for the good of the group or country.

In contrast, greed can now be defined as the behavior of individuals or businesses who violate any of these ethical principles to gain greater individual profit or reward. In other words, greed is the equivalent of “unfettered” or unconstrained self-interest.  Profit made by violating these ethical principles reduces economic efficiency relative to the case when all pursue enlightened self-interest.  Thus, greedy market participants benefit at the expense of the larger group.  If the greedy merchant is originally wealthier than those who lose from his actions, then the actions will also increase inequality.  Thus, unequal income and wealth distributions may result from greedy behavior on the part of market participants.  It is worth highlighting, though, that the presence of inequality alone does not automatically imply greed since inequality of income and wealth is also driven by differences in natural productive abilities even in the absence of greedy behavior.

This definition of greed captures the complaint that many economics critics have about the stereotypical description of homo economicus (economic man); namely that the unfettered pursuit of self-interest will result in socially unacceptable outcomes.  Indeed, it will!  However, unfettered self-interest is not the behavior that is being described in the standard neoclassical model. Suggestions by economists or others that the homo economicus assumption means that individuals can do anything at all they perceive to be in their own best interest is a misunderstanding of the neoclassical paradigm. Unfortunately, this misunderstanding has been enabled by the economics discipline’s unwillingness in recent decades to emphasize the role of ethical behavior in promoting economic efficiency especially when teaching economics principles. 

Steven Suranovic, December 1, 2019

WHY CALL IT "ENLIGHTENED" SELF-INTEREST?

Harold Demsetz (1969) referred to perfect competition as a kind of “economic nirvana.” This reference to Buddhism provides a useful analogy.  Nirvana, a Buddhist concept describing a state of personal enlightenment, is something to be sought by individuals but is very difficult to achieve.  In achieving nirvana, one becomes Buddha.  Similarly, perfect competition models are like nirvana because they describe an economic condition that, in reality, is all but impossible to achieve.  Nevertheless, economic models, much like Buddhist teachings, can help us to understand conditions that can guarantee a more perfect or “enlightened” economy. 

To reach economic nirvana then, self-interest must be constrained by ethical behavior, hence the use of the term "enlightened self-interest."

     

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