HONESTY

Another ethical principle needed to assure efficient market activity is to refrain from lying, or otherwise misrepresenting one’s products or one’s intention to trade.  Economic models generally assume perfect information.  This assumption is included because a person needs to know, accurately, what is being received in trade and must be able to judge how valuable the products are to him or her.  More specifically a person must be able to determine precisely how much utility the consumption of a product acquired in trade will generate.  In contrast, the possibility of deception, which can only occur if information is imperfect, enables one trader to fool another into a transaction they would otherwise not want to make given accurate information.  Such an outcome is tantamount to theft and would result in a win-lose situation with the deceiver gaining at the expense of the deceived.  This is despite the fact that the trade may have been made voluntarily because the deceived party was expecting a favorable outcome.  Regardless, a trade made with deception will be win-lose, will inhibit further market activity (deceived traders will be reluctant to return to the market), and will therefore cause a subsequent reduction in economic efficiency. 

One other related ethical principle is a rule to keep one’s promises.  Frequently, trade extends over time with one side of the transaction occurring now and the other side occurring later.  For example, a loan is a transaction in which money is given to another person now, but with a promise to repay a larger amount of money (principal plus interest) in the future.  Alternatively, a supplier may promise to ship a specified quantity of an item at a certain level of quality.  These promises, often written down, become a contract.  Thus, another way to state this principle is that individuals agree to fulfill their promises and honor contracts.   Failure to do so means that the quid pro quo of exchange is not honored and one party gains at the expense of the other.  This is another win-lose outcome that, if perpetuated, will inhibit market activity and thereby result in economic inefficiencies.

Steven Suranovic, December 1, 2019

• Respect for Property
  • The Role of Private Property
    in a Capitalistic Market Economy
    
• Honesty
• Competition - Freedom to Enter
• Freedom of Information
• Good Neighborliness
• Loyalty/Patriotism/Courage
• Inequality
• Altruism/Charity

• An Economic Definition of Greed

Ethical Principles
Promoting Economic Efficiency

• Be Honest; Keep Promises; Fulfill Contracts
  • Do not deceive others
  • Do not lie
  • Do not cheat

 

Why?

• Efficient trades require that traders receive what they expected to receive when they agreed to exchange.
• Receipt of unexpected products or non-fulfillment of contracts makes trade win-lose.

 

RELATED ARTICLES

• The Market for Honesty, by Dwight R. Lee, Foundation for Economic Education.