ETHICAL ISSUES IN ECONOMICS Ethical Issues in Economics From Altruism to Cooperation to Equity M. Teresa Lunati Senior Lecturer in Economics Bolton Institute Bolton First published in Great Britain 1997 by MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 6XS and London Companies and representatives throughout the world A catalogue record for this book is available from the British Library. ISBN 0-333-67366-2 First published in the United States of America 1997 by ST. MARTIN'S PRESS, INC., Scholarly and Reference Division, 175 Fifth Avenue, New York, N.Y. 10010 ISBN 0-312-17496-9 Library of Congress Cataloging-in-Publicalion Data Lunati, M. Teresa, 1958- Ethical issues in economics: from altruism to cooperation to equity / M. Teresa Lunati. p. cm. Includes bibliographical references and index. ISBN 0-312-17496-9 (cloth) 1. Economics—Moral and ethical aspects. I. Title. HB72.L86 1997 174'.4_<|c21 97-7118 CIP © M. Teresa Lunati 1997 All rights reserved. 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This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. 10 9 8 7 6 5 4 32 06 05 04 03 02 01 99 98 Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire Contents List of Tables viii List of Figures ix Preface x Acknowledgements xiii Introduction 1 1. Altruism, Rationality and Morality 9 Introduction 9 1.1 Morality as 'Altruism cum Rationality' 10 1.2 Altruism and Rationality 12 1.3 Morality and Rationality 14 1.4 Moral Behaviour and the 'Invisible Hand', and Individual Freedom 15 1.5 Summary 18 2. Economic, Socio-Economic and Moral-Economic Approaches to Altruism 20 Introduction 20 2.1 Standard Economic Approaches to Altruism 21 2.2 Alternative Socio-economic and Moral-economic Approaches to Altruism 25 2.3 Summary 29 3. (Non-Altruistic) Treatment of Altruism in Some Recent Economic Works 31 Introduction 31 3.1 Recent Articles Selected 32 3.2 The Articles' Modelling of Altruism 33 3.2.1 Altruism as a 'Preference' in the Utility Function 33 3.2.2 Altruism as Cooperative Behaviour 35 3.3 Allocative Inefficiencies, Exploitability and 'Moral Hazard' of Altruism 36 3.4 Altruism as a quid pro quo 41 vi Contents 3.5 Altruism as a Genetically or Culturally Inherited Trait 43 Appendix 3.1 A 'Prisoner's Dilemma* with Altruism and/or Trust or Assurance 47 Supplement: On Altruism, Fitness, Intelligence and Poverty 50 Introduction 50 53.1 The Economist's and Sociobiologist's Altruism and Fitness 50 53.2 From Altruism to 'Pauper Homo Economicus' 52 53.3 Conclusion 57 Appendix S3.1 A Sketch of the Model 57 4. Ethical and Political Non-Neutrality of Neoclassical Economics 59 Introduction 59 4.1 Some Thoughts on the 'Prisoners' Dilemma' and 'Free-Rider' Problem 62 4.2 On the Ethical Non-Neutrality of the 'Selfishness' Assumption 63 4.3 Some Implications 64 5. Ethics, Politics and Economics 71 Introduction 71 5.1 Economic Research 73 5.2 Economic Teaching 75 5.3 Economic vs Weather Forecasting 78 5.4 Some Semantic (or not so) Issues in Economics 79 Supplement: Is the 'Dismal Science' a Corrupting One as Well? 82 Introduction 82 55.1 Possible Explanations for Economists' Observed 'Bad' Behaviour 83 55.2 Reasons for Concern 87 6. Ethics, Game Theory and Laboratory Experiments 89 Introduction 89 6.1 From Game Playing to Game Theory 89 Contents vii 6.1.1 From Playing Games to Working ... 90 6.1.2 ... to Game Theory 90 6.2 Concern for Others in Games versus Real-life 92 6.3 Laboratory Experiments and 'Mixed' Results 95 6.4 Teleological versus Deontological Ethics 97 7. Competitive vs Cooperative Individuals and Moral Principles of Cooperation 100 Introduction 100 7.1 Game Theory, Rationality and Cooperation 101 7.2 Competitive Individuals: Prisoner's Dilemma and Other Social Dilemmas 105 7.3 Cooperative Individuals: Natural or Command Cooperators 108 7.4 Summary 117 Appendix 7.1 Description of Social Dilemmas 118 Appendix 7.2 Asymmetric Games among 'Competitive' Players 119 8. Efficiency and Equity: A Short-Run, Short-Sighted Trade-Off 120 Introduction 120 8.1 Efficiency, Equity and the 'Paradox of Greed' (or Inequality) 124 8.2 Digression on Charities 126 8.3 Formal Relationship between Efficiency and Income Distribution 126 8.4 Causality between Efficiency and Distribution 128 8.5 Economy's Trajectory 129 8.6 Income Distribution in the Four Regions: a Simple Model 132 8.7 Conclusions 136 Concluding Notes 139 Notes 144 References 173 Index 185 List of Tables 3.A1 The Prisoner's Dilemma 47 3.A2 An Asymmetric Assurance Game 48 3.A3 Illustrative Examples of an 'Altruist' *s Prisoner's Dilemma 49 7.1 'Competitive' Individuals: (Two-player, Two-strategy) Social Dilemmas 107 7.2 'Cooperative' Individuals: The Resolution of Dilemmas: Cooperation is the Best Individual and Collective Outcome 114 8.1 Rich-Poor 'Game' over (e, d): Scenario (a) 135 8.2 Rich-Poor 'Game' over (e, d): Scenario (b) 135 8.3 Rich-Poor 'Three-strategy Game' over (e, d): Scenario (a) 136 VIII List of Figures 2.1 A Taxonomy of Altruism 30 7.1 'Competitive' vs. 'Cooperative' Players: Payoff Rankings and Outcomes 115 8.1 Efficiency and Distribution 127 8.2 The Economy's Four Regions 130 8.3 Ten Individuals' Income Distribution 132 IX