Posts Tagged ‘Economics and Ethics’

Economic incentives are no substitute for ethics

October 20, 2013

“Yves Smith” wrote an important post on her naked capitalism web log about the claim that economic incentives can be a substitute for ethics and morals.

Economics as it usually is taught considers moral values only as one of the factors that influence free choice.   A few make a specialty of writing books and articles purporting to show that acting on moral intuition always does harm, and that self-interest always works to the greater good.

It is true enough that good intentions can backfire if there is no reality check.  That does not mean simplistic economic goals such as “maximize shareholder value” are a substitute for a moral code.   In our complex economy and big organizations, actions and decisions are so far removed from their consequences that it is impossible to design a set of economic incentives that will automatically generate the common good—especially when the structure of economic incentives is rigged to benefit those who already have economic and political power.

As Yves Smith wrote:

Over the course of my life, one of the side effects of the increased infiltration of economic-style thinking into more and more walks of life has been a decline in a sense of social responsibility among what passes for our elites.

Yves Smith

Yves Smith

To the extent that anyone is tasked to see that outcomes are fair, it appears to default to government (food stamps, early childhood education programs, prohibitions against workplace discrimination, etc).

But at the same time, we’ve also been on the receiving end of a forty-year campaign to discredit, co-opt and shrink government. One proof of this pudding is that formerly competent regulators like the SEC and FDA are shadows of their former selves.

The reason the lack of concern with ethics is a focus is that ethics are an important, perhaps the most important, guide for managing complex systems.

One of the points that John Kay argues persuasively in his book Obliquity is that most systems are so complex that we cannot map an efficient path through them. He’s taken pairs of companies in the same industry, similarly endowed, one of which focused on maximizing shareholder value, the other which set a richer set of goals which seldom included making shareholders wealthy. The ones with the loftier aspirations also did better for stockholders.


Highly complex societies don’t simply have rising energy costs, they also have increasingly high information and communication burdens. Those larger spans of control and the difficulties of monitoring make it hard to get incentives right.

It’s brutally hard to define rewards and checks well when you have to manage from afar, through reports, infrequent meetings, and results that depend on environmental and competitive conditions, not just skill and effort.

There just aren’t good substitutes to the owner who grew up in a business, knows the industry well, knows his people and their job requirements intimately, and can reprimand bad behavior and give rewards based on direct observation.

The U.S. Constitution establishes the principle of separation of church and state, which means the government should be neutral between one religion and another.  But this does not mean individuals should be ethically and morally neutral.

One mistake we liberals make is that we try to reduce all issues to procedural questions, rather than frankly stating our moral principles and making a case for them.  This disarms us morally against those who want to bring the values of for-profit corporations into all walks of life.  We make arguments on grounds of procedure or economic efficiency rather than stating our real reasons.

Click on Ethics and Complex Systems to read Yves Smith’s whole post.