Economic Ethics

The Application of Moral Standards (Norms) in the Economy

An Article in the Compendium of Market-Based Social-Ecological Economics

Key issues in view of the neoliberal crisis:
How can we guarantee employment and fair income?
How can we protect the environment effectively?
How should we shape the economic globalization?
What should the economic sciences contribute?
What must be the vital tasks of economic policy?
How can we legitimize economic policy democratically?

Click here for the list of all articles: Compendium
Click here for the German-language version: Wirtschaftsethik

Table of Contents

  1. Overview
  2. Philosophy and Economy
  3. The Universality of Economic Morality
  4. The Practical Implementation of Moral Standards
  5. The Dependence of Business Ethics
  6. The Regulatory Framework as a Haven of Morality
  7. The Social-Ecological Framework of Regulations
  8. The Immanent Immorality of the Neoliberal System

1. Overview

WirtschaftsethikJPG03The theoretical agreement on moral standards is still relatively easy to achieve within a cultural sphere. However, practical implementation of moral standards in the economy often fails because of the self-interest of powerful and capital-owning groups. To avoid switching to ineffective moral appeals and self-commitments of economic players, the existing moral insights must be specifically anchored in an economic policy framework as rules stipulated as part of the democratic process. In other words, the rules must provide incentives for moral acting and must penalize immoral acts by imposing high prices upon the players. Thus moral deficits need no longer be assigned to individual players, but can be prevented from the outset by developing appropriate rules. This is how individual moral acting can be virtually enforced by means of an economic policy framework.

2. Philosophy and Economy<

WirtschaftsethikJPG02Ethics is a philosophical discipline concerned with the critical review of prevailing standards (the prevailing morality) and the search for new standards of human activity. Since Greek antiquity, ethicists have been driven by the idea of fathoming the timeless good in human coexistence and helping it to break through. Economic ethics, which is interdisciplinary located between philosophy and economics, deals with the question of how the respectively recognized standards, especially those of human rights, are to be applied to economic processes and the actions of economic players and how economic activity is to be legitimized thereby. Since every citizen is at least involved in economic processes as a consumer, but if possible also as a producer (as an entrepreneur or employee), economic ethics has overall social significance – especially under the conditions of the neoliberal economic globalization. For further details I recommend the article Economic Globalization.

As a concrete economic policy objective, sustainable social welfare thus becomes the focus of attention. It can be defined as the welfare optimum to be aimed for by four criteria: (1) a high degree of participation of citizens in economic life (full employment), (2) a fair share of the economic outturn to ensure the livelihood of every citizen, (3) a high degree of equal distribution of income, wealth and productive capital, as well as (4) a high degree of sustained preservation of natural resources (environmental protection). See also the article Sustainable Social Welfare.

3. The Universality of Economic Morality

The moral standards prevailing or recognized in a society cannot be relativized. The economic morality in force must therefore be in harmony with general moral concepts if it is to serve the welfare of society and not run the risk of exerting a corrosive influence beyond its sphere. Economic science, which is a social science, has the responsibility to promote this harmony and corroborate it theoretically. However, the temptations for immoral behavior are nowhere greater than in economic transactions – simply because the lures of power and money can form a uniquely unholy alliance in economic life. The political efforts must therefore be all the greater to ethically justify and (democratically) legitimize the rules of economic activity time and again. This is especially true for foreign trade transactions, where different values and standards clash and the temptation is great to let profit prevail over morality.

4. The Practical Implementation of Moral Standards

EconomicEthicsJPG01Figure 1: The constant search for the best standards of human activity only makes sense if it is linked to the unconditional will to put insights and ideas gained into practice in a timely manner, i.e. to establish them in binding regulations. This demand may seem trivial and self-evident, but historical development shows that the implementation is regularly hindered by one of two apparently ineradicable misjudgements:

(1) On the left side of the political spectrum there is a latent scepticism about the insight and willingness of people to subordinate their selfish actions to ethical standards. This is where the utopian pipedreams of authoritarian over-regulation flourish as well as phantasies of a better human being, who is first to be developed, as Marxism had in mind, before ideal conditions can be established.

(2) The right side of the political spectrum, on the other hand, tends to want to control economic events by lax moral self-commitments and appeals and runs the risk of exposing itself to the selfish interests of individual groups. Voluntary commitments and appeals must, however, remain ineffective, because any economic player who would be reckless enough to comply with non-binding moral restrictions would be immediately ousted in competition by those who are not prepared to do so. Therefore, the contradiction arises that players are morally obliged to act against their own interests. So it becomes apparent that an economic policy based on non-binding commitments makes use of a wrongly understood liberalism and in fact promotes immorality and its consequences, the most apparent being the anarchic cutthroat competition on »liberalized« global markets. The 2008 economic crisis that was caused by »liberalized« financial markets is the best proof of this.

Insight into moral behaviour is an indispensable prerequisite for change, but not sufficient on its own. On the one hand, insight and willingness must be supported and promoted, but they must also be used at the same time to reach binding and assertive agreements. Democratically constituted states have the unique advantage of being able to incessantly drive this process forward and enter into agreements on a regular basis. For the individual and group interests that stand in the way of these insights can only be overcome in a mostly laborious democratic balancing of interests in order to finally enshrine the respective results in laws. Because the democratic process creates a regulatory order and offers incentives to comply with the laws, this type of search for future-oriented standards is referred to as regulatory ethics and also as incentive or rule ethics. Rules that emerge from this process enable individual moral action that serves one’s own well-being and, at the same time, the common good. Related to such democratically won rules Adam Smith’s metaphor of the »invisible hand« gains a new, a contemporary justification.

This means that economic policy must not be limited to moral appeals. Rather, moral insights must be used as a starting point for developing and enforcing morally justified standards and rules. Establishing standards and rules for social coexistence is one of man’s great cultural achievements. English sociology puts it in a nutshell: Man is a rulemaker.

5. The Dependence of Business/Corporate Ethics

The quality of the ethical standards to which companies are committed in the market economy depends predominantly on the quality and binding nature of the prevailing standards of the macroeconomic ethics. Inadequate macroeconomic standards inevitably lead to immoral behaviour in the private sector and leave all subordinate efforts towards modern business or corporate ethics in vain. That is why the process of deregulation in present-day neoliberalism, from which a lawless transnational sphere emerges, is responsible for the worldwide decline of corporate morality, both with regard to internal corporate conduct and in relation to competitors, suppliers, customers, trade unions and the public, i.e. to the stakeholders of a company (see also the article Stakeholder Value (English)). The vacuum created by the inadequate binding nature and sanction robustness of macroeconomic standards can neither be filled by appeals to company management nor by their possible voluntary commitments.

6. The Regulatory Framework as a Haven of Morality

The regulatory economic framework (economic order) is a system of rules that serves to steer economic transactions within an economic area in the direction desired by economic policy. The prerequisite, however, for the binding nature and enforceability of rules are unrestricted government powers. The legislature branch, for example, must be able to develop the system of rules in a timely manner – and with democratic legitimacy -, the judiciary branch (justice system, antitrust office, competition authority) must impose effective sanctions in the event of violations, and the executive branch must be able to enforce the sanctions. Such powers can neither be obtained at the international and global level, nor can they be applied »from above« in a meaningful subsidiary way, because of the different interests and traditions. Therefore, a global regulatory framework as a replacement for eroding national and supranational orders is not conceivable – and is also unnecessary because of the desirable preservation of worldwide diversity, not least as a source of inspiration. What is conceivable, however, is a global framework resulting from international consultations that sets the benchmark for human rights and sustainable social welfare, and serves as a non-binding guideline for the development of national rules.

This implies two aspects:

Firstly, economic areas are well advised to shape their economic relations through bilateral agreements in order to ensure that foreign trade and foreign competition take place on the basis of periodically calculated fixed exchange rates that neutralize the natural price and productivity differences between economic areas and allow competition to be determined by relative price and competitive advantages. Thus hostile (immoral) attacks and market captures are excluded, which are always a consequence of floating exchange rates, uncontrollable reserve currencies and the resulting shift towards absolute price and competitive advantages.

Secondly, economic areas should fulfil their moral duty to participate at the global level in the development of globally valid standards for international trade, international cooperation and development aid. The system of foreign trade values and standards that is thus built upon global consensus is not binding, but has a disciplinary effect in the long term, and it complements the national regulatory systems without any danger of an undesirable hierarchical penetration from the global level to the national and subnational levels – as currently practiced by the immoral regime of the World Trade Organization (WTO), and: as also promoted by the apologists of the current European integration that is based on centralism (as a supplement see the articles World Trade Organization (WTO), EU: Federal Superstate or Confederation and Undemocratic EU Institutions).

It should be emphasised that market-economy conditions are an indispensable requirement to combine social welfare and economic efficiency in an ideal and future-oriented way by means of a regulatory framework based on moral values and standards and thus achieve the welfare optimum. The market economy is the only known economic mechanism which gives economic players the freedom to allocate and use economic resources (the factors of production) at their own discretion, and which at the same time offers the advantage of ensuring the consistently efficient use of resources through a regulatory framework. In concrete terms, this means that the system of rules influences the prices for the productive factors labor, natural resources and production capital directly via fiscal taxation and indirectly via structural measures in such a way that the market mechanism can steer the complex, opaque economic events as if by an »invisible hand« solely via prices in a socially and ecologically productive direction. The term »free market economy« thus refers to the (regulated) freedom of economic players, which is granted to them under a future-oriented regulatory framework for their own and the overall wellbeing. »Free market economy« by no means implies an absolute freedom that turns into anarchy, as the protagonists of the currently ruling neoliberal doctrine selfishly seek to enforce.

7. The Social-Ecological Framework of Regulations

The intent and purpose of any economic framework is to permanently ensure the optimal welfare within an economic area. This requires first of all immutable principles, on which an order must be based, as well as objectives and control parameters derived from them, which are suitable for establishing an economic equilibrium directed towards welfare. For further details see the article General Equilibrium.

According to today’s state of knowledge there are four principles that can be applied to a regulatory framework: the principle of human dignity, the principle of solidarity, the principle of subsidiarity and the principle of sustainability – the first three, by the way, following the Catholic Social Teaching developed in the 19th century, but without its religious reference:

  1. The principle of human dignity
    places the human being at the centre and assigns to economic actions a function oriented solely towards human and social well-being.
  2. The principle of solidarity
    is based on a mutual commitment between the individual and society: The individual supports society to the best of its ability and, should its strength fail, will be supported by society.
  3. The principle of subsidiarity
    demands self-responsibility from individuals and small social entities like the family, meaning that responsibility must be assumed as decentrally as possible. The economic application of the principle demands that economic value added is always provided at the lowest possible level in terms of technological capability and thus as decentrally and autonomously as possible. At the same time, the corresponding subsidiary levels of the social, political, economic policy and economic sphere each form an inseparable entity with regard to democratic decision-making. In other words, decisions on each subsidiary level have to be closely coordinated between the four spheres mentioned.
  4. The principle of sustainability
    is based on the fact that the human economy is a subsystem of the natural environment and that human economic activity for better or for worse depends on the availability of natural resources, that is the functioning of natural (biological) cycles including the direct reuse of biological material and the natural recycling (composting) of biological material, as well as the direct reuse of non-biological materials like minerals and the technical recycling of those materials. This dependency leads to the ecological imperative to substantially conserve all natural resources in the long term.

The primary objectives are:

  1. Self-determined participation of all citizens in economic processes (full employment),
  2. an appropriate, livelihood securing share of the economic outturn for every citizen,
  3. performance-related equal distribution of income, assets, property and production capital among citizens,
  4. reuse and recycling of non-renewable resources and use of renewable resources not beyond their regenerative capacity (as a prerequisite for qualitative growth).

The economic equilibrium ultimately results from economic governance, which addresses four parameters:

  1. The permanent decentralization (better: subsidiarization) of economic structures to ensure self-determination, equal distribution, diversity and constructive competition – supplemented by solidarity-based social security schemes,
  2. the qualitative growth (the qualitative progress) based on sustainable use of resources,
  3. the international competitiveness on the basis of bilaterally agreed fixed exchange rates which facilitate the use of relative competitive advantages,
  4. and the foreign trade equilibrium which is controlled by trade tariffs and trade quotas.

In summary, a social-ecological regulatory framework that enforces subsidiary domestic structures automatically creates constructive economic competition both within subsidiary levels and between labor-intensive and capital-intensive levels, and it lays the ground to complement demestic competition with controlled foreign trade competition based on relative price advantages. Under these conditions entrepreneurial profits arise from social and ecological productivity, i.e. from qualitative growth, and can then be reinvested in this productivity and this growth. As a supplement see the articles Comparative Advantage – Upgraded and Future-Proof Foreign Trade.

8. The Immanent Immorality of the Neoliberal System

Competition in neoliberal free trade on open global markets is an unsuitable platform for discussing moral values or even enforcing moral standards, because it is caught in a vicious circle of increasing cost pressure and correspondingly inevitable economies of scope and scale with the consequence of mounting concentration of economic power and capital. As the current development shows, national economic policies are coming under more and more pressure to concentrate on improving the international competitiveness of their resident companies through all kinds of price dumping, which they can only achieve by fostering absolute price advantages by means of ever new methods of cost reduction. In this process the most unscrupulous social, ecological and currency exchange dumping is rewarded with the greatest competitive advantage. Since the cost pressure on open global markets also affects domestic players, any enterprise that cannot withstand the boundless cost dictates will be driven out of the market (see also the article Economic Dumping).

The immorality is inherent to the neoliberal economic system, i.e. the immorality is systemic. The previous crises of the system have clearly demonstrated this: the aforementioned financial market and economic crisis, which began in 2008, and the euro crisis which took its course in 2011 and was erroneously referred to as the over-indebtedness crisis. Besides, the permanent crisis in Greece shows that a national government acts immorally when it recklessly transfers national powers to EU institutions thus consolidating the supranational hegemony of these institutions.

It is to be hoped that countries will finally use the crises to make their financial and economic systems fit for the future by virtue of their own powers – even against external resistance. In view of the different national interests and unscrupulous international and intra-European competition, there can be no relying on global or European consensus.

Click here for the German-language version: Wirtschaftsethik.

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