Chevrolet Malibu But a jury fined General Motors $4.9 billion in punitive damages (July 1999) – for thinking at the marg

1. Ethics and EconomicsJonathan B. WightContact Information:Professor of EconomicsUniversity of RichmondRichmond, VA 23173(804) 289-8570jwight@richmond.edu © Jonathan B. Wight

2. EconomicsEconomics is a “way of thinking” to help students understand the ramifications of actions. It is a tool to help students make more informed judgments. One of the most powerful concepts in economics is thinking at the marginwhen evaluating costs and benefits. © Jonathan B. Wight

3. Chevrolet MalibuBut a jury fined General Motors $4.9 billion in punitive damages (July 1999) –for thinking at the margin! © Jonathan B. Wight

4. GM’s private calculation:* MC to fix the faulty fuel tank: $8.59 per car.* MB to fix the faulty fuel tank: $2.40 per car(savings from wrongful death and disfigurement lawsuits @ $200,000 on average) The “efficient” solution was chosen not to fix the faulty fuel tank. (Does this pass the ethical smell test?) Source: http://www.safetyforum.com/gmft/. The punitive damages against GM were later lowered by a judge to $1 billion. © Jonathan B. Wight

5. Economists have extolled short-run profit maximizing—in a moral vacuum. http://www.sciencecartoonsplus.com/gallery/ethics/eth06.gif © Jonathan B. Wight

6. Ethics is the consideration of “right” and “wrong.”It is penny-wise and pound foolish to ignore ethical considerations.Yet theAmerican Economic Association complains that graduate schools keep turning out “idiot savants, skilled in technique but innocent of real economic issues” (Barber 1997, p. 98) © Jonathan B. Wight

7. Is our commercial system based on ... © Jonathan B. Wight

8. Economicsor ... © Jonathan B. Wight

9. ...Greedonomics? © Jonathan B. Wight

10. Wall Street © Jonathan B. Wight

11. Wall Street © Jonathan B. Wight

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16. Arthur Andersen Enron East Asia WorldCom © Jonathan B. Wight

17. Walter Williams (Former chair, Dept. of Economics, George Mason University)“Free markets, private property rights, voluntary exchange, and greed produce preferable outcomes most times and under most conditions.”--“The Virtue of Greed in Promoting Public Good,” Richmond Times-Dispatch, October 6, 1999, p. A15) © Jonathan B. Wight

18. “[G]reed is healthy. You can be greedy and still feel good about yourself.”--Commencement address, May 18, 1986, School of Business Administration, University of. California, Berkeley. Six months later Boesky was convicted of insider trading ……and received a sentence of three years in prison and $100 million fine. Ivan Boesky, leaving a federal half-way house in 1989. © Jonathan B. Wight

19. Gordon Gekko in Wall Street (1987)“[G]reed is good.... Greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit....” © Jonathan B. Wight Video

20. Is Adam Smith to Blame?Adam Smith, “gave a new dignity to greed,” and sanctified “predatory impulses” (Lerner, 1937, x). More than 250 years ago, Smith wrote: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” Visual 2.1 (Adam Smith, The Wealth of Nations, Indianapolis: Liberty Press, 1981 [1776], 26-27) © Jonathan B. Wight

21. Do we really understand Adam Smith? What would he say – if he came back to life? A novel Jonathan B. Wight, Saving Adam Smith: A Tale of Wealth, Transformation, and Virtue (Prentice Hall, 2002). © Jonathan B. Wight

22. Smith’s bottom line: It is appropriate to be self-interested. But moral considerations generate self-restraint, and beyond that, a concern for justice.Greed is self-interest… without the moral restraint. © Jonathan B. Wight

23. Ethical people generate the social capital that lubricates the wheels of commerce and society.“When the happiness or misery of others depends in any respect upon our conduct, we dare not, as self-love might suggest to us, prefer the interest of one to that of many.” (TMS, pp. 137-8)“[B]y acting according to the dictates of our moral faculties, we necessarily pursue the most effectual means for promoting the happiness of mankind….” (TMS, p. 166) © Jonathan B. Wight

24. The Invisible HandSelf-interest is a tremendous force for individual self-betterment. In “many” cases, self-interest also advances the interests of society The example Smith gives is of a businessman who prefers to keep his investments domestically because, “He can know better the character and situation of the persons whom he trusts...” (Wealth of Nations, 1981, 454). Social capital thus creates a bias in favor of domestic investments. This strengthens the domestic economy and creates spill-over benefits for society at large.See:Jonathan B. Wight, “The Treatment of Smith’s Invisible Hand,” Journal of Economic Education (forthcoming). © Jonathan B. Wight

25. Thus:“By preferring the support of domestic to that of foreign industry, [the entrepreneur] intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible handto promote an end which was no part of his intention.”Sociability and trust—along with competitive markets and a system of justice—create conditions in which self interest promotes the broader interests of society. © Jonathan B. Wight

26. Lesson 2Play the Ultimatum Game (p. 24) © Jonathan B. Wight

27. VISUAL 2.2THE ULTIMATUM GAME: DIRECTIONSYou are about to play a famous game called the Ultimatum Game. In thisgame players negotiate the division of 10 rewards items. The teacher willdefine the specific rewards to be allocated. Read these rules, but don’t begin to play until your teacher says “Go.”1. You play this game in pairs; one player is the Proposer and the other is the Responder.2. If you are the Proposer, your job is to propose an allocation, or division, of 10 rewards items between yourself and a Responder. You may not use fractional amounts, so you must propose a whole number between 0 and 10 rewards for yourself, with the remainder of the 10 rewards going to the Responder. © Jonathan B. Wight

28. VISUAL 2.2THE ULTIMATUM GAME: DIRECTIONS(con’t)3. If you are the Responder, your job is to accept or reject the Proposer’s proposal. If you accept the proposal, both of you will get the proposed number of rewards at the end of the lesson. If you reject the offer, neither of you will getanything for this round.4. Proposers will randomly pick Responders for each round (try not to pickyour close friends). Players must switch partners after each round. Do notrepeat partners.5. Half the class will start the game as Proposers and half as Responders.You will play two rounds, with a new partner for each round. After the secondround, you will switch roles: Each Responder becomes a Proposer, and eachProposer becomes a Responder. You will play two more rounds — again, with a new partner for each round. © Jonathan B. Wight

29. VISUAL 2.2THE ULTIMATUM GAME: DIRECTIONS(con’t)6. Record your results after each round on the score sheet below. At the end of the game, calculate the total rewards you earned.7. All rewards will be distributed at the end of the lesson. © Jonathan B. Wight

30. Visual 2.2 THE ULTIMATUM GAME This is the record sheet each student keeps. • In the column marked (P), circle the number of rewards you earned as a Proposer. • In the column marked (R), circle the number of rewards you earned as a Responder. 3. Add up the total rewards you earned as both a Proposer and Responder. © Jonathan B. Wight

31. The Bottom Line Self-interest may lead people to make aggressive offers, but greed can often lead to earning nothing. In the Ultimatum Game and in life, people dislike unfairness and will incur costs to punish it. Human nature includes the instincts for social cooperation and justice. Questions or comments? © Jonathan B. Wight

32. Positive economics – the study of what “is”Positive economic models become more powerful when we consider that human beings are partially motivated by sociability and morals.Examples* Highway tips* Doctor and patients* Auto mechanics and customers * Employees and fiduciary dutiesEthical norms and judgments are pervasive—including in economics! © Jonathan B. Wight

33. Example from Lesson 1 – Does Science Need Ethics? Maria’s research project • Picking a professional field • Picking a subject for study • Perception and model-building • Methodology and data collection • Analysis, Dissemination and Impact Text, p. 11 © Jonathan B. Wight

34. Ideology = the characteristic thinking or beliefs of a particular group, culture or class at a point in time.Worldview = Ideology plus random knowledge(pre-analytical)World view and ethical judgments permeate research at every step. © Jonathan B. Wight

35. PROVIDE FACTUAL ANSWERS TO THESE QUESTIONS:1. What is the current time?2. What is this? 3. Does this animal pictured here eat: a) carrots from the garden b) fish from the lake? © Jonathan B. Wight

36. 1. What is the current time? A. Did you answer “9:50”? Why didn’t you say, “It is exactly 9:50:43:50 a.m.”? You likely put the question of fact determination into a context. How important is the exact detail? You automatically filtered the question and added a value judgment about how much detail to add. B. Did you answer based on time in Las Vegas, NV? Why didn’t you say, “It is 6:20 pm in London, England? [Again, you put the question of fact determination into a context.] © Jonathan B. Wight

37. What is the current time? C. More importantly, where does the concept of time and its measurement come from? Why is each day broken up into 24 segments called “hours” and not into 12 or 15 or 30 segments? Where does each day “officially” start on the globe, and why there? What is Greenwich Mean Time, and how did this arise? © Jonathan B. Wight

38. 2. What is this? Did you answer “an apple”? Why not manzana(Spanish)orapfel(German) or 苹果(Chinese) ? Language is a human construct. Words that exist for concepts in one language may not exist in others, or may have multiple interpretations (e.g., “love”). What are the “facts” about what this thing is? © Jonathan B. Wight

39. 2. What is this? B. Moreover, thisis NOT factually an apple in any language. It is a two-dimensional representation of something you interpret to be an apple. Technically it is a spectrum of light particles bouncing off a reflective surface. © Jonathan B. Wight

40. KUHNIAN WORLDVIEW: Is this a duck or a rabbit? Around Easter, more children see the animal as a rabbit. Context determines the “facts” collected. © Jonathan B. Wight

41. Conclusion:It is hard to construct a “fact” in isolation from context, theory, worldview, and human judgment. © Jonathan B. Wight

42. Example from EconomicsThe study of unemployment © Jonathan B. Wight

43. Where do research questions come from?(worldview, vision)Key issue: Who is paying for the research? Do research payers always ask the most important questions? What biases enter in? © Jonathan B. Wight

44. 2. Model-Building* Market wage clearing model* Keynesian wage rigidity model* Marxian class conflict model(worldview, ideology, institutions) © Jonathan B. Wight

45. 3. Data Collectiona) How do we define the data to be collected? That is, what is “unemployment”?Any answer we give requires a judgment about why we are collecting the data and what goal its collection will serve. © Jonathan B. Wight

46. 3. Data Collectionb) How much data do we collect? Data is not free. There are opportunity costs of acquiring data.How much is the “right” amount? © Jonathan B. Wight

47. 3. Data Collectionc) Collecting the data is constrained by ethical considerations in addition to economic limitations. For example, is it possible to collect data by kidnapping people and torturing them? [Think of Hitler’s concentration camp experiments in the further of science.] © Jonathan B. Wight

48. 3. Data Collectiond) Collecting the data might CHANGE the data!For example, surveying households about who’s actively looking for work might stimulate someone to start searching!Asking consumers about their confidence in the economy could introduce uncertainty into their minds that didn’t previously exist! This is called the “Observer” problem, also in physics known as “Heisenberg’s Uncertainty Principle.” © Jonathan B. Wight

49. 4. Data Analysisa) Statistical significance* Type I error* Type II errorb) Economic significance © Jonathan B. Wight

50. Statistical Significance Does spending on childhood intervention programs increase high school graduation rates? © Jonathan B. Wight