Adam Smith (1723-1790) is famous for founding economics as an independent field of study by synthesizing and systemizing classical economics in The Wealth of Nations (1776). But he was also a significant moral philosopher in his own right who deserves to be recognized alongside his close friend David Hume (1711-1776) as a key figure in the Scottish Enlightenment, the conjunction of minds, ideas, and publications in Scotland during the whole of the second half of the 18th century and extending over several decades on either side of that period. Smith saw economics as a branch of moral philosophy, and he saw capitalism as an ethical project whose success required political commitment to justice and freedom, not merely an understanding of economic logistics.

The following questions juxtapose practices and institutions that economists study (capitalism, profits, competition) with concepts that ethicists use (good, admirable, and best). Is capitalism good? Should we admire hard workers who are motivated to make large profits? Does competition bring out the best in people?

Smith’s economic analysis was thoroughly entangled with a deeply humanistic ethical perspective. The picture of the real Adam Smith reveals is of a true ‘friend of commerce’, supporting the project because of its achievements and its even greater potential, but constructively critical about both the shortcomings of the mercantilist society he lived in and commerce in general. He justified commercial society for its tremendous contribution to the prosperity, justice, and freedom of its members, and most particularly for the poor and powerless in society. But he was no naive ideologue for free markets and profits. He criticised the political machinations and moral character of the very merchants and manufacturers who, he acknowledged, were driving economic development, and not only told them they should act better, but also argued for institutional measures to restrict their worst proclivities particularly by getting government out of the business of economic micro-management. Though its promise was great, the rise of commercial society also meant the loss of valuable old ways and posed new challenges of its own. Its success was not predetermined, but had to be worked for. That is a lesson modern economist, and politicians, would do well to relearn.

We have two questions of ethics that bear directly on economics: (i) What is the standard of good? and (ii) How does one establish that something is good? A third relevant question of ethics is: Who should be the beneficiaries of the good? A common assumption of economic analysis is that individuals are rational and self-interested. The third question focuses on self-interest. Is self-interest moral, amoral, or immoral? Is morality a matter of individuals taking responsibility for their lives and working to achieve happiness? Or is morality a matter of individuals accepting responsibility for others and being willing to forgo or sacrifice for them? This is the debate in ethics between egoism and altruism.

Strong forms of egoism hold that individuals should be self-responsible and ambitious in their pursuit of happiness, that they should treat other individuals as self-responsible trading partners, and that those who are unable to be self-responsible should be treated through voluntary charity. Strong forms of altruism argue the opposite, holding that morality is primarily a matter of helping those who are in need, that charity is more moral than trade, and that the most moral individuals will be motivated by a spirit of self-sacrifice.

For example: consider the debates over rent control and minimum wages. Economists, by a large majority, agree that such policies are not merely zero-sum, as their advocates intend, but rather negative-sum. It may be argued hat rent controls cause landlords a loss—and also cause housing shortages that harm some of the poorest renters the most. It may also be argued that minimum wages cause employers a loss—but also destroy jobs for unskilled laborers. These unintended consequences are well known among economists, but there is little sign that rent controls and minimum wages will be abandoned anytime soon. Because in the case of rent controls, part of the explanation involves the political dynamics of urban areas, in which many voters are renters: renters believe that rent control is good for them, and politicians sometimes listen to their constituents.

But another major part of the explanation has to do with an altruistic ethic that says that the self-interest of landlords and employers counts for little morally and may be sacrificed to help tenants and employees. The thinking is that landlords and employers are richer, and tenants and employees are poorer, and thus rich people should be willing to sacrifice profits to help out the poor if necessary. But if we cannot expect the rich to do the right thing voluntarily, then an altruistic ethic will help justify the government’s mandating the sacrifice by law.

The moral difference between egoists and altruists on these economic policy issues is between those who see employers and employees as win-win trading partners and those who see employment as exploitation; and between those who see landlords and tenants as trading value to mutual benefit and those who see poor tenants vulnerable to being taken advantage of by rich landlords.

Generalizing from debates over particular policies to evaluations of economic systems as a whole, Adam Smith’s famous statement about self-interest from The Wealth of Nations is directly relevant to our contemporary debates about the morality of capitalism: “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”.

Smith is working out a middle ground between traditional ethical theories that have been altruistic in principle and his new (at the time) economic theory that is optimistic about the power of egoistic individuals in a free market. Smith’s position is modern and egoistic in accepting that self-interest is natural and beneficial in making capitalism work well; at the same time Smith is traditionally altruistic in reserving his highest praise for those who take a disinterested perspective on their own interests and are willing to sacrifice their interests.

Then what about justice; justice in economics is a subcategory of welfare economics with models frequently representing the ethical-social requirements of a given theory, whether “in the large”, as of a just social order, or “in the small”, as in the equity of “how institutions distribute specific benefits and burdens”. That theory may or may not elicit acceptance.

Some ideas about justice and ethics overlap with the origins of economic thought, often as to distributive justice and sometimes as to Marx (1818–1883)-ian analysis. The subject is a topic of normative economics and philosophy and economics. In early welfare economics, where mentioned, ‘justice’ was little distinguished from maximization of all individual utility functions or a social welfare function. As to the latter, Paul A. Samuelson (1947), expanding on work of Abram Bergson (1914-2003), represents a social welfare function in general terms as any ethical belief system required to order any hypothetically feasible social states for the entire society as “better than”, “worse than”, or “indifferent to” each other. Kenneth Arrow (1963) showed a difficulty of trying to extend a social welfare function consistently across different hypothetical ordinal utility functions even apart from justice. Utility maximization survives, even with the rise of ordinal-utility/Pareto theory (1906), as an ethical basis for economic-policy judgments in the wealth-maximization criterion invoked in law and economics.

Amartya. Sen (1970), Kenneth Arrow (1983), Serge-Christophe Kolm (1969, 1996, 2000), and others have considered ways in which utilitarianism as an approach to justice is constrained or challenged by independent claims of equality in the distribution of primary goods, liberty, entitlements, opportunity, exclusion of antisocial preferences, possible capabilities, and fairness as non-envy plus Pareto efficiency. Alternate approaches have treated combining concern for the worst off with economic efficiency, the notion of personal responsibility and (de)merits of leveling individual benefits downward, claims of intergenerational justice, and other non-welfarist/Pareto approaches. Justice is a sub-area of social choice theory, for example as to extended sympathy, and more generally in the work of Arrow, Sen, and others.

A broad reinterpretation of justice from the perspective of game theory, social contract theory, and evolutionary naturalism is found in works of Ken Binmore (1994, 1998, and 2004) and others. Arguments on fairness as an aspect of justice have been invoked to explain a wide range of behavioral and theoretical applications, supplementing earlier emphasis on economic efficiency (Konow, 2003).

Religion Islam provides with excellent guidelines to economic justice and ethical standard to be followed by mankind in the broad spectrum of meanings of certain Al Qur’anic ayahs beyond their literal meanings. Al Qur’ân reads: “Give full measure when you measure, and weigh with a balance that is straight: that is better and fairer in the final determination” (Surah Baniii-’Israaa-’Ill, 17:35) and further “Woe to those that deal in fraud, – those who, when they have to receive by measure from men, exact full measure, but when they have to give by measure or weight to men, give less than due” (Surah Tatfiif, 83:1-3). These two ayahs, in their broad spectrum of meanings, aptly nullifies the root of injustices and lack of ethical standard in economic dealings prevalent in contemporary capitalism “in order that it (wealth – that Allah has bestowed on the citizens) may not (Merely) make a circuit between the wealthy among you” (Surah Hashr, 59:7) which usually is the practice under capitalism.

The writer is a retired Professor of Economics, BCS General Education Cadre. - See more at: http://www.daily-sun.com/details_Ethical-basis-of-economics_879_2_5_1_1.html#sthash.EBx3rvoU.dpuf