post-autistic economics review
Issue no. 21,  13 September 2003
article 3



      issue 21 contents                            PAE Review index                               home page




Ethics And Economic Actors

Charles K. Wilber   (University of Notre Dame, USA)

© Copyright 2003 Charles K. Wilber


Economics and ethics are interrelated because both economists (theorists and policy advisers) and economic actors (sellers, consumers, workers, investors) hold ethical values that help shape their behavior. In the first case economists must try to understand how their own values affect both economic theory and policy. In the second case this means economic analysis must broaden its conception of human behavior.

In a previous article in this journal I dealt with the first issue. In this article I will focus on the importance of the second issue-- economic theory, with its myopic focus on self-interest, obscures the fact that preferences are formed not only by material self-interest but also by ethical values, and that market economies require that ethical behavior for efficient functioning.


Values of Economic Actors

It is important to recognize that though Adam Smith claimed that self‑interest leads to the common good if there is sufficient competition; he also, and more importantly, claimed that this is true only if most people in society have internalized a general moral law as a guide for their behavior.1  This means that the efficiency claims that economists make for a competitive market system require that economic actors pursue their self-interest only in "fair" ways. Smith believed most people, most of the time, did act within the guidelines of an internalized moral law and that those who didn’t could be dealt with by the police power of the state.

One result of this recognition must be the acknowledgment that a better conception of human behavior is needed. Thus, I argue that (1) people act on the basis of embodied moral values as well as from self-interest and (2) the economy needs that ethical behavior to be efficient.

Hausman and McPherson recount an experiment in which wallets containing cash and identification were left in the streets of New York.  Nearly half were returned to their owners intact, despite the trouble and expense of doing so to their discoverers.2  It could be argued that altruistic motives-- modeled as the concern for another’s utility as an element within one’s own utility function-- ultimately are an extension of self-interested behavior.  Such an argument is substantially weakened in this case because the discovered wallets belonged to persons unknown to the finders.  Hence, the personal satisfaction and pleasure stemming from the wallets’ return ought to be significantly diminished, as altruistic sympathies are usually weaker with a lack of personal familiarity.  The effort expended and the apparently unselfish behavior demonstrated by those who returned the lost goods may, as Hausman and McPherson assert, more likely reflect a commitment to societal norms than a reflection of egoistic desires.

Similarly, it usually is argued that the provision of such goods as public broadcasting and church services will be hobbled by the classic free-rider problem that accompanies public goods.  Many consumers of these goods do indeed fail to respond to funding appeals or shirk as the collection plate passes. This, however, does not explain the motivation of the many who do give.  Are we to attribute irrationality to those who contribute to public broadcasting, for example, knowing that their gift offsets the free-loading of others?  In the case of public church collections, it might be argued that the anticipated approval of fellow church-goers entices contributions and their threatened opprobrium dissuades stinginess.  Masking the amount of one’s gift in a closed fist or a sealed envelope are effective and relatively costless, however, and suggest that perhaps a sense of duty, obligation or gratitude might be more important in compelling contributions to church collections.

It is not only for the sake of accuracy that economists should pay attention to evidence that human actions are guided by concerns not solely egoistic, but also because there are real economic consequences to non-egoistic behavior.  Robert Solow has suggested that “principles of appropriate behavior” among workers may explain why labor markets are not fully clearing.   Appropriate behavior dictates that one not undercut a peer in order to get that person’s position.  As Albert Hirschman argues, this example of seemingly non-self-interested behavior may entail market inefficiencies and resulting costs, but most in society (with the exception of many economists) would deem the portrait of human interaction it paints as more than worth it.3


A Case in Point: The Supply of Blood

An example of the problem of relying solely on self-interest is given by a comparison of the system of blood collection for medical purposes in the United States and in England. In his book, The Gift Relationship, Titmuss questions the efficiency of market relationships based on purely monetary self-interest principles.4  Instead he hypothesizes that in some instances, such as blood giving, relying on internalized moral values (in this case, altruistic behavior) results in a more efficient supply and better quality of blood. Kenneth Arrow's response to Titmuss questions the extent to which altruism or other internalized moral values may be counted upon as an organizing principle yet acknowledges that there may, indeed, be a role for altruistic giving.5 The following covers some of the more salient points in the debate and reflects on these issues in an attempt to clarify the role that embodied moral values may play in the economy.

Titmuss focuses on the blood supply system in Great Britain and the United States. The United States system has moved toward a commercialized market system in which suppliers of blood are paid for the service while in Great Britain the supply of blood depends on voluntary and unpaid individual blood donors. Titmus argues that the commercialization of blood giving produces a system with many shortcomings. A few of these shortcomings are the repression of expressions of altruism, increases in the danger of unethical behavior in certain areas of medicine, worsened relationships between doctor and patient, and shifts in the supply of blood from the rich to the poor. Furthermore, the commercialized blood market is bad even in terms of nonethical criteria.

In terms of economic efficiency it is highly wasteful of blood; shortages, chronic and acute, characterize the demand-and-supply position and make illusory the concept of equilibrium. It is administratively inefficient and results in more bureaucratization and much greater administrative, accounting, and computer overheads. In terms of price per unit of blood to the patient (or consumer), it is a system which is five to fifteen times more costly than voluntary systems in Britain. And, finally, in terms of quality, commercial markets are much more likely to distribute contaminated blood; the risks for the patient of disease and death are substantially greater. It is noteworthy that since the AIDS crisis started in the United States, physicians regularly recommend that patients scheduled for non-emergency surgery donate their own blood in advance.

Arrow attempts to restate Titmuss' arguments in terms of utility theory. Thus the motivation for blood giving is reduced and reformulated in the form of a utility function. One such form is (1) the welfare of each individual will depend both on his own satisfaction and on the satisfactions obtained by others. We here have in mind a positive relation, one of altruism rather than envy. Another form is (2) the welfare of each individual depends not only on their own utility and of others but also on one’s own contribution to the utilities of others. By representing altruism in this way, the incommensurability of self-interest and altruism that is crucial to Titmuss' analysis is ignored.

However, the commercialization of certain activities that historically were perceived to be within the realm of altruism results in a conceptual transformation that inhibits the expression of this altruistic behavior. Contrary to the commonly held opinion that the creation of a market increases the area of individual choice, Titmuss argues that the creation of a market may inhibit the freedom to give or not to give. If this is true then Arrow's model that treats apparent morally based behavior as a simple addition to an ordinary utility function, seriously misrepresents these issues. What is only mentioned in passing and downplayed by Arrow is that market relations may often drive out non-market relations. Material incentives might destroy rather than complement moral incentives.

The supply of blood provides a clear illustration of the problem. A person is not born with a set of ready-made values, rather the individual's values are socially constructed through being a part of a family, a church, a school and a particular society. If these groups expect and urge people to give their blood as an obligation of being members of the group that obligation becomes internalized as a moral value. Blood drives held in schools, churches, and in Red Cross facilities reinforce that sense of obligation. As commercial blood increases, the need for blood drives declines. Thus, the traditional reinforcement of that sense of obligation declines with the result that the embodied moral value atrophies. In addition, the fact that you can sell your blood for, say, $50 devalues the donation from a priceless gift of life to one of a small monetary value. Finally, there is an information problem. As blood drives decline it is rational for an individual to assume that there is no need for donated blood. The final outcome is that a typical person must overcome imperfect information, opportunity costs, and a lack of social approbation to be able to choose to donate blood. The tremendous outpouring of blood donations after September 11 indicates the latent altruism available.

Economists often claim value neutrality in their analysis. But value neutrality cannot be achieved merely by focusing on the efficiency results of a policy recommendation derived from a theoretical model. The motivations on which the results are based are also important, that is, how we achieve these results needs to be addressed.

This problem arises because economists take preferences as given--they neither change over time nor are affected by the preferences of other individuals or society. Consequently, the process of preference formation and the nature of the preferences that people have are ignored. That the distribution of beliefs and behaviors at time t influences individual beliefs and behaviors at time t+1 is, however, the single most basic finding of the voluminous research within sociology on the behavior of groups.6 

Beliefs and preference structures are important because they are the basis for individual motivation. An understanding of these also gives us a notion as to what are and what will encourage the continuation of certain valued feelings. When economists look to self-interest to solve social problems they are placing a higher value on and promoting their own beliefs about what is proper motivation.

Even though neo-classical economists are seldom interested in why people behave the way they do, society usually places a high value on motivations. This is readily evident if one looks at the legal system. Consider a situation in which a person shoots and kills someone else. The end result is the same but depending on the motivation the act may be judged to be murder, justifiable homicide, or even just an accident.

In short, three conclusions can be derived from our discussion of issues raised by the Titmuss-Arrow debate. First, economic policies have a direct effect on both market outcomes and individual values. Second, economists should drop their narrow approach to human behavior and join the rest of society in giving attention to the effect that policies have upon values. How we achieve results is important. Finally, economists must recognize that the policy impact upon values exerts its own influence on future market activity. Thus, over time the type of values promoted by public action has significance even within the `efficiency' realm of traditional economic analysis.

Economists are often reluctant to depend on ethics. Ethics are perceived to be a less stable attribute of human behavior than self-interest. As Arrow states: “I think it best on the whole that the requirements of ethical behavior be confined to those circumstances where the price system breaks down... Wholesale usage of ethical standards is apt to have undesirable consequences.”7

Certainly individuals, with particular needs and abilities, motivated by self-interest do create consequences that often are benevolent. But there is also a role for ethically based behavior. In response to Adam Smith's “it is not from the benevolence of the butcher, the brewer, and the baker that we expect our dinner, but from their regard to their own interest,” the reality is that more than half of the American population depend for their security and material satisfaction not upon the sale of their services, but rather on their relationships with others. There are many occasions on which reliance on the good will of others is necessary and more reliable.

Internalized Moral Behavior vs. Self-Interest

I do not want to leave the impression that ethically based behavior and self-interest are necessarily mutually exclusive. Proximity to self-interest alone does not defile morality. Moral values are often necessary counterparts in a system based on self-interest. Not only is there a “vast amount of irregular and informal help given in times of need”8; there is also a consistent dependence on moral values upon which market mechanisms rely. Without a basic trust and socialized morality the system would be much more inefficient.

Peter Berger reminds us that “No society, modern or otherwise, can survive without what Durkheim called a `collective conscience,' that is without moral values that have general authority.”9 Fred Hirsch reintroduced the idea of moral law into economic analysis: “truth, trust, acceptance, restraint, obligation‑‑ these are among the social virtues grounded in religious belief a central role in the functioning of an individualistic, contractual economy....The point is that conventional, mutual standards of honesty and trust are public goods that are necessary inputs for much of economic output.”10

The expectation that public servants will not promote their private interests at the expense of the public interest reinforces the argument that the economy rests as importantly on moral behavior as self‑interested behavior. As Hirsch wrote: “The more a market economy is subjected to state intervention and correction, the more dependent its functioning becomes on restriction of the individualistic calculus in certain spheres, as well as on certain elemental moral standards among both the controllers and the controlled. The most important of these are standards of truth, honesty, physical restraint, and respect for law.”11

Attempts to rely solely on material incentives in the private sector, and more particularly in the public sector, suffer from two defects. In the first place, stationing a policeman on every corner to prevent cheating simply does not work. Regulators have a disadvantage in relevant information compared to those whose behavior they are trying to regulate. In addition, who regulates the regulators? Thus, there is no substitute for an internalized moral law that directs persons to seek their self‑interest only in `fair' ways.  The second shortcoming of relying on external sanctions alone is that such reliance can further undermine the remaining aspects of an internalized moral law. The Enron case might be an example of the decline of those embodied moral values in the market place. As discussed above, by promoting solely self-interest society encourages that type of behavior rather than ethical behavior. The argument is not that there is no role for self-interest, but rather that there is a large sphere for morally constrained behavior. To distinguish in which sphere self-interest should be used and in which sphere altruism should be promoted is very important and sends signals to society as to what we value.


In conclusion, I claim that (1) self-interest alone does not adequately explain actual economic behavior because economic actors are also motivated by internalized moral values, such as trust and honesty and (2) self-interest does not lead to efficient outcomes in the absence of these moral values. The irony of mainstream economic theory is this: on the one hand it is permeated, despite repeated denials, with ethical values imported from its governing world view; on the other hand it fails to fully understand that economic actors are motivated by more than material self-interest and need to be if a market economy is to function efficiently.



1. See Adam Smith, Theory of Moral Sentiments (London: Henry Bohn, 1861);  A.W. Coats, ed., The Classical Economists and Economic Policy (London: Methuen, 1971); and Jerry Evensky, "Ethics and the Invisible Hand," Journal of Economic Perspectives, Vol. 7, No. 2 (Spring 1993), pp. 197-205..

2. Daniel M. Hausman and Michael S. McPherson, Economic Analysis and Moral Philosophy (Cambridge University Press, 1996), p. 34. It is interesting that experimental studies by psychologists indicate that people are concerned about cooperating with others and with being fair, not just preoccupied with their own self-interest. Ironically, these same studies indicate that those people attracted into economics are more self-interested and taking economics makes people even more self-interested. Thus economic theory creates a self-fulfilling prophecy. See Robert H. Frank, Thomas Gilovich, and Dennis T. Regan, `Does Studying Economics Inhibit Cooperation,' Journal of Economic Perspectives, 7, 2 (Spring 1993), pp. 159-171.

3.  Albert O. Hirschman,  “Morality and the Social Sciences: a Durable Tension,” in The Passions and the Interests: Political Arguments for Capitalism before Its Triumph( Princeton: Princeton University Press, 1977), pp. 304-5.

4. Richard M. Titmuss, The Gift Relationship: From Human Blood to Social Policy (London: Allen and Unwin, 1970).

5. Kenneth Arrow, “Gifts and Exchange,” Philosophy and Public Affairs, I, 4 (Summer 1972), pp.343-362.

6. Steven Kelman, What Price Incentives?  Economists and the Environment (Boston, MA: Auburn House Publishing Company, 1981), p. 31.

7. Kenneth Arrow, “Gifts and Exchange,” p. 355.

8. Kenneth Arrow, “The Gift Relationship,” p. 345.

9. Peter Berger, “In Praise of Particularity: The Concept of Mediating Structures,” Review of Politics (July 1976), p. 134.

10 Fred Hirsch, Social Limits to Growth (Cambridge, MA: Harvard University Press, 1978), p. 141.

11. Fred Hirsch, Social Limits to Growth, pp. 128‑129.


Charles K Wilber, “Ethics and Economic Actors”, post-autistic economics review, issue no. 21,  13 September 2003, article 3,