Market And Morality

American Economic Review: Papers and Proceedings 2011, 101:3, 162–165 http://www.aeaweb.org/articles.php?doi=10.1257/aer.101.3.162

Markets and Morality
By Jagdish Bhagwati*
It is common knowledge that Adam Smith, the acknowledged father of Economics as we know it, had written The Theory of Moral Sentiments (1759) before he wrote The Wealth of Nations (1776). More sophisticated students ofEconomics today would also know that Adam Smith held the Chair in Moral Philosophy from 1752, after a year as Professor of Logic, at Glasgow University. Therefore, that Economics has evolved from moral philosophy, and has affinity by birth with it and therefore is a moral science, should not surprise anyone. Yet, the analysis of the interaction between Economics and moral philosophy, or perhapssimply morality, has raised interesting issues over time. In the following, I concentrate on a few salient ones today.
I. Positive and Normative Analyses

against John Maynard Keynes, the punch line was that Keynes held the two opinions). Douglas A. Irwin (1989, p. 45) has recalled how Sir Robert Peel, who repealed the Corn Laws in 1848 to usher in unilateral free trade in England, lamented,despite his love of “political economy” (as Economics was called then), that Peel found only confusion and dissension among the leading economists of the day on the Corn Laws’ effect on wages, profits and rents: “The very heads of Colonel Torrens’s chapters are enough to fill with dismay the bewildered inquirer after truth. These are literally these—‘Erroneous views of Adam Smith respecting the value ofCorn’, ‘Erroneous doctrine of the French economists respecting the value of raw produce’, ‘Errors of Mr. Ricardo and his followers on the subject of rent’, ‘Errors of Mr. Malthus respecting the nature of rent’, ‘Refutation of the doctrines of Mr. Malthus respecting the wage of labour.’” The normative leg of Economics, coming more directly from moral philosophy, has been generally based onutilitarianism from the time of Jeremy Bentham (1776, 1780). While this has generally meant that economists typically work with social utility functions whose arguments are goods and services, there have been important qualifications. In particular, we owe to Roy Harrod, the pioneer with Evsey Domar of growth economics and biographer of Keynes, the extension to “process utilitarianism,” which says thatwe derive utility not merely from outcomes but also from the process by which we reach the outcome. Thus, many find it distasteful to have a market for adopting babies even though it may produce an efficient outcome; and I have noted in Bhagwati (1998) that Judge Richard Posner’s advocacy of such a market may well cost him a seat on the Supreme Court. Again, international economists such as HarryJohnson, T. N. Srinivasan, and myself have actually dealt with “noneconomic objectives,” where we modify the utility function also to
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First, if Economics is to advance the public good, we must have two prior conditions satisfied: we must have scientifically compelling “positive” economic analysis and we must have an agreed yardstick, what we call “normative” criteria, with which we use thatpositive analysis to choose public policy that advances the public good. The former task has been the main reason why Economics branched out as a separate discipline from moral philosophy whose principal preoccupation naturally was with the latter task. Economics has been evolving continually, of course, in its main task of illuminating the working of the economy. That it is essential beforenormative analysis does not mean, of course, that it can unambiguously help the policymaker. Thus, recall the famous witticism that if there are six economists, there are seven opinions (and, when directed
* Council on Foreign Relations, 58 East 68th Street, New York, NY 10021 (e-mail: jbhagwati@cfr.org; jb38@ columbia.edu). Note: there were no Discussants. Professor Benjamin Friedman (Harvard...