Is Economics Moral?

Author: Henry Law

This article was originally published in the June 1999 edition of “The Month”, and appears here by permission of the Society of Jesus, 114 Mount Street, London W.1.

Is economics moral or is it an objective account of a particular set of human relationships, that are subject to forces as inexorable as the force of gravity? Political Economy emerged in the Enlightenment as a branch of philosophy during the eighteenth century.

The pioneers, a group forming part of the court of Louis XV, developed a body of theory which became known as Physiocracy, “the rule of nature”; probably the best known of the Physiocrats is François Quesnay (1694-1774). Physiocracy was underpinned by a belief that natural law was both fundamental and benevolent. The most durable of the ideas developed by the Physiocrats were the case for laissez faire free trade, the concept of the surplus arising from land, the produit net (which today would be described as the “Economic Rent of Land”), and the impôt unique, the single tax on land rent.

No doubt because France was an agrarian economy, the Physiocrats were primarily concerned with agricultural trade. In contemporary Britain, however, the industrial revolution was under way and Adam Smith (1723-1790), Professor of Moral Philosophy at the University of Glasgow built upon the insights of the Physiocrats and applied their ideas to manufacturing, thereby creating a comprehensive body of theory. This was set out in his famous work “An Inquiry into the Nature and Causes of the Wealth of Nations”, published in 1776. After Adam Smith, the “Classical School” of Political Economy continued to shed fresh understandings on the subject; the best-known figures include Thomas Malthus, J B Say, David Ricardo, whose name is always associated with the Law of Rent, Karl Marx and John Stuart Mill. Despite the divergence of their views, common to all was an analytical method, based on introspective reflection on their own experience, the use of reason and “thought experiment” and the expression of their ideas in the form of narrative.

Late in the nineteenth century, political economy metamorphosed into economics. The dropping of “political” is perhaps significant, because political implies acknowledgement of the polity – the ordered society. The subject shifted from narrative to a mathematical expression, the pioneers in Britain including Alfred Marshal and J M Keynes, who was first a mathematician. With the development of statistical analysis, it became possible to construct complex mathematical economic models, a famous example from the 1940s being an assembly of transparent tubes and flasks filled with water, which purported to represent the British economy. With the advent of computers, economic modelling has become ever more sophisticated; such economic models include those used by the UK Treasury and by professional investors such as the managers of “hedge funds”.

The social context

Economics does not exist in a vacuum, but within a social context in which there are problems to be addressed and powerful interest groups to be appeased. The Physiocrats formulated their theories in response to the financial problems of the French king and in opposition to Mercantilism, a theory that had developed in the sixteenth century; broadly speaking, Mercantilism equated wealth with money, and in consequence led governments to pursue policies of trade protection and other measures that resulted in a positive balance of payments and the import of gold bullion. Mercantilism was comprehensively refuted by the Physiocrats and their successors, but nearly a century would pass before politicians implemented the laissez faire trade policies that paved the way for the great expansion in prosperity in Great Britain and America. Yet because of the widespread poverty that persisted alongside this advancing progress, and an unwillingness to examine the causes of this poverty at a fundamental level, there was always a core of support for mercantilism and protectionism, which was to surface strongly again from the late nineteenth century onwards. To this day, the EU remains committed to protectionist trade policies against the outside world, and until recently, the ghost of mercantilism manifested as an obsession with the balance of payments.

The social context is significant in another way, too, because economic theories inevitably support particular courses of action and if these threaten the powerful, then those who advocate the supporting theories are discreetly silenced. No doubt, if there were a powerful pecuniary interest in denying the existence of the force of gravity, many scientists would have been found to come forward to assert that there was, indeed, no such thing. But whereas in sciences such as physics and chemistry, it is possible to devise controlled experiments that will, sooner or later, settle disputed questions, this is not possible in economics, and so nothing is ever settled. Worse still, the observer is always part of the system and so can never be disinterested. Added to this is the general limitation that constrains every discipline – only certain ideas are thinkable and available within a particular epoch.

Not only do we have, then, a discipline with no accepted body of theory; there is no possibility of it ever acquiring one. Is there, then, no hope of gaining any understanding, and where does morality come in? In such a situation, we can do no more than go back to the methods of the classical economists and reflect on our own experiences and observations.

Defining terms

In order to do this, we must first define our terms and hold firm to those definitions and concepts. We can tentatively define political economy as “the study of the production and distribution of wealth”. “Wealth” is “natural products that have been secured, moved, combined, separated or in other ways modified by human exertion so as to fit them for the gratification of human desires”. From this definition of “wealth”, as a product of labour, it follows that not everything that can be sold or exchanged can, in political economy, be regarded as Wealth. Neither land nor any other natural resources are wealth, since they are not a product of human labour; nor are slaves, whose value represents the power of the slave owner to appropriate the labour of others; nor paper money, title deeds or share certificates of no intrinsic value, these being merely evidence of ownership or claims.

“Capital” is defined as “that part of wealth that is devoted to the aid of production”, whilst “Labour” is “human exertion applied to the creation of wealth”, and Land is “the whole material universe outside of man himself and his products”. Land and Capital, on these definitions, are always clearly distinguishable. A building is Capital, the site it stands on is Land. Minerals in the ground and fish in the sea are “Land”. The mine and its equipment, extracted minerals, fishing boats, fishing nets and fish in the net are Capital. The produce remains Capital until it is in the hands of the final consumer. The characteristic feature of Capital is that Labour (human exertion) has been required for its production.

Each contributor to the production process receives its share of the produce. “Wages” are the reward for labour. Interest, strictly speaking, is the reward to Capital – the owner of the fishing boat and nets, who may, or may not, be the fisherman. Rent is the reward to Land and arises because the application of equal amounts of Labour and Capital yields differing quantities of Wealth, depending on the quality of the Land – its natural and communal advantages. Rent does not arise through human exertion but is an attribute of Land.

This view has the merit of providing a clear picture of Wealth being produced by the action of human labour on Land, aided by Capital, and implies that there are three factors of production – Land, Labour and Capital. It explicitly acknowledges the key rôle of the natural world. If any one of these three factors is missing, no production can take place; even the most primitive hunter-gatherer requires a container (Capital) to collect the wild berries.

Unfortunately, the terms as defined above differ not only from their meanings in common speech, but also from their use in the accountancy and legal professions. “Wages”, “Interest” and “Rent” are customarily lumped together under the heading of “profit” or “income”, whilst “Land” and “Capital” are conflated in the single term “capital” or “property”, and where chattel slavery persists, slaves would be considered by the slave owners as part of their capital investment. This confusion has the effect of diverting attention away from the privilege enjoyed by landowning interests, with the result that analysis of the function of land in Political Economy tends to be squeezed out of the discourse. This is how the significance of the natural world in Political Economy comes to be ignored.

Original sin is undoubtedly at work here in directing minds away from the truth. If Land is in private ownership, a landowner has only to collect the rent or wait for it to be paid into his bank account. The institution of Land ownership amounts to private appropriation of God-given resources. In the account of the Law of the Jubilee, the Israelites were told that “Land must not be sold in perpetuity, for the land belongs to me and to me, you are only strangers and guests” (Leviticus 25:23)

Moral questions

We see, then, that morality undoubtedly impinges on Political Economy. Moral conduct is implicit in those relationships that belong to Political Economy, since it is assumed that the Eighth Commandment is observed. Morality obliges us to study the discipline with detachment and honesty, which may be difficult. We might, for instance, be brought uncomfortably to the realisation that we are acting oppressively or dishonestly. And morality determines desire; if people see their fulfilment in the extravagant consumption of luxury goods, they will devote their lives to producing them.

But there is an aspect in which Political Economy is no more moral than, say, physics, which, morally neutral in itself, can be applied to moral or immoral purposes. There can be no doubt that we tend to act consistently and, in the aggregate, it is fairly safe to describe our actions in generalised terms to the extent that it can be said that Political Economy is subject to laws. There is, for example, the “Law of One Price”, which is a formulation of the everyday experience that similar goods sell for much the same price at a given time and place. There is the Law of Rent, which any street busker understands on looking at the number of passers-by when selecting his pitch. The differential advantages of the different pitches in use give rise to Economic Rent of Land in precisely the sense that David Ricardo described it.

The truth of such observations is clearly not dependent on the beliefs of the observer, being outcomes of the general principle that people seek to satisfy their desires with the least effort. There is an assumption here that people will, in the aggregate, act rationally – for instance, other things being equal, we pick the lowest fruit on the tree first. Rational action of this kind is not immoral.

But other things are never quite equal. Political Economy is about people with opinions, beliefs and values, making decisions and acting on them, in contrast to the physical sciences, in which passive objects behave in a predictable way in response to the forces applied to them. Nevertheless, provided that we are rigorous about our definitions, careful, consistent and precise in our use of terms, and confine ourselves to a narrative description of Political Economy, we can gain valuable insights into the nature of the underlying relationships that exist. And whilst this sense, Political Economy has no more to do with morality than does physics, an understanding of economics is essential to anyone attempting to build a moral society, since those who advocate particular economic policies need to appreciate the forces they are dealing with. The politician who implements a harmful policy in ignorance – or perhaps defiance – of these forces, is as culpable as the incompetent engineer who designs a dangerous structure. If, for example, people have sufficient desire to ingest harmful substances but governments legislate to restrict supplies, the trade will be driven underground. The forces of Political Economy operate regardless of the intentions of lawmakers.

The proposed minimum wage will, likewise, not abolish the forces of Political Economy. If Smith is told that he must pay no less than amount “X” to Brown for his labour, Smith may very well conclude that Brown’s labour is not worth “X”, and unless Smith is compelled to employ Brown, the latter will be jobless. Morality directs us not to support the idea of a minimum wage, but to ask why Brown has no alternative but to accept a penurious wage.

Market regulation at this level cannot be used as means of redressing economic injustice. If it is decreed that Smith must give Brown amount “X” in exchange for product or service “Y”, a bureaucrat is required to determine “X” and “Y”, and a referee to stand between Smith and Brown to ensure that the exchange takes place on the decreed terms. Even in the unlikely event that the bureaucrat got “X” and “Y” right, they would not stay that way for more than five minutes, and the referee will need to be backed up by, at the least, a policemen, and possibly a man with a gun. The fruits of controlled markets are shortages, gluts, fraud, smuggling, corruption and black markets.

Does this mean that there is no alternative to allowing the free market to run riot? Willing exchange is no robbery, although anything stolen remains stolen no matter how many times it has been traded subsequently, and exchange is not entirely willing if either party to the exchange is in an inherent position of weakness. Moreover, the price mechanism does not always respond to supply and demand quite as most advocates of the free market would have us believe. The price of manufactured goods and foodstuffs does indeed tend to follow the rules, falling in times of glut and rising when shortages occur, the higher prices then calling forth increased supplies. But the land market is entirely different; when prices are rising, there can be no additional supplies, because land (including natural resources) is fixed in quantity and sites are immovable. There is a rush to buy, creating a situation of positive feedback in which land prices are subject to runaway increases, eventually ending in an economic crash. It is a phenomenon about which mainstream economic theory has little to say.

What, then can we conclude? Economic injustice is a grave evil and the source of great hardship. It cannot be righted without the necessary understanding of how economic relationships develop and operate. Because we live our lives within a Political Economy, those relationships are accessible to observation by all of us. We therefore have a moral duty to observe and reflect, in a disinterested manner, on what is happening. That duty extends to forming our own views and drawing our own conclusions. It is a task of questioning and discernment.