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August 7, 2009

Ethics and Economics - From Adam Smith to Amartya Sen

Dr. Osama Kadi

The status of global economy exhibits outrageous contradiction between basic ethical values and economics, thanks to the economical policies of superpowers.

The surge in food prices could push 100 million people into deeper poverty, and could mean “seven lost years” in the fight against worldwide poverty, according to World Bank President Robert B. Zoellick at the International Monetary Fund-World Bank Spring Meetings in Washington on April 14th, 2008.

“Based on a very rough analysis, we estimate that a doubling of food prices over the last three years could potentially push 100 million people in low-income countries deeper into poverty,” Zoellick said, “This is not just a question of short-term needs, as important as those are; this is ensuring that future generations don’t pay a price too.” 
Zoellick’s point becomes obvious when looking at the extreme increase of prices of maize, for example; up by 80 percent between 2005 and 2007, and has since risen further. Many other commodity prices also rose sharply over this period: milk powder by 90 percent, wheat by 70 percent and rice by about 25 percent.

And the World Bank clearly stated that an estimated 1.5 billion people survive on incomes of US$2 or less a day.

Rising food prices threaten to cause more hunger and malnutrition, while climate change is already having an impact on agriculture, the source of livelihood for the majority of people in poor countries.

Infectious diseases, particularly HIV/AIDS and malaria, are widespread. Many of the poorest countries in Africa are landlocked and lack reliable electricity, preventing the development of business and trade.

Poverty, hunger, the poor distribution of national and international wealth, and the widening gap between rich and poor countries doesn’t leave any doubt that the superpowers’ economical decision makers have diverted from the ethical and moral values of Adam Smith (1723- 1790), the father of political economy.

Adam Smith himself was a moral philosopher, and many economists in the nineteenth century made significant contributions to what these days would be called social ethics. 

In one of his important books, The Theory of Moral Sentiments (1759), Adam Smith commented on ethics and human nature.  It begins with the following assertion:

“How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it. …. That we often derive sorrow from the sorrows of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous or the humane, though they perhaps may feel it with the most exquisite sensibility”

The term “Sympathy” was the term that Smith used for feeling these moral sentiments, or what we would today call “empathy”:

“As we have no immediate experience of what other men feel, we can form no idea of the manner in which they are affected, but by conceiving what we ourselves should feel in the like situation. … It is the impressions of our own senses only, not those of his, which our imaginations copy. By the imagination, we place ourselves in his situation.”

Amarty Sen, an economist from Bangladesh and the winner of the 1988 Nobel Prize in Economics, believes in the same ethical- economic paradigm. 

In one of his most original discussions, Sen indicates that the richness of the modern literature of ethics is much greater than has been accommodated in economics. 

The extremely narrow assumption of self-interested behavior in economics has impeded the analysis of very significant relationships. Mainstream economic theory, however, identifies rationality of human behavior with internal consistency of choice and, further, with maximization of self-interest.

But, as Sen noted in his book On Ethics & Economics, there is neither evidence for the claim that self-interest maximization provides the best approximation to actual human behavior nor that it leads necessarily to optimum economic conditions.

Sen refers to the free market economies, such as Japan, in which systematic departure from self-interested behavior in the direction of rule-based behavior – loyalty, duty, and good will – have been extremely important for the achievement of individual and group economic efficiency. An accurate interpretation of Adam Smith, Sen demonstrates, does not lend support for believing in, or advocating, a narrow interpretation of self-interest behavior either in ethics or in economics.

Freedom, Sen argues in his book Development as Freedom, is both the end and most efficient means of sustaining economic life and the key to securing the general welfare of the world's entire population.

Releasing the idea of individual freedom from association with any particular historical, intellectual, political, or religious tradition, Sen clearly demonstrates its current applicability and possibilities.

In the new global economy, where, despite unprecedented increases in overall universal welfare, the contemporary world denies elementary freedoms to vast numbers--perhaps even the majority of people--he concludes, it is still possible to practically and optimistically retain a sense of social accountability.

There is a call of reunion between Economics and ethics as started by Smith and to be continued especially by Amartya Sen, and philosophers such as John Rawls, Robert Nozick, and Ronald Dworkin. 

These philosophers are often aiming to provide among economists an ethical rationale for -- or rejection of –income redistribution. This wave of ethical sentiment will stay for too many years to come, and until then the citizens of this globe will suffer from hunger, poverty, and malnutrition.

Nearly 15 percent of all children born in Mozambique fail to reach their first birthday, and the infant mortality rate is 2 percent for children of educated mothers and 10 per cent of those whose mothers have no schooling.

In Eritrea, immunization coverage is close to 100 percent for children in the richest fifth of the population but only 50 percent for the bottom fifth. While 7 of every 1000 American babies die in the first year of their lives, 126 of every 1000 Malian babies do. (World Development Report 2006)

Do we still feel for global Misery as Smith said before? And if we do humanely feel the misery of billions distressed, have the superpowers decided to alter their selfish economical paradigm to sympathy – by implementing new policies?

Should we blame Indian and Chinese people because they decide to eat two meals instead of one, as the German Councilor shamelessly declared, or blame countries which didn’t keep their promise to devote 0.7 per cent of their Gross National Income (GNI) to development aid? 

According to the United Nations, The Millennium Development Report 2007, only five countries reached or exceeded the long-standing United Nations target of 0.7% of GNI to development aid: Luxembourg, Denmark, the Netherlands, Norway and Sweden.

“The World wants no new promises,” UN Secretary –general Ban Ki-moon declared in a forward to that report. The report also points out that total official development assistance (ODA) fell 5.1 per cent in real terms between 2005, and 2006, the first decline since 1997.

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