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Ethics of Market Efficiency with Jonathan Wight



Dr. Jonathan Wight is a professor of economics in the Robins School of Business at the University of Richmond. He has authored and coauthored four books, including most recently Ethics in Economics: An Introduction to moral frameworks. Much of his work concerns the intersection of ethics and economics pedagogy, including a Templeton Foundation backed project which introduced ethics in economics to several thousand economics teachers. In this podcast, we discuss the ethical underpinnings of differing definitions of market efficiency.


APA citation: Cazzell, A. R. (Host). (2020, January 28). Ethics of Market Efficiency with Jonathan Wight [Audio Podcast]. Retrieved from https://www.ambercazzell.com/post/msp-ep24-jonathanwight


NOTE: This transcript was generated automatically. Please excuse typos and errors.


Jonathan Wight: 01:11 I remember particularly the exact moment when I suddenly took a strong interest in ethics and economics was I went to a borders bookstore and it was about eight o'clock at night and I was perusing the economics section and I came across this wonderful Liberty fund edition of Adam Smith's theory of moral sentiments, which had been published in 1759. And then the Oxford university press had issued a new updated version of this and seven in 1982 or thereabouts. And then the Liberty fund had produced this wonderful paperback copy. And I'm looking at this thing and I'm thinking, Oh, well I'm, I've got the wealth of nations, so I might as well buy this book and it will be on my bookshelf next to that. And I'll just have it kind of there because I've had no reason particularly. So it was cheap and I brought it home and I thought, well, it's about 10 o'clock at night by then.


Jonathan Wight: 02:15 And I think I'll open a few pages and it'll probably put me to sleep because it'll be boring philosophy. I opened it up and I really couldn't put it down. It was so exciting. And I came back to campus and put together a reading group. Oh, faculty members from around 12 disciplines around campus. We had economics of course, history, political science, religion, philosophy, law, and we all came together and spent a year reading the theory of moral sentiments together. And I was so lucky to have somebody on campus called Scott Davis, who's in the religion department one of the smartest I've ever met who knew all about the theory of moral sentiments and was able to really give me a good rundown. And so that turned into a sabbatical project where I went out to Silicon Valley and wrote my first book on Adam Smith. And this was an academic novel.


Jonathan Wight: 03:22 Actually, I wrote it as a novel because I thought it would be more engaging as a teaching device. It's called saving Adam Smith a tale of wealth transformation and virtue. And as I was heading out to go to California on my sabbatical, my Dean pulled me aside and said, why are you wasting your time on ethics? You're an economist and luckily I had tenure so I could politely politely say to my Dean, well, I think it's important and I want to learn this and I think it's important to other people. And later on he came around to see that point of view. So I've, I'm, I've been very lucky at the university of Richmond, I've been very supported being off in this wilderness called ethics and economics and a lot of departments I'm sure would not consider it to be an acceptable area of study. But in my department it's been very supportive.


Amber Cazzell: 04:22 That's very neat. That's such a fun story. And I, I just finished the book by Russ Roberts, how Adam Smith can change your life and the beginning of that book, his story sounds so similar to yours that he kind of accidentally com came across the theory of moral sentiments. Didn't really know that much about it. Kind of got it as like a, a dust collector, wound up reading it and then couldn't put it down and loved it and all of that. So it must be really good. Now I want to go back in and read the original text. So I'm not sure how many, I'm not sure how many listeners are familiar with the fact that Adam Smith had a sort of a moral framework that he was working out of. Could you give me just a brief backdrop of what was in the theory of moral sentiments? What was Adam Smith doing in


Jonathan Wight: 05:22 Sure. Well first of all, Adam Smith was a Scottish philosopher in the 18th century and he dealt very deeply into issues of morality. I was part of the Scottish enlightenment and he was it's a long story, but he ended up becoming a professor of economics, a professor of morals at Glasgow university. And it was there that he wrote the theory of moral sentiments, which was published in 1759. Smith in that book is telling us about the life we know he's, he's proceeding inductively from facts and he's developing a theory that can explain the facts. So this is very different from, I'm Mark White who you said you interviewed recently who is a Kantian and Kant proceeded as follows Kant said God gave us rational minds and we can use our rational minds to deduce the laws of morality, which are absolute and true for all time.


Jonathan Wight: 06:37 Adam Smith starts at the same place with God at the top, but Smith says, God created nature and nature wants us to be successful at survival and procreation and in order to be successful at survival and procreation, nature implants in our breasts, really strong instincts. Not a really strong rational mind, but really strong instinct. So to survive we need to eat. So it's not that humans sit around and think rationally and deduce for the survival of the species. I need to go get carbon and protein and put them into my body. That's not the way it works. It works through our instincts. We have craving for food, for fat, for other kinds of things in our diets. Same was true with procreation. We don't rationally deduce that aha survival of the species would be improved if I had sex. No, it works through our instincts.


Jonathan Wight: 07:45 We have these cravings for sex. These are instinctual responses. So that's a very good starting place to try to understand Adam Smith's theory of moral sentiments. It gives rise to Smith's saying these natural instincts that make us successful revolve around our ability to socialize and the role of socialization in developing in every human breasts, self-control, which is necessary for morality. Hmm. So I don't want to dump too much on you all at once. Do you want me to go on? Yeah, no, this is great. Please do. Okay. Okay, good. So we've got human instincts. Well, what are these instincts? Well, one prime instinct is for the self. A baby comes out of the womb and what's the first thing the baby does? The baby is crying. And what is that? That's an instinct that the baby has to cry. It's not a rational thought process. It's just instinctual. And that crying of course, opens up the lungs. The crying calls attention to the baby saying the baby saying, may, Hey, I'm over here. I want love, I want warmth, I want food, I want attention.


Jonathan Wight: 09:08 And that's a very normal and natural instinct Adam Smith says. So the instinct for the self is entirely appropriate. But depending on the context you, you have to develop self control. And so socialization is the process of helping a young child develop self control so that they can in fact lead a more virtuous life. So for example, when a baby is six months old and the baby's throwing food left and right, nobody expects a baby that age to really understand self-control. But by the time the baby gets to be, say, two years old, the baby has developed perspective. The baby can separate things. Okay. Now humans have, Smith said, have a very strong instinct to feel what other people are feeling. So the baby and the parent have a strong instinct to feel what the other is feeling. You've probably seen the videos of babies that are crying together. One baby starts to cry. What do the Other babies start to do? They start to cry as well. Or one baby starts to laugh, other babies start to laugh. So we have the strong instinct, first of all, to feel what others are feeling and then to get into emotional equilibrium with what they're feeling.


Jonathan Wight: 10:42 And this is a really powerful instinct. It's not a rational thought process. It's instinctual. So you get back to the baby who's now two and a half, and the mother or the father, the caregiver who is there in emotional equilibrium. The parent is holding the child, they're rocking the child, the baby's smiling, the parent is smiling, and they're in emotional equilibrium. And by the way, Paul Zak, who's a friend of mine, and Claremont has been able to discover that this kind of bonding releases oxytocin in the brain, which is a bonding hormone. So if you get a chance, you should interview Paul Zack, really good, really good conversation with him. In any event, so, so the parent and the child are in this bonding situation. Parent puts the child down to give the child some food, and the child reaches out and smashes the food into the face of a baby brother.


Jonathan Wight: 11:57 Well, the parent is not going to be happy with this at all. The baby at two-and-a-half is old enough to know the difference between appropriate and inappropriate behavior. And that bond between the parent and the child is broken. They are no longer in equilibrium emotionally. And when that break becomes a parent because the parent is scolding the child or withholding sympathy, then that child is going to start to cry even though they did the thing that was bad. And even though it was the baby brother who got hit in the face, the perpetrators, the one who's going to start to cry because they feel that pain of that break. And from that the child is going to start to learn that when they behave inappropriately according to group standards or social norms, there's going to be that emotional break. And from that they begin to develop self control. So Smith's story is about, we take the title of his book, the theory of moral sentiments. Theory is about generalizations. Moral is about right and wrong. Sentiments is about feelings. So this book is about feelings about right and wrong and generalizations we can make. And again, Smith is proceeding inductively from what we observe in the world about our feelings about right and wrong and what kind of model we can develop from that.


Amber Cazzell: 13:35 So how did Smith kind of veer into economics and writing wealth of nations? It seems like that was actually more out of character, so to speak.


Jonathan Wight: 13:48 Well, there's more to tell you about his theory and then I can tell you about economics if you want. No, that's okay. So the story gets a little more complicated because at the base of the model is our feelings about right and wrong and how these feelings give rise to social norms. Because if you sympathize and I sympathize and we all sympathize with the victim of a crime, then that's sympathy gives rise to a, our anger and our resentment of people who would violate those kinds of social norms, which eventually gives rise to actual rules, legal rules which are called the institutions of economics or law or society more broadly in general. So once there are in place these social norms, which happens over time, then I'm sort of become, I'm judged on the basis of whether I adhere to those social norms.


Jonathan Wight: 14:56 Right? So judgment or irrational mind plays a very important part in the story. I mean, all we've all, so far all we've been doing is talking about feelings, but rationality plays a role. And I'll explain why it goes something like this. Suppose you are walking along the street and you encounter a friend who is sobbing. They're just in tears. They're just inconsolable. And you say, what's the matter? What's, what's wrong? And they say, I just got an A minus on a practice quiz. You say, what? What, why? Why are you, why are you reacting like that? It's, it's nothing. And we would use our judgment. Just say our rational minds are telling us this person's response to their situation is totally wrong. It's not right. So we withhold our sympathy. In that case, we can't get into emotional equilibrium with them on that case. But on the other hand, if they had told us that they're sobbing inconsolably because their best friend had just been diagnosed with a terrible disease, well then it would be totally understandable.


Jonathan Wight: 16:14 We could be an emotional equilibrium with them. So our judgment is playing an important role here. And when we're in emotional equilibrium with someone, we have judged that the circumstance which gave rise to their emotional feeling is appropriate to that situation. So reason and judgment are playing an important role here. And if enough people share this rational judgment that it's appropriate to feel a certain way towards a certain thing, then that's how the social norm develops. But social norms therefore give rise to rules and duties and we are duty bound to obey those rules. So that I might, an example would be, suppose I go to a party and somebody says something about me that's deeply insulting and I immediately feel anger and I feel resentment and my anger and resentment. These are instincts for justice that Smith writes a lot about. These are powerful instincts.


Jonathan Wight: 17:22 And my immediate instinct could be in some cases to pull out a gun and try to shoot the person for, for insulting me in that way, for not showing me the proper respect. And all too often we read in the newspaper, these are the kinds of things that give way to violence in our society. And Smith would say that response was totally inappropriate to pull out the gun and to act on my feelings was totally inappropriate because we live in a society where there are social norms and there are rules and I have a duty to conform to those rules. And therefore my duty is to not act on my feelings. It's not proper, it doesn't show propriety. And if I go home and I think about it and I realize my anger, even though my anger was just the idea that I'd pull out a gun and wipe somebody away for, for that is ludicrous. And I can't therefore in the, when in when I'm calmed down, I can't defend what I was about to do. Even I'm, I'm conforming my actions to my duty.


Jonathan Wight: 18:37 So in that sense, Smith is similar to Kant in that Smith would say, we do have a duty to act in certain ways, but the difference is Smith does not say my duties are true for all time and all places as Cottonwood because my duties derived from circumstances and from time and place. So moral norms evolve. Slavery was considered perfectly okay for thousands of years in some parts of the world. And yet once people could identify with slaves in a, in a feeling way, once they could feel the pain of the slave and they could identify with that and get into moral alignment with that, that gave rise to abolitionism and eventually the abolition of that. The same is true of the rights of women to vote. The same is true of gay marriage. These institutional rule changes according to Smith would change as people's moral imaginations changed as people could use their imagination to put themselves into the shoes of a woman who's not allowed to hold property, or not allowed to vote, and could feel her pain and could sympathize with that and can realize that the rules of the society as they currently exist are wrong and need to be changed.


Amber Cazzell: 20:09 So let's go back to how does that, he then moved from the theory of moral sentiments into writing a wealth of nations?


Jonathan Wight: 20:21 Well, the theory of moral sentiments was a huge hit back in those days. And it made Adam Smith quite famous. And a result of that he got an opportunity to be a tutor to a young man and to travel on the continent with this young man and his brother. And so they spent time in France, a little bit of time in Switzerland. And during that time, Smith was meeting with people like Voltaire and he met with the French physiocrats and other reformers of the time who were interested in economic reforms. So Smiths had already written, he had been giving lectures on commerce, but he hadn't actually, I don't think, started a full book until he was in France and was inspired by the salons in France. And then he went back to England and went back to Edinburgh and then to London back and forth. And he was working there for a long time on the wealth of nations the book.


Amber Cazzell: 21:29 Okay. and how, like a lot of, I, I hear that a wealth of nations, a lot of times people have a difficult time reconciling his two books because a wealth of nations seems to be absent of moral theorizing. Which I think if you read between the lines, I mean, I, I haven't read wealth of nations myself, but it seems like what we're actually supposed to be talking about today, the ethics behind efficiency that he's, he's kind of saying like, okay, there are these, that efficiency is, is normative in some way, and that the invisible hand is actually in some way under girding these ethical, cultural normative practices. But maybe I'm assuming too much. So maybe I'll just stop. And back up here and let you,


Jonathan Wight: 22:23 No, I don't think you're assuming too much at all. Smith wrote the theory of moral sentiments, which is basically fundamentally about how do we socialize people in a way authentically so that they can trust and trust is a key factor in economic trade. Now, in the 20th century, people sort of forgot about that. They assume we're all kind of automatons and that we're kind of like robots and that we're all trade is invisible in a way between invisible people and anonymous trade. And that's true in many cases in finance and other kinds of markets. But it's not true most of the time in most of our office settings or work settings or retail settings, trade is not anonymous or invisible. It's up front. I mean, we're right there interacting with other people and Smith Roach in the wealth of nations. Just before he mentioned the word, the invisible handiwork, he wrote about the importance of trust and fermenting trade.


Jonathan Wight: 23:30 So trust enables you to lower transactions costs, which enables you to engage in more profitable trade and that'll make you wealthier. So there's a, there's a strong connection between the two books and this has come out abundantly in the research and the scholarship of the last 30 years. So the idea that these two books are somehow different comes from German scholarship in the 19th century. The so-called das Adam Smith problem. But it, it isn't really a problem. And I think there are many, many scholars, not just myself who would point you to the evidence that these two books are essential together. It's impossible to really understand how you could have limited government in wealth of nations unless people had developed sufficient self-control to, to maintain their own behaviors, to appropriate social norms and to do their appropriate duty at times.


Amber Cazzell: 24:37 Yeah. Interesting. And so from Adam Smith's perspective, that's all just naturally going to be baked in.


Jonathan Wight: 24:49 Well, no, I don't mean to suggest that morality is baked in because we're getting what's baked in are the human instincts for sociability. But then your experiences and what you learned from those experiences are the key thing that will, that will determine how you learn. So it isn't that we're morality is baked in morality has to be learned through appropriate socialization.


Amber Cazzell: 25:19 Yes. But I guess I'm referring to like the idea of the invisible hand that on this aggregate scale, assuming that people are being socialized, there's, there's to some degree these moral norms come into play and bear on the market. It's, it's not as though the market can be neatly separated from moral sentiments. And so for Adam Smith then this idea of efficiency, which let's turn to now this idea of efficiency is carries with it normative principles that are at work. Even though that's, it seems like reading your article that economists rarely acknowledge that.


Jonathan Wight: 26:20 Yeah. Let me, let me just make a mention something before we get to that idea of efficiency and the ethics behind efficiency is that Adam Smith didn't have the same idea of efficiency that we do in the 20th century or the 21st century. His idea was about dynamic growth and change over time. So we had kind of a dynamic vision of so on, but there was a lot of ethics tied in with what he thought was fair and just that shows up later in 20th century and 21st century. But 20th century efficiency is very different. Would you like me to go into that at this point? Okay. So we can start with a very fundamental idea that you own something and you are no longer want it and you're willing to sell it to me and I, I'm willing to buy what it is that you have.


Jonathan Wight: 27:24 And so if we can agree upon a price, then you get to choose where you want to do. And I get to choose what I want to do and we can satisfy our own individual preferences through exchange. And so economists would say of the 20th century would say welfare, human welfare is improved when we get to satisfy our preferences to do, to take certain actions. And so efficiency could be seen as maximizing the satisfaction of preferences. Now it gets, it gets tricky. And the reason it's tricky is because the easiest version of this comes from Vilfredo Pareto, an Italian economist who in the early 20th century, basically he came up with a story that goes something like this. Voluntary trade is the means by which we determine what is efficient and what is not efficient. Because through voluntary trade, you can satisfy your preferences.


Jonathan Wight: 28:32 I can satisfy mine and we know we've reached a state of efficiency that is, we've maximized when all such voluntary trades have been exhausted. And it's not possible to make anybody better off without making somebody else worse off. And because people are considered to be rational, you wouldn't ever voluntarily make yourself worse off. So therefore, voluntary trade is kind of the gold standard for determining efficiency. This is assuming that we don't have pollution or other externalities involved. It's just one on one trade and doesn't affect anybody else, but the problem and parade those ideas really helpful. So for example, in the olden days I'm old enough to remember airplane flights when, when people would be not be able to get on a plane because that overbook the seats and it was first come, first serve whoever got to the airport first, got on the plane and then they put an economist at the head of the regulatory agency federal transportation administration.


Jonathan Wight: 29:49 And the economist said, let's use Pareto's idea. Let's allow for voluntary trade so you could get to the airport early. You get on the plane, they discover they've oversold the seats and then they announced over the loudspeaker, would anybody give up your seat in return for some gift from us? So that it's somebody else who's got a seat. It's got a reserved seat, could get on the plane. And nowadays it happens every time you fly. That we, we, we find a voluntary trade. So that's a great example of Pareto's insight, very useful. But it can't help us solve any of the big problems we face today, which would involve government, public policy to some degree, whether it's global warming or it's any, anything as simple as taxation or any public policy at all. And the reason you can't use pareto to help us there is because government public policy inevitably is going to hurt somebody.


Jonathan Wight: 30:58 If we talk about trade, should we or should we not impose a tariff on imported goods? Imposing the tariff is going to help domestic producers, but it's going to hurt domestic exporters'. So domestic exporters, would never agree to it and therefore it can never happen. So in this was a real problem for economists because economists think we have a lot to add to the public discussion and we're not able to have this discussion cause our measure of efficiency is only about voluntary trade. So in the 1930s, a new measure called Kaldor Hicks from two, two different economists Kaldor and another Hicks developed simultaneously a measure. And this is how it goes. We'll, we'll call something efficient. As long as the winners win more than the losers lose. So if we change the policy on tariffs and we've worked, for example, to lower the tariffs, as long as the winners, the consumers would win more than the losers would lose. And we'll call it efficient, whether or not any compensation is paid to the losers. So in Pareto's world, you always have to pay to get something in the Kaldor-Hick's one you don't, you impose a public policy. Public policies has winners and losers. As long as the winners get more than the losers, they could in theory compensate the losers, but they don't have to.


Amber Cazzell: 32:40 So, and how, and how is winning or losing measured? Is it just by dollars?


Jonathan Wight: 32:50 Yes. By dollar votes cast in the marketplace. I can give you a numerical example, which I use in class anyway. Suppose suppose you have something that I want to buy a painting that you're tired of it and you're willing to let go of it for 200 bucks. I on the other hand, love this painting. I think it's great. I'd pay 300 bucks to get that painting. So which we agree on a price of 200 bucks. So you valued it at $100. That's what you would have been willing to sell it for. But you actually sell it for 200 so you get $100 more than you thought it was worth. So guess what? Your wealth just went up by $100. You used to own a picture and now you own $200, you just got $100 of extra wealth. I, on the other hand, value the picture of $300 and I only have to give up $200 of my money.


Jonathan Wight: 33:59 So I used to, I had $300 in hand, I give up 200 now I have the picture I value at 300 plus I have another a hundred dollars in cash. So I just made a $100 in value. So that would be an example of Pareto efficiency through trade. We can create a wealthier society through satisfying our preferences. But let me tell you how Kaldor-Hicks analysis would work. Kaldor-Hicks is just saying, as long as the winners make more than the losers, it's a go. So I could break into your house and steal your painting. I get $300 a value, you lose $100 of value. So what's the net increase in value to society? $200. So if we were to trade for for $200 for your painting, then that gain to society would be $200 of extra wealth created through voluntary trade. But if I steal your painting, then I get $300 a value, you lose $100 of value.


Jonathan Wight: 35:14 And again, society's wealth goes up by $200. Now this is in accordance with Calder Hicks because preferences have been satisfied to the extent that the winners make more than the losers lose. But every economist I know is going to immediately stand up and yell at me and say, but of course we have laws, we have property rights. You can't simply steal something that you don't have. But that in fact is what has been going on. People using Kaldor Hicks to essentially take something from somebody else at a lower price and use it as a higher price. So there's a famous Supreme court case of the Suzette Kelo. Do you own your house in new London, Connecticut? And a developer wanted her house to put it in a fancy development. You didn't want to sell. Yeah. And the new London use eminent domain to force her to sell at below, which she valued the thing.


Jonathan Wight: 36:25 So essentially it was the government stepping in for a private developer and allowing the private developer to get her land at below what she was willing to sell it for. You can justify that on the basis of Kaldor-Hicks by saying, well, the developer is going to create a lot more wealth than Suzette Kelo was. Right. Now the important part for me with Kaldor-Hicks is to say, we live in a democracy. We live in a society where there, where there are laws where there's impartial courts and juries, Suzette kilo had access to a lawyer. She could take her case to court. It went all the way to the Supreme court. They didn't decide in her favor, but at the very least, she was treated appropriately. And with respect by the judicial system, she had newspapers she could write, she had candidates she could support or not support in elections.


Jonathan Wight: 37:27 So she even had the right to leave the country if she wanted to, she could exit. And so although she might think she was mistreated by Kaldor-Hicks, she lived in a society in which due process and human rights matter. But think of all the multinational companies that operate overseas in war torn African countries or Asian countries and they want to set up a factory. And people's property rights are somewhat tenuous and they use the power of eminent domain to put in a gold mine or something else. And the people don't have access to courts. They don't have access to a democracy or a free press. And therefore the moral justification for the coercion used in Kaldor-Hicks, which I think we can justify coercion. If you're living in a society with due process and human rights, it's a lot harder to justify that when you're in a country that kills journalists. And kills judges that's decide in the wrong way that people simply disappear for raising these strong ethical issues. And so I would caution everybody that the Kaldor-Hicks version of efficiency is tied up in a whole series of other ethical debates about how it's appropriate to treat other people. And it's not simply the case that you can talk about economic efficiency in the modern way we do without considering the context in which you're going to apply the Kaldor-Hicks version of efficiency.


Amber Cazzell: 39:25 So why, why was there kind of a shift from Pareto efficiency to Kaldor-Hicks efficiency? Are you saying it, it kinda came down to like, okay, frontier expansion is like limited and there's


Jonathan Wight: 39:42 Well here, no, the story would be something like this that parade auto is, it's a brilliant insight and it's very useful, but it can't help us solve some of the biggest problems we have. Like should we, or should we not impose tariffs on imported goods? And the reason we can't use Pareto to solve that is because anything we do is going to involve pain to somebody. We either do impose a tariff and that that imposes a pain on importers or we don't impose a tariff, in which case that imposes a cost on domestic producers. So,


Amber Cazzell: 40:21 Right. I guess I'm just thinking, hasn't that been the case throughout history? So is it just that Kaldor Hicks put a name to a type of efficiency people were already operating out of?


Jonathan Wight: 40:34 Maybe so. Maybe. So. I think it's a little more formal than that because of the way we measure winners and losers. It all has to do with wealth creation as the only metric of human welfare. Whereas in olden days, even if you're talking to Adam Smith and Smith is talking about the need for trade it would go way beyond the metric of the dollars gained and lost in, in wealth creation. It would be, we talk about national security, we could talk about jobs, we could talk about fairness, we could talk about a lot of other human values aside from just maximizing the dollar wealth created in the market.


Amber Cazzell: 41:21 Yeah. Yeah. So what, what are, like, when economists think about welfare and maximizing welfare, how are they really measuring that? Is that on the basis of things like basket of goods or how does that, it seems like that's a, of course a moral judgment call and I'm curious where that comes from.


Jonathan Wight: 41:45 It certainly is a moral judgment call and it goes something like this. Utilitarians Jeremy Bentham and John Stuart mill thought that they could measure pleasure and pain through your physical feelings and sensations of pleasure and pain. And they had various metrics by which they would try to measure and, and weigh your pleasure and your pain. Modern economists would say, we can't really feel, or we can't really measure your pleasure and your pain directly, but we can observe what you do through your actions in the marketplace and we can count up the money that you're willing to offer in exchange for things versus what you had to pay for things. So we're willing to use the metric of money to get at one part of social welfare, that part, which can be put under the realm of monetary exchange. And that part is fine. But the problem, as you alluded to then becomes if we say that that part of human welfare that can be measured by dollars and cents, that that part is the most important part of human welfare for hay.


Jonathan Wight: 43:07 And Amartya Sen is a really famous economist used to be at Harvard who is, you know, one of the modern giants in ethics and economics. And he was one of those people to really argue against that point of view and basically say, look, I'm a wealthy person's income or wealth could go up by a a hundred dollars. And a poor person's could go up by zero. And economists would salute that as saying, Oh, the economy went up by $100. Everything is great. And you know, Sen would say, wait a minute. We don't have to be psychological geniuses to say there's something wrong with that story. We can, we can actually tell the difference between a hundred dollars to a rich person and a hundred dollars to a poor person. Even though economic theory doesn't try to say anything about that. We as human beings can say something about that. And so Sen went on to develop what are called substantive measures of wellbeing, things like literacy, life expectancy, infant mortality levels of education. And Sen was the one who developed the human development index at the, with another Pakistani, with a Pakistani economist. So that's an attempt to move the conversation away from dollars and cents and towards other metrics by which we could evaluate human welfare.


Amber Cazzell: 44:46 Yeah, it's interesting, just across a number of these podcasts, there's a recurring theme of metrics kind of masking what are, what are moral stances that people take on issues. So like recently I was interviewing a psychologist about this idea of personal wellbeing and how it's measured. Subjectively actually sort of hand waves and you miss a lot of the richness that is involved in, in measuring really what we mean in a rich sense of wellbeing. And so it's interesting that economics is kind of dealing with the same thing, but at a much larger scope. Yeah. So what, what are, what is your hope for how economists kind of take some of your work looking at Kaldor-Hicks and your cautions with Kaldor-Hicks and actually apply that?


Jonathan Wight: 46:00 Well, I think the, the discipline has been moving along way forward. And if you get a chance, if you haven't already interviewed Deirdre McCloskey, she's another giant in ethics and economics. Excellent. And I think, and I think what we could say is the following that in economics we try to understand the world that's called positive economics. We also have make a case for changing the world that's called normative economics. A lot of economists would say, well, it's possible to do positive economics that has studied the world without any ethics. And I think that is completely wrong or misguided anyway because I think we bring our ethical values to the very science behind ethics and Deirdre behind economics in Deirdre McCloskey makes this point when she talks about statistical analyses and how you have to use your ethical judgments when you set up statistical tests.


Jonathan Wight: 47:09 So you'll know what type one error you're willing to accept. And one, what type two error you're willing to accept. These are your false positives and your false negatives. So if for example, you're studying a drug and you want to see does that drug prevent a certain disease or I'm sorry, let me change and give you a different example. Suppose you want to know whether some effluent coming out of a factory is harmful or not and you want to be certain beyond a reasonable doubt that you don't have a false positive on this. But we can't know what kind of tests to run exactly or what statistical level of precision we need until we know what the costs are. So if this chemical is being released, could cause permanent childhood brain damage. We would say the costs of this are really, really high and therefore we're willing to accept only say 90% certainty that this chemical did this potentially bad thing.


Jonathan Wight: 48:18 We don't need 95% certainty. We're willing to act with just 90% certainty. So McCloskey has been one of those calling attention to that issue that you have to have a normative judgment about how costly is it to be wrong and how willing am I to accept that my statistical test may have some probability of being wrong. So that would be an example in which having an ethical standard matters to a scientific endeavor. Like does this chemical cause or not caused some bad reaction and economists are doing econometrics all the time. They have to set type one and type two errors and therefore it's relevant. And that would be one example of many of how ethics plays into positive economics.


Amber Cazzell: 49:14 Yeah. Yeah. So what are kind of your next things that you're working on and your research?


Jonathan Wight: 49:33 Well, I have moved beyond Adam Smith, uh, to write a book on specifically ethics and economics. And I titled it that way, ethics in economics differently than a lot of others have titled things because I really do think ethics is embedded in economics. And this, this book came out on 2015 at Princeton, I'm sorry, at Stanford university press where you are. And I try to develop a case for what's called pluralism in ethics and economics. Meaning I really believe that we have to go beyond single models of ethics to really capture the complexity of the world we're living in. And to give people the tools we need to live and, and be successful. So what do I mean by this? While there three major ethical systems in Western thought anyway, one would be outcome based ethics. This would be the utilitarian view that we want to act so that our action produces the best outcome in terms of pleasure and pain.


Jonathan Wight: 50:37 This is what neoclassical economists are when they say we want to create the greatest wealth. They're trying to create certain outcomes, but that that's subject to what I mentioned before. Having in place certain constraints on behavior from our duties to behave towards other people in a certain way. So human rights, for example, an important constraint on human action. So it's not just outcome based ethics that we have to worry about. It is duty based ethics. So here's where content ethics might come into play. Milton Friedman, by the way, in his famous article on profit maximization where he said business leaders have a duty to maximize profits for their shareholders. He was talking about their fiduciary duty. Duty is an important part of the economic world we're living in. And to the extent that doctors, lawyers, accountants, economists don't follow their duty to their professional norms.


Jonathan Wight: 51:46 They create bad situations such as the collapse on wall street in 2008 where bankers and others failed to perform their fiduciary duties. But duties alone are not enough because when you asked the question, why should anybody follow their duty you have to use something like virtue ethics to explain how people come to develop self control and how people come internally to want to be worthy of the respect of other people. Not just get the respect but be worthy of it. And so in my view, no one ethical system, whether it's utilitarianism or neoclassical economics or content ism, duty ethics or virtue ethics works very well by itself. We need a pluralist approach to bring all of these into perspective with each other. So that's my more recent theme.


Amber Cazzell: 52:48 Yeah. could you tell me a bit about, I consider myself to be a virtue ethicist in psychology. So I'm always curious to learn about its shortcomings. So, so what is the shortcoming of a monism with virtue ethics in economics? This is a selfish question for me.


Jonathan Wight: 53:16 By adding the word economics, it's ringing up the idea of I guess to me there are a lot of realms of life where I could use outcome-based ethics without even needing virtue ethics to get involved. So, you know, I can make certain choices and maybe they're not, you wouldn't call them necessarily ethical choices. I can make certain choices based on the outcomes. Certainly in virtue ethics prudence that is taking appropriate regard for our future selves involves kind of figuring out what lies ahead. And we are virtuous when we take appropriate regard to our future selves. So that would be prudent. But I think to only talk about virtue, ethics in some contexts leaves out a lot of important information. So, for example, I don't think the virtue ethics approach has a economic analytical part associated with it. You sort of have to get into the neoclassical economic model, which is outcome-based in order to really get into some things.


Jonathan Wight: 54:39 So for example, should there or should there not be a legal market in kidneys or some other organ economists have a pretty strong model for analyzing shortages in, in organs and discussing how if there were to be a market, how that could end up saving a lot of lives by ameliorating the shortages in the market. So saving lives is important. How did we get there? We got there through a neoclassical model and so virtue ethics informs a lot of what I do and virtue ethics would be important in carrying out the economic research that I do. But I need that outcome based model as well, which is giving us vital information about, for example, saving lives. So to me it's kind of hard to say I can get everything I need out of virtue ethics. I do need a neoclassical model as well. I do need a Kantian model. Sometimes I need the a utilitarian model because utilitarians are animal rights activists. Neoclassical models typically don't treat, they don't count. You don't count unless you're a human who spending money in the marketplace.


Amber Cazzell: 56:06 I see. Yeah. Yeah. It's interesting too that like in the case of economics, you're trying to use a dollar to compare values across a number of different goods that may or may not be commensurate with one another. And that creates a lot of challenges potentially for virtue ethics. Yeah,


Jonathan Wight: 56:34 As it, as indeed it should. So, I mean, I think Michael Sandel, you know, what money can't buy was, it was a great discussion point talking about coercion, but more importantly the corruption of certain ideals. So why babies shouldn't be for sale, for example, even though some economists have said if you're allowed to market in babies, the child would get a richer family. The richer family would devote more resources, the child's potential in life would go up. But Oh my God, I mean, just, just so many challenges with that idea cause it's corrupting the very notion of what motherhood and fatherhood is. And we might as well it gets us into essentially slavery. Again, if you're buying and selling babies, why not adults?


Amber Cazzell: 57:29 Yeah. That's interesting. There's a interview I did for this podcast recently with a psychologist that was talking about how there are certain relationships that we can mix with money and then there are certain relationships that if you, if you confuse and label it as one that you can mix with money, you get a lot of moral outrage problems happening. And it seems like parent child relationships are definitely one of those, one of those groups, at least in in the U S where you don't really want to mix money and, and that relationship.


Jonathan Wight: 58:01 Yeah, I think this is important enough. A problem. I had a whole chapter devoted to the moral limits to markets.


Amber Cazzell: 58:08 Yes, I read it. It was fascinating.


Jonathan Wight: 58:11 Oh, thank you.


Amber Cazzell: 58:12 It was a good one. I shout out for anybody listening. I recommend it. Of course. Yeah. Anyway, good stuff. We're actually right up against time here. Jonathan. Thank you so much. I really appreciate your conversation and being a trailblazer for bringing some of these economic discussions into the podcast.

Jonathan Wight: 58:34 Amber, I am so appreciative of your asking me and also how well you were able to amass all this stuff and, and you know, and asking Interesting questions, not being an economist yourself.


Amber Cazzell: 58:47 Thanks. That's very kind.