THE MORAL TRIAL
ON THE ETHICS OF ECONOMICS
ISBN 978-90-9022960-7
© Alessandro Lanteri, 2008
All rights reserved. No part of this book may be reproduced in any form or by any electronic or mechanical means (including information storage and retrieval) without permission in writing from the author.
See http://eps.eur.nl/dissertations for the electronic version of this thesis.
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THE MORAL TRIAL On the Ethics of Economics
HET MORELE TRIBUNAAL Over de ethiek van economie
Thesis
to obtain the degree of Doctor from the Erasmus University Rotterdam by command of the rector magnificus
Prof.dr. S. W. J. Lamberts and in accordance with the decision of the Doctorate Board
The public defense shall be held on
Wednesday 9 April 2008 at 11.45 hours by
Alessandro Lanteri born in Sanremo, Italy
Doctoral Committee
Promoters: Prof.dr. D.N. McCloskey Prof.dr. J.J. Vromen
Other members: Prof.dr. D.C. Colander Prof.dr. A. Klamer Prof.dr. U. Mäki
ACKNOWLEDGEMENTS
As the accomplishment of every achievement, the completion of this dissertation is saluted with relief and gratitude. The relief, I believe, is not only personal but extends to my whole family: mamma Rita, papà Claudio, my sister Valentina, and my brother Paolo. Despite at times considering me a spoilt unemployed indulging in a convenient procrastination of a student- status, they were always by my side, encouraging, supporting, and inspiring me to do my best. For these and many more reasons, among the institutions of which I am a member, my family is one of which I am most proud.
My most sincere thanks go to my supervisors at EIPE: Deirdre McCloskey and Jack Vromen, who unashamedly supported my project since the days when it was a mere insignificant hunch in the mind of a young, inexperienced, wannabe scholar; and devoted an incalculable amount of time and effort to make this book happen. They repeatedly invited, urged, and eventually forced me to do better than I believed necessary. I now see even these improvements are but a small step down a long path. This teaching remains the most precious lesson of theirs. Salvatore Rizzello offered me his guidance and helpful teachings during and well beyond my visit at the Centre for Cognitive Economics in Alessandria. Bruce Buchanan granted me the chance to spend a very fruitful term at the Leonard Stern School of Business in New York, and thoroughly read and commented upon my writings. Anna Carabelli, who supervised for my Post-Doctoral research project, allowed me all the time needed to complete this dissertation. Besides guiding my professional development, they have all shown me what is known only to the insider: that academia is a lively and dynamic human milieu, well deserving of the caustic remark of Prof. Paul Armstrong (played by Sean Connery) in the movie Just Cause (Warner Studios 1995): “why every [f-word] thing is the real world, but teaching?”
This dissertation has truly been a multi-national enterprise. I benefited from fruitful discussions with many people in Italy, in the USA, and elsewhere, but it is The Netherlands the place where I owe the greatest gratitude to the many people who helped me. At the end of a seminar held at EIPE, during the earliest months of my research, I remember discussing with the invited speaker about my intention to touch upon the connections between ethics and economics via psychology. My own confusion back then probably cast a
i legitimate suspicion that there was any point in doing so. The speaker’s response (“I think it’s a very bad idea”), however, alerted me to a major challenge I was to come across: besides producing a meaningful piece of work I would have to stand up for my research and campaign for it, in order to show why it mattered and why it was a sensible enterprise (though very often in the process I surrendered to discouragement and came to believe that the speaker had been absolutely right). One would thus be justified in saying that only in such a pluralistic and open-minded institution as EIPE could I have found the support and inspiration to pursue this dissertation. My thanks to Uskali Mäki and to all the wonderful EIPEople are well overdue. A complete list would be redundant, but it is only fair to single out Caterina Marchionni, whom defining a fantastic friend and a brilliant colleague would be an understatement, and Roberta Muramatsu, who helped me greatly during my first tentative steps. I ought to thank Kizito Nsarhaza who invited me at UNAIDS in Geneva and who showed me that research is not necessarily an autistic enterprise, but indeed bears consequences on the life and death of human beings. My hosts in Geneva, the Feldmans, have been a veritable family. Moreover, David Feldman, a Guinness world record auctioneer, allowed me to witness firsthand what most economists only suspect exists: a real auction. Through the years, I also received inspiring inputs from Gianni Abbate, Carlo Altomonte, Angela Ambrosino, Alessandra Arcuri, Roberto Burlando, Mark Blaug, Luigino Bruni, Damaso Caprioglio, Pieranna Casalino, Mario Cedrini, Chiara Chelini, Giorgio Coricelli, Raffaele Costa, Alan Fiske, Kenneth Froewiss, John Groenewegen, Frank Hindriks, Arjo Klamer, Jacob Kol, David Levy, Cesare Lombrassa, Thomas Maier, Marco Novarese, Giorgos Papadopulos, Roberta Patalano, Sandra Peart, Lorenzo Rampa, Ana Santos, Eric Schliesser, Carlo Secchi, Anna Spada, Angiolino Stella, Louis Tietje, and Peter-Wim Zuidhof. Space constraints force me to limit myself to reminding that I have known them all as extraordinary human beings (remarkably, many among them nonetheless happen to be excellent economists).
If it is true, as I believe, that there exist two families: one we are born with and one we choose for ourselves along the way, the ‘second-type family’ members I felt close through these years cannot remain unmentioned: Achara, Alessandro, Carlotta, Chiara, Costanza, Davide, Eva, Fabio, Federico, Filippo, Francesco, Giuseppe, Ilaria, Jerome, Kim, Luca, Marco, Matteo, Sergio, Serena, Silvia, Simone, Stefano, Tommaso, and Tiffany; and specifically those who turned the cold and rainy Rotterdam into home: Andrea (I entered grad school only to be like him), Bauke (who did an equal and opposite mistake), Carlotta (who is so caring no one can feel homesick when she is around), Caterina (see above), Francesco and Adelina (for his being a tireless source of inspiration and for her calculator), Frank (because indeed today is the first day of the rest of my life), Paolo (who shall prove his worth sooner than he thinks, and will have to face the consequences), Roberto (for the beer and the shoulder
ii one sometimes badly needs), Stefano (for the countless nights spent planning world domination), and Till and Sabrina (who offered me a friendly place to call ‘casa’). To conclude, a loving thank you goes to Francesca, who has made my return to Italy less traumatic in some ways and substantially more traumatic in several others. Their contribution to my personal growth is immeasurable, but I am certain I could have measured its absence. Hard though I have tried, I am truly sorry I may have left some marvellous people out of this list. Please acknowledge this as limit in my skills, not in my gratitude.
***
Early versions of the material of this dissertation were presented at several venues across the globe, where I gathered enlightening suggestions from excellent discussants and from numerous participants. I also benefited from the discussion with students in graduate and undergraduate courses during the Spring term 2006 at the Faculty of Philosophy of the Erasmus University and during the Fall term 2006 at the Faculty of Law of the University of Eastern Piedmont. I should consider myself a good teacher if I did teach them half as much as they have taught me. Finally, I would like to thank my co-authors Angela Ambrosino, Anna Carabelli, Chiara Chelini, Matteo Lupano, Marco Novarese, Kizito Nsarhaza, Francesco Paolucci, Salvatore Rizzello, Anna Spada, and Altug Yalcintas for the great experience of working with them and for first having improved our joint work and subsequently let me use parts thereof in this dissertation. Financial support from EIPE, Fondazione CRT, and Vereniging Trustfonds is gratefully acknowledged.
iii
This work is dedicated to my late grand parents:
Antonio, a self-educated scientist and poet, who taught me to always be faithful to the principles of reason and consistency;
Felice, whose generosity gave meaning to Seneca’s maxim: “he surely doesn’t live for himself, who doesn’t live for anybody;”
Lidia, who has always been as caring as a mother without ever being nearly as annoying;
and Palmira, whose strength of character and passion in every endeavour could match any epic standard.
TABLE OF CONTENTS
ACKNOWLEDGMENTS i
TABLE OF CONTENTS v
INTRODUCTION 1
I. – ECONOMICS, MARKETS, AND ECONOMISTS 9
1. THE OUTLOOK OF ECONOMICS 11 1. A caricature sketch of economics (12) - 1.1. If you wanna be a part of it (13) - 1.2. Welcome the economic man (14) - 1.3. Down on the economic man (17) - 2. Economics and the hunt for reality (19) - 2.1. What is unrealistic? (20) - 2.2. What is realistic? (22) - 2.3. Sometimes reality does matter (23) - 3. Beyond the mainstream (and not just against it) (25) - 3.1. Bounded rationality and procedural rationality (27) - 3.2. Where do we stand? (29) - 4. A mammoth’s breakfast (30)
2. ECONOMY, MARKETS, AND THE MARKET 33 1. There is something (missing) about the market (34) - 1.1. The competitive market (34) - 1.2. Incentives and choice (36) - 2. Market and alternatives (38) - 2.1. The social embeddedness of markets (40) - 3. On the market itself (43) - 3.1. What is ‘the market’? (44) - 3.2. Prices and behaviour (46) - 4. Something to learn (47) - 4.1. Knowledge and markets (49) - 4.2. Mind a trade? (51)
3. ECONOMISTS AND THE MORAL TRIAL 53 1. A trial in economics (54) - 1.1. The trial turns moral (55) - 1.2. A display of charges (58) - 2. Experimental evidence (59) - 2.1. The economist as everyone else (61) - 3. Experimental lack of evidence (62) - 3.1. Who are the indicted? (64) - 3.1.1. All economists are not created equal (67) - 3.2. H0:
v
II. – SELF-INTEREST, ETHICS, AND PSYCHOLOGY 75
4. MOTIVATION, ACTION, AND CONSEQUENCES 77 1. It’s all in your head (79) - 1.1. What I only know (79) - 2. Life is all around (81) - 2.1. The social dimension (83) - 3. Motivation, action, and consequences (84) - 3.1. A tool for the analysis of motivation and consequences of actions (86) - 4. Exploiting the MCD (88) - 4.1. Self-directed and other-directed motivations (88) - 4.2. Motivation, constraints, consequences and degrees (91) - 4.3. Moral relevance (94) - 5. What ethics? (95) - 5.1. Why the MCD? (96)
5. SELF-INTEREST AND MORAL JUDGEMENT 99 1. How we judge self-interest (100) - 1.1. Is self-interest morally wrong? (100) - 1.2. From self-interest to harm, non-tuism, and greed… (102) - 1.3. … and from harm, non-tuism, and greed to self-interest (103) - 2. Some fallacies of intuition (105) - 2.1. Disentangling self- interest? (105) - 2.1.1. What is fairness? (107) - 2.1.2. What is self-interest? (108) - 2.2. How does self-interest work? (109) - 3. Moral judgements gone awry (111) - 3.1. Judgement for what? (112) - 3.2. Judgement for whom? (112) - 3.3. What about that homo economicus? (114) - 4. Repeal the trial (115) - 4.1. Acquit the economist (117)
III. – FRAMING, IDENTITY, AND MORALITY 119
6. FRAMING, EMOTIONS, AND THE MARKET 121 1. The kind of persons people are not (121) - 1.1. The kind of situations people are in (124) - 2. Judging a picture by the frame (125) - 2.1. Market power (128) - 2.1.1. Modelling Hayek (129) - 2.1.2. Modelling Wall Street and Community games (130) - 3. Reasoning about emotions (131) - 3.1. Cooperate or defect? (134) - 4. The nombre van le gioco (136)
7. ECON-THINK AND PRICING 139 1. Philosophy, methodology, and party membership? (140) - 1.1. A party apart (141) - 1.2. The method and domain of economics (143) - 1.3. There is a method, is there a domain, too? (144) - 2. Econ-think (146) - 2.1. The legacy of economic thinking (146) - 2.2. The empirics of fair pricing (149) - 3. The (real) great transformation (153) - 3.1. Experiments framed (154) - 4. The expert economist (158) - 4.1. If you are an economist, think like one (161)
vi 8. BEING ECONOMISTS AND BEING LIKE ECONOMISTS 165 1. Social and self-identity (166) - 2. Values and stereotypes (169) - 2.1. Values of economists and economics (169) - 2.2. Stereotypes, and accuracy thereof (171) - 3. The experiments (174) - 4. Identity and cognitive dissonance (178) - 4.1. Some consequences of economics stereotypes (180) - 5. How strange (182) APPENDIX (184)
9. A SOCRATIC PROBLEM 187 1. Ethics in the market (188) - 1.1. Individual and situation (or economist and market) (188) - 1.2. The ethics of markets (190) - 2. On the scope of markets (192) - 2.1. Moral violations in the market (195) - 2.2. If it were a market… (196) - 3. The trial turns Socratic (198) - 3.1. Some problems with self-selection (199) - 3.2. Training and the Socratic problem (200) - 3.3. The market sellout (202) - 4. Have you become an economist, yet? (203) - 4.1. Know thyself (204) - 4.2. The trial on trial (206)
CONCLUSION 209
BIBLIOGRAPHY 215
SAMENVATTING (DUTCH SUMMARY) 233
CURRICULUM VITAE 236
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INTRODUCTION
I always go to the funerals of my friends; otherwise they won’t come to mine. – Anonymous
Some time ago I received an email with the following test: A woman went to the funeral of her mother. There she saw a man with whom she immediately fell in love. She believed the stranger to be the love of her life. Unfortunately she didn’t have a chance to talk to him and ask his name or telephone number. She thus had no hope of ever seeing him again. A few days later, this woman killed her sister. Why did she kill her? Hard though I have tried (well, not so hard), I could not make sense of it. And most people are unable to even suggest a haphazard answer. But later I learnt that this question is used to test whether a person has a murderous personality and it seems that many serial killers respond promptly. In case you are not a serial killer, you may want to know that the answer is not very difficult: she hoped to see the man again at her sister’s funeral. Smart, huh? When I informally tried this quiz with my acquaintances it became evident how, just like me, an astounding majority of the respondents struggled to even make a guess. And just like me they failed to guess correctly. The two persons who gave the right answer – both women, if this means anything – came up with the answer very fast, almost instinctively. If they had known the quiz already, I’d expect them to at least pretend reflecting on the matter before uttering the response. Both, however, swore they never heard the question before. (And having to deal with potential killers, it felt unsafe to question their sincerity.) Most people are incapable of answering correctly, or at all, because we cannot conceive of such reason as the explanation of a murder, even less so the murder of one’s relative. Economists can, however, describe this act as coldly rational. How sorry is she for having forever lost the man of her life? Say - 100. Now calculate the joy of seeing her beloved to be worth 100 and the chances that he turns up for the funeral to be 70%. The suffering from her sister’s death could be -40, the displeasure of being imprisoned -20, and the risk of being caught might be 50%. (These are random values.) Then it’s easy to see that the action itself has an ex