Column: Economics and Ethics

"Economics is about facts, whereas ethics concerns values and norms."

Door Martin van Hees en Bernd Heidergott

In Vuurwerk no. 22, 2015, Albert Menkveld discusses his research on high-frequency trading. His starting point is a claim by Charlie Munger about the morally questionable practices of high-frequency traders. After lamenting the fact that morality often comes into play when high-frequency trading is discussed, Menkveld expresses a familiar view about the role of morality in economics:

“As an economist, such [moral] statements leave me empty-handed. Who am I to judge “fairness?” And, how can all stakeholders ever agree on what is fair? A much more productive approach to regulation is to simply track transaction costs for various end-users of securities markets. Secondary markets exist to enable trade. They facilitate the re-allocation of assets across (long- term) investors so that those who have the largest appetite for them get to hold them. Trading further leads to price discovery or, perhaps better, value discovery. It ensures that funds get channeled to the most valuable firms, which benefits economic growth.”

The idea that economics should be kept separate from ethics emerged at the end of the 19th century, and received in the 1930s its famous articulation and defense by Lionel Robbins. The proposed separation was defended on the grounds that economics and ethics have very different objects of study: economics is about facts, whereas ethics concerns values and norms. Moreover, in accordance with the then popular philosophical views, it was widely believed that ethics cannot fall under the domain of scientific enquiry; norms and values were thought to escape rational scrutiny.

The proposed separation of ethics and economics was a new view. As the works of Aristotle, Adam Smith, or Karl Marx testify, economic thought has long been intertwined with moral and political thought. Although the separation view became the common methodological assumption in economics for much of the 20th century, it now is out of fashion. Indeed, it is almost a cliché to say that economic models presuppose values and that a strict separation between economics and ethics cannot be sustained. For instance, the quest for efficiency itself is an ethical value, and it is not clear why it should be the only one to which economists are permitted to refer. Moreover, the revival of ethics in the 1970s, spearheaded by the philosopher John Rawls, together with the work of economists like Kenneth Arrow, James Buchanan, John Harsanyi, and Amartya Sen, showed that ethical issues can be the object of rational enquiry. And, the financial crisis of the 2000s may well have delivered the decisive final blow to the separation thesis given that the crisis was taken by many to be both an economic and an ethical one.

Albert Menkveld ignores these developments and sticks to the separation thesis that was so dominant before the 1970s. He dismisses the idea that economists can say anything meaningful about fairness and suggests that it is an entirely subjective notion (“how can all stakeholders ever agree on what is fair?”). Instead of any discussion of fairness, he calls for a ‘much more productive’ factual analysis of possible determinants of economic growth. Yet his stance is plainly not a philosophically neutral one. For instance, why should we have to establish unanimity among stakeholders before we can refer to or discuss fairness? What exactly does it mean to talk about ‘valuable firms’? To strive for economic growth is to assume a certain ethical standpoint, but why adopt that particular one?

Modesty is a virtue, and it is certainly annoying when non-economists make uninformed claims about the presumed immoral nature of market transactions. It is also frustrating when, in public debates, economists make moral claims without bothering too much about their justification. On the other hand, economists can also be too modest. Their research is not value-free, and suggesting otherwise is to fail to do justice to the ethical assumptions underlying their work. High-frequency trading is a specialized and complex form of trading, but its assessment cannot be left to policy-makers or opinion leaders alone: we need the expertise and competence of experts like Albert Menkveld. If they shake off their distrust of ethics and can explicate, defend and, if so needed, revise their moral assumptions, then substantial progress can be made on important questions posed by 21st century economic developments.

Martin van Hees
Martin van Hees is professor of Ethics at the Department of Philosophy and Director of the new Philosophy, Politics and Economics Programme.

Heidergott, B.F.
Bernd Heidergott is professor of Stochastic Optimization at the Department of Econometrics and Operations Research and Programme Director of the bachelor and master programme Econometrics and Operations Research.