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How to build ethics into economics

by Matthew Smith | 06 Apr 2017

We could be teaching students to be better economists and finance professionals — not just so they can earn more money, but for the betterment of society — says an associate professor of economics from University of Technology, Sydney.

One area in particular educators could be paying closer attention to is how economic analysis is applied to moral issues, says Gordon Menzies, who is also a member of the Centre for Applied Macroeconomic Analysis.

“In economics, we do a cost benefit analysis for everything — we identify rationality with balancing costs and benefits of things and then decide what seems to be the best option. Perhaps there’s a problem doing this for moral issues,” Menzies says, to a room full of academics and industry professionals during the university’s recent Investment Management Research Program Workshop in Sydney.

Making the distinction between moral optimisation and moral prioritisation should be an important part of teaching economics, and would go a long way to solving some of the cultural issues the finance industry is facing, Menzies says.

Moral optimisation is when a position is optimised through economic modelling without questioning the broader moral context, Menzies explains. He highlights that moral prioritisation involves first making an assessment of what’s right and wrong before applying economic analysis.

“There’s quite a few things about economics that evacuates space and makes it difficult to discuss ethics … I certainly think there are some morally corrosive elements to economic training,” Menzies says.

Among the so-called morally corrosive elements of economic training, Menzies highlights the way economists are trained to look externally rather than considering internal variables such as an individual’s character to get a feel for what’s going on.

He also questions the modern adoption among finance professionals of the so-called “invisible hand” theory, first introduced by economist and philosopher Adam Smith in 1759, which suggests that if individuals pursue their own self interests, then the outcome for society more broadly is actually good.

“I think economists have failed to interrogate this proposition enough,” Menzies states.

Menzies points to the recent $US185 million settlement by US bank Wells Fargo late last year after it was found the employees in the institution allegedly set up as many as two million unauthorised bank and credit card accounts to meet internal sales targets.

He highlights that Wells executives stayed with the bank amid the revelations because they were making making a cost benefit analysis rather than simply recognising the wrongdoing.

The ensuing public outcry over the issue subsequently led to the sudden retirement of longtime CEO, John Stumpf.

“Do people studying economics really understand the difference between a moral cost benefit analysis and a moral obligation? I think it’s important they do,” Menzies says.

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  • | Apr 07, 2017

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