36 Humanomics Volume 7 Number 4 1991

WEALTH, VIRTUE AND ECONOMIC THEORY: A FEW OBSERVA-

TIONS

Leonard Pluta

Department of Economics, St. Francis Xavier University, Antigonish,

Nova Scotia

Introduction

The connection between wealth and virtue or between economics and

ethics has been severed. Pure or positive economics is believed to be
objective and scientific, based on facts alone, while normative or ethical
reasoning is believed to be less reliable and non scientific because it is
subjective, value-laden and prone to prejudice and personal pref-
erences.

The process of expelling ethics from economics, which culminated

with the adoption of positive economics, took centuries to complete and
occurred not without bitter intellectual struggles. (Tawney, p. 197) It was
part of a larger intellectual revolution and transformation of Western
knowledge. The unity of knowledge based on the pre-eminence of
theology during the medieval times was gradually eroded and under-
mined by political, economic and intellectual changes -the emergence
of nation-states and strong monarchies, the reformation, economic
development and the rise of science. For the emerging discipline of
economics it meant, most of all, freeing itself from the restrictions and
limitations of moral theology, of which it was a minor part, and to ally
itself with the more tolerant and dynamic branch of knowledge - science.
The process occurred in several stages. That part of moral theology
which later became economics was transformed into natural moral
philosophy from which it became shaped by the genius of Adam Smith
into political economy. A century later, during the course of the margi-
nalist revolution, political economy was transformed again, this time into
economics; an independent, sovereign, autonomous discipline which
was created, in its methodology and even its subject matter, into the
image of physical science.

Economic historians and the historians of economic theory point

out that there were valid intellectual and pragmatic reasons for the
separation of economics from moral theology. The prevailing morality,
Humanomics Volume 7 Number 4 1991 37

regardless of whether catholic, Calvinist, or puritan, severely con-

strained not only the scope and freedom of intellectual inquiry into
economic problems but it also constrained those economic activities
which were in conflict with the prevailing ethics.(Tawney) Thus, the
intellectual progress of discipline and economic development were
equally retarded.
There may be some validity in this argument. However, it must be
pointed out that both the economy and the discipline of economics itself
have been forced to pay a significant price for this intellectual freedom
from ethics and close association with science.
The purpose of this paper is to examine this issue. We will examine
the relation between morality and economy with regard to the economic
activities of an individual and of a society. In other words, we will be
asking the following questions: How does morality affect the wealth of
an individual and of society? Should morality be included in economic
theory? Why? What difference does it make for economic theory or for
the economy?

Many writers, including some of the participants to this conference,

have noted and explored the implications of the relationships between
ethical and economic forces and events. The significance of these
relationships, for economic theory and for the economy, can not be
ignored. At the same time, their general neglect in standard economic
theory requires a concentrated effort, on the part of many individuals,
to bring the relevant issues to the fore. In this regard this conference is
most timely.

Morality and the Economy

We begin by defining ethics as a coherent set of ideals, principles and
goals along with the appropriate rules of conduct and norms and
behaviour. Morality is defined as the conformity or adherence to these
ethical norms and principles. Thus, morality is simply the application of
ethics in practice. Usually, morality falls short of ethical standards and,
not infrequently, may even be contrary to these standards.
Both ethics and morality may influence the economy in different
ways: by influencing the selection of the economic goals and aspirations
of individuals and social groups; by affecting individual or group moti-
vations, choices and decisions in undertaking economic activities; and
38 Humanomics Volume 7 Number 4 1991

by influencing the effectiveness and performance of economic institu-

tions. Furthermore, an economy, through its capacity to create wealth,
may, in turn, affect the ethical standards and principles and the moral
fibre of the population. Moreover, the interplay between ethical and
moral forces occurs at the level of the individual as well as of society.

Economy and Personal Ethics

The relationship between the economy and personal ethics has received
considerable attention in the economic literature in the form of the
celebrated Weber-Tawney thesis, which attributes the origin of capital-
ism to the reformation and the creation of protestant ethics. The new
theological doctrines arising from the reformation - predestination,
calling, salvation by faith, etc., - have dramatically altered the ethical
values, principles and aspirations of believers, away from the traditional
catholic ethics which tended to discourage certain economic activities,
and particularly, the accumulation of wealth. The new protestant values
and aspirations were channelled into economic activities giving rise to
capitalistic practices and institutions. Specifically, the ethical norms,
sanctions and judgements involving wealth, work, thrift, enterprise, risk
taking etc., have been altered fundamentally. Wealth, which had been
treated with suspicion if not outright hostility under the catholic ethics
as an obstacle to salvation, was given a high status in the new ethical
system. The doctrine of pre-destination reconciled the pursuit of wealth
and salvation as being fully compatible if not complementary. The moral
dilemma of a catholic believer of choosing between wealth or salvation
was replaced with the new ethical principle of salvation through wealth.

Similarly, the older ethical obligation of disposing accumulated

wealth through charity in order to earn salvation was dissolved by the
new doctrine of salvation by faith. As charity was discouraged by the
new protestant ethics, work, thrift and enterprise were encouraged
through moral and spiritual sanctions. At the same time, the ethical
principles of ascetism, abstinence and denial of pleasure were retained
from the catholic ethics thus discouraging consumption and further
encouraging thrift and capital accumulation. These theological and
ethical changes led to the development of a new individual - a hardwork-
ing, thrifty, enterprising, independent, wealth accumulating merchant or
artisan who, along with the other members of his class, the bourgeoisie,
became the driving force behind the development of capitalism.
Humanomics Volume 7 Number 4 1991 39

The Weber-Tawney thesis examined the relationship between reli-

gion, morality and the economy in the context of Western history.
Economists studying the problems of economic development of non-
western countries have noted the existence of similar relationship al-
though in an entirely different context. Specifically, they discovered an
incongruity between the cultural and ethical norms of the traditional
societies and the requirements of economic development. This indi-
cates that the relationship between the economy and morality holds true
regardless of tradition and culture, although the specific form of that
relationship - whether harmonious or conflicting and to what extent - will
vary among societies and cultures.

The relationship between the economy and ethics is imbedded in

human existence. The philosophy of existentialism defines "moral exist-
ence... a life of decision and action as well as a debate on moral
questions" (Banner, p.133). In economic terms, it means that the moral
considerations and influences enter into the estimations of opportunity
costs involved when making economic decisions. Every individual
strives for a good and meaningful life. Since economic activities con-
stitute such an important component of human conduct, economic
goals and aspirations must enter as an integral element of every individ-
ual's elusive goal of the good life. However, other non- economic goals
and aspirations - friendship, freedom, wisdom, love, tolerance, justice,
etc, - enter into the overall objective of attaining the good life as well.
Each individual must decide how to integrate, order and rank the various
and often conflicting goals and aspirations into a coherent and consist-
ent ethical system. This ordering and ranking is necessary in order to
avoid chaos, confusion and conflicts, which may lead to ineffective
action or to the lack of any activity at all. The difficulty for any individual
is the enormous variety of ethical systems to choose from. Thus, the
good life for any individual may be defined, and often is, in a variety of
different and sometimes conflicting ways, which may lead to social
discord and disorder. To prevent this undesirable occurrence, various
social forces - intellectual, religious, political, economic, etc, - tend to
limit the range of these possibilities to what is socially permissible to a
group, a class or a society at large. Furthermore, most societies or
groups select a dominant value which constitutes the good life and
allows the individual to order and rank subordinate values. This will be
discussed further later on in the paper. Even if a society allows the
40 Humanomics Volume 7 Number 4 1991

individual the freedom to select other than the dominant social value its
impact on the society will be limited, unless that individual is a repre-
sentative of a significant social group.

The Weber-Tawney thesis was applied to a situation where a large

number of craftsmen, merchants and even lower nobility, influenced by
the new religious beliefs, changed the relative ranking of economic goals
within their ethical system. It is interesting to note that the dominant value
of their ethical system - salvation - remained unchanged and only the
subsidiary objective of wealth accumulation has been shifted from a
lower end of the scale to a position of importance in their ethical system.
Yet, even that relatively modest change in the ethical system has had a
profound effect on the economy by releasing an enormous volume of
human productive energy into economic activities so as to move the
economy onto a path of rapid expansion. This indicates the power of
the ethical system to influence the economy.

The problems associated with economic development - unemploy-

ment, internal migration, urban congestion, high school drop out rates,
malnutrition, etc, - shed a different light on the relationship between
ethics and the economy. The model of development presently followed
by LDCs involves not only the economic problem of a re-allocation of
resources or their mobilisation and increase in their volume, but, more
fundamentally, the difficult problem of effecting a radical transformation
of an ethical and cultural value system based predominantly on a
non-materialistic morality to one of strongly materialistic ethics. Such a
process involves a clash of values, principles, obligations and loyalties
which is extremely painful to the individuals and the groups to which
they belong. Basically, it involves a change in the meaning of the notion
of the good life. Those traits and patterns of behaviour which were
cherished as highly meaningful and highly esteemed - generosity,
hospitality, kin obligations, etc, - become meaningless and useless.
Furthermore, those principles and practices of behaviour which were
once scorned and despised - selfishness, competition, aggressiveness
- become highly valued and respected. Needless to say, the failure to
develop these traditional societies economically during the last several
decades is due not only to the economic and political factors, which, no
doubt, have been significant contributors, but also to the underlying
moral and cultural forces as well.
Humanomics Volume 7 Number 4 1991 41

Wealth, Virtue and the Common Good

As every individual strives to attain the good life so is every society
attempting to reach for its social equivalent, commonly known as the
common good or the pursuit of happiness. "The pursuit of happiness is
the foundation of morality and that the rules of morality are simply the
rules of prudence" (Banner, p.100). The good life for any individual
comprises, among other goals, the attainment of material prosperity and
wealth, and this applies even more strongly for society as a whole. It
may be possible for some individuals to renounce the life of material
comfort and to follow the ideal of ascetism. However, such course of
action is not possible for a society at large. The ascetism of a few
individuals may be supported by the charity of others who provide for
their minimum subsistence but, as Jeremy Bentham pointed out, ascet-
ism, on a national scale, leads to collective suicide.(Paul, p.48). Thus,
the common good of a society must include economic goals. However,
there are other goals - security, justice, equality, freedom, brotherhood,
national power, etc. - which also constitute a part of the common good.
The difficulty arises, as with the case of an individual, in ordering and
ranking these diverse social goals in order to create a coherent system
of social or national ethics which will unite society in the pursuit of a
common goal.

The history of morality reveals a variety of diverse ethical systems

among traditional societies and somewhat lesser diversity among con-
temporary societies. Cultural anthropologists and moral philosophers
have discovered the principle of cultural unity which has tended, in
practice, to limit that diversity significantly.
By the internal unity of a culture we refer to two different but related
features: (a) the extent to which all the different institutions are
dominated by a single value or a set of related values most highly
cherished by the whole people, and (b) the extent to which
individuals in practice conform to the requirements of the cultural
pattern and institutions or laws.(Garnett p.37)
The principle of cultural unity explains, rather well, the present
ethical system of the North American culture. Its dominant value is
clearly expressed as the possession of wealth, economic security, and
the material comforts resulting from it. Furthermore, the subsidiary
values and principles - justice, freedom, equality, wisdom, etc. - are
42 Humanomics Volume 7 Number 4 1991

defined in relation to the dominant goal of wealth accumulation. That is,

freedom is primarily economic freedom of enterprise, equality is the
equality of income or the equality of economic opportunities, etc. The
relative ranking of these subsidiary principles is derived from their
association with the process of wealth accumulation. A case in point is
the conflict between the ethical principle of equality and freedom.
Basically, freedom, particularly in the economic sphere, breeds in-
equality, while the principle of equality necessitates some limitations on
the degree of freedom enjoyed by individuals, particularly their freedom
to accumulate wealth.

The moral dilemma consists of the relative ranking of freedom

versus equality in a materialistic society. Two great philosophers have
offered diametrically opposed solutions to this dilemma. Adam Smith
pointed out that economic freedom along with the ethical principles of
self-interest and competition would produce the greatest wealth for the
nation, albeit, at the expense of equality. Karl Marx advocated equality
along with the moral norms of co-operation and altruism, but at the
expense of freedom, as the most effective way of reaching material and
non- material progress. The application of these two diametrically op-
posed ethical systems into practice has created two great and opposing
socio-economic systems - free enterprise capitalism and communism.

The ethical systems are applied into social practice through the
creation of a network of institutions embodying these ethical principles
and norms. Thus Adam Smith's ethical system has been implemented
through the creation of a network of free, enterprising and competitive
firms while the ethical system of Karl Marx has been embodied in
communist institutions such as state property, the central planning
system, etc. It is interesting to note that both systems share the common
objective of attaining material progress as their dominant value but they
differ in the relative ranking of the secondary principles - freedom and
equality. Experience has shown that "the morally lower" individualistic
and selfish ethic of Adam Smith has proven to be more effective in
attaining the goal of national prosperity than its great competitor - "the
morally superior" ethics of Karl Marx.(Fagothey, p.405)

Economic Virtues and Vices

We have discussed, so far, the relationship between ethics and econ-
omy at the level of goals, objectives and aspirations of individuals and
Humanomics Volume 7 Number 4 1991 43

of societies. There is another linkage between these two sets of forces

and that is at the level of desires, interests, motivations, activities and
behaviour.

Moral experience embraces desire and feeling, together with

discrimination and choice. If the trust or intention of any disposition
as desire or feeling is to claim one thing over another the good is
always some end or object in which this claiming is satisfied.(Ban-
ner, p.44)

These elements of morality - desires, interests, motivations, choices

and activities - are the principal means of attaining the ethical goals of
the good life or the common good. While we do not want to go into a
philosophical discussion concerning the relationship between means
and ends, their ethical nature and origin, a few general comments are
warranted. The selection of a particular set of goals will affect the choice
between different activities, by influencing their relative attraction. Those
activities which are consistent with, and are the effective means of,
pursuing the ethical goals will be considered and approved as right and
correct. On the other hand, those activities which hinder the attainment
of the selected goals will be regarded as incorrect or wrong. If wealth
accumulation is chosen as the dominant value, then the interest and
motivation to engage in economic activities will be relatively strong. On
the other hand, if the accumulation of wealth is discouraged and morally
disapproved, of then the interest and motivation to engage in economic
activities will be weakened. Furthermore, the existing institutions will
tend to reinforce the interests and motivations of the individuals. The
latter situation has prevailed during the middle ages while the former
situation applies to the contemporary Western countries. In each case,
the impact of prevailing morality on the economy is significant.

Crane Brinton, in his extensive history of Western morality has

found, amidst the great diversity of ethical systems,

an unmistakable constant element. Honesty, loyalty, kindness,

self-control, industry, co-operativeness are virtues; lying, trea-
chery, cruelty, self-indulgence, laziness, conspicuous and uncon-
trolled aggressiveness and selfishness are vices (p.417)

It is quite obvious that the economy will be affected, directly and

indirectly, by the relative strength and weaknesses of most of these
44 Humanomics Volume 7 Number 4 1991

moral traits. For example, such moral qualities as industry, co-opera-

tiveness, loyalty, honesty, perseverance, etc., constitute what are com-
monly referred to as the work ethic, which affect directly the level of
productivity, quality of production, industrial relations, international
competitiveness, unemployment, etc. Other factors, such as self-con-
trol, self- indulgence, laziness, selfishness, etc. determine the ethics of
other economic agents, such as consumers, investors and business-
men. Their ethical systems, known popularly as consumers or business
ethics, have been linked to such economic problems as personal
bankruptcies, the decline in the savings rate, rising expectations, the
decline in entrepreneurship, inflation, etc. The performance of economic
institutions, including the most important institution of the capitalistic
system, that is, the market, is positively affected by, among other things,
honesty and mutual trust among buyers and sellers and adversely
affected by widespread lying and cheating. Furthermore, it appears that
the ethics of various economic groups -workers, consumers, business-
men - is the product of the struggle between what may be perceived as
economic virtues and vices. For example, what is known as consumer-
ism is the result of what has been regarded as the traditional vices -
self-indulgence, self-gratification and impulsiveness - becoming
stronger than the traditional virtues of self-control, abstinence, and
prudence. Similarly, the social welfare ethics are the outcome of a
gradual weakening of such economic virtues as self-reliance, industry
and enterprise and, at the same time, of a strengthening of such
economic vices as dependence, laziness and self-indulgence.

We can state, without exaggeration, that there hardly exists an area

of the economy not directly or indirectly effected by the moral conditions
and habits of the population. Pure theory ignores the influence of these
factors by hiding them under the ethically-neutral label of tastes and
preferences which are assumed to be given and constant. These so
called tastes and preferences are, in effect, the moral qualities and habits
of the population and are neither exogenous to the economy nor are
they constant. In fact, one of the significant factors affecting the moral
characteristics of the population is the economic theory itself, a point
which will be discussed later on.

There is a fundamental break, at least in the sphere of economic

activities, between the traditional morality as embodied in Brinton's
classification of virtues and vices and the present morality on which our
Humanomics Volume 7 Number 4 1991 45

economy operates. This discontinuity can be explained, reasonably

well, by the "dual-self" hypothesis of human nature.(Lutz and Lux)
Traditional morality was designed to support the higher moral self,
although it may not have been always effective in that endeavour.
Modern morality, on the other hand, does not recognise the existence
of the higher self and appeals, rather effectively, to the lower self of
human nature. What was traditionally perceived and judged as virtue -
for example, loyalty and co-operativeness - is no longer approved as
such in the current economic opinion. In fact, their opposites - compe-
tition and opportunism - may properly be regarded as virtues to be
cultivated.

Furthermore, the traditional condemnation of such behaviour as

self-indulgence, aggressiveness and selfishness as morally reprehens-
ive is no longer acceptable to the modern economists. On the contrary,
selfishness, in particular, has been elevated to the status of social virtue
by David Hume (Gauthier, p.107) and subsequently has been advanced
by Adam Smith to the high status of scientific fact of universal validity
and has been regarded as the driving force of the modern economy.
This fundamental revolution in morality has been the product of the
intellectual efforts of such great economists as Smith, Malthus, Bentham
and to some extent Keynes.

Ethical Systems and Institutions

As mentioned earlier, the ethical system of an individual guides his

activities toward certain goals and away from others. This type of
guidance and control is of a subjective nature. That is, the individual
wills, chooses and follows a certain course of action guided by the
standards and norms which, although social in origin, are regarded as
his own. However, except for a few isolated cases of Robinson Crusoe
types of situations, all economic activites are conducted in groups,
sometimes very large ones, working together toward a common goal.
This means that inter-personal economic activities must be regulated,
controlled, supervised, evaluated and rewarded according to some
objective and acceptable criteria.

The social character of economic activities calls for additional

ethical standards - fairness, equality, justice, harmony, trust, co-oper-
ation etc. - to supplement and, in some cases, to over-run the personal
ethics of individuals. This is done by developing the principles and ideals
46 Humanomics Volume 7 Number 4 1991

of social ethics and putting them into practice through the creation of
an appropriate institutional network - the legal system, the state, the
economic organizations, the social institutions, etc. These institutions
direct the work of individuals toward the common goal, which combines
the personal aspirations of the individual with the common good of
society. Thus, the contribution of each individual toward the profit of a
firm reconciles his objective of receiving an income with the goal of the
firm and is also, indirectly, contributing to the national goal of prosperity,
wealth and material security. Institutions are empowered to assign
different economic roles to participants, to evaluate and to reward their
performance according to some socially accepted and legally enforced
moral norms. The institutions themselves are assigned different roles,
tasks, rights and obligations and their interaction among themselves is
regulated by accepted procedures, standards and laws.

The notion of morality must be distinguished from the notion of

legality. According to the famous Prussian philosopher, Emanuel Kant,
morality can be defined as the inner guidance of the individual's beha-
viour according to his personal ethical system while legality is the
external controls imposed by the rules of law and by the state. (Banner,
p.214) Our distinction between moral and institutional controls generally
parallels the Kantian classification. However, what needs to be stressed
is that both types of controls - inner and external - originate from the
same source, namely the ethical system. As indicated earlier, the institu-
tional order, including economic institutions, is designed to apply an
ethical order into social practice. Just as the ethical system consists of
a hierarchy of different social goals and objectives, the institutional
system also forms a pyramidal structure reflecting the relative ranking
of ethical values. The dominant value of the ethical system will be
reflected in the dominant position of certain institutions specifically
empowered to put that value into practice.

It is not surprising that in the capitalistic society, whose dominant

value is to accumulate wealth, the economic institutions occupy a
position of pre-eminence within the institutional structure. These institu-
tions not only control the economic activities of any individual directly -
production, distribution, exchange - but, often, also indirectly through
their influence over the activities of other, non-economic institutions. For
example, the economic institution, such as the corporation, exercise a
great deal of control over the educational institutions and their activities.
Humanomics Volume 7 Number 4 1991 47

Thus, the role and functioning of universities, including what is being

taught, is shaped by the educational requirements of corporations and
their funding. Similarly, the economic institutions also exert influence,
to a large extent, over society's recreational and cultural activities. In
effect, the economic system has transformed the essentially voluntary,
elitists and non- profitable cultural and recreational associations of the
nineteenth century into professional sports and cultural industries pro-
ducing recreation and culture for profit.

The most powerful, and potentially most dangerous, control by the

economic institutions is over the political system. Since the advent of
Keynesian economics, the executive branch of the government has
been largely transformed from a political institution into an economic
one. The government is the largest single business firm operating in the
country, directly controlling a very large and growing sector of the
economy. As the economic function of government grows in import-
ance, its original function - political and moral leadership - withers away.

In the communist system, the implementation of the Marxist-Lenin-

ist ethical system has been entrusted to an elite institution - the com-
munist party - which until recently exercised totalitarian control over
every other institution in the country. The recent restructuring of Soviet
institutions - perestroika - involves the transformation of the political
control by the party, which, in effect, has politicised every activity,
including sports, into predominantly economic controls. These reforms
are the consequence of the collapse of the beliefs in the validity of the
Marxist-Leninism ethical system.

Morality and Institutional Effectiveness

Clarence Walton (1982, pp.254-61) has presented a theory which ex-
plains the interaction between morality and institutions in the context of
American economy. This theory states that the institutions must meet
two requirements - rational and moral - in order to operate effectively.
Rationality requirement dictates that the participants in the institution-
alised process, which involves practically all economic activities, are
convinced that these institutions operate on rational principles, i.e. that
the institutional goals and objectives are reasonable and that the avail-
able resources, including the efforts of the participants, are used ration-
ally to achieve these objectives. Moreover, it also requires that rational
principles of organization - order, efficiency, stability, accountability,
48 Humanomics Volume 7 Number 4 1991

fairness - be used. When the rationality criteria is not met, the perfor-
mance of the institutions is impaired. Such has been the case when
millions of Soviet citizens came to the realization, through their own
experience and their observations, that the systematic waste of re-
sources, including their labour, by the Soviet institutions, particularly,
the economic institutions of central planning system, could not be
explained on rational principles.

The rationality requirement, although necessary, is not sufficient for

institutional effectiveness. The participants must also be convinced that
the existing institutions are legitimate as well. Although the legitimacy of
the institutional order is safeguarded by the legal system, this is not
sufficient as the legal sanctions alone will not guarantee its acceptance.
Moreover, to be effective the legal system itself must be approved as
legitimate. In the final analysis, the legitimacy of the institutional order,
including the legal system, is only assured when the participants accept
it as morally right. Any individual must feel confident that he will not be
exploited, taken advantage of, cheated, abused, discriminated against,
etc. His fears, suspicions, hostility, resentment must be overcome and
replaced by trust, honesty, integrity, loyalty and commitment. Based on
such a positive moral judgement of institutional practices the partici-
pants will direct their productive energy toward the goals of the institu-
tional order.

The two crieteria of rationality and legitimacy are related since if

institutions are judged to be irrational their legitimacy will also be
automatically questioned. On the other hand, rational institutions may
not have legitimacy if they violate some of the prevailing moral norms.

Walton applied his theory to analyze the problem of government

deficit and its implications for institutions. He divides his theory into three
stages. His first stage he labels "the economic deficit" stage, which
occurs when the government deficit can not be eliminated by the
existing institutional practices. This leads to the second phase - "the
rationality deficit" - during which the rationality of the government, and
other institutions, is questioned. Do they operate on a rational basis
using their resources efficiently? When this and related questions cannot
be answered in the affirmative the third stage occurs - "the legitimacy
deficit" phase. In this stage, the right and the legitimacy of the govern-
ment to engage in economic activities is questioned, which further
Humanomics Volume 7 Number 4 1991 49

undermines the effectiveness of the government to carry out its econ-

omics activities and the process repeats itself.

Walton's analysis can be generalised and pushed a step further.

The dynamic, self-reinforcing process of institutional ineffectiveness,
particularly when it involves dominant institutions, inevitably leads to
institutional crises. This crisis can be resolved only through political
action aimed at either the reform or the radical change of the institutional
order. The success of such actions depends, in large measure, on
whether the action is guided by a vision of a new institutional order to
replace the ineffective one. That vision can only be produced by an
intellectual or a group sufficiently removed from the pressure of politics
and vested interests. In a sense, what is required for successful institu-
tional change is the creation of a theory which explains the causes of
irrationality and illegitimacy of the existing institutions and outlines a
new, rational and morally superior institutional order.

When such a theory does not exist to guide political action, institu-
tional change will not be effective. The French revolution of 1789 is a
case in point. During its course various, radically different institutional
experiments were tried and failed. In contrast, the Bolshevik revolution
of 1917, guided by the Marxist theory, completely overthrew the existing
Russian imperial institutions and replaced them with a radically different
institutional order within a remarkable short time span. Equally success-
ful, although less dramatic and violent, was the transformation of eight-
eenth century British mercantilism into the free enterprise capitalism
guided by the intellectual vision of Adam Smith. The hard core of both
Smith's and Marx's theories consisted of a new moral order.

Impact of The Economy on Morality

We have analyzed, so far, the relationship between morality and econ-

omy in terms of a single causal relation, that is from ethical and moral
causes to their effects on economy. This relationship, is of primary
significance to the economists. However, there is another relationship,
a feedback, originating from the economy and having an impact on
morality. Although, this relationship may be of primary interest to other
groups, economists should nevertheless become aware of it as it may
affect their intellectual efforts.
50 Humanomics Volume 7 Number 4 1991

We will confine our comments to one aspect of this complex

relationship, although an important one, namely, the impact of wealth
and poverty on morality. Wealth has, traditionally, been treated with
suspicion or outright hostility by most of the great ethical systems, both
religious and secular. For example, the communist ethics shares the
same negative attitude toward wealth as catholic and Buddhist ethics.
Only a few ethical systems, such as the so-called protestant ethics, have
been able to reconcile wealth with their higher spiritual and moral goals.

The reason for this negative attitude of ethical systems toward

wealth is due to the fact that wealth has, indeed, had a demoralising
effect on people's lives. Unless the use of wealth is strictly controlled by
ethical norms, as was the case with Calvinist and Puritans ethics, wealth
tends to weaken the moral fibre of the population. This may occur as a
result of the weakening of the traditional virtues such as industry,
perseverance, prudence and responsibility which were previously exer-
cised to acquire wealth and are regarded, now, as obsolete and useless.
Also, the weakening of controls over appetites and emotions may occur,
leading to self-indulgence, excessive gratification, over-consumption,
impulsiveness and sloth.
The negative effect of wealth on morality has, in fact, been observed
by economists and historians alike. Adam Smith has observed that the
wealthy Scottish aristocracy of his day was morally and intellectually
corrupted by its lavish lifestyle.(Phillipson, p.196) In contrast, the sober,
industrious, intelligent middle classes, skilled workers and lower gentry
retained their strong moral fibre and, for this reason, they carried his
hopes for social and economic progress. John M. Keynes anticipated,
with considerable apprehension, the demoralising effect of the inevit-
able future affluence. He even made dire predictions of the "general
nervous breakdown" of the population unable to cope with affluence.
There is enough evidence to suggest that his prediction of general
demoralisation may come true in the not too distant future.
The verdict of historians on the morality of the wealthy aristocracy
- French, Austrian and Russian - has been generally negative. Some
moral philosophers have also found a generally negative relationship
between economic and moral progress.(Garnett, p.65)
The negative impact of wealth on morality is not inevitable. Wealth
has a potential for moral good. Poverty may be a purifying and spiritually
Humanomics Volume 7 Number 4 1991 51

rewarding experience for a few ascetic, highly disciplined and motivated

individuals but the poverty of the masses possesses few redeeming
virtues. Poverty breeds immorality, crime, violence, envy, mistrust,
selfishness and other vices among the poor. Honesty, integrity, self-re-
spect, dignity, kindness, prudence are the moral luxuries beyond the
reach of most of the poor who are engaged in the struggle for bare
existence.

What made poverty bearable to the masses in the past, in addition

to the enormous human capacity to suffer, was its spiritualisation by the
great religions. Christianity, for example, has lifted poverty from the
animal struggle for existence into a noble and spiritually rewarding
experience necessary for salvation. Although this spiritual ideal was
seldom attained in practice, except for a few individuals, it certainly
helped to lighten the burden of poverty among the masses. With the
decline of religious influence today, the spiritual protection of poverty
has been removed making the poor of today more vulnerable to the
demoralising effect of poverty, particularly among young, than in the
past.

The moral commitment of some eminent economists - Alfred Mar-

shall for example - to the intellectual development of their discipline has
been traced to their realisation of the potentially liberalising effect of
wealth on the demoralised and impoverished masses. The moral justi-
fication of economic development and accumulation of wealth is primar-
ily derived from this liberalising effect of wealth. If, however, wealth is
used to demoralise the population and particularly the young, as it is to
a large extent today, the very purpose of the discipline as applied to the
Western countries, must be questioned by responsible economists.

Economic Theory and Morality

As we have noted earlier, economic theory, alone or as a part of a larger

philosophical system, has played a crucial role in resolving past institu-
tional crises by guiding political action. In this process, the theory has
performed several tasks: (1) it questioned the validity of the prevailing
personal and social ethics; (2) it questioned the effectiveness, rationality
and legitimacy of the existing institutions founded on the principles of
the existing social ethics; (3) it formulated an alternative ethical system
that was economically rational and morally superior; (4) it proposed a
52 Humanomics Volume 7 Number 4 1991

new institutional order designed to put into practice the new ethical
ideals and principles.
A study of the intellectual history of the discipline, as opposed to
the narrowly defined but currently popular history of economic analysis,
reveals that the writings of the great economists who shaped the
intellectual development of the discipline have, in fact, performed some
of these tasks along with the development of the body of economic
knowledge. Their theories and policy recommendations have varied
according to the circumstances and conditions of their times but the
integral part of their analysis consisted of the examination of the rela-
tionship between the economy and ethics in theory and in institutional
practice. It is this part of their analysis, their moral philosophy, and not
so much the strictly economic analysis derived from it, that constitute
their most lasting social and intellectual contribution.

A similar conclusion was reached by Ellen Paul in her analysis of

the decline of laissez faire, the most fundamental principle of institutional
economic order, in nineteenth century England.

Thus, we have discovered that the theoretical movement toward

ever greater government intervention in the economy in nineteenth
century Britain was caused principally by a change in moral
perspective and not by alternations in pure economic theory
(p.283)

We will sketch, briefly, some of these changes in moral perspective

accomplished by the great economists.
Adam Smith, the founder of the economic discipline, based his
impressive body of economic knowledge and his policy recommenda-
tions for the new institutional order, on what was then a radically new
moral foundation. That foundation was the product of the collective
efforts of Francis Hutcheson, David Hume and other members of the
Scottish Enlightenment who broke away decisively with the theological
orientation of John Locke's moral philosophy.(Dunn, p.119) They re-
placed the theocentric system of ethics with the egocentric ethics
grounding their moral system not on the existence of God but on social
existence of man. They found the origin of morality - the so-called moral
sentiments - not in moral theology but in social psychology symbolised
by that famous metaphor of Adam Smith - the impartial spectator.
Humanomics Volume 7 Number 4 1991 53

Smith's own contribution to the new ethics was outstanding. As we

mentioned earlier he revolutionalized the traditional ethics by altering
the perception of such morally suspect behaviour - self-interest, materi-
alism, enterprise and competition - from being regarded as private vice
into dominant social virtue - his famous invisible hand metaphor. Be-
cause of the moral consequences of such behaviour, the traditional
restrictions on it, both moral and legal, needed to be removed, allowing
the new institutional order based on such behaviour to take shape.

He also revolutionalized the principle of liberty, particularly econ-

omic liberty, in the scale of social ethics from the lower end of the
spectrum, where it was subservient to other goals, such as equality,
national power, etc., to a position of prominence, second in importance
only to wealth. He criticised the illegitimacy and the demoralising effect
of the old feudal institutions and contrasted them with the moral supe-
riority of the new institutional order - the market.(Phillipson, p.188) This
new institution, of what he called the "commercial society", allowed
individuals to engage in economic activities as free, independent and
self-reliant entities capable of exercising their industry, enterprise and
dignity. On the other hand, the feudal institutions of agricultural society,
based on the personal and arbitrary relationships between the lord and
his clients, morally corrupted both. It tended to make the lord self-indul-
gent, slothful, ignorant and capricious while at the same time his clients
became servile, cunning, lying and lacking in self- respect. The new
economic order, based on the impersonal market, was not only econ-
omically more efficient but also morally superior to the existing feudal
institutions.

Smith combined economic and moral arguments to expose the

irrationality and illegitimacy of mercantilistic practices and institutions,
which attempted to accumulate gold at the expense of real wealth and
thus imposed restrictions on the flow of capital preventing it from being
channelled into the most productive areas of the economy and forcing
it to flow into the least productive sector, i.e. the foreign trade. He
showed the irrationality of monopolies which restricted the size of the
market and, indirectly, reduced their own profits. He exposed the
immorality of mercantilistic practices which allowed the state to waste
capital generated by the industry, enterprise and thrift of individuals, by
using it for unproductive activities such as erecting public monuments
and engaging in destructive wars. He presented his blueprint for the new
54 Humanomics Volume 7 Number 4 1991

institutional order - competitive markets - based on the principles of

laissez faire, self-interest and competition as rational and moral.
Smith's theories and policies recommendations helped to remove
the obstacles and restrictions which the mercantilistic institutions have
imposed on the freedom of individuals, motivated by the protestant
ethics, to accumulate wealth. The new institutions of competitive mar-
kets allowed the protestant ethics the necessary freedom of action
creating the foundation for the industrial revolution. It is interesting to
note that the justification for teaching the new discipline of political
economy in Scottish and English Universities was that the instruction in
new morality would somehow spread to the masses and allow them to
lift themselves out of their poverty by the new virtues of industry, thrift,
enterprise and competition. Thus, the new discipline was conceived as
"a handmaiden of ethics" from its very origin.

Other great economists followed the tradition of Adam Smith and

made their own significant contributions to the moral foundation of the
economics discipline. Thomas Malthus, through his population theory,
removed any moral obligations of the wealthy to the poor whose
economic conditions could only be remedied by their own moral re-
straints. Jeremy Bentham replaced the natural laws of Adam Smith with
his utility principle as a foundation of social and political ethics.(Paul,
p.187) The utility principle, which was used by David Hume to explain
the origin of the social virtues of benevolence and sympathy, (Robinson,
p.58) was employed by Bentham to justify hedonism and individualism,
changing, in the process, the ethical status of self-indulgence from a
vice into a virtue. At the same time it "demoted" industry from being a
virtue to a lower status of disutility or a pain which is to be avoided.

John M. Keynes, the founder of modern macro-economics, accom-

plished an equally profound revolution of the perception of morality. He
showed that the moral principle of laissez faire was socially harmful
being responsible for prolonging the depression and unemployment.
Similarly, he argued that the chief virtue of protestant ethics - thrift - was
a social vice being responsible for, among other things, unemployment.

These few examples suggest that the conclusion of Ellen Paul, that
changes in moral perception and not in economic theory have a pro-
found impact on economic conditions, may have some validity. Further-
more, these changes in moral perception have tended to follow a definite
Humanomics Volume 7 Number 4 1991 55

pattern of undermining traditional morality and converting it gradually

into its opposite.
There is another aspect to this pattern of moral changes, namely,
to ground the ethical principles on some objective, constant and per-
manent basis, which would remove the subjective and arbitrary nature
of conflicting ethical systems. This search for the scientific base of
morality led various economists to discover that base in the universal
and unchanged human nature. Unfortunately, that human nature was
defined in so many different and conflicting terms - the naturalistic man
of Adam Smith, the hedonistic man of Jeremy Bentham, the mechanical
homo economicus of neoclassicists, etc., as to make this search meth-
odologically and scientifically questionable.

Positive Economics and Morality

A different approach to the search for the scientific base of economic
theory was adopted by other economists - Ricardo, Senior, Jevons, etc.
- which ultimately lead to the notion of positive economics. It consisted
of progressively narrowing the subject matter of economic theory by
jettisoning the areas of inquiry which contained normative or ethical
elements. Thus, the problems of public policies, the problem areas of
institutions and their change, the problem of dynamics, etc. were
removed from economic theory leaving only pure economics - basically
price theory. Unfortunately, the discarded areas of inquiry were poten-
tially the most productive which affected the rate of intellectual progress
of the discipline. Furthermore, what was retained as pure theory was
based on a very narrow set of ethical principles - utility, self-interest and
competition - and equally narrow set of institutions embodying these
principles - competitive markets - and, therefore, could not be con-
sidered positive.

The present position of pure theory is unsatisfactory in two re-

spects: it is neither positive nor scientific. It arbitrarily declares certain
moral principles - utility, self- interest, etc. - as objective and therefore
scientifically valid while, at the same time, the opposite set of ethical
principles - ascetism, altruism and co-operation - are declared to be
subjective, arbitrary and normative. This is an arbitrary classification. It
would be more reasonable for economic theory, following the reasoning
of Adam Smith and Jeremy Bentham, to demonstrate that certain ethical
principles - self-interest, utility, etc. - are stronger, more basic, more
56 Humanomics Volume 7 Number 4 1991

stable and permanent part of human nature and therefore economically

more efficient and, possibly, morally superior than all other alternative
ethical principles and, therefore, should be used as the moral foundation
of economic theory. However, this approach would necessitate the
renunciation of the claim of economic theory to scientific authority and
admitting its moral character. Furthermore, it would open the flood gates
of competing ethical systems with their claims to moral superiority.

The alternative approach would be to expel all ethical principles

from economic theories, including the principle of utility and self-inter-
est. This would amount to the rejection of most of the pure theory leaving
very little of economic content in the remaining economic theory.
Economic theory would cease to be economic and would become a
part of logic (pure theory of choice), or a part of applied mathematics
(game theory, optimisation theory) or a part of industrial engineering
(input- output theory).

Neither of these alternative solutions is acceptable to most of

mainstream economists. Instead, the purity of economic theory is being
defended by such intellectually questionable devises as the use of
dogma - only the ignorant or perverse would question the economic
truth - and the misuse of the authority of science. Arbitrary ethical
principles are presented as axioms, self-evident truths, assumptions or
as tastes and preferences. The same technique is used with regard to
arbitrary institutions - competitive markets.

There are serious consequences of this hardening of economic

theory into dogma and the misuse of science. Questioning and criti-
cisms of the intellectual foundation of the discipline is discouraged
although these activities are necessary for the intellectual growth of the
discipline.

An equally serious consequence of positivism applies to the econ-

omy. As pointed out by various writers, major current economic prob-
lems - unemployment, inflation, government deficit - are moral in
nature. (Byron, Erteszek, Walton) an economic theory which does not
recognise the moral causes of economic problems limits its inquiry to
purely economic factors and will not be able to provide an adequate
explanation of these problems, nor suggest appropriate policies. Such
a theory will be partial at best and irrelevant at worst. The advantage of
the pure economic approach is its precision but this is often outweighed
Humanomics Volume 7 Number 4 1991 57

by the partiality, incompleteness and irrelevance of the analysis. The

failure of economic theory to explain such major problems, to discover
their hidden causes will, in turn, render the policies derived from the
theory ineffective and sometimes even damaging to the economy.

A more productive approach to economic analysis would be to

expand its scope to include such things as work ethic and its impact on
unemployment; consumers ethic and its impact on inflation, savings,
capital accumulation and its cost; welfare ethic and its impact on deficit,
unemployment, etc. Furthermore, to analyze the problem of govern-
ment deficit, it may be necessary to include in the analysis such moral
factors, as a decline in the political culture, otherwise known as "pork
barrel politics", the decline of political authority, the rise of special
interest groups, the dependency syndrome and its effect on the level of
motivation and productivity, etc., along with the standard economic
factors.

Conclusions

Morality and economy, or virtue and wealth, are related in a system of

dynamic, circular causation. That is, virtue affects wealth which, in turn,
influences the moral norms and the conduct of behaviour. An economic
theory, which strives to eliminate any ethical elements from its subject
matter, must inevitably purge itself of practically all economic content
because economic activities involve ethical considerations. Thus, pure
or positive economic theory must inevitably become a branch of logic
or an applied part of mathematics.

Equally serious is the negative impact of the positivistic approach

to economic theory on the performance of the economy. It adversely
affects the ability of economic theory to explain and to propose solutions
to major economic problems such as unemployment, inflation, govern-
ment deficit, environmental damage, etc. These problems contain, in
addition to their economic causes, moral dimensions as well; both in
terms of their consequences and their underlying causes. Economic
theory which does not recognise the moral underpinnings of these
problems will lose its effectiveness in dealing with them and the econ-
omy as a whole will suffer.

The ineffectiveness of the existing institutions to solve the major

economic problems is the first step in a dynamic process of institutional
58 Humanomics Volume 7 Number 4 1991

dis-equilibrium which leads to institutional crisis. Economic theory, in

the past, has played a crucial role in the resolution of such crises.
Unfortunately, the economic theory of today, because of its positivistic
orientation, is ill-equipped for such a task. There is enough evidence to
indicate that the existing institutions are being questioned as to their
rationality and their ligitimacy. There is sufficient evidence to believe that
the ethical principles underlying the existing institutional order - utility,
self- interest and competition - have outlived their usefulness and are
contributing not only to the economic inefficiency but to the demorali-
sation of the population, particularly the young. Time is running out for
economic theory and the economy. The return of economic theory to
its original roots - moral philosophy - is inevitable. The question is
whether that return will occur soon enough to resolve the approaching
economic crisis or will it occur after, and because of, the crisis. Only the
time will tell.
Humanomics Volume 7 Number 4 1991 59

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