Economics and Justice

Understanding Peoples’ Hungers and Fears

Standard economic theory – which is based on the expected utility maximization model – assumes that individuals are fully rational, they have well-defined preferences and they understand the market.

However, research in psychology and economics has shown that human beings are systematically irrational. People do not have enough self-control and are willing to “buy protection against loss of will power”; they tend to sell “winners” and hang on to “losers” in financial markets; they show concern for not just theirs, but also for the welfare of others. They show social pressure giving, warm-glow giving and even pure altruism.

Second, people show nonstandard beliefs – they exaggerate their own abilities; they draw sufficient conclusions from insufficient premises; they expect their future preferences to be too close to the present ones and over-project current tastes on future tastes. People are also susceptible to decision errors because of framing effects; they use mental short-cuts to solve complex problems and they are affected by transient emotions in their decisions.

In short, people neither have complete information required to take fully rational decisions, nor do they have the ability to do so because of endogenous cognitive limits. They therefore not only misjudge situations, but they do so in fairly predictable patterns. The standard model of economics – which is based on the question of a global utility function – is therefore called into question.

The most obvious weakness in standard economics is perhaps its omission of the nature of happiness. It would be intuitive to assume that the objective of the expected utility maximization theory would involve consideration of aspects of happiness and unhappiness. But sadly, that has not been the case.

On another plane, social scientists and philosophers have for long tried to understand the ideas of justice and happiness.

Aristotle (384 – 322 BC, Greece) believed that wealth should be distributed such that there is the best possible end-use (‘telos’) or purpose of a good, an institution, or even a person. For Jeremy Bentham (1748 – 1832, UK), a utilitarian, the principle of utility was to always do whatever will produce the greatest amount of happiness and whatever is necessary to prevent the greatest amount of unhappiness. Benthamite utilitarianism permitted sacrificing one person’s interests for the sake of the majority. If the greater balance of pleasure could be produced by building a sports stadium rather than a hospital (because, say, there are few sick people but many sports fans), then the Benthamite principle of utility tells us to build the stadium—even if a small number of sick people will suffer greatly as a result.

On the other hand libertarians like John Locke (1632-1704, UK) thought that people have unalienable rights, which can never be taken away from them. And that people were by nature free and that government must be limited and founded on consent. Robert Nozick (1938-2002, USA), a libertarian philosopher, opposed redistribution stating that it is not possible to maintain a pattern like equality without restricting people’s liberty. He argued that taking a richer person’s earnings and giving them to a poorer person is like taking the earnings of two hours of labor from the rich person, which is like forcing the rich person to work for two hours for the benefit of the poor person, which is nothing but slavery.

Immanuel Kant (1724-1804), a German philosopher, opposed utilitarianism and held that freedom—and not happiness—is the goal of morality. Kant has a more demanding idea of freedom as self-determination. You are free in Kant’s sense only if you live by your own reason. If someone brainwashes you into doing something, you are not free. Likewise, if you buy expensive shoes only because you’ve had the desire implanted in you through advertising, then you are also not free. If you eat lots of ice cream because you can’t control your cravings, then you’re also not free. You are little more than a slave to your desires.

Kant emphasized that morality is a matter of having the right attitude, or acting for the right reason. He held that it’s your motive that is important. If a shopkeeper who does not overcharge his customers only because he fears that word of his dishonesty will spread and he’ll lose money, the shopkeeper does the right thing, so to speak. But he does it for the wrong reason. For Kant, morality says that you should never treat rational human beings merely as a means to your end. Whenever you use someone’s skills or services to your own end, you should always also treat that person as an end in himself or herself. Since you’re a rational human being, this includes you!

M.K.Gandhi (1869-1948, India) emphasized equality and for him justice was resisting injustice. He also stressed that the means are as important as the end. He chose non-violence and non-cooperation as his means and fought against all kind of man-made inequality. His idea of freedom, like Kant, was true self-determination (swaraj). For B. R. Ambedkar (1891-1956), Gandhi’s contemporary, inequality of opportunity to sections of people was an evil which was perpetuated through centuries. He argued that unless this deprivation was compensated in some way, the oppressed never stood a chance to pull themselves out of their pits and therefore he sought to remedy this through affirmative action.

Mother Teresa (1910-1997, India) emphasized universal love as the basis for equality and she said “Being unwanted, unloved, uncared for, forgotten by everybody is a much greater hunger, a much greater poverty than the person who has nothing to eat”. For her, hunger lied deeper than the stomach and she believed in the freedom of the spirit through universal love.

John Bordley Rawls (1921-2002, USA) emphasized fairness. We should not propose social rules designed to give ourselves an unfair advantage over other people. Therefore, according to Rawls, in order to be fair, an agreement must also be made against a background of equality. It is unfair if one of the contracting parties is able to take advantage of the other party because he is stronger, richer, better informed, or simply more powerful.

Amartya Sen (3 November 1933, India) advocated the ‘capability approach’. He stressed the concept of positive freedom - an individual's actual capability to do something - through better education and healthcare. He brought an entirely new dimension to redistribution and equity by asking “How can one compensate for the income loss of the poor?”  Most of all he brought the question of happiness into economics by devising a human development index which incorporates not just income but also social indicators of education and healthcare.

Philosophers cutting across centuries and continents have been searching for definitive ideas of justice and happiness. While for Aristotle the focus was on rationality (better end-use), for Amartya Sen it is about ‘capability’ and for Gandhi and Ambedkar it was ‘equality’ and for Mother Teresa it was ‘love’. Even as the ideas of justice have changed over the centuries, reflecting the political economy of those times, the spirit has always been that of greater good for greater number of people, but not at the cost of anyone. That has been the case, at least at the philosophical level. What about practice?

Justice seems elusive – changing from time to time, much like the scenery changes as you travel in a car. But, between the viewer in the car and the scenery outside, which would be justice and which be economics? Which one is unchanging and fundamental, and which is ephemeral? Should we change our ideas of justice to suit our economics or should we change our economics to fit into our idea of justice? In which direction should we change? Should it be utilitarianism (maximization), libertarianism, greater social equality, distributive justice, capability building, greater world peace or even (as in recent times) greater nationalism?

In short, the question is ‘What is the right thing to do?’ Should justice follow our economics or should it be the other way round? If you thought the answer to this question is simple, think again!

Hrudananda Panda, 23 July 2016, Pune

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