Today, public trust in markets has deteriorated. Modern societies are confronted with extreme inequality (the Occupy movement), tax avoidance, corruption and protests against the dominant system. Mainstream economists tend to ignore these contemporary issues leaving them to other social scientists.
The relations between economics and ethics have been developed by a number of economists drawing on welfare and development economics as well as moral philosophy. In the classical tradition of Adam Smith, Stuart Mill or Marx, economics goes beyond issues of profit and efficiency. Amartya Sen, perhaps the most prominent 'ethical economist', looks at the relations between economic behaviour and moral sentiments and discusses how freedoms and rights are fundamental to understand them.
The arguments about 'ethical economics' are often presented as a mix of markets and morals. We look here at three different arguments.
Some consider markets as being intrinsically 'moral'. There is wide consensus that markets are necessary because they allow for free choice among a variety of goods and services. The former head of the Bank of England, Professor Brian Griffiths, gave a series of lectures in 1980, collected and published in 1982 under the title 'Morality and the Market-place'. In his book, he regards businesses as a moral community and markets as "morally self-sufficient" if they respect certain Christian values such as justice and compassion. But this is not a condition for being 'moral'. The question is to ask whether the income distribution outcome is fair. Profits are not immoral but they are not an end in itself.
For others, ethical economics is about the use of human and natural resources. Various economists (for example, J.Attali) consider that sustainable development is 'ethical in itself'. The reduction of carbon emissions is certainly kinder for future generations than accepting the 'diktat' of markets. However, ethical investment goes beyond the environment: for example, respecting workers rights or not supporting dictatorships. Increasing the minimum wage, in times of austerity, is an 'ethical measure' because the poorest workers will increase their purchasing power and this will increase internal demand, which is also good for producers.
Moreover, other systems of ethics call for more fundamental change beyond the the functioning of markets. In Islamic finance, for example, religious tenets forbid usury and favour risk sharing with low but safe returns of investments. There are also some systems, such as Bouddhists who reject the foundations of classical markets based on individual choice, private property and material wealth. To be ethical an individual should withdraw from the market or even disrupt it . Marxists in turn, seek a transformation of social production relations between capitalists and workers, but socialist ideas gave rise to original forms of organization such as cooperatives and other aspects of social economy.
There is thus wide disagreement on the relations between markets and morality and the different systems of ethics which underpin those relations. But, there are also different views on where ethics should apply when economic agents make a decision. Adam Smith, who was regarded as the founder of classical economics was a moral philosopher who believed sympathy for others (or empathy)was the basis of the ethical system. But one of his key ideas in the Wealth of Nations is that empathy could be counterproductive - in other words individuals would be better off if they pursue their self interest. Smith explains this by the collective outcome.
Instead of judging consequences, Aristotle argued that ethics is about having the right character, displaying virtues such as courage and honesty. We see this today between good managers or political leaders and greedy bankers and financiers in search of immediate gains. Aristotle thought there was a golden mean between the extremes and found it a matter of fine judgement. But if ethics is a matter of character, it is difficult to apply it in modern economies.
But there is another approach - instead of focusing on the consequences of actions or the character of people who act - we may also focus on our actions. From this perspective, some things are right, some others are wrong. For example, we should buy fair trade goods and help the poor, but adverts should not tell lies. Ethics could thus result in a list of commandments of dos and dont's.
Many moral dilemmas arise when these three views go in different directions and conflicts can be inevitable. Take fair trade coffee, for example: buying it might have good consequences and feed virtuous behaviour in flawed markets. This suggests, that even without an agreement on where ethics applies, ethical economics is still possible.
The classical conception of man - rational and selfish - exists, only in limited cases, and even classical economists, such as John Stuart Mill admitted that this was a parody. This economic man is a fiction, and our brain can hardly process all the relevant information to take rational decisions. A new wave of ' behavioural economists' (such as recent Nobel prizes Fama and Schiller), aided by neuroscientists, tries to understand our psychology, both as individuals and groups, so they can anticipate our decisions in markets more accurately. But psychology can also help understand why we react with disgust toward social injustice or we accept the market laws as universal. This will not define a new ethics for us, but at least economists will be more attentive to consider ethical issues in their judgements.