Wednesday, September 26, 2012

The Consequences Of Economics Without A Moral Compass

INET is an organization with a mission to reform economics.  It was founded during the financial crisis which exposed some of the problems within the profession.  On the one hand economists pretend that it is an objective science.  Efficiency, which depends upon the allocation of resources to their most productive uses, is its guiding principle.  The current financial crisis, and many economic crises before it, has shown that economies do not do a good job of allocating resources to their most productive uses.  The dominant economic institutions have allocated resources to serve the economic interests of those who own and manage the institutions.  This failure has not had much of an influence on the teaching of economics.  Undergraduate textbooks have not been changed much by the financial crisis.  Moreover, graduate students are still being taught to develop mathematical models of the economy that, like all models, depends upon the use of simplifying assumptions.  It appears that many of the simplifying assumptions are faulty, and that important factors that have been excluded from the models, have eroded the practical value of the models.  Their claim to fame depends upon the mathematical elegance of the models rather than their practical or expanatory value.

In addition to the inability of the prevailing economic models to accurately reflect economic reality, and the inability of economic institutions to attain the minimal goal of economic efficiency,  there are also questions about the adequacy of efficiency as the goal of economic inquiry.  For example, many assume that economic efficiency depends upon income inequality.  That is true up to a point,  but it is difficult for the profession to determine the optimal level of inequality.  That would require moral and ethical judgements that the profession cannot answer.  Some research has also shown that beyond certain levels, the marginal utility of additional income declines.  The profession deals with this problem by not attempting to define the concept of utility.  Efforts to incorporate moral values and the concept of social well being are strongly resisted by the profession. Yet the worship of efficiency and undefined utility, obscures the implicit values of economics as it is practiced. Many economists claim that cutting taxes for the rich would increase the efficiency of the economy.  INET is seeking a way to incorporate moral considerations into the study of economics.  Perhaps there are some moral values that everyone might agree upon.  Making our planet inhabitable by future generations might be at the top of the list.

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