Moral Dilemmas, Choice, & Economics

We often delve into behavioural economics when looking for depth in microeconomics analysis. This ties in with moral dilemmas as it is all ultimately down to the choices we make. To start off the Heinz Dilemma and Hobson’s choice will be considered.

Heinz Dilemma

In the Heinz Dilemma Kohlberg suggests that there are always six possible approaches to any problem encountered. Consisting of obedience, self-interest, conformity, law-and-order, human right, and universal human ethics. There are a few examples of this dilemma, which are well known but I will be using the original example.

In the original example the story is as follows:

“In Europe, a woman was near death from a special kind of cancer. There was one drug that the doctor’s thought might save her. It was a form of radium that a druggist in the same town had recently discovered. The drug was expensive to make, but the druggist was charging ten times what the drug cost him to make. He paid $200 for the radium and charged $2,000 for a small dose of the drug. The sick woman’s husband, Heinz, went to everyone he knew to borrow the money and tried every legal means, but he could only get together about $1,000, which is half of what it cost. He told the druggist that his wife was dying, and asked him to sell it cheaper or let him pay later. But the druggist said, “No, I discovered the drug and I’m going to make money from if.” So, having tried every legal means, Heinz gets desperate and considers breaking into the man’s store to steal the drug for his wife.”

From this there are six choices that present themselves so Heinz. I am going to list them from the example so we can get to the economics of it:

  1. Heinz should not steal the medicine because he will be but in prison, meaning he is a bad person or Heinz should steal the medicine because it is only worth $200 and that is not how much the druggist wanted for it; Heinz offered to pay and has no intention to steal anything else. (Obedience Example)
  1. Heinz should steal the medicine because he will be happier if he saves his wife, even if he serves a prison sentence or Heinz should not steal the medicine because prison is awful and he would languish greater in jail rather than his wife’s death. (Self-Interest Example)
  1. Heinz should steal the medicine because his wife expects it and he wants to be a good husband or Heinz should not steal the drug because that is breaking the law, he is not a criminal and he has done everything in his power so is blameless. (Conformity Example)
  1. Heinz should not steal as it is illegal as described by law, or Heinz should steal the drug for his wife, take the punishment, and also eventually pay the druggist. (Law & Order Example)
  1. Heinz should steal the medicine because everyone has the right to live regardless of law or Heinz should not steal because of the druggists right to fair compensation. (Human Right Example)
  1. Heinz should steal the medicine as saving a human life is a more fundamental value than that of property right or he should not steal the medicine because others may need the medicine as desperately. (Universal Human Ethics)

Through considering the variety of choices we have various equilibriums. The question we might want to ask is which is the optimal scenario. One may quickly realise there is no obvious option if you take it from a moral standpoint, but if we take it from an economic perspective we can examine the marginal private benefit, marginal social benefit, marginal private cost, and marginal social cost. This is due to the decisions at times having an effect on a third party that is not involved in the original transaction (that is the choices present to Heinz considering the druggist). Moreover, we can consider the Pareto efficient equilibrium considering who will be better or worse off.

In the first part of the obedience scenario Heinz is not necessarily worse-off as his wife is going to die if he does nothing, and there can be no Pareto improvement, as it would involve the druggist no longer having the drug. Would society be better off if Heinz steals in order to save his wife’s life? Since the disease is rare and special we may assume there is no demand other than Heinz’s. However, in this justification we encounter the potential problem a pharmaceutical company may face. In that if they go about developing a special drug surely they deserve some kind of compensation other than benefitting society. This to an extent depends on one’s economic view, whether we care more about the individual or society.

In the third example giving us conformity, it would seem to be the neutral equilibrium if he were to do nothing as mentioned above. If he were to conform in a sense to his wife’s demands he is not conforming to the norms of society so we come back to the issue of whether we consider societies or the individuals’ welfare of greater importance. In the fourth example we may argue that law in any sense is restrictive, and should not be needed for society, because we should be able to provide a social framework that would create an understanding for these scenarios. What if Heinz steals the drug then pays the druggist, should he still go to prison? I would argue that there is no longer a need for the law stating he should go to prison provided he pays for the drug as he has enacted a social framework not requiring the law to be in place.

The fifth example brings up the issue we may find with patents. Does an innovator deserve compensation for his work through price setting power? In this case the druggist has enacted monopoly power by price setting. As the druggist charges $2,000 when it cost $200. Then we have the inelastic demand, as Heinz effectively needs the drug and has no other choices available. This is a clear abuse of power that is afforded to the druggist through property right, and is not increasing anyone’s welfare. The druggist could take the $1000 offered or take the payment in full later, but chooses to be bullish due to the position held.


 

Hobson’s Choice

This is a special case of take it or leave it choice, whereby there is a false perception of free choice between any good. Thomas Hobson who owned a 40-horse stable where customers hired the horses developed this theory. Seeing the 40-horse stable suggested the variety of choice available and the perception there was free choice, however the condition was that the horse nearest to the door of the stable was the option and the other option was to have no horse at all.

An ultimatum game is effectively a form of Hobson’s choice, taking the classic example of a pot of money being split by two people with one person the proposer and the responder, as the proposer gives a take it or leave it choice. Results in this game often depend on the type of society it is tested in. Below is an example chart of this trade-off, noting that people believe that a 50/50 split is fair:

Screen Shot 2014-12-03 at 00.56.39

In Hobson’s case this ensured that the best horse was not picked every time, allowing that horse to rest in order to maintain its condition, while forcing the user into a choice. This may mean that in the long-run there are better quality horses available for riding, however in the short-term the consumer has been mislead about the opportunities available. Therefore, it comes down to the quality of horse presented to them at the door as to whether they take it or leave it.

Sources:

Kohlberg, Lawrence. The Philosophy of Moral Development: Moral Stages and the Idea of Justice. San Francisco: Harper & Row, 1981. Print.

Graph:

COREECON PROJECT

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Planning & Democracy

Hayek

 

One of the base arguments supporting central planning is that society left alone is guided by the fancies and whims or irresponsible individuals. Therefore, once again we are left back at collectivism. It desires the organisation of society in achieving things which are in the “general interest” or “general welfare”. The problem with this is that the complexity of happiness or welfare is ever-present. Hayek uses the individual happiness of a man as an example; we do not place our happiness in the result of one central goal, but create a hierarchy of goals in which completion aids our well-being or happiness. Thus, planning must attempt to find out all of these micro goals, and place them in relative importance to each other, and this ultimately is an impossible task.

Furthermore, this imposes the need for an ethical code. This would have to establish the significance of each aspect of our lives in contributing to the general interest. However no such code exists or could ever be comprehensively completed, due to the innumerable differences between each individual. Additionally, Hayek states that it “would be impossible for anyone mind to comprehend infinite variety of different needs of different people” even more so as to some extent we all compete for available resources. The central planning system could only cater to one set of needs, whereas individualism (not in the sense of being egoistic or selfish) allows each individual his own value placement, and thus through coordination with other common areas can be reached, or an individual pursuit can occur, not being limited by an overriding power. Hayek is not against voluntary association as in that case it is simply the realisation amongst a group of individuals their common goal and how they go about it, however this can of course depend on whether there is a leadership in this association.

Contributing to this is the concept of voluntary agreement, whereby the state should only be allowed to intervene in the case where agreement exists. At any moment when there is no agreement and the state intervenes there is a loss of freedom. He notes that at a given point of intervention the state holds enough of resources or income, that it indirectly controls all aspects of economic life. Thus, individual ends become inevitably dependent on the state, and then they are not met as the state cannot cater for every individual end.

This brings Hayek onto democracy and planning, as he seeks the importance of making an ultimate agreement. Hayek mentions that the use of “general welfare” or “general interest” is actually just a cloak for the fact that socialism struggles to agree on one definite end:

“As if a group of people were to commit themselves to take a journey together without agreeing where they want to go: with the result that they may all have to make a journey which most of them do not want at all”

Thus democracy and planning do not coincide! Democracy attempts to allow each individual to voice his desires, and thus in places like parliament there is a tendency for more conversation then agreement because our aims conflict. Hayek states that in most cases there is no real majority but a compromise which ultimately satisfies no one. Socialism comes to the conclusion that there should be a removal of democracy in order to push through certain decisions and that in itself is the removal of both political and economic freedom.

Even if a plan were to be broken down, and clause by clause voted on this would not satisfy anyone to a full degree. Even if it were delegated to separate bodies in which they developed it in regards to expert knowledge, it would then become difficult to integrate the individual plan with all other plans. Democracy struggles with planning as it reduces democracy in itself, as it loses the power of guidance and a reliance on each individual institution. He then accounts for how democracy can decay (a great example of this being Weimar Germany) in that “people reach the agreement that planning is necessary, then democratic assemblies struggle to produce a plan, thus invoking demands that the government or a single individual should be given power to act on their own responsibility.” Thus this leads to the loss of political freedom, almost in arguing that there is a need for an economic dictator “unfettered by democratic procedure”.

There exist today many harsh critiques of democracy from a variety of places. But there is evidence as Hayek states that a democratic government can work effectively:

“restricted to fields where agreement among a majority could be achieved by free discussion; and it is the great merit of the liberal creed that it reduced the range of subjects on which agreement was necessary to one on which it was like to exist in a society of free man”

The use of competitions reduces the amount of things that require agreement, and allows government to concern itself only where it truly fails to operate. Democracy will inevitably destroy itself under the guidance of collectivism, as stated previously one body or person will have to prevail with the responsibility for making the decision.

To round of the chapter Hayek quotes Lord Acton in regards to liberty:

“is not a means to a higher political end. It is itself the highest political end”

Where democracy is the manner in which we safeguard liberty (individual freedom), this is not to say that democracy achieves this at all times, but it is the best method in our possession. Power regardless of where it lies can be arbitrary; democracy can at times bring the illusion that due to things being the will of the majority that power cannot be arbitrary. Democracy tries its best to prevent this.

Individualism & Collectivism

Hayek

 

The concept of socialism must be defined it its aims and the actions it proposes to take in order to achieve them. He recognises that its general use is to describe the ideals of social justice, equality, and security. However it becomes more specific in the way that this is brought about such as the abolition of private enterprise, private ownership of the means of production, and the use of central planning.

Hayek laments that many proclaimed socialists are only looking at the first aim of social justice or equality but “neither care nor understand how they can be achieved”. Therefore he understands that there is dispute in that some people support the ends but not the means, and it also raises the question of whether socialisms ultimate aims can be achieved simultaneously.

Here he begins to breakdown the problem that socialism proposes, first by noting that central planning can result in two separate ends in regards to distribution of income, where one use of it may result in equal distribution, similar use of it may result in income reaching the hands of few. Thus, he states that socialism must be approached as a species of collectivism. As collectivism claims that we are interdependent which conflicts with Hayek’s libertarian outlook in that each individual is sovereign of his/hers decisions. So this conflict also applies to socialism, in that there is a loss of an individual’s sovereignty. However, he does mention that the root support of planning comes from rational thought. In that we plan our own decisions, and governments before putting through policy plan in considering bad or good action, or wise or short-sighted action. However he argues that modern socialism does not take the stance of liberal planning in that a framework should be erected in order to achieve this aims, he states that socialism looks to establish is a central direction for all economic action, where all resources are consciously directed. He summarises the dispute in the question:

“For this purpose is it better that the holder of coercive power should confine himself in general to creating conditions under which the knowledge and initiative of individuals is given the best scope so that they can plan most successfully; or whether a rational utilisation of our resources requires central direction and organisation of all our activities according to some consciously constructed “blueprint”

In order to argue his point he clarifies that a libertarian approach must be accompanied with the correct infrastructure and institutions in order to make competition and the benefits of market forces actually work and to not simply leave things be. I believe that it is here that Hayek begins to develop the point where a system must travel down one road completely or risk failure. In that he expands upon his point citing that legal framework is one example of ensuring competition achieves its purpose. Furthermore, competition should not be supplemented by conscious direction as it is a method in itself which provides the adjustments to our behaviour without the intervention of authority. Then he delivers an integral point: “any attempt to control prices or quantities [he previously mentions how competition solves this problem, e.g. market forces creating price signalling] of particular commodities deprives competition of its power of bringing about an effective co-ordination of individual efforts, because price changes then cease to register all the relevant changes in circumstances and no longer provide a reliable guide for the individual’s actions.”

I think that at points like these it seems that Hayek portrays himself against any form of corrective intervention, however he fully realises the existence of negative externalities or factors that may corrupt competition’s benefits. He simply asks the question “are the advantages gained greater than the social costs which they impose” as a condition in which intervention is decided. Hayek considers both the existence of negative and positive externalities, and where price signalling through competition seems to have failed. He argues that the fact we may bring in direct regulation through authority where it is difficult or impossible to develop regulation for competition is not proof to suppress competition where it may function. Here he states that in “no system that could be rationally defended would the state just do nothing”, for the system to be effective however the need for state activity needs to be realised but also stress the creation of effective competitive system by “continuously adjusting legal framework” (alongside the already well-established institutions) thus reducing the occurrence of fraud, deception, exploitation, etc. as the existence of asymmetric information, moral hazards, adverse selection are all realised, and can be acted against appropriately.

Finally, Hayek states the point that not only is complete centralisation an unbelievably difficult task, but more so the sheer loss of freedom in that one single centre decides everything. He argues that there is no middle position, that by going down one path you must commit to it consistently he states that:

“Both competition and central direction become poor and inefficient tools if they are incomplete, they are alternative principles used to solve the same problem.”

“Planning and competition can be combined only by planning for competition, but not by planning against competition.”

It is determined that planning is inevitable, a necessity in ensuring that competition works well, Hayek only critiques the planning that is working against competition, as he has stated before not only due to economic outcomes, but on the fundamental principle of maintain political freedom.

 

The Great Utopia

Hayek

 

It is here that Hayek delves into the traditionally authoritative roots of socialism, bringing forward the example of early socialism which its founders during the French Revolution felt that it could only be put in practice through a dictatorial government. Then its transfer to being considered an agent of liberty in regards to the development of “democratic socialism”, and this saw greater acceptability in western societies.

It is established that democracy and socialism stood at an “irreconcilable conflict” through reference to Alexis de Tocqueville who stated:

“Democracy extends the sphere of the individual freedom, socialism restricts it. Democracy attaches all possible value to each man,’ socialism makes each man a mere agent, a mere number.”

Further Hayek notes the development of thought in regards to people placing greater importance over economic freedom than political freedom, of which Hayek argues that one cannot have economic freedom without political freedom. Socialism aims to provide economic freedom without political freedom in that equality can be reached. To finish the Tocqueville quote:

“Democracy and socialism have nothing in common but one word: equality. But notice the difference: while democracy seeks equality in liberty, socialism seeks equality in restraint and servitude”

In this there is a change in the meaning of freedom from “freedom from coercion, freedom from the arbitrary power of other men, etc.” to “freedom from necessity, and to free from the despotism of material want,”. He notes that rather it being a demand of a new freedom it was simply the old demand for equal distribution of wealth. In this he notes the appeal of socialism and its promise of greater freedom as it lured more liberals, from this he makes his most bold remarks in regards to socialism “The Road to Freedom was in fact The High Road to Servitude” and that to the followers of socialism in a progressive manner from liberalism that “it should appear inconceivable of socialism leading to the opposite of liberty”

This is then developed into the political sphere where at first approach communism and fascism appear to be at opposite poles, but to some extent they are actually the outcome of similar tendencies. Where “socialism achieved by democratic means seems definitely to belong to the world of utopias”

Then with reference to Italy and Germany as being examples where dictators arose from socialist backgrounds into fascist and Nazi forces respectively, which would appear to be at opposite sides of the spectrum but are ultimately as he notes was realised in 1930s Germany it was easy to transfer young communist to a Nazi and vice-versa. History tells the tale of how the two sides have clashed and Hayek argues this was because they sought the support of similar minds, as in actual fact they were both against the old type of liberalism. His use of Hitler and Mussolini as examples of the rise of Socialism is interesting in that when being taught history often the struggle between fascists and communists for power is portrayed and that they appealed to different parts of society. However, Hayek notes their similarities and that their forms of policy were rooted in socialism as the agent for pushing through authoritarianism and nationalism (notably through central control).

Thus, here Hayek concludes that those whom argue socialism can coincide with freedom have simply not yet realised the extent to which they are irreconcilable ideals. Ultimately stating that democratic socialism or individualist socialism, or however many ways socialists who still believe in liberal ideals express it are arguing for the creation of an impossible utopia.

The Abandoned Road?

Hayek

It is here that Hayek develops what can be seen as his doctrine of freedom, this is more of political science then economics but it is integral in understanding his ultimate support of capitalism and the threat socialism and communism pose on liberty.

He identifies how it was the liberation of action and thought which had resulted in the improvement in our general living standards whether at the top or bottom of the social ladder.

“During the whole of this modern period of European history the general direction of social development was one of freeing the individual from the ties which had bound him to the customary or prescribed ways in the pursuit of his ordinary activities”

The example of science and its development alongside freedom is noted as a direct benefit of allowing individual thought, he notes the remarks of Auguste Comte “the perennial Western malady, the revolt of the individual against the species” but rather than Hayek noting this in a derogatory sense he uses it an example of freedom being the force which created Western civilization.

Hayek is often bundled in with far right wing economic policy, with taking a completely laissez-faire approach, but he to some extent is more of an opponent to socialism then a proponent of laissez-faire policy. This originates from his core ideology of libertarianism which he states can be a mobile creed that does not stay on set values when conditions of society change. The other supporters of the liberal cause had made laissez-faire a “hard and fast rule” in which there was a failure to recognise the need for developing institutions to support it. This is identified as the cause for the picking apart of the liberal argument and then the slow progress of policy, as it was (and still is) difficult to change the institutional framework of society.

He uses a delightful metaphor to summarise this:

“The attitude of the liberal towards society is like that of the gardener who tends a plant and in order to create the conditions most favourable to its growth must know as much as possible about its structure and the way it functions.”

Moving on from this he accounts for the rise of the argument for planning, “conscious direction”, and socialism. In that he looks at how society changed from the rough rules of the 18th century accompanied by new thought but slow progress in making gaps which were yet to be filled. Thus, there were those who argued that “it was no longer a question of adding to or improving the existing machinery [of society], but of completely scrapping and replacing it.” Consequently, leading to the removal of unseen forces that produce unforeseen results, and its place have a collective and conscious direction towards deliberately chosen goals.

He accounts for the spread of similar thought throughout Europe as a consequence of the import of German ideas, he notes that the ideas may have not been first conceived in Germany but were “developed to perfection”, and that during Germany’s materialist accumulation these ideas were spread and were encompassed in the government itself which had a large socialist party in the parliament. He then notes a distinction that German thinkers developed in that “Western” was west of the Rhine, and that the society become opponents of this “Western” ideology which was constituted in liberalism, democracy, capitalism, and individualism. As the German people conceived these things to be shallow ideals, or “the rationalisation of selfish interest” thus defining the nature of German society in the early 20th century.