Alan Saunders: Hello, and welcome to The Philosopher's Zone. I'm Alan Saunders.

This week: ethics, and more specifically, The Ethics of Economic Rationalism. That's the title of a new book by John Wright who teaches philosophy at the University of Newcastle, and he joins us now in our Newcastle studio. John, welcome to The Zone.

John Wright: Hello.

Alan Saunders: Now, you begin your book by defining economic rationalism and also by doing a sort of vox poppery, asking people, people in the street as it were, what they thought economic rationalism was, and you got a wide variety of answers. Well our own Polly Rickard did that too, and here's what she found.

Polly Rickard: I'm from ABC Radio National. Can I ask you a quick question?

Man: Yes, what is it?

Polly Rickard: Economic rationalism. What does that mean to you?

Man: Just another way for the government to make money, I guess.

Polly Rickard: Can you explain that a little bit more?

Man: Well, if by rationalism you mean bringing the economy together, I think it's just another way for the government to take money off the Australian people, that's all.

Polly Rickard: Thank you.

Man: No worries.

Man: Not sure, to be honest.

Woman: Economic rationalism: trying to make excuses for the way things are in regard to economics?

Man: Well, it's taking a realistic view of economics, but it's sort of at the expense of humanity.

Man: Economic rationalism: I don't now too much about it, I'm actually a science student, but it's probably about equality, isn't it? Financial equality? I mean that's what I would think economic rationalism is. It's pretty much equal rights for everyone.

Man: I've no idea really. I do science.

Man: Economic rationalisation is just a government excuse, tag that they put on for their abhorrent waste of our taxpayers' resources, rationalising any decision that they make and coming up with feeble excuses on why they're wasting our money.

Man: Economic rationalism in my opinion means it's the government's job to manage the economy, in an understanding and educated way.

Polly Rickard: Thank you.

Alan Saunders: Polly Rickard, on the streets searching for a rational answer.

So for a more authoritative view, John Wright, what is economic rationalism?

John Wright: Well, there doesn't seem to be any totally universally accepted definition, but I think one definition that's probably reasonably OK is something like this.

The aim of economic rationalism is to maximise economic efficiency. Or if a government embraces the principles of economic rationalism, then that government sees as its over-riding aim, maximising economic efficiency.

And there's another strand to economic rationalism, and that is the belief that the best way to maximise economic efficiency is by leaving as much as possible up to the free market, that is, individuals acting in a free market and companies acting in the free market, rather than activity done by government. It's thought that that's going to increase economic efficiency, and economic efficiency is held to be a good thing.

Alan Saunders: And what is economic efficiency?

John Wright: Well, you can say it's made up of two components: one is minimising the outlay or expenditure and the other one is maximising the benefits. It's really quite a simple notion that we all use in our everyday life. If you want to, say, buy a car, then the rational thing to do, or the economically rational thing to do is surely to spend as little money as you can, and at the same time get as many benefits as you can, in terms of say, if it can go off-road, or pull a boat, or something like that, get as many benefits as you can, while at the same time minimising the outlay in terms of costs. You could say that the economic efficiency is something like the ratio of benefits to costs, and the higher that that ratio is, the more economic efficiency you have.

Alan Saunders: Now these are ideas with a history. So tell us about Adam Smith and his book The Wealth of Nations, which was published in 1776.

John Wright: Yes, well Adam Smith's book, The Wealth of Nations, has been very influential. In fact Edmund Burke, the conservative thinker and politician thought that it was perhaps the most influential book that had ever been published. Now at the core of it, is the idea that what we can call voluntary exchanges in the free market are mutually beneficial. Now what does that mean? Well, first of all, in its simplest form, it's something like this.

Suppose you've got $1 and you want a loaf of bread, so you go into the baker and you hand over $1 to the baker and the baker gives you back a loaf of bread. Now, Smith pointed out that it only took place because both parties benefited from it: you wanted a loaf of bread more than you wanted $1, and the baker wanted the $1 more than the loaf of bread.

So in this sense, the exchange is mutually beneficial, or in more modern terminology we can say that the exchange is a win-win situation. So Smith thought that these free exchanges in the free market were mutually beneficial; they increased the welfare of both parties, and therefore, because they increase the welfare of both parties, the total wealth in a community would be increased by these beneficial exchanges. That's the core of the idea.

He went on to develop it in a little bit more detail, and one way we can approach this is by asking ourselves, How would the baker go about ensuring that people are prepared to buy his loaves of bread? Well, the answer is that he would try to bake loaves of bread that people like buying, that they like eating, high quality loaves of bread and also he would offer it at a price that would be attractive to people. Now Smith pointed out that the baker's motives in doing this are completely selfish, they're not selfless, they're selfish. He wants to make a profit by selling loaves of bread, but the way in which he persuades, or gets people to buy his bread, is by offering them good bread, the bread they want, as cheaply as possible. So, although his motives are selfish, what he's actually doing is doing something that is of benefit to his customers, or of benefit to the community.

Now this isn't a part of their intention, to benefit the community; their intention is simply to make a living, and even to grow rich. And there's a famous phrase from Smith called 'the invisible hand', where he says that although the butcher, the baker and so forth, are led by their own self-interest to offer for sale the things that they do, there is this unintended consequence of this. He says that they are led 'as if by an invisible hand to promote an end, in Smith's term, 'that is no part of their intention', and that is to benefit the community as a whole. So Smith thought that the operation of the free market via this idea of the invisible hand would lead to benefits throughout the community as a whole.

Alan Saunders: And government should not try to interfere with the operations of the invisible hand?

John Wright: Well, yes. According to Smith, that's right. He thought that there were a number of reasons for this. One reason is that in a society of any size, you've got thousands and thousands of exchanges taking place, and any government or leader, in order to actually effectively improve upon this process, they would just need to have an enormous amount of information. And Smith thought, and later a 20th century economist by the name of Frederick von Hayek also had a similar thought, that the amount of information that a government would need to do this as effectively or more effectively than the many individuals operating within the free market, the amount of information that they would need would be astronomical and really beyond their capacity to gather and manage. Smith also thought that any government who thought that it could do this better than the free market would be being deluded. Smith believed that any community or society that handed over this power to a government would really be handing over an enormous amount of power to the government that the government would not be really equipped or able to use effectively or responsibly. So Smith was opposed to governments taking over that role.

Alan Saunders: John, let's turn to the modern case for the free market, and this turns on an intellectual construct called the ideal market. What is that, and why is it ideal?

John Wright: Well, it's a rather complex notion, but it's composed of a number of different elements. Roughly the idea is that in an ideal market all producers are competing against each other, they're trying to produce the best quality products as efficiently as possible, and in an ideal market there are no obstacles to them doing this, or nothing preventing this process of companies finding the best, the most efficient way of producing goods that the public wants. So that for example, in an ideal market, there would be no monopolies. If you've got a monopoly, that is, just one company producing all the goods of a particular type, say televisions or something like that, and there's no competition, then if there's no competition there's sort of not really that much stopping the company from offering the televisions for sale at a higher price. And so if you want to maximise the overall benefits to the community, that is getting high quality televisions at a lower cost, then there'll need to be no monopolies.

Some other aspects of the ideal market is that there are no public goods. Now what does that mean? Well, the notion of a public good is a fairly complex notion but it contains two components. One component is the idea of it being, in the terminology of economists, non-excludable. Well what does that mean? Well it means that something is non-excludable if you can't stop a person gaining the benefit from it. Now an example of this would be a lighthouse. Suppose there's a lighthouse up on a cliff somewhere, and it's shining out, telling boats there's rocks around here so stay away, there's no way you can stop a passing ship from seeing the lighthouse. This means it would be very difficult for example, for a private company to make a profit building lighthouses and offering the service for sale, because anybody can see the light whether they've paid the fee or not.

Now goods that have this feature that you can't stop a person from gaining the benefit of them, are called non-excludable.

There's also another feature: public goods are non-rival. Now what does that mean? Well, suppose I go into a canteen or something at lunchtime and there's only one hamburger left, and there's two people in the shop, me and someone else. Only one of us can have the hamburger. If I buy the hamburger and eat it, that stops the other person from eating that same hamburger. A hamburger is a rival good. One person's consuming it does stop another person from consuming it, but a lighthouse is not like that. Lighthouses are an example of a non-rival good. So are things like for example works of art, one person looking at a painting doesn't stop another person from looking at a painting.

Alan Saunders: Now you've obviously never tried to look at the Mona Lisa, huge crowds.

John Wright: I have, but I was very lucky that day I think actually. Books are the same, you know, one person reading a book doesn't stop another person from reading a book, and so on.

Alan Saunders: John, we've looked at what economic rationalism is, so now let's turn to the ethical arguments for it. The first I suppose is simply that it's rational. Would that be right?

John Wright: Well, I think it's seen by some of its advocates as being a kind of an ethical justification. It goes something like this. If something is the rational thing to do, then there seems to be a very straightforward sense in which it's the thing that you ought to do. So in that sense it could be seen as being something like an ethical justification.

Alan Saunders: And one way in which the argument works I take it, is that economic rationalists want to get society as close as possible to an ideal market and ideal markets, by definition, for economic rationalists, maximise welfare. So that has to be a moral good.

John Wright: Well, not necessarily. Maximising welfare, if this is taken to mean maximising wealth, then it's not entirely clear, or at least more argument needs to be done to show that this is a moral justification or an ethical justification. Now one kind of ethical justification that perhaps most immediately springs to mind is something along the following lines: that if you've got an ideal market, then welfare will be maximised, and if welfare is maximised, or wealth is maximised, then people will be happier, the greatest happiness for the greatest number will occur when welfare is maximised, and if you've got the greatest happiness for the greatest number, then at least on a utilitarian perspective, which actually sees the best, the morally best perspective, or some versions of utilitarianism see the morally best perspective as the one in which there is the greatest happiness for the greatest number. Then in those circumstances it's plausible to think you would have an ethical justification for economic rationalism.

Alan Saunders: I want to come on shortly to utilitarianism but just one thing on maximising perhaps not welfare in society, but the wealth of a society. Of course you could maximise the wealth of the society, but the distribution might remain unaltered, so Australia might become richer, but Jamie Packer is still going to have a hell of a lot more money than I do.

John Wright: Yes, that's entirely correct. It is possible to maximise wealth but that does not mean that the wealth will be in any way necessarily evenly distributed, there might be huge disparities of wealth. You can have billionaires and people living in poverty, but you could have an overall increase in the total, or average wealth.

Alan Saunders: Now you mentioned utilitarianism. Utilitarians believe that one action or course of action is more moral than another if it conduces to the greatest happiness of the greatest number. Now this sounds quite promising for economic rationalism, but we do I suppose, have to ask if there is in fact (and I suppose this is not a philosophical question, it's a sociological question) but, is there in fact a clear link between happiness and wealth?

John Wright: This is a very complex question, and it's to some extent it's a controversial question, but I think there are a few results that seem to be fairly well accepted now. One of the most significant I think is this: if you have a poor country and you increase its wealth, then this does produce an increase in happiness. And as you further increase the amount of wealth in a country, happiness still goes up, but the amount that it goes up starts to lessen. What seems to happen is that once wealth gets to a particular level, then further increases in wealth don't actually produce at least any statistically significant further elevation in happiness. It's as though once you've got enough wealth, that's enough and getting still more doesn't make you any happier.

Alan Saunders: Well turning away from that, I suppose we might argue that in a free market people get what they deserve. They are rewarded according to their abilities and their exertions, and that again surely is just an ethical.

John Wright: I think that one answer to that is that it's something that has a fair amount of truth on the whole, but it's also got an enormous number of counter examples. For example, it's simply not always the case that in a free market, the amount of wealth that a person ends up with is proportional to something like the sum total of their meritorious qualities such as intelligence, creativity, industry and so forth. For example, somebody might just inherit a lot of wealth, but if somebody has inherited a lot of wealth, we wouldn't say that it was deserved. Again, somebody might just be plain lucky. Now, sometimes it's said that somebody should be rewarded in business, or in industry, for taking risks for example. But what is a risk? Something is a risk by definition, if you don't really know in advance what the outcome is going to be. So if the risk that you took turned out to have good consequences, then there is, by definition, if it was a risk, there is an element of luck there.

There are also a lot of occupations which seem to involve the use of intrinsically meritorious skills, but which in the free market at least as it exists nowadays, don't really get much reward. For example, take the activity or occupation of being an artist. Now I mentioned before that a feature of a work of art, or two features of a work of art, is that they tend to be non-excludable and non-rival. Now these features of works of art, mean that artists are really quite likely to confer a lot more benefit on society than they really get in return in the free market. Suppose that a painter does a painting and someone comes along and they like the look of it and pay a certain amount of money for it, how much money is the artist going to get? Well probably it's going to be roughly proportional or commensurate with the amount of pleasure that that person, the purchaser, is going to get from the work of art. But, the amount of pleasure that the artist will give to the community as a whole could be very considerably greater, because the person who bought the work of art is going to look at it but so is anybody who say, goes into that person's house. The person can pass the work of art onto their children, they can continue to enjoy it and so forth. It's not like something like a loaf of bread or a hamburger where the person who buys it is the only one who gains the benefit from it. The amount of pleasure that something like for example, a work of art, can bring to a community can be vastly greater than, let's say, the pleasure given just to the person who bought it. And so the amount of pleasure or reward that a work of art can bring to the community can be very much greater than the amount of reward, monetary reward for selling it. And again, I guess we all know of cases of famous artists, Van Gough is probably the best known one, who lived their lives in poverty but whose work has brought pleasure to millions and millions of people afterwards. So art is a very clear case where the rewards conferred by the free market are very much less than the benefits that the activities of the artists bring to the community as a whole.

Alan Saunders: Another argument is urged by an American philosopher, the late Robert Nosick, and this is that anything that results from voluntary exchange must, by the very nature of voluntary exchange, be just.

John Wright: Yes, well as I understand what Nosick says, his argument is that if two people voluntarily exchange without any kind of coercion, say a bottle of medicine for a few dollars, then the person who receives say the bottle of medicine thereby has a property right to it and you cannot forcibly take from them that bottle of medicine, for example, without violating their property rights. So it would be wrong for a government to forcibly take something from somebody who has acquired it through a voluntary exchange, but it would also be wrong for the government to take goods from a person, say a certain quantity of money in the form of taxes, if what was behind it was the threat of some kind of physical action or imprisonment. So, Nosick thinks that goods, money, bottles of medicine, loaves of bread or whatever acquired through voluntary exchanges are acquired justly and that any attempt by anybody to take those things from them by force, violates their property rights.

Alan Saunders: Now people who advocate economic rationalism, are often taken to be conservative, and you've already mentioned Edmund Burke, the great conservative politician and thinker of the 18th century, who obviously thought very highly of Adam Smith's Wealth of Nations, but is this true, do you think? Is economic rationalism a conservative force?

John Wright: I think the short answer to that is No. Conservatism is basically the idea that particularly long-standing institutions in society ought to be preserved. Conservatives anybody who tried to sit down and figure out how society worked and tried to figure out some way of doing things better, or restructuring society so that things would be done better, would probably fail. They would probably be like a person who doesn't really understand how computers work, trying to improve the way their own computer worked.

Alan Saunders: Well that fits in quite nicely though with Adam Smith, doesn't it: government keeping its hands off because the operations of the market are too complex for government to understand.

John Wright: Yes. That is right. But economic rationalism is a little bit different from just letting free enterprise do whatever it wants. Economic rationalism involves maximising economic efficiency. It involves trying to get society as close as practicable to an ideal market, and this may involve doing things like eliminating public goods, so that for example, things that were previously done by governments are done by free enterprise. Now this type of thing is different from letting society run on its own. It's changing society with the aim of maximising economic efficiency, and it can have these unforeseen consequences that conservatives were concerned about.

Alan Saunders: So how in the end do you think the moral balance sheet of economic rationalism stands?

John Wright: Right. In my personal opinion, from an ethical point of view, the ethical case against it is considerably stronger than the ethical case for it. I think that the arguments for it are all flawed. I think they're all unconvincing and they've all got a lot of problems with them.

Alan Saunders: John Wright, thank you very much for joining us.

John Wright: That's OK.

Alan Saunders: And John's book, The Ethics of Economic Rationalism is published by the University of New South Wales Press.

The show is produced by Polly Rickard with technical production this week by John Diamond, I'm Alan Saunders and I'll be back next week with another Philosopher's Zone.