Some thoughts on economics and morality
Point 1: Greater honesty results in more symmetric and more perfect
information, a requirement for perfect competition.
Economists commonly refer to what they call “perfect competition” when discussing economic models. The consensus amongst most economists is that when an economy is functioning amid perfect competition, or at least close to it, markets are at their best. Modeling under the assumption of perfect competition is useful, but it is not realistic because it relies on certain assumptions that simply aren’t true in real life.
One of perfect competition’s assumptions is that information is perfect, meaning that every actor has access to all information. Again, in many cases this assumption is useful. The supermarket is usually upfront with the consumer and gives that individual a wealth of information – the expiration date of milk, the country of origin of fruit, the nutritional information of a candy bar – such that the individual knows pretty accurately the benefits and costs of each item. In other cases, however, information is asymmetric, meaning that one actor in a transaction has more information than the other. A used car dealer, for instance, may have a lot more information about a car he’s trying to sell than the person interested in buying the car. He may even give the prospective buyer false information about the car’s condition. The result in such situations is that the transaction results in costs and benefits sometimes different from what the buyer and seller anticipated, which in the aggregate puts a drag on the economy.
If we can assume people to be perfectly honesty in situations like these, an economy moves towards the fulfillment of one unrealistic but important requirement of perfect competition, that information be perfect. This is true because honesty and the more accurate and frequent sharing of information improves the symmetry of information – the buyer and seller both have access to the same knowledge. Thus, a used car dealer who might stand to gain financially from lying or withholding information about a car, for instance, may choose to share this information because he chooses to be honest. The customer receives this information, and information in the market for used cars becomes marginally more “perfect.”
How does this concretely make a difference? Assuming that we human beings are risk averse, meaning that we would prefer to know exactly what we are buying than risk the chance of being surprised once we get home, the presence of dishonesty acts like a tax, an extra cost, on transactions. The uncertainty involved lowers the value of what we’re buying in our eyes, because it makes it less desirable. The end effect is that the probability that the benefits outweigh the costs is reduced, and fewer transactions take place.
Imagine that there is one good, and you are the buyer. The value of that good in your eyes is V, and the price is P. Now, if the value is higher than the price, V > P, then you’ll buy it. But if the opposite is true, V < P, then the transaction won’t take place. Now, when you introduce dishonesty (and its accompanying risk) to the equation, the value of that good is reduced by r, such that now you’re looking at whether (1-r)V is greater or less than P.
Each person values a particular good with a different amount. For instance, if the good we’re talking about is orange handbags, my sister’s value, V1, would be much higher than my value, V2. So you could draw a normal distribution of people’s valuations for a particular good to look something like this:
But when you introduce dishonesty, each point on the curve above gets pushed back (left) by r, yielding this result:
The gray area represents those situations where a transaction takes place. The purpose of this very crude and probably incorrectly conceived model is to illustrate that assuming that people dislike risk, the risk-increasing presence of dishonesty reduces the total number of transactions that take place for a given good.
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economics and morality summary
point 2: An
attitude of detachment yields a more rational balance between spiritual and material
goods.