Machan's Musings - Predictability and Free Will in Economics

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Submitted by removed on Wed, 2006-01-11 06:02

At the beginning of each term I mention an apparent problem for students taking my business ethics course in our school of business and economics: While economists tend to approach their discipline with the understanding that human beings are relentless utility maximizers, in business ethics that idea would be very odd. The reason is that business ethics assume economic agents to be free to choose what they will do and holds them responsible to do the right thing.

The late Nobel Laureate George Stigler of The University of Chicago put the widely embraced economists’ stance quite succinctly when he said, “. . . Man is eternally a utility-maximizer—in his home, in his office (be it public or private), in his church, in his scientific work—in short, everywhere.” In contrast, the position of business ethics teachers could best be expressed as Professor M. van Swaay of Kansas State University puts it: “Because ethical behavior implies free choice, it cannot be captured in rule. The standard of reference for what is ethical has to exist 'outside human definition,' and therefore cannot be open to human negotiation. Some may know that standard as Human Rights, some may know it as the Seven Virtues, some may know it as the Ten Commandments, and some may know it by yet another name. It is impossible to force adherence to that standard: the notion of coercion itself is foreign to it. But individually we can make a promise to abide by it....” Ethics and, in particular, business ethics assumes that human beings can choose what they will do, what they will pursue in life, how they will conduct themselves.

So there appears to be a conflict of assumptions about human life under the same roof in most business schools: Economics seems to be deterministic; business ethics rejects determinism. But there is a way out.

Although human beings have free will and thus can choose between different courses of conduct, they are also able to—and often do—commit themselves to engage in long-term behavior. Just think, when people marry, they promise to do what (as a result) be can be expected of them (remain loyal, help raise the kids, provide for the family, etc.). When they enroll in school or take up a job, they intend, most of the time, to embark on a planned course of conduct.

Taking this into the realm of economics, people also commit to seek economic security and prosperity. They are, in other words, prudent. Because of this, economists, in turn, can expect them to follow through with their commitment. The general idea is that when people commit to go into the market, they will ordinarily seek to make good deals. This is why economists can expect us all, often, to be economic agents, or to use Stigler’s words, utility maximizers. They can, as a result, make predictions about what we will do, and their predictions are likely to be confirmed. From this way of understanding people, the discipline or science of economics can emerge, with all its (probabilistic) laws and theorems.

On the other hand, the above doesn’t assume that people cannot make free choices. Indeed, they not only often choose some plan of conduct, but also often enough choose to abandon their plans or commitments, and change course. Even when they venture into the market, they sometimes get sidetracked and depart from the economic mode of behavior (say, if in the course of business they meet a friend, and instead of making deals, they focus on indulging in the pleasantries of friendship). When this is multiplied throughout an economic system, it introduces much uncertainty and unpredictability in the midst of the opposite, reasonable certainty and predictability.

As regards ethics, because they are able to choose, people can also choose well or badly, including in the course of doing business. In terms of this understanding of people, they can be viewed as having the responsibility to act ethically in all realms of their lives, including commerce and business. Accordingly, both the economist and the business ethics specialist can continue to work with similar but slightly different assumptions about human behavior: people commit to market activities enough so as to forget the social science of economics. Yet they are also free to make choices for which they are responsible, thus giving rise to ethics and business ethics.

This is important because in reality, two contradictory theories cannot both be correct—that would violate the law of non-contradiction. It cannot be true both that people are determined to act as they do and also not so determined, but free to make choices (despite some torturous efforts to defend this possibility). But with the above proposed resolution, there need be no contradiction between the economic and the business ethics understanding of human nature.

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