Ethical Economics: Partie Deux

[This is the concluding half of my two-parter on ethics within economics. The first half, introducing some of my insights can be found here.]

You’ve probably all been taught the differences between positive economics (objective facts) versus normative economics (subjective views), and it’s the normative side that I want to discuss today. Someone asked a thought-provoking question at Dan Ariely’s talk – “What are the ethical implications of your research?” He focused on the ethics of lying with regards to placebos: by lying to a patient about the treatment you’re giving them, you can actually improve their situation. Now most people would not morally object to this – it’s a white lie designed for their own good after all. But how far can we stretch this utilitarian view?

Shortly after the run on Northern Rock, Robert Peston (BBC business editor) was accused of triggering the problem by disclosing on BBC News 24 that the Rock had approached the BoE for emergency financial support. Now this was clearly market sensitive information, but it was a significant development and legally released. However, it may have been this very broadcast that started off the destabilising speculation and exacerbated the problem. If by containing the information the government can prevent a large-scale crisis from happening (see: how the Fed dealt with Bear Stearns), is there then a right for the government to hide that information (possibly even censor the media!) since it would be in the public interest to do so? Or, is there a right for the public to know and transparency must exist at all costs? MI5, MI6 and GCHQ keep their secret intelligence very well hidden and they justify it on terms of national security. Does recession prevention not count as national security?

At what point does that paternalistic “we know better than you, it’s for your own good, you’ll understand when you grow up” line get drawn? The same ethical dilemma applies to similar high-profile cases such as Gisele refusing to be paid in dollars. That kind of information can have large, possibly irreversible impacts on the market, in which case does the government or the media have a moral right, or even responsibility to not report it? (I didn’t include Prince Harry in Afghanistan since it’s not really economics but the same issue applies.)

Let’s move to a more radical example. We’ve learnt that inflation is built on expectations – not completely, but largely dependent. Now let’s pretend that the Bank of England can control inflation simply by reporting inflation rates (because we know that never works in real life!) If CPI is reportedly 2.0%, then everyone adjusts their expectations accordingly, demands wage increases of 2.0% and shops raise their prices by 2.0% too. Assuming total confidence in the BoE’s competence (lolz), then inflation should continue to grow at 2.0% per annum.

Now let’s relax our assumptions a little. The real world has more issues than our hypothetical model so inflation deviates around 2.0% - sometimes 1.8%, sometimes 2.3%, etc. But what if the BoE doesn’t report this deviation and lies? Ignoring the practical complications since we’re focusing the ethical aspect of this thought experiment, this is a pretty big white lie, right? Would you be morally okay with a central bank that lies to protect your best interests? What if rather than a constant lie of 2.0% they decide to under-report inflation by 0.2% when it’s getting too high? A dishonest mistake, but one which can happen to any central bank. In fact, the inflation figures we have are hardly accurate and reliable as they are!

For the conspiracy theorists out there, this probably doesn’t happen at the moment since if it does, the state of the economy would be a lot better. Given all the Chicken Littles running around out there, we would need a heavy dose of optimism to restore confidence in the markets and avoid a recession. Is it up to the government and the media to tuck us in, lie to us and tell us everything’s going to be okay?

I’m going to leave you with one of the cheesiest lines in the universe: “With great power comes great responsibility.” Keynes said (and I’d like to think so too!) that the ideas of economists and political philosophers are more powerful than commonly understood, so I hope you’ll all learn some responsibility for when you start making decisions for the rest of us!