Elgar original reference
Edited by Luigino Bruni and Stefano Zamagni
Chapter 42: Virtue ethics and economics
If ethics is the branch of knowledge that evaluates human action in terms of the good and the evil, than economics is, to a large extent and for essential parts of it, a branch of ethics. Joseph Stiglitz’s recent essay, Freefall (2010), displays a characteristic example of the interweaving of ethical and analytic considerations in the evaluation of a major economic crisis. Much of the argument concentrates on the perverse large-scale consequences of cupidity (that is, in analytic terms, profit-maximizing behavior) in ill-regulated financial markets. On the analytic side of the thesis, the crisis is interpreted as a global (‘systemic’) market failure, and explained by the interplay of two types of imperfections of financial markets, namely, information imperfections and market incompleteness. It is shown how the race for financial and accounting innovation, sustained by the (partly illusory) benefits of financial development (i.e. the benefits of the endless efforts for completing incomplete capital markets), resulted in the massive under-evaluation of risk premiums for some financial products (pooled ‘subprime’ mortgage loans, principally); hence in severe deviations of the corresponding market prices from their ‘fair’ or ‘efficient’ values. On its ethical side, the chapter pictures the vivid portrait of professionals of finance who, blinded by the immediate prospect of enormous individual gains, opportunely lose sight of the longer-run prospect of enormous losses for themselves and, as a consequence of non-pecuniary externalities (an aspect of market failures), of still larger losses for society.
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