The troubled relationship between economics and ethics through the centuries.

Reading time: 5 min

by Alberto Aleo

Those who work in business ethics (which combines economics and ethics) often tend to define its principles in opposition to those of classical economics. It often seems as though the ideals of the founding fathers of capitalism, and of the economists who have championed it over time, are rooted in a ruthless form of self-interest. But are we really sure that economic theory, in its very DNA, carries this “original sin” that inevitably condemns it to be unethical? To answer this question, we need to briefly go back in time and retrace some key stages in the relationship between economics and ethics.

Photo by Shihab Chowdhury on Unsplash

The origins of economic thought.

There are various theories on the birth of economic thought, but it is well known that the earliest traces of accounting and resource management can be found in the way monasteries were managed. If economics was born within consecrated walls, then it must have had a close relationship with ethics and morality. The Benedictines, in fact, declared that in order to develop properly, people need prayer, study, and work. Their communities were meant to be self-sufficient through production, both because generating resources allowed them to share prosperity with those in need (rather than draining it), and perhaps also because self-sufficiency is synonymous with independence and freedom of belief. Since the very beginning, the concepts of freedom, economics, and ethics have been intertwined, and they have continued to be so, sometimes with controversial outcomes.

Smith and the Scottish liberal school.

When talking about freedom, economics, and ethics, it is impossible not to mention the Scottish school. With the rise of industrial production and the emergence of the bourgeoisie, the power of individuals and their ability to self-determine suddenly became a main priority. This led economists and philosophers such as Smith and Hume to challenge the idea that a “higher order” should regulate economic exchanges, arguing that such control would limit individual freedom and slow down societal progress.

To those who argued that, without a central regulatory system, markets would become more like a jungle where individuals, driven by self-interest, would commit even the most unethical actions, Smith and Hume responded by stating that it is precisely in the individuals’ own interest to cooperate and adapt. This is due to two fundamental reasons:

• First, our individual skills and abilities are limited, and we depend on others to meet needs we cannot satisfy on our own.
• Second, “interest”, i.e., what we consider useful and valuable, does not only refer to material needs, but also to psychological ones, such as the need for socialising and recognition. These can only be fulfilled by cultivating good relationships.

---

The Scottish school, therefore, promotes a revolutionary idea: that moral rules cannot be the product of abstract theories or external authorities, but rather emerge from relationships and from processes of cooperation and mutual adaptation.

---

Companies vs Society.

The liberal vision of markets and exchanges gradually took hold in Western countries and, over time, proved to be the most efficient system for ensuring widespread prosperity and sustained growth, outperforming competing models such as communism. However, not everyone likes the idea that some individuals become wealthier than others, even when it’s justified by capitalists through the concept of meritocracy. In particular, many take issue with the immense power of corporations and their ability to influence our lives solely for the purpose of generating profit.

Statements such as Friedman’s “The only social responsibility that any business has is to increase its profits” seem to exclude any moral dimension from economic activity. In truth, much like what happened around 200 years earlier with Smith and Hume, we believe that Friedman (who was also a liberal thinker) has been misunderstood. In defending the right to pursue individual interests, he was, in our view, emphasizing the idea that each person should specialize and “do what they do best,” thereby contributing to the organic development of society. In this sense, companies should focus on generating profits because that is their area of expertise.

Like Smith, Friedman was a supporter of long-term interest. For him, it was self-evident that companies must nurture cooperation with all market actors, and with society as a whole, because doing so ultimately serves their own long-term profitability. Seen this way, the contrast between Friedman’s ideas and those of Freeman, the father of stakeholder theory, which argues that companies should prioritize creating value for all stakeholders and not just profit, is not as stark as it is often portrayed.

Photo by Diogo Nunes on Unsplash

Freedom, economics, and ethics.

At this point, some readers might suspect that we are defending classical capitalism and its emphasis on individual interest, often seen as being at odds with the well-being of society. But this is precisely the heart of the matter:

---

We believe there should be no conflict between my interest and the interest of the society I live in.

---

Believing the assumption that a more ethical society requires sacrificing individual interest is dangerous, and history shows that it has led to dictatorships and terror regimes. It translates into powerful authorities deciding “top-down” what constitutes the common good and how it should be pursued. 

In contrast, the idea we want to support, and that many economists and thinkers before us have advocated, is that human beings should be placed in a position where they can freely choose to act in their own best interest, provided they are equipped with “incentives” that also benefit society.

To achieve this, individuals need to be guided towards a broader understanding of their own interests, in terms of both content and time, which will allow them to overcome cognitive biases and information asymmetries that might otherwise lead them to make short-sighted decisions that seem satisfying, but that only appear to be in their own interest and only in the immediate term.

---

According to the branch of business ethics we feel we belong to, the freedom to pursue one’s own interests, aspirations, and ethical principles is not only compatible, but mutually necessary.

---

Our mission at Passodue, as well as that of the GVV research program we are part of, is precisely to make this compatibility clear by providing professionals and companies with tools that make ethical behavior both effective and advantageous.

If this were not the case, two outcomes would be inevitable: either our interests would come into conflict with those of society, leading someone to impose their moral rules onto us; or ethics would become a luxury reserved for a privileged few, those who can afford to ignore their own interests because they have already satisfied them, perhaps through unethical means.
Business ethics, therefore, should not position itself as an alternative to classical models, but rather as a tool to renew and rediscover the relationship between economics and ethics.

Note: The interpretations of the economists’ ideas presented in this article are personal and intentionally simplified for informational purposes.

| partem claram semper aspice |