A clear role for community-based ethics

Prior to Easter, Reserve Bank of Australia Governor Glenn Stevens made a speech in which he stated that God was not responsible for the global financial crisis.   Instead, Mr Stevens pointed the finger at human greed as a key factor in driving the business cycle and contributing to the global economy’s recent boom and bust.

The combination of neoclassical economics and Christianity in Governor Stevens’ professional and personal lives looks, at first glance, like an awkward juxtaposition.   Social justice and charity are two values associated with Christianity, yet one of the key assumptions in neoclassical theory is that individuals and firms act in a self-interested manner.   Neoclassical theory assumes that the goal of individuals is to maximise their wellbeing, and firms aim to maximise their profits.   Bring in some bounds on firm and individual behaviour, such as clearly defined property rights, and neo-classicists would argue that this individual behaviour will add up to the enhancement of society’s overall wellbeing within the constraints of finite resources.

Where does this emphasis on individualism leave those people who want to take a more community-based view of society?   The financial crisis of the last two years has shown that individual decision-making can have negative outcomes for society’s overall wellbeing.   New Zealand’s finance company failures, and the misinformation suffered by investors, are good examples of where wealth has been destroyed through greedy and self-interested decision making.   America’s subprime housing collapse, and the banks ‘pursuit of greater profits without due attention to risk, also demonstrates what can happen when individual behaviour fails to align with society’s wellbeing.

Some of these outcomes can be put down to poor decision-making based on imperfect information.   But shoddy business practices, whereby scant regard was given to those investors funding the financial activity, must also take their share of the blame.   And the rules governing the financial sector also appear to have been unduly lax.   So should we throw out our current brand of capitalism and its neoclassical roots?

The answer, in my view, is no.   Critics of neoclassical economics miss the point that neoclassical theory seeks to explain human behaviour, rather than determine it.   Blaming economics for the world’s ills is like blaming physics when you fall over.   Physics and gravity explain how you got the graze on your knee, but the real reason you tripped up was because you weren’t looking where you were going.

Maximising wellbeing for an individual does not necessarily equate to maximising an individual’s wealth.   This distinction is a critical one how else can we explain people who give their time and money to help out others?   For some people, generosity may be a case of showboating.   For others it may be a kind of "insurance policy", whereby they hope that people will help them out in future if they are in a situation of need.   And for others, their generosity may be based on humanitarian concerns looking out for others without any hope or expectation of recompense.

The last motivation is perhaps the purest, with the giver not looking at what they might get, but instead focused on improving the lot of other people.   This attitude is at the heart of a more community-based society.   Building community is not about bringing everybody down to the same level or penalising financial success under the guise of redistribution, just because some people are worse off than others.   It is not about excessive regulation to prevent people from undertaking activities in case they harm someone else, no matter how small the probability.   It is about enhancing people’s empathy for each other, and recognising that how each person’s life turns out is some combination of their actions, the consequences of those actions, and plain old luck.

One of the best-known phrases from the bible is "do to others what you would have them do to you".   Variations on this principle provide an important foundation in the way that people in society interact, and the absence of consideration for others can often be an underlying factor in detrimentally individualistic behaviour and a lack of ethics in business dealings.

Technological advancements mean that our world has become more individualistic and less community-based over the last150 years.   A conscious effort is needed to preserve and enhance community if we believe that is important for a healthy and well-functioning society.  Economics generally only explains average human behaviour; it does not necessarily explain the extremes of behaviour and it does not determine the behaviour.   Government policy has a role to play in providing appropriate incentives and regulations, but it’s important to realise that values or ethics can’t be forced on people through legislation.   You and I ultimately have responsibility for maintaining our community by taking opportunities to make a positive difference in the lives of those around us.

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