Economic Analysis, Moral Philosophy, and Public Policy

When we say that it is morally right to relieve famine victims, we are expressing our approval of famine relief and at least suggesting that, all things being equal, people ought to go to the aid of those in danger of starvation. Morality is normative as opposed to merely descriptive. So is rationality – although, unlike morality, only conditionally so: actions are rational or irrational, given the agent's beliefs and desires. When we say that it is rational for individuals to have medical insurance, we are expressing approval of having it. Similarly, to characterize a choice as irrational is usually to condemn it, and not simply to describe it. Not only are morality and rationality alike in these ways, but “rational” is often used (as in the previous example) as a synonym for “prudent,” and prudence is a morally admirable character trait or moral virtue. At the same time, morality and rationality are not the same.

How are morality and rationality related? Is it always rational to be moral? These general philosophical questions are critical to understanding the relations between ethics and economics, because economics is built around a theory of rationality. We explore the relations among economics and rationality, norms, and morality in Chapter 5.

To prepare for this exploration, Chapter 4 presents the standard theory of rationality and its extensions to circumstances of risk and uncertainty; it also considers some of the objections to which the theory has been subject. Chapter 4 is the only technical chapter in the first three parts of this book.

Chapter 5 examines the role of the standard theory of rationality in both positive and normative economics, and it explains how the theory ties positive and normative economics together and makes both appear to be more plausible than they otherwise would be. Chapter 5 also deals with questions raised by the effects of people's morals on their behavior. How (if at all) can economic theory take account of these effects? What is the relation between morality and preference? Can one (or should one) develop a conception of economic rationality that permits a distinction between acting morally and maximizing utility? If the two diverge, is it then sometimes irrational to act morally or immoral to act rationally?