The Ethical Economy and Competitive Markets: Reconciling Altruistic, Moralistic, and Ethical Behavior with the Rational Economic Agent and Competitive Markets

Abstract:     
Contrary to some of the leading critiques of neoclassical theory, I argue that this theoretical framework can incorporate the moral dimension into the modeling of economic agents when the consequences of their choices are not answerable to market forces. Neoclassical theory, broadly defined, simply stresses the potential trade-off that exists between altruistic or ethical behavior and the material well-being of the individual. Nevertheless, the behavioral assumptions of neoclassical theory are too narrow to deal with the potential ramifications of introducing the moral dimension into the objective function of workers, managers and owners. The conventional wisdom predicts that moral or ethical firms cannot survive in a competitive market since it is assumed that such firms must produce at relatively higher unit costs. However, higher cost firms can survive as demand is restructured towards the output of the relatively ethical firms. Moreover, modifying mainstream economic theory by introducing more realistic behavioral assumptions into the modeling of the economic agent allows for the simultaneous survival over time of both unethical and ethical firms that are cost competitive and profitable. These revisions of the conventional wisdom have important implications for public policy as well as for an understanding of the actual scope that is afforded to firm decision makers with regards to altruistic or ethical behavior.

Keywords: Altruism, Ethics, Behavioral Economics, Rationality, Demand

JEL Classification: B4, D2, J5, L1, L2

Accepted Paper Series