GOVERNANCE - 24 JUL 2015

The Myth of Ethics-free Economic Policy

The Myth of Ethics-free Economic Policy
Ngozi Okonjo-Iweala

In Nigeria, politics, and to a large extent government, rarely concern themselves with issues of virtue. Most political parties are shaped by historical and geographical dynamics rather than particular ideologies and this feature manifests in economic and social policy. The situation is different in some parts of the world. Not too long ago, the Prime Minister of the United Kingdom, David Cameron, proposed new policies that were met with great concern and opposition from ordinary citizens. The impression that the UK government was attempting to legislate virtue or impose particular moral views was considered unacceptable. Yet such a vehemently negative response is at odds with the reality of economic policy, an area that rarely provokes any opposition along moral lines.

In economics you are rarely amoral, or quiet about values, so involvement in economic policy already implies some consideration of values. For example, the removal of fuel subsidy is not just an economic decision but also a moral one – about people’s entitlement to cheap fuel as a resource in today's world and the legitimate role of a democratic government in regulating prices. Another example is the severance packages for the previous administration – beyond the legal and incentive issues lie concerns about what qualities and actions of service are worthy of reward.

More generally, economics, and by extension, economic policy, are not ethics-free. Firstly, strict assumptions of complete self-interest, complete self-control and complete rationality underlie all economic theory. Recent evidence suggests that these are descriptively false but even more importantly, they give the discipline a normative framework. The reason is that any economic systems and policies created end up rewarding and promoting particular behaviour – individuals who conform most closely to the identified assumptions will do better than others. In other words, the economic systems created dictate the way people ought to act. These assumptions become self-fulfilling.

Economics is about optimisation and efficiency. Again, this is a normative stance. Appealing primarily to efficiency suggests that it should take precedence over competing claims such as equality. Such claims often need to be sacrificed to improve efficiency. For example, pursuing a policy (lower taxes for the rich) that improves efficiency (by improving work incentives) at the expense of other concerns (equality), requires the value judgment that the increased efficiency is worth the cost (increased inequality). Prioritising economic growth automatically relegates other attainable goals. But this requires some moral judgment.

Finally, macroeconomics, the part of economics that most concerns the general population, requires the most value judgments. This is because pure economic theory does not give much license to make judgments of policies that affect many people in different ways. But this applies most strictly to macroeconomic policy. The transformation of Lagos metropolis may improve the general welfare of people but the costs and benefits are significantly asymmetric and it is necessary to make value judgments about the relative merits of those affected in order to judge the net benefit of the plan.

Most people remain unaware of the implications of governments conducting economic policy. A large portion of the blame lies with policymakers and economists who fail to acknowledge the full implications of what they do. It is likely that admitting the normative nature of policy-making would be akin to admitting its deep flaws and subsequently, cast doubt on the scientific nature of their decisions. Yet the moral dimension to economic policy is not a weakness. Indeed, economics is the only discipline that studies human choice by attempting to do away with the “human” element. This custom has led to systematic predictive failures (the most recent of them being the great recession) and a troubling disparity between economic and social development in many developing countries.

Embracing the normative aspect of economic policy is the first step towards better governance. For Nigeria, the relative immaturity of its economy today means the opportunity is still there to shape the economy in the desired image. Value judgments are crucial for helping policy-makers choose between policies. For example, transport policy in Nigeria cannot be determined solely from consideration of the most economical options, but also from social attitudes and beliefs about the layout of our cities, climate change, and choice. Such issues are naturally occuring in transport debates and choosing to remain silent on them leaves us at the mercy of fate and time.

There are many routes to development. It is necessary to embrace the value judgments needed to make economic policy. Only then is it possible for people to willfully decide what route to take and at what cost. Issues such as transport policy, labour market reforms and wealth redistribution will soon come into sharper focus for Nigeria. To resolve them, we will rely not only on cutting edge economic and econometric analysis but also on reasoned, transparent and fair value judgments about how we want our society to be. Everyday, governments make moral decisions about the population. Democracy requires the people to assume a seat at the table.

 

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Kitan Williams

Kitan Williams

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