Ten Ethical Flaws of Neoclassical Economics

This post is heavily based on chapter 3 of my book, Cathonomics. I will be listing some basic assumptions of neoclassical economics - some explicit, some implicit - and contrasting them with the principles of other ethical traditions, chiefly Catholic social teaching, the approach of Aristotle and Aquinas, and the civil economy paradigm. Economists will often argue that economics is a values-neutral science, separate from ethics. But this isn’t true. It’s riven with ethical assumptions that simply don’t get interrogated enough. Here are the main ones from my perspective:

1. It’s all based on self-interest. This goes back to Adam Smith’s famous dictum that it’s not through the benevolence of the butcher, baker, and brewer that we expect our dinner, but rather out of their self-interest. The civil economy paradigm, on the other hand, says that we actively will the good of the person on the other side of the economic transaction. Or, in Catholic social teaching terms, we are motivated by solidarity, reciprocity, and gratuitousness. This is not merely wishful thinking, as it builds up the social trust necessary for economic success. In seeking to remove all personal relationships from the economic life, the Smithian vision loses something important.

2. Preferences are subjective and can’t be questioned. The maxim here is “de gustibus non est disputandum” (about tastes, it should not be disputed). In other words, you like what you like, and nobody has the right to tell you otherwise. For neoclassical economics, this leads to the consumer seeking to maximize the satisfaction of these subjective preferences. There is no notion of seeking what is truly good in an objective sense. The tradition of Aristotle and Aquinas, on the other hand, argues that there are objective goods that contribute to human flourishing. And Catholic social teaching emphasizes integral human development, the development of the whole person and all people.

3. What really matters are goods and services that can be purchased on the market. Theoretically, neoclassical economics says you maximize utility, and any type of goods can go into your utility function. But in a practical sense, these goods are restricted to what can be purchased on the market. This is how you measure whether or not your preferences are satisfied. There is no notion of the wider issues of integral human development, of “being” rather than “having.” There is no notion of non-material goods essential to human flourishing - such as relational goods, spiritual goods, the goods of nature.

4. Wants are unbounded. The key word in neoclassical economics is “maximization.” You seek to maximize your utility to the greatest extent possible, and all that stops you is the amount of money you have available. In the tradition of Aristotle and Aquinas, though, it’s about perfection rather than maximization. To achieve this, desires should be bounded, needs should be limited, and lower goods should be subordinated to higher goods. It is precisely this assumption of maximization that leads to the idea that more economic growth is always to be preferred to less, regardless of the quality of this growth.

5. It offers a really weird definition of rationality. In neoclassical economics, rationality is considered to be what makes economics a science. This means that consumers have preferences that follow simple rules, and they seek to maximize the satisfaction of these preferences to the best extent possible. But in the tradition of Aristotle and Aquinas, rationality means something completely different. It centers on the deployment of the virtue of prudence or practical reason to figure out what is good and then to actively choose the good. From the vantage point of this tradition, neoclassical economics centers on the satisfaction of the appetites, which is the antithesis of reason-based choice.

6. It emphasizes competition rather than cooperation. Neoclassical economics holds up the standard of “perfect competition” - where no single producer can influence prices, there is a standardized good, and there is free entry and exit. But these conditions hardly ever hold. So why then the emphasis on perfect competition? Because it can be mathematically demonstrated that perfectly competitive markets lead to the most efficient outcome for society - the market works its magic. In reality, we know that social cooperation is vital for economic success and that people are motivated by principles such as altruism, reciprocity, and fairness. But there is no such thing as “prefect cooperation” in neoclassical economics…

7. It rules out redistribution and is compatible with vast amounts of inequality. I noted that in neoclassical economics, competitive markets are efficient. What does this mean? It means “Pareto efficiency” - the point at which all voluntary trades that can satisfy preferences are exhausted, so that you can’t make somebody better off without making somebody else worse off. But this rules out redistribution, as you are making one side of the transaction worse off. It follows that it’s possible to have a Pareto efficient outcome whereby the vast majority of people are suffering. In Catholic social teaching, on the other hand, the standard is the universal destination of goods, the notion that the goods of the earth are destined for all people to enjoy.

8. The only rights that matter are property rights. For markets to work, we need contracts to be well-specified and enforced. So while neoclassical economics does not come out of the libertarian tradition, it is often aligned with it - because the main role of government is to enforce property rights and let the market do its job. But other ethical traditions, including Catholic social teaching, emphasize economic rights - including rights to such goods as food, shelter, healthcare, education, just wages, and social protection. Neoclassical economics says that either these goods should be purchased on the market based on ability and willingness to pay, or belong to the domain of politics, not economics.

9. It has a crimped view of justice. The only form of justice recognized by neoclassical economics is commutative justice - the justice between two individuals, the justice of contracts and agreements. Unlike in Catholic social teaching, there’s no role for distributive justice, what the community owes the individual, because you’re not “owed” anything that the market cannot provide. Likewise, there’s no notion of contributive justice, what the individual owes the community, because neoclassical economics is all about furthering your self-interest and maximizing your own advantage rather than fulfilling your duties or social obligations.

10. Firms maximize profits. In neoclassical economics, just as consumers maximize utility, firms are supposed to maximize profits. This position was most forcefully stated by Milton Friedman, who argued that business should have no social role, but should restrict itself to maximizing profits, equated with shareholder value. But other ethical approaches, including Catholic social teaching, support “stakeholder capitalism” - the idea that firms have duties not only to shareholders and managers but also to workers, suppliers, customers, the community at large, and the environment. Indeed, Catholic social teaching and the civil economy paradigm argue that businesses can simultaneously make profits and extend social benefits.