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Ethics and Economics (And Coffee Too)

A bit of economics can go a long ways in helping understand a range of issues in business ethics. I’m not an economist myself, but I’ve read a fair bit of economics here & there. And I want to read more. In order to arrive at sound ethical conclusions, you need more than just ethical […]

A bit of economics can go a long ways in helping understand a range of issues in business ethics. I’m not an economist myself, but I’ve read a fair bit of economics here & there. And I want to read more. In order to arrive at sound ethical conclusions, you need more than just ethical beliefs: you need some understanding of how the world works. For many issues in business ethics, economics provides relevant facts.

For example, consider ethical issues related to price. Prices are clearly important to all of us: the price of a thing tells us how much we would have to pay to get it. But economists recognize that prices play two other very important social roles, roles that are important to the way the economy as a whole operates.

First, a price conveys information. When something is expensive, that tends to convey the fact that it is scarce — scarce enough that buyers are willing to pay a lot for it, and are perhaps even competing with each other and hence bidding up the price. Likewise, when something is cheap, that generally conveys the fact that it is plentiful. (Note that scarcity can be either natural, a straightforward matter of the amount of a thing in existence, or artificial, as when some person or company gains monopoly control over the supply of a thing.)

Second, a price provides motivation. People are generally (though unevenly) motivated by money, and by money-making and money-saving opportunities. (If you really don’t care about money, you should send me all of yours. Thanks.) Among those who want to buy a good, high prices tend to lower demand, and low prices tend to increase it. Price also affects suppliers. The fact that the price for a given good or service is high is going to tend to motivate people to want to get into that line of business. A low price is going to tend to deter people from making that their line of work.

Now, how does that understanding of the social role of prices affect a real-life issue in business ethics? Here’s a simple example of the social function of prices at work, and why economics matters for ethics. It’s an example I learned from the book, The Undercover Economist, written by economist Tim Harford.

Consider coffee. Coffee is a hugely important commodity — second only to oil on the world market. Most people know they now have the option of buying ‘fair trade’ coffee, the aim of which is to make sure that the people who grow coffee get a fair deal for what they produce. (October is “Fair Trade Month,” by the way.)

Hartord’s argument is this. Coffee farmers are poor, and will generally remain poor, because the thing they produce isn’t scarce. Coffee is relatively easy to grow, and can be grown in relatively many (hot) places. Buying fair trade coffee (at a premium price) means paying coffee farmers more. Now, recall what I said above about the role of prices in motivating people. Paying more for coffee is likely to draw more growers into the business. And drawing more growers into the business will increase the supply of coffee. And if you increase the supply of coffee, you inevitably depress its market price — and along with it the wages of those who labour on coffee plantations. So it’s hard to make coffee growers alone better off, until workers in other industries (like the garment industry) are well-enough off that they can’t be attracted into the coffee industry by (for example) fair-trade-driven higher wages. According to Harford (p. 229):

High coffee prices will always collapse, until workers in sweatshops become well-paid blue collar workers in skilled manufacturing jobs, who don’t find the idea of being even a prosperous coffee farmer attractive.

That makes it awfully hard, if not impossible, to boost net wages in the coffee industry, in the long run. Now, that by itself is nothing like a conclusive argument against fair trade coffee. But a sound understanding of the economic role of prices does give reason to pause before we accept the notion that we can make people better off simply by voluntarily paying more for a non-scarce commodity. (I’ve blogged before about other problems with the fair trade notion. See: What’s so Fair About Fairtrade?)

As I noted above, I’m not an economist — so if someone reading this can help by correcting anything I’ve written here, or add any further detail, I’d be grateful.

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Here are a few books about economics that I recommend (not all equally good, and I recommend them for different reasons). All of them are aimed at non-economists, and 2 of the 4 are even written by non-economists.

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