Ethical Economy as the Theory of the Ethical

Presuppositions of the Market Economy

• Another side of ethical economy
• Forms the ethical theory of economics
– the theory of the ethical preconditions and
presuppositions of the market economy.
• Adam Smith – 18th Century Scottish Economist
– Theory of moral Sentiments
• Based on human Sympathy
– Wealth of Nation
• Based on self-interest
 Ethical Economy as the Theory of the Ethical
Presuppositions of the Market Economy

• In the market economy

– Price : not the only parameter for
competition
– New goods and services
• create unique offers with no adequate
substitutes
• yet and for which the price is not the only
criterion in competition
 Ethical Economy as the Theory of the Ethical
Presuppositions of the Market Economy

• Perfect competition – an ideal case

– Instantiation of actual markets or a market
type that is more an ideal than a
reflection of the actual shape of markets.
– Voluntary trade(exchange) between different
people that benefits both the parties.
– All Highly organized (from below)
– Millions of people acting on their own self
interest
 Ethical Economy as the Theory of the Ethical
Presuppositions of the Market Economy

• Under perfect competition

– large number of suppliers and consumers
– homogeneous goods offered by different
suppliers
– No barrier to entry
– uniform market price - same for all
suppliers and consumers
– Suppliers and consumers are price takers.
 Ethical Economy as the Theory of the Ethical
Presuppositions of the Market Economy

• Assumption of perfect competition

– no need for ethics
– perfectly transparent market price
– perfectly transparent quality of the goods
– tends to squeeze out non-remunerative
incentives in the labor market
• all suppliers have to provide the same working
conditions to attract labor
 Ethical Economy as the Theory of the Ethical
Presuppositions of the Market Economy

• Assumption of perfect competition

– drives out non-remunerative incentives in
the market for goods
• the goods offered by suppliers are the same -
consumers have no other incentive but the
market price
– Consumers can only differentiate in the
quality of goods being sold on the market
by moving to substitutes of the goods in
question
 Ethical Economy as the Theory of the Ethical
Presuppositions of the Market Economy
• David Gauthier describes the ideal market of perfect
competition as a ‘morals-free zone’ (Gauthier 1985)
• no need for morals in a perfectly transparent market
situation
– all goods are perfectly recognizable in their
qualities
– have no hidden qualities
– available in any part of the market at same price
– price is the only decision parameter
– price is determined by factors outside the control
of the market participants (Demand and Supply)
Ethical Economy as the Theory of the Ethical
Presuppositions of the Market Economy
– Monetary price incentives are the only
incentives in a market of perfect
competition
– no buying incentives introduced by unique
features of goods and services.
– no incentive for the buyer to buy above
equilibrium price
– no incentive for the seller to sell at a lower
price.
 Ethical Economy as the Theory of the Ethical
Presuppositions of the Market Economy

• Perfect Market- Ideal Case

• Interaction of the market participants is
– free of imposition
– free of any distortion of the scarcity ratios
– reflects adequately the scarcity conditions
and the suppliers’ and consumers’
preferences
– an ideal form of social coordination
 Ethical Economy as the Theory of the Ethical
Presuppositions of the Market Economy
• Theory of competitive market assumes
– market participants are driven by self-interest
– They do not use force, power or collusion in their
interactions
– The price of the competitors is parametric
– The price is set beyond the control of a single
supplier and therefore is not dependent on
supplier discretion
 Ethical Economy as the Theory of the Ethical
Presuppositions of the Market Economy
• Theory of competitive market assumes
– The suppliers control only their own production
and cost functions, the consumers only their
budget
– no coercion to enter into or maintain a contract
– model of free interaction
– satisfies conditions of freedom and optimality
– far superior to any model of centrally planned
and therefore coercive interaction.