The Factor Economists Neglected in their Models: Integrity

Material Problems, Spiritual Solutions – Focus for Global Unity: ..So the center of our national feeling or our international feeling is not fixed on the proper object. If the center is right, then you can draw any number of circles around that center and they’ll never overlap. They’ll simply keep growing, growing, growing. They’ll not intersect with one another if the center is all right. Unfortunately, although everyone is feeling nationally or internationally, the center is missing. Therefore your inter-national feeling and my international feeling, your national feeling and my national feeling, are overlapping and conflicting. So we have to find the proper center for our loving feelings. Then you can expand your circle of feelings and it will not overlap or conflict with others’. That center is Krishna. Full Chapter

The Factor Economists Neglected in their Models: Integrity

Creation Evolution Headlines — Is economics a science?  It’s on that borderland that has many things in common with the sciences; it is highly law-governed (law of supply and demand, for instance); it uses mathematical models; it uses experimental methods; it develops theories.  Granted for the time being that it is a kind of science (albeit a “soft science” or “social science”), some economists are recognizing that they have been failing to include an important factor in their models – morality.  PhysOrg mentioned that factor in a surprising headline today: “Researcher considers the role of morality in modern economic theory.”  The first paragraph elaborated with an even stronger word –

The worldwide financial crisis in 2008, which led to what many in the United States now call the “Great Recession,” has caused researchers to rethink traditional economic theories of financial markets and the corporate world.  Even renowned financial theorist Michael Jensen, whose widely cited work has laid the foundation for the broad use of stock options as an executive compensation tool, has called on his fellow researchers to incorporate “integrity” into their economic models.

The economists are not just taking a moralizing stance here, as if they need to preach to stockholders and traders, telling them they had better play fair.  No – they are realizing that partakers of contracts and financial arrangements really do have moral sensibilities that affect their behaviors.
The article highlights the theories of Douglas Stevens, an associate professor of accounting at Florida State University, who has for years incorporated morality into his models.  Now, inspired by Jensen’s call, he has co-authored a peer-reviewed paper in Accounting, Organizations and Society called “A Moral Solution to the Moral Hazard Problem.”  When did you ever hear the phrase “Moral Solution” in a peer-reviewed paper?
Stevens has incorporated a radical new idea in his thesis.  It’s not enough, he says, to attract a principal (like an employee or contract partner) with financial incentives.  Previous models have neglected moral content.  They focused on more and riskier incentives – some of which led to the financial collapse of 2008.  Instead, Stevens broke with the traditional “principal-agent” model of incentives, which assumed a moral sensitivity of zero, and factored in the moral sensitivities of the agents.  “Thus, their model answers Jensen’s call to incorporate integrity into economic theory,” the article said; “This is significant because principal-agent theory, the most mathematically formal economic theory of the firm, has previously been closed to moral content.”
The new model explains things that the old model found baffling – like why people often do more than incentives provide:

“We know from simple observation that the traditional principal-agent model is not fully descriptive of real-world behavior,” Stevens said.  “A majority of people are paid a fixed salary in their jobs and yet provide sufficient effort for their pay.  This is particularly true in professions and nonprofit firms where the financial incentives required by the traditional model are difficult if not impossible to arrange.  The traditional principal-agent model can’t explain this behavior.  Our model, however, demonstrates that a principal can pay a morally sensitive agent a fixed salary that is increasing in the productivity of the agent’s effort.”
Their model also demonstrates the value of moral sensitivity to the firm and society.
“Our model suggests that moral sensitivity increases the efficiency of principal-agent relationships within the firm – which makes more of these relationships possible – and allows the agent to receive a fixed salary that is increasing in his or her productivity or skill,” Stevens said.  “Thus, moral sensitivity increases the general welfare of society by decreasing unemployment and increasing the productivity and pay of those who are employed. This explains the emphasis placed on moral training within the firm and society at large.  This also provides a warning against letting moral sensitivity diminish.”

Who would have thought that morality is a factor in reducing unemployment, as well as increasing productivity – regardless of incentives?  That is actually a principle taught in the Bible – that work should be done “as unto the Lord,” not with “eye-service” just to please men (Colossians 3:23, Ephesians 6:5-6).  The renowned “Protestant work ethic” taught individuals to believe that a job well done has intrinsic value, regardless of incentives or compensation.
In closing, the article (actually a press release from Florida State University), emphasized the importance of professional ethics training as, if you will, a “moral” of the story.  “Every financial crisis and scandal is a wake-up call – for both practitioners and academics,” Stevens said.  “Hopefully, we won’t waste yet another financial crisis.”

Where does ethics come from?  To find the source, don’t walk across campus to the science lab, where the Dawk is telling impressionable frosh that they are evolved slimeballs.  Don’t go to the auditorium where Shermer is telling them intelligent design is a myth and a pseudoscience, and we must use Reason, but he can’t for the life of him tell us a reason why.  Don’t walk over to the Humanities, where the profs want to divide everybody into groups of the aggrieved who want to hold placards with upraised fists dripping in blood and chant, with foaming mouths, “End the Hate!”  Don’t go to the Astronomy department, where they say universes just happen from time to time, and ours is just one of an infinity that popped into existence out of a quantum fluctuation, and is on the way to a heat death.  Don’t go to the music department where they tell you hip-hop is the equivalent of Bach.  Don’t go to the History department, where the profs have no idea why functionally modern humans spent 800,000 years grunting in caves, then decided in the blink of an eye to build cities, ships, trade, agriculture, writing, economics, warfare, manufacturing, mathematics, law, religion, morality and philosophy.
No, to find morality, use your head.  You have a conscience.  Where did that come from?  It didn’t evolve.  You know innately that certain things are good and certain things are evil.  Good and evil refer to eternal standards.  Conscience, in a sense, is a law of nature.  Paul, a “scientist” of that inner law, explained, “For when the Gentiles [i.e., non-Jews] who do not have the law [the Jewish Scriptures], by nature do what the law requires [i.e., knowing that murder, theft and adultery are wrong], they are a law to themselves, even though they do not have the law.  They show that the work of the law is written on their hearts, while their conscience also bears witness, and their conflicting thoughts accuse or even excuse them….” (Romans 2:14-15).  We all know that is true by experience.  Steal something, and even if you get away with it and nobody knows about it but you, the proverbial devil and angel on your shoulders start having their argument in your ears.  People have moral sensibilities, and economic theorists have been amiss to ignore those factors in their models.  By treating people as mere Pavlovian dogs responding only to incentives, they have been missing out on how the real world operates.  Could that have led to bad forecasts that blindsided the world to one of the worst financial collapses in modern times?  Well, it’s about time to add the words morality and integrity back into economics theory – for practical reasons if for nothing else.
To find integrity, leave the campus, cross the street, and go into that building with the steeple.  There you will get to the source.  The fear of the Lord is the beginning of knowledge (Proverbs 1).  You shall love the Lord your God with all your heart and with all your soul and with all your mind.  This is the great and first commandment.  And a second is like it: You shall love your neighbor as yourself.  On these two commandments depend all the Law and the Prophets. ((Matthew 22:34-40).
It’s nice to see that some economists are finding out that integrity matters.  The other sciences could use some integrity training.  There was a short-lived call for integrity in Science and Nature after the Hwang scandal in 2006 (02/05/2006).  Not much happened.  It was followed by shameless arrogance in Darwinist response to the movie Expelled in 2008, and then a half-hearted admission of fallibility after Climategate in late 2009.  Scientists apparently don’t have the innate integrity to make progress on their own, so we may have to provide incentives for them.  Do your duty; take a scientist to church.  Tell him it’s an experience that’s out of this world, or it will bring true riches, or tell them it’s a science project – whatever incentive appeals to his or her maturity level.  Take someone who needs it, like the Dawk.  He’s already admitted that he prefers living in a Christian society instead of one that acts out Darwinian principles, so he is already inconsistent and needs to learn integrity.  If he kicks and screams, give him a pacifier so he doesn’t disrupt the hymn.  You may have to use childish incentives on him until he gains the maturity to exercise his conscience, but real progress will only be possible when he can explain and defend the source and ultimate reference of integrity.  That, of course, will only be the beginning of knowledge, but getting on the right path is a victory.