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Ethics in Economics and Finance Essay

Ethics is defined as a standard of human behavior that offers how to act in many situations with friends, family members, employees, business people, professionals, etc. It is necessary to mention that to make really ethical decision means to use trained sensitivity to ethical issues. In other words, ethics is associated with acceptable human behavior in this or that everyday or scientific field. Ethics incorporates norms of conventional morality to distinguish ‘wrong’ behavior from ‘right’ behavior.

Generally, ethical norms suggest honesty, truthfulness, fairness, integrity, justice and respect for others. Ethics is applied to all aspects of life as, for example, medicine, psychology, business, finance and economics. Financial and economic ethics is considered subset of general ethics. (Frowen, 1995, p. 46) Ethics and Ethical Norms Researches argue that ethical norms and values play important role in maintaining harmony and stability in social life as ethics suggests proper ways of human-human interactions.

Ethics recognizes human needs and aspirations, as well as cooperative efforts, fairness and truthfulness. Ethics contributes social stability and ensures balance in all spheres of life and business. Social evolution has developed instinct care in humans to take care of ourselves and of others. Ethical norms are necessary for guiding human behavior and it is refereed to when it is necessary to resolve conflicts between selfishness and selfishness, between conscience and material needs. In finance and economics ethical violations are associated with inconsistency in modern financial-economic theory.

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Violations are also attributed to inconsistencies in use if principal-agent model of relations in economic and financial transactions. It is noted that the financial-economic theory is based on the rational-maximizer paradigm which promotes capitalist system stressing that individuals are egoistic and they tend to behave rationally when looking for ways of maximizing their own interest. The problem is that modern financial-economic theory contradicts ethical norms of loyalty, fidelity, trustworthiness and stewardship.

Moral values are the core of traditional concept of agency, but if humans are claimed to be rational maximizers, then traditional sense is impossible. (Frowen, 19995, p. 47-49) For example, Duska argues that “to do something for another in a system geared to maximize self-interest is foolish. Such an answer, though, points out an inconsistency at the heart of the system, for a system that has rules requiring agents to look out for others while encouraging individuals to look out only for themselves, destroys the practice of looking out for others”. (Duska, 1992, p. 61) Ethics in Finance

Ethics in finance plays important role as it aims at ensuring fair deals and transactions. Moreover, ethics in finance addresses corporate governance, and agency relationships which should be purely contractual. In financial sphere, ethical behaviour should be based on carrot-and-stick approach. In corporate governance the conflict between stockholder and management is described as agency problem. To deal with this problem an agency theory was developed. It stresses that the principal and agent are both self-interested aiming at generating their gain. (Dobson, 1993, p. 7)

Researchers say that we tend to entail our needs as, for example, management of retirement savings or stock and bond investing, to financial services as we may fail to carry them effectively. We are not as organized as financial managers, but we are not aware of agency problem. Lack of necessary information limits our ability to monitor managers’ behaviour. Therefore, modern world is characterized by selfish behaviour as people are willing to get their things done by others. Such paradoxical situation explains ethical problems in financial sphere stressing that declining in morality is observed. (Dobson, 1993, p. 8)

Ethical violations in finance are rather frequent nowadays and that mainly associated with stakeholder interest, insider trading, investment management and camping financing. Loyalty and trust in public and private dealings are often violated. The most common occurrences are fraudulent financial dealings, corruption in government and public institutions, influence peddling, cheating customers about their trading profits, insider trading, unauthorized transactions, misuse of customer funds in order to obtain personal gain, larceny and corruption in banks, improper pricing of customer trades, etc.

Most frequently, unethical behaviour is associated with insider trading which is defined as trading in securities of particular company or organization with an effort to take advantage of information about material side of the company. In such a way, trade is provided with unfair advantage over other competitors in the same security. (Dobson, 1993, p. 59) Therefore, ethical codes are very important in financial filed as they set standards of acceptable behaviour, fair dealing and honest relations with customers.

Ethical codes in finance tends to replace egoistic paradigm and to create such system which would promote, honesty, altruism and virtuous traits. It is rather common to fid ethical codes in modern financial markets and financial corporation. In financial markets such ethical codes are established by official regulatory agencies which are trying to ensure ethical and responsible behaviour as important part of all operations and transactions. Furthermore, re-examining of the core principle of capitalist society helps to address ethical problems in both financial and economic fields.

Financial ethics suggests that individual should be presented as honest and altruistic promoting honesty and fairness in public and private dealings. The primary purpose of ethic in financial sphere is to set standards of internal good. (Dobson, 1993, p. 60-61) Ethics in Economics Ethics is related with economic sphere in three ways: economists should follow ethical values trying to shape the way they are doing economics; economic actors have ethical values which shape their own behavioural standards; finally, ethical values are important for economic policies and institutions as they affect people differentially.

However, from economic perspective ethics is defined as a matter of choice for everyone. Many economists argue that ethical values contribute positively economic welfare. However, there are ideas that economics is ethically neutral. Economists are interested in implication of Adam Smith’s idea that all human are driven by self-interest and egoism. Smith argued that self-interest led to the common good of nation. (Wilber, 1996, p. 135) However, he agreed that human should act in terms of internationalized moral law and police power of the state.

Therefore, it is recognized that in economic sphere all figures should act on the basis of acknowledged ethical norms as economy of every country needs efficient ethical behaviour to improve country’s reputation at the world scene. In economics ethics suggests avoiding corruption in government and promoting fair decision-making. It is a matter of fact that ethics is not an easy task for economic system and business as there will be always interest groups which will challenge ethical standards and values.

Therefore, economics should pay more attention to ethics and social responsibility, as well as to set ethical codes of behavior. For example, businesses are defined as important institutions in any economic structure. Therefore, they are expected to follow ethical norms when deciding how to organize the work and to produce necessary goods and service. Businesses reflect the overall economic system and unethical behavior may create unfavorable reputation. (Wilber, 1996, p. 139) Conclusion

Ethics plays crucial role in all aspects of life, especially in financial and economic sphere. In financial field ethics is associated with fair transactions and dealings, honest buyer-customer relations and avoidance of corruption. In economic field ethics is associated with social responsibility, ethical decision-making as the whole nation depends on them, and, of course, with no corruption on national level. Ethics is necessary not only for maintaining balance and harmony, but also for improving reputation of company, organization, and even country. (Frowen, 1995, p. 68)

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