PHIL 2120: Introduction to Ethics
Dr. Robert Lane
Lecture Notes: Wednesday November 10, 2010


[9.5.] Criticisms of the Utilitarian Defense of the Classical Model.[1]


As DesJardins notes, there are two types of criticism of the utilitarian defense of free market economics in general:


1.      Criticism of means: the means (unconstrained, free market pursuit of profit) do not actually attain the desired ends (namely, maximized preference satisfaction). This type of criticism agrees that public economic policies should promote preference-satisfaction, but it asserts that a free market is not the best way of achieving that end.


2.      Criticism of ends: the desired ends ought not to be desired. This criticism rejects the utilitarian assumption that public policy ought to aim at promoting preference satisfaction to begin with.



[9.5.1.] Criticism of Means: Market Failures.


This criticism involves the notion of a market failure...


market failure (df.) a “situation[] in which the pursuit of individual self-interest (profit) will not result in a net increase in consumer satisfaction (the overall good). Such situations are called ‘market failures’ precisely because in these cases markets fail to do what they were designed to do. Market failures provide evidence against reliance on markets alone to achieve public policy objectives.”[2]


According to this type of criticism, unrestrained pursuit of profit will result in three types of market failure:

1.      negative externalities;

2.      public goods; and

3.      general harm resulting from individual rationality.



[] Negative Externalities.


This criticism states that free markets result in negative externalities...


externality (df.): a consequence, either positive or negative, that an economic exchange has on parties external to that exchange, i.e., parties other than the buyers and sellers. Parties external to the exchange cannot influence the exchange by, e.g., refusing to pay the asking price or by lowering the asking price. So the price charged and paid in the exchange does not reflect the total cost of the product or service.


Examples of negative externalities:

·         excess pollution generated by an SUV affects people in addition to those who buy and sell such vehicles;

·         resource depletion affects future generations, consisting of people who do not yet exist and so are obviously not a party to any current exchanges.


According to this criticism, “whenever [negative] externalities exist, free market exchanges do not work to the greatest good for the greatest number.”[3]


And in order for these externalities to be “internalized” (i.e., in order to ensure that the consequences of the economic exchange in question affect only the participants in that exchange and no third parties), the market must be regulated to some significant degree, for example...

·         by introducing emissions standards that will reduce the degree to which automobiles pollute the environment; and

·         by introducing MPG (miles per gallon) requirements that will reduce the amount of gasoline needed to operate cars, thus depleting less of the oil that future generations will need.



[] Public Goods.


These are “social goods … for which no pricing mechanism exists. Without an economic price, no means are provided for markets to ensure that these goods get allocated to those who most value them. Thus, there is no guarantee that markets result in the optimal satisfaction of the public interest in regards to public goods.” (54 / 57, emphasis added)


So according to this criticism, even if the free market does result in the maximum satisfaction of preferences for things that are bought and sold, not everything relevant to peoples’ preferences is bought and sold, and so the market has no means of maximizing satisfaction of preferences for those things.


Examples: “clean air, groundwater, ocean fisheries, scenic views, friendly and supportive neighborhoods and communities, [and] safe streets” (54 / 57).



[] General Harm Resulting from Individual Rationality.


Sometimes, “individual pursuit of rational self-interest … results in a worse outcome than what would have occurred had the parties’ behavior been coordinated, either through cooperation or regulation.” (56, emphases added)


DesJardins points out that this situation is a prisoner’s dilemma, a “situation[] in which cooperation has a more optimal outcome than competition.” (54 / 57)


The phrase “prisoner’s dilemma” was coined in the 1950s to describe the following scenario.[4] Suppose you are arrested by the secret police, beaten and thrown into a cold, dark cell in the basement of police headquarters. Hours later you are taken to an interrogation room. “You are being charged with treason,” says the interrogator. “We have also arrested your friend Axel. He is in another part of the building now and is also charged with treason. We demand that you confess, and we offer you the following deal. We are also making Axel the same offer.” You have no way of knowing what Axel is going to do, and you want to base your decision entirely on the basis of what is best for you (what will get you the shortest sentence).


If Axel confesses and

A.     you confess...     you both five years.

B.     you don’t confess...  you get ten years and Axel is set free.

If Axel doesn’t confess and

C.     you confess...   you are set free and Axel gets ten years.

D.    you don’t confess...  you each get six months.


The solution: no matter what Axel does, it is in your best interest to confess.


But you and Axel are in the exact same situation. So Axel will do the same as you: he will confess.


So you both get five years.


Why this is a dilemma: if neither of you had confessed (if neither had done the rational, self-interested  thing), each of you would only get only six months. You would both be better off if neither of you had not done the rational thing!


Even if you could somehow communicate with Axel and agree both not to confess, you still don’t know that, once you are separated again, he will keep his end of the agreement. Either way, you are better off breaking the agreement yourself. So both rational agents will end up confessing and thus both be worse off than they would be had neither one of them done the rational thing.


Unconstrained individual pursuit of one’s own interests in a free-market economy is a prisoner’s dilemma. It results in lower over-all preference satisfaction than would a cooperative approach.


For example, the choice by an individual to drive a low-mileage SUV rather than a high-mileage compact car:


A 13-mpg SUV will discharge 134 tons of CO2 over its 124,000 mile lifetime. A 36-mpg compact car will discharge 48 tons over the same distance. If I act as the rationally self-interested individual presupposed by free market economics, I would calculate the benefits of driving an SUV and weigh them against the increased costs and health risks that I face from pollution. Since the increased risks to me (or to any individual facing such a choice) of my driving an SUV rather than a compact are infinitesimally small, my self-interested choice to drive an SUV is reasonable according to market conceptions of individual rationality. (55 / 58, emphasis added)


But clearly, society as a whole—and preference satisfaction in general—are negatively impacted by hundreds of thousands of people each adding dozens of extra tons of CO2 into the atmosphere.


… markets are incomplete (at best) as a means to attaining the overall social good. In other words, what is good and rational for a collection of individuals [considered individually] is not necessarily what is good and rational for a society. … if society wishes to address these concerns it will need to rely on public and not private (i.e., the market) decision-making mechanisms. (57)



[] A Utilitarian Defense, and a Critical Response.


A utilitarian can reply to these criticisms by saying that we can correct the market failures described above by supporting government regulation, including taxes and legislation, to “internalize” externalities and avoid further market failures.


Remember, the utilitarian defense of the free market model does not advocate that managers do anything whatsoever in pursuit of profits. It advocates that they do what they can to pursue profits within the law. This model recognizes the need for some government regulations of (otherwise) free exchanges, e.g.,

·         restricting the amount of CO2 that an SUV can produce; and

·         taking certain goods, like national parks and wilderness areas, out of the market altogether, and thus protecting them for public use.


But a critic of this defense can respond as follows:


  1. This approach does not avoid the first generation problem: irreplaceable goods like public safety and natural resources must be sacrificed in order to learn what the market failures are in the first place. For example,

·         fish populations in the North Atlantic were decimated before we realized the need to regulate fishing in order to protect them;

·         workers were injured and killed by inhaling asbestos and coal dust before the dangers of those substances were known;

·         consumers were injured and killed by exploding fuel tanks (the Ford Pinto) and contaminated food before the need for regulation of such products became apparent.

In some instances, such sacrifices will be too high a cost to pay.


  1. Business can influence legislation and consumer demand in inappropriate ways, i.e., in ways that aim at protecting the interests of business rather than promoting overall preference-satisfaction. Even if government regulation is extensive, business will still have undue influence over that government regulation (by lobbying law makers to shape legislation so that it works to the advantage of business rather than to that of consumers), as well as over consumer demand (by advertising).



[9.5.2.] Criticisms of Ends.


These two criticisms are willing to grant that perhaps a free market does maximize the end claimed by the utilitarian defense, viz. preference satisfaction. But they nevertheless see big problems with the utilitarian defense. In short, these criticisms amount to the claim that if “economic growth” means that more people are getting more of what they want, economic growth is not (necessarily) morally good.



1. Preference-satisfaction should not be the end that we pursue.


According to this criticism, “what people demand as consumers and what makes them happy, are not always identical. … even if people received all the goods and services that they desired as consumers, there is no guarantee that they would be happy.” (57 / 60)

·         Things that contribute to happiness that cannot be purchased: friendship, psychological health, love.

·         Things that can be purchased that (says DesJardins) undermine happiness: drugs, cigarettes, pornography.


This criticism amounts to saying: even if a preference utilitarian defense of the free market is correct (that the free market best satisfies people’s preferences), preference utilitarianism is faulty. We should be classical utilitarians instead of preference utilitarians, and thus we should emphasize happiness instead of preference-satisfaction. And the free market does not maximize happiness, so a (corrected) utilitarianism will not support the free market.



2. The fact that a transaction increases utility (understood as either preference-satisfaction of happiness) does not guarantee that it is morally permissible. It is possible for parties in an economic exchange each to get their preferences maximally satisfied, and yet for the outcome to be morally terrible.


Things that can be purchased that might result in (individual or overall) preference-satisfaction or happiness are (for other reasons) immoral: infants sold on the black market, child pornography, child prostitution, black market drugs, WMDs, military secrets.


In short, markets provide no substantive ethical basis for evaluating the ethical content or quality of consumer choice. Efficient markets, which even in theory can accomplish nothing other than optimally satisfying consumer choice, offer no guarantee that an ethically worthy outcome has been achieved. (58 / 61)




Stopping point for Wednesday November 10. For next time, read DesJardins pp.58-64.



[1] Note that the word “model” is used differently by economists than it is sometimes used by business ethicists such as DesJardins. DesJardins is using it to mean any theory of corporate moral responsibility towards society.


[2] DesJardins, Introduction to Business Ethics, 2nd ed., p.G3.

[3] Joseph DesJardins and John McCall, Contemporary Issues in Business Ethics, 5th ed., Wadsworth, 2005, p.38.


[4] Games with this structure were developed by Merrill Flood and Melvin Dresher (Hampton refers to Flood, "Some Experimental Games," Management Science 5 (October 1958): 5-26). The version with prisoners, as well as the name "prisoner's dilemma," is due to Albert W. Tucker. For more on prisoner's dilemmas, see Steven Kuhn, “Prisoner's Dilemma,” The Stanford Encyclopedia of Philosophy ((Spring 2009 Edition), Edward N. Zalta (ed.), URL = <>, retrieved November 9, 2010. DesJardins states his version of the classic prisoner’s dilemma at 71 n.6 / 78 n.6.

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