An important role of normative economics is to provide an analytical framework to evaluate social states. Such an evaluation is based on value judgments derived from moral views of the members of the society. There exist three major approaches in normative ethics, which formalize many people’s moral views. These are consequentialism that focuses on consequences of actions; deontology that focuses on moral duties, and virtue ethics has two important aspects: acquiring virtues and human flourishing that can be achieved by using virtues and abilities. Among these, formal analytical frameworks have been developed for important aspects of consequentialism, deontology, and the flourishing aspect of virtue ethics. However, normative economics does not have a formal analytical framework for the learning aspect of virtue ethics.
This paper develops a formal analytical framework for the learning aspect of virtue ethics for models with endogenous preferences. There are two reasons for our emphasis on the learning aspect of virtue ethics. First, the recent rise in populism, low fertility and aging population especially in the developed countries has prompted a discussion among economists about the importance of communities. Second, incorporating the learning aspect of virtue ethics in economic analysis is important because many people use it in their everyday lives to think about ethical issues.
We propose that introduction of virtue ethics can lead to very different policy recommendations than those based solely on welfarism where emphasis is on maximizing social welfare functions. Importantly, in contrast to the commonly held view, we use our framework to illustrate that incorporating virtue ethics into normative economic analysis may not always lead to greater government interventions. For example, in the rational addiction model, as long as a consumer does not impose any external cost, the optimum welfare maximizing tax on addictive good consumption is zero. Using our proposed framework, we find that positive weight placed on virtue ethics, because say a society considers smaller addiction stock to be virtuous, makes the optimum tax rate positive even in the absence of an externality. In contrast, in our tough love altruism model with bequest motive greater childhood consumption leads to a smaller discount factor for the child during adulthood. Hence, a parent can use childhood transfers, an important determinant of a child’s consumption, to influence the child’s discount factor. This induces a trade-off for the parent between childhood transfers and adulthood bequest. For example, the amount saved by lowering childhood transfers can be used to increase parental bequest during the child’s adulthood. In this setting, we show that the policy choice of bequest rate has implications for the optimizing behaviors of the parent and the child. The optimum tax rate depends on functional forms and model parameters, but we use a numerical example to show that the rate is welfare maximizing bequest tax rate is positive. However, if we place a positive weight on virtue ethics, then the optimum tax rate becomes smaller and eventually becomes zero at a certain weight on virtue considerations.
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