Economics and Moral Sentiments: The Case of Moral Hazard

Abstract

The purpose of this paper is to develop the argument that sentiments (including moral sentiments) are endemic to the building of knowledge about the economy, as well as the functioning of the economy itself. This contrasts with the mainstream treatment of sentiment as separable from rationality, such that it is seen (if at all) as requiring an ex post modification of rational choice theory. The case of moral hazard is considered, first in its mainstream interpretation in terms of rationality, and then in terms of an alternative approach where knowledge and behaviour are built on (moral) sentiments. The implications are drawn for how we understand the financial crisis, and the appropriate policy response.