The Market for Morals

Lately, I’ve been thinking about what we obtain from markets: obvious things like goods and services, wages and output, credit and interest. But we get much more than these. Here’s Aristotle in Ethics, Book V:

 “Money is a sort of medium or mean; for it measures everything and consequently measures among other things excess or defect, e.g., the number of shoes which are equivalent to a house or a meal. As a builder then is to a cobbler, so must so many shoes be to a house or a meal; for otherwise there would be no exchange or association. But this will be impossible, unless the shoes and the house or meal are in some sense equalized. Hence arises the necessity of a single universal standard of measurement, as was said before. This standard is in truth the demand for mutual services, which holds society together.”

Markets are places of reciprocity, of fair exchange, of a sort of equalizing justice. Without money or markets, there would be “no exchange or association.” The demand for services that are mutually beneficial is part of what holds society together.  In Aristotle's time, markets drew people out of their homes and into the marketplace to interact with their neighbors and townsmen and women; to observe the behavior of merchants over time; to develop sympathy for the individuals that they traded with; and to become invested in the welfare of their community. Markets were the warp upon which was woven the social fabric that binds us into community.

In Adam Smith’s time, markets had expanded beyond the Agora and the village square, but the social by-products of market transactions were not much different. The oft-repeated transactions of market exchange and trade provided opportunities for the development of individual virtues such as temperance and prudence as well as the social glue of mutual sympathy, trust, loyalty, and justice.  Unfortunately, Smith’s thoughts (in Theory of Moral Sentiments) on the moral glue that binds us have been largely ignored, while a very few passages from Smith’s Inquiry into the Nature and Causes of the Wealth of Nations have become the scaffolding in support of extremely dysfunctional markets and the rhetoric that promotes them.

Here’s Smith saying something similar, but more nuanced than Aristotle above:

 Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard for their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

Of course, Smith’s conceptualization of “self-love” was much broader than the narrow “self-interest” that is often confused with it. Self-love hearkens back to Smith’s Impartial Spectator in TMS, the moral arbiter within:

 “It is reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct...who calls to us, with a voice capable of astonishing the most presumptuous of our passions, that we are but one of the multitude, in no respect better than any other in it; and that when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and execration. It is from him only that we learn the real littleness of ourselves. It is this impartial spectator . . . who shows us the propriety of generosity and the deformity of injustice; the propriety of reining the greatest interests of our own, for the yet greater interests of others . . . in order to obtain the greatest benefit to ourselves. It is not the love of our neighbor, it is not the love of mankind, which upon many occasions prompts us to the practice of those divine virtues. It is a stronger love, a more powerful affection, the love of what is honorable and noble, the grandeur, and dignity, and superiority of our own characters.”

Notice that Smith’s “self-love” had a long-term perspective where the preservation of market relationships whether as owner, customer, manager, or shareholder went beyond the next quarterly report. It is a broader form of self-interest, one that rationally recognizes that the greatest benefit to ourselves and our loved ones may accrue from restraining narrowly conceptualized, short-term self interest.

Markets then are places where more is exchanged than goods and services, labor and product, credit, and interest. They are places where we also develop the personal virtues of temperance and prudence and the social virtues of benevolence and justice. When they function well, they produce trust, loyalty, and sympathy among those who trade there.

Please don’t get me wrong. If injustices in the form of, say, racism, sexism, xenophobia, or homophobia are entrenched in a society, market forces alone cannot be relied upon to eliminate them. In fact, market forces may reinforce injustice if a dominant majority “votes” always with its dollars to penalize the businesses  and individuals and institutions that attempt to remedy discrimination or injustice. (As a thought experiment, imagine yourself as a small business person trying to serve both blacks and whites at the same lunch counter in the US south prior to 1965 even in the absence of Jim Crow laws.) However, even in such a society,  well-functioning markets should reinforce trust, loyalty, and sympathy, at least among the dominant, unjust majority.

For a variety of reasons, the modern marketplace no longer promotes and reinforces moral behavior and moral sentiments as effectively as when firms were smaller, markets were local, most products were simple, and most transactions were transparent. Instead, complex and opaque financial “innovation” has allowed capital to be siphoned off into speculative and unproductive uses. The same “innovation” is now allowing bets to be made against troubled countries and currencies to the detriment of those countries. At the same time, taxpayers have been asked to finance bailouts for banks too large to fail and apparently also too large to be required or regulated to be competent or trustworthy while at the same time they are allowed to wield unfettered political power.

The danger here is that weak, ineffective political responses to such market and moral failures create new market and moral forces that undermine the social fabric that binds us and supports future economic growth and welfare.  We have created in the no-strings attached bank bailout and the failure to regulate against future finance-induced crises a very public example of how vice (or the absence of wisdom and prudence) is rewarded at the expense of the virtuous because vice is too big to fail. We have created a very public example of how hard work, showing up on time every day, doing what you’re supposed to do, raising your kids, going to PTA meetings, pursuing the prudent American dream of owning a home can evaporate almost overnight along with health insurance cover. There is no justice in this. The provision of a safety net and access to affordable healthcare for unemployed and displaced families remains an apparently insurmountable political and economic challenge, while the bailout of unwise and imprudent financial institutions that were the cause of the injustice was accomplished quickly and easily with bonuses for all.

If market transactions are the warp, then moral sentiments and a well-developed sense of justice are the weft of the social fabric that binds us together and supports economic growth and prosperity. When the social fabric tears, when firms dominate markets, the economy, and the political system; when the resulting distribution of goods, services, and wealth become very unequal; when individuals begin assuming that no one is trustworthy so they might as well be untrustworthy too; we will lose all the things that markets have traditionally given us:  economic growth; cooperation and coordination; and efficiency. The rule of law can only do so much and the costs of policing and enforcing rules far exceed whatever costs are associated with a fundamentally moral and just society.

I’m not sure any of us, especially economists, fully understand the extent to which market transactions produce and reinforce the moral conditions that allow us as a nation to flourish economically or to decay.  Large businesses may be too big to fail, but they are also too big to be allowed to be immoral , unjust, and unpunished. If they are, I fear it will produce a contagion of mistrust and injustice that will spread to the detriment of us all.

Comments

[theleftstuff]

A lot of the problem is that people don't realise what a dead metaphor is. In Aristotle's time, and long aterwards, markets were real places, and functioned as social as well as economic centres. Already by Smith's time, with long-distance and foreign trade, "market" was starting to become a metaphor for a much more complicated series of transactions. Now, the metaphor is dead and means nothing. What are described as "markets" have nothing in common with a free exchange between individuals who benefit equally, but are really a form of fraud practised upon the weak by the strong. There is nothing called "the market" and it is naive to suppose there is.

[tjfxh]

The problem is that self-interest as Adam Smith used it is now confused with self-interest in the way that Ayn Rand used it. Unfortunately, Rand is more influential now than Smith. I wonder how many people know that she modeled John Galt on a sociopathic murder name William Edward Hickman, whom Rand admired for his absolute self-centeredness and complete indifference to others. The evidence is reported here.

http://tinyurl.com/y9ermqa

[Ecrive]

Unfortunately, we are not we ... as in a representative government, we are instead increasingly dissocaited from those who hold elective office. For markets to be effective, there needs to be more than buyers and sellers, else predatory behavior will not be contained. Intelligent regulation to support markets and transparency has been abandoned - sold - almost at open auction (Pay to Play). It seems that under our purchased government, the invisible hand was not guiding the market so much as taking the graft.

[The Raven]

"Much of what we took for granted in our free market system and assumed to be human nature was not nature at all, but culture. The dismantling of the central planning function in an economy does not, as some had supposed, automatically establish a free market entrepreneurial system. There is a vast amount of capitalist culture
and infrastructure underpinning market economies that has evolved over generations: laws, conventions, behaviors, and a wide variety of business professions and practices that have no important functions in a centrally planned economy. "--Alan Greenspan, http://www.federalreserve.gov/boarddocs/speeches/1997/19970610.htm

[rjs]

maxine, dont know if you knew this post is excerpted & recommended here:
http://adamsmithslostlegacy.com/2010/03/more-on-smith-and-market-morals.html
but i wanted an excuse to stop in anyway & thank you for showing up on my blog... sometimes i get to thinking im working in a vacuum and a little attention is encouraging...

[Maxine Udall (girl economist)]

Thank you for letting me know about this, rjs. I'm pleased and honored to be recommended by one of my favorite blogs.

You are not working in a vacuum. Someday I will blog about the loneliness of being "outside the mainstream." :-)

Thanks so much to you, the others who have offered excellent comments, Mark Thoma, and my many silent, but regular visitors. :-)

[Dan Hirschman]

Maxine,

You might enjoy a short and excellent book by Albert O. Hirschman: The Passions and the Interests: Political Arguments for Capitalism before its Triumph. Hirschman argues that pre-Smith, "interest" (as in economic self-interest" was argued to be a powerful force for taming the other "passions", like avarice or the lust for power. Hirschman also published a related article, "Rival interpretations of market society: civilizing, destructive, or feeble?" in 1982. That piece was updated, in a sense, by a pair of economic sociologists, Fourcade and Healy (2007) "Moral views of market society" (Annual Review of Sociology). They review some of the recent literature, largely in sociology, on exactly this sort of question.

[Peter Kurze]

Maxine - I like this essay very much. I sometimes worry that the optimism that seems to underlie our society will in the end prove a curse. It is as though we have come to believe that we can indulge in all manner of destructive polarization, but that in the end it will all work out somehow. After all we're just playing at extremism. We're only under-educating a portion of the next generation. We're only letting parts of our cities to fall into ruin and lawlessness. I am hopelessly optimistic myself, and though I believe things can work out, I do not believe that they necessarily will. It is up to us, each of us, all of us, but the tenor of our public conversation is now feeding the danger. I believe that if there is a way back from the edge of this maelstrom, it will be found by renewed examination of the fundamental value propositions of the human condition in the context of our times. Sort of like what you are doing here. So thanks.

[Maxine Udall (girl economist)]

Dan, Thank you very much for the references to Hirschman's work. I will for sure track it down and read it as well as the updated piece by Fourcade and Healy. Some of my best friends are sociologists. I'm always interested in understanding their perspective, especially when there may be common ground. :-)

[Maxine Udall (girl economist)]

Peter, wonderful to see you back here! I share your concerns and your beliefs about the way back. The recognition that each piece is a "part of the main" would help, I think. Unfortunately, human nature being what it is, it may take another great depression to bring us together. Even then, I worry that we will have grown so far apart and untrusting that we will not be able to cooperate back to something good. Not so optimistic I'm afraid. I think I'm just tired. :-)

Thank you for your comment and kind words.

[Peter Kurze]

I probably overstated my optimism. Now that I think about it, the phrase “hopelessly optimistic” seems apt. By conventional perceptions I am as pessimistic as anyone. My optimism is rooted in the belief that our collective perceptions of the world are highly combustible. A kid speaks up in innocence and suddenly no one can plausibly deny that the emperor is naked (or that his tailor is a swindler), and yet a moment before, it was unutterable.

I am not a particularly religious fellow, but I believe with every fiber of my being in the validity of the phrase “the truth shall set you free”. It is for me every bit as self-evident as that “all men are created equal”. A big part of that truth is that when conventional social arrangements are interrupted, it is obvious that, in the main, we care profoundly about each others' welfare. Yes, there is a self-interested side to our nature and that is a part of what we must deal with, but the better angels of our nature, in an honest accounting, have at least an equal claim in defining who we are.

The earth shakes and buildings crack open. When we find our neighbor, our first thought is not if their prized tea set broke or if their cable is out. We want to know if they are OK and if they need anything. As the crisis resolves, we are swept up in establish patterns of commerce and life and the intimacy of those moments recede. Is the fault in ourselves, or in social structures and patterns predicated on the poorer side of our nature?

One doctor crosses borders to endure hardship and danger to treat the destitute. Another defends their right to drive a Bentley around West L.A. sucking the fat out of wealthy patrons. Most people can correctly identify the poorer man, but our accounting system fails the test.

[Maxine Udall (girl economist)]

Peter, I hope you have a blog because you have a true gift for words and I like your worldview. If you have a blog, please post the URL as I would like to read it. If you do not, I think you should start one. :-)

[Peter Kurze]

Maxine,

I do not have a blog. Your kind words are encouraging me though. I've always been doubtful that I can sustain the effort that it requires. When the intensity of my day job ramps up, the more creative side of my life can go dark for months at a time.

[Maxine Udall (girl economist)]

Yes, Peter. I understand. Totally and completely.

[racetoinfinity]

This book looks like a good start at remedies:

"Agenda for a New Economy: From Phantom Wealth to Real Wealth" by David C. Korten

http://tinyurl.com/25e8wav