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:
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:
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:
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.