Economics, Morality of Markets

April 27, 2015   |   by Dunstan

Morality of Markets

How does one go about connecting the idea of morality with markets? The Latin root word moralis means proper behavior of a person in society, literally pertaining to manners. But a market is not a person. It is a place. The word market, which first started to appear in our vocabulary in the 12th century was initially used in the sense of a meeting at a fixed time for buying and selling livestock and provisions. The Latin word mercatus is a root word meaning trading, buying and selling. When you try to put the two words together, see what they have in common, on the surface, the commonalities are not obvious.

However, upon reflection, there is a common denominator between morality and markets. Both are built on the same foundation, human action. Economics by definition is a social science that studies how individuals, governments, firms and nations make choices on allocating scarce resources to satisfy their unlimited wants. In our economy, called a market economy, we allocate scarce resources such as land, labor, capital, and technology through the marketplace. A market is a place where vast numbers of human actions occur daily. Meanwhile, morality is the determination of what human actions should be done and what should not be done. It is the distinction between what is right and what is wrong. Using these deeper and more specific definitions of the terms morality and markets, the relationship between the two is much easier to identify.

Ethics is a branch of philosophy dealing with what is morally right or wrong. It is a subset of morality, a study of how we can go about judging our human actions. According to the economist Henry Hazlitt, reflection reveals that economics and ethics:

“…are, in fact, intimately related. Both are concerned with human action, human conduct, human decision, human choice… There is hardly an ethical problem, in fact, without its economic aspect. Our daily ethical decisions are in the main economic decisions, and nearly all our daily economic decisions have, in turn, an ethical aspect.”

Economics, in our classroom experience of it, separates morality from science in neat compartments. From the very beginning, in an academic study of economics, discussion of “what should or ought to be” is called normative economics. While the study of “what is,” the way things are in the real world, is called positive economics. We define terms and conveniently move on, concentrating our time and effort on the positive side. We do this because this kind of approach is more pragmatic. We do this because it is easier to create mathematical models that predict what will happen as a result of specific human actions in terms of dollar value. There are no mathematical equations capable of telling us whether our human actions are right or wrong.

In our schools and universities, embracing this “positive” view of economics, we have appointed Neoclassical economics as the best and most useful way to study the real world. Neoclassical economics, the dominant and most current economic paradigm, is an approach to economics that relates supply and demand to an individual’s rationality and his or her ability to maximize utility or profit. Using economics, for example, you can very accurately, using mathematical models, predict how much a lifesaving cancer drug will cost to develop in two years’ time and what price you should charge per dose when you are done to make a profit of a certain percent. However, while this kind this kind of approach is efficient and effective in explaining and interpreting how things work, there is a cost. Neoclassical economics provides little insight into the morality of such an action. For example, if our cancer patient is a single mother with four children and carries no health insurance, we are provided no insight into whether she should be charged at all. As Oscar Wilde wrote, “Now-a-days, people know the price of everything, but the value of nothing.” Or, in economic speak, the analysis provided by Neoclassical economics today is most often “value free.”

It was Adam Smith who wrote: “Man is an animal that makes bargains: no other animal does this – no dog exchanges bones with another.” Exchange is a basic and necessary part of our existence. By itself, there is nothing wrong about that. In economic terms, the simple definition of a market is a place where exchange takes place. A market is a place where we trade goods and services. On the surface, it sounds innocuous. However, from a philosophical perspective, wherever there is human action, there must be preceding it, an exertion of will. This will is a first cause, or the primary force propelling any human action. Without this first cause, a human act would not come into being.

This is a cause for concern. One must wonder whether we are willingly or unwittingly committing economic acts? The famous economist John Maynard Keynes wrote: “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.” If we are simply buying goods, promoting economic policies, and designing market structures “value free,” devoid of moral considerations, without thought, without awareness of detail, then are we not following the scribbles of “madmen in authority?” If so, we commit the sin of commission daily and with profound effects.

Any trade or exchange results from a human decision. It is a willful act, voluntary in a free enterprise system. That means we are free every time we make a purchase to evaluate it from a moral perspective. Consider a list of market exchanges that originate from an article in the Atlantic Monthly listed below. As you read the list, form an opinion on whether you make the trade based on your personal philosophical, ethical, moral, religious beliefs:

o A prison-cell upgrade: $90 a night. In Santa Ana, California, and some other cities, nonviolent offenders can pay for a clean, quiet jail cell, without any non-paying prisoners to disturb them. Is it right for convicted felons with extra cash to buy comfort?

o Access to the carpool lane while driving solo: $8. Minneapolis, San Diego, Houston, Seattle, and other cities have sought to ease traffic congestion by letting solo drivers pay to drive in carpool lanes, at rates that vary according to traffic. Is it right for individuals to buy the right to inconvenience others?

o The services of an Indian surrogate mother: $8,000. Western couples seeking surrogates increasingly outsource the job to India, and the price is less than one-third the going rate in the United States. Is it right to outsource work to cheaper third world locales?

o The right to shoot an endangered black rhino: $250,000. South Africa has begun letting some ranchers sell hunters the right to kill a limited number of rhinos, to give the ranchers an incentive to raise and protect the endangered species. Is it right to sell the right to hunt an endangered species, in limited numbers, if the money raised from killing a few saves the herd?

o Your doctor’s cellphone number: $1,500 and up per year. A growing number of “concierge” doctors offer cellphone access and same-day appointments for patients willing to pay annual fees ranging from $1,500 to $25,000. Is it right if a single mother on welfare with four children and no discretionary income to have less access to health care than a healthy and single twenty-something who happens to have a great job and an extra $25,000?

o The right to emit a metric ton of carbon dioxide into the atmosphere: $10.50. The European Union runs a carbon-dioxide-emissions market that enables companies to buy and sell the right to pollute. Is it right to let a company pay to pollute?

o The right to immigrate to the United States: $500,000. Foreigners who invest $500,000 and create at least 10 full-time jobs in an area of high unemployment are eligible for a green card that entitles them to permanent residency. Is it right to put entrepreneurs at the end of the immigration line?

o Sell space on your forehead to display commercial advertising: $10,000. A single mother in Utah who needed money for her son’s education was paid $10,000 by an online casino to install a permanent tattoo of the casino’s Web address on her forehead. Temporary tattoo ads earn less. Is it right to use the human body as a permanent billboard?

o Serve as a human guinea pig in a drug-safety trial for a pharmaceutical company: $7,500. The pay can be higher or lower, depending on the invasiveness of the procedure used to test the drug’s effect and the discomfort involved. Is it right to use human beings in medical tests even if they are willing and the drug tested saves lives?

o Fight in Somalia or Afghanistan for a private military contractor: up to $1,000 a day. The pay varies according to qualifications, experience, and nationality. Is it right to pay others to defend our homeland?

o Stand in line overnight on Capitol Hill to hold a place for a lobbyist who wants to attend a congressional hearing: $15–$20 an hour. Lobbyists pay line-standing companies, who hire homeless people and others to queue up. Is it right to pay for political access?

The simplistic notion that economics can be neatly separated into positive and normative camps is a fallacy. Our current free enterprise system is founded upon the idea that the ability to trade freely, to freely make economic decisions, is the highest moral order. By allowing people to freely choose, without coercion, they will naturally bring about the most good, with the market guided by an “invisible hand.” However, this perspective implies the moral agent, the consumer, invested the time to consider moral consequences before the trade. It implies a will to do the right thing at the expense of inconvenience. Or to quote Edmund Burke, “All that is necessary for the triumph of evil is that good men do nothing.”

In response, another way to view the economy is as a social ethical structure. (See the graphic entitled “Our Economy as a Social Ethical Structure” below.) Value judgments are embedded in all economic systems (capitalist, free market, socialist, planned communism, or fascist) and in every economic decision and corresponding action taken. Our individual moral perspective, or absence of one, is embedded in every exchange. Our economic system is driven by a series of crucial daily moral decisions that largely occur automatically and by default. However, a simple default decision, taken without measure is not a substitute for moral evaluation. Whether we desire it or not, each exchange or purchase we make implies a moral order. Trade by trade, we build an economic order. The whole is greater than the sum of its parts. Or as from the Gospel of Luke 6:35, “When good men do nothing, they get nothing good done. To be good, one must do good. The Lord commands his people to do good.”

Next, consider the fundamental economic questions that every economic order must answer before individual actors can get to work. What to produce? How to produce it? How much to produce? Who gets what is produced? In economics, we say there are no free lunches. This means that to do anything we must expend time, money and resources. Every good we make or thing we buy requires resources, costs money, and has a cost. In a world of unlimited wants, and scarce resources, by definition, every economic decision taken is a tradeoff. If we decide to make guns, we have less resources available for butter. If we invest in automated teller machines and industrial robots, employers have less money available to hire unskilled laborers. If we commit more farmland to raise more beef cattle, we have less capacity to grow fruit and vegetables. If we pay our top executives multi-million dollar bonuses on top of six or seven figure salaries, there is less money available in the budget to raise the minimum wage.

After we answer these fundamental questions, we go on to address some new and critical macro problems that arise naturally out of our individual decisions. Problems that an economy must address include allocation, distribution, scale, and the quality of relationships. Allocation is about deciding how natural and human resources will be employed in the production of our various goods and services. Do we utilize a free market economy or a planned state system? Distribution is about deciding who gets what of all the things produced. Do we decide everyone is paid equally or by how productive they are in their job? Scale is about preventing problems caused when market activity gets so large that it threatens the stability of the system (economic or ecological). Do we outlaw the production of automobiles if we determine that carbon emissions from vehicles is the root cause of global warming? Finally, quality of relationships is about ensuring trust and cooperation between persons involved in economic activity. Do we legislate morality in the workplace, in the form of gender laws, affirmative action, and prohibitions about practicing religion at work in the name of harmony? In his article Morality of Markets, Kenneth Melchin states: “For economic activity to function in service of human relations, participants need habits and virtues for fostering trust, cooperation, and good will, and this must be cultivated and supported by civil society.” How we address or solve these core problems determines the fundamental quality of our economic system.

After making our choices in the first three phases, we further refine the elements of markets. Think of this as how we manage our particular economic system. These four elements include definition of laws, provision of essential goods and services, morality of individuals and groups, and our view of civil society. They work together to complete the Social Ethical Structure that animates our system of exchange.

The four elements of markets are what we most often take for granted. First, the definition of laws is about prohibiting certain activities because they are too abusive to be allowed or because there are better or worse ways of doing that action and thus regulation makes some ways of acting illegal. For example, we outlaw slavery, human cloning, or operating a restaurant without a food license. All economic systems, capitalist, communist, libertarian, or socialist have practices that they want to outlaw, the question is which ones. Second, the provision of essential goods and services is about identifying which goods and services are so essential that they ought to be provided to everyone regardless of their ability to buy them. Here a libertarian may say that police or national defense are two examples of a very short list. Meanwhile, to a liberal democrat, universal healthcare and social security are obvious essential goods. Third, the morality of individuals and groups is about our ideas on the true definition of morality. Who and how will we define our beliefs about what is right behavior and what is wrong behavior? In a communist society, the church is outlawed, a critical plank of Marxian ideology. Each economic system defines its own proper moral code. Fourth, the civil society is about how as a community of citizens we are linked by common interests and collective activity. Here, for example, a Libertarian may view social arrangements such as important but voluntary agreements. From a more liberal perspective, critical social arrangements are viewed as compulsory. Fundamentally, each element works to create and define our moral universe, forming a Social Ethical Structure.

It is our responsibility to ensure that we take the time to build this structure properly, one brick at a time. There are no “value free” decisions available to us in a free enterprise system. There are no actions to take without tradeoffs or consequences. There are only free human actions based upon our freewill that lead to inevitable moral consequences.