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UCD Neuroscientist

Moral character is relative and depends upon the status of the observer. Business has an insider’s “mob ethics” that define the norms of behavior for the group and this is often at odds with ethics from the point of view of the larger society. In business, it is exceedingly rare for individual actors to knowingly cheat. For example, stock traders make million dollar deals on the basis of a phone call lasting a few seconds, and they can be trusted to follow through on these transactions. However, during the dot-com boom even the most venerable Wall Street firms such as Goldman Sachs sold securities in companies with virtually no business histories and unrealistic profit projections. (This was rationalized because it was generally believed that the world had entered a new regime where clicks on a web page were the new metrics of economic value.) More recently, the same firms sold collateralized mortgage obligations of dubious value. (This was rationalized because of the meme that housing prices always appreciate.) The individual players thought of themselves as highly ethical as they were acting strictly within group norms. On the other hand, outsiders who bought these securities (and eventually suffered staggering losses) considered the investment bankers who created the securities to be scoundrels and cheats. Clearly, free markets can easily lead to great corruption while allowing individual actors to perceive themselves as moral and virtuous. Government regulation is necessary to align business ethics with the interests of the larger society.


You have it backward, guys. Lack of moral character causes corrosion of the free market.

David Drake

Professor Becker: I'd rephrase the conclusion regarding the knowledge, wisdom and morality of regulators to read as follows: "Unfortunately, that is not often the case."

David Drake

Professor Becker: I'd rephrase the conclusion regarding the knowledge, wisdom and morality of regulators to read as follows: "Unfortunately, that is not often the case."

David Drake

Professor Becker: I'd rephrase the conclusion regarding the knowledge, wisdom and morality of regulators to read as follows: "Unfortunately, that is not often the case."

David Drake

Professor Becker: I'd rephrase the conclusion regarding the knowledge, wisdom and morality of regulators to read as follows: "Unfortunately, that is not often the case."


UCD makes good points on Becker's post. The best is the way that we all (whether in business, or other life endeavors) operate within group norms. I knew many individuals caught up on the margins of the Enron debacle who are among the most honest and ethical people I know. But, you can tend to convince yourself that some marginal behavior is acceptable, especially when all around you are doing the same. I am sure that for every dishonest or unethical mortgage broker, there were 50 who believed they were doing good work to get people into houses, and give them a chance to build some equity.
The danger becomes the operation of the "Nirvana fallacy" cited by Posner a couple posts back. When things fall apart (ala Enron, or more disastrously, now), it is assumed that these failures are due to fundamental flaws in the system that can be corrected, or to criminal acts on behalf of those responsible. This leads to misguided laws (Sarbanes-Oxley) or misguided prosecutions/witch hunts. Rules are necessary to "play the game." But, once rules are set, people need to be free to play, compete, succeed - and, yes, fail.
The lack of perfection in the free market system, or even the assumption of perfection, is in fact the greatest testament to its strength. Trial and error and correction lead to great discoveries and a general greater level of societal "health."

Rumple Stiltskin

Market worship is one of the causes of the current crisis. I am not surprised by Becker confessing that he has never worked in the real world.


"Businessmen get a low rating"? Interesting, it must be true that "Businessman" is a euphemism for liar, cheat, thief, fraud and scoundrel. Perhaps that why the Romans coined the phrase, "Caveat Emptor". Strange, the more things change, the more they stay the same. Basic human nature perhaps?

St. Darwin Assisi's cat

Professor Becker...curious, how did you handle your observation, i.e. knowledge of dishonest professor behavior? I distinctly recall David Warner, Contracts Professor, Ohio Northern University Claude W. Pettit College of Law saying that the law is not based on morality thus commerce would not be based on morality. The above comment about relative moralism reminds me of the quote (recently seen in this blog) ...power corrupts, absolute power corrupts absolutely.


Read Marvin Harris, "Why Nothing Works". His analysis is from an anthropological perspective and would conclude that the breakdown in the free market is secondary to the rise of burocracy and oligopoly in our economy in the sense those social forms in production of goods and services are so far removed from the "customers" that the "producers" do not care about the effects of their activities and that the free market is just the vehicle that provides for corrosive effects.
In that sense the economic analysis is secondary to the sociological one.


I think the issue is not corruption and dishonesty, as Becker states it, but greed. Greed, a fundamental human trait that is in and of itself amoral, is one necessary driving force of capitalism. When the marketplace is unregulated, unbridled greed thrives. Again, this is human nature and to expect otherwise is simply naive. Most would agree that unchecked greed is morally corrupt, so a system that leaves greed unregulated is probably corrupt as well. This is not a new lesson, nor is it a repudiation of a free market economy. All human systems and institutions require some rules and parameters to prevent them from lurching into self-destruction due to the flaws of human nature.


I am interested in why nobody (i.e., media, regulators, commentators) is focusing on the investors that demanded these securities but failed to investigate or even understand them (aside from the casual use of the phrase "caveat emptor")?

Investment Banks sold securitized products in response to investors' demand for high yielding AAA rated securities (think about the oxymoron "high yielding AAA rated" and compare to the age old principle of the relationship between risk and reward; there has to be a reason why certain AAA rated assets were yielding significantly more than similarly rated assets; investors should have asked this question rather than eating up as much securitized AAA rated paper as available). These investors are highly sophisticated repeat market players (i.e., not mom and pop) that, in theory, need not be protected by bankers or the government. The true reason for the current market turmoil is that the investors that acted as the catalyst for the creation of these toxic assets finally came to their senses and pulled the plug on their investments, thereby leaving the Investment Banks "holding the bag" on securitizations that were in the pipeline but had not been sold.

I would like to see Congress grill hedge fund managers, pension fund managers, county/city/state treasurers and other similarly situated money managers as to why they thought these investments were a good idea, the amount of research conducted prior to investing in these assets (I am fairly confident that many of these "sophisticated" managers simply saw AAA rated paper and bought the highest yielding paper without ever conducting any substantive research), their level of understanding and how they were able to rectify the obvious conflict as to why certain AAA rated assets were yielding significantly more than other AAA rated assets.

The business community should be held accountable for situations like the "touting" scandal where they were touting stocks to the public that they were privately killing and/or selling. Here, however, in my opinion, the true culprits were the end users that drove this market rather than the bankers. With that said, I would also lay blame at the feet of the mortgage brokers that gamed the system and, here, perhaps investment banks that acted as the middle men may have some culpability in investigating these mortgages more closely before repackaging them but again, at the end of the day, I would think that the investor who is investing millions of dollars should be the party that is allocated the responsibility to understand and vet the product and not the investment bank that is acting as the middle man.


A very interesting answer--I wrote a blog article about this for the William & Mary School of Law's ACS Chapter. If anybody wants to check it out, just follow this link: http://web.wm.edu/so/acs/?p=545


A very interesting reply, indeed. I actually wrote a blog-article responding to this answer. If anybody is interested, the blog is located here: http://web.wm.edu/so/acs/?p=545 (the actual blog is the William & Mary School of Law's ACS Chapter Blog). Enjoy!

Roberto Lupi

Apart from the issues of "selective" attention (excitement and suspension of belief) shown by many economic players when they face the prospect of high or recurring rewards.

There may be a clinical explaination for about 1% of the population.

Psycopaths share many of the traits of successful businessmen (see "Without Conscience" by Hare, the seminal book on psycopathology). It's no wonder than some of them trive in high-reward industries. High reward tend to attract (good and bad) businessmen, so they tend to be highly competitive too.
Being very successful also feeds the psycopath's generally huge superiority complex.

As the post points out correctly, consumers will punish morally corrupt businesses in many cases. However, to be able to do so, they must have an alternative. When all players in a market with high barriers to entry act in a morally corrupt way, customers may have no way to punish them for their corruption.

Morally corrupt businessmen try to collude in order to exercise monopoly power. When they do and also capture the regulator, the market skews toward uncompetitive behaviour and cartels. New entrants, even those acting morally, won't be able to capture a sufficient market share to survive.
It gets even worse: morally corrupt business, in this scenario, may favour outher morally corrupt entrants because they won't compete on morality with them. Thus morally corrupt markets with high barriers to entry tend to remain morally corrupt.


Heads up: This is what I see in your RSS feed.


The links that appear are spam ads. Dunno if your RSS got corrupted, but you should definitely check it out.


Gill Eapen

Free markets are optimal when they are in fact completely free. The fact is that even in the US, we do not have free markets. We have markets regulated (manipulated) by agents with asymmetric pay offs. Markets are also controlled by a few firms with monopolistic power over consumers. In some cases, certain firms have been able to obtain "exceptions," from regulators. For example, an “exception” was granted to certain investment banks by the SEC to leverage over 3 times normal, in 2004.

What we have is a class system with significant market failures in all aspects. Transaction costs are significantly lower in certain classes of the system, essentially creating huge entry barriers for anybody else. The reputation of businessmen can come either from previous transactions or purely from marketing scale. Prior to June 2008, many accepted without question that a few firms have capability that significantly exceeds the average. The only empirical information used was the “profits” generated from these firms. We now know that those profits happened not because of the capability of the managers but due to leverage.

The issue is not morality of an individual but rather properties of the system currently in place. Morality, thus, is relative and can only be assessed in relation to the framework. Those who are making excess profits using the properties of the contemporary non-market system are not necessarily immoral. The real question is how society can create a true free market system. This is better than any other available alternative.


"The Free Market system ... is better than any other available alternative"? That was the mantra before the current debacle. Don't you guys ever learn, even from experience?

I'll put my money on "Heterodox Economics" any day.

As for the morality of it all, "Ethical Relativism" is only valuable when one doesn't won't to make the hard decisions and take the necessary hard actions. In the end, it only makes us weaker, destroys confidence and sometimes destroys the ends we seek.

Gill Eapen

Your presumption is that the “free market system” caused the "current debacle." It is lack of free market system that caused it. Rather than assuming something is true, it is better to test it with known information.

(a) Fannie and Freddie were not part of the free market system. They were set up with "implicit government guarantee."

(b) Lowering of credit standards (1999) was not part of the free market system. It was government fiat

(c) Allowing 5 investment banks to lever up 1:40 as an exception (from the SEC in 2004), was not the free market system. It was regulation by exception.

(d) Bailing out certain firms by taxpayer money was not the free market system.

Almost nothing in the current debacle was caused by the free market system. Just the opposite. Lack of consistent implementation of regulations that exist when there are market failures should not be confused with the failure of the free market system. Free markets are democracy. If you are advocating autocracy, I think we have enough empirical evidence that it does not work. It has been tried.


Really? So the "Mantra" has now become, "The reason for the market failure is not that the Free Market failed, but that the Free Market was not "Free" enough". Ever heard of Anarcho-Capitalism?

David Heigham

"Two conditions must be operative ... :1) customers must be able to detect when they are being cheated or misled, and 2) customers must be frequent enough buyers, so that repeat business is an important determinant of profitability."

This is commonly said; and follows from many models of repeat purchase games. However, it seems to miss one commonplace of behaviour. When we must make a major purchase in a field where we feel unable to judge if we are being misled or cheated, we ask around for a supplier we can trust. Our choice of supplier is then made on reputation for ethical conduct. Further, such purchases are often of things or services that we buy very rarely. To convert the quotation above into a description of the real world, I suggest adding:
"Alternatively, it can be sufficient that buyers select suppliers on reputation."

A reputation for ethical conduct, once established, is surprisingly long-lasting. In a free market, it appears to have the characteristics of a superior business strategy. However (as with Warren Buffet's investment strategy) there seem to be unidentified obstacles to its general adoption.

David Heigham

"Two conditions must be operative ... :1) customers must be able to detect when they are being cheated or misled, and 2) customers must be frequent enough buyers, so that repeat business is an important determinant of profitability."

This is commonly said; and follows from many models of repeat purchase games. However, it seems to miss one commonplace of behaviour. When we must make a major purchase in a field where we feel unable to judge if we are being misled or cheated, we ask around for a supplier we can trust. Our choice of supplier is then made on reputation for ethical conduct. Further, such purchases are often of things or services that we buy very rarely. To convert the quotation above into a description of the real world, I suggest adding:
"Alternatively, it can be sufficient that buyers select suppliers on reputation."

A reputation for ethical conduct, once established, is surprisingly long-lasting. In a free market, it appears to have the characteristics of a superior business strategy. However (as with Warren Buffet's investment strategy) there seem to be unidentified obstacles to its general adoption.

Chris Graves

I agree with Professor Becker’s observation that for a free market to avoid the pitfall of being overtaken by charlatans, consumers must have the power to detect and punish deceptive business practices. A big part of the basic insight of those who advocate free markets is that customers can more effectively monitor and discipline businesses that do not supply the goods or services promised than can a central authority. While theorists such as Adam Smith and Pierre Nicole applied the Christian doctrine of original sin to economic motivations and devised institutions that were more pessimistic, but realistic about what human nature could be trusted with, when this strategy became de-Christianized, it overlooked other aspects of tempering human greed and selfishness. The Founders of the United States such as James Madison took a similar tack in devising political institutions with an eye to setting people off against each other since no one could be trusted with power. At the same time, Madison and other Founders also emphasized the importance of religion, community, and moral self-control to place constraints on aggressive impulses in humans. I am afraid that certain developments resulting from free market capitalism has undercut the willingness of people to enforce moral constraints on others, to practice self-restraint, and has undercut practices and institutions that fostered a socially cooperative ethos. The very success of the free market in creating abundance and greater wealth very rapidly lies at the heart of these socially and morally destructive tendencies in capitalist economies.

First, unless people are willing to confront and retaliate against economic actors who perform in irresponsible ways, the bad guys will continue to lie, cheat, and steal. Why would they stop unless they realize that bad behavior is not in their rational self-interest?

As people become more prosperous, they tend to become more generous and less cruelly vindictive. Daniel Yankelovich observed in a 1996 paper that “There are two major factors that determine when the society will swing toward one pole or the other. One
is economic. In periods of affluence, societies move toward the more permissive and more-choice-for-the individual
pole. When the economics are more difficult and the economic expectations are lower, they
tend to swing toward the tighter social morality. The other factor that influences the direction of trends is how far the society has moved toward
one pole or the other, because there almost seems to be an adaptive response . if you get too close to the extreme, a reaction sets in and you lurch back in the other direction. In our society at the moment, both apply. During the sixties, seventies, and eighties, our society moved toward greater individual choice, a loosening of sexual morality, and fewer demands for a sacrifice for the family or for others. We probably
have moved very close to the extreme of that pole of unrestrained individualism and choice… This eroding social morality seemed to be attacking a number of these core values, such as neighborliness, sense of community, fairness, equality of opportunity, access to quality education as the road to opportunity, and,
above all, individual responsibility.”

As people acquire greater amounts of disposable income, their economic dependence on other people in their family and in their community lessens. This creates a greater sense of social freedom, but it also creates a situation where there is less personal responsibility. People do not want to be held accountable for their actions and are less willing to hold others accountable for theirs. In less affluent times with fewer choices, if someone wronged you, then you must deal with it directly or else continue to suffer. With increasing incomes and more social choices, it is simply easier and less costly to overlook wrongs or seek to manage the losses resulting from a dodgy deal. For those who are more affluent, it can seem bad form to angrily confront a less prosperous swindler. A perverse version of the Categorical Imperative emerges in many people’s thinking in times of prosperity: I would not want to be called on my peccadilloes, so I won’t call others on theirs. This trend can be exacerbated by unscrupulous peddlers who are the modern-day equivalent of coin-clippers as they shave off small increments of quantity or quality of products or services so that the cost of detecting being short-changed does not seem worth the cost if someone is otherwise affluent. For example, seemingly reputable businesses in the United States frequently nowadays decrease the quantity of grocery items instead of increasing pricing in times of rising food prices. The attempt to dupe the unwary customer is more likely to pay off if the customer does not feel the need to carefully check not only the prices of the goods he is buying but also the weights. Television networks pull the same tactic, in essence, by cutting a few seconds off of movies they air or television shows until the total minutes of advertising is far greater than in past. The marginal cost of engaging in critical vigilance that is necessary for detecting cheating may not be pay off in terms of the marginal benefits when there are boom times. A certain sloppiness in habits of thought and tolerance for rude service or poorer quality work as well as a willingness to pay more rather than shop around and jaw-bone dealers’ price down are all more prevalent when people are more prosperous. In short, prosperity leads to greater tolerance for all sorts of immoral or irresponsible behavior that would not be tolerated in times of scarcity.

Second, as people become more affluent, they tend to feel their need for God less (see Robert Barro’s column in *Business Week,* December 10, 2001). As people not only neglect religious practice, which forms closer bonds with other humans, they also become less aware that God is watching them in their daily lives and holding them accountable for what they do. In a recent study by University of British Columbia psychology researchers Ara Norenzayan and Azim Shariff published in *Science,* people became more responsible and honest when dealing with others when they became more aware of God’s presence. When they forgot about God watching over them, their respect and kindness evidenced toward other people noticeably declined.
David Friedman has speculated along these lines as to why Christian radio thrives entirely supported by listeners avoiding the free-rider problem—Christians believe that God knows who sent in money and who did not.

Third, another negative side effect of increased wealth is the decline of family and community. As noted above, as people gain additional amounts of disposable income, they also feel greater social freedom from others with whom they have formed social bonds. They are therefore freer to discard these bonds if they perceive that family members or friends are becoming too costly, so to speak. Aggravating this tendency is the capitalist practice of shopping around for the best bargain and ditching previous business relationships if a better deal comes along. Another contributing factor to moral decline resulting from free market prosperity is what sociologist Daniel Bell called the “Cultural Contradictions of Capitalism.” Bell observed that as people gain additional wealth they find that they can buy whatever they choose and enjoy it immediately, thereby undercutting the capitalist ethic of deferred gratification necessary for the formation of capital (including here, social capital). Keynesian economics and its monetarist variant reflect the aversion to savings and true capital formation sustained over time creating such financial failures as we are now witnessing.

As historian Eugene Genovese has observed in his *The Southern Tradition,* a significant social difference emerged between property-owning societies in the American North and South in the Nineteenth Century. Genovese observes that Southern culture while championing laissez-faire, private property, and business enterprise, as did the North, the South was able to place these pursuits in a socially responsible context in a way that their Northern cousins were not. Mitigating ruthless business dealings and environmental hazards was a sense of place in the South that encouraged people to act with empathy and responsibility toward their neighbors in business activities. Southerners conversely were (and are) more likely than Northerners to take offense when they perceive others mistreating them and directly confront and retaliate against the aggressor (a number of studies show this including a University of Michigan study by Richard Nisbett, Norbert Schwarz, et al). The willingness of Southerners to retaliate has helped to reinforce a code of conduct that highly values cooperation and mutual respect.

Adam Smith’s overlooked *A Theory of Moral Sentiments* emphasized a similar point that Genovese is making about Southern Culture. Smith argued that people have an innate capacity to empathize with other humans so that we can immediately see when another person is suffering. As we intuitively recognize the pain another feels, we are set in motion to seek a moral remedy for an injustice inflicted on another. Smith argues that justice as well as something more is needed for human flourishing. A sense of social union with other people is required for our well-being that exceeds a bare minimum of respect for another’s basic rights. A sense of community with on-going relationships are needed to cultivate this sense of civic union with others with whom we share fellow feelings.

When we move to far-flung international markets as well as large number of immigrants entering an area, we find that these social bonds are loosened as people either deal with people at a distance or others move into an area who do not share the same folkways. As business dealings consequently become more depersonalized with fewer opportunities for repeated contact with others whom we feel empathy with, as well as fewer opportunities to retaliate, it is likely that other people will come to be seen not as fellows with whom we feel sympathy. Others become mere objects to manage or manipulate to extract cash from. The willingness and ability to strike back for being cheated is diminished in large, impersonal markets. One is more able and willing to package fraudulent investments together and pawn them off to someone in another country with whom one has no personal relationship, personal regard, or personal fear. People become cogs in a machine instead of personal friends, business partners, and on-going customers. This danger of depersonalization is why Southerners as well as Asians have a history of cultivating personal business relationships at all stages of production. It is also why Southerners dating back to Thomas Jefferson have feared distant, large organizations such as the Federal government, large corporations, and big banks. The technocratic, bureaucratic model is seen as dehumanizing, and, hence a threat to personal freedom and the community that offers protection from the unscrupulous.

Further accentuating these problems, free markets, as they evolved more along Northern or Hamiltonian lines, tend to create a certain type of person who is less aesthetically or morally perceptive. Instead this social and economic milieu focuses on cultivating a scientistic, instrumentally rational, calculating mindset with little attention to cultivating on-going relationships that allow for more subtle, intuitive, flexible, intangible aspects of communal life. The age of chivalry is truly dead with these folks.

Also along these lines, as wealth increases at a rapid rate, the opportunity cost of cultivating personal relationships increases, so that people spend less time developing the relationships that would make them less likely to defraud or take advantage of another. There is a general decline in a person’s health, taste, morals, education in times of economic prosperity due to the opportunity cost of each of these pursuits, which is facilitated by the very success of the market (there are recent studies that show these very things—prosperity is bad for a person’s spiritual, social, and physical health).


Chris, I've lived in the South and I found that a "Southerner's" capacity for ethical action to be no greater or less than a "Northerner's", "Easterner's" or Westerner's capacity. As for the Religious aspect, the same also applies.

Oh, well! So much for that idea.

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