Does the Free Market Corrode Moral Character? Posner's Comment

The essays commissioned by the John Templeton Foundation and available at www.templeton.org/market/ offer a variety of answers to the question whether free markets corrode moral character. Becker's posting offers an interestingly different answer, and I shall offer a different answer as well. Different cultures and, within cultures, different occupations both select for different character traits and shape character traits. Let me start with culture. One can distinguish between a culture built on notions of honor, military prowess, and status within a hierarchy often based on birth, on the one hand, and a commercial culture on the other. English history is a case study of the transition from the first to the second, the second having been realized in the United States earlier and more fully than in the mother country. The two types of culture select for and inculcate quite different character traits--reckless physical courage, a fierce concern with personal honor, identification with a group (family, dynasty, or nation), and hierarchic control in the former; cooperativeness, empathy, tact, politeness, intelligence, individualism, self-interest, prudence, and deferral of satisfactions (i.e., a low discount rate) in the latter. Aggressiveness and a willingness to deceive are constants, although deception is more skillfully deployed in a commercial society. Politicians possess and cultivate the traits associated with whatever culture they operate in. Honor-based societies attract charismatic leaders, often warriors; democratic societies model their politics on the economic market. As Schumpeter explained in his unfortunately rather neglected economic theory of democracy (sometimes called "competitive democracy"), democratic politicians, constituting the members of a governing class much like the business community in the economic domain, compete for the support of "consumers" (= voters) who "pay" (vote) for the competitor whose product (a package of policies, values, and leadership traits) they prefer. People in a commercial society are probably more self-interested than people in an honor-based society, because the latter are more likely to identify with leaders or causes than to behave as separate individuals with individual tastes and goals. Although commercial society selects for and encourages traits that we are apt to think "good," such as cooperativeness, intelligence, and empathy, in fact these qualities are morally neutral. Intelligent and cooperative businessmen, whose empathetic qualities enable them to manipulate consumers' emotions and intellectual limits, will be prone to collude with their competitors and defraud their consumers, as well as to ignore pollution and other externalities that economic activity produces. That is why even libertarians, with the exception of anarcho-capitalist extremists, believe that antitrust and antifraud laws are necessary controls over commercial activity. Even without such laws, it is true, not all markets would be riven by collusion and fraud. Collusion invites free riding, since a seller can increase its profits by slightly undercutting the cartel price; and the reputation concerns stressed by Becker will often deter fraud. But without any regulation, cartel agreements would be legally enforceable, which would discourage free riding, though they would be eroded by new entry--but often the new entrants, attracted by supracompetitive prices, would be less efficient than the incumbent firms. Reputation concerns will not deter deceptive advertising concerning traits shared by all products in the market in question. A cigarette advertiser who advertises that his cigarettes are "safer" than competitors' cigarettes is reminding consumers that smoking is in fact unsafe. The cigarette companies (also the automobile manufacturers) tried for decades to conceal the dangers inherent in their products, since trumpeting those dangers would have reduced demand. Businessmen also have an incentive to manipulate the regulatory process, seek tax loopholes, and the like. Although we tend to blame politicians and bureaucrats for bad policies, often they are merely brokering interest-group deals. In a democratic society, it is legitimate (in fact inevitable) for policy to yield to the demands of interest groups. We should not blame politicians who are honest agents of politically powerful forces. Politicians who do not yield to those forces are ineffectual. Of course politicians lie a great deal, but so does anyone who depends on the goodwill of others. Max Weber in a famous essay on politics as a vocation distinguished between private and public morality. Anyone in a public position--and this includes business and academic leaders as well as politicians--cannot indulge a taste for candor or altruism and expect to be successful at his job. It is the same reason why good business leaders drive hard bargains with their suppliers, play off subordinates against one another, lay off workers by the thousands, receive huge compensation packages, and often relocate plants overseas when foreign wages and taxes are lower. The difference between public and private morality shows that even honesty is a morally neutral quality. Often the regulations imposed on business are mindless and crippling and to survive a businessman must violate them; in doing so he promotes both his own welfare and that of society as a whole. History teaches that a commercial society is bound to be more prosperous and peaceful than an honor-based traditional society. The commercial culture creates incentives and constraints that, provided that economic activity is effectively regulated, (an important qualification) maximizes the values that are important to most people. This doesn't mean that people in a commercial society are "better" than people in other types of society. The human race is genetically uniform, and our "moral" genes are not much different from the corresponding genes in chimpanzees. The success of commercial societies just illustrates that different institutional structures produce different human behavior.

Comments

[Michael F. Martin]

If different cultures constitute different behavior, then why shouldn't the individuals with traits more conducive to that behavior gradually be selected for? In other words, why shouldn't culture influence how we evolve genetically?

Hawks and Harpending published last year on this very point. Culture may be accelerating human evolution, not freezing it as most assume.

Great post.

[neilehat]

Does this mean that as long as society benefits in the commercial sense it's right and proper to practice, "the Law can be bent with impunity, but shouldn't be broken". And by inference, what good is a law when it can be bent. It reminds me of a saying by Solon I do believe, "Laws are like spider's webs, the little ones get caught, but the big ones pass right on through".

[Dan]

Judge Posner wrote: "Often the regulations imposed on business are mindless and crippling and to survive a businessman must violate them; in doing so he promotes both his own welfare and that of society as a whole."

Unless, of course, the regulations are in place to, say, prevent the collapse of the global financial system. Does "crippling" mean imposing a limit on financial institution leverage to less than 30:1?

We are seeing in the current crisis that aggregate self-interested behavior in the "free market" framework does not yield social benefit without great risk, perhaps unacceptable risk.

As always, Judge Posner is provocative and a joy to challenge. But I think the judge's "Oh grow up already!" take on hard-nosed business morality/amorality misses the point. The challenge of our time is to keep the free market system in a framework that is sustainable over the long term. The current challenge is to bridge a gap in time between the status quo and the "green" industries/technologies we see around the corner. Once viable, affordable electric cars, solar/wind power, etc. are commercially available, there is every reason to believe that the free market will invest in value. A combination of enlightened consumer demand and government mandates will create a market for these technologies.

But we aren't there yet. At present, the "moral" gap must be filled by government regulation because there are no market incentives to do otherwise. Because sustainable economies are moral and unsustainable economies threaten life in the most fundamental way, they are therefore immoral under any ethical or religious framework.

So the question for me is less about "honesty" or "fairness" than about having moral imagination to appreciate the consequences of aggregate self-interested behavior.

[Dan]

A quick addendum to illustrate a lack of moral imagination in the area of aggregate behavior:

The recent PBS special "Torturing Democracy" (http://www.thirteen.org/tag/torture) covered detainee abuses at Guantanamo, Abu Ghraib and other places. What I found most fascinating was not that White House lawyers drafted a memo enumerating "acceptable" harsh interrogation methods (no surprise there), but that no one apparently ever stopped to consider the effect on detainees of implementing MANY of the separate techniques in one interrogation regime.

This is why I have posted here a number of times encouraging economists to develop sophisticated modeling to project aggregate effects of individual behaviors. We fell into the trap of focusing on one bank at a time operating in the grey areas of accounting practices. Economics needs to provide better tools for policy makers.

[gdgeiss]

Wow, what IS Judge Posner smoking?

Where on earth does this list of character traits attributed to the traditional aristocratic/warrior culture versus the commercial (bourgeois) culture come from? I know it's called in the post a culture based on military prowess, personal honor, and hierarchic authority, but that's surely just a description of the traditional aristocratic/warrior culture.

Let us take up the commercial culture first. The post lists cooperativeness, empathy, tact, politeness, intelligence, individuality, self-interest, prudence, and deferral of satisfaction as traits of a "commercial culture". What nonsense!

First, self-interest and individualism are clearly contradictory to and inconsistent with cooperativeness. Second, there is no corner on intelligence in either culture, although clearly aristocratic culture tends to reward status first and intelligence second (or perhaps even third behind bravery), but it is not absent there and it is surely highly valued and rewarded in such societies.

Additionally, by their very nature, aristocratic/warrior cultures are inherently tactful and polite. Think Japan under the samurai. There may never have been a more tactful, polite society in history. Surely rough and tumble bourgeois market cultures are far more brash and impolite.

And again drawing on Japan during the samurai period, the aristocratic warrior culture can be tremendously empathetic and sensitive. So too, was European aristocracy often among the most empathetic and sensitive/artistic portions of their society. Heavens, they were often the only ones who could afford to be.

The fierce sense of personal honor accurately attributed to the warrior elite culture also tends to ameliorate the hierarchal regulation of society. An affront to his (generally, his) personal honor might set any warrior aristocrat against the normal hierarchic establishment. And in every such culture, individuals recognized higher duties than those imposed by the hierarchy. Those traits certainly require that a high degree of self-interest and individualism exist within the aristocratic culture.

As to deferral of satisfactions, the commercial culture must surely be way more impatient than the warrior aristocrat. Just look at us today, everybody seeks instant gratification. The aristocratic warrior tradition is far more altruistic. They expected to sacrifice for the greater good. What more dramatic example of the deferral of satisfaction is available to us than the tradition of "courtly love" that existed in both European and (in slightly different form) Eastern aristocratic societies? The Posner characterizations are, in my view, off base.

On the overall question, what corrupts in all societies, at all times, under all circumstances is POWER. Sometimes the aristocratic/warrior tradition provided better brakes on the accumulation of extreme power, with their suspicion of the too powerful rival lord, and their more altruistic devotion to tradition itself, but surely not always.

In today's commercial arena, where money IS power, the lust after it surely corrupts. Sometimes, as Professor Becker points out, enlightened self-interest will prevail over greed, but not always. And money pervades politics as well and exercises its corrupting influence there.

But ultimately, stress, in the form of the money equals power equation (or otherwise), does not MAKE character, it REVEALS it. It remains a personal moral obligation to find and maintain one's own integrety and (to borrow a very out of fashion word) virtue; and virtue (leaving aside it's teaching in public or private education) is never a cultural or collective phenomenon.

The source of power today is generally different than in traditional aristocratic/warrior cultures. But neither is inherently "better" than the other in that regard and there is no "cultural excuse" for corruption in either one and certainly not, with all due respect, based on the wayward attribution of character traits cobbled together in Judge Posner's post.

[Rumple Stiltskin]

I too have wondered what some of these people are smoking. The simple, yet more shocking, truth would seem to be that they are advancing their ideas in an unimpaired state. The world is full of cults and the cult of market worship is a large one. Current events may make it difficult, for a short time, for them to recruit more members. But only for a short time. The collapse of the Soviet Union, for example, has not stop communism gaining new recruits. Unfortunately, cults will be with us as long as humans exist.

[Luca G-.C]

Sir, I am surprised and dismayed to read your assertion that, "[t]he difference between public and private morality shows that even honesty is a morally neutral quality." It seems self-evident that of all virtues and moral principles, honesty, the choice between truth and deception, is superlative in being the least morally-neutral. / I completely understand you qualification, yet do not think it provides sufficient grounds to justify your statement. For the purpose of clarity, I now restate the rest of the paragraph in question: "Often the regulations imposed on business are mindless and crippling and to survive a businessman must violate them; in doing so he promotes both his own welfare and that of society as a whole." Yes, this is true, I agree: but is a violation of such ‘mindless and crippling regulation’ truly dishonest? / My firm belief is that, as Thoreau said in "Civil Disobedience" and Jefferson averred in our nation's Declaration of Independence, a law which is unjust and unjustified (by reason of its inefficacy) should not be followed. It is the right---in fact the duty---of the oppressed to violate the bonds of such a law; such a law, or such a regulation. My point is that being honest, in life, in business, in all things, is not defined by following human laws, but rather moral imperatives. To follow such imperatives is always right, and it follows, always requires one to be honest. / At the risk of bogging my argument down in platitudes, there is always a basic choice between right and wrong, honesty and dishonesty. Following unjust rules is to my mind a most terrible form of dishonesty, because it is a self-denial by the individual of his right to personal liberty. Put in terms of the Judeo-Christian moral tradition, it robs man of his free will. He should expect to be able to conduct his life, and his business, without asinine rules which not only restrict him personally, but prevent him from contributing his actions to the benevolent force of the invisible hand. Bad (read: “mindless and crippling”) regulations can only be dealt with honestly if they are challenged on their merits, or lack thereof. This is my rebuttal of the assertion that honesty is morally neutral. / This is not to say that I believe businesses necessarily live up to this ideal. Human weakness is of course part of the equation. I conclude by noting that the manner in which businesses go about challenging said regulations, such as bribery and bureaucratic maneuvering to undermine fair market competition, may be reasonably perceived as neither moral nor honest.

[Bryan Willman]

The question is sort of interesting but largely irrelevent.

"Moral character" has to be measuring against some set of morals - for example, praying carefully on Sunday and then beating slaves on Monday... Higly Moral for that local context.

A better question is - given the various selection functions at work at various levels in society, what sorts of social constructions, and in particular what sorts of "market rules", select locally for outcomes positive to a person or group while selecting globally for outcomes unacceptabel to society as a whole?

In short, it's not "do markets corrode morals" but rather "do markets of certain types yield behavoirs that are painful to most of the rest of us?"

That is, I think, closer to the real politics of the situation.

Indeed, suppose the law explicitly allowed, indeed encouraged, 30:1 leverage ratios and various kinds of looney risk management. One might claim that the parties involved were being "completely moral", but that wouldn't reduce the disaster. Just as keeping slaves was 'legal and moral' at least in slave states, yet the outcome was of course horrible.

[Adam]

Also an intriguing answer. I left a similar comment on Mr. Becker's post, but I thought I'd leave it here too. I wrote a blog article for the William & Mary School of Law's ACS Chapter on both answers. If anybody is interested, then take a look here: http://web.wm.edu/so/acs/?p=545

[dice tsang]

"Laws are like spider's webs, the little ones get caught, but the big ones pass right on through"
may be!It is not easy,wherever and whenever!

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