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Monday, June 17, 2013

Do Markets Promote Immoral Behavior?

Pure markets enhance good behavior, because in such arrangements, voluntary acts are rewarded and involuntary acts are punished. A pure market, as we define it, consists only of voluntary human action. That’s because a truly free market includes governance structures that penalize coercive harm, and such pure markets do not impose any restrictions or costs on honest and peaceful human activity.

Critics of markets think otherwise. They point to slave markets or a market for stolen goods as examples of market immorality. 

More recently, Professor Dr. Armin Falk (University of Bonn) and Professor Dr. Nora Szech (University of Bamberg) conducted experiments in which people were offered a choice between receiving 10 euros versus letting a laboratory mouse get killed. If a subject decided to save a mouse, the experimenters bought the animal, according to the study authors writing in the journal Science

But in the experimental market with buyers and sellers, more people were willing to accept the killing of a mouse than when individuals were simply offered an isolated choice. Therefore, the researchers concluded, markets erode moral values. Guilt is shared with other traders who are also involved in transactions that kill mice. If a person refused a transaction to save a mouse, somebody else would step in, so the mouse would be killed anyway.

Do Falk and Szech’s analysis prove that markets erode morals?

Pure Markets or Coercion-Infected Bazaars

The term “market” can refer to any bazaar or system of transactions, and also to pure free markets in which action is voluntary. Thus the buying and selling of slaves falls outside a voluntary market, but it is a bazaar or trade “market” in the sense that it includes buying and selling. When discussing the morality or failures of “markets,” we need to distinguish between voluntary transactions and those that involve coercive harm. Hence I will use the term “bazaar” to refer to trade that may involve coercion, while using “market” to mean a nexus of trade free of coercion.

In his paper “Is Economics Independent of Ethics?” economist Jack High examined the term “market economy,” in contrast to “government activity.” The market, writes High, “is defined as a system of voluntary exchange.” A deep understanding of the concept of the pure market requires an analysis of the meaning of the term “voluntary.” It will not do to simply state that “voluntary” means “not coercive,” since “coercive” is equivalent to the term “not voluntary.” 

“Voluntary” action implies an ethical rule by which some acts are morally permitted and other acts, the involuntary ones, are prohibited. To have a universal meaning of voluntary action, and thus of the market, this moral standard must itself be universally applicable to humanity. This universal ethic is the expression of natural moral law, based on human nature rather than any cultural practice or personal viewpoint.

The Universal Ethic

John Locke (1690) described the moral “law of nature” or natural moral law as being derived from two premises: biological independence and human equality. Independence is the biological fact that human beings think and feel as individuals. Equality is the proposition that there is nothing in human biology that entitles one set of human beings to be masters over another set which are slaves.

A unique universal ethic can be derived from these Lockean premises. The universal ethic has three basic rules:

1. Acts that have welcomed benefits are good.

2. Acts that coercively harm others, by initiating an invasion, are evil.

3. All other acts are neutral.

The term “harm” is distinguished from a mere offense. In an offense, the distress is due solely to the beliefs and values of the person affected. In contrast, coercive harm involves an invasion, an unwelcome penetration into the legitimate domain of the victim. So if a person is offended by what someone says, this is due to his beliefs and values; this act is not coercively harmful, and is designated as morally neutral by the universal ethic.

The universal ethic also provides a meaning for moral rights and liberty. A moral right to X means that the negation of X is morally evil. For example, a person has a moral right to possess a car because the negation of that possession, i.e., theft, is morally evil. Since the universal ethic is the expression of natural moral law, the moral rights based on that ethic can be called “natural rights.” Society has complete liberty when its laws are based solely on the universal ethic, with legal rights congruent with natural rights.

The pure market is inherently ethical because the same universal ethic that provides the meaning of “market” is also the natural-law ethic used to judge policy and human action. Involuntary action is both evil and outside the market. There are slave bazaars, but there cannot be a free market in buying and selling slaves, because slavery is involuntary and, thus, evil.

Although the pure market is ethical in excluding evil acts, it is a separate issue whether a free market enhances or hinders ethical behavior by minimizing evil action. Since the governance of a pure market penalizes acts that coercively harm others, the ideal governance of a free society will have optimal penalties for wrongful acts.

By deterring coercive acts, rehabilitating criminals, and providing restitution for victims, the free society steers human action toward those acts that are good or neutral. Adam Smith, who popularized the concept of the invisible hand of the market, also wrote in his book, The Theory of Moral Sentiments, that people have a natural fellow-feeling or sympathy for others. Social entrepreneurs can promote sympathy for communities and benevolent causes, which promotes morally good behavior.

Relative to today’s interventionist economies, the free market promotes good behavior by avoiding the imposition of costs and restrictions. In today’s world, even when good acts are not prohibited, they are impeded with costs such as taxes, licenses, and permit requirements. Even when an organization is tax exempt, it must today fill out forms and report on its activities. The free market promotes good behavior more than today’s interventionist economy by avoiding barriers that make goodness more costly.

Critics of markets claim that when people search for the cheapest goods, moral concern takes a back seat. But in a truly free market, the products offered are produced by moral means, by a process that does not involve coercive harm. Therefore searching for the lowest-cost goods is not evil. Only when goods are produced by immoral means, such as with slave labor, is the product morally tainted, but that, by definition, could not occur within a voluntary market.

Of Mice and Men

Unfortunately, some behavioral economists—those who conduct experiments on human behavior—leap to incorrect conclusions about markets because they use the term “market” for any system of transactions—even those involving non-voluntary aspects. 

Recall that in the Falk and Szech experiments cited above, subjects were offered a choice between receiving money versus letting a laboratory mouse get killed. If a subject decided to save a mouse, the experimenters bought the animal and allowed it to live. In the experimental bazaar, however, more people were willing to accept the killing of a mouse than when individuals were simply offered an isolated choice. The researchers concluded that markets erode moral values as guilt is shared with other traders who are also involved in transactions that kill mice. If a person refused a transaction to save a mouse, somebody else would step in, so the mouse would be killed anyway.

The first trouble is that no conclusion about markets and morals can be derived without first analyzing the morality of the particular act, killing a mouse. There is no consensus among ethicists on the issue of mouse (animal) rights, but with respect to the issue of how markets affect moral behavior, we can analyze two possibilities: First, if killing a mouse is not evil, then accepting a choice that kills a mouse is not promoting evil behavior. Second, if the non-utilitarian killing of a mouse (i.e., killing for reasons other than for food, useful materials, or self-defense) is indeed evil, then it is prohibited by the laws of the market and is thus penalized, which minimizes such acts and avoids eroding moral values. 

Another problem with the Falk and Szech approach is that the study turns on the condition that people violate their own “individual moral standards,” which to some individuals may, indeed, include mouse killing. I have tried above to show that, in order for an ethic to be universal, it must satisfy certain criteria. Individual moral standards are not morals per se, but rather personal values. Violation of these would be offenses. It may be interesting to some that markets—even pure ones—tend to make people overlook offenses, due to the distance the transactional nature of the arrangement creates between the actor and the original evil, or due to the perceived amorality of fellow actors in the bazaar. For example, “If I don't buy or sell, someone else will” can creep into a market actor’s rationale. But this rationale has no bearing on a universal moral ethic, which would proscribe harmful actions ex ante—that is, before they infect the market.

In other words, concern about the tendency of market forces to reinforce perceived evils confuses the body and its symptoms with the pathology. The blood stream can carry a pathogen around to various part of one’s body, for example, hastening disease. That doesn’t mean that the bloodstream is somehow evil or undesirable by extension. It’s simply that the pathogen must be eliminated.

Evils of Intervention

Another (perhaps more familiar) approach is to blame markets for outcomes that are actually the result of state intervention rather than voluntary action. Even economists have made a cottage industry out of blaming the market for problems such as recessions and unemployment. These critics fail to distinguish between today’s mixed economies (bazaars replete with governmental interventions) and an arrangement that is much closer to a pure market. Any outcome, however, such as an economic crisis or depression, has to be analyzed sufficiently to determine whether the causes are the interventions or the markets.  

Failure to appreciate the concept of a pure market is on display in the article “Markets Erode Morals, Let People Do Horrible Things: Study” by Mark Gongloff in the Huffington Post.  The author states, “The devastating collapses of the dot-com and housing bubbles in recent years have finally led us to start questioning the value of unfettered markets.”

If markets are unfettered, the Federal Reserve does not exist, there are no income and sales taxes; no asset forfeitures; no government subsidies; no federal regulatory agencies such as the SEC, FDA, FHA, and Fannie Mae; and no state and local interventions. The author presumes, with no analysis, that the housing bubble was caused by the market. There is good reason to conclude that massive monetary and fiscal subsidies to real estate—intervention—were primary causes of the crash of 2008, and that the cheap credit provided by money expansions skewed interest rates away from their natural rates, promoting previous bubbles. In these cases, the evils of those impure markets were the consequences of interventions whose intentions may arguably have been good.

The purpose of economic theory is to enable people to understand the implicit economic reality beneath superficial appearances. Critics of free markets observe the superficial appearances of the bazaar without delving into the ethical foundations of the free market and the economic causes of outcomes such as the boom-bust cycle. The ethical and economic reality is that markets are inherently ethical, and they promote ethical behavior.

  • Fred Foldvary teaches economics at San Jose State University, California. He received his Ph.D. in Economics from George Mason University. Foldvary's scholarly interests include private communities, business cycles, decentralized governance, and natural-law ethics.