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Monday, July 24, 2017

No, Markets Aren’t Making Us Greedy

Free markets us more tolerant and trusting, now Socialism on the other hand...

Delivering the Keith Joseph Memorial Lecture last week, Matt Ridley highlighted a common, yet unfounded, attack on free markets: that they encourage us to be greedy and selfish, and erode moral values.

No hard evidence is ever offered to prove that free markets encourage greed.

This has been a frequent lament from the Left, who pivoted in the 1980s from claiming Margaret Thatcher and Ronald Reagan’s free market agenda would slow growth to saying that it encouraged us to want too much.

The US philosopher Michael Sandel has argued that the infusion of markets into many areas of life has led to the crowding out of virtues such as altruism, generosity and solidarity. The Pope has said that “libertarian individualism . . . minimises the common good”. Bizarrely, even UK Conservatives appear to agree. The 2017 Conservative manifesto declared: “We do not believe in untrammelled free markets. We reject the cult of selfish individualism”.

The weird thing about all these assertions is that no hard evidence is ever offered to prove that free markets encourage greed. That may be because the evidence – and logic – suggest that the opposite is true.

“Proof” of Capitalist Selfishness

First, let’s state an obvious truth. There appears to be a robust and strong relationship between levels of prosperity and economic freedom. Natural experiments, such as East and West Germany, North and South Korea, and Hong Kong and mainland China, have shown that market economies tend to be much more prosperous than non-market economies.

“No one would remember the Good Samaritan if he’d only had good intentions.”

This results in more resources for compassionate causes, whether through individual activity or socialised through the collection of tax revenue. It can be said quite clearly that free market economies facilitate the opportunity to be more compassionate. As a British Prime Minister once said, “no one would remember the Good Samaritan if he’d only had good intentions; he had money as well.”

But opportunities need not be taken, of course. So what does the empirical literature suggest on whether markets facilitate greed and lead to selfish immoral behaviour?

In a famous paper in 2013, Armin Falk and Nora Szech purported to show that markets norms did in fact damage us. They ran experiments involving cash, giving participants in the experiment the option of paying to save a mouse from being killed. They found that people were more likely to enable the killing when the decision came about as a result of bargaining between buyers and sellers (which made the mouse a third party), rather than someone making an individual decision based on the mouse-cash trade-off alone.

They concluded that “market interaction displays a tendency to lower moral values, relative to individually stated preferences,” perhaps because of the ability to spread the guilt between trading parties, or because of the “competition” for money.

Building Trust and Tolerance

This study went around the world as “proof” that markets eroded our humanity. But closer examination of the results suggested something quite different. In this game, there was no clear good being traded, except the abstract thought of a mouse dying. In the real world, most transactions are more like the individual judgment rather than bargaining. We walk into a store or market as a price-taker and decide whether or not to buy a product.

This would suggest the interpretation given by Falk and Szech could be the the opposite of what the results suggest. As Breyer and Weimann concluded in their critique of the original paper, “in typical market situations, moral norms play a more prominent role than in non-market bargaining situations” that tend to be zero-sum.

Markets encourage collaboration and exchange between parties that might otherwise not interact.

This alternative interpretation is backed up by the experimental work of Herbert Gintis, who has analysed the behaviours of 15 tribal societies from around the world, including “hunter-gatherers, horticulturalists, nomadic herders, and small-scale sedentary farmers – in Africa, Latin America, and Asia.”

Playing a host of economic games, Gintis found that societies exposed to voluntary exchange through markets were more highly motivated by non-financial fairness considerations than those which were not. “The notion that the market economy makes people greedy, selfish, and amoral is simply fallacious,” Gintis concluded.

This makes sense. Considering the broad sweep of history, one can observe that the rise of market economies and the greater material wealth they have brought has largely coincided with a greater tolerance of others, including less willingness to exploit. As Gintis again summarises, “Movements for religious and lifestyle tolerance, gender equality, and democracy have flourished and triumphed in societies governed by market exchange, and nowhere else.”

In other words, we might expect greed, cheating and intolerance to be more prevalent in societies where individuals can only fulfil selfish desires by taking from, overpowering or using dominant political or hierarchical positions to rule over and extort from others. Markets actually encourage collaboration and exchange between parties that might otherwise not interact. This interdependency discourages violence and builds trust and tolerance.

What About Mixed Economic Systems?

Now, at this stage, I’m sure that many people who consider themselves moderate socialists would object. Of course, they might say, there is a role for markets. But modern economies are mixed, compromising some relatively free markets and other areas with extensive government intervention. The “longer individuals were exposed to socialism, the more likely they were to cheat.”

Most countries have different cultures too, so comparing whether more “free market” or “socialistic” countries are likely to promote and encourage greed is very difficult. Gintis’s experiments are interesting, but do they really inform us about whether shifting the balance from markets towards state provision would lead to negative effects in terms of a less trusting or more greedy society?

Well, we cannot say for sure. But sometimes natural experiments arise which give us suggestive insights, and the most obvious recent example was the split of Germany into a broadly capitalist West and the socialist East.

In a 2014 paper, economists tested Berlin residents’ willingness to cheat in a simple game involving rolling die, whereby self-reported scores could lead to small monetary payoffs. Participants presented passports and ID cards to the researchers, which allowed them to assess their backgrounds.

The results were clear: participants from an East German family background were far more likely to cheat than those from the West. What is more, the “longer individuals were exposed to socialism, the more likely they were to cheat.”

All of which suggests that the conventional trendy wisdom is wrong. Free markets do not make us greedy and immoral. But embracing socialism may well do.

Reprinted from CapX.