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Thursday, April 26, 2012

Why Moral “Don’ts” Matter Most

How important are moral values for the development and operation of a free-market economy? What follows is an explanation for why some moral values—the moral “don’ts”—are important to the conduct of economic activity, while other moral values—the moral “do’s”—can actually act as impediments. This distinction was first proposed in my book, The Moral Foundation of Economic Behavior. An interesting byproduct of this exercise is that it sheds light on what a moral framework that comports with libertarianism might look like.

“Moral do’s” are exhortations that tell us what to do if we are to be moral. Since the positive moral action they encourage is often a matter of degree, they tend not to be specific. For example, the moral exhortation “be generous” may induce you to give a beggar money, but it does not tell you how much to give in any given circumstance. Moral exhortations leave unanswered the question of how generous is generous enough to be moral. There are different degrees of generosity, and what you might think is appropriately generous in a given circumstance I might find inadequate.

Since there is no objective basis for determining the proper place to stop on the continuum of positive moral action intensity (people can honestly disagree about how generous is generous enough, for example), moral exhortations are inherently subjective. Moreover, encouraging one to be completely generous or completely kind just trades a specificity problem for a feasibility problem, since in most cases the upper bound (if one even exists) of the intensity of any given positive moral action is above any individual’s ability to pay. This brings us to a key point. Because moral exhortations normally require action, and action normally requires resources, moral exhortations normally force us to choose.

“Moral don’ts” are prohibitions that tell us what we shouldn’t do if we are to be moral. Unlike moral exhortations, moral prohibitions are not inherently matters of degree. Consider the moral prohibition “don’t steal.” One either steals or does not. While it is true that there are degrees of stealing, there are no degrees of not stealing.

Because positive moral action is normally a matter of degree, there is normally no objective basis for concluding that someone has behaved immorally in any given circumstance. But because of the categorical nature of moral prohibitions (one is either in the set “not steal” or one is not), obeying moral prohibitions is inherently objective. With respect to moral prohibitions, then, you either behaved morally because you obeyed or you behaved immorally because you did not.

Since resources are finite, moral exhortations normally force us to choose between competing ends. So except in rare circumstances, it is not possible to have a universal standard for behavior with respect to moral exhortations. This is rarely a problem for moral prohibitions. Moral prohibitions require inaction, not action, and inaction normally does not require resources. One can “not lie” to an infinitely long list of individuals without running out of resources. Although obeying moral prohibitions may be costly in the sense that one forgoes chances to engage in opportunism, it is nevertheless true that it is nearly always possible to obey them, so with moral prohibitions a universal standard for behavior is possible and expecting others to live up to it is meaningful.

The hallmark of a free-market economy is voluntary transactions. To occur, voluntary transactions must be mutually beneficial, so they tend to be welfare-improving. Mutual benefit is made possible by the existence of transaction surplus—each party gets more than he gives up—the expectation of which provides the impetus for voluntary transactions.

Should economic transactions be encouraged by moral exhortations or should they be left to the pursuit of self-interest? What is morally positive about economic transactions is the surplus they produce, because this is what ultimately increases the value of output per person. But this surplus is precisely what induces transactions to be undertaken voluntarily in the first place, so there is nothing for moral exhortations to do. Unless there is a genuine market failure to be addressed, moral exhortations solve a problem that does not exist. In doing so they are either superfluous because they don’t change the outcome or inefficient because they do.

This means there will be fewer resources available to undertake positive moral actions. Even when a genuine market failure exists, it does not follow that moral exhortations are an efficient means of addressing it. It does follow, however, that benevolence is most efficaciously pursued if, when we are moved to behave benevolently, we do so as a private consumption activity financed by income derived from transactions that have already been undertaken because of their mutually beneficial nature.

With respect to economic behavior, there is therefore nothing for moral exhortations to do, no problem for them to solve. What should concern us about the moral character of our transaction partners is not that they aren’t sufficiently willing to promote our interest, because we don’t need them to. What should concern us is that some are all too willing to opportunistically exploit us.


Opportunism can be defined as acting to promote one’s welfare by taking advantage of a trust extended by an individual, a group, or society as a whole. The possibility of opportunistic exploitation drives up the expected cost of transacting. Such transaction cost reduces the scope of transactions through which exchange and cooperative surpluses can be realized. Where opportunistic activity is widespread, evidence of its crippling effects is everywhere.

The moral “don’ts” matter most because if an individual obeys all moral prohibitions, it is impossible to engage in opportunism. Widespread obedience to moral prohibitions therefore directly and dramatically reduces transaction costs by precluding opportunism. So while there is nothing for moral exhortations to do to support the development and operation of a free-market economy, there is plenty for moral prohibitions to do.

Individuals who believe they are morally obligated to obey all moral prohibitions before even considering obeying any moral exhortation can be rationally expected to always behave in a trustworthy manner. They will never engage in “greater good” rationalizations at your expense. Societies within which such moral beliefs predominate enjoy a social norm of unconditional trustworthiness, which makes a high-trust, low-transaction-cost society possible.

Social harmony is directly related to the existence of clear standards for behavior. This is a problem for moral exhortations because, as noted, there is no objective basis for discerning to what degree a positive moral action should be taken, and they entail action that requires resources an individual might not have in sufficient measure.

As we’ve seen, neither of these problems applies to moral prohibitions. So with moral prohibitions we know what we can practicably expect from others and what others will be expecting of us.

Because of this, with moral prohibitions everyone can conclude at the same time that someone has not lived up to a particular standard for moral behavior. This produces a consensus of disapproval. When everyone can agree that a given action is wrong and therefore requires disapproval, standards can be reinforced automatically and informally. There is no need for a central authority to make value judgments because obeying the standard is not a matter of degree and is therefore not a matter of subjective judgment.

When we don’t recognize the elastic nature of moral exhortations in contrast to the categorical nature of moral prohibitions, we naturally treat them as equivalently functioning moral values, with the latter being nothing more than negation of the former. In this case all that matters is relative moral weight. The problem is that even though negative moral actions are by nature well defined, the moral weight put on them is not. This makes moral behavior inescapably subjective even for behavior involving negative moral actions and in so doing makes people effectively moral free agents, because they are the ones choosing the weights. As such we don’t know (because we can’t know) what we can and cannot expect from others.

Many firms have been caught engaging in questionable practices because of a competitive race to the bottom of ethical behavior. Modern moral theorists normally attribute this to corporate leaders not having been sufficiently exhorted to want to “do the right thing.” But a better approach might lie in the fact that clear moral standards made possible by prioritizing obedience to moral prohibitions would provide minimum standards for behavior that people of integrity can use to avoid getting into a competitive race to the ethical bottom.

The absence of clear moral standards for behavior can make managers feel they are morally compelled to disobey moral prohibitions as a means to the end of pursuing positive moral actions (such as telling a small lie so as not to fire an employee). Such managers can even conclude that being unwilling to disobey a moral prohibition amounts to an insufferable act of moral self-righteousness (such as steadfastly refusing to change a bookkeeping entry after the fact) that puts one’s own moral self-esteem ahead of the welfare of others (if, say, changing the entry would avoid bankruptcy, which would lead to workers losing their jobs).

A society composed of individuals who strongly value obeying moral prohibitions is a society composed of individuals who expect to feel very guilty if they undertake negative moral actions. Even when opportunism cannot be observed and no one is appreciably harmed at the margin, they still feel guilty. Such a society will enjoy low transaction costs. Such a society has the reason to create and the ability to sustain institutions that fully support property rights and the creative use of contracts, which in turn strengthen incentives for effort, investment, innovation, and invention.

So what explains efforts by firms to appear benevolent? In low-trust societies firm owners and managers are forced to extend the radius of small-group trust, which is largely based on mutual affection. This they do by treating customers and employees “like family.” Such “warm glow” behavior is actually a symptom of a society’s inability to produce a norm of unconditional trustworthiness. It is not for nothing that the warmest cultures have the lowest levels of measured trust and trustworthiness, and therefore the lowest levels of economic development and general prosperity. As a society we do best when, with the exception of those very close to us, we do not expect others to promote our welfare and only expect that they will obey all moral prohibitions.