Ancil – Morality and Markets: The Humane Balance
Dr. Ralph Ancil
President, Wilhelm Roepke Institute
The Philadelphia Society
National Meeting in Philadelphia
April 26, 1997
"Morality and Markets: The Humane Balance"
(Permission to quote this speech must be granted by the
Author)
Introduction
Nikolai Lenin said that when the time came to hang the capitalists, they would
trip over each other to sell the communists the necessary rope. One is reminded
also of the similar recent case of a Canadian mining firm whose owner in order
to keep the business worked with Castro and generously donated money to his
Young Communist League. And currently, we have the example of capitalists,
including former high-ranking government officials, blithely trading with
Communist China despite its human rights violations and aggressive military
build-up. What do these examples have in common? They illustrate the effect of
actions based on self-interest alone, self-interest turned lose from any anchor in
morality or community values, thus proving it is not an adequate basis of
economic or social organization.
The solution of the problem, of course, is not embracing any form of
collectivism. Rather, it lies in limiting the sphere of legitimate market activity so
that it harmonizes with the rest of the community and with other values and
indeed with itself. As will be argued here, in a properly understood sense,
market limitation is a logical necessity. It is akin to the problem of political
liberty which James Madison identified in Federalist No. 63 that "liberty may be
endangered by the abuses of liberty as well as by the abuses of power…." What
is true of political liberty here is also true of economic liberty.
To protect the market system against these destructive abuses, a commitment to
permanent values is required by market participants, both consumers and
producers, and in the form ideally by what German economist Wilhelm Roepke
called a "terror regime of decency" as well as by a public policy rooted in that
decency. To do this, I want to consider the market with some of its blemishes
and issues relating to the role of moral values. There are three inter–related
aspects to emphasize: (1) the failures of pure self-interest; (2) the nature of the
relationship between market activity and morality; and (3) the question of the
end-state vs. proceduralist views.
The Failures of Pure Self-Interest (Social Traps)
A market economy is based on the assumption that the collective result of
individuals pursuing their own self-interest is good. Adam Smith is famous for
his dictum that we do not expect our meat from the benevolence of the butcher
but from a regard for his own interest. Precisely so. Yet, the fact remains that
this assumption is not always valid. Many of the present policy problems are the
direct outgrowth of a dogmatic version of this truth maintained even in the face
of counter-examples which Adam Smith would have been the first to recognize.
Consider three cases. In a depression as each employer tries to survive in the
face of a diminishing demand, consulting only his self-interest, he lays off
employees. But if all or a large number of employers do that, total demand
declines even more and so requires more lay-offs. The collective result of the
individual decisions is unwanted even though each decision-maker helped bring
it about. Similarly, in the familiar case of a "run on the bank" of by-gone days,
one or a few withdrawals was not a problem, but if all or many suddenly
withdrew their deposits the results were disastrous for the bank, a result no one
wanted but which each one helped bring about. And as a final example, if we
accept Talbot Page’s analysis, entrepreneurs try to evade (externalize) costs
whenever they can by exploiting weaknesses in the property rights system,
especially in their choice of technology. In the current jargon, they try to
socialize costs while, of course, still privatizing benefits. This means passing the
costs off onto the environment, the general public or the taxpayer. Cost
avoidance is arguably an important aspect of the firm’s idea of "efficiency" but
it is obviously not consistent with the economist’s definition of price efficiency
which requires that the price reflect all of the relative benefits and costs. Thus, a
higher product price may be the more efficient one. However, as each
entrepreneur evades costs as he pursues only his own self-interest, the cost
"efficiency" of his firm may go up, but as other firms in the industry follow suit,
the efficiency of the market goes down.
To conclude this first point, if we are told that we are to maximize our
self-interest in each specific transaction and that we are not to lookout for the
other guy or the common good and other intangibles, then it is not surprising to
see not only how the failures described above came about, but also how they,
or many like them, are maintained. And if we further tell people, as one George
Mason University economist did to college students not long ago, that greed, in
the sense of getting more things for oneself, is the noblest human motivation,
then we cannot but believe these failures will grow worse in both frequency and
intensity. And the success of this propaganda may be the biggest market failure
of them all. If pure self-interest is not always beneficial or rational collectively,
we must rely on something more.
Markets Presuppose Morals
Fortunately, not all economists are so dogmatic that they are unable to see the
issue correctly. The late Fred Hirsch showed how the market economy
succeeded being based on a pre-capitalist morality, which by its increasing
orientation to self-interest (i.e., private-oriented behavior) at the expense of
communal and public good, also undermined that foundation. ‘The system,"
writes Hirsch, "operated on social foundations laid under a different order of
society." But today "…it erodes the social foundations that underlie a benign
and efficient implementation of the self-interest principle operating through
market transactions" (Social Limits, p. I 1). More fully he writes:
"The social morality that has served as an understructure for economic
individualism has been a legacy of the precapitalist and preindustrial past. This
legacy has diminished with time and with the corrosive contact of the active
capitalist values – and more generally with the greater anonymity and greater
mobility of industrial society. The system has thereby lost outside support that
was previously taken for granted by the individual. As individual behavior has
been increasingly directed to individual advantage, habits and instincts based on
communal attitudes and objectives have lost out ." (Social Limits, pp. 1 17-1
18).
In other words, Hirsch sees another kind of social trap but one which doesn’t
just undermine a particular market but the entire free market system.
While there are undoubtedly many reasons for this, I will touch on only three.
First, in so far as our national policy has been and is a commitment to endless
or indefinite increases in per capita consumption, it has been a policy affirming
and promoting discontent. And though in times past there was good reason to
be discontent with the economy, the danger lies in cultivating it as a habit of
mind that is difficult, if not impossible, to limit just to economics. Instead, it
spills over into the social and moral spheres.
Secondly, correlated with increasing levels of consumption (discontent) is the
problem of technological change. If change is too rapid and inappropriate, and
in some cases, flatly immoral, it renders not only skills obsolete, which is itself
demoralizing, but also entire ways of life, including the continuity we need by
remembering our past, by tradition, by the wisdom and experience of parents
and grandparents. Thus, individuals are left bobbing on an ocean of change
without solid connections to an enduring community.
Thirdly, the increasing commercialization of the arts, sciences, sex, indeed every
private and higher aspect of life, especially embodied in advertising, appeals to,
and thereby promotes and affirms our vanity, lust, ambition, and greed. It can
hardly be maintained that in such a deracinating atmosphere our characters are
left unaffected.
All this contributes to that "sinking in of the moral being" in Yeats’ phrase that
comes with a loss of belief in higher values, virtue and morals. One result of this
loss in turn is bitterness, and bitterness is always self-destructive.
Strikingly similar to Hirsch, Wilhelm Roepke pointed out "historical liberalism,"
and with it especially nineteenth century capitalism, failed to see that competition
was not a harmless activity either morally or psychologically but was something,
he argued, that had to be kept in bounds if one wanted to avoid poisoning the
rest of society. The failure to understand this, he explained, was due to the
peculiarly naïve and optimistic belief: "…that a competitive market economy,
based on division of labor, was an excellent moral academy which, be appealing
to their self-interest, encouraged men to be pacific and decent, as well as to
practice all the other civic virtues. While we know today…that competition
reduces the moral stamina and therefore requires moral reserves outside the
market economy…" (Social Crisis, p. 52). Years later he emphasized the same
point again:
"The market economy is a constantly renewed texture of more or less
short-lived contractual relations. It can therefore, have no permanence unless the
confidence which any contract presupposes rests on a broad and solid ethical
basis in all market parties. It depends upon a satisfactory average degree of
personal integrity and, at the margin, upon a system of law which counteracts
the natural tendency to slip back into less-than-average integrity…the ultimate
moral support of the market economy lies outside the market. Market and
competition are far from generating their moral prerequisites
autonomously…These prerequisites must be furnished from outside, and it is,
on the contrary, the market and competition which constantly strains them, draw
upon them, and consume them." (Humane Economy, pp. 125-6)
In figurative terms, the same explosive force of self-interest that powers the
economic engine, also breaks it down, requiring interventions of adjustments
and tune-ups.
To be humane as well as economically effective, self-interest must be channeled
and limited by the adherence of market participants to meta-economic values
and that means, among other things, that we must have an idea of the end-state,
the good society (which is not to be confused with utopias, either of the
libertarian or Marxian variety)
Values and the End-State
At the root of this problem is the belief among the self-interest-is-enough school
of economics, that values and morals are purely subjective and therefore relative
either to individual preferences and tastes, or to currently dominant but more or
less ephemeral social prejudices and habits. This moral subjectivism/relativism
is an essential ingredient in one of the two dominant schools of liberal thought
which in current jargon are described as end-state liberals or procedural liberals.
Norman Barry perhaps defines the proceduralist school most succinctly when
he states that "…procedural liberalism precludes the imposition on a people
without their consent of any political end-state, including, of course, a liberal
one" (Peacock and Willgerodt, p. 112). So, the proceduralist liberal says it’s
okay to end up in hell, so long as one does it "properly," that is, according to
his (subjective) notions of rules (such as free unanimous consent).
While there are ways to hedge on this, ultimately this is nihilism. It is nihilistic to
be indifferent to whether the free market is preserved or not, whether a free
government is preserved or not. It is nihilistic to say anything goes so long as
it’s done "freely." It implies a deification of man that claims whatever he wills,
collectively or individually, is all right and there is no objective value to judge or
check it, nothing to validate or condemn it. To use Roepke’s phrase, it is an
"intransigent dogmatism" that condemns "itself to death with open eyes…a sort
of gambling club whose rules include their non-observance" (Social Crisis, p.
50).
We ought to have understood the danger of this sort of thinking from the
Weimar experience, as Roepke and others did. The Weimar Republic boasted it
had the "freest constitution" in the world but the result of that total freedom was
totalitarianism. The lesson learned was that procedures and rules themselves
presuppose an enduring moral order, otherwise individuals will cheat on them in
the familiar free-rider way. Here is another social trap, another failure of pure
self-interest
This is the conclusion drawn by other members of the Ordo-liberal school of
economic thought. They learned that the expression of sound legal and
economic principles could not be left to the task of irrational political and
"spontaneous" economic forces. They thus came to advocate, as Norman
Barry writes, a socially responsible market economy which "rejects the
argument that exchange itself generates an appropriate moral and welfare
dimension… " (Peacock and Willgerodt, p. 108). They believed with Walter
Eucken that "’what experience of laissez- faire goes to prove is that the
economic system cannot be left to organise itself"’ (ibid., p. 109). That
organization involves, among other things, limitations on the freedom of
contract if such a contract were, for example, to restrain competition. This was
seen as only logical since it was based on the "’legitimization of economic
freedom in order to prevent this freedom from destroying its own
prerequisites"’ (ibid., p. 149).
Conclusion
The reason for many market and policy problems is the loss of those basic
values and beliefs that would most effectively support the market. This problem
is not removed by resorting to orthodox economics techniques and concepts,
or by denying the problems exist, or by facile recommendations for government
limitations and privatization. It is rather by a restoration of those values among
market participants and policy-makers, a restoration which begins with the
admission that self-interest alone is self-destructive and proceeds to locate
economic action in the proper place in the hierarchy of human goods and in the
service of a vision of the good society. As Roepke’s friend, Alexander
Ruestow, put it:
‘The social market economy must be the servant of humanity and of
trans-economic values. All social, ethical, cultural and human values are more
important than the economy, yet the economy must prepare the ground for their
fullest development. For this reason the economy must not take on forms which
are incompatible with these trans-economic values." (Peacock and Willgerodt,
p. 108)
Our present economy, contrary to some pro-market rhetoric, is hardly in a form
compatible with "trans-economic" values. If we are not able or willing to re-cast
it into such a form, we will not have to worry about communists hanging us with
our own ropes…we will be doing it ourselves.
Sources
1. Hirsch, Fred. Social Limits to Growth. 1976. Harvard University Press,
Cambridge, Massachusets
2. Page, Talbot, Conservation and Economic Efficiency. 1977. Johns Hopkins
Press, Baltimore and London.
3. Peacock, Alan and Hans Willgerodt, eds. German neo-Liberals and the
Social Market Economy. 1989. St. Martin’s Press, New York
4. Roepke, Wilhelm. A Humane Economy. 1960. Henry Regnery Publishing
Company, Chicago.
5. Roepke, Wilhelm. The Social Crisis of Our Time. 1992 [1942]. Transaction
Publishers, New Brunswick, New Jersey