ESSA

ESSA

Markets and morality


Hugh Oliver

By

March 20th, 2014


First the free market. Then Enron. Then the GFC. Is the market inherently immoral?


In recent years, the interrelationship between ‘free markets’ and morality has become increasingly apparent. Stories of corporate corruption, unethical animal testing and the exploitation of workers in third world countries arise frequently in the media. As the global economy recovers from the trauma induced by the GFC, we are constantly reminded of the devastation that can occur when perverse economic incentives eclipse sound moral judgements.

Regrettably, the landscape of history is no different. Set within the years preceding the GFC, the recent film The Wolf of Wall Street epitomises a period of reckless behaviour, heedless risk taking and flagrant disregard. Similarly, one only has to look to the Ford Pinto case in the 1970s or the Enron scandal in 2001 to observe the negative effects of unsanctioned corporate greed.

Taken collectively, these examples serve to underlie the contention that free markets undermine moral values. But is this really a valid contention?

Conceptually, it is not difficult to see the potential for the free market—a system built almost entirely on self-interest—to corrode morals. Increasingly fierce competition within markets can engender cost cutting mentalities that manifest in immoral behaviour. Information asymmetries arising from deregulated industries reduce the incentives for businesses to make decisions that coincide with society’s interests at large. Negative externalities reflect firms insulating themselves from risk by externalising costs onto third parties. Markets have a propensity to reward and perpetuate self-interest as a normative ideal. Self-interested behaviour appears to equate with higher profit. Socially desirable traits such as altruism and generosity are rewarded to a significantly lesser degree as compared to greed and self-interest.

Moreover, it could be argued that individuals make immoral decisions within the market context that they wouldn’t make outside the market environment. Consumers purchasing clothes manufactured in exploitative third world countries’ conditions often legitimise their decisions in terms of the idea that their payment validates their good intention—no matter how cheaply they obtain the clothes. Firms have been known to pay their employees the minimum wage in order to privatise and maximise (legally) the benefits derived from their workers, while at the same time socialising the costs onto government (and taxpayers) in the form of welfare programs (to supplement the incomes of such workers). To the extent that these immoral decisions can be ascribed to the self-interested incentives nurtured by the free market, the relationship between markets and immorality is powerful.

And indeed there is an alluring simplicity in the conclusion that the free market erodes moral values. The reality is however, that the relationship between markets and morality is much more complex than at first glance.

At most, the relationship is correlative. To contend that the market undermines moral values implicitly presupposes that the market itself is the cause of immoral outcomes. In turn, this implies that the market is fundamentally flawed. However, the market is merely the myriad of institutions that coordinate and facilitate commerce and exchange. If the activities of economic actors result in negative or immoral consequences, explanations should be found primarily in the social institutions and circumstances that underpin the market rather than the market itself.[1]

The underlying moral values and norms of economic actors within the market are shaped by extraneous social, cultural and political variables. Consumers who purchase cheap counterfeit brands from exploited individuals in third world countries often do so in order to conform to trends back home. Does this reflect poorly on the free market, or rather, is it an example of a broader cultural variable (i.e. consumerism) shaping the moral priorities of an economic actor?

As a corollary of the above analysis, it is likely that the imperfections of the market stem from the flaws and motivations of its human participants—rather than its design.[2] The market does not create or cause self-interest. At most, it reinforces self-interested incentives. Yet, it is by no means impossible for the market and morality to co-exist. Vivid examples of immorality in the market—the sub-prime mortgage crisis, the Enron scandal and the exploitation of workers in third world countries by large international firms—represent a fraction of market participants. They are not indicative of the majority. Individuals such as Bernie Madoff, Kenneth Lay and Jordan Belfort were intrinsically greedy; the fact that they allowed unbridled self-interest to govern their decision-making reflected poorly on themselves—not the market.

In fact, for most economic actors, the incentives nurtured by the market are not so overbearing as to supplant their moral judgements. There are many examples of legitimate firms who seek to strike a balance between fulfilling their self-interested objectives and ensuring that their economic activities correspond to societal values. Examples of socially responsible firms include Starbucks, Kellogg’s, GE, Dell, Intel and Nokia. Although the motive surrounding the proliferation of socially and environmentally friendly activities is likely self-interest, these firms (amongst many others) are representative of the growing trend within society towards corporate social responsibility. Importantly, these illustrations bolster the contention that market activities and outcomes are deeply embedded in constantly evolving socio-cultural circumstances.

Ultimately, there is no simple solution to the question of whether or not the free market undermines moral values. Admittedly, the market nurtures and reinforces self-interested behaviour. Yet, it does not flow from this fact that the market itself causes negative or immoral outcomes. Rather, the moral (or immoral) priorities and norms of economic actors are derived from the socio-cultural circumstances that encapsulate the market. Accordingly, the answers to negative outcomes produced within the free market lies in the economic actors themselves, and the prevailing socio-cultural norms that influence the values of those actors.

References:

[1] Qinglian, H, ‘A Templeton Conversation: Does the free market corrode moral character?’ (2008) available at http://www.templeton.org/market/

[2] Ibid.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

  • Aristidi Armstrong

    Hi Hugh, great article. Just wondering, you touched on the Ford pinto being an example of unethical behaviour. How would you respond to Milton Friedman’s contention that it is not a matter of ethics but rather comes down to freedom of choice to the consumer. The contention is contained in this video: http://www.youtube.com/watch?v=sjIrK84Eai4
    Ari

    • Yannis Goutzamanis

      Hey Ari This clip came to my mind also when I read this article. Poor young Michael!

      Philosophically, I find myself in agreement with Milton here. If Ford had disclosed the risk to consumers and they freely chose to bear it and pay less that would be philosophically fine. As Milton points out it would be the same as smoking where people choose to bear the risk of lung cancer.

      However, my problem with applying this philosophy as public policy by repealing large portions of consumer protection legislation is that it would cause practical problems. Firstly, it would disproportionately effect lower income earners as they would have little choice but to buy riskier products as they are cheaper. I think this practical problem undermines Milton’s rationale of ‘free choice’ because for many persons the choice would not be free in the true sense of the word as their choices would be drastically constrained by virtue of their incomes.

      Society no longer accepts people going to work in the dangerous workplaces that existed during the Industrial Revolution. Yet if we did allow unsafe workplaces, people would undoubtedly work in them. However, this does not mean that people are making a ‘free choice’ as the people who would work in unsafe workplaces are the economically marginalised. In fact, we still see this occur in the developing world (take the 2012 factory fire tragedy in Bangladesh for example).

      Therefore, I believe policies around around areas such as workplace safety and consumer protection ought to balance the principle of respecting freedom of choice with the protection of those who don’t have the means to protect themselves. A good way to balance these competing aims is to ask whether the choice is truly free or made under duress. When a choice isn’t truly free (e.g. an employer threatening to fire an employee unless he works on unsafe scaffolding) then society should not tolerate the practice involved. Of course this isn’t an easy ‘test’ to apply and there are obviously grey areas. However, I believe it is a sound view in principle which adequately responds to Milton’s challenge to Michael that he was not debating on principle.

      Thanks for the thought-provoking discussion Hugh and Ari!

      • James Wilcox

        Firstly, Milton Freidman is actually stating that the consumer is aware of, to a large extent, how much risk they are taking on when making a purchase. That is the part of the video where he says that you know a Pinto is more risky than a Mack truck. The consumer may not have precise information, but it is good enough. This defect only increased the risk of this car by a tiny fraction, so really it was comparable to any other competitor’s car from the period.

        Secondly, freedom of choice means freedom of choice within one’s choice set. It is not extra-choice set freedom — the free market automatically constrains the choice set to the magnitude of that person’s contribution to the market and is a large source of incentives. Furthermore, an extra-choice set choice is not a free choice as it requires violating another person’s right to property in order to make that choice. That is, taking another’s property against their will.

        Once again, a large benefit of individual choice is that the preferences of an individual can be better satisfied as opposed to a collective choice. Saying that ‘society no longer accepts unsafe workplaces’ may be true, however there are individuals perfectly willing to work in ‘unsafe’ workplaces in exchange for ceterus paribus higher compensation. Making such a transaction wrong is no different to and no better than banning any other free exchange. It is just making those involved worse off and impinging upon their liberty. The Bangladeshi example conflates coercion with free choice, and this situation stems from Bangladesh’s extremely poor legal system.

        It is true that a ‘choice’ made with the threat of coercion is not a free choice, however, an employer threatening to fire an employee for not performing a task they wish them to is not coercion. That is simply the employee not accepting the pay/risk/safety/other characteristics trade off of a certain job, or the employer possibly not following their agreement with the employee. In any case, there is nothing wrong with either party ending an agreement to exchange labour for money and other benefits.

        I also fail to see how addictive substances can mean that someone no longer has free choice. Addicts are generally aware of the likely results of taking such a substance and generally plan ahead, taking the addiction into account. For example, heroin addicts decrease the quantity of heroin they consume if they learn that the future expected price of heroin has increased. One also knows that their decision making abilities will be altered while under the influence of certain substances.

        I realise that this article is more about the effect of the market on individual morality, but I fail to see how the market itself could be immoral. I actually think it is moral, because unlike any other economic system, nearly all transactions in a free market are voluntary. Trade only occurs when both parties expect to benefit. This means that, apart from maximising welfare, it does not violate an individual’s right to life, liberty or property.

        I would also add that, provided a t-shirt made in a sweat shop has been produced by voluntary labour, no ethical problem arises. Similarly, I fail to see how an individual who produces a counterfeit watch is being ‘exploited’. They chose to produce the watch…

        It is also interesting to note how Enron was punished by the market. Other firms which had superior corporate governance policies in place are still in business. Enron is not. The collapse of Enron is a good thing and is exactly what is supposed to happen, although their fraudulent behaviour was wrong.

        Great discussion!

        P.S. I’m not sure whether you guys (and others) realise this or not but that young guy in Milton Friedman’s video isn’t actually Michael Moore… it is just intended to refer to the Moore-like question.

        • Joey Moloney

          Hi James, I don’t disagree with your principles as a whole, I just sometimes wonder if things are a bit more nuanced in reality.

          For example, you say: “Saying that ‘society no longer accepts unsafe workplaces’ may be true, however there are individuals perfectly willing to work in ‘unsafe’ workplaces in exchange for ceterus paribus higher compensation. Making such a transaction illegal is no different to and no better than banning any other free exchange. It is just making those involved worse off and impinging upon their liberty.”

          Does this mean you would have no objections to new factories being built with asbestos, granted that any potential employee was aware this fact?

          Joey

          • James Wilcox

            Hey Joey—yes, I have no issues with that. Out of interest, why do you raise this issue in particular?

            Fantastic to see that you agree, at least to an extent, with the principles I have espoused in my comment!

          • Dave Sharpe

            Hey James, have you been hitting the quaaludes? (ref: Wolf of Wall st). No issue with unsafe work places in exchange for higher compensation! What has happened to the concept of duty of care, if not moral responsibility. I suppose you have no issue with paying people for organ donation either. On a less serious note, has anyone noticed that Hugh looks a little like Jordan Belfort (as portrayed by Leonardo D) ? Coincidence? Cheers Dave

          • James Wilcox

            Hi Dave, that may be true that the employer owed the employee a duty of care for risks that have not been consented to, however this is explicitly the case where the employee has assumed the risk. This is also a hypothetical situation, not one arising within an existing legal framework.

            I don’t see what is wrong with having a market for organ transplants. This is similar to the status quo except without a price ceiling of $0. The resulting situation would mean more organs being transplanted which is surely a good thing.

          • Dave Sharpe

            James, I guess it follows that you are wondering why we are bothering to have a Royal Commission into the Home Insulation debacle? Are you being argumentative and disputatious for the sake of it or do you actually believe what you’re espousing? Scarily, I suspect it may be the latter. Dave

          • Joey Moloney

            Yes, definitely. If the principle is ‘individual liberty should be maximized’, then of course I agree. But if it is ‘individual liberty should always be absolute’, then I feel it is unrealistic and even undesireable.
            The asbestos example is demonstrative because other factors outside the simple freedom of contract between consenting parties come into play.
            For example, an unskilled job in a factory in which the employee is going to be exposed to asbestos is likely to go to a under-privileged and under-educated young person – most likely a young male. Young males routinely underestimate risk (if they actually are capable of assessing the risk in the first place – i.e. can we assume every potential employee is capable of assessing the probability of exposure having an effect on their health? Here questions of what exactly is symmetric information come into play too), and therefore are highly likely to not demand adequate compensation from their employer. Implicit in that is also an assumption that it is actually possible to put a marginal dollar figure on the value of each marginal increase in the chance of contracting mesothelioma later in life. That would involve understanding the metrics to compute firstly the relationship between the level of exposure and the chance of contraction, and secondly the chance of survival given contraction, while putting financial values on every number along the way. It is different from one taking a job as, say, a crane driver and accepting the higher pay as compensation for the risks associated with the job – it is complicated by the known unknown of whether or not it will have an effect on your health in the long term, and the discounting effect on risk assessment of a possible event being so far in the future as to appear almost irrelevant. Also, one has to think about the fact that many people who used to be exposed to asbestos in Australia inadvertently exposed family members by bringing particles home – here a contract between two consenting individuals begins to develop negative externalities.
            I understand the rebuttal of ‘why should the government be telling people what is good for them?’. But that fails to take into account context. For example, the movement to ban asbestos was led by victims of its effects, not a power-drunk politician making arbitrary decisions under the assumption that it knows what is best for particular people. It was a process by which critical information was discovered by scientists and used by the government to enact legislation that is deemed warranted by the population.
            More broadly, I generally think that the principles put forward by the great philosophers of classical liberalism should be our starting point, that we only retreat from if absolutely necessary. To look at them at inflexible rules denies their true character. They are the products of deductive logic and abstractions of reality that begin to falter when put into concrete situations.

    • Hugh Oliver

      Great question Ari! Sorry for the delay!

      As a matter of principle, I think Friedman’s contention is difficult to contest. A consumer who is aware of a risk and proceeds to voluntarily accept that risk makes a free choice. The consequences of that decision are the result of the consumer’s voluntary assumption of the risk – as distinct from any unethical or
      immoral behaviour on the part of the seller.

      However, I think Friedman’s emphasis on individual autonomy and the ‘freedom to decide’ is less tenable in a practical dimension. I completely agree with Yannis’ analysis of the issues although I probably would attack the question at a higher level of generality. In my opinion, in order for a choice to be considered free it needs to be both informed and free from coercion.

      In the reality of the modern marketplace, the conditions seemingly necessary for such a decision i.e. symmetrical information, high levels of competition, etc are not necessarily present.

      To illustrate, Friedman’s preoccupation with the liberty of the consumer to decide how much to pay to ‘reduce the chance’ of his or her death implies that the consumer is aware of the risk in the first place. Whilst smoking is the obvious example of a case where the consumer is ‘free to decide,’ from what I have been led to believe, consumers lacked knowledge of the defects in the Ford Pinto case. In such an illustration, the consumer is clearly incapable of making an informed decision and therefore – at least according to my definition of free choice – lacks the ability to make a free decision.

      Secondly, high levels of competition are necessary to ensure that the consumer has access to a wide variety of alternative products. The freedom of a consumer to decide which product to choose in the case of imperfectly competitive oligopolies or monopolies is constrained. In such cases, consumers may have little choice but to accept products from a limited number of suppliers – which may be of a lower quality.

      Thirdly, I think there are a multiplicity of other variables in a contemporary marketplace that impinge on one’s ability to make a free decision. For example, consumers vary in their cognitive capacity. As we saw in the GFC, predatory lending practices resulted in often uneducated consumers taking on high-risk loans/mortgages that they could never repay. Moreover, in the context of goods such as smoking and alcohol, their addictive qualities detract from the ability of the consumer to make a ‘free decision.’ Should the consumer bear responsibility for a factor that may be beyond their control?

      On balance therefore, I would contend that a minimal interventionist free market ideology and the corresponding implications for consumer choice falls down at a practical level. By ascribing the onus to the consumer in terms of his or her free choice, I don’t think Friedman was necessarily according due weight to the realities of market environments.

    • Hugh Oliver

      Great question Ari! Sorry for the delay!

      As a matter of principle, I think Friedman’s contention is difficult to contest. A consumer who is aware of a risk and proceeds to voluntarily accept that risk makes a free choice. The consequences of that decision are the result of the consumer’s voluntary assumption of the risk – as distinct from any unethical or immoral behaviour on the part of the seller.

      However, I think Friedman’s emphasis on individual autonomy and the ‘freedom to decide’ is less tenable in a practical dimension. I completely agree with Yannis’ analysis of the issues although I probably would attack the question at a higher level of generality. In my opinion, in order for a choice to be considered free it needs to be both informed and free from coercion.

      In the reality of the modern marketplace, the conditions seemingly necessary for such a decision i.e. symmetrical information, high levels of competition, etc are not necessarily present.

      To illustrate, Friedman’s preoccupation with the liberty of the consumer to decide how much to pay to ‘reduce the chance’ of his or her death implies that the consumer is aware of the risk in the first place. Whilst smoking is the obvious example of a case where the consumer is ‘free to decide,’ from what I have been led to believe, consumers lacked knowledge of the defects in the Ford Pinto case. In such an illustration, the consumer is clearly incapable of making an informed decision and therefore – at least according to my definition of free choice – lacks the ability to make a free decision.

      Secondly, high levels of competition are necessary to ensure that the consumer has access to a wide variety of alternative products. The freedom of a consumer to decide which product to choose in the case of imperfectly competitive oligopolies or monopolies is constrained. In such cases, consumers may have little choice but to accept products from a limited number of suppliers – which may be of a lower quality.

      Thirdly, I think there are a multiplicity of other variables in a contemporary marketplace that impinge on one’s ability to make a free decision. For example, consumers vary in their cognitive capacity. As we saw in the GFC, predatory lending practices resulted in often uneducated consumers taking on high-risk loans/mortgages that they could never repay. Moreover, in the context of goods such as smoking and alcohol, their addictive qualities detract from the ability of the consumer to make a ‘free decision.’ Should the consumer bear responsibility for a factor that may be beyond their control?

      On balance therefore, I would contend that a minimal interventionist free market ideology and the corresponding implications for consumer choice falls down at a practical level. By ascribing the onus to the consumer in terms of his or her free choice, I don’t think Friedman was necessarily according due weight to the realities of market environments.

  • Ignatius Chan

    Well thought out article on a provocative and controversial topic. I believe that the free market is simply a mechanism or system by which goods and services or products are exchanged and is, if anything, amoral. As with any system of engagement or institution the moral code reflects the integrity or morality of the participants. Is the Catholic Church as an institution immoral because of the immoral behaviour of certain priests? Is our political system immoral because of the unbridled self serving narcissism of individual politicians or parties? The free market has generated enormous wealth and lifted vast numbers of people out of poverty, and overall improved the quality of lives. I contest that without free market economies the vast technological advances that have benefited the health and lives of billions of people would not have been possible. Look at the work of our great contemporary philanthropists such as Bill and Melinda Gates, who, through their Foundation are but one example of individuals who have benefited from free market and are using their wealth and influence to better the lives of underprivileged communities. Closer to home, most businesses in Australia are SMEs, whose toiling, hard working owners , leaders and employees generate products and services that generate wealth and taxes for the community’s benefit. Granted they are not good fodder for Hollywood producers looking for titillating stories of greed, avarice and excess or for mindless anti capitalism chants of the occupy “where-ever” groupies. We have certainly seen, and will no doubt continue to see, the best and the worst of human behaviour amplified through the lens of the free market. I believe the problems are not the market per se Hugh they are the lack of virtue of some of the participants

    • Hugh Oliver

      Thanks for your response Ignatius!

      I think you have rightfully touched on the idea that although free markets are morally indifferent, they do have the potential to amplify the best and worst of human behaviour. To the extent that markets intensify the negative characteristics of human behaviour, critics will use this as a basis to challenge their moral integrity. Yet, whether or not the market is flawed in this sense, or perceived as inferior to socialist ideals of resource allocation is sharply contrasted by reality; a reality in which market based economies have historically outperformed alternative economic systems. The advances spurred on by the market – whether technologically or in terms of living standards – cannot be downplayed as a result of the skewed morality of some of its participants!

    • Hugh Oliver

      Thanks for your response Ignatius!

      I think you have rightfully touched on the idea that although free markets are morally indifferent, they do have the potential to amplify the best and worst of human behaviour. To the extent that markets intensify the negative characteristics of human behaviour, critics will use this as a basis to challenge their moral integrity. Yet, whether or not the market is flawed in this sense, or perceived as inferior to socialist ideals of resource allocation is sharply contrasted by reality; a reality in which market based economies have historically outperformed alternative economic systems. The advances spurred on by the market – whether technologically or in terms of living standards – cannot be downplayed as a result of the skewed morality of some of its participants!

  • Dave Sharpe

    The key issue Hugh is not so much whether the free market undermines
    moral values but how we can protect consumers from those individuals who would
    seek to exercise immoral behavior through the free markets. This is not a new phenomenon and in my mind
    the argument is moot: individuals taking advantage of others has been in
    existence for as long as trade and exchange of goods and services has taken
    place between individuals. What never ceases to amaze is the extent to which people will go to work outside of the system
    of checks and balances usually put in place after a major scandal. Take what
    happened after Enron collapsed: has Sarbannes-Oxley legislation in the US
    prevented further corporate scandals? It simply moved the goal posts. Look at the
    hedge fund managers now being or recently prosecuted for insider trading in the
    US. It seems the immorality of people and their desire to extract unfair advantage or
    to exploit others for personal gain keeps the cheaters one step ahead of the
    regulators: thats the issue!. Competitive sport is not immoral because
    individuals like Lance Armstrong cheat; the challenge is to continually find
    new ways of detection: think like the cheat to be able to outsmart them and be
    one step ahead of them rather than vice versa. Ignatius, whilst I agree with
    much of what you have said, you ask if the Catholic Church is immoral
    because of the behaviour of certain rogue priests? After listening to George
    Pell’s deposition today at the royal commission into child sexual abuse I would
    say most definitely yes! A shocker! cheers Dave

    • Hugh Oliver

      Thanks for your response Dave!

      To clarify, I don’t disagree with what you have said! The challenge facing regulators is how to maintain pace with the rule breakers. I don’t think the answers to these questions can be found in a criticism of the free market per se, as this doesn’t get at the fundamental issue. As you have said, the core underlying issue is how we can address the fact that individuals seek to exploit other individuals through the lens of the free market for the sake of personal gain. Through the passage of time – and learning from past experience – we can certainly hope that the regulatory framework is further tightened and the parameters of market behaviour are more strictly circumscribed. But ultimately, it will be difficult – if not impossible – to entirely eradicate or completely control the negative behaviours and tendencies of some market participants – at least without unduly encroaching on the individual liberties of market participants.

    • Hugh Oliver

      Thanks for your response Dave!

      To clarify, I don’t disagree with what you have said! The challenge facing regulators is how to maintain pace with the rule breakers. I don’t think the answers to these questions can be found in a criticism of the free market per se, as this doesn’t get at the fundamental issue. As you have said, the core underlying issue is how we can address the fact that individuals seek to exploit other individuals through the lens of the free market for the sake of personal gain. Through the passage of time – and learning from past experience – we can certainly hope that the regulatory framework is further tightened and the parameters of market behaviour are more strictly circumscribed. But ultimately, it will be difficult – if not impossible – to entirely eradicate or completely control the negative behaviours and tendencies of some market participants – at least without unduly encroaching on the individual liberties of market participants.

  • monika

    This was a thoroughly engaging read. It’s one of those quintessential chicken and egg questions. Do socio-cultural norms shape the market or does the market shape socio-cultural norms?

    I agree with you that markets are not inherently bad, and it’s a constant feedback loop of evolution (or in some cases devolution) arising from the interface of the two.

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