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Friday, March 14, 2008

Morality and Markets

Robert Skidelsky on the morality of the capitalist system:

The moral vulnerability of markets, by Robert Skidelsky, Project Syndicate: Today, there seems to be no coherent alternative to capitalism, yet anti-market feelings are alive and well, expressed for example in the moralistic backlash against globalization. Because no social system can survive for long without a moral basis, the issues posed by anti-globalization campaigners are urgent — all the more so in the midst of the current economic crisis.

It is hard to deny some moral value to the market. ... It is morally better to have our goods supplied by free labor than by slaves, and to choose our goods rather than have them chosen for us... The fact that the market system is more efficient at creating wealth and satisfying wants than any other system is an additional bonus.

Moral criticisms of the market focus on its tendency to favor a morally deficient character type, to privilege disagreeable motives, and to promote undesirable outcomes. Capitalism is also held to lack a principle of justice.

Consider character. It has often been claimed that capitalism rewards the qualities of self-restraint, hard-work, inventiveness, thrift, and prudence. On the other hand, it crowds out virtues that have no economic utility, like heroism, honor, generosity, and pity. ...

The problem is not just the moral inadequacy of the economic virtues, but their disappearance. Hard work and inventiveness are still rewarded, but self-restraint, thrift, and prudence surely started to vanish with the first credit card. ...

No doubt it is unfair to blame the market for bad moral choices. ... But the market system relies on a particular motive for action — Keynes called it “love of money” — which tends to undermine traditional moral teaching.

The paradox of capitalism is that it converts avarice, greed, and envy into virtues. We are told that capitalism discovers wants that people did not realize they had and thus moves humanity forward. But it is truer to say that the market economy is sustained by the stimulation of greed and envy through advertising. In a world of ubiquitous advertising, there is no natural limit to the hunger for goods and services.

The final moral issue is capitalism’s lack of a principle of justice. In a perfectly competitive market..., all the factors of production receive rewards equal to their marginal products, i.e. all are paid what they are worth. The full competition and information requirements ensure that all contracts are uncoerced (there is no monopoly power) and all expectations are fulfilled, i.e., people get what they want. Justice in distribution is supposedly secured by justice in exchange.

But... There is always some monopoly power, insiders have more information than outsiders, ignorance and uncertainty are pervasive, and expectations are frequently disappointed. Justice in exchange has to be supplied from outside the market.

Moreover, the endowments that people bring with them to the market include not just their own innate qualities, but their starting positions, which are radically unequal. That is why the liberal theory of justice demands at a minimum equality of opportunity... As a result, we rely on the state to provide social goods like education, housing, and health care.

Finally, the claim that everyone is — under ideal conditions — paid what they are worth is an economic, not a moral, valuation. It does not conform to our moral intuition that a CEO should not be paid 500 times the average wage of his workers, or to our belief that if someone’s market-clearing wage is too low to support life, he should not be allowed to starve to death. ...

While the market today has no serious challenger, it is morally vulnerable. It has become dangerously dependent on economic success, so that any large-scale economic failure will expose the shallowness of its moral claims. The solution is not to abolish markets, but to re-moralize wants. The simplest way of doing this is to restrict advertising. This would prune the role of greed and envy in the operation of markets, and create room for the flourishing of other motives.

Restrict advertising?

We won't ever create a system that everyone regards as fair since we all have different notions of what is equitable. What we can do is create a system, e.g. capitalism, investigate its properties thoroughly, and let society decide if that system needs correction, i.e. if it is moral and equitable according to widely agreed upon principles, or more radically if another system is needed (which doesn't happen easily). The economic system may match our ideas of fairness, and it may not. For me an important attribute is that everyone have an equal chance to compete and maximize within the system, to have an equal opportunity to claim a share of the goods and services society produces. Thus, based on this, to the extent that the economic environment favors one person or one group over another, I think we should step in and correct the inequity. If we can fix unequal opportunity ex-ante, i.e. make changes so that nobody is affected from that point on, that is best, but in some cases that may not be possible, at least not immediately, and some sort of ex-post redistribution to correct the outcome may be necessary, and this includes measures such as an estate tax.

But calling for equal opportunity and corrections where it doesn't exist doesn't do much to separate one economic system from another, equal opportunity as expressed in te previous paragraph could be satisfied within most economic systems so long as everyone begins on an equal footing. So beyond equal opportunity, I also like the idea that people should have a right to the value of what they produce - something that a purely competitive model promises, but this breaks down when market power or other market imperfections intervene in the marketplace. So, on this basis, I also advocate aggressive correction of market failures of all types. For example, if everyone has an equal opportunity to become a CEO (they don't), and it the market for CEOs is perfectly competitive (it isn't), then I wouldn't get too excited about their salaries. Taking part of it away would be unfair (though I understand that others could easily argue, as above, that a 500 to 1 difference is immoral according to their notions of equity). But if the salaries exist due to unfair advantages, then taking part of the salary away to give to others so that they too can have the opportunity to, perhaps, become a CEO someday, is a correction of an inequity that arises because of imperfections in the system. So I don't see these types of redistributive efforts as immoral in the sense of taking away something that the person has some moral right to keep.

For me, those two principles - equal opportunity and the ability to keep what you produce - take us a long way so long as we step in as necessary to make corrections when these principles are not satisfied, so I'll stop there [update: can I add freedom of choice?]. As to the character issues discussed in the article, those don't concern me too much (and I disagree with some of the assertions, e.g. that capitalism undermines thrift). What moral principles do you think an economic system ought to satisfy?

    Posted by on Friday, March 14, 2008 at 02:07 PM in Economics | Permalink  TrackBack (2)  Comments (32)

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