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RECKONING WITH MARKETS

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By James Halteman and Edd Noell

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The Montréal Review, October 2012

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"Reckoning with Markets: The Role of Moral Reflection in Economics" by James Halteman and Edd Noell (Oxford University Press, 2012)

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"A timely book. It gives a much needed moral perspective on the science that should give guidance in these turbulent times yet seems to fail miserably doing so. This book does not only provide an explanation for the failure of economics as a science but also shows how economics has in its history the answers to the current confusion. The challenge, so the authors argue persuasively, is to recover its roots as a moral science."

--Arjo Klamer, Professor in Cultural Economics, Erasmus School of History, Culture, and Communication

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When Adam Smith promoted a market economy in the mid 18th century it was in the context of a moral theory that depended upon personal interaction. In those days the interests of small business entrepreneurs were best served by quality products and service for their customers who rewarded them with repeat business. In many areas of the market today the same strategy applies, but technology, shipping speed and the globalization of markets are testing the interpersonal foundation of trust upon which markets must depend.

Changes in technology have made products more complex and capital-intensive production has increased the scale of operations and the size of the market. While this is common knowledge in areas like auto production and information technology, it is also true in the service sector of the economy. Sick folks rely on medical people for diagnosis and financial transactions have become complicated territory left to trained experts. Even auto repair is too complicated for the average citizen. Acquiring information on competing producers is easier with electronic media, but the quantity and quality of the information makes it hard to feel confident that its message is helpful. In most cases there is no relationship involved in the acquisition of information so the moral check envisioned by Smith is missing. All of this leads to an asymmetry of information in the market where the seller, who is often in another country, has more accurate information than the buyer about what is being sold. The desire for repeat business can substitute for trust if frequent purchases are made and good information on competitors in a market can be helpful, but in some markets neither of these may be relevant. The recent financial crisis is evidence of how markets can fail to the detriment of nearly everyone. Many buyers were clueless of the risk they were absorbing and sellers were not transparent in their dealings. There seemed to be no moral considerations involved and opportunism seemed to dominate as markets became expansive and impersonal. In general, modern markets are in danger of losing the trust, cooperation, and moral features that the early visionaries of market exchange considered essential.

This dilemma has opened a discussion of the nature of moral behavior and the prospects for embedding trust back into economic transactions. One approach attempts to show how the benefits of trust and trustworthiness make such behavior a rational response. A trusting social order has lower transactions costs and therefore higher production and growth then social groups that operate solely out of self-serving motives. Much research has confirmed this conclusion, but how can generalized trust be achieved when it is in the interest of any one member to fake cooperative action and then defect for greater personal gain. Do we simply recognize that best outcomes result when people cooperate, trust, and extend trust and so we act on that belief assuming that everyone will do the same? While this strategy may be useful its logic is less persuasive as the size and impersonal nature of markets increase and detection of opportunistic behavior becomes more difficult or impossible.

Recognizing this, many economists have been looking beyond the personal rational models of self-regard by looking more broadly at behavioral, biological and moral aspects of human motivation. By exploring the nature of trust and cooperative behavior a more comprehensive and convincing story can be told about how we behave in markets. The counter story begins by looking for alternatives to the standard approach. One possibility is that we are hardwired mentally for trust and cooperation and, as if by some moral compass, are guided to appropriate behavior that leads to social cohesion. Another option is that moral sensitivity and trust is learned in a social setting and reinforced by cultural norms. In both of these cases, people develop a taste for cooperation and trusting relationships and behave in that way, not because of the consequences but because it is the right thing to do.

According to David Rose and Robert Frank, trust that depends on positive consequences will be unstable as opportunists seek advantage, but trust that is duty based or heartfelt will result over time in consistent cooperative behavior irrespective of outcomes. A person is trustworthy because an internalized moral system will bring guilt if one submits to an opportunistic temptation. Upon the practice of cooperative moral behavior one becomes a genuinely trustworthy person, not out of rational calculation but from an internalized belief. Practicing that belief fosters more trust from others who then become morally duty bound as they practice being trustworthy. In this way a society can rise above the limits of an individualized self-seeking equilibrium and enjoy the benefits of cooperative behavior even though those benefits are not the driving force of their actions.

It might seem that eventually any population will be fully trusting as the added benefits help moral folks to gain in population share. In Frank's cooperation models that only happens if trusting people can discern who the opportunists are and avoid dealing with them. In the absence of such knowledge there will always be those who lack moral commitment and take advantage of those who extend trust, but as their numbers grow they unknowingly become increasingly engaged with others like themselves who take the perceived opportunistic route. In such cases their opportunistic interaction results in detrimental outcomes and so the opportunistic share of the population recedes until it is small enough to limit the chance of engaging again with their own types. For this reason, social orders are never fully trusting and cooperative, but the more successful a society is at instilling trust within its members and the more transparent trusting behavior becomes, the more harmonious and prosperous that society will be. The challenge ahead for the economy is to provide the framework of transparency so that trusting behavior can be practiced and, in the process, internalized as a moral virtue that dominates unbridled egoism. The individual utility machine does not produce the meaningful and satisfying life that is offered by the practice of moral virtue and trust in the marketplace and elsewhere.

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James Halteman is Professor of Business and Economics Emeritus at Wheaton College, IL, and a Visiting Professor of Economics at Goshen College.
Edd Noell is Professor of Economics and Business at Westmont College. His research and teaching center around the History of Economic Thought, Financial Markets, Emerging Market Economies, and Labor Market Regulation.

Helpful Sources:

•  Cook, K., M. Levi, and R, Harden, eds. (2009) Whom Can We Trust, New York: Russell Sage Foundation.

•  Frank, Robert H. (2008) The Status of Moral Emotions in Consequentialist Moral Reasoning, In Paul J. Zak, ed. Moral Markets: The Crucial Role of Values in the Economy. Princeton: Princeton University Press.

•  Moulin, Herv'e (1995) Coopoerative Economics, Princeton, NJ: Princeton University Press.

•  Rose, David C., (2011) The Moral Foundation of Economics Behavior, Oxford: Oxford University Press.

•  Ulrich, Peter (2008) Integrative Economic Ethics, Cambridge: Cambridge University Press.

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