Abstract
This chapter argues that markets actually have the ability to make us more virtuous. We show how market participants respond to trustworthy and untrustworthy trading partners and highlight the mechanisms through which moral development occurs in markets. Rather than being morally corrupting, markets are spaces of moral development because they offer us opportunities to discover others who have the moral qualities that we admire as well as because virtuous behavior is rewarded and immoral behavior is punished in markets.
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Notes
- 1.
Cowen (2017) appeared to support Schumpeter’s prediction that the vibrant entrepreneurial spirit which was so important to the (early) economic success of commercial societies like the United States would eventually dampen in these societies. Complacency, Cowen (Ibid.: 1) explained, has “sapped us of the pioneer spirit that made America the world’s most productive and innovative economy.” “Americans,” (Ibid.) he continued,
are in fact working much harder than before to postpone change, or to avoid it altogether, and that is true whether we’re talking about corporate competition, changing residences or jobs, or building things. In an age when it is easier than ever before to dig in [i.e. to desire more success or be ambitious], the psychological resistance to change has become progressively stronger.
- 2.
Arguments in favor of basic income guarantees are often motivated by this concern. For example, Munger (2015: 504) wrote that “[a]ll too often the ‘other side’—my side—loses this debate [on basic income guarantees] because we say that doing nothing is better than having a welfare state. Then we get told we must hate the poor.” See also Zwolinski (2011, 2015).
- 3.
However, this is not enough to explain the active hostility toward the market system. The active hostility toward the market system also requires a group of people “whose interest it is to work up and organize resentment, to nurse it, to voice it and to lead it” (Schumpeter [1942] 2010: 130).
- 4.
According to Pew Research Center (2011), more Americans have a positive reaction (50%) to the term “capitalism,” than a negative reaction (40%). But, while only 28% of the richest Americans (defined as those with a family income more than $75,000) have a negative reaction to the term “capitalism,” 47% of the poorest Americans (defined as those with a family income less than $30,000) have a similar negative reaction. Likewise, while a majority of people in 38 of the 44 countries examined believed that people are “better off in a free market economy,” people’s economic situation affects their attitude toward market economies (Pew Research Center 2014).
- 5.
Recall, for Adam Smith ([1759] 1982: 181–183), the poor man’s son’s self-deceit is the cradle of industry and the division of labor in commercial society, which ultimately leads to moral corruption.
- 6.
Alfred Marshall, the economist, agreed that people cannot help but to be altered (even a tiny bit) by their interactions in the marketplace. “[M]an’s character has been molded by his every-day work, and the material resources which he thereby procures, more than by any other influence unless it be that of his religious ideals; and the two great forming agencies of the world’s history have been the religious and the economic” (Marshall [1890] 1920: 1).
- 7.
- 8.
- 9.
Kohlberg (1958: 337) wrote that “[a] Zulu and a Frenchman might do very different things and yet their choices are equally moral in terms of our criteria, criteria of internality, universality, etc. For the sake of labelling we said our criteria were those of form as opposed to those of content.” And, Kohlberg and Mayer (1972: 479, italics in original) stated, “What is one person’s ‘integrity’ is another person’s ‘stubbornness.’”
- 10.
- 11.
Kohlberg et al. (1983) distinguished between two distinct moral types: individuals who make type A, heteronomous, moral judgments and individuals who make type B, autonomous, moral judgments. (Moral type analysis primarily concentrates on the content of moral reasoning.) Those who make type A moral judgments have no clear moral hierarchy; hold an instrumental view of people; perceive moral duty as instrumental or hypothetical; validate their judgments on external bases; display unilateral obedience; can only view the moral dilemma from one point of view; have a rigid view of rules and laws; and do not choose or justify choices in terms of fairness and justice. On the other hand, those who make type B moral judgments have a clear hierarchy of moral values; view people as ends in themselves and hold respect for autonomy and dignity; perceive moral duty as a moral obligation; do not rely on external authority or tradition; believe in cooperation among equals; are capable of understanding the other’s perspective; hold a flexible view of rules and laws; and generally choose solutions seen as just or fair (Logan et al. 1990: 75). Logan et al. (Ibid.) found that there were significant and persistent differences across cultures in the proportion of their populations that belonged to the two different moral types. They also found that as people moved to higher stages of moral development, they tended to move from heteronomous to autonomous moral types.
- 12.
For example, most of our market decisions are not choices between engaging in theft and allowing our spouses to die.
- 13.
See, for instance, Bloom (1977). Gibbs et al. (2007) evaluated Kohlberg’s cultural claims. Kohlberg (1981), for his part, proposed that individuals in some cultures (e.g. preliterate cultures) could not achieve the highest stages of moral development, and that the modal stages of moral development were likely to differ across cultures. But he did not believe directly in “deriving” a person’s stage of moral development based on their culture and believed that his stages of moral development were universal. Snarey (1985) contended that only the first four stages of Kohlberg’s theories are universal. According to Edwards (1986: 427), “while the available data cannot positively demonstrate invariant sequence, taken together they strongly suggest that development change is generally gradual and positive throughout the childhood and adolescent years, in a wide variety of cultural groups.” And, Snarey (1985: 226) concluded that,
the evidence suggests that Kohlberg’s interview [method] is reasonably culture fair when the content is creatively adapted and the subject is interviewed in his or her native language. The invariant sequence proposition was also found to be well-supported, because stage skipping and stage regressions were rare and always below the level that could be attributed to measurement error.
- 14.
Storr (2018) elaborated that our exposure to markets is likely to positively impact our morality. Our morality, he explained, is a product of our experiences and the people we know. Markets consistently place us in circumstances where we can benefit by serving others and come in contact with an expanding range of diverse others. As such, our moral sentiments are improved for the better in the market. Also, in Chap. 4, we argued that people in market societies are more likely to avoid trolley problems than people in nonmarket societies. This does not mean that they can avoid moral choices, just that the moral dilemmas that they encounter are not likely to be as dire as those in nonmarket societies.
- 15.
Other popularly used markets in experimental economics (e.g. double auctions) do not give the subjects such degree of freedom to choose with whom to trade. Also, we were able to eliminate any possibility of collusion by forcing our subjects to negotiate with those in the opposite market role.
- 16.
In this case, the round payment depended on the market role of the subject who sent the offer. If he was a seller, he earned the agreed trading price plus the cost while the buyer earned zero for that particular trade. If he was a buyer, he earned his budget plus the good (valued at E$10) while the seller earned zero for that particular trade.
- 17.
In experimental economics, trustworthiness is popularly viewed to be essentially the same as reciprocity (e.g. Croson and Buchan 1999; Fehr and Gächter 2000b; Ostrom and Walker 2003). Although some have challenged this view (e.g. Kramer 1999; Dufwenberg and Gneezy 2000; Cox 2004), we will follow the popular view and interchangeably use trustworthiness and reciprocity.
- 18.
- 19.
Following convention in the trust game literature, we converted the trustee’s transfer from tokens to percentage of the respective trustor’s tripled transfer (i.e. \( \frac{y}{3x}\ast 100 \)).
- 20.
See Appendix for statistical tests comparing trustor and trustee transfer sizes across relationship types.
- 21.
There are, however, limits to how much we can make of these results, especially with regards to strangers. We define two market participants as strangers if they never successfully negotiated a trade during the ten rounds of our experimental market. This definition prevents us from distinguishing between “true” strangers (those market participants who never sent offers to each other) and “unfortunate” strangers (where at least one of the participants sent an offer that was never accepted). As such, we cannot exclude the possibility that subjects can learn about each other by their negotiation behavior even if at the end of the day they never successfully transact.
- 22.
In the treatment with the new experimental market, the trustors transferred an average of 4.96 tokens to those trustees with whom they developed positive relationships and transferred an average of 4.38 tokens to strangers. The trustees transferred an average of 34.3% back to those trustors with whom they developed positive relationships and transferred an average of 32.5% to strangers. Both trustor and trustee transfers to positive relationships and strangers were statistically identical in this new experimental market. See Choi and Storr (2018) for more details.
- 23.
According to Zak (2008: xvii), “the very freedom to exchange in markets celebrates individual dignity and choice but also allows for transgressions.” As he (Ibid.) detailed,
Reliance on these values [such as honesty, trust, reliability, and fairness] … arise in the normal course of human interactions, without overt enforcement – lawyers, judges, or the police are present in a paucity of economic transactions. Indeed, we show that legal regulation may perversely lead to an increase in immoral behaviors by crowding out our innate sense of fair play.
To be sure, Zak was not endorsing the absence of legal enforcement; “cheating does occur,” he (2008: xvii) continued, “and the institutional rules of exchange and their enforcement are a critical reinforcement of [moral] values.” Our experiment suggests that the possibility of cheating makes learning about the trustworthiness of trading partners possible.
- 24.
Lachmann wrote quite extensively about the centrality of the plan. See, for instance, his book titled The Legacy of Max Weber (1971). See, also, Lachmann ([1940] 1977: 68–69).
- 25.
We often use the shorthand of talking about the entrepreneur as if he was a person with some prescribed role in the market. But, as Kirzner (1973: 15) often reminded us, entrepreneurship is in fact an element in every action.
- 26.
Note that adjustments of the sort discussed earlier are possible because the market is ultimately a discovery process.
- 27.
See Klein (1999) for an interesting discussion of Kirznerian discovery.
- 28.
Lavoie (1986) argued persuasively that much of the knowledge that is discovered and transmitted through the market is inarticulate knowledge. This is knowledge that we possess but cannot describe in any concrete and detailed way, such as the kind that most of us have regarding how to ride a bike or throw a curve ball in baseball.
- 29.
Rose (2018) has reasoned that culture is what stops any opportunism that cannot be constrained by rules. Our argument is that not only do markets have mechanisms for constraining opportunism but also that a culture that resists opportunism can emerge in markets.
- 30.
Leeson (2007) described how it was possible to trade peacefully with even bandits. In the absence of governments, it is cheaper for some economic agents to violently steal what they desire from weaker economic agents due to their sheer superior strength (such as was the case in pre-colonial west central Africa). In response, agents employed two mechanisms: (1) they used credit to alter the cost-benefit structures of bandits to encourage them to trade, not plunder; and (2) they demanded risk premiums from traveling traders to minimize their risk of transacting with them. But, note that the “market” that Leeson described here is not a thriving market.
- 31.
Recall, according to Smith ([1763] 1982: 538–539),
A dealer is afraid of losing his character, and is scrupulous in observing every engagement. When a person makes perhaps 20 contracts in a day, he cannot gain so much by endeavouring to impose on his neighbours, as the very appearance of a cheat would make him lose. Where people seldom deal with one another, we find that they are somewhat disposed to cheat, because they can gain more by a smart trick than they can lose by the injury which it does their character.
- 32.
Interestingly, this higher probability did not translate into a price premium; while sellers with better reputations were more likely to sell their goods compared to others, they did not benefit from a boost in the prices of the goods sold (Resnick and Zeckhauser 2002). This is contradicted by Houser and Wooders (2006), who found that the seller’s reputation had a statistically significant effect on the prices of goods sold through eBay.
- 33.
Gregg and Scott (2006: 95) demonstrated that “recent negative feedback posted in an on-line reputation system is useful in predicting future on-line auction fraud” and that “experienced on-line auction buyers are in a better position to use reputation system data to avoid potentially fraudulent auctions.”
- 34.
- 35.
See Lavoie (1990) for a discussion of hermeneutics and how it may be useful in helping us to understand markets.
- 36.
Like a conversation, a market can also be described in terms of the play of questions and answers as well as the “fusion of horizons” that can result from open discourse. Note that there is nothing inconsistent about talking about conversations or markets in these two ways—that is, by focusing on the process that leads to order or the nature of the order that results. This analogy captures both critical aspects of the market. It is a process (i.e. play) and an emergent order (i.e. the result of that play).
- 37.
Corporate, or business, fraud makes headline news. Business people who engage in fraud also face legal sanctions. For instance, Cendant’s decade-long accounting fraud was discovered in 1998 (Norris 2000). It was uncovered that Bernard Madoff, once a well-respected investor, operated a US$85 billion Ponzi scheme in 2008 (Aitken 2018). Former CEO of WorldCom, Bernard Ebbers, was convicted of securities fraud, conspiracy, and falsifying reports in 2005 (Ackman 2005). In late 2018, Carlos Ghosn, once celebrated as an automobile industry icon and who served as the CEO and chairman of Renault, Nissan, Mitsubishi Motors, and the Renault-Nissan-Mitsubishi Alliance, was arrested in Japan for allegedly falsifying his financial reports and misusing corporate funds (Ganley 2018; Greenfield 2018).
- 38.
Maintaining good relationships with customers is one way for a firm to demonstrate its integrity and dependability. Moreover, there are reasons to believe that good customer service can have a considerable effect on revenue. For instance, Chick-fil-A was the politest fast food chain according to QSR Magazine’s 2016 report on drive-thrus and made the most revenue of all fast food chains in 2015 (Taylor 2016). “While small pleasantries are easy to dismiss in the multi-billion dollar restaurant business, these little things have played a key role in setting Chick-fil-A apart from the competition” (Ibid.). The literature on customer relationship management further demonstrates how customer relations matter for business performance (e.g. Knox et al. 2002; Buttle 2004).
- 39.
In his memoir, for instance, Alan Greenspan recounted how his firm benefited by engaging in less gender discrimination than his competitors in the market. “Townsend-Greenspan,” he (2007: 74) explained,
was unusual for an economics firm in that the men worked for the women. … My hiring of women economists was not motivated by women’s liberation. It just made great business sense. I valued men and women equally, and found that because other employers did not, good women economists were less expensive than men. Hiring women did two things: it gave Townsend-Greenspan higher-quality work for the same money, and it marginally raised the market value of women.
- 40.
The experience of immigrant entrepreneurs in market societies is also telling in this regard. For instance, Tuttle (2015: 1) implied that “the fiscal contribution of foreign-born households increases the longer these households remain in the [United States].” Given that most of the immigrants to the United States are originally from nonmarket societies, the fact that these immigrants prospered and grew even more prosperous over time would seem to contradict this absolute cultural advantage of market societies argument. Similarly, Powell et al. (2017) argued that the institutional improvement that Israel observed in the 1990s could not have occurred to the same degree without the mass migration to Israel from the former Soviet Union (which increased Israel’s population by 20% in the 1990s).
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Storr, V.H., Choi, G.S. (2019). Markets Are Moral Training Grounds. In: Do Markets Corrupt Our Morals?. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-18416-2_6
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