American Spirit

Greed is good, isn't it?

Market economies are built atop the idea that people can be counted upon to act in their own self-interest. Rational self-interest provides the motive power of capitalism. I have a reasonable idea what’s good for me; you have a reasonable idea what’s good for you; we choose, of our own free will, to transact; transactions such as these, in aggregate, allocate society’s scarce resources in a more-or-less optimal way. That’s meant to be the clever thing about markets: they manipulate huge numbers of anonymous individuals into coordinating their activities in a socially useful way while relying on nothing more virtuous than plain old human selfishness. You don’t need a population of angels to have a functioning capitalism. You just need rational self-interest. In the view of many economists, it was the unlocking of this magic which transformed human society from one of constant struggle to survive into one of mass luxury and relative leisure.

Complicating matters just a little is the fact that rational self-interest doesn’t produce the desired outcome every time. Sometimes something can be good for me and good for the person with whom I’m freely and voluntarily transacting, but bad for other people who get no say in the matter. It’s in my interest to buy and operate a car, and it’s in the interest of others to sell me the car and the gas to run it, and so those transactions take place. But when I buy and operate the car, I create costs for others who get no say in the matter. My driving takes up scarce space on roadways, which slows down traffic and inconveniences others. The gas that the car burns spews pollutants into the air which are bad for the health of those living around me, and increases the concentration of carbon dioxide in the atmosphere which warms the planet and causes trouble for people and ecosystems all over the world.

Economists call these costs—created through voluntary transactions and imposed on innocent others—“externalities”. They’re everywhere: examples of me (or you) behaving rationally and managing in the process to harm others who would prefer not to be harmed. It is possible to get markets to yield that more-or-less optimal outcome despite these externalities. All you need to do is impose a Pigovian tax (named for the British economist Arthur Pigou) to get the people responsible for imposing unpleasantness on others to take those external costs into account: you tax gas, for instance, so that people use a bit less of it. I mean, that’s not all you need to do. Actually you need to do a lot more than that: get clever modelers to work out the social cost of the externalities, design an effective Pigovian tax structure, build political support for the plan (understanding that interest groups which benefit from the status quo will resist your proposed intervention), get it up and running, work tirelessly to maintain support for the program so unscrupulous politicians don’t manage to get it repealed by appealing to people’s selfishness, I mean rational self-interest, and so on.

It’s hard to do, which is why, despite economists having identified this important way in which markets can fail, there are still lots of extremely costly externalities out there. Which is to say, there are lots of people doing things which are good for them despite the fact that these actions impose large costs on others who would prefer not to bear them. 

Phrasing it like that, though, and thinking on it a bit, is it clear that the problem is necessarily one of efficiency, or of policy design, rather than of ethics? Me doing something because I want to even though it hurts you? We could call that a market failure, sure. But if we’re being honest, doesn’t it also seem like an ethical lapse on my part? Pollution is the classic example of a negative externality, the one the professors use when they’re first explaining the concept. In the days before environmental regulation, manufacturers generated all sorts of noxious byproducts and dumped them willy-nilly into the air, water and soil, imposing enormous health and quality-of-life costs on those living around them. I understand why economists analyze this behavior in terms of a failure of private economic actors to take into account social costs. The framework has its uses; it has helped illuminate various challenges associated with efforts to cost-effectively limit pollution, and has informed policy actions which have indeed made the world a better place to live: like the sulfur dioxide emissions trading program used to reduce acid rain in America.

But let’s be clear: polluting the environment around you because you can and because it’s better for your bottom line to do so is really messed up behavior. It’s wildly unethical. It’s wrong. In any normal human context, imposing grave harm on others—sickening and killing them—just to make a buck would be considered far outside the boundaries of acceptability. Sometimes I try to recall how I felt when I was first exposed to the concept of externalities ages ago as an undergrad, how it sat with me and why. As best I can remember I found it a pretty nifty way of thinking about the problem of pollution; back then I was enthralled by the perspective on the world offered by economics. It seemed so clear-cut, antiseptic, and rigorous. I don’t know why I didn’t pause to ask why we shouldn’t just expect executives not to behave like assholes. Maybe it had already become clear that those sorts of questions did not belong in an economics classroom. More probably I was too impressed by the idea and its presentation to think of it. In any case, an economics education is not a moral education. There’s no right and wrong, just more utility or less.

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Now, in fairness, not every economist sees questions of morality as being entirely unrelated to questions of efficiency. Maybe you’re familiar with the work of Deirdre McCloskey. In her “bourgeois trilogy”, she argues that there is a deep connection between markets and morality. Modern prosperity is possible, she argues, because western societies came to recognize that market activity is in fact virtuous. It is ennobling to participate in the market, in which the allocation of society’s resources is managed through the independent and voluntary interactions of autonomous individuals, and not imposed on unfree subjects by a tyrannical state. Markets reward hard work, honesty and prudence, she explains. Societies in which markets decide who thrives and who does not are likely to be ones in which the virtuous prosper and set an example for everyone else to follow. By becoming bourgeois, people became good.

I can see what she means. I know businesses and entrepreneurs which fit her description: run by people who work hard and honestly to provide quality goods and services to members of their community, and who are respected and lauded for it. But did the market make them that way, or does their participation in the market look like that because of who they were already: ethical, community-minded people? Certainly, McCloskey’s view of the effect of free enterprise on a society is at odds with the reality of how externalities operate in the real world. Would policy interventions like those needed to make our air breathable and water drinkable have been necessary in a world made moral by free markets? Would gunmakers freely sell equipment whose sole purpose is to kill large numbers of living things—including, demonstrably, innocent people—if engagement in the market had made their executives more ethically conscious? Would pharmaceutical companies push highly addictive and potentially deadly opioids on vulnerable patients or make a mint on the insulin people need to survive? Forget externalities. Would ethical capitalists put their workers at risk by demanding they stay on the job without appropriate safety protections during a pandemic? And so on, you get the idea. 

McCloskey might respond that we have the luxury of caring about such things, over and above the matter of day-to-day survival, because capitalism has made us rich enough that day-to-day survival is no longer a concern. But average incomes in the rich world have been high enough that day-to-day survival needn’t be a mass concern for a century, and it’s not clear to me that firms are any less in need of non-market pressure to get them to behave ethically than they were 50 or 100 years ago. 

Adam Smith had a slightly more realistic view of the interaction between ethics and markets, in my opinion. In his Theory of Moral Sentiments he noted that human impulses are not purely self-regarding. We also show concern for others, and are more or less sympathetic to the circumstances in which others find themselves based on how morally justified we perceive their actions to have been. These other-regarding sentiments moderate the operation of the market. Yes, it is individuals’ pursuit of their own self-interest which powers the invisible hand and generates the optimal outcome that we expect or hope that markets will generate. But this happy outcome occurs because people who behave unethically in markets will be punished by the loss of business, because people care about how others are treated and reject others who act unscrupulously. Markets don’t make people moral. Markets work because moral people will not stand for excessive and unmitigated greed.

That’s more right, certainly. But let’s state the obvious: people *will* stand for excessive and unmitigated greed. I mean, look around. 

I think we might want to consider the possibility that the relationship between morals and markets is both far more intimate and far more fraught than either of the above views allow. First, it seems to me that complex market activity is impossible in the absence of a robust, pro-social ethical foundation. Strangers can swap commodities in person without sharing much in the way of trust or common values. But any complex operation or supply chain will fall apart without a good amount of trust that all involved will adhere to basic, often informal and generally unstated, behavioral rules. If every contingency had to be specified in every contract and every contract had to be enforced by armed agents of the state, then the level of productivity and income we manage to achieve in the rich world simply wouldn’t be attainable. Ethics are essential.

Experience bears this out. Looking across the world, richer countries are generally those which manage to sustain high levels of social trust outside of kinship groups, and poorer countries are those which don’t. You could say that it’s something like state capacity which is doing the work, rather than social trust, but where does state capacity come from? It’s built on the same ethical foundation: tacit rules, held in common, which successfully constrain individuals from indulging in all the self-interested behavior they could get away with. (It’s very important to note that differences like these across countries aren’t intrinsic or unchanging or reflective of “better” or “worse” cultures; they’re just different social equilibria that history happened to throw up, and people fortunate enough to be born into high-trust societies should consider themselves damned lucky rather than superior in any way.)

But even as ethics are essential to the operation of a market economy, there is an inherent tension between the pro-social impulse written into those ethical rules and the motive of self-interest from which markets take their energy. The permission to “do what’s in your own interest” that markets provide has to come with the proviso “subject to the constraint that your actions ought not undermine the ethical consensus that allows markets to work well in the first place”. 

You can think of the ethical foundation of a market economy as a commons, like the clean air we need to breathe, and unethical behavior within the market as pollution, imposing harms on others with no say in the matter. Maybe this company and that company are doing what they believe is right, treating customers and employees well, honoring commitments even when it would pay to do otherwise. If others thrive by breaking the rules, by taking advantage of the fact that people expect ethical behavior, they reduce the value of the commons and undercut the ability of the good guys to survive. The system becomes increasingly vulnerable, until the market economy isn’t any longer about autonomous individuals interacting freely for the benefit of all. In the absence of the self-restraint encouraged by ethics, the economy is just power pitted against power. The only utility that matters is that of the people and the institutions with the strength to take what they can.

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To prevent that from happening, it is essential that one of society’s foundational principles be that ethics matter. It is critical that society communicate to its members that doing the right thing is good, and placing profit above all other concerns is bad. But that is not what American-style capitalism has come to mean, is it? Over the past half century, American society has determined to explicitly valorize the unchecked pursuit of profit. Through some process—one I can’t claim to understand, but there is interesting and suggestive recent writing on the subject—the notion of faith in markets that won out over others was one in which there are no valid constraints on business, except perhaps the law, and the law can always be changed. Greed, for lack of a better word, is good. Social norms which suggest that greed is not always good must therefore be bad.

It’s a weird creed. In America, we believe that rational self-interest is supposed to do the work in allocating resources in a market economy, not sentiment and conscience. Other-regarding norms threaten to stand between private-equity firms and beloved but inefficient businesses. They persuade people to sink money and talent into industries or places which really ought, for efficiency’s sake, to just go away. Firms which take their eyes off the ball and use scarce time and capital to pursue pro-social goals are misusing resources which could more effectively raise output if deployed in the bloodless pursuit of profit. Conscience is a source of economic friction. It’s for the best—even obligatory—to put it aside. That’s America, baby. 

And what has happened to the commons? This year, this pandemic ordeal will show us. It isn’t beyond salvaging; that’s clear enough. The health professionals putting themselves in harm’s way to treat the sick demonstrate that, as do the millions and millions of people patiently staying inside—despite the monotony and the stress and the economic hardship—so as not to become a vector for disease. 

But I don’t know. How strong is it really? At a time like this it is clear that many of us feel a sense of solidarity, and are eager to participate in a collective effort to protect each other and see the most vulnerable of us through this and then get the economy going again, stronger and fairer than before. Some of us feel, or hope at least, that solidarity found in this moment could help us finally address other looming collective threats, the most dangerous of which is climate change: still out there, still happening even as all of this unfolds.

It feels dicey, though, doesn’t it? Like maybe we just don’t have *it* anymore? We’re hoping some heroic individual effort by some company or billionaire will bail us out of this, pull a covid-19 treatment out of a hat and save us from this trial. Meanwhile, these decades have elevated into positions of authority people who internalized the new American ethic, that self-restraint in the name of the common good is for suckers. People who got where they are because of it; who see other-regarding norms as a weakness to be exploited. We will get through this, I believe, and it will be despite these people, not because of them. But if we can’t at that point be more skeptical of the state of American ethics and the way we relate to each other, I feel terribly certain we won’t get much farther.