The Moral Vulnerability of Markets

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. After all, we attach moral value to processes as well as outcomes, as in the phrase “the end does not justify the means.” 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 by the state. 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. (Heroism survives, in part, in the romanticized idea of the “heroic entrepreneur.”)

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. In the affluent West, everyone borrows to consume as much as possible. America and Britain are drowning in debt.

Adam Smith wrote that “consumption is the sole end and purpose of production.” But consumption is not an ethical aim. It is not positively good to have five cars rather than one. You need to consume in order to live, and to consume more than you strictly need in order to live well. This is the ethical justification for economic development. From the ethical point of view, consumption is a means to goodness, and the market system is the most efficient engine for lifting people out of poverty: it is doing so at a prodigious rate in China and India.

But this does not tell us at what point consumption tips us into a bad life. If people want more pornography or more drugs, the market allows them to consume these goods to the point of self-destruction. It oversupplies some goods that are morally harmful, and undersupplies goods that are morally beneficial. For quality of life, we have to rely on morals, not markets.

No doubt it is unfair to blame the market for bad moral choices. People can decide when to stop consuming or what they want to consume. 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, with full information, models of the market show that 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 no actually existing capitalist market system spontaneously generates justice in exchange. 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: the attempt – as far as is compatible with personal liberty – to eliminate all those differences in life chances arising from unequal starting points. 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. As our societies have become richer, we have come to believe that everyone is entitled to a minimum standard, whether in work or sickness or unemployment, which allows for a continuing level of comfort and flourishing. The market system does not guarantee this.

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.