Economic Theory

Free market capitalism and morality

It has become increasingly difficult to make a case for the morality of markets even though free market capitalism has been unequalled in reducing poverty and discrimination, and in creating opportunities for social and economic advancement. The left has hijacked the moral high ground because the proponents of free markets have been incapable of mounting a credible defence for the benefits that free markets provide at both individual and societal levels. The recent financial crisis and the various market-rigging scandals have compounded the commonly held view that market behaviour is inherently immoral and divisive, even if it produces desirable outcomes. Public opinion has become dominated by an anti-market narrative that has led into increasingly aggressive calls for markets to be subjected to strict supervision and regulation to ensure ‘moral behaviour’ by market participants. The idea that free market capitalism is a mechanism to advance social order and decent humane relationships is considered outlandish.

Faced with hostile anti-market polemic, many policy makers and commentators seem to think that the answer is to give capitalism a human face by attaching adjectives such as ‘caring’, ‘compassionate’, or ‘responsible’ to it. In reality, any attempts to modify the functioning of free markets through policy interventions and mould them into some ideal normative model invariably result in suboptimal outcomes compared to a market left to its own devices.

The root cause of the problem that free market capitalism faces is that modern society tries to assess the functioning of markets by attributes that are used to evaluate the morality of individual behaviour. In order to think about the morality of markets, or lack thereof, we need to consider morality as a two-dimensional construct. The first dimension of morality can be defined by the commonly held conception of ‘duty’. The second dimension is concerned with outcome-based morality, e.g. behaving in a way that produces the best outcomes, including economic outcomes. Clark and Lee define these two sides of morality as magnanimous morality and mundane morality respectively.

Magnanimous morality is present in behaviours that help others in ways that is intentional, doing so at the benefactor’s personal sacrifice, and providing help to identifiable beneficiaries.  Magnanimous morality was strongly present in Adam Smith’s writings as positive merit and he considered it an important part of human psyche: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.” [1] This type of morality is selfless and highly personal between the benefactor and the beneficiary. In contrast, mundane morality can be considered broadly as obeying the generally accepted rules or norms of conduct such as telling the truth, honouring one’s promises and contractual obligations, respecting the property rights of others, and refraining from intentionally harming others. Mundane morality is closely associated with Adam Smith’s concept of negative virtue or justice that hinders us from hurting our neighbour, his property, or reputation.

Magnanimous morality refers to behaviour that most people associate with true moral conduct. It is deeply rooted in the Judeo-Christian value system illustrated by the biblical story of a widow dropping a few coins in a collection box, and Jesus telling his disciples: “Verily I say to you, That this poor widow hath cast more in, than all they which have cast into the treasury; For all they did cast in of their abundance; but she of her want did cast in all that she had, even all her living.”[2] In the story, the widow acts intentionally at a great personal sacrifice without expecting anything in return for her actions.  Although magnanimous morality may represent the highest virtue, it has problems in the wider economic context because such selfless altruistic behaviour is by necessity limited to a small group of benefactors and beneficiaries.

As the benefactor is not expected to earn a return from his good deeds, and because the beneficiaries are supposed to be known to the benefactors, these acts of kindness can probably be found in small homogenous communities that tend share a similar ethnic or religious background or worldview. Indeed, it can be argued that since magnanimous morality may foster the emergence of tightly knit, even closed social groups, it can become an isolating and divisive force within wider society. Moreover, as the benefactor is not expected to earn a return from good deeds, the long-term sustainability of magnanimous charity is limited by the benefactors’ resource scarcity.

However, the concept of magnanimous morality has a strong hold on how we judge behaviour and it is incorrectly applied to judge the functioning of markets. Markets cannot operate under the conditions of magnanimous morality. They are mostly characterised by negative virtue or mundane morality.

An entrepreneur may make a significant impact in improving countless people’s lives globally, far beyond what would be possible through the practice of selfless charity. But as the benefit to the wider society is tied to the entrepreneur’s profit motive, his actions often do not warrant the same level of acceptance in the eyes of the society than selfless altruism. It is the profit motive, regardless of the positive market outcomes, that causes the critics to condemn market-mediated activity as selfish and immoral. Many critics point to a passage by Adam Smith that states that people are governed by self-interest: “Every man is, no doubt, by nature, first and principally recommended to his own care; and as he is fitter to take care of himself than any other person, it is fit and right that it should be so.”[3]  This narrow reading of Adam Smith ignores his insistence that although people are self-interested we nevertheless have to rely on the help of a vast network of people for every one of us to pursue our own well-being. Smith stated that in a civilized society we need the cooperation and assistance of others, and for each individual to direct his effort where:

“its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it […] By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”[4]

Adam Smith’s famous ‘invisible hand’ is a manifestation of mundane moral conduct. It does not involve the conditions of magnanimous morality of intention, personal sacrifice, or identifiable beneficiaries. However, as Clark and Lee point out, the invisible hand provides more help because people do not intend to provide it. Help is motivated and accompanied by personal gain and the benefits accrue to society as a whole, rather than to an easily identifiable group of people. Therefore, markets do not require behaviour that is seen as moral to produce positive outcomes. The market may be indifferent to morality, but since it aligns self-interested behavior with satisfying the needs of others, it delivers positive outcomes to the wider society as long as markets are governed by Smithian negative virtue of lawful conduct.

Free market capitalism is a mundane moral construct but any attempt to equate market conduct with a commonly held perception of morality can become tangled in normative discourse. A more productive approach to address the critics of free markets is to focus on the positive outcomes of free markets that have moral merit in them on both national and global scale. In terms of policy debate, free market advocates should seek to influence decision-makers to create an environment where markets can operate free from political and special interest group interference. The Economist (2010:16) highlighted attempts in European countries to maintain and promote social cohesion with greater government control over the economy and concluded “that many of the policies espoused in the name of social cohesion do not promote compassion over cruelty.  Rather, they encourage decline, entrench divisions, and thus threaten the harmony they pretend to nurture.” The mundane morality of the invisible hand creates an environment where each one of us is able to pursue our own self-interest through non-discriminatory impersonal exchanges governed by prices and free from normative interference. It is this mechanism that allows us to realize the morally virtuous outcomes of prosperity, reduced poverty and discrimination.

[1] Adam Smith, The Theory of Moral Sentiments, Part I, Section I, Chapter I, 1 [1759], (Cambridge Texts in the History of Philosophy, Knut Haakonssen, Ed., 2009).

[2] St. Mark 14:18-9, King James Version of The Bible, Standard Text Edition, Cambridge University Press.

[3] Adam Smith, The Theory of Moral Sentiments, [1759], (Cambridge Texts in the History of Philosophy, Knut Haakonssen, Ed., 2009).

[4] Adam Smith The Wealth of Nations [1776], Penguin Classics, 1999.

3 thoughts on “Free market capitalism and morality”

  1. Posted 21/05/2015 at 12:49 | Permalink

    How can you write an article about morality and free markets without mentioning Ayn Rand?

  2. Posted 21/05/2015 at 17:49 | Permalink

    Adam, There are many great thinkers, Ayn Rand, among them who could and ought to be covered when discussing markets and morality. Unfortunately in a very short blog post I had to make a decision and use Adam Smith as the basis of my argument.

  3. Posted 23/05/2015 at 21:10 | Permalink

    Since the government passed the income tax laws we have been in a depression,the markets have floundered. Individual taxation is legal in the constitution, just it has to be the same for rich and poor, Do you think it was coincidental that the great depression followed the income tax? Government has grown, 25% of all workers depend on taxes for their income. The private sector has shrunk. The dollar is worth-less and real unemployment is close to 30%. The US dollar stayed the same from 1775 until 1913 when the tax was enacted. The monster Roosevelt took us off of the gold standard. Wars all around the world could not be waged if real capitalism had survived because the government could not finance them. It is not capitalism my friend, capitalism works better than any system, it is the governments intervention income tax not money standard that destroyed America.

Comments are closed.