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Ethics and the free market

by Simon Longstaff

We live in a time when economists have been characterised as both the heroes and villains of modern society. Some people treat them as if they were a priestly caste blessed with the capacity to shape our destinies. Others treat them as confused ideologues who take their ability to sit on both sides of the fence, simultaneously, to be a virtue.

My own view is that economists have never recovered from the enchantment generated by the unsullied and abstract idea of the perfect market. It is easy to see how such an appealing idea might have bewitched so many; for it offers an ideal that has the incredible distinction of promising both universal happiness and perfect virtue. I will make my point by describing some of the key features of the perfect market.

In a perfect market:

• Every person has both the capacity and the opportunity to make an informed choice
• People do not take advantage of those who are relatively powerless
• People do not purchase things that they neither need nor value
• People engage in neither misleading nor deceptive conduct
• The right goods and services go to the right people at the right price

Who could fail to be inspired by such an ideal? The trouble is that it is rarely, if ever, realised except in the minds of economists and dreamers. One explanation for this failure of reality is that human nature falls somewhat short of the minimum standard assumed by the likes of Adam Smith.

We should never forget that Smith was Professor of Moral Philosophy at the University of Glasgow. While it is true that he believed that self-interest would power the operation of the 'invisible hand' of the market, it is less clear that he was indifferent to issues of character. Instead, he clearly distinguished between 'self-interest' and 'selfishness' when warning against some of the excesses that the merchant class was capable of entertaining. Furthermore, he was quite clear, in his own mind, that the claims of the market fell well short of being universal in their application. Nor did he believe that the market would never be prone to failure.

I have emphasised the word 'free' because some people wrongly believe that the idea of a free market is the same as the principle of laissez faire. The latter concept is something altogether different in which individual actors are free to do as they please – effectively unbounded except by those who meet them with equal or greater force. As such, there are no rules beyond those that the strong agree amongst themselves and impose on others.

As suggested above, this can be distinguished from the idea of the 'free market' which is regulated by an internal set of ethical principles that are designed to ensure that the market performs its proper function; namely, to increase the stock of common good.

This last point bears thinking about when made in the context of our incredible shrinking world. Globalisation is characterised in terms of a planetary market without borders. This is certainly the world in which a number of trans-national corporations exist. We tend to focus on the economic 'opportunities' and 'rights' attached to the phenomenon of globalisation. Yet, there are equal and balancing 'challenges' and 'responsibilities'. As markets go global so the obligation to increase the stock of common good extends to all who participate in that market. This is an obligation owed as much to the person in the meanest condition as to the mightiest.

This is not to say that every individual or society has to be treated equally or identically. However, there are good reasons (based on both a sense of prudence and a sense of justice) for ensuring that the process of globalisation improves the basic conditions of life experienced by the least advantaged person covered by the market.

The not-so-perfect world in which we live

Properly understood, the idea of the free market as the foundation for an equitable trading system would seem to be quite compelling. So what has gone wrong? Some are tempted to attribute blame to the fact that human nature falls somewhat short of the ideal that the abstract system would seem to demand as a basic minimum. It's not that markets only work in a world inhabited by angels. It's just that they need a basic level of human decency – something that has been absent from some people in all societies at some time.

While it is true that human nature may fall short of what the free market requires, I do not think that this is where the theory fails. Instead, I believe that the foundation of classical economics is weakened by an underestimate of the need for some sense of fellow-feeling amongst citizens who (amongst other things) happen to be producers, traders and consumers.

That is, I think that the view of homoeconomicus offers us a narrow and inadequate account of what makes us tick as people! There are many problems with this one dimensional account but perhaps the most critical is its inability to offer a convincing account of how we might build an indispensable element in any efficient trading system – trust.

It could be argued that the development of a sense of trust is primarily driven by the self-interest of a number of parties who recognise their inter-dependence. For example, it has long been known that high-trust environments are far more efficient as economies. After all the cost of sealing an agreement with a handshake is considerably cheaper than having to seal the bargain with a legal document.

Despite this, I do not find the argument that trust is built out of the necessity of making and keeping agreements to be wholly convincing. It is an an economic model that assumes promise keeping to be the rational response of actors who fear the possibility of a kind of 'mutually assured destruction' should the system collapse. Instead, I think that trust can only be built by people who care, at some deeper level, about the relationships that they have with other people. As noted above a sense of interdependence and mutual advantage is important. It's just that I doubt that it is enough to carry the burden of the whole story.

If I am correct in my analysis, then the following strategies will need to be pursued:

• Corruption will need to be eliminated from the public and private sectors of all trading nations. Corruption in all of its forms: bribery of officials, collusive tendering, crony capitalism and the like is a cancer that distorts the trading system. It allows the wrong products to go to the wrong people at the wrong price. It allows dangerous goods and services (some of which kill) to be provided to the public
• The international community will need to establish an international body with the power to investigate and prosecute examples of unconscionable conduct in which the powerful trample on the interests of those who are relatively weak
• The developed nations will need to ensure that the developing nations have a real opportunity to develop their people and infrastructure to a level sufficient to ensure that they can produce goods and services that will find a market. This will generate a related capacity to purchase a range of goods and services from others – and thus keep the great wheel of trade turning
• Nations and international institutions will need to establish mechanisms to support those suffering the hardships inevitably caused by economic reform. It is common for economies to experience 'friction' as they evolve. At such times, people experience periods (often prolonged periods) of unemployment and deprivation as they try to adjust to new conditions and develop new skills. Of course, economic terms like 'friction' hardly do justice to the terrible human reality that the term sanitises. It is difficult to imagine a peaceful and prosperous future in a world in which the gulf between rich and poor widens and becomes permanent and irreversible – even as we all grow more inter-dependent.

All of the above could be justified by an appeal to the pure ideal of the free market. However, I would prefer to place greater emphasis on the justice of extending such a system to everybody affected by the market.

On this last point, it is important to note that not everybody will want to participate in the global market. Some may decide that there are good enough reasons for remaining outside – perhaps in order to preserve some unique and positive aspect of their society. In relation to this we need to remember that it would be worse than contradictory to force people to participate in what is supposed to be a free market.

Bearing this in mind, my comments are directed only to those who choose, for whatever reason, to participate.

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