The Virtues of Free Markets?


In our books, Dubner and I have argued that economic analysis (at least the way we try to do it) is neither moral nor immoral. We try to start with a question, obtain a set of facts, and then understand where those facts lead, trying not to be prejudiced one way or the other by moral considerations when coming to a conclusion.

Similarly, I’ve never really thought of markets as being moral or immoral.

Mark Zupan, the dean of the University of Rochester’s William E. Simon School of Business, thinks differently. In a recent piece, Zupan makes an argument that most people will find counterintuitive: he claims that free markets foster integrity and cooperation.  I’m not sure I fully agree with him, but the basic idea is sensible and straightforward. Markets lead to firms that survive for long periods of time. Reputations are important to firms, which leads them to behave in virtuous ways, not because they’re inherently moral, but because virtue is good for business in the long run.

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  1. Deron says:

    Let’s say there’s a bank that owns a couple of skyscrapers in San Francisco. Some of my analysts take a look at the properties and figure that the property is under water. What’s the virtuous thing to do? Keep paying on it, or give the bank to the creditors?

    From the stand point of the owners of a very big bank, the virtuous thing to do is to give the bank away. From the standpoint of the creditors the virtuous thing to do would be to continue making payments. From the standpoint of the broader society it might be that the decision that causes the least market disruption would be the right one.

    In any case, should the move be considered non-virtuous some funding to the arts or health sciences should make everyone feel better.

    I submit that a small business or a household would not be considered virtuous in any circumstance. Default is bad. Continuing to pay is just deserts for foolish decisions.

    On a micro-scale markets the power of reputation is a hangman’s whip, and “sorry” won’t suffice. On a very large scale reputation can be nodded to, apologies accepted, and donations heal all wounds.

    Markets are basically amoral, but they do exhibit certain human traits. Only the sick will ever get behind the murder of a shopkeeper because he’s the wrong ethnicity, but kill large groups of that ethnicity and whole societies will fall in line. Scale matters, when issues hit a certain scale morality becomes very flexible.

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  2. Joshua Northey says:

    Free markets may *generally* foster integrity and cooperation. I would need some pretty strong arguments to believe that is the case absent a lot of assumptions about agents having access to information and not simply relocating to greener pastures once the shit all over the place they are currently eating. In any case, you need to be very aware of and ready to intervene in the situations where the market does not cause good outcomes, because in some of those places the outcomes can be catastrophic or reach unacceptable local minima while equalizing.

    A free market policy that briefly passes through a minima of thermonuclear war on its way to some higher maxima of good fortune is not one we probably want to unleash.

    If we completely “freed” the economy 25% of the population would consume/borrow itself into indentured servitude/slavery within a few generations. Surely we don’t want that?

    Markets are a powerful amazing thing, but they cannot just “be free” they need constant monitoring, safeguards, and intervention.

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  3. Ed B says:

    There are two primary issues I see. For one, firms do not make decisions, individuals do. The individual incentive for a large bonus check does not necessarily line up with the firm’s incentive to keep a good reputation. So, as need in thousands of instances in the last several years, individual desire’s trump the “desires” of the firm. Firms can disappear, but deposited bonus checks don’t.

    Also, we seem to be stuck in the Adam Smith days when we think about the virtues of the market. We act like BP, Goldman Sachs, and GM are the baker, the cobbler, and the candle-stick maker from Smith’s example who live within blocks of each other and are mutual dependent for a healthy economy. This is obviously not true. Global firms are so far removed from being dependent on any individual customer or even any individual country that the incentives to be a good actor are simply not there anymore.

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  4. Kevin says:

    But a more basic force in the markets is creative destruction, which requires firms to regularly be shut down. If competition is very intense in a given industry, then there’s no reason to expect firms to live long enough to exhibit these virtues.

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  5. Gary says:

    Any transaction bears several costs besides the price of the item being traded. One of those costs is for “insurance” on the likelihood of being cheated. Both buyers and sellers bear this cost in terms of prolonged negotiations, enticements, skepticism, etc. Businesses that can optimize the trust of their customers that their products are well-made, reliable, and perform as advertised will reduce the cost of that insurance. Trustworthiness is a moral quality so free-markets that provide information about it (through word-of-mouth, consumer reports, customer reviews, etc.) certainly are more moral than controlled markets where customers are kept in the dark (a case of lying by omission, as it were).

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  6. AaronS says:

    I used to think, like millions of Americans, that capitalism was on the side of good and truth…while communism was of the devil himself.

    I was wrong.

    First, to have integrity because you HAVE TO (in order to remain in business) is not a moral virtue at all. That is, if I am an honest dealer only because I know you won’t come back otherwise, or because I know I’ll go to jail, that is not really what we mean be “honesty,” is it?

    I’m sure that many, maybe even most, capitalists are honest because they are virtuous. But when you get to corporation-size, that personal virtue becomes a drop in a wider ocean of profit-maximization, harsh competition, etc.

    What capitalism does have over the other economic systems is a much better PR campaign. Why, you’d think God Himself invented it, what with all this talk of freedom, individual liberty, personal excellence, drive, motivation, hard-work, and the such.

    But then along comes socialism and communism, both built on the foundational premise that no one should get left behind, that those who do the work should not be overlooked. “Thou shalt not muzzle the ox that treads the corn,” the Bible says. Hmmmm, that seems to have a moral flavor.

    Very simply, TO ME, the morality of an economic system is not how high it can allow someone to go…but how it deals with those at the bottom. Raw capitalism (something we do no have in full force in America) lets the church and do-gooders take care of the poor. Raw capitalism is a machine that eats up men and children, then spits them out to get more.

    Just today I was reading that many companies avoid hiring people that have been out of work. They do not take into account that the economy wrecked the lives of millions. But that’s capitalism for you.

    Of course, in their IDEAL states, all of these economic philosophies work perfectly. But in the real world, I have to believe that it is SOCIALISM that combines the best of capitalism and the best of communism (by the way, the early Church practiced communism–read about it in the Book of Acts–the sold what they had and held all things in common).

    Communism sought to end the oppression of workers by capitalists. In Russia, Lenin put his own brand on communism by coupling what was supposed to have been an organic worker’s revolt with arms, violence, and organization. In America, we were able to take the wind out of the sails of rightfully angry workers by offering “concessions” such as unions, the minimum wage, overtime, age limits, benefits, and the such–in other words, a move in the direction of socialism.

    With our economic circumstances, we see that capitalism has the moral standing of a dog in heat. The financial players cared only about money. Not about the welfare of our nation. Not about the welfare of their workers (they give them benefits ONLY because if they didn’t, the workers could go elsewhere to get them). MONEY. PROFIT.

    Maybe Jesus was making a telling point when he said that it was easier for a camel to go through the eye of a needle than for a rich man to enter into the Kingdom of Heaven? Maybe He recognized that moral shortcuts that many of our most powerful and wealthy men have taken to be powerful and wealthy.

    I don’t know where the right balance is, but I know that it’s NOT raw capitalism nor the almost necessary totalitarian state for communist nations. Somewhere in the middle there is freedom, room for creativity, advancement, and profit, yet also a solid standard of living for the poor.

    While other nations use guns and force to keep the masses in their places, we use the more genial persuasion of the media. We must never forget that just beneath the surface of this great nation that we all deeply love, we have done dark deeds. We have enslaved others. We have stolen Indian nations, putting them on reservations. We have played just as dirty as anyone else…we’re just better at getting away with it.

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  7. thebok says:

    Seriously, free market? There is no such thing. Until you can show a society wherein private enterprise paid for, built, and maintained the infrastructure necessary to have a society, the words ‘free market’ have a zero basis in reality. That is just the beginning; never mind all the government policies that affect businesses. The government plays the key role in markets through its laws and policies. For example, pollution was routinely dumped into our air, land, and water until- and only until- the government was prodded to regulate. The government did not really want to affect its best buddy, business, but when our water began to catch fire, and we couldn’t breathe, and Love Canal came along, well, even government decided to correct the immorality.

    And we won’t even talk about sweatshops, child labor, discrimination, etc., etc…. Markets can be moral- thanks for the laugh.

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  8. Paul Clapham says:

    That article seems to be mainly concerned with the relationships between buyers and sellers (as is fairly normal for articles written by economists). It doesn’t deal with externalities (as is fairly normal for articles written by economists).

    Consider the News of the World. They produced a product and acted fairly with respect to the people who bought that product. This was all totally fair and trustworthy and everybody was happy with the situation. None of the buyers and the sellers of the News of the World were cheated, and there was a free market in newspapers so nobody was coerced into buying it or not buying it.

    So yeah. Everybody behaved in virtuous ways and business was great.

    But the people producing the News of the World were engaging in all kinds of bad conduct to do that. It appears that many people consider the actions which have recently been reported to be “immoral”. Not to mention that the police seem to consider them “illegal”. Can we then say that this free market in newspapers is immoral?

    I guess we can say what we like, but the article referred to here doesn’t have anything to say about that. Which is unfortunate, because that’s the interesting part of the question.

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