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. Binky the Bear says:

    Isn’t that notion the same one Alan Greenspan used to help deregulate the financial markets into a mafia-like free for all of Griftopia?

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  2. Jonathan says:

    Another great source of insights on this topic is the recent work of Deirdre McCloskey. She has published two hefty volumes (Bourgeois Virtues and Bourgeois Dignity) with more in the planning stages.

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  3. MinnItMan says:

    Thanks for the reference to the Monty Hall problem – I’d never heard of it. As a sidenote, I MISread it before my first coffee as the Monty Python problem, “What is your quest …, etc.” Made me think of Plato’s “Timaeus,” which if I recall correctly, implies that thought and experience essentially compound error and inaccuracy ad infinitum, although occasionally, you can learn something, if you don’t mistake Monty Hall for Monty Python. (Thanks to google for automatically searching after a block control-C).

    Two related thoughts though, to the actual post here:

    1) I think it was the pilot of Mad Men where Don Draper is trying to figure out an ad campaign for a cigarette company in light of the impending Surgeon General’s report, which among other things, will undercut the current campaign where medical doctors actually recommend the company’s cigarettes. His insight is that “other company’s cigarettes give you cancer. Ours are ‘Toasted.”

    2) I’m a lawyer, not an economist, although I did get a fellowship for a summer program in economics while in law school. Anyway, during a five or six year period, I was solicited for Amway and a few other MLM “business opportunities” at least a half dozen times. I’m not sure there is a company out there that has a worse reputation than Amway, and I’m not sure there is a worse business model than MLM, at least for solicitees. And I’m not sure there is a group of people who talk up morality more, yet are fundamentally committed to falsity, greed and ripoffs in plain sight. (I certainly agree with previous posters about the blue chip bad actors, btw). My question used to be how does this company (and its methods) exist? But more apropos of this thread is how have they have continued to exist for so long?

    A final comment about the mortgage business, particularly say 2001 to late 2007. I was in a position to clearly observe that making bad loans with a high likelihood of default was far more profitable than making good loans that wouldn’t default. It was [is] universally understood that any monkey could do the latter, but it took real ability to do the former. It was really as if they were two different businesses. Part of what I did involved surveying originators for the relative make-up of their pipelines, conforming to non-conforming (aka subprime). People would more gladly tell me about their porn-viewing habits than give me remotely accurate information about the relative volumes. The best answer I ever got was: “Oh, we concentrate on A paper (conforming), but very occassionally, we’ll do b-c-d paper.”

    It turned out that this answer entirely depends on what the meaning of “very occasionally” is.

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  4. Amos Newcombe says:

    This is an amusing point of view for me, living as I do in an economy that was recently hammered by widespread fraud generated by unregulated free-market capitalism. And not for the first time. This is an old story for capitalist apologists, and it’s just as bogus now as it always was.

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  5. bdbd says:

    In the long run, we’re all gone to heaven.

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  6. TheSpaceBetween says:

    This is simple…but extremely profound. Ask Ayn Rand, ha. Need a real life example? Specifically Ebay as an example. It is the best example of capitalism and free markets today. EVERYTHING is about reputation. How may times are you begged to rate a company positive, or beg you to contact them if not satisfied.

    Another profound statement I’ve come to understand as true: free markets don’t crash. I’d like to see a politician start chanting that economic life lesson.

    Trouble with free economy, is certain people loose control and cannot skip off the spoils of regulation.


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  7. Adam Acosta says:

    This paper is itself an indictment of the state of economic analysis. It derives a conclusion about the real world by generalizing from a game theoretical abstraction. I’m a big believer in math and use it myself in my work, but here we have a question with an empirical answer that can be studied empirically. How many of our largest and most successful firms actually display integrity? I challenge a social researcher to design a way to study this scientifically rather than trying to derive an answer from abstract first principles, because there has to be a way.

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