The fall of Communism two decades ago also seemed to be the triumph of markets. Since then, we’ve seen that was not the case. If anything, the world is confronting two global market failures: The rampant greed in the financial sector that almost collapsed the entire economic system, and the largest of all tragedies of the commons—the warming of earth’s atmosphere and oceans. There are many specific causes and solutions for these massive problems, but they also highlight more fundamental issues of human behaviour.
My colleague, Daniel Friedman, has written an erudite and brilliant book, Morals and Markets, which gets to the heart of the dilemmas we face. His definition of morals is this: “A shared understanding within a group of people, of how to live and work together. The understanding can be summarized in a code or a set of rules, some explicit and others implicit.” Friedman traces humankind’s moral capacities and moral systems to our evolutionary roots: Morals that increase evolutionary fitness are likely to be sustained and spread. In this telling, morals came long before markets, and markets evolved from specific norms of reciprocity, such as gift exchange. Other species practise reciprocity, but only humans engage in spot exchange, or barter, the essence of markets.
In this way of looking at markets, they are at “the edge of the moral sphere”. Who you are doesn’t matter, who you know doesn’t matter, only what you can offer in exchange. This is, of course, part of the power and the danger of markets—they seem to free us from restraints that operate on so much else of our behaviour. The ruthless derivatives trader may be a caring householder and upstanding citizen, but those are traits that may be left at the entry door of the marketplace.
If there is a tension between markets and morals, then one can argue that markets need to be regulated and restrained. This is the flavour of much of the post-crisis thinking about new financial regulation. The crowding out of morals by markets is destructive, and must be stopped. However, the conflict is not necessarily that stark. Markets themselves work best when there are sets of rules. In financial markets, rules on transparency of trading and disclosure of certain kinds of actions or knowledge are incorporated into market institutions. These not only promote fairness (a moral value), they also increase efficiency (a much less morally charged concept). The US stock market works quite well because it has these rules (developed through experience). Several kinds of derivatives markets lacked these rules, and were major contributors to the financial crisis.
So rules for how markets operate, and rules for the operation of firms whose shares may be traded as assets on such markets, can also be part of the broader moral system, just as much as social norms or laws that embody collective values. Problems such as financial instability and global warming can be viewed as challenges for the design of market institutions, improvements in this aspect of the moral system, rather than as an opposition of markets and morals. Markets operate on a foundation of morals (including collective rules). Indeed, Friedman gives examples of new markets institutions being used to alleviate tragic destructions of common resources, from certain species of fish to clean air.
There is yet another layer in the story. Moral codes for groups are built on individual human capacities, including cognition, communication, memory and emotions such as empathy and anger. The same evolution that gave us abilities for creating sophisticated social codes also made us curious, creative and playful. Human motives extend beyond material well-being and direct evolutionary fitness. People do worse at some tasks when they are given explicit financial incentives for performance than when they are rewarded less tangibly.
Carrots and sticks work relatively well for routine tasks, though even in those cases, making tasks varied and part of a larger purpose leads to better performance. But for creative activities, external rewards can be counterproductive, undermining intrinsic motivation. Of course, all of this presumes that the individuals are not struggling for basic biological needs. But it means that once those needs are no longer salient, human motivation may be conducive to newer moral codes that are more light-handed than those of old. It also means that relying too heavily on market-style incentives can make it harder to create and sustain such moral systems based on intrinsic motivations for creative problem-solving.
Ultimately, this line of thinking leads to a more optimistic view of the future. If basic human needs can be met universally (which is within reach), it becomes easier to sustain moral systems that align with the intrinsic human drives to create and innovate. Markets would remain vital, but innovation is the driver of improved well-being, making motives most important of all.
Nirvikar Singh is a professor of economics at the University of California, Santa Cruz. Your comments are welcome at firstname.lastname@example.org