by Dwight R. Lee
There is a large gap between the performance of markets
and the public's approval of markets. Despite the clear superiority of
free markets over other economic arrangements at protecting liberty, promoting
social cooperation and creating general prosperity, they have always been
subject to pervasive doubts and, often, outright hostility. Of course, many
people are also skeptical about government. Yet when problems arise that can
even remotely be blamed on markets, the strong tendency is to
"correct" the "market failures" by substituting more government
control for market incentives. Recent evidence of this bias is healthcare
reform, which, instead of freeing up healthcare markets to correct the
distortions created by government subsidies and mandates, made the distortions
worse by expanding the subsidies and mandates.
Public choice theorists have explained the bias
favoring government expansion that does more harm than good by emphasizing
concentrated interests vs. diffused costs. They point out that politicians
often choose policies whose costs exceed their benefits if the costs are
diffused among tens of millions of "losers," and the benefits are
concentrated among a much smaller number of "gainers." The losers,
they point out, will have little or no role in the policy process, while the
gainers, with much more at stake per person, will have a huge role. Interests
are clearly important in explaining why socially harmful government policies
trump socially beneficial market solutions.
But that's not the whole story. Widely held moral
perceptions also favor politics over markets. Those perceptions reflect a
serious flaw in the political process and a failure to appreciate the moral
foundations and outcomes of markets.
Two Types of Morality
What most people think of as moral behavior can be
briefly described as satisfying three conditions: (1) helping others
intentionally, (2) helping them at a personal sacrifice, and (3) helping
identifiable people or groups. We all seem hard-wired to like this morality,
which I refer to as "magnanimous morality." Magnanimous morality is an
indispensible factor in living a meaningful life. But it is not the only type
of morality we rely upon. While magnanimous morality is important in many of
our economic activities (for example, practicing a certain measure of
generosity and kindness to those we deal with directly), it is not the moral
foundation of markets.
The moral foundation of markets is what I call
"mundane morality." Mundane morality requires no more than what we
would expect of any decent person and has, for most people, little of the emotional
appeal of magnanimous morality. Mundane morality can be described broadly as
obeying the generally accepted rules or norms of conduct, such as telling the
truth, honoring promises and contractual agreements, respecting the property
rights of others, and refraining from intentionally harming others except
through legitimate competition. As Adam Smith stated:
Mere justice is, upon most occasions, but a negative
virtue, and only hinders us from hurting our neighbour. The man who barely
abstains from violating either the person, or the estate, or the reputation of
his neighbours, has surely little positive merit.... We may often fulfil all
the rules of justice by sitting still and doing nothing.1
One can question Smith's characterization
of following the rules, or mundane morality, as having little positive merit.
There is a continuum between magnanimous morality and mundane morality: on
occasion, following the rules (mundane morality) satisfies some of the
conditions of magnanimous morality. Professional golfers, for example, are
known to call an infraction of the rules of golf against themselves even when
no one would have otherwise known. Such behavior is done intentionally, is
personally costly and is instinctively applauded as morally meritorious. But
whether or not Smith saw mundane morality as having positive merit, he did see
it as necessary and sufficient for people to coordinate their decisions through
markets with large numbers of others in ways that promote their general
interests, something that cannot be accomplished by magnanimous morality alone.
In his famous "invisible hand" statement, Smith concludes that people,
by pursuing their self-interest in the marketplace, unintentionally promote the
public interest more effectively than if that had been their intention.2
Ever since its publication, people have criticized the "invisible
hand" passage on both positive and normative grounds. The positive
criticism is that the "invisible hand" doesn't work as well as Adam
Smith claimed. This criticism has been moderated, however, by the overwhelming
and steadily accumulating evidence that markets are unsurpassed at fostering
freedom and promoting prosperity. But the evidence has done little to reduce,
and may have increased, the moral skepticism toward markets. Market behavior is
widely seen to be lacking in the magnanimous morality that people instinctively
find appealing, and Smith's "invisible hand" justification for
markets supports that view—people do more to help others unintentionally in
markets by seeking only their personal gain, and benefits go
to the general public, that is, to no one in particular. Many
people see this justification as immoral or, at least, amoral. Think, for
example, of how most people would react if told that Bill Gates, Steven Jobs,
or Henry Ford did more for humanity than Mother Teresa ever did. It's factually
correct. By bringing down the cost of computers and software (Gates and Jobs)
and by putting swift personal transportation within the reach of middle-income
and even lower-income families (Ford), they made life easier for hundreds of
millions of people and probably took, as their reward, well below ten percent
of the value they created. Mother Teresa, though a noble human being, did far
less good because she helped far fewer people. Yet make that claim and you will
hear howls of protest. What matters to most people in judging morality is
intentions, not results.
The Perception of Political Morality
The widely perceived moral deficiency of market
behavior contrasts sharply with the dominant view of political behavior.
Because individual choices are far less decisive for voters than for consumers,
people have much less motivation to evaluate the political outcomes than the
market outcomes of their decisions. One result is that people are more
influenced by political rhetoric than by market rhetoric. And when politicians,
and organized interests, are seeking support for particular policies, the
rhetoric almost always emphasizes magnanimous morality.3
Politicians and rent seekers routinely talk about how
policies they favor are intended to help identifiable and deserving groups,
such as the poor, the elderly, the sick, the unemployed, the family farmers,
the children, or those with jobs threatened by foreigners. When costs are
acknowledged, they are commonly discussed in terms of the virtue of caring for
others. Voters are referred to as members of a family who have obligations to
each other, with our moral worth being determined by how well we treat the least
fortunate among us. Of course, many people see those who profit by helping
others as people who are simply profiting at the expense of
others. Think, for example, of the person who profits by shipping plywood to
people in Florida after a hurricane. He helps people in Florida. But many
people see him as someone who benefits by hurting people in Florida. So
policies restricting markets are commonly supported by political rhetoric
demonizing those who, for example, are receiving "excessive" pay, making
"excessively" large profits, charging high prices and interest rates
in poor neighborhoods, outsourcing American jobs to foreign countries and not
paying their workers a "living wage."
Magnanimous Morality on the Cheap
The ability of political rhetoric to bias moral
perceptions in favor of politics over markets is reinforced by the fact that
politics offers people an opportunity to convince themselves that they are
being magnanimously moral at almost no personal cost. Consider the November
2010 vote on Proposition 23 in California. This proposition would have
suspended the state law requiring that greenhouse gas emissions be reduced to
1990 levels by 2020 until the state's unemployment rate dropped to 5.5 percent
or less for four consecutive quarters. The vast majority of California voters
would have personally benefited had this proposition passed. Any change in
global temperatures from suspending the state's efforts to achieve its
greenhouse emissions goal would have been miniscule. And the suspension would
have created noticeable gains for California residents in the form of lower
energy prices and reduced state taxes and spending. Against these personal
gains were morality-based arguments that a vote against the proposition was a
vote for the environment and green jobs and against polluting oil companies and
their profits. And "morality" seemingly prevailed over self-interest
since Proposition 23 lost 61.6 to 38.4 percent.
I use the word "seemingly" because of the
arithmetic of voting, which explains the low cost of voting against personal
interest and the power of the rhetoric of morality in political discourse. In
virtually any state or federal election, the probability that a voter's choice
will determine the outcome of the election is effectively zero. Even if an
election is expected to be close, the probability that the outcome will be
decided by one vote will almost surely be less than 1 in 50,000.4 Using this unrealistically large probability, it
cost the typical California voter effectively nothing to vote against
Proposition 23. For example, if she is $500 worse off because it failed,
the expected personal cost of voting against the proposition
is only 1 cent ($500 × 1/50,000)—i.e., $500 times the probability that the
policy would have failed only because she voted for it.
This tiny cost would hardly have given pause to a
voter who had been convinced that voting against Proposition 23 was the morally
right thing to do. More generally, no matter how much it will cost a voter if a
government program or proposition passes (fails), voting for (against) it cost
her almost nothing. So if she has been convinced that voting for it is the
morally right thing to do, voting for it is a cheap way to achieve a sense of
moral superiority. As Bryan Caplan points out, "inefficient policies like
tariffs or the minimum wage might win because expressing support for them makes
people feel good about themselves" and "the private cost vanishes due
to voters' low probability of decisiveness.".5
Protecting Moral Self-Esteem through Ignorance
The ability to achieve a sense of magnanimous morality
by voting at extremely low cost is a bargain that can, and does, create a
strong emotional bias in favor of political over market approaches to solving
problems. Being able to take advantage of this bargain, however, depends on
voters believing that casting a vote for noble objectives really is an act of
magnanimous morality. And this belief depends on two supporting beliefs: first,
that casting a vote in favor of expanding government is a significant personal
sacrifice; and second, that the expansion really helps those it is intended to
help. Evidence that the first belief is widespread can be seen in the
difficulty of convincing people that voting for expensive government programs
costs effectively nothing because the individual's vote is completely impotent
at affecting election outcomes. Outside the classroom, my attempts at this have
been met with moral indignation far more often than with calm reflection, and
I'm not sure I have had much more success in the classroom.
Also, expect most people to be resistant, and often
hostile, to attempts by economists to convince them that a host of government
policies do more harm than good by regaling them with economic concepts such as
opportunity cost, comparative advantage, and marginalism. Given the incentives
inherent in voting, there is far more emotional uplift and self-satisfaction in
accepting the claims of magnanimous morality that politicians and interest
groups make about the programs they favor. The lack of interest that voters
have in knowing if the government programs they vote for actually accomplish
their noble objectives is reinforced by the very high cost of determining the
effect of those programs—and of doing anything about it if they find out that
the effect is the opposite of what they were told.
The big exception to this "vote and forget"
approach is the organized groups that have a direct and concentrated interest
in the effect of the programs they supported with their rent-seeking and magnanimous-morality
rhetoric. These groups have the connections and influence with politicians
necessary to sway how legislation is written before it is enacted and
implemented afterward. In other words, as opposed to the average citizen's
vote, the "voting," i.e., lobbying, of organized groups continues
after the election and has significant influence on political outcomes. So it
should come as no surprise that the moral objectives for which voters casually
assumed they were voting often end up as little more than smoke screens behind
which politically influential groups can promote their private advantages at
public expense.
Neither Moral nor Cheap
The rhetoric dominating the public statements of
politicians and their special-interest supplicants is successful at convincing
people that magnanimous morality requires substituting political action for
market incentives, even though the former generates outcomes that are less
efficient and moral than does the latter. The reality is that political
behavior is as motivated by self-interest as market behavior is. Voters receive
a low-cost sense of moral virtue by voting for noble-sounding policies;
organized interest groups secure protections and privileges at the expense of
the public; and incumbent politicians secure the favor of voting blocks.
Furthermore, this political self-interest is not disciplined as productively as
is the self-interest pursued in the marketplace. Spending and investing your
own money, subject to the discipline imposed by market prices, is more
effective at motivating people to actually serve the interest of others than is
casting votes in the ballot box and lobbying for political favors. The market
process has a fundamental morality that is, if one looks beyond the moral
pretense in political rhetoric, conspicuously absent in the political process.
Still, as long as there are people who cannot resist
the appeal of morality on the cheap, the political process will continue to
serve up cheap morality. And the result will continue to be neither moral nor
cheap.
Footnotes
1. Smith, A. ([1759] 1982) The Theory of Moral Sentiments (Indianapolis: Liberty Fund, Inc.). P. 82.
Online Part II, Section II.
Par. 9, at http://econlib.org/library/Smith/smMS2.html#II.II.9.
2. Smith, A. ([1776] 1981) An Inquiry into
the Nature and Causes of the Wealth of Nations (Indianapolis: Liberty
Fund, Inc.). P. 456. Online at Book IV, paragraph
IV.2.9 at http://www.econlib.org/library/Smith/smWN13.html#IV.2.9.
3. Efforts are also made to present business and
their products in moral ways with claims about their environmental concerns and
mention of their charitable contributions to worthy causes. But businesses know
that if consumers find no personal advantage in their products, bankruptcy will
soon follow, no matter how strong their reputation for magnanimous morality.
4. The probability that a vote will determine if a
policy is enacted is even lower when voting for a politician who promises to
support the policy, rather than directly on the policy itself.
5. Caplan, Bryan, The Myth of the Rational
Voter (Princeton: Princeton University Press, 2007. P. 138.
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