Are Markets Moral?

Posted by on October 24, 2009 in Entrepreneurship, Featured, World

good vs evil

One of the most useful concepts that I learned while studying sociology was that of the “social construction of reality.”  Coined by Peter Berger and Thomas Luckmann in their 1965 book by the same title, here is the Wikipedia definition:

“The central concept of The Social Construction of Reality is that persons and groups interacting together in a social system form, over time, concepts or mental representations of each other’s actions, and that these concepts eventually become habituated into reciprocal roles played by the actors in relation to each other.”

In other words, “reality” is hardly objective.  It is made up of the sum of billions of everyday interactions and the subjective interpretations of those interactions – the lessons they teach us and the norms and roles they create and reinforce.

These lessons and norms evolve into stories – folklore and narratives that we use to educate and socialize our children.  They become the foundational assumptions onto which we graft our individual decisions and actions, as well as our broader economic, political, and social institutions.

What are the stories that we tell about capitalism and free markets?

For most of the last century, there have been two competing narratives about capitalism, sitting on opposite ends of a wide continuum.  They go something like this:

  • Greed is good.  Through the work of the “invisible hand, ” self-interest and the profit motive are transformed into social good and widespread economic prosperity.
  • Capitalism corrupts.  Relying solely on self-interest and greed, capitalism rewards immoral behavior.  It serves the inequitable distribution of wealth and power. It destroys the social fabric and promotes exceptional individualism.

These are our socially constructed narratives.  Their manifestations can be observed all around us, in the rhetoric of union leaders to the free-market proselytizing of Milton Friedman-inspired economists.

Even among socially-minded entrepreneurs do we hear speak of the central role of self-interest in making markets work.  The MBA Oath is a fantastic initiative started by MBA students at Harvard Business School.  Their aim is to bring true professionalism to the management profession through a code of ethics similar to that taken by doctors and lawyers.  Here is a piece of that oath.

“I will manage my enterprise in good faith, guarding against decisions and behavior that advance my own narrow ambitions but harm the enterprise and the people it serves. The pursuit of self-interest is the vital engine of a capitalist economy, but unbridled greed can be just as harmful. I will oppose corruption, unfair discrimination, and exploitation.” (Read the full oath here)

The story of self-interest as the “vital engine of a capitalist economy” dates back to Adam Smith and has firmly taken root in our society.  It could be easily added to the Declaration of Independence… “We hold these truths to be self-evident… that economic prosperity springs forth from self-interest.” But how well is this story substantiated by real life?  To what extent does the success of capitalism really rely primarily on greed and self-interest?

Social entrepreneurs know in their guts that the growth of free markets can not only serve but also arise from motives and values other than self-interest.  And what we know instinctively is being validated by the work of evolutionary biologists, economic sociologists, and behavioral, institutional, and neuro-economists.  We are increasingly finding evidence that socially responsible and mindful behavior makes capitalism feasible.  Only within a society that is undergirded by values like empathy, honesty, integrity, and trustworthiness can self-interest be effectively channeled into economic productivity.

In his introduction to the book “Moral Markets: The Critical Role of Values in the Economy,” Paul Zak, and neuro-economist from Claremont Graduate University, states:

“Markets are moral in two senses. Moral behavior is necessary for exchange in moderately regulated markets, for example, to reduce cheating without exorbitant transaction costs.  Market exchange itself can also lead to an understanding of fair exchange and in this way build social capital in non-market settings. Research has shows that the values that create social capital are a potent stimulus for economic development.”

The problem is not that capitalism inherently promotes strict individualism and self-interest.  It doesn’t.  Indeed, my experience in the private sector suggests that cooperation and regard for others is more often rewarded than is greed and lack of social concern.

The problem is that cooperation and moral behavior are so common in our economic interactions that they hardly constitute news.  The outliers, the remarkable stories of greed and corruption, have become the basis for our narratives, of our socially constructed reality.  Through these “greed is good” stories we tell about capitalism, we give business leaders tacit permission to behave in ethically questionable ways.

The story that Paul Zak and others are attempting to tell obliterates the existing paradigm that places capitalism and socialism on two ends of a greed vs. altruism continuum by rejecting the notion that capitalism is fueled solely or primarily by self-interest.

If the “Moral Markets” story is a story that we social entrepreneurs also intuitively believe to be true, how do we help Paul Zak and others tell it?  Perhaps modifying the MBA Oath is a good starting place.

However we do it, we absolutely must change the paradigm if we ever aspire to make the actions of all companies, large and small, more socially responsible.

Mike Shoemaker

Mike is a graduate of St. Olaf College in Minnesota and a former Fulbright Scholar at the Universidad de los Andes in Bogota, Colombia. Mike currently manages strategic alliances for a global consulting firm, is a volunteer and advisor to The Ayllu Initiative, and blogs at Human Ventures.

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