What does it take to bring about a well-functioning market? Almost all economists agree that people should engage in cooperative exchange rather than predation, theft, or fraud, but how to ensure this is a matter of debate. Many neoclassical economists follow Thomas Hobbes and focus on changing legal arrangements to solve prisoners’ dilemma situations (Barzel, 2002, Hirshleifer, 2001; Tullock, 1972). Eliminating unwanted behavior is a matter of imposing optimal fines, the “price of an offense” (Becker, 1968, p.262), to alter the costs and benefits of different choices. Buchanan (2003, p.183) argues there must be “an agency that will in some fashion, offer incentives, positive and negative, that will lead participants to respect behavioral constraints.” This approach assumes that people are knaves and then seeks to designs political and legal institutions that will elicit cooperation even amongst amoral egoists (Brennan and Buchanan, 1985). Notably absent from these scholars’ discussions are appeals to morality. As Oliver Wendell Holmes (1897, p.459) wrote, “A man who cares nothing for an ethical rule which is believed and practised by his neighbors is likely nevertheless to care a good deal to avoid being made to pay money and will want to keep out of jail if he can.” According to this view, one must assume that people are bad and use the threat of force to make them behave positively.
Yet, economists such as Wilhelm Röpke and Adam Smith and philosophers such as Immanuel Kant heavily emphasize the importance of another type of constraint: the internal moral constraint. These are the rules that people choose to follow independent of what the law says; they are chosen from within. Manners, politeness, honesty, and trustworthiness are the most obvious examples of internal constraints that people adopt independent of external rules. But in areas with external constraints (such as laws against force or fraud), are external constraints the only factor influencing behavior, or do internal moral constraints have an influence too?
Most neoclassical economists are reluctant to discuss or appeal to moral constraints since they run contrary to many of the basic assumptions of homo economicus, rational self-interested man. Others may recognize the potential importance of morals, but do not talk about them because they cannot be measured using their scientific method nor can they be easily manipulated using policy. Since many neoclassical economists ignore morality they usually attribute the cooperation they observe to external constraints. But the relative influence of external versus internal constraints is an empirical question. Many or almost all of the observed differences in cooperation might be attributable to differences in people’s internal constraints. Furthermore, whether changes in external constraints or appeals to internal constraints are more effective in influencing behavior is also an empirical question. People who focus solely on external constraints are more likely to believe that changes in laws and regulations (as opposed to changes in morality) are the only way to eliminate opportunistic behavior.
In recent years various behavioral and experimental studies indicate that what I am referring to as internal constraints are not only important, but one of the most powerful methods of inducing cooperation. Not everyone behaves morally, but many people do, even in the absence of external constraints. For example, Ariely (2008) finds that starting experiments by asking subjects to think about the Ten Commandments subsequently makes them more likely to tell the truth, a finding obviously inconsistent with the assumptions of homo economicus. Although some people clearly behave much less morally than others, this paper will offer reasons why economists should embrace the study internal moral constraints, which is latent or explicit in much of the relatively recent research in behavioral and experimental economics. Internal moral constraints may be given to humans by our creator, they might have come about through evolution, or they might be learned through the process of socialization, education, or religion.
Additional research in this area can provide economists with a better idea of when and why people cooperate, for example, and perhaps suggest ways to utilize internal constraints. For instance, in the short run, if people can associate with others who share similar sets of moral beliefs (and can avoid associating with people who do not) the total amount of cooperation can increase. In the long run, although neoclassical economists often focus on changing external constraints, working to influence internal moral constraints might be a better means of eliciting cooperation. A society in which nobody is honest or respects the property rights of others is unlikely to become a successful market economy no matter how many laws exist.
Even though the homo economicus assumption is being overturned by a plethora of research, the normative prescriptions advocated by many economists have not caught up. This article argues that the orthodox neoclassical holdouts should not only embrace studying internal moral constraints, but that many of their normative prescriptions should be reconsidered. Instead of hoping that an external group can “force people to cooperate” (Holcombe, 1987, p.108), a better approach may be to try to bring about changes in internal constraints. Rather than attempting to devise an optimal vector of punishments, advocates of a market economy might better advance their cause by openly studying the moral prerequisites of a market economy.
{ 27 comments }
It is doubtful that homo economicus will ever be able to move out of its sterile wertfrei world into the world of the inseparability of economics and ethics. Such a construct cannot be inserted into a completely different realm without the appearance of incongruencies. Far better is to start within the realm of the inseparability of economics and ethics with the human entity followed by the exploration of purposeful human action.
My last second editing caused this blog entry to go haywire last night. Here is what it was supposed to look like:
Surely There Is A Better Representation Than Homo Economicus.
It is doubtful that homo economicus will ever be able to move out of its sterile wertfrei world into the world of the inseparability of economics and ethics. Such a construct cannot be inserted into a completely different realm without the appearance of incongruencies. Far better it is to start within the realm of the inseparability of economics and ethics – with the essence of the human entity – followed by the exploration of purposeful human action.
The separation of morals from economics is even a betrayal of the scientific method.
What does “self-interest” mean, exactly? If it means that individuals regard other human beings as tools to exploit and use and do not care how it turns out for them in the end, then the statement “humans are self-interested” is an empirical statement with testable consequences. If you assume it where it is not true, your predictions will come out wrong.
You’re conflating self-interest with selfishness. That’s a very popular thing to do. But when Adam Smith used the term self-interest he clearly didn’t have selfishness in mind. Selfishness is clearly bad, so any behavior included under it must be unethical. Self-interest, in Smith’s use of it, was nothing more than providing food, clothing and shelter for oneself and one’s family. If those are unethical, then I don’t know what is ethical.
Of course, self-interest can morph into selfishness if taken to extremes, but it is not selfishness. If people insist on conflating self-interest and selfishness, I ask them to give me an English word to describe providing food, clothing and shelter for your family and yourself that doesn’t have unethical connotations. They can’t.
I personally would separate self-interest from selfishness even further. I would define self-interest in the Austrian way to mean agents, when they make decisions, use their own preferences to do so. Under this definition, self-interest is just a simple condition of coherence.
But it’s clear neither this nor the smithian definition is what “homo economicus” models of behavior mean by self-interest.
interesting that the author allows that internal moral constraints might have an evolutionary origin, amongst others. presumably that allows for a range of different common traits and predispositions of groups formed over countless generations in response to different geographical settings. internal moral constraints could be expected to vary from locality to locality.
Ants have abdomens filled with formic acid so they can use it against other ants or termites in warfare. Tigers have claws. Crocodiles have sharp teeth and the strongest jaws on earth. Mammoths had the largest ivory defenses. Rhinoceros have sharp horns. Bulls are massive and have sharp ramming horns.
Look at nature around you. It’s nothing but might is right. In fact, it’s might is might, there is no right.
I don’t see how the God who created a universe of perpetual and omnipresent warfare can be the same who says to us to love our neighbors.
Surely the fall of man, the original sin, alone cannot account for nature’s perpetual and omnipresent warfare and specialized weapons found in creatures all around the world.
Such messing up with my reason and my mind by God can only lead me to hate everything and everybody, including my neighbor and especially God.
Why should I have morals when God himself clearly lacks morals ???
You have arrived at the only possible conclusion about God if one doesn’t accept the Biblical account of creation. At least you’re honest.
The oldest question is “If God is good and powerful, then why does so much evil exist?” The only rational answers are 1) God doesn’t exist or 2) God isn’t good or 3) God isn’t powerful enough to do anything about the evil. Those are the only answers if you have no inside information.
The Bible says that God created mankind to be good, but also gave him a free will to choose between good and evil. Mankind chose evil and God distanced himself from him. God’s punishment for man’s rebellion was to let the race have its way in doing evil to each other. So when people say that God seems distant, it’s because he is.
Of course, he occasionally intervenes when things get too bad, and he provided a way out for those who want to end the rebellion.
A lovely rationalization.
“The oldest question is “If God is good and powerful, then why does so much evil exist?””
You completely missed my point and my question. I was referring to nature, to the state of nature, to wilderness. From a humanitarian perspective, animals are not evil because they are not moral creatures.
Even so, observe wilderness and you will see many animals, reptilians and insects with weapons and warfare specialization. Ants fight chemical warfare using formic acid filled abdomen. When their territories are invaded, some ants advanced in suicide defense against their attacker, spewing formic acid all around.
Tigers have claws made for the purpose of killing their preys. Crocodiles have the strongest jaws in the world, made to hold and devour their preys. Other animals have horns etc.
The question is not why does evil exist. If you look at nature and if you accept the proposition that God created everything, therefore God created all those creatures the way they are, with their weapons and war tactics.
So clearly, God has an affinity for war, weapons, is enjoying the predator-prey game, must be sadistical of nature etc.
I just can’t reconcile the “love your neighbor” with the formic acid thing. I’m sorry, but from now on, I will HATE my neighbor and he better not step on my grass or else, LOL !!! >:-D
If ants can use their formic acid, if tigers can use their claws, if crocodiles can use their jaws, if bulls can use their horns … I can use my SOUL and not feel guilty about it.
“but also gave him a free will to choose between good and evil”
Then I chose to climb Jacob’s ladder and kick God’s triple filthy ass down the ladder and crush his despicable little face of shit deep into the ground and make him eat mud, LOL !!! >:-D
If I meet my maker, then he will meet his breaker, LOL !!! >:-D
Very interesting paper!
It seems that all of the research done on internal constraints has been carried out on Westerners, mostly Americans. There is no reason to think that the results transfer to other societies. As Geert Hofstede (see geert-hofstede.com) has demonstrated, the US is an outlier in the world on many cultural measures.
“Culture Matters: How values shape human progress” (Lawrence E. Harrison and Samuel P. Huntington) has a lot of good information on internal values and how they differ around the world. Some cultures exhibit very few internal restraints.
I read an article a couple of years ago by a US construction contractor in Iraq in which he described how difficult it was to do business there. He wrote that contracts meant nothing to people and the courts wouldn’t uphold them because the judges were easy to bribe. Subcontractors had many ingenious ways to cheat. He said it was exhausting.
Also, I knew a Moroccan construction contractor year ago who said very similar things about Morocco. He detailed the many ways his customers, employees and subcontractors try to cheat him and the efforts his has to expend to protect himself. But the really important point he made was that such cheating is not considered unethical. It is astute business.
I had a Moroccan friend who told me that in his country cheating others was considered just wise business, but you can’t cheat family members. That would be unethical. That probably explains why most business is family owned and run.
Then there is the story of the UN trying to give oxen to farmers in Uganda a decade ago in order to increase farm productivity. The farmers wouldn’t accept the oxen because they feared their neighbors would steal and eat them the first night.
The US used to have high levels of internal restraints, but they seem to be falling fast. I had a professor in college tell us that contracts used to be rare in business in the US. A man’s reputation was all one needed to do business with him. That’s why people used to fight to the death when their reputation was damaged falsely. Without a good reputation you couldn’t do business with anyone. Today, not only does reputation matter little, contracts don’t matter much either.
The author mentions the importance of religion, but I don’t think he stresses it enough. Religion tends to be the dominant factor in determining culture. Culture determines institutions and institutions determine economic development.
As Deirdre McCloskey emphasizes in the “Bourgeois Values”, European values had to change in order for capitalism to emerge and religion caused that changed. Western values of liberty came from Christianity, forged in the fires of the Reformation. As traditional Christianity has declined in the US, so have the bourgeois values. And it should be no surprise that the values of socialism has appreciated as well.
Interesting commentary on Christianity and the West:
http://toqonline.com/archives/v1n1/TOQv1n1Francis.pdf
…and along the same lines, demography hasn’t left christianity untouched.
http://is.gd/kHSBZR
That’s a very good article. I prefer the term irreligious to secular because secular originally meant the separation of church and state while the people were quite religious. As the West has become increasingly irreligious they have embraced socialism as the means of salvation.
I’m not sure what the author’s point is. It’s true that cultural Christianity changed through the ages. But the Reformation caused a major rupture in thinking within Christianity and brought about invididualism, liberty and the thing good things we associate with Western culture today.
You’re referring to Francis’ review of Russell’s book? The point was that Christianity also had to change to become acceptable to the various European tribes, and in particular in such a way as to be compatible with the character of the people who adopted it.
to fundamentalist:
your thoughts on this? http://is.gd/7FLnhA
it does address the points you raise (on which i agree), but through a socio-biological prism.
Not impressed with this one. I think evolutionary psychology is junk science.
is that because you object to the general concept of environmental differences shaping a population over eons, or that you consider psychological traits not part of the hereditary mix?
see also levin’s paper for the differing acceptance of the kantian categorical imperative across groups.
https://mises.org/journals/jls/12_2/12_2_4.pdf
That’s one is odd. I agree with a lot of his conclusions but not necessarily how he got there. The strange thing about races is that you can take someone out of a failed country in Africa or Latin America, dropped them in the US, and they become as productive as any American. This suggests that institutions and culture are holding them back.
but that’s just not the case. certain ethnic groups flourish, others sink in the new country.
Some individuals do flourish in a different environment, nobody has ever disputed such a thing is possible. But put simply, if every Mexican was brought to the US, do you really think they would display patterns of behavior very much different from what currently exists in Mexico?
This reminds me of the experiment in Freakonomics where they found that the incidence of parents picking up their children increased when they started charging for it, presumably because this turned what was incosiderate behavior into something perfectly OK that one could pay for. So the externally-imposed constraints can sometimes cause internal constraints to cease.
Parents that don’t care about their children and don’t give everything to their children and don’t consider their children to be their everything should have their balls rip off alive.
What a shame that parents would treat their children like that. If they are to arrive late and if they can’t care for their children, they should have remained single with no kids. That way they could arrive as late as they want to pickup their no-child and it would have cost them nothing.
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