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Moral Misunderstanding and the Justification of Markets

I suggest that many of our students, including some of our most thoughtful ones, are reluctant to let themselves be captured by the economic way of thinking because they see economic theory as at bottom an elaborate justification for an immoral society.

December 1, 1998


Paul T. Heyne Senior Lecturer, Department of Economics, University of Washington
Moral Misunderstanding and the Justification of Markets

The level of economic literacy among Americans is low in large part because we college and university teachers do an ineffective job of presenting the introductory courses in our subject. Far too few students leave our courses with a genuine understanding of how commercial societies work, societies in which everyone specializes and lives by exchanging. Even at the end of the course students find the processes of supply and demand that coordinate activities in such a society baffling or boring or both.

It isn't entirely our fault. We deserve sympathy, not blame, for having to teach a subject that is by its very nature extremely abstract. Economic theory generalizes about activities and relationships, such as economizing and exchange, that can't be shown in pictures. That's why we lean so heavily on graphs. It's also why no one has yet been able to make a good film to teach economics and why the best of the ones that have been made are filled with "talking heads."

On the other hand, it is our fault that we persist in teaching the first course as if everyone enrolled were headed for a Ph.D. in economics. That's not an effective way to introduce students to any subject and it's a particularly poor way to introduce someone to a subject as abstract as economic theory.

But I want to use my space to discuss another reason why economic theory may be so difficult to teach effectively, a reason less often commented on. Really learning economics requires "getting into" the economist's way of thinking about social phenomena. I suggest that many of our students, including some of our most thoughtful ones, are reluctant to let themselves be captured by the economic way of thinking because they see economic theory as at bottom an elaborate justification for an immoral society.

The Defense of Commercial Society

Most economists will insist that anyone who views economic theory in this way is totally mistaken. Economic theory merely describes; it does not justify or defend anything at all. Economists who teach economics as a defense of commercial society, they will claim, are not scientists but ideologues. While I agree that those who perceive economic theory as a system of thought that defends an immoral society are mistaken, I maintain that their mistake is only in supposing that the society it defends is immoral.

Economic theory is in large part an elaborate justification of commercial society. To say that it merely describes, it does not justify, is to ignore what it's describing. It's describing the cooperative and positive-sum aspects of the supply and demand process to people inclined to see the process as zero-sum at best and more often as a negative-sum game. Copernicus' description of the heliocentric system was a description, not a defense, of that system because the system required no defense. People may have thought it was impious or immoral to believe that the earth revolved around the sun; but no one thought that Copernicus was suggesting wicked behavior on the part of the earth and the other planets. Many people today do believe, however, that the activity of pursuing one's own interests, which generates supply and demand functions and through them the prices that coordinate production, is, if not wicked, at least somewhat immoral, and if not immoral then at least morally inferior.

Inferior to what? Inferior to activity that aims at promoting the interests of others rather than one's own interests. We in the Western world have inherited a religious tradition that tells us we should do for others what we would like them to do for us and that we should give without expecting anything in return. That's not how commercial society functions. In commercial society the rule is: "I'll do this for you if and only if you do that for me." Maybe that's the way it has to be in an imperfect world, say the critics. But it's not good. It would be far better morally if people produced to satisfy the needs of others than to enrich themselves. In a commercial society, everyone uses others as means to their own ends. And that is basically immoral.

The abject failure of the socialist vision that became so obvious with the collapse of the Soviet Union has turned a lot of people into realists. The critics of capitalism admit that socialism does not work—unfortunately, they add. People are basically selfish. They won't live by the Golden Rule. And so we must, regrettably, turn to capitalism. Capitalism works. It may stunt the spirit and corrupt the soul; but it does feed the body. We must go on living in a world of self-seeking and competition, at least until a New Age appears in which human nature will be transformed and all swords and spears will be reshaped into plows and pruning saws. My language is deliberately religious because I believe that religious misunderstanding has greatly contributed to the depth and pervasiveness of the error I want to criticize.

Commercial Society and the Golden Rule

The fundamental error lies in supposing that the reason the Golden Rule won't work is that human beings are basically selfish. I submit that the Golden Rule won't work as an organizing principle for a commercial society because human beings are not omniscient. We simply do not know enough and could never know enough to organize social life in a commercial society on the basis of the Golden Rule. Running a society by the Golden Rule requires comprehensive social planning, and that just cannot be made to work except in very small societies, societies not much bigger than a family.

I am not denying that some human beings are selfish most of the time or that all of us are selfish some of the time. I am making a different kind of assertion altogether, namely, that the Golden Rule could not effectively organize a commercial society even if every single individual in the society were like St. Francis of Assisi. It is possible, even probable I suppose, that in a society made up entirely of people like St. Francis, a commercial society would never have developed. People everywhere would have remained poor, at least by our standards, living always on the edge of subsistence, though presumably in peace and contentment. There would also be far fewer of them, even if these St. Francis-like people differed from him in preferring marriage and procreation to celibacy, because the economic systems that prevailed prior to the evolution of commercial society could not have maintained one-tenth the number of people that inhabit the earth today.

However much some people may suppose (do they really believe it?) that a poorer and simpler world of far fewer people would be a better world, we do not have the option of going back. If all those who now grow the food that feeds the nearly 6 billion people in today's world decided to begin producing for people rather than for profit, so that each one of them planted their crops only after determining which particular people wanted the product, most of the world's population would die of starvation within a few years. Contrary to the slogan that long filled the window of local Communist Party headquarters in my neighborhood, production for profit is production for people.

Those who find commercial society morally repugnant are capable of conceding that production for profit delivers the goods without granting that this describes a moral society. Selfishness may work, they say, but it's still wrong. But it is not selfishness that motivates people in a commercial society, although some undoubtedly are in fact selfish. Participants in the supply and demand processes that animate modern society are motivated by love for family, the desire to do a good job, anxiety about the opinions of others, the satisfaction of overcoming challenge, a wish to avoid boredom, a determination to act always so that they can respect themselves, sadistic urges, masochistic urges, or lust for sex, drugs, domination, or more toys than owned by anyone else in their acquaintance—just to give a sampling of what motivates people.

Selfishness and Self-Interest

Economists have done a great deal of damage by failing to make clear the distinction between selfishness and self-interest. Some economists, even some who have earned Nobel prizes, mistakenly claim that economic theory presupposes selfishness and greed. That just isn't so. It presupposes that people act in their self-interest. But whether pursuing one's self-interest is selfish depends entirely on what one's interests are. Adam Smith never made this mistake. He never once claimed that selfishness motivates activity in a commercial society, but rather self-interest, self-love, concern for one's own advantage. And as his book on moral philosophy makes clear, he did not identify self-love with selfishness and held open the possibility that self-love would inspire some people to acts of courageous sacrifice for others. A major source of misunderstanding and moral confusion might be removed if economists simply stopped saying that economic theory describes a society running on greed and selfishness. I would prefer that we even stop saying that it presupposes the pursuit of self-interest, because this still lends itself to misunderstanding. Economic theory assumes only that people pursue the projects that interest them. That was true of Mother Teresa, Jack the Ripper, Henry VIII and Augustine of Hippo.

"I have never known much good done," Adam Smith observed, "by those who affected to trade for the publick good." He thought that people usually promoted the interest of society most effectively when they tried to promote their own interests. This paradoxical result was the work of the invisible hand, by which Smith did not mean any magical or supernatural intervention but simply the process he attempted to describe throughout The Wealth of Nations and that we teachers should be trying to explain in the introductory economics course: Market interactions in a well-governed society, a society in which government protects people against theft and robbery, provides a system for the peaceable adjudication of disputes, and assures its citizens that government itself will not engage in predatory behavior.

The Golden Rule is irrelevant or even mischievous in its effects when people attempt to apply it in the context of market transactions. The reason, once again, is that we usually do not know enough. A city bus driver who waits in the morning commute for a late passenger whom he sees running to catch the bus cannot know whether the good he does for this one passenger outweighs the harm he does to all others on the bus by delaying their trip. He delays each of them just a little; but that little might be enough to make some miss a transfer connection. The passenger for whom he waits might be on an urgent mission of mercy; or he might be meeting an accomplice in order to rob a liquor store. The point is that the driver does not know, and because he does not know, he has a moral obligation to follow the rules that have been established by the bus company with the aim of maximizing the general welfare. The driver who waits, in violation of company rules, is not so much virtuous as arrogant.

Appropriate Rules

The ethical rules of the marketplace are different and must be different from the ethical rules that can guide action in a family or another small, face-to-face society. Because the Golden Rule tells us to do to others what we would like them to do for us, it presupposes a condition of personal knowledge and directness or immediacy of action that is typically missing in market transactions. In market transactions something like the Silver Rule ought to reign: "Do not do to others what you would consider unfair or unjust if they did it to you."

The Silver Rule is not a rule of expediency or a watering down of ethics or a double standard. It is a difficult and demanding rule. It does indeed demand too little if we take it to express what parents owe to their children or what members of a religious community owe to one another. It is not a rule, however, for the governance of relations among family members and friends, but a rule for the governance of relations among strangers. Once that is recognized, the truly noble and challenging character of the imperative contained in the Silver Rule becomes much clearer.

The transactions that economic theory explains are almost entirely transactions among strangers. Would it be better in some sense if fewer of our transactions were with strangers, if we lived our lives more than we do in the company of friends, if we specialized less narrowly so that we could trade primarily with people whom we know personally? It might be better in some sense. But in what sense? It would also surely be worse in many ways. Extensive specialization and anonymous trading has created for us all sorts of trivial goods. But are classical CDs, antibiotic medicines, high-speed dentist drills, fresh fruits and vegetables in all seasons of the year—are these all trivial goods? They would not be available in the absence of very extensive specialization and its corollary, numerous transactions with anonymous others.

I have no simple advice to offer here at the end to teachers of economics. If my hypothesis is correct, that some good students do not learn economics from us because they are never captured by its perspective, and they are never captured because they perceive economic theory as an elaborate justification for an immoral society—if this is correct, then we will certainly not remedy the situation by talking about the positive-normative distinction or by insisting that ethical considerations are irrelevant in scientific inquiry. We can begin to overcome this obstacle only by being more attentive to the questions and convictions that our students bring with them when they come into our classrooms. But in order to respond effectively to the misgivings and misunderstandings that I have attempted to analyze, we will ourselves have to reflect more carefully on the nature of economic theory and of the society whose workings it explains.

Heyne is senior lecturer in economics at the University of Washington in Seattle. He came to economics as a divinity student interested in questions of social ethics and gradually became an economist with an interest in ethics, rather than an ethicist with an interest in economics. Heyne is currently revising his textbook, The Economic Way of Thinking, for a ninth edition.

Heyne has a master's of divinity from Concordia Seminary, a master's degree from Washington University and a doctorate from the University of Chicago.