"Capitalism is perishing for a lack of a moral base and of a full philosophical defense ... No man, and no movement, can succeed without moral certainty--without a full, rational conviction of the moral rightness of one's cause. "
--Ayn Rand (1967a, p. 218)
Empirical studies have legitimized many arguments in support of economic liberty. If those who favor free markets are "winning" the statistical argument, (1) why have they failed to move other people and public policy toward their vision of economic freedom? As evidence of this failure, since the year 2000, the United States has fallen from the world's second-freest economy to the fourteenth, according to the Economic Freedom of the World Report's chain-linked summary ratings (Gwartney, Lawson, and Hall 2014). (2)
The answer to why free-market proponents are failing lies in ethics. Supporters of liberalism need to focus on arguments that value liberty as, or as integral to, an ethical end, and not solely as a means for monetary utility. In this paper, monetary utility means evaluating preferences through and basing arguments in solely monetary terms. This view fails to account for the range of other factors that strongly influence individuals' values. Monetary utility also fails to account for the fact that individuals value different goods at varying levels. People seek moral justifications for their actions, and if there are not strong ethical arguments in favor of liberty, people will be hesitant to accept it as a value--much less a primary value. In this moral vacuum, arguments that treat individuals' negative rights as violable have gained influence. (3) The outcome of this debate is essential to liberalism's future, as it informs the arguments used in support of capitalism.
This article questions the effectiveness of monetary utility arguments through assessing why the movement for limited government is failing. Specifically, it seeks to provide evidence against homo economicus, while supporting homo moralis--meaning humans are not monetary utility calculators, but instead are heavily influenced by moral convictions. I discuss problems with the prevailing approach to justifying capitalism and give special attention to treating capitalism as a necessary evil instead of a moral necessity. I also discuss issues with macroeconomic models of human behavior and the nature of rights. The proposed cure is to support capitalism on solid moral foundations, and I present two ethical theories based in virtue ethics that exemplify this superior approach.
This article is not a fully supported philosophical refutation of specific ethical theories nor a complete moral defense of liberalism. It would be far beyond this article's scope to provide a detailed plan of action for how to successfully bring about a society based on free-market principles. Instead, what this article argues is that three groups pivotal to liberalism's future success--economists, philosophers, and public intellectuals--need a change in approach and an opening of discussion.
Disproving Homo Economicus
To illustrate the power of perceived moral violations, Duke University philosophy professor Michael Munger recounts a story from the aftermath of Hurricane Fran in his home state of North Carolina. The category 3 storm left more than a million people without power in 1996. With temperatures above 90 degrees, people were in dire need of ice.
As Munger recounts, "There were no generators, ice, or chainsaws to be had, none. But that means that anyone who brought these commodities into the crippled city, and charged less than infinity, would be doing us a service (Munger 2007)."
Four young entrepreneurs did come. They loaded their trucks with ice from a part of the state that was not experiencing the shortage and headed off to the affected areas. After setting up, they began selling the ice for around $8 per bag--far higher than their purchase price of just over a dollar per bag. While some people complained, they realized the benefit and still purchased the ice.
When police showed up, they arrested the young men for price gouging. Munger could not believe what happened next: those waiting in line clapped and cheered as the young men were led away in handcuffs. They celebrated even though they were being made materially worse off. They needed ice and had the opportunity to buy it, but, because of the arrests, they remained without ice. While being protected from high prices, they were also "protected" from the option to purchase ice at all. The question remains: Why did they clap? (4)
The answer lies in what people perceive to be fair, just, or right; in other words, the answer lies in ethics. People must view the results of free markets as morally permissible; otherwise, they will reject market principles even if they are passing up monetary gain by doing so. People crave moral justifications for their actions and will often act in ways they view as right or just even when they are monetarily harmed. Sadly, common defenses of free markets are often based in monetary utility, not morality.
Experiments show that people will turn down monetary gains when they feel situations are immoral. The late economist and Nobel laureate Elinor Ostrom brought up ultimatum games in her writing to demonstrate this point (Ostrom 1998, pp. 11-12). In these games, two players divide a sum of money. The first suggests a division to the second, and the second decides whether to accept or reject. If the second accepts, both parties receive their respective funds. If the second rejects, neither party receives anything.
On a purely monetary basis, the first player would offer a small amount to the second since any amount greater than zero would be rational for the second to accept. However, real-world experiments show this is not what happens. The first players often offer more, an amount deemed to be "fair." If they do not offer an amount close to equal shares, the second players often reject the proposed sum. People do not always act as monetary utility maximizers. Unsurprisingly, basing arguments and models on the assumption that they do does not work well.
People act in ways they perceive as moral even in the very private act of voting. Research has shown that the self-interested voter hypothesis is wrong: people do not vote for the policies that will bring them the greatest monetary benefits. There is a weak connection between individuals' incomes and their party affiliation, and the elderly do not favor Social Security and Medicare at a higher rate than the young. Instead, people support policies they see as morally required and consistent with justice (Caplan 2011, pp. 148-50).
When people view markets as immoral or as a necessary evil, they will not hesitate to discipline those who benefit from markets if they see the gains as unfair (Quervain et al. 2004; Kahneman, Knetsch, and Thaler 1986). Unless their sense of fairness is informed by strong moral defenses of markets, there is little hope to secure a liberal society.
The so-called punishment hypothesis is one explanation for these findings. Research has shown that unaffected third parties are willing to enforce what they view as moral norms, even when it comes at a direct cost to them (Fehr and Fischbacher 2004). This research helps explain why many who view "capitalistic acts between consenting adults" as morally abhorrent go out of their way to impose their views on others. These findings further show that creating a moral foundation is necessary for liberalism to flourish. In the face of overwhelming evidence, this proposal should not be controversial, and it is rarely taken to be. However, even though proponents of free markets claim to understand the need for a moral foundation, many fail to advocate such a basis. As Texas Tech University economist Edward Stringham argues, "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 (2011, p. 100)." III.
It's More Than the Economy, Stupid
For Milton Friedman, a society is justified by its power to create wealth, and a free society fares better than a compulsory one. For Friedrich Hayek and Ludwig von Mises, a society is justified by its wealth-generating power, and an individualized society is superior to a collective one. As philosopher Stephen Hicks argues, for these economists, creating wealth is the end, free individuals are direct means, and capitalism is an indirect means (Hicks 2013). However, is individual freedom justified only to the extent it increases social wealth? Treating freedom as such downplays the moral significance of a social system based on mutual consent and individual rights.
The arguments of influential economists, including those just mentioned, are of great use in providing supplemental evidence to already consistent theories, but they are not fully formulated moral defenses on their own. Proponents of liberty must realize that economists, in their roles as such, do not replace ethical philosophers. Economics is well-suited for evaluating situations with respect to appraising means, but not ends. However, value-free economics is not sufficient to promote a moral argument for a society. (5)
Moral claims are intertwined into most commentary from the political left. They argue, "We must pursue a certain policy because its intended outcomes are morally required." This line of argumentation has predictably proven more persuasive than, "We should pursue a certain policy because it is leads to economic growth." While both these examples are gross simplifications of more advanced arguments, their essences are the same, and it is not surprising which is more convincing.
Why does the American political left spend so much time talking about fairness or equality? A typical opinion article by Paul Krugman, Noble laureate in economics, usually has more moral...