Moral capital and commercial society.

• Author: Ratnapala, Suri

Modern civilization is based on laws and other institutions that allow individuals a large measure of freedom to seek profit through voluntary exchange. Indeed, but for the prospect of making profits, many transactions simply would not occur, and we would find ourselves without most of the goods and services that we now take for granted. There is not much argument these days about the role of profits in the production of goods and services. Yet the notion of profiting from dealings with others seems intuitively wrong to many people even when the profits are gained by perfectly legal transactions. The ancient Greeks had their own pejorative term for money making, chrematistics. Cicero thought that those who buy from merchants in order to resell immediately make no profit "without much outright lying" (qtd. in Finley 1987, 1: 421). Some religions still condemn usury, and philosophers still pursue the quest begun by Aristotle for the "just price." In the present age, the bias against commerce persists, evidenced by constant pressures in democracies to restrain profit seeking and to redistribute wealth. Such thinking contains the unspoken assumption that entrepreneurship is a necessary evil whose consequences need to be mitigated.

Another way of looking at human affairs regards commerce as not only morally unimpeachable but also unsustainable without moral capital. This viewpoint is closely but not exclusively associated with the evolutionary tradition in social science that sees both markets and morals as aspects of the spontaneous order of society. In this article, I examine from this theoretical perspective the connections among moral capital, commerce, and economic performance. Following Adam Smith, David Hume, and later evolutionist thinkers, I argue that commerce coevolves with moral rules and leads not only to prosperity but also to the accumulation of moral capital. Conversely, depletion of moral capital can result in economic deterioration that causes further moral decline. I do not attempt here to devise ways to measure moral capital or to test the theory empirically. My aim is the more modest one of explaining the theory by clarifying some of the conceptual issues relevant to its understanding. I hope to provoke thought about what societies can do to enhance their stocks of moral capital.

The first part of this article contains a discussion of the concept of moral capital. I explain the sense in which the disposition to moral conduct represents a type of capital, and I distinguish the concept of moral capital from the related ideas of social capital and human capital. The main forms of morality are identified as justice, beneficence, and temperance. Whereas morality in all forms is conducive to commerce, justice has special significance. I follow a discussion of the abstract qualities of justice with an inquiry concerning the rules of justice that are indispensable for commerce. I conclude this part of the article with observations on the role of institutions in the accumulation of moral capital.

The second part presents a closer examination of the connection between commerce and morals. I present morals rules and commerce as aspects of the same evolutionary phenomenon and examine the dependence of commerce on moral capital against the converse proposition that commerce promotes greed and hence causes moral decline.

In the third part, I discuss the competence of the state with respect to the accumulation of moral capital and propose that the state is effective mainly in the promotion of justice and that its attempts to promote beneficence and other virtues invariably result in the erosion of justice.

I end with a summary of my principal conclusions and some ideas about ways to build moral capital.

The Concept of Moral Capital

Morality as a factor in production may be counterintuitive, but it is both real and substantial. The most obvious ways in which morality helps production and exchange are by enhancing the security of person and property and by promoting the keeping of contracts. Laws that protect person and property and that enforce contracts rest on ubiquitous moral rules whose origins are lost in the mists of time. Legal reenactment strengthens these rules but obscures their origins. Such reenactments are of limited value unless most members of the community live voluntarily by the morals that the reenactments encapsulate.

Capital generally understood consists of resources owned by individuals or firms and applied in the production of goods and services. These resources include incorporeal assets such as goodwill, trade reputation, and training. The concept of capital has more recently been extended to conditions that help production by facilitating coordination among parties to transactions. This form of capital may or may not be "owned" by individuals or firms, but it provides them with clear advantages. Morality falls within this extended meaning of capital.

Morality as capital may be seen from the viewpoints of the individual and of society in general. It can take two forms from the individual standpoint. Persons who are habitually moral in conduct may gain a reputation for trustworthiness that induces others to deal with them. This form of capital may increase in value where institutions have become unreliable and people seek reliable trading partners. Again, habitual observation of a common set of known moral rules within a community of individuals will reduce costs of transacting with others. These costs include the costs of finding reliable trading partners and the costs of enforcement through self-help or third-party intervention in the event of breach of obligation. In contrast, persons living among rule breakers need to take costly precautions and will have to limit their transactions to a minimum. The transaction-cost saving that accrues to a person as a result of others' moral conduct represents part of that person's moral capital.

In what sense does a group possess moral capital? The number and types of transactions that occur are influenced by transaction costs (Coase 1960; Calabresi 1968). The extent to which a group's moral rules reduce transaction costs and hence facilitate mutually advantageous dealings between group members as well as between group members and outsiders represents the community's moral capital: members of the group have an economic advantage that results from the objective prevalence of the observance of certain moral rules. As explained presently, these rules owe their existence to the moral conduct of individuals.

If capital is taken to mean a factor in the production of goods and services, those moral rules that increase transaction costs do not generate moral capital. Thus, the rule against usury will not constitute moral capital. In our tribal post, it was considered perfectly moral to treat strangers harshly and to use force to take their belongings and even their lives. Coincidentally, it was a time when we were very poor and our own lives were, as Hobbes famously described them, "nasty, brutish, and short." Fortunately, we learned to extend to countless strangers some of the consideration that previously we accorded only to our own, and thereby we made civilization possible.

Moral Capital Distinguished from Social Capital

The concept of social capital refers to informal or voluntary social organizations and networks that engage in charitable activities or the production of public goods. The term social capital in this sense is aligned to the concept of civil society, the base structure of society that is distinguishable from the coercive order the state imposes. The term is used widely in the analysis of social factors that help or hinder communities in achieving prosperity. Among the better-known studies of social capital are Robert Putnam's (1993) on the role of civic tradition in Italian democracy; Glenn Loury's (1977) and Ivan Light's (1972) on racial income differences; James Coleman's (2000) on the creation of human capital; and Jane Jacobs's (1961) on the role of community networks in crime prevention. In contrast, moral capital refers to individual conduct. Clearly, individuals make up social networks, and hence moral capital is required for social capital formation. Conversely, social networks place constraints on individual behavior and hence contribute to moral capital. However, it is useful to distinguish these concepts not only because they are not coextensive, but also because moral capital raises distinct issues whose discussion would be hindered by confusing it with social capital.

Human Capital, Work Ethics, and Moral Capital

Moral capital and human capital overlap at the margins, but the concepts are clearly and usefully distinguished. Human capital is regarded as the stock of skills and knowledge gained by education, training, and experience that enhances a person's earning powers and that increases the efficiency of economic decision making (Rosen 1997, 2: 682). Earning power arises through improved productivity of value to oneself (as in self-employment), to a firm, or on the more general scale (Becker 1964). Sound professional education encompasses the ethical norms relevant to the profession, such as legal ethics and medical ethics. Membership of certain guilds and tradesmen's associations also requires competencies that include knowledge of relevant ethics. Thus, training can generate moral capital. Yet moral capital is a wider concept. It reaches beyond the needs of specific professions or occupations, and its accumulation depends on many more factors than education. Work ethics also overlap with moral capital to the extent that they translate to just conduct or beneficence. Thus, diligence in the discharge of contractual obligations is just conduct, and delivering more than what is bargained for amounts to beneficence.

Moral Capital Consists of Justice, Beneficence, and Temperance

Morality is conceived in both...