Moral Markets: The Critical Role of Values in the Economy.

• Author: Colombo, Ronald J.
• Position: Book review

MORAL MARKETS: THE CRITICAL ROLE OF VALUES IN THE ECONOMY. EDITED BY PAUL J. ZAK. PRINCETON UNIVERSITY PRESS, 2008.

The prevalence of the Homo economicus model of humanity has crowded out considerations of important noneconomic aspects of human nature--most importantly the moral dimension of human thought and conduct. As a result, our understanding of the present ills besetting the business world and the market economy is incomplete, and the policy prescriptions flowing there from are often suboptimal (if not counterproductive).

This Book Review situates Moral Markets within the larger debate over human nature generally, and shows how, through the presentation of biological evidence and evolutionary theory, Moral Markets repudiates the Homo economicus model and supports the Aristotelian position that human beings are fundamentally moral creatures. After demonstrating that free markets cannot thrive in the absence of virtue, Moral Markets concludes that free markets must generally be populated by virtuous actors. This Book Review asks whether another conclusion might be drawn: that the free markets of today lack a critical mass of virtuous actors, hence the current spate of corporate scandals and economic woes.

INTRODUCTION

Enron. ImClone. Global Crossing. Tyco. WorldCom. Several prominent commentators have concluded that the scandals these names have come to represent are not mere market aberrations, but rather symptoms of a deep, systemic problem with capitalism today. (1) As this Book Review goes to press, other names are becoming synonyms for scandal--Samuel Israel, Marc Dreier, Bernard Madoff, and surely more with them--leading to a renewed focus on the market's shortcomings. (2)

To understand this problem fully, and to select an appropriate means of treating it, we must first accurately diagnose its root cause. As I and others have suggested, this cause is essentially moral in nature: "a loss of belief in objective ethical standards," as one commentator summarized it; (3) "'a mentality ... [of] putting profits ahead of all principle," in the words of another; (4) and a rejection of the commandment to "love thy neighbor," according to the former President and CEO of the Federal Reserve Bank of New York. (5) And a problem that is fundamentally moral in nature counsels in favor of a solution that is, at least in part, also moral in nature.

To others, morality does not enter into the equation. Or, even if it does, morality certainly does not enter into the solution. To them, the problem is merely one of properly aligning cost and benefit structures in such a way as to punish wrongdoing more severely, reward appropriate conduct more generously, or both. (6) Adherents to a law-and-economics perspective, among others, take this approach. (7)

What becomes clear is that, at its core, the dispute over what ails the modern market economy (and what ought to be done to address it) turns on our understanding of human nature. (8) And the prevailing modern understanding (at least within the context of economic thinking) is that human beings are little more than rational wealth-maximizers. (9) It is assumed that Homo economicus--"economic man"--populates the roles of consumer, entrepreneur, stockholder, employee, director, and officer in our modern economy. (10) Homo economicus "is cold and calculating, worries only about himself, and pursues whatever course brings him the greatest material advantage." (11) Homo economicus is a single-minded, wealth-maximizing automaton, who does not take into account "morality, ethics, or other people." (12) Not surprisingly, subscribing to the Homo economicus model of humankind leads to characterizing problems and framing solutions in economic terms of benefits and costs, incentives and disincentives. (13)

Many have doubted the existence of Homo economicus, challenging whether the evidence of actual human behavior fits the theoretical model. (14) And, if Homo economicus does indeed exist, some have argued that he is to blame for what ails contemporary capitalism, (15)

Into this fray steps Moral Markets: The Critical Role of Values in the Economy. (16) Over the course of fifteen powerful essays, Moral Markets marshals some of the strongest evidence, and lays out some of the strongest philosophical, evolutionary, and biological arguments against the existence of Homo economicus. The contributors to Moral Markets compellingly assert that human beings are fundamentally moral by nature and that the free market economy would not function if things were otherwise.

The full range of repercussions that follow is not entirely discernable, but seems difficult to overstate. For, if correct, the conclusions reached in Moral Markets call into question the merits of economic analysis of the law and suggest that solutions to corporate wrongdoing (and other economic ailments) heavily take into account the moral dimensions of humankind. (17) In short, Moral Markets exposes the myth of Homo economicus.

This Review summarizes and critiques the evidence and arguments set forth in Moral Markets. In doing so, it does not provide fifteen separate analyses of the fifteen separate essays, but rather reviews the book thematically. This thematic approach is particularly appropriate given that the essays in Moral Markets are not completely independent of each other, but rather reference and build upon one another.

Part I of the Review briefly sketches the work that went into the publication of Moral Markets. This sketch is necessary to appreciate the volume fully, for Moral Markets is not merely a collection of related essays, but rather the fruit of a two-year collaborative project among several distinguished contributors. The resulting product is therefore much more coherent and consistent than most multi-authored volumes.

Part II addresses the claim that human beings are fundamentally moral in nature. To be clear, the assertion here is not that all people act properly all the time, but rather that the vast majority of people possess the ability to recognize the difference between conduct that is good and conduct that is bad. Although not everyone with this ability elects to do right instead of wrong, the overwhelming majority of individuals do indeed make this salutary election. Additionally, this Part points out the happy confluence of Aristotle's conceptualization of human nature and the empirical evidence of human nature derived from modern science.

Part III considers the claim that individual morality is an essential precondition to the free market economy. It is here that Moral Markets is most vulnerable to criticism. Moral Markets makes an unjustifiable leap from the theory that individual morality is a precondition of the free market economy to the implicit (and sometimes explicit) conclusion that today's free market actors do in fact behave in morally appropriate ways. Such a conclusion is by no means unreasonable, but it does not inevitably follow. An alternative, and quite worrisome conclusion, could also follow: Today's market participants no longer behave in morally appropriate ways, and thus our free market economy is living on borrowed time--subsisting on the remnant of essential but vanishing values. Such a theory could, perhaps, explain the market breakdowns identified in the opening paragraph of this Review.

An interesting debate that some of the contributors to Moral Markets address is whether the free market promotes, rather than undermines, the moral values essential to its existence. At one extreme, some argue that free markets not only promote but generate the values and preconditions required for their existence. (18) Others insist that markets do not create the values necessary for their existence and are, indeed, inadequate at moral self-policing. (19) Still others go so far as to argue that free markets are parasitic and serve to destroy slowly the very values that their existence requires. (20) Part IV addresses Moral Markets's contribution to this debate.

Part V explores the policy implications that flow from the insights and data presented in Moral Markets--some of which are noted and amplified by the volume's contributors, and some of which the book does not consider.

The Conclusion suggests that Moral Markets is required reading for anyone interested in behavioral economics and economic regulation. Even if one disagrees with each and every conclusion its contributors reach, Moral Markets brings together, in one convenient and accessible volume, the very latest research and thinking on the fundamental relationship between human nature and the market economy. One would be hard-pressed to participate in today's broad public discourse if ignorant of the facts and scholarship assembled in Moral Markets.

1. MORAL MARKETS: THE PROJECT

   Moral Markets is more than simply a book. As explained in its introduction, the work "is the culmination of more than two years of research by a transdisciplinary group of scholars." (21) Its authors met six times over two and a half years, and "[e]ach chapter evolved through the process of presentation, critique, and rewriting." (22) The resulting product is not merely a collection of fifteen essays related by a common theme, but rather a coherent, albeit multi-authored, whole. Editor Paul J. Zak rightfully boasts that the "approach produced a high degree of cross-fertilization across both individual contributors and fields," which is vividly underscored by the "extensively cross-reference[d]" chapters. (23)

   The authors of Moral Markets include prominent biologists, anthropologists, economists, and philosophers; professors of business and law; and a winner of the Nobel Memorial Prize in Economic Sciences. (24) The project was spearheaded by Paul J. Zak, the founding director of the Center for Neuroeconomics Studies at Claremont Graduate University. (25)

   Zak and the other contributors shared a preconceived belief that "values might play an...