The story of markets and morals

The story of markets and morals January 27, 2015


By Bruce Baker

In the months leading up to the crash of 2008, Chuck Prince, CEO of Citi, was asked to justify his firm’s bullish appetite for leveraged lending. He acknowledged the risk of an impending liquidity crunch, and yet explained that he really had no other option but to play along with the rest of the market: “[As] long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Prince’s glib remark reveals a generally accepted confidence that the free market is a self-governing force of nature, as well as a sense of moral rectitude in “dancing to the music.” As the Dow and S&P climb to new heights, this might be an opportune time to ask: Who’s calling the tune?

The recent “near-death experience” of the financial markets, as Joseph Stiglitz has called it, rocked people’s faith in the ability of the market to self-correct (i.e., prune itself of exploitative and harmful transactions). Alan Greenspan, for one, could not fathom such a catastrophic failure of a system based on self-interest: “Those of us who have looked to the self-interest [of private companies to promote the capitalist system] – myself especially – are in a state of shocked disbelief.”

Greenspan’s overconfidence in the principle of self-interest reflects what might be called a morality gap in our culture. This gap is due in part to the gradual decline of religious narratives as sources of cultural truth. Having lost touch with a larger narrative capable of providing a moral framework based in transcendent values, we have seized upon a narrative based in sheer pragmatism – namely, that the market is a (generally beneficent) force of nature driven by self-interest. Self-interest is pragmatic to the extent that it creates jobs, wealth, and productivity. But we need a richer story.

What we need is a narrative capable of absorbing, assimilating, and transcending the inexorably complicated trade-offs inherent in the market system. Religious narratives help people make sense of life by providing the context of a moral universe in which people accept their God-given responsibility to care for strangers, steward the environment, and build economic shalom.

In the absence of a telos, or higher purpose based in a transcendent narrative, lesser narratives will emerge to justify the premise of a moral market. The pragmatism of self-interest thus emerges by default as justification for the goodness and power of the market. It all comes down to natural forces, fueled by self-interest.

The new secular metanarrative that has emerged to fill the morality gap can be described in terms of three fundamental principles that are accepted at face value:

  1. Self-interest is the feature of human nature that is most conducive to productive capacity in a practical sense;
  2. The ethical priorities of an economic system are to be evaluated on the basis of its efficiency at optimizing the relationships between ends and scarce means according to the premises of game theory; and
  3. There exists a force of nature which  works through people’s economic choices to automatically orchestrate everyone’s activities, such that we need only follow our natural inclinations and wealth will be generated for all.

This mysterious force of nature is often called the “invisible hand.” It provides a convenient rationale to trust the free market to automatically promote the common good, without needing any moral guidance. The presumption of such unguided beneficence in the “invisible hand” thus relieves us of moral responsibility for seeking a transcendent ethic in business and finance. This line of thinking presumes that natural inclinations will reliably guide economic activity toward its proper end without restraint or moral evaluation based in a transcendent telos. The invisible hand takes care of all that for us.

This line of reasoning was articulated with convincing rigor by the great 20th century economist Ludwig von Mises, who argued that economic morality should be judged solely on the basis of “praxeology”, i.e., the science of human action, which concerned means, not ends. Leaders of other schools of thought within economics embraced much the same kind of thinking. The movement of 20th century economics in this “scientific” direction has had subtle yet profound effects on the idea of market morality. During this period, economics was reimagined as a scientific topic detached from moral philosophy.

As this has happened, we have seen capitalism become the greatest force of global transformation in history. In a relatively short span of time, the free market has increased the living standards of billions worldwide, and American democratic capitalism became the shining standard bearer among world economies. America’s victory in the Cold War seemed the icing on the cake.

There is indeed great moral vindication to be seen in these victories, in both the pragmatic as well as political realms. The only problem is that we have increasingly lost touch with the sustaining power of religious narrative to provide a moral foundation to keep the power of market forces on an even keel.

Unfortunately, our business schools have mostly failed to close the morality gap. Instead, they have “served the market” by emphasizing quantitative finance, while losing touch with the moral beliefs held by their universities’ founders in earlier centuries. Professor Rogene Buchholz sums up the problem in business ethics education:

The demise of the Protestant Ethic left capitalism without a comprehensive ethical or moral system to provide legitimacy for the accumulation of wealth and root capitalism in a larger moral purpose beyond itself.

As educators, business persons, and people of faith, we need to reclaim a theological metanarrative to guide the power of our economic engines. The sustainability of our economy and the moral integrity of our culture depends upon it. When religious values are removed from the story, a new story will emerge to meet the need for sense-making. In our secular age, we have ended up with a morality tale of business based in the denial of a greater purpose to life. Higher aims are replaced by lesser ambitions, driven by the self-propagating principle of survival as the natural explanation for the moral legitimacy of the market. In this frame of mind, the power of money will inevitably drive the behavior of the most powerful financiers to pursue greater and greater wealth, until the market collapses when their pursuits are no longer sustainable.

We need to ground capitalism in a better, truer, more robust story – a story that inspires hope and courage in humankind to pursue the ultimate good for the common good, as well as the realism to see where and how this pursuit becomes impaired by the allure of monetary gain.

Bruce Baker is assistant professor of business ethics, Seattle Pacific University. This post originally appeared on the Oikonomia Network page. Image: ON.

Helpful models of academic papers: This article is adapted from an academic paper selected by the ON Advisory Committee as a “helpful model” for network faculty to consider. The original paper is not yet publicly available as the author seeks publication.

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