Virtuous Capitalism

by Jerry O’Driscoll 

Over at the Austrian Economists, Steve Horowitz has posted a challenging statement and asked for reactions: “The great virtue of the free market is that it requires so little virtue to work effectively.”  The thrust of the responses is that defenders of free markets have had little to say about virtue (at least since Adam Smith).  

In a brilliant paper for APEE a few years ago, Liberty Fund’s Doug den Uyl asked whether we need ethics if we have free markets. That is a broader question, but on point.  Do markets discipline transactors to act virtuously and ethically?  Many would be tempted to answer affirmatively, but that would be facile. (Doug is not facile.)  

Freedom has certainly not existed throughout human history, much less economic freedom. What are the pre-conditions? 

Many would respond with property rights.  In Property and Freedom, Richard Pipes provides an historical account of how property rights evolved in some societies and not others (especially comparing England and Russia).  In England, property owners controlled Parliament.  In stark contrast to Russia, the Crown had no large property holdings of its own. It was forced to turn to a Parliament controlled by landowners for funds.  Parliamentarians desired to keep taxes low to protect their interests.  That led them to oppose standing armies and royal extravagance. Property, liberty and free markets were the outcome. 

Thomas Sowell provides an account that focuses on how culture and the transmission of ideas — including virtues — have played a role across time and place. Some cultures begat warriors, some bureaucrats and some capitalists. Capitalist virtues are transmitted by imitation. Migration bears a heavy burden in his account. And the ability to adapt.  

Culture and religion have been inextricably intertwined in history. In The Victory of Reason, Rodney Stark credits Christianity with bringing freedom, capitalism and the rise of the West. “The Virtues of Work and Frugality” are important, but covered in 2 pages. “Christian commitment to reason and progress” is the source of everything else.  

Capitalism without virtue is impossible. We have just witnessed a decade of trying to operate financial markets without honesty, and know the outcome.  

Does capitalism actualize virtue and punish latent vice?  That is the currently fashionable diagnosis, and has a long lineage at least back to Voltaire.  Is capitalism the outcome of the cultural transmission of virtues and other ideas? That accords with Sowell.  Are both capitalist virtues and capitalism itself the product of yet a third historical factor? That is Stark’s response, and Christianity is his surprising answer. 

The issue is less about providing an ethics of capitalism, or enumerating capitalist virtues, as explaining how capitalism and its needed virtues evolved.  As Greg Ransom observed, not even Hayek provided that answer. 


14 thoughts on “Virtuous Capitalism

  1. I think a single answer will never be fully satisfactory: it generally isn’t in economic history, and there are plenty of reasons not to expect one in the even more complex “general” history.

    For any explanation there is a counterexamle: Christianity brought some defense of private property, but also a ban on interest; several power groups may have fought for liberty in certain historical episodes, but their very same self-interest may have worked against freedom afterwards (it’s rare to find people against power when it comes to their power).

    I would say four general things that don’t make a full argument but may be an important part of it.

    (1) Liberty’s benefits are public and liberty’s costs are private, whereas the opposite is true for power. There’s no mystery if liberty has been rare and authoritarianism the rule, in human history.

    (2) As for every public goods problem, there can be some hope when free riding is difficult: a social group may defend liberty for its own interests (like aristocracy in England), and this accounts for some privatization of its benefits.

    (3) Freedom works, thus even a rational, selfish and almighty dictator would leave a lot of freedom to its subjects, not to destroy the social base of its power (the “power Laffer curve”). Social dictators uncertain of their power will be less restrained in destroying liberty, and “non-rational” dictators may overshoot the optimal level of “exploitation”.

    (4) Ethics matters, but it matters more for those who have slack (“market power”) than for those who must surrender against the “power” of the contingent situation (“price takers”). This implies that moralizing about free markets and moralizing about power yields different results: to preach for morality in financial markets is equivent, in the presence of moral hazard, to outcompete the most moral entrepreneurs, for instance. Preaching may be more effective in politics, instead.

  2. No one really believes this “liberty versus power” dichotomy, do they? “Liberty” requires plenty of power, to keep that boot heel on the necks of the poor and make sure they’re willing to work in a factory all day.

  3. I like Pietro’s post, but must note that he changed subjects a bit. (That’s ok, it is a blog.) He took us from virtue to ethics to “moralizing.” I found the challenge of Steve Horowitz’s original post was it was on virtue and not morality.

    “Christianity brought — a ban on interest.” There is a long history there and the injunction against taking interest is rooted in the Old Testament. It took a long time to sort the issue out intellectually, but practically it resolved much sooner.

  4. Surely it is not correct that “the free market is that it requires so little virtue to work effectively.” At the minimum it requires the virtue of honoring contracts. A market where people do not honor contracts will be dysfunctional. Not only that, it’ll be always focused on the shortest time horizon, the here and now–since you can’t rely on people doing what they say they will do, no point in longer term plans.

  5. I really liked this post, but I wonder why the hints of an ‘all or nothing’ approach to the question? Say that virtue could have helped avoid “a decade of trying to operate financial markets without honesty”. How much virtue would be necessary to achieve an optimal outcome? A little? A lot?

    I doubt you’re arguing that we all need to be purely altruistic…Are you?

  6. I will just add that it was indeed “virtue” not “ethics” that I was asking about.

    @Robert: I, at least, do not think it’s all or nothing. “Virtue” is not the same as “altruism.”

    A fuller context would come from reading McCloskey’s *The Bourgeois Virtues*.

  7. What about Deidre McCloskey’s stuff in her gigantic body of writing on “Bourgeois Virtues?” I have only read pieces… but she seems to make a case that the industrial revolution and capitalism at large emerged from respecting and embracing a certain set of virtues — but also that the market is a moralizing force for bringing more and more people into honoring these same virtues.

  8. I am SO confused. I think of “morality” as being the norms that people follow to be good persons. I think of “ethics” as a systematic approach to morality — making explicit and consistent what people may act according to or adhere to as norms. I think of “virtues” as the names we give certain instantiations of morality — honesty, obedience. I think of “virtue ethics” as the system of thought that focuses in on these instantiations as what people ought to pursue.

    I prefer simply to say that certain moral attributes or dispositions at the individual level are conducive to markets. And that Hume-Smith justice is required at the social/political/legal level. I buy completely the idea that we needn’t love each other to be good cooperators.

  9. Not all virtues are moral.

    I cited work and frugality as underpinning free markets, but not necessarily morality. Chidem mentions honoring contracts. Keeping one’s word — honesty — is surely a moral virtue and a necessary capitalist virtue.

    So I say “no” to Steve’s statement. But the question remains from whence the needed virtue? McCloskey is relevant. Plus culture and religion.

  10. It is a cliche that “the financial markets are based on trust” (at least I’ve heard that over the years). But if that were true, no one would require collateral for a loan. Chidem’s point is key that what is necessary is honoring contracts. One question then becomes, “Does a free market alone provide sufficient mechanisms to enforce contracts?” If the answer is, “Without virtue, no” then I also disagree with Steve’s statement.

  11. Well put, Bill. I think it was J. Schumpeter who pointed out that certain old-fashioned institutions, in particular ethics, are necessary for capitalism to function well. Because he believed those institutions are being undermined, he predicted that some sort of socialism would come to pass.

  12. Jerry,

    I think one problem we have in discussions of economic freedom and ethics is a limited view of ethics. Virtue includes not only avoiding bad but actively pursuing good. I find that investors, for example, place honesty and integrity above all else. They do not want to do business with a thief for obvious reasons. However, equally important is that the entrepreneur have courage, intelligence, and persistence. Free markets encourage both kinds of virtue.


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