Does economic competition destroy ethical behavior? I ask because I came across in my reading today this insightful short paper by Harvard economic Andrei Shleifer in which he argues that, yes, in some cases, competition destroys ethical behavior, but, in the long run, competition promotes such behavior.
The argument for the first proposition is that, in some cases, unethical behavior can lower a firm’s costs (e.g., using child labor) or increase its revenues (e.g., universities commercializing faculty research), and so, once one firm in a market begins engaging in such behavior, other firms must follow suit, even if the people controlling them regard the behavior as wrong. If they don’t, they will suffer a competitive disadvantage that could eventually put them out of business.
Why do people who regard certain behavior as immoral nevertheless engage in such behavior under competitive pressure? A moral theologian would say that they are succumbing to avarice. Scheifer, as an economist, puts the point differently. He writes, “I assume that the proprietor of the firm values ethical behavior, but that such behavior is a normal good,” meaning that, the higher the cost of the good, the less of it people will buy. He continues, “When sanctioned behavior by competitors reduces their costs, it also reduces prices in the market, and as a result the proprietor’s income falls. When his income falls, so does his own demand for ethical behavior, leading to the spread of censured practices.”
On the other hand and for quite the same reason, competition will raise ethical standards in the long run. Shliefer writes, “Competition is the fundamental source of technological progress and wealth creation around the world. The very same market forces that might encourage unethical conduct also motivate firms to innovate and create new products, leading to economic growth. As societies grow richer, their willingness to pay for ethical behavior, through both government enforcement and private choice, increases as well. As a consequence, both moral and regulatory sanctions work better in the richer countries,” and so “competition is likely to promote ethical behavior in the long run.”
By the way, regarding the idea that being wealthy is a bulwark against wrongdoing (or, in Shleifer’s terms, when you have more money, you’re more willing to pay a price to be ethical), compare Cephalus in Plato’s Republic. Asked by Socrates what was the greatest blessing he reaped from his great wealth, Cephalus answers, “The greatest blessing of riches … is that [a man] has no occasion to deceive or to defraud others, either intentionally or unintentionally, and when he departs to the world below he is not in apprehension about offerings due to gods or debts which he owes to men.” (Republic, 330d-331b).
July 9th, 2011 | 8:16 am
It is notable that all ancient democracies, who prized virtue as the condition of public liberty, were deeply suspicious of commerce. “They can find no leisure,” says Xenophon, “either for their friends or for the republic.” Plato, in the fifth book of the Republic orders a citizen to be punished, if he attempts to concern himself with trade and Aristotle in the third book of the Politics maintains that a well-regulated republic will never give artisans the right and freedom of the city. Indeed, at Athens, Diophantes made a law that they should be slaves of the republic. At Sparta, “that flash of lightning, in the dark night of crime and despotism,” as Robespierre called it, the laws of Lycurgus debarred citizens from trade and all foreign commerce was conducted through magistrates appointed for that purpose.
In modern times, such views were shared by the Jacobins. According to Saint-Just, “Trade ill becomes the true citizen. The hand of man was made only to till the soil and to bear arms.” And it was to prevent anyone from debasing himself by practicing a trade that he wished to distribute land to every citizen.
It was Calvin and Beza, the first theologians to extol usury, who first treated commerce as a school of virtue.
July 9th, 2011 | 10:33 am
On the other hand, St. Paul, who also lived in the ancient world, said, “Those who will not work should not eat” (2 Thes. 3:10).
July 9th, 2011 | 11:41 am
Robert T Miller
It was commerce, rather than work they objected to. Tillage of the soil was positively venerated – Cincinnatus, Fabricius &c
Hence Saint-Just’s remark.
July 9th, 2011 | 12:17 pm
Michael:
I should first say that I’m not clear why this point is relevant to that in my original post.
That aside, it’s patent that all these people objected to manual labor for profit, which is precisely what St. Paul was talking about. He worked as a tent-maker, which would make him one of those traders or artisans whom the authors you cite deplored.
BTW, what we really see here is not some well-reasoned view about the virtues needed to run a democracy. The attitude is exactly same as that of the landed British nobility of the 18th and 19th century, which also deplored people who engaged in “trade.” It’s the attitude chacteristic of an upper class enjoying inherited wealth in a highly class-based society. It is, frankly, a reprehensibile attitude, which the world has now happily left in the dust bin of history.
July 9th, 2011 | 5:43 pm
So if Shleifer’s right, ethical behavior in the U.S. should be exponentially greater today than it was back in, say, 1776, since today’s economy (adjusted for inflation, etc.) is exponentially greater than it was back then. That makes me feel good (ethically speaking).
July 10th, 2011 | 5:39 am
Robert T Miller
The relevance of my remarks to the original piece is that the competitive spirit – overreaching one’s fellow-citizens – is the essence of commerce. The merchant’s gains are at the expense of his fellows and of the public, in a way that those of the soldier or the peasant are not.
The virtues of the ancient republics, on which their liberty and survival depended – courage, perseverance, self-control, prudence, discipline, constancy in misfortune, devotion to the community, are not the virtues for which commercial states, such as Carthage, are conspicuous.
Did Sparta, with its black broth and iron money need wealth to promote emulation in virtue?
July 10th, 2011 | 10:30 am
To Michael:
I see, but “overreaching one’s fellow-citizens” and “gains at the expense of the public” and “the competitive spirit” have nothing to do with “competition” in the sense in which an economist like Shleifer uses the word.
When an economist talks about a market being competitive, he means that prices are (approximately) equal to marginal costs. This can happen (though rarely) even when there is only one seller of the product and questions of “competition” in terms of rivalry can’t arise. Moreover, “competitive” markets (in the economic sense) benefit the public by reducing prices to the lowest sustainable level; they don’t harm the public.
So I still think you’re speaking at cross-purposes to Shleifer and my post.
July 10th, 2011 | 3:05 pm
@Michael PS
Competition is not about gains at the expense of others, but about cooperation. In the absence of outside intervention (government), those who succeed in commerce are those who figure out the ways to serve the wants/needs of the consumers for the cheapest price. That’s a good thing.
July 10th, 2011 | 8:38 pm
One thing we know, experientially, is that “better” in this instance is often marginal, and not uniformly even that. So, it’s an argument, but it only goes so far.
July 11th, 2011 | 9:37 am
The quote from Cephalus from Plato’s “Republic” is remarkable for how extraordinarily naive and wrong it is.
The folks on Wall Street who contributed their part (and it was only part, though it was a whopper) to the financial crisis we’re in had plenty of riches, and yet they wanted more and were willing to cut all sorts of ethical corners to get it. We now know that many already wealthy Wall St. traders were made astronomically richer even as they gamed a system that was destined (and they knew it) to come crashing down like the house of cards it was. (You can blame Fannie Mae and Freddie Mac for lots of things, but Triple A-rated CDOs is not one of them).
The Conquistadores who came to the New World looking for gold already possessed riches, and yet they were single-minded in their pursuit of more, ready and willing to do despicable deeds (to deceive and to defraud and to despoil) in order to acquire greater wealth.
My wife and I have been watching HBO’s excellent Deadwood series, which is obviously the figment of someone’s imagination, though it’s also a work of historical fiction. Why is Charles Hearst so convincingly portrayed as a rapacious gold hunter, willing to sacrifice anything to get another shot at “the color”?
I can’t believe someone of Robert T. Miller’s acumen has tossed out such a facile and obviously problematic argument about the benefits of wealth.
The problem with Schleifer’s argument is the presumption that moral values lurk somehow or other unscathed and beneath the competitive forces of the market place. If the market demands, suggests Schleifer, we might submerge them more deeply (translate: become unethical even while retaining our moral values), but the long-term effects of competition are to make us more wealthy, which then gives us the freedom to allow our unchanged moral values to come to the surface, with the added benefit that now we can afford to do something interesting with them.
Notice, first, that moral values are a luxury in Schleifer’s analysis. We can’t afford a yacht when we’re losing in the economic game, nor can we afford to run a firm ethically if the competition is beating us by running theirs unethically. In other words, Schleifer’s analysis is itself morally suspect for giving tacit support to the subordination of morality to markets. Second, and more importantly, Schleifer fails to account for the ways in which competitive economic practices themselves form moral subjects—and in the most problematic ways in contexts in which competition is hailed as some sort of wonder worker. The person who comes out of Shleifer-endorsed competitive marketplaces is likely to be a wealth-maximizing utilitarian whose “Christianity,” if it survives at all, will be made to conform to his or her deeper love of wealth production. You’re going to need more than one verse from St. Paul to justify this sort of perversion of so much of what the Bible has to say about the topic of wealth and treasure.
July 11th, 2011 | 10:36 am
I wish my friend Charlie Collier would think more and write less.
Neither Shleifer nor I said that rich people never steal, etc., and so examples of rich people engaged in such wrongdoing are not counterexamples to the point being made.
What Shleifer said (and I endorsed) was that, *other things being equal,* richer people have less incentive to steal, etc. than do poorer people. That point, with the essential ceteris paribus qualification, is not only true but a truism. In fact, Charlie, as a good liberal, probably already believes it, at least if you put the same point in different langauge: poverty is a root cause of crime.
July 11th, 2011 | 12:05 pm
One could make a case that poverty is a crime in and of itself because the mere fact that a person is poor is an indication of being unwilling to make a profit and benefit society.
It is possible to twist ethical arguments in any way conceivable if one is willing to do the work thus forcing folks to ultimately cut the Gordian knot and say, “Is this ethical? Probably not. Do we care? Of course not.”
July 11th, 2011 | 5:29 pm
I am sure Robert Miller is right that I should think more and write less, though I don’t write much, and blogs only foster dialogue when comments follow posts relatively quickly. I could think for days and then comment, but I’d be writing for nobody. Perhaps Miller would prefer that.
It’s evocative of Miller’s own hasty intellectual habits that he attributes to me a position I’ve never espoused as my own, and from which my criticisms of his remarks do not flow: it’s alleged that I’m a liberal and that I believe things I’ve not even mentioned.
I’m rather trying, and surely failing, to be a Christian, but I’m definitely not persuaded that Christianity is compatible with the ideological underpinnings of American-style free-market capitalism. In fact, I doubt there is any more “liberal” a view of the human subject than that which is embedded within the “orthodox” economic theory of our day. In my view, the autonomous subject of much pro-choice feminism is wholly compatible with “homo economicus” as presupposed by much of Wall St. and Madison Ave. That troubles me for reasons I’d think Miller would share.
Nor am I persuaded that poverty is the root of crime, though I’m supposed to believe this according to Miller’s reflexive conservative stereotyping. I learned from Aquinas that the person who has the greatest incentive to steal (to stay with Miller’s language for a moment) is not actually stealing–anyone who is in genuine material need is entitled to take from those who have in abundance (“In cases of need all things are common property.” ST II-II, Q66, A7, sed contra).
It would seem to be the case, then, at least according to Aquinas, that genuine need can never be an incentive to steal, for taking out of need is never stealing (careful
qualifications are needed, but Aquinas’s core logic suggests exactly this). Needless to say, this undercuts the point that Miller claims to be ratifying in Shleifer, and it does so without recourse to liberal cliches.
Miller’s truism is thus false. The people with the least material resources on this planet don’t have an incentive to steal, because they cannot steal by definition. If stealing is taking things to which one is not entitled, then describing poverty as a root cause of crime is itself a form of theft: it takes from the poorest of the poor truthful descriptions of exigent “taking”–taking that stems from material need–as non-criminal.
The point of my examples wasn’t to suggest that rich people also have vices. Rather, the point was to suggest that, contrary to the sweeping claim made by Cephalus and endorsed by Miller, the presence of wealth in some circumstances seems to encourage, or inflame, a vicious pursuit for more of the same. Such a point may be odious to committed capitalists, by I dare say it’s closer to the witness of Scripture on the dangers of wealth/mammon.
July 17th, 2011 | 2:27 pm
[...] Does Economic Competition Destroy Ethical Behavior? – Robert T. Miller, First Things [...]
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