Discussion of “markets” typically combines a discussion of what I think of as "markets" – a mechanism of exchange of goods and services – and "capitalism" – a system of raising capital to fund projects wherein the providers of capital are distinct from the managers of business.  When we critique "markets" we should understand whether we are critiquing the mechanism of exchange or the system of capital-raising.

Focusing upon the mechanism of exchange, it is important to recognise that markets are not any kind of state of nature, not “the law of the jungle”.  Instead, they are a deliberate creation of policy, built over centuries of the establishment of property rights, contract rights, and a medium of exchange.  Markets are also reliant, for their efficacy, upon the respect for moral norms – especially property, truth-telling, promise-keeping, and fair dealing.

A market can be seen as a tool, like a knife.  A knife can be used for moral or immoral purposes – e.g. we could cut dinner or stab those we'd like to rob.  If we could not be confident that most users of knives would accept moral constraint upon their use – i.e. that they wouldn't use knives for stabbing people – then allowing people to have knives would not be practically or morally attractive.  In the same way, the market mechanism grants us a freedom that we can abuse – we can try to cheat and lie and steal and break our promises, getting away with the most that the law cannot practically intervene to prevent.  It is precisely for this reason that markets depend, for their efficacy, upon morality.

It is particularly helpful to distinguish between the market as a morally neutral mechanism and the moral context in which the market operates when we find the operation of a market does not produce an outcome we desire.  We want to be able to ask: Does it fail because the mechanism malfunctioned; does it fail because the mechanism is inappropriate for the purpose; or does it fail because the moral norms that guided its use were flawed or absent?

There is no genuine necessary tension between morally significant institutions and markets.  The allocation of meat and vegetables to children at the family dinner table is not done via trade, but by Mother or Father's central planning.  Similarly, at the village fete the tent will be put up by a team that has tasks allocated, not traded for.  Indeed, orthodox economic theory assumes a key role for central planning in one of its most important institutions – namely a "business".  In a business, once the initial stock of resources (e.g. the workers and raw materials) are determined by market processes, tasks are allocated (centrally planned) by managers.  One great attraction of markets is that they can function partially, in combination with other institutions.  By contrast, if society as a whole is to be centrally planned (if central planning is to be the centrepiece of the economic order), then central planning must be more-or-less comprehensive to be useful.  It is central planning of society that crowds out other morally significant institutions, not markets.

As well as depending upon certain moral norms to function at all, markets and capitalism encourage morally admirable behaviours and facilitate morally admirable social outcomes.  They

  • encourage innovation, imagination and creativity (through the rewards of success)
  • facilitate social mobility (the promotion of social mobility is the very purpose of capitalism – the point of capitalism is that it allows those with good ideas or willingness to work hard to obtain capital to fund their projects, even if they have none of their own to start with)
  • encourage efficiency and oppose stagnation and vested power (through the pressures of competition)
  • encourage hard work and thrift, offering leisure and plenty as rewards
  • are environmentally friendly (by using resources efficiently)
  • allow a society of great diversity and tolerance (because the moral norms required for markets to function are narrow, and because by contrast with planning there is no need for moral choices to be made as to whose projects should flourish and whose die)
  • are the enemies of misguided prejudice (if you think women are less effective workers than they are, and hence you refuse to hire women, your business will not succeed as well as your competitors' that do hire women)

Markets also provide helpful and timely warnings.  That includes the widely-recognised impacts of pricing and profit signals (if making washing soap is not profitable, the market signal is "Do something else.") but also speculation.  For, despite the common populist caricaturing of the evils of "speculation", speculators are key agents of economic good.  Speculators spotted, before governments realised it themselves, that Greece could not repay its debts.  The same thing happens all the time with speculators who understand, often before incompetent company managers have comprehended it, and certainly before they admit it, that companies are in trouble.  By observing the pricing consequences of speculation in financial markets, we can see what speculators believe are the risks.  If we forbad speculation we would have to wait until the company actually failed before seeing that it was at risk, meaning companies would fail precipitately and unnecessarily, when earlier action in response to signals from speculators, could have turned things around.

The key failure of recent years, leading up to the financial crisis, did not lie in the functioning of markets.  It was not over-reliance upon market mechanisms or a misguided idea that all markets are the same.  Neither did it lie in failing to add a sufficient "promoting the broader social good, as opposed to individual gain" dimension to the regulation of markets.  The key failures, in my view, related to our forgetting the moral underpinnings of capitalism.  Specifically, we forget the moral constraints upon usury – lending money at interest.  The lesser one forgotten was this: to induce someone to make a promise they will break is to induce (and thus yourself commit) a sin.  If you lend money to someone that cannot repay, you make that person make promise (to repay the loan) she will not keep.  That is wrong.

That was a problem, and in the US may have been a significant problem with certain subprime lending.  But the bigger principle forgotten was this: the moral justification for the receipt of interest is that money lent is at risk of loss, and it is not the job of the state to keep the rich lender rich.  Bank deposits are not a mechanism for rentiers to receive riskless passive income.  Bank depositors are paid interest because bank deposits are loans.

As a society, we forgot this.  Worse than that, we applied market principles to some industries and regions of the country (mining, steel-working, ship-building, the North, Scotland) that we later refused to apply to other industries and regions (banking, the South).  Closing the mines had systemic consequences for entire regions, but it was right to subject them to market forces nonetheless.  Seeing bank bondholders and depositors lose money when banks went bust may also have had systemic consequences.  It was wrong to refuse to see those consequences played out in banking, when we had been content to see them played out in other industries.

Markets and capitalism are tools/systems/mechanism.  They depend, for their social efficacy, upon moral norms in their daily operation, and upon moral restraint by policymakers in intervening in markets.   We need to learn lessons about morality and markets.  But they need to be the right ones.

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