Library of Economics and Liberty masthead logo 
Dwight R. Lee

The Political Economy of Morality: Political Pretense vs. Market Performance

Dwight R. Lee*

 
" The market process has a fundamental morality that is conspicuously absent in the political process."
There is a large gap between the performance of markets and the public's approval of markets. Despite the clear superiority of free markets over other economic arrangements at protecting liberty, promoting social cooperation and creating general prosperity, they have always been subject to pervasive doubts and, often, outright hostility. Of course, many people are also skeptical about government. Yet when problems arise that can even remotely be blamed on markets, the strong tendency is to "correct" the "market failures" by substituting more government control for market incentives. Recent evidence of this bias is healthcare reform, which, instead of freeing up healthcare markets to correct the distortions created by government subsidies and mandates, made the distortions worse by expanding the subsidies and mandates.
 

For definitions and more information, see Public Choice, by William F. Shughart II and Political Behavior, by Richard L. Stroup in the Concise Encyclopedia of Economics.

Public choice theorists have explained the bias favoring government expansion that does more harm than good by emphasizing concentrated interests vs. diffused costs. They point out that politicians often choose policies whose costs exceed their benefits if the costs are diffused among tens of millions of "losers," and the benefits are concentrated among a much smaller number of "gainers." The losers, they point out, will have little or no role in the policy process, while the gainers, with much more at stake per person, will have a huge role. Interests are clearly important in explaining why socially harmful government policies trump socially beneficial market solutions.

But that's not the whole story. Widely held moral perceptions also favor politics over markets. Those perceptions reflect a serious flaw in the political process and a failure to appreciate the moral foundations and outcomes of markets.

Two Types of Morality

What most people think of as moral behavior can be briefly described as satisfying three conditions: (1) helping others intentionally, (2) helping them at a personal sacrifice, and (3) helping identifiable people or groups. We all seem hard-wired to like this morality, which I refer to as "magnanimous morality." Magnanimous morality is an indispensible factor in living a meaningful life. But it is not the only type of morality we rely upon. While magnanimous morality is important in many of our economic activities (for example, practicing a certain measure of generosity and kindness to those we deal with directly), it is not the moral foundation of markets.

The moral foundation of markets is what I call "mundane morality." Mundane morality requires no more than what we would expect of any decent person and has, for most people, little of the emotional appeal of magnanimous morality. Mundane morality can be described broadly as obeying the generally accepted rules or norms of conduct, such as telling the truth, honoring promises and contractual agreements, respecting the property rights of others, and refraining from intentionally harming others except through legitimate competition. As Adam Smith stated:

Mere justice is, upon most occasions, but a negative virtue, and only hinders us from hurting our neighbour. The man who barely abstains from violating either the person, or the estate, or the reputation of his neighbours, has surely little positive merit.... We may often fulfil all the rules of justice by sitting still and doing nothing.1

One can question Smith's characterization of following the rules, or mundane morality, as having little positive merit. There is a continuum between magnanimous morality and mundane morality: on occasion, following the rules (mundane morality) satisfies some of the conditions of magnanimous morality. Professional golfers, for example, are known to call an infraction of the rules of golf against themselves even when no one would have otherwise known. Such behavior is done intentionally, is personally costly and is instinctively applauded as morally meritorious. But whether or not Smith saw mundane morality as having positive merit, he did see it as necessary and sufficient for people to coordinate their decisions through markets with large numbers of others in ways that promote their general interests, something that cannot be accomplished by magnanimous morality alone. In his famous "invisible hand" statement, Smith concludes that people, by pursuing their self-interest in the marketplace, unintentionally promote the public interest more effectively than if that had been their intention.2

Ever since its publication, people have criticized the "invisible hand" passage on both positive and normative grounds. The positive criticism is that the "invisible hand" doesn't work as well as Adam Smith claimed. This criticism has been moderated, however, by the overwhelming and steadily accumulating evidence that markets are unsurpassed at fostering freedom and promoting prosperity. But the evidence has done little to reduce, and may have increased, the moral skepticism toward markets. Market behavior is widely seen to be lacking in the magnanimous morality that people instinctively find appealing, and Smith's "invisible hand" justification for markets supports that view—people do more to help others unintentionally in markets by seeking only their personal gain, and benefits go to the general public, that is, to no one in particular. Many people see this justification as immoral or, at least, amoral. Think, for example, of how most people would react if told that Bill Gates, Steven Jobs, or Henry Ford did more for humanity than Mother Teresa ever did. It's factually correct. By bringing down the cost of computers and software (Gates and Jobs) and by putting swift personal transportation within the reach of middle-income and even lower-income families (Ford), they made life easier for hundreds of millions of people and probably took, as their reward, well below ten percent of the value they created. Mother Teresa, though a noble human being, did far less good because she helped far fewer people. Yet make that claim and you will hear howls of protest. What matters to most people in judging morality is intentions, not results.

The Perception of Political Morality

The widely perceived moral deficiency of market behavior contrasts sharply with the dominant view of political behavior. Because individual choices are far less decisive for voters than for consumers, people have much less motivation to evaluate the political outcomes than the market outcomes of their decisions. One result is that people are more influenced by political rhetoric than by market rhetoric. And when politicians, and organized interests, are seeking support for particular policies, the rhetoric almost always emphasizes magnanimous morality.3

 

For more information, see Rent Seeking, by David R. Henderson and Charity, by Russ Roberts, in the Concise Encyclopedia of Economics.

Politicians and rent seekers routinely talk about how policies they favor are intended to help identifiable and deserving groups, such as the poor, the elderly, the sick, the unemployed, the family farmers, the children, or those with jobs threatened by foreigners. When costs are acknowledged, they are commonly discussed in terms of the virtue of caring for others. Voters are referred to as members of a family who have obligations to each other, with our moral worth being determined by how well we treat the least fortunate among us. Of course, many people see those who profit by helping others as people who are simply profiting at the expense of others. Think, for example, of the person who profits by shipping plywood to people in Florida after a hurricane. He helps people in Florida. But many people see him as someone who benefits by hurting people in Florida. So policies restricting markets are commonly supported by political rhetoric demonizing those who, for example, are receiving "excessive" pay, making "excessively" large profits, charging high prices and interest rates in poor neighborhoods, outsourcing American jobs to foreign countries and not paying their workers a "living wage."

Magnanimous Morality on the Cheap

The ability of political rhetoric to bias moral perceptions in favor of politics over markets is reinforced by the fact that politics offers people an opportunity to convince themselves that they are being magnanimously moral at almost no personal cost. Consider the November 2010 vote on Proposition 23 in California. This proposition would have suspended the state law requiring that greenhouse gas emissions be reduced to 1990 levels by 2020 until the state's unemployment rate dropped to 5.5 percent or less for four consecutive quarters. The vast majority of California voters would have personally benefited had this proposition passed. Any change in global temperatures from suspending the state's efforts to achieve its greenhouse emissions goal would have been miniscule. And the suspension would have created noticeable gains for California residents in the form of lower energy prices and reduced state taxes and spending. Against these personal gains were morality-based arguments that a vote against the proposition was a vote for the environment and green jobs and against polluting oil companies and their profits. And "morality" seemingly prevailed over self-interest since Proposition 23 lost 61.6 to 38.4 percent.

I use the word "seemingly" because of the arithmetic of voting, which explains the low cost of voting against personal interest and the power of the rhetoric of morality in political discourse. In virtually any state or federal election, the probability that a voter's choice will determine the outcome of the election is effectively zero. Even if an election is expected to be close, the probability that the outcome will be decided by one vote will almost surely be less than 1 in 50,000.4 Using this unrealistically large probability, it cost the typical California voter effectively nothing to vote against Proposition 23. For example, if she is $500 worse off because it failed, the expected personal cost of voting against the proposition is only 1 cent ($500 × 1/50,000)—i.e., $500 times the probability that the policy would have failed only because she voted for it.

This tiny cost would hardly have given pause to a voter who had been convinced that voting against Proposition 23 was the morally right thing to do. More generally, no matter how much it will cost a voter if a government program or proposition passes (fails), voting for (against) it cost her almost nothing. So if she has been convinced that voting for it is the morally right thing to do, voting for it is a cheap way to achieve a sense of moral superiority. As Bryan Caplan points out, "inefficient policies like tariffs or the minimum wage might win because expressing support for them makes people feel good about themselves" and "the private cost vanishes due to voters' low probability of decisiveness.".5

Protecting Moral Self-Esteem through Ignorance

The ability to achieve a sense of magnanimous morality by voting at extremely low cost is a bargain that can, and does, create a strong emotional bias in favor of political over market approaches to solving problems. Being able to take advantage of this bargain, however, depends on voters believing that casting a vote for noble objectives really is an act of magnanimous morality. And this belief depends on two supporting beliefs: first, that casting a vote in favor of expanding government is a significant personal sacrifice; and second, that the expansion really helps those it is intended to help. Evidence that the first belief is widespread can be seen in the difficulty of convincing people that voting for expensive government programs costs effectively nothing because the individual's vote is completely impotent at affecting election outcomes. Outside the classroom, my attempts at this have been met with moral indignation far more often than with calm reflection, and I'm not sure I have had much more success in the classroom.

Also, expect most people to be resistant, and often hostile, to attempts by economists to convince them that a host of government policies do more harm than good by regaling them with economic concepts such as opportunity cost, comparative advantage, and marginalism. Given the incentives inherent in voting, there is far more emotional uplift and self-satisfaction in accepting the claims of magnanimous morality that politicians and interest groups make about the programs they favor. The lack of interest that voters have in knowing if the government programs they vote for actually accomplish their noble objectives is reinforced by the very high cost of determining the effect of those programs—and of doing anything about it if they find out that the effect is the opposite of what they were told.

The big exception to this "vote and forget" approach is the organized groups that have a direct and concentrated interest in the effect of the programs they supported with their rent-seeking and magnanimous-morality rhetoric. These groups have the connections and influence with politicians necessary to sway how legislation is written before it is enacted and implemented afterward. In other words, as opposed to the average citizen's vote, the "voting," i.e., lobbying, of organized groups continues after the election and has significant influence on political outcomes. So it should come as no surprise that the moral objectives for which voters casually assumed they were voting often end up as little more than smoke screens behind which politically influential groups can promote their private advantages at public expense.

Neither Moral nor Cheap

The rhetoric dominating the public statements of politicians and their special-interest supplicants is successful at convincing people that magnanimous morality requires substituting political action for market incentives, even though the former generates outcomes that are less efficient and moral than does the latter. The reality is that political behavior is as motivated by self-interest as market behavior is. Voters receive a low-cost sense of moral virtue by voting for noble-sounding policies; organized interest groups secure protections and privileges at the expense of the public; and incumbent politicians secure the favor of voting blocks. Furthermore, this political self-interest is not disciplined as productively as is the self-interest pursued in the marketplace. Spending and investing your own money, subject to the discipline imposed by market prices, is more effective at motivating people to actually serve the interest of others than is casting votes in the ballot box and lobbying for political favors. The market process has a fundamental morality that is, if one looks beyond the moral pretense in political rhetoric, conspicuously absent in the political process.

Still, as long as there are people who cannot resist the appeal of morality on the cheap, the political process will continue to serve up cheap morality. And the result will continue to be neither moral nor cheap.


Footnotes
1.

Smith, A. ([1759] 1982) The Theory of Moral Sentiments (Indianapolis: Liberty Fund, Inc.). P. 82. Online Part II, Section II. Par. 9, at http://econlib.org/library/Smith/smMS2.html#II.II.9.

2.

Smith, A. ([1776] 1981) An Inquiry into the Nature and Causes of the Wealth of Nations (Indianapolis: Liberty Fund, Inc.). P. 456. Online at Book IV, paragraph IV.2.9 at http://www.econlib.org/library/Smith/smWN13.html#IV.2.9.

3.

Efforts are also made to present business and their products in moral ways with claims about their environmental concerns and mention of their charitable contributions to worthy causes. But businesses know that if consumers find no personal advantage in their products, bankruptcy will soon follow, no matter how strong their reputation for magnanimous morality.

4.

The probability that a vote will determine if a policy is enacted is even lower when voting for a politician who promises to support the policy, rather than directly on the policy itself.

5.

Caplan, Bryan, The Myth of the Rational Voter (Princeton: Princeton University Press, 2007. P. 138.


*Dwight R. Lee is the William J. O'Neil Professor of Global Markets and Freedom at the Cox School of Business, Southern Methodist University.

For more articles by Dwight R. Lee, see the Archive.
Return to top
Copyright ©2008
Liberty Fund, Inc.
All Rights Reserved