ON THE MORALITY CULTIVATED BY COMMERCE

In 1997, Condoleezza Rice, not yet America’s Secretary of State, was speaking to a gathering about American foreign policy, and in the question period, she was asked what principles would guide her foreign policy.  Without a moment’s hesitation, she responded, “Free markets.”

It’s worthwhile expanding on the reason why she put so much weight on free markets.  It is a moral reason –moral in the sense of shaping human character.  I want to discuss the virtues that are generated by the commercial exchange of services and goods in a free market.

Nothing I write today will be new to you.  I suspect that I'm mostly preaching to the choir.  As Mark Twain quipped, "No one ever got converted at a Thursday night prayer meeting" or (as he might have added) on the Class of ’54 website.  Still, it's important once in a while to take stock of our good fortune and remark on the honor and miracle of what each of us has done with our lives.

In 1776, Adam Smith looked down from his ivory tower and made sense of the seeming haggling in the market place below him.  His explanations struck many of his readers as paradoxical, defying common sense.  Today, his paradoxes have grown in acceptance, but not so much that we don’t need reminders of them.  Let me mention four of those paradoxes.  I call them the paradox of scarcity, the paradox of abundance, the paradox of equality, and the paradox of freedom.

First, the paradox of scarcity: the scarcer the supply, the higher the price; the higher the price, the more is supplied.  In Smith’s time, it was conventional wisdom that the price of goods and services was based upon the cost of producing them.  Even today, many people still think that there is a “just price” for things (like gasoline).  But that seeming truth is just plain wrong.  A commodity’s price rises or falls, depending on its scarcity – on its supply relative to demand for it.

High prices attract new efforts to meet the needs of others.  For the entrepreneur, "a problem is nothing more than an opportunity in work clothes,” as Henry Kaiser once said.  Someone else’s problem is a road to prosperity for any of us who can help solve it.  And so we get good at stepping into the shoes of people who need help; we empathize with them, seeing their troubles from their point-of-view.  Then we improve our skills so that we can assist them by inventing a solution to fill their need: a gas-saving car, a better air-conditioning system in their building, a cure for cancer.  What, in fact, we do in a commercial society is work constantly to improve our abilities to make the lives of others better.  The paradox of scarcity, in short, develops two vitally important virtues, empathy for others and the habit of continual self-improvement.

The second of our paradoxes is the paradox of abundance: the more resourceful our competitor, the worse, but the more resourceful our customer, the better.  Think about it: As a general rule, I don’t envy the success of others, but (to the contrary) am made happy by their prosperity because their success in their chosen field enriches me.  If I’m a winemaker in California, I cheer when car sales rise in Detroit because a set of my customers, wine-drinking auto engineers, are working and making money.  Because of their increased buying power of my wines, I profit and experience an increase in my profits – my buying power.  Conversely, when auto sales slump, alas, so do my wine sales; auto engineers start scrimping and drinking tap water.  My fortunes decline when my customers suffer misfortune, and it is my sincerest wish that they will get back on their feet.

The moral consequence of the paradox of abundance is a huge increase in social good will.  Since most people are potential customers, not competitors, participants in a commercial society are cheered by the successes of virtually everyone. 

The third of our paradoxes is the paradox of equality: people hang out with others with whom they can be mutually useful.  Let me explain it in slightly more detail.

One might think that in free markets persons with few skills or resources to exchange for assistance would be ignored and left destitute.  Doubtless, in the past the needy sometimes were regarded as useless and became invisible. But, in today’s commercial and social life, partly because of the empathy generated by the habits of exchange, the more fortunate frequently hold out a hand to those in great need.  Creditors extend repayment periods, negotiate their bills downward, devise jobs for the least fortunate to do, and lend encouragement and training in how they might improve themselves.  We tend to be patient even when a man has not lived up to his end of the bargain.  In short, we habitually act generously to turn others into good customers.

More interestingly, in a free market system the indebted person usually will want to terminate his needy relationship as soon as he can to regain his self-respect.  The anthropologist Elliot Liebow spent years observing homeless men.  He became particularly interested in the ups and downs of the affectionate relationships between a dozen unemployed vagrants and their “nice,” attractive girlfriends.  In contrast to the men, the women held paying jobs and lived in clean, well-lit apartments.  Liebow was surprised when the homeless men “broke off” these affairs against the wishes of their attractive girlfriends.  Then it dawned on him that the men acted the way they did out of need to maintain their self-respect.  So pervasive in American society is the notion of “giving fair weight”, so intertwined in the definition of being worthwhile is the duty to reciprocate, that they were ashamed at being over their heads in social indebtedness.  And so these homeless men walked out on the sweet deals their girlfriends offered them and returned to their community of vagrants where they regained what Liebow called a “sanctuary for those who can no longer endure the experience or prospect of failure.”[i]  They retreated to less demanding relationships, where their jokes, their scavenging, their patient listening and consolations were appreciated by their peers.  By voluntarily retreating to a less demanding status, they transformed themselves from good-for-nothings to good-for-somethings, able to reciprocate the lesser obligations they incurred.  At that level, by caring for others that they could assist, they experienced success.

As a consequence of this tendency to seek out a comfort level, people in commercial societies tend to drift into separate but self-respecting communities.  Individuals of one set of abilities tend to withdraw willingly from individuals with different sets or levels of talents; we cluster with individuals more like us.  Birds of a feather flock together and begin feeling good about each other.  Within our distinctive communities (in the words of Garrison Keillor) we all end up thinking we’re “above average.”  Self-esteem rises within the segment of society to which we assign ourselves.

That is the paradox of equality – in a society that lives by the ethic of reciprocity, we seek out those with whom we can make a fair exchange –.

And, finally, the fourth paradox, the paradox of freedom: liberty requires limits.  While most Americans observe the norm of reciprocity most of the time, it is not fail-safe.  In all of us the obligation to give fair weight breaks down once in a while, and in a few of us it breaks down much too often.  We take without paying back.  Theft by robbery is the classic instance of the refusal to reciprocate, but theft occurs in many other forms, as well.  When individuals do not deliver on their promises, or create nuisances, or refuse to pay their fair share of taxes for national defense, public safety, highways, clean air, and universal education, they are taking without paying back.

When theft (in whatever form) increases, free exchange is threatened, for theft erodes trust and frightens persons into hiding their abundance of skills and products instead of letting customers know about them.  Exchange depends on trust.  With those who lack internal restraints on the temptation to take something for nothing, government has to use its police power: the patrol officer to threaten the robber, the judge to threaten the promise-breaker, the regulator to threaten the nuisance maker, the taxman to threaten the tax evader.

So liberty requires limits.  Its moral consequence is personal honesty.  We can prosper and avoid the coercive restraints of the policeman, the judge, the regulator, and the taxman by restraining ourselves.  In a commercial society we are rewarded for being honest by being left alone by the restraints of government.

These are the moral consequences of the  four paradoxes of the dynamic of reciprocity in a commercial society – the paradox of scarcity makes us empathetic, inventive, and self-improving; the paradox of abundance makes us supportive of our fellows and neutralizes envy; the paradox of equality confers self-respect on all who try; and the paradox of freedom rewards honesty and self-restraint. To put the same points negatively, free markets neutralize four of mankind’s deadliest sins, sloth, detachment, dishonesty, and (most importantly) envy.

If one were to conceive of a utopia in the real world – a paradise not perfect, but as good as it gets, it probably would look like a society that motivated the bulk of its members to want to make themselves better so that they could help others.  A commercial society in which voluntary exchange  enables collaboration is precisely that utopia.

This country’s founding fathers envisioned creating what they called a “commercial republic” because they had this one central insight: a free-market society motivated its members to improve themselves.   In a society where the good fortune of others multiplies our own, there would be a material foundation to live by the golden rule – to do unto others as we would have them do unto us.

Government has a critical role in making free markets work.  Besides curtailing the liberty to swindle and steal, a skilled government maintains a stable currency, the lubricant of exchange.  It collaborates as both supplier and customer in providing universal education, national defense, and highways for hauling commerce.  It also remedies extreme differences in bargaining power with antitrust and labor laws.  It motivates private charity and augments private generosity with public funds as “the charity of last resort.”

But when government carries out these essential tasks, the free marketplace is a superb device for enabling collaboration.  It gives individuals the personal freedom to pursue their own purposes without requiring the collective assent of others.  It enables individuals to get the precise assistance they need to accomplish their purposes.  It diminishes government’s temptation to coerce by reducing our dependence on government.  And most importantly, it rewards service to others and, in doing so, reinforces a morality that motivates self-improvement and becoming useful to others, while discouraging laziness and envy.  The most important product of free markets is not that they make more goods, but that they make more good people.

Not a bad bottom line. 

Now, we come back to Condi Rice’s reply about a proper principle for America’s foreign policy.   Free markets are key to making people better and nations less aggressive.  The same holds true for American domestic policy.  Free markets work every day to transform each generation of Americans into self-improving, self-respecting, and self-restraining adults. Free markets enable Americans to be truly self-governing.

There is a wise Chinese saying, “Governing a great nation is like cooking a small fish: Don’t overdo it.”   While it might seem opportune to solve America’s problems – health, energy, education, jobs, you name it – by replacing private markets with ambitious government programs, I suggest we might want to weigh the moral costs of doing so.  And in assessing the various candidates who seek our votes, we might want to pay attention to their awareness of the foundations that have made – and keep on making – Americans a very good people.

William K. “Sandy”  Muir