CURRENTS

INMODERN THOUGHT MORALITYIN THE MARKETPLACE

THE MORAL FOUNDATION OF THE MARKET

nesspersons, and moral education are themost important of these regulators. Ac-cording to this socioeconomic mode of anal-ysis, those concerned with preservationof markets must concern themselveswith the effective working of these non-market mechanisms.

REGULATION: SOLUTION ORPROBLEM? '

for fear of being put out of business bythose who keep their word.

As a result of this belief in the abilityof the invisible hand not only to facilitateeconomic exchanges but also to ensuretheir ethical quality, lists of the prerequi-sites of a free market, provided by neoclas-sical economists such as George Stiglerand Gerard Debreu, do not include anyreference to ethical sustaining mecha-nisms, or even externally generated rulesof the game. The lists of prerequisitesmention only that buyers and sellersmust be small relative to the market;that finns act independently of one anoth-er; that complete information about offersto buy or sell be freely available; and thatresources be transferable among users.

Those neoclassicical economists whodo concern themselves with the rules ofthe market assume that they are some-how naturally provided, and hence do notrequire any special effort or attention. Orthey may assume that the ethics-sustain-ing measures will arise out of the give-and-take within free markets, as partici-pants, recognizing the efficiency of hav-ing such rules, formulate them and abideby them out of sheer self-interest.

Socioeconomists (who draw heavilyon social sciences other than economicsin studying economic behavior) include intheir analysis the "other" Adam Smith,the author of The Theory of Moral Senti-ments. They maintain that all m.arketsare encapsulated in societies, which pro-vide the markets with the rules ptescrib-ing what is morally acceptable-what isand what is not tolerable. The encompass-ing ~ety has specific mechanisms to en-sure that the markets "behave." Thesemechanisms include government regula- .tions but do not necessarily rely chiefly up-on them: Community values, peer pres-sure exerted through associations of bus i-

efore examining the CUn'entstatus of these morality-sus-taining mechanisms in our s0-ciety and inquiring whether

they need urgent repair, I will considerthe neoclassical suggestion that the mor-al difficulties of the market arise from gov-ernment regulation rather than fromweakening of ethical mechanisms. TheS&L crisis provides an important case inpoint. Although the $500 billion-plusmess has many causes, practically allagree that changes in banking regula-tions in the early 1980s were a major insti-gating factor. These changes raised themaximum insured deposit from $40,000to $100,000 in 1980; relaxed capital re-quirements; and above all, beginning in1982, allowed thrifts to invest in high-prof-it, high-risk markets such as commercialreal estate and junk bonds.

Socioeconomists may argue that thiswas actually a measure of deregulationrather than of change in regulation, butneoclassicial economists are bound to ar-gue that if there had been no governmentinsurance in the first place, the risky be-havior of S&Ls'would have corrected it-self. Those S&Ls that took too much riskwould have failed, taking with them onlythe investments of their stockholders anddepositors but not taxpayers' billions.Moreover, depositors soon would have

468 THE WORLD &

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not adequately self-regulating, and thuscoITections via public institutions were vi-tally needed. Indeed, this has become oneof those market "failures" neoclassicaleconomists acknowledge and allow, as amatter of public good, for some measureof external regulation.

learned to avoid risky institutions, orwould have demanded high premiumsfor their investments (as they do in thejunk bond markets), or sought private in-surance that is self-financing.

This line of argument, however, ig-nores the fact that the regulation of finan-

While

excessive and poorly drafted regulations are

clearly a major cause of economic problems,

removing the government completely is not an

acceptable course for anyone.

cial institutions was introduced preciselybecause the unscrupulous conduct of fi-nanciers, banks, and savings institutions(and insurers) in the preregulatory dayshad major detrimental effects not merelyon depositors and investors but on thewhole economy.

Modern economies require large con-centrations of capital, but prior to the es-tablishment of national banks and a uni-fonn currency in 1863, bank failure, coun-terfeiting, and banks' refusal to honor cur-rency (state banks were free to issuetheir own notes) were so common thatthe public was reluctant to entrust finan-cial institutions with their deposits. Addi-tionally, the fragmented system could notprovide the flows of credit necessary foreconomic development-for example, richNew England banks had no reliable wayto channel funds to the credit-starvedSouth and West. Eventually, this lead tothe formation of the Federal Reserve sys-tem in 1913. Still, runs on banks andlack of public confidence were problemsuntil the establishment of federally in-sured deposits in 1933.

In short, the financial markets were

One may argue that if there were nopublic till, defense contractors could notbilk the public out of billions of dollars.However, not even extreme libertariansargue that we need no publicly provideddefense. Competitive bidding is some-times recommended as a w~y to intro-duce market discipline in this public re-alm, but it is far from a cure-all. Competi-tive bidding can be rigged by contractors'bribes, and many of the items we buy-from aircraft carriers to B 1 bombers--areso big there is only one, at most two, pro-ducers, and hence no basis for true compe-tition. When the government complainedto General Dynamics about shoddy prod-ucts and grand-scale overbilling for nucle-ar submarines, the company in effectsaid that it would cease to produce them.The Defense Department, having no oth-er source to turn to, was forced to yield.Clearly some regulation of defense con-tractors is required. Similarly, withoutsome government regulation, customerswould not be able to tell if prescriptionand over-the-counter drugs had been test-ed for safety until it was too late.

In short, while excessive, stupid, and

469DECEMBER 1990

CURRENTS INMODERN THOUGHT- MORALITYIN THE MARKETPLACE

THE MORAL FOUNDATION OF THE MARKET

poorly drafted regulations are clearly amajor cause of economic problems-andin turn lead to ethical temptations thatwould not exist if government were not in-volved-removing the government com-pletely (as distinct from cutting its roleand powers) is not an acceptable coursefor anyone.

ALTERNATIVE WAYS TO REGULA1't:THE MARKET

he best way to minimize govern-ment regulation of the marketis to rely heavily on three otherfactors: culture, associations of

practitioners, and personal and profes-

470 THE WORLD & I

barons, and may ~ave been tamed tosome extent during the Progressive era,but what has happened in recent decadesis much less clear. Because there are noreliable measurements of the ethicality ofbusiness culture and changes in it, it is al-most impossible to ascertain whether the

sional moral education. Although thesemust be considered one at a time, theywork best in conjunction with one anoth-er, each supporting and magnifying the

others.Moral Culture. Culture is a term oftenloosely applied to the sets of values that

The best way to minimize government regulation ofthe market is to rely heavily on three factors:

culture, associations of practitioners, and personal

and professional moral education.

standards have ch~. Did corporateAmerica grow more rolerant of unre-strained greed? Was this the case in

some industries (defense, finance) but not

in others? Or have we become more sensi-

tive ro oo::un-ences that. abounded in previ-

ous decades, such as insider trading?There are no convincing, let alone conclu-

sive, answers. It is clear, though, that in

the late seventies and early eighties, crim-

inal and unethical conduct was surprising-

ly common.The Resolution Trust Corporation, es-

tablished ro manage the savings and loan

bailout, reports that criminal fraud was

discovered in 60 percent of the savings in-

stitutions seized by the government in

1989. The inspector general's office in the

Department of Defense reports that twen-

ty of the one hundred largest defense con-

tractors have been convicted in criminal

cases since 1983. A study by the Depart-ment of Justice that looked at almost six

hundred of the largest U.S. publicly

owned manufacturing, wholesale, retail,and service corporations (with annual

sales of $300 million or more), showed

that during 1975 and 1976, "over 60 per-

are shared by members of a certain

group-for example, corporate cultures.Indeed, each business community has an

unspoken set of dos and don'ts. For exam-

ple, in the 1980s in the United States, hos-

tile raids of corporations by outsiderswere considered proper conduct, but in

Britain, West Germany, and France they

were heavily frowned upon. As a result,

considering such raids in those countries

was morally unthinkable, just as Ameri-

can CEOs would not think of walking

down Main Street stark naked, carryinga billboard for their product, whether or

not that would improve "exposure" for

their products. Those who -attempted to

do so would be condemned by their busi-

ness community, and they would find no

cooperation in many other areas they re-

quired. (Hostile raids are not necessarily

unethical or economically undesirable;the preceding discussion simply uses

them as an example to illustrate the work-

ings of business culture.)The norms of business culture are

constantly changing, affected by a variety

of forces. Business culture was rather

Wild in the free-for-all days of the robber

471

DECEMBER 1900

CURRENTS INMODERN THOUGHT- MORALITYIN THE MARKETPLACE

THE MORAL FOUNDATION OF THE MARKET

cent had at leas~ one enforcement actioninitiated against them [actions were allfederal-administrative, civil, and crimi-nal]." And that "more than 40 percent ofthe manufacturing corporations engagedin repeated violations." My own study ofthe Fortune five hundred found that 62percent were involved in one or more inci-dents of corrupt behavior-these includ-ed price-fixing, environmental and anti-trust violations, bribery, and fraud-dur-ing the period between 1975 and 1984. AGeneral Accounting Office report issuedon April 26, 1990, found that about 52 per-cent of the gasoline sampled was labeledas having a higher octane level than it ac-tually contained. The report estimatesthat such misbranding costs Americanmotorists as much as $150 million peryear.

The business community, whateverit privately felt about these incidents, didnot express public condemnation of theconduct involved. On the contrary, busi-ness representatives have taken the posi-tion that corporations are law abiding:"Many, if not most, organizations are com-posed of morally and ethically honorablepeople who genuinely try to comply withthe law" (testimony of John Borgwardt,Boise Cascade Corp. Feb. 14, 1990, beforeU.S. Sentencing Commission). They alsoclaim that if transgressions do occur it isfrequently because of some "rogue employ-ee's misstep" (lli>bert J. Giuffra, TheAmer-ican Enterprise, May/June 1990), or be-cause "compliance with our laws is not al-ways a simple and precise task" (JamesCarty, National Association of Manufac-turers, May 24, 1990, testimony beforeHouse Subcommittee on Criminal Jus-tice). Thus, it is claimed, unintentional vio-lations may occur in even the most consci-entious corporations. At most, businessrepresentatives were willing to acknowl-

edge that there are a few corporations cre-ated solely for the purpose of criminal ac-tivity (Mafia-run drug processing plan~,for example) that deserve punishment.

If the integrity of markets is to be pre-served or, when necessary, enhanced,this orientation will have to change. Busi-ness leaders must take a major role in des-ignating what is beyond the bounds of ac-ceptable conduct, involving business man-agers in discussing and accepting thesevalues, and redefining the business cul-ture. They may not feel that insider trad-ing is definable or clearly unethical evenif it is illegal, and they may wish to em-brace hostile raids as proper, but theycan hardly refrain from condemning thesale of bogus parts to airlines, which en-danger the lives of passengers; manufac-ture of faulty weapons that blow up inthe hands of unsuspecting victiIns; or fail-ure to report fatalities caused by drugs.This may be a timely con"ective to whatsome see as ramifications left over fromReagan policies, welcomed by significantparts of the business community-whichto some seem to have endorsed unre-strained wheeling and dealing, unbound-ed greed.Associations. When I was appointedstaff director of a commission investigat-ing nursing homes in New York State,the demand was for more government reg-ulation of the industry. The commissionwas appointed after months of reports ofgross abuses in largely proprietary (prof-it-making) nurSing homes. Owners weresaid to have diverted funds allocated tobuy their patients' food and medicines topurchase rare paintings and luxuries forthemselves. The homes were under-staffed, and the elderly were drugged tomake them more manageable.

As the commission prepared for pub-lic hearings, I invited the heads of ten ma-

472 THE WORLD &

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their representatives that the com-wished to learn what the busi-

However, the business representa-tives were unwilling to acknowledge theimportant role of moral communities. If agroup of managers of major corpora-tion&-say from IBM, Xerox, Delta, CBS,Quaker Oats, and a few other upstand-ing one&-were to develop a moral code of

all, I pointed out, other professions,as law and medicine, have theircodes of ethics and enforcement

,

i ." 'i ;".

~c

My own study of the Fortune five hundred found

that 62 percent were involved in one or more

incidents of corrupt behavior.

Though it was, and is, truethese are far from sufficient to en-

and physicians have sys-.. -"

They take violators aside, encour-

do expel the most abusivetheir circles. "Could the man~rs.,'. ,

It was like giving a party to which no-

at least those members with.were

interested. Their responses were in

medicine: it was not really a profes-anyone could become a manager.was nothing from which to disbar

behaviors expected from managers andcorporations, and privately (or if need bepublicly) censor those who grossly violat-ed the code, this would have significantsalutary effects on the moral level of thebusiness community.

Existing associations such as theBusiness Roundtable (an organizationthat embraces the major American corpo-rations, those that often, for better orworse, act as role models for others), theChamber of Commerce, the NationalAsso-ciation of Manufacturers, and the Busi-ness Conference provide major avenuesthat could be used to conduct dialogues todevelop such a moral code. Each of theseassociations has leaders who often speakup on other issues ranging from the needto reduce the deficit to fixing Americanschools. This leadership, with very rareexceptions, has yet to be applied to the is-sues at hand.

It is surely more difficult to appeal toone's own community to shore up ethicalstandards (or even help figure out whatthose standards are) than to preach to oth-ers. Yet this is what is necessary if we .are to help bring about a more ethical

Hence, there wasway to exclude unethical practitio-

473DECEMBER 199)

business community, shore up the integri-ty of the markets, prevent the decline ofthe legitimacy of business, and slow thecalls for re-regulation. Indeed, preciselybecause the business community playednext to no role in the S&L cleanup, newregulations have already been introduced

the teachers of morality, as' difficult andcontroversial as this job is.

Business schools must pick up theslack as well. Since many who enroll of-ten have insufficient moral education orbelieve that businesspeople must leavetheir values behind, a number of busi-

If and when the corpor,ate culture clearly defines

acceptable and unacceptable behaviors, business

morality will be enhanced.

in this industry, and many more are like-ly to follow.Moral Education. Last but not least, in-dividual members of the business commu-nity must be reached. Ideally, moral edu-cation starts at home and is reinforced byone's peers, neighbors, and churches.However, the fact is, given the sorrystate of American families, many are notsufficiently intact to provide effective edu'-cation, least of all moral education. Sin-gle parents or married couples, who comehome after an exhausting day at wo~k todo household chores, often have littletime or ene:rgy to deal with psychological-ly taxing matters such as questioningtheir children's conduct or helping themchoose proper peers. Pop psychology pro-vides the parents with further assur-ances that they need not intervene. As aresult, schools are increasingly becoming

ness schools have always had courses inethics. In recent years, their numbershave increased. Still, most students gradu-ate from business schools having re-ceived very little moral education. This isan area in which major improvementsneed to be made.

To reiterate: All these factors workbest when they pull together. If andwhen the corporate culture clearly de-fines acceptable and unacceptable behav-iors; business associations cajole, censor,or expel those who violate their percep-tions of right and wrong; and families,and all schools-from elementarythrough professional-participate in mor-al education, business morality will be en-hanced. This will significantly reduce theneed for government regulation and willensure the integrity of the market..

475DECEMBER 1990