In western countries, commonly considered homes to market economies, the market is losing its political and social reputation. The international financial crises from 2007/08 onwards are certainly not blameless for the declining confidence in the market economy, nor are auto-manufacturing fraud crises, and especially not the (as some call it) “climate-harming profiteering” of the energy producers—not to mention the very peculiar economic policy variations of the American President Donald Trump. Moreover, another driver of market skepticism is the debate about social inequality, the supposedly widening gap between rich and poor. All these concerns imply immorality in market capitalism.
Therefore, it seems more necessary than ever to once again draw attention to the functions of the market and morality, that is, of market economy and human nature in contrast to socialism and redistribution.
Socialism Requires Small-Group Morality
At the heart of the moral debate about market versus state (that is, about the market economy versus socialism), is the relationship between profit and morality. This relationship cannot be properly assessed without the concept of competition. As is well known, competition, as a central prerequisite for functioning market economies, is based on the regulatory idea—which experience has shown to be useful—of using human self-interest as a driving force and at the same time neutralizing it as a threat to others.
This idea is based on the empirically sound assumption that people basically have a self-interested preference structure. In concrete terms, this means that the average morality of individuals—at least at the level of culture and civilization—consists in increasing their self-interest, their own prosperity, and their own happiness in their activities. Presumably, nobody will work for the good of the President, the mayor, the boss, etc., but everyone wants to reap the benefits of their actions primarily for themselves. Politicians are not exempt from this in any way: They too act in principle for reasons of reelection, political power, reputation, the enforcement of their own ideology, and other self-interested motives.
However, this individual self-interestedness, which is regarded in large swaths of economic science as a kind of anthropological constant, also includes family, close friends, fellow believers, comrades, etc., i.e. all those who feel closely connected in non-market relationships. And it also includes, on the margins (i.e. not always as a central preference) the categories of charity, compassion, empathy: the altruistic preferences of the individual, who then helps and gives and stands up for others. In this respect, it is probably correct to say that socialism contains a small-group morality. The larger the groups of people, and thus the more anonymous the relationships between these group members, the less effectively it functions. That is why institutions with an affinity for socialism regularly fail in the long term when this system is applied to entire states, and of course even more so in large integration spheres such as the EU.
Competition: The Driving Force of Self-Interest
The idea of competition, of using the driving force of self-interest to control against xenophobia was, as is well known, subject to different evaluations at different times. In his Wealth of Nations, Adam Smith spoke of the invisible hand that transforms the baker’s self-interested pursuit of profit, for example, or more generally of an entrepreneur who offers goods and services to his customers, into an increase in prosperity that is useful for society. Although no baker has the compassionate motive of baking and selling bread so that the population does not starve, he nevertheless acts unintentionally in his self-interested profit motive in exactly this way.
In other words, the entrepreneur’s profit is certainly morally relevant, because a loss puts the existence of the company, and thus jobs and capital, at risk. And Smith adds that a society that does not want to starve to death would be better off not relying on an altruistic motive of the baker, because it is not reliable. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Above all, the butcher, brewer, or baker’s pursuit of profit is reliable, which—without directly intending this result—prevents famine and thus produces prosperity. The transformation of individual self-interest into collective usefulness therefore means that it is not the ethics of moral conviction but the ethics of responsibility that becomes the fundamental value standard of entrepreneurial behavior.
This distinction has affinity to the thinking of the sociologist Max Weber, who links the emergence of capitalism with Protestant ethics. The driving force of self-interest in entrepreneurial action ultimately implies the need for certainty of salvation, because entrepreneurial success can be interpreted as a sign of election in the hereafter, as the Calvinists argue. This body of thought is an outflow of faith within the framework of a religion of achievement, which in this particular form, an economic incentive, one might not be necessarily inclined to share. Consequently, however, every entrepreneur must strive for economic success in order to have a clear conscience. Being chosen in the hereafter is thus a positive intertemporal feature of earthly success. In this sense, entrepreneurial success, which ultimately translates into profit, has a high moral justification.
It can be said that this viewpoint has since radically changed. In general, it is probably true that not only is the pursuit of corporate profit not assumed as containing any morality per se, but rather it must first be morally legitimized. In addition, not only the profit motive as such, but also the use of profits has come under critical scrutiny, especially when one examines, for example, the current absurdities of granting bonuses and additional compensation arrangements for managers. Last but not least, the moral dubiousness of reducing employment while at the same time making a high profit is frequently brought up.
The Insecure Entrepreneur
Immanuel Kant distinguishes three basic forms of human action: technical action, pragmatic action, and moral action. Technical action is directed towards objects, machines, and things. In this sense it requires dexterity on the part of the actor. Pragmatic action refers to people and to interactions between them. It requires cleverness. Moral action implies moral standards and ethical values. It requires wisdom.
Kant’s famous categorical imperative refers specifically to moral action: Act in such a way that the maxim of your will could at any time also be the principle of general legislation. The issue here, then, is the universalizability of action. It is evident that the basis of this imperative is individual ethical norms and by no means collective standards highly regarded by political actors as social-ethical, as we are increasingly experiencing today.
The actor is initially free in his search for ethically justifiable values for his actions. The moral yardstick for the choice of ethical norms is the individual-ethically accepted universalizability of his actions; it is raised, as it were, to a test of their morality. It represents a self-chosen individual ethics, but not a socio-politically prescribed collective ethics of social behavior.
An Ordoliberalism of Good Rules
From today’s perspective, some people say that Kant’s system of thought contains a tension between individual and collective ethics, to which, for example, today’s entrepreneurial behavior is strongly exposed. To a certain extent, this brings us closer to the basic principle of the reality of good rules (which is widely discussed in economic science), such as the rules that play a central role in ordoliberalism. The Freiburg School of Ordnungsökonomik, which developed a new concept of economic order after the Second World War (especially for the Federal Republic of Germany) primarily through its main representatives Walter Eucken, Wilhelm Röpke, Franz Böhm and others, designed the system of the social market economy. Fundamentally committed to the market principle and the entrepreneur’s inherent pursuit of profit, which transforms the entrepreneur’s self-interestedness into the common good through competition, the system requires something external, i.e. from the state, which on the one hand does not leave competition alone, which is prone to certain perversions, but rather subjects it to certain rules and regulations as a kind of governmental activity. On the other hand, it ensures a certain social balance if the results of competition are not considered acceptable by society as a whole.
The social market economy was rightly celebrated in the past—for instance, 70 years ago—as a great success due to its practical implementation by Ludwig Erhard and Alfred Müller-Armack. In the years that followed its implementation, it proved to be an extraordinarily successful model for a fruitful balance between individual and collective ethics, but it was at the same time a gateway for increasingly ideologically and politically motivated abolition of the competitive market process in combination with an increasingly pronounced misinterpretation of social balance in the direction of state regulation, with an affinity to socialism. The latter perversion tends toward viewing the citizen as a subject to be comprehensively controlled and politically “cared for.” Ludwig Erhard warned early of this development.
But it was first and foremost Friedrich Hayek, who, knowing Ludwig Erhard well, branded the concept of the “social” market economy early on as incorporating the “weasel word” of the dangerously arbitrary interpretation of what is socially beneficial, “social,” and he castigated it as a gateway for a regulatory and interventionist, even approaching totalitarian, socialism. The rules of the market economy, market regulation and market laws—without the qualification of being “social” and dangerously open to interpretation—are the ones that generate prosperity, and thus they are the ones which come closest to the demands of morality for economic activity.
However, we are seeing that market laws are increasingly seen as amoral; the inherent mechanism of competition is more likely to be associated with an undesirable competitive morality of the strong over and against the weak than with a wealth-producing mechanism of society as a whole, which not only involves present risks but above all makes future opportunities possible and more widely available. In this regard, Hayek highlights the ability of competition to discover new solutions for the future that we do not yet know today. Moreover, it must be noted that the violation and abrogation of rules inherent in the market system, out of perverse incentives, is too often of greater benefit to individual entrepreneurs and managers than compliance with them. And this can endanger the ordered stability and cohesion of society. A serious defect in this respect is also seen in the state’s intervention into the functioning mechanisms of the market system: an intervention that is usually morally and ethically justified but is disastrous in terms of incentives and responsibility.
Even though in many countries the social safety net budget now accounts for by far the largest share of the national budget, i.e. there are constantly increasing social benefits, politicians say that “social justice”—also a weasel word in Hayek’s sense—is not increasing. In this context one can see: the creeping increase in public awareness of state-organized redistribution; the expansion of state welfare via the social systems; and the associated antipathy towards market mechanisms and individual responsibility. In the collective consciousness, those who organize the redistribution of added value, i.e. the state, are increasingly regarded as morally superior to those who produce the added value and thus who make redistribution possible in the first place: the entrepreneurs.
The State as An International Competitor
The ethical debate about entrepreneurial action takes on another dimension as a result of globalization. Globalization means worldwide networking of economic and political markets across national borders. It forms the framework for the international competition among the various regions for the world’s mobile resources. In this context, regions can be characterized not only by their material infrastructure, but also—and this is important in our context—by customs and traditions, values and morals, which are shaped in a specific way in each region of the world. The freedom of international movements of people, goods, services, capital and knowledge, which globalization makes possible and which we in the EU celebrate as a great step forward, also opens up the freedom to exit. Companies can turn to other locations if, for example, they are no longer satisfied with the special regional conditions of collectively and politically regulated institutions, values, and morals, of their own region. For this reason, values and morals, as location-bound institutions, are in global competition with each other for mobile world resources; they are internationally contestable and thus not absolute, but relative, and must prove themselves in global competition.
For the behavior of citizens and companies, this means that the international choice of location is one of the key entrepreneurial decisions to be made: Stay or go? Stay or go, loyalty or exit? Since the potential implementation of the exit option is an integral part of every competitive process, it is also subject to the individual ethical, and not the collectively set, yardstick for moral action. In concrete terms, this means, for example, that the relocation of production, or parts of it, abroad can by no means be classified as immoral—because it is “unpatriotic” and damaging to domestic jobs—if the conditions at the domestic location endanger the international competitiveness of the company or even fail to promote it sufficiently compared to other locations.
The exit option is particularly obvious as a high quality option in terms of responsibility and morality if certain productions—e.g. in genetic research—are banned at the domestic location due to politically-set standards, but are permitted or even desired in other locations around the world. This reveals the relativity of the collective morality of a location, which is imposed by the state with its presumption of knowledge and morality over and above individual ethics, and which is exposed to the test of its own international competitiveness in globalized markets. In this respect, the individual ethical dimension of entrepreneurial decisions is becoming increasingly important as a result of globalization. And in this sense, the accompanying loss of traditional statehood of the decision-making and enforcement monopoly over the private sector is not an entirely regrettable development, but perhaps the exact opposite, because now the state—like private companies—can no longer act as a monopolist, but must act as a competitor in the international competition of its own collective norms. The traditional dominance of collective morals over individual morals is thus disappearing. At the same time, this results in an increase in the importance of individual ethics of responsibility in entrepreneurial action, which brings us back to Kant’s universalizability as a yardstick for “good” individual ethics.
Moral Failure, Institutional Failure
After these considerations, we must return once again to the massive distortions we mentioned at the beginning when speaking of the debt, financial, currency and fraud crises of recent times. The analysis of the reasons for these upheavals is highly complex, and this is not the place to delve further into them. There is no doubt, however, that in addition to moral failures on the part of economic and political leaders, there is also a broad institutional failure. What does this mean?
Institutions can be understood as sets of rules: rules that create incentives for people to behave. For example, in the form of laws, rules contain prohibitions and commandments for the activities of citizens and business leaders. In the sector of civil society, there are written and unwritten, i.e. formal and informal, rules in which specific moral and ethical concepts are expressed. Friedrich Hayek argues with great conviction that in society there must be general rules that apply equally to all, and which exclude special rules for individual or special groups. Whether and to what extent the moral behavior of people can be influenced fundamentally and permanently by pure appeal to rules is debatable. But empirical evidence seems to show that the average morality of people—at least at the level of our culture and civilization—cannot be changed decisively: the self-interestedness of individual preferences is a fairly certain anthropological fact. On this point, empirical socialism as a large-scale state project has failed.
Morality as A Capital Asset
We can now deplore the institutional moral failure of the bank managers and equally of the state leaders who triggered the current crisis. But the appeal for better morality will probably not help if people’s average self-interested morality is quite unchanging. Nevertheless, this last point is called into question by some economists who, for example, devote themselves to so-called behavioral economics, which argue that we should rather start from a “new” altruistic view of man. At least that is what various specialized university laboratory tests on the behavioral elements of altruism have shown. These are truly innovative laboratory tests in the field of human behavior. But do these specialized academic tests represent the general reality at large, in the empirically observable laboratory of our actual environment? Instead, it seems that it is the real institutions, the body of rules, that represent the clue to the moral behavior of real people around us.
The international capital markets, for example, need weighty and adequate rules for managerial behavior, as well as for state leaders (i.e. the politicians) who, for example, should be held to strict rules of government debt limitation so that they can no longer carry out their self-interested reelection strategies at the expense of taxpayers and future generations. Nor should it be possible for bank managers to declare their own organization as systemically relevant (“too big to fail”), with government tolerance or even active cronyism, in order to be able to nationalize the costs of their failure and thus pass those costs onto the taxpayer. It is also incomprehensible that the strict rules that apply in civil society with regard to managers’ embezzlement and their sanctioning obviously do not exist for political leaders, or at least these rules are handled very laxly. The taxpayers, rarely or never the political polluters themselves, are liable for millions or even billions of dollars of damage as a result of poor decisions by politicians. Moreover, tax evasion is severely punished, in contrast to tax waste by politicians. Here it must be in Hayek’s sense that general rules apply equally to everyone and are linked to positive and negative sanctions for those who abide by the rules or violate them. For it is rule-induced incentives that fundamentally control human behavior.
For years in the EU, without sanction, the contractually codified rules have not been observed by political actors on a large scale. This is probably the most important reason for the growing tensions within the EU, which threaten to politically crumble this space of integration. The moral yardstick is not the romanticizing declarations of belief in Europe, or even increasing Europe, if and because they refer to Europe as a supposedly solidarity-based, morally controlled transfer union. Rather it is the rules that have proven themselves in terms of creating an ordered economy. These are rules which likewise include individual responsibility, risk, and liability as unconditional elements among the political-behavioral categories of governance.
Conclusion: Moral Education Is Necessary
We need to improve the reputation and acceptance of the market economy within society. This requires a large-scale institutional environment of moral education. Institutions in the form of incentive rules are the pragmatic key to moral behavior. They are the ones that lead to long-term wisdom, because observing good rules for moral action brings greater benefits to the actor than non-moral rules. The advantage that market morality generates is stability: the reliability of mutual expectations of behavior. Thus, morality becomes an investment good. From the standpoint of economic order, it is worthwhile to act morally.
The original German version of this article, with the same title, appeared in March 2018 on the blog Economic Freedom. The present German version has been revised by the author for the Austrian Institute.
Translation from German by Thomas and Kira Howes