Moral Criticisms Of The Market Essay
Are Markets Morally Free Zones?
Daniel M. Hausman*
University of Wisconsin-Madison
Markets are central institutions in societies such as ours, and it seems appropriate to ask whether markets treat individuals justly or unjustly and whether choices individuals make concerning their market behavior are just or unjust. After all, markets influence most important features of our lives from the environment in which we live to the ways in which we find pleasure and fulfillment. Within market life we collectively determine the shape of human existence.
Yet in Chapter 4 of Morals by AgreementDavid Gauthier argues that a perfectly competitive market is "a morally free zone", an arena of social life in which moral evaluation has no role to play. Gauthier is not maintaining that real markets are such morally free zones, but his claim is still remarkable. If it were correct, morality would find applicability to markets only in virtue of the imperfection of those markets. I find this claim difficult to accept and hard to reconcile with comments Gauthier makes about real imperfect markets and with his general views on justice.
Although I shall focus on Gauthier's views, my points are general and the issues of wider importance. For Gauthier's thesis is a sophisticated and idiosyncratic variant of the perennial view that undisturbed market economies are morally attractive because they permit people freely to get what they deserve. This view is multiply mistaken, for at the very least, one must realize (as Gauthier stresses) that real markets are not perfectly competitive, and their many imperfections are morally significant. But even with respect to perfect markets, this general view, including Gauthier's special variant, is indefensible. Competitive markets place people in intimate relations with one another. The many consequent benefits and costs are joint social products, not the sole responsibility of the individuals upon whom they fall. How this social surplus is to be distributed is an unavoidable problem for a theory of social justice. One cannot correctly say that a particular distribution or the actions of individuals that give rise to it are beyond moral assessment.
1 Gauthier's view
A perfectly competitive market (PCM) is characterized by so many buyers and sellers in every market that no one can influence prices. There is no room for bargaining. There are no "non-pecuniary" externalities and no jointness in consumption. My activities influence you only through the market. A very strong form of mutual disinterest is essential. There is no force or fraud, and there are no failures of information or rationality. Furthermore, the activities of individuals on the market never undermine its perfection. For example, no one is able to acquire a monopoly.
Gauthier's claim that the PCM is a morally free zone seems ambiguous. In the first interpretation, he is saying that moral assessment of the actions of individuals on a PCM is out of place (see particularly pp. 84, 96). On the second interpretation, he is maintaining that moral assessment of a PCM itself is out of place (pp. 94-95). The first interpretation is weaker than the second, because it may be possible for individuals to commit no injustices when conforming to the norms of institutions that are themselves unjust. I shall take Gauthier as defending only this weaker view that the actions of individuals on a PCM are not open to moral assessment. I shall take it as an implication of Gauthier's view that if initial holdings on a PCM are not unjust, then the outcome of individual actions on a PCM is not unjust either.
So, as I am reading Morals by Agreement, it is as mistaken to attempt a moral assessment of an action an individual takes on a PCM as it is to ask whether a solitary individual is acting justly. In saying this, Gauthier is not committed to the claim that the outcome of a PCM cannot be assessed. On the contrary, in Gauthier's view if the initial holdings are just, that outcome will be just, and if the initial holdings are unjust, that outcome will be unjust. But the choices made within a PCM are neither.
It might be objected that the claim that PCMs are morally free zones is trivial, since the absence of force and fraud is built into the definition of a PCM. Suppose one were to maintain analogously that a perfect family is a morally free zone because by definition there is no force or fraud and the combination of concern for others and a willingness to cooperate avoid all sub-optimal outcomes. Is Gauthier's claim any more illuminating?
Indeed qualms about whether Gauthier's position is trivial are aggravated by the recognition that free-rider and prisoner's-dilemma problems arise within market interactions. (If the seller delivers first, the buyer is better off not paying.) The absence of force or fraud requires that these coordination problems already be solved. As Gordon Winston argues,
Are market choices "morally free" in any more interesting way than are any choices that satisfy all relevant moral constraints?
In response to Buchanan's emphasis on the moral presuppositions of the market, Gauthier has offered a tentative reformulation of his claims. "How morality manages to "overcome its directly constraining character" remains mysterious to me. But let us not pursue the point further, for it is still worth enquiring whether the individual on a PCM who avoids "force and fraud" is beyond any other moral constraint."
Gauthier offers a tripartite argument for the conclusion that PCM's are morally free zones. First, Gauthier maintains that a PCM grants each individual all the liberty of a Robinson Crusoe. There is no compulsion or constraint (apart from whatever prevents force or fraud). Second, the incomes individuals receive in a PCM are exactly equal to the contribution made by the inputs that the individuals supply. So there is no redistribution. Nothing of mine is given to anyone else. Thus PCMs are impartial and any interference is necessarily partial. Third, PCMs function optimally. The choices agents make in seeking to maximize their individual utilities lead to an outcome that cannot be changed without making someone worse off. There is no conflict between individual utility maximization and Pareto optimality and thus no space in which morality might fit. The liberty, impartiality and optimality of a PCM establish its credentials as a morally free zone. Let us examine each of these three branches of the argument in turn.
2 Freedom and Perfect Competition
Gauthier describes the freedom of a Robinson Crusoe as follows:
Crusoe is free to use her capacities in whatever way will best fulfill her preferences given the external circumstances in which she finds herself. Her capacities of course limit the extent of her fulfilment. Her preferences affect the use she makes of her capacities--not in limiting what she can do but what she finds worth doing. But neither of these limitations
constrains Crusoe's freedom. A person is free in so far as she is able,without interference, to direct her capacities to the service of her preferences.(p. 90; my emphasis)
This freedom is preserved in a PCM because
Each person is thus a Robinson Crusoe, even in the market. Of course the existence of other persons, and the possibilities of exchange, affect the limits on each person's behaviour.
...But these limitations are the interpersonal analogues of thos experienced by Robinson Crusoe alone on her island. If her freedom is not constrained by her limited talents and particular interests, then it remains unconstrained when she leaves her island and comes to relate her talents and interests with those of others.(p. 91)
...no one is subject to any form of compulsion, or to any type of limitation not already affecting her actions as a solitary individual. (p. 96)
The argument seems to be that although the preferences and capacities of others (along with my capacities and preferences) determine the range of opportunities available to me, others cannot employ their capacities intentionally to influence my range of opportunities. The preferences and capacities of others are thus analogous to the rainfall on Crusoe's island and are thus the same "type of limitation". Market choices may thus be as removed from moral assessment as are Crusoe's.
But there is a difference. The new limitations a solitary individual would encounter upon joining a PCM are not facts of nature, like the terrain of a new island. Given Crusoe's capacities and preferences, there is nothing that can be done about the circumstances in which she finds herself, while the terms of interaction, even on a perfect market, are not natural, but the result of a prior (moral) determination of the scope and nature of rights and of a prior hypothetical cooperative agreement. So it must also be shown that no rational individual would object to the rules governing a PCM.
The second and third branches of Gauthier's argument for the moral freedom of a PCM apparently go much of the way toward showing that a rational individual would not object to the terms of a PCM, for each individual benefits proportionally to her contribution and the result is optimal. But it is not true that every rational agent would consent to the ground rules of a PCM. One reason might be that some agents prefer to live in ways that a PCM and the economic development that results render impossible. An ascetic hermit seeking isolation, peace and poverty arguably has a better chance of obtaining these in the state of nature. (For more general problems see below pp. ??.)
3 Benefit and Marginal Contribution
The second part of Gauthier's argument that PCMs constitute morally free zones relies on the equality between return and contribution to show that PCMs are impartial:
Robinson Crusoe enjoys the full benefit of her labours. Similarly those who engage in market interaction enjoy the full benefit of their labours. Under certain conditions, the value of total market output is equal to the sum of the marginal value each person contributes to that output--the sum of the marginal differences each person makes. In the free exchanges of the market each may expect a return equal in value to her contribution....Thus the income each receives, or the value of the goods each is able to consume, is equal to the contribution she makes, or the marginal difference she adds to the value of the total product. (pp. 91-92)
Since each receives what is her own, there is no space or need for morality. The image is of an individual who is causally responsible for her marginal contribution and whose marginal contribution then determines her income. But both of these implict causal claims are false and neither is implied by the mere equality between factor payment and marginal product.
Consider first whether marginal contribution determines income. In fact both are effects of "common causes"--the underlying determinants of the general equilibrium that obtains in a PCM. The equality is a trivial accounting identity and has no causal significance. For the equality between income and marginal contribution obtains regardless of what incomes are. Suppose (leaving the PCM) government decrees or unions negotiate a wage w' that is larger than w*, the wage that would obtain in perfect competition. Are the hypothetical homogenous workers then receiving more than their marginal contribution? Not at all. Assuming (as is standard) diminishing returns, firms will cut back on their labor requirements until the marginal contributions workers make will equal w'.
Furthermore (as Gauthier implicitly conceeds in his discussion of rent), an individual's marginal contribution is socially determined. It is not causally determined solely by the individual. The marginal contribution of a worker when wages are set at w' is larger than when wages are w* not because the worker is working harder or has otherwise changed, but because wages are set at w' and firms have consequently adjusted their employment. Indeed, since competitive equilibria are not generally unique, a worker's marginal contribution can differ without any interference with the operation of the market and without any difference in technology or in anybody's tastes or holdings.
Consider in this regard Gauthier's views on rent. Gauthier argues that individuals who own scarce resources, such as Wayne Gretzky's talents as a hockey player, are not entitled to the rent such resources command.
Society may be considered as a single cooperative enterprise. The benefit represented by factor rent is part of the surplus afforded by that enterprise, for it arises only in social interaction. But then that benefit is to be distributed among the members of society on the terms established by minimax relative concession. Each person, as a contributor to social
interaction, shares in the production of the benefit represented by factor rent. Wayne Gretzky's talents command factor rent because they are scarce, but their scarcity is not a characteristic inherent in his talents,...(p. 274)
The compensation Gretzky receives is equal to the value of the contribution his talent makes. Since Gretzky's talents are unique and his compensation a matter of negotiation, it is correct here (unlike in the case of perfect competition) to say that Gretzky's talents command rent because they are scarce. But, as in the case of perfect competition, and as Gauthier recognizes here, the scarcity or the value of the contribution "is not a characteristic inherent in his talents, but a function of the conditions of supply, and so of the relation between his talents and those of others, and a function also of the conditions of demand, and so of the relation between his talents and the interest of others in attending hockey games."(p. 274) These last words are entirely correct, but exactly the same could be said of the salaries in a PCM for unremarkable accountants, cooks, or philosophers. To compare market inequalities with the inequalities that may exist among non-interacting individuals hides that fact that the inequalities causally depend on the interaction. The income one receives in a PCM is nothing like Crusoe's income, and the fact that it is equal to marginal contribution is of no moral significance.
Indeed Gauthier's comments on rent directly undermine his claim that a PCM is a morally free zone. For there are rents on PCMs, and if permitted to exchange freely, individuals will wind up distributing rents in a way that Gauthier regards as unjust. There will, of course, be no Wayne Gretzky's (which fact should be enough to undermine the appeal of a PCM!), because there must be many buyers and sellers to eliminate the possibility of bargaining. But unique talents are not necessary for rents. Suppose that thousands of hand-made Green Island baskets are produced each day and provide most of the basket weavers with the going wage net of the costs of cane and bandages for their blisters. A number of the islanders, however, have a remarkable innate talent at basket weaving and can produce many more baskets a day than their fellow islanders. But the output of these gifted weavers is only a minority of the total output. The gifted weavers then earn a higher wage that includes an economic rent. Since a PCM can generate this outcome, which Gauthier regards as unjust (p. 274), from the initial holdings that are, by assumption, not unjust, a PCM is not always an impartial morally free zone.
The difficulty here is fundamental and has nothing to do specifically with rents. The principle that Gauthier invokes in his discussion of rents, which is fundamental to his view of justice, is that if a surplus results from the relationship between the activities of different people, then its distribution is an appropriate matter for bargaining. Consider the following remarks Gauthier makes concerning rent:
The recipient of rent benefits from the scarcity of the factors she controls--a scarcity which is of course entirely accidental from her standpoint, since it depends, not on the intrinsic nature of the factors, but on the relation between them and the factors controlled by others. She receives more than is needed to induce her to bring her factors to the market; rent is by definition a return over and above the cost of supply.(p. 98)
As we shall see in a moment, these comments apply to the entire surplus over autarkic production, not just to rents.
The cost of supply is the amount needed to bring forth the supply. Suppose wages for unremarkable pearl divers were the same as the wages of the untalented Green Island basket weavers. If the talented weavers were ordinary divers, then the opportunity cost of foregoing diving for weaving would equal the wages of the untalented basket weavers. The returns of the talented from basket weaving would be larger the cost of the supply of their labor services, and they would earn rent.
But notice that the benchmark used to determine cost and thus whether there is rent is a market alternative. If the gifted weavers were equally gifted divers, then they would earn no less, but none of it would now be rent. These market alternatives depend on the same "accidental" scarcity that Gauthier discusses in the last quotation. Cost of supply is not what "is needed to induce her to bring her factors to the market"; it is the amount need to induce her to bring her factors to this market rather than some other one. Gauthier remarks that on a PCM "...each benefits from and only from the contribution she makes." (p. 97, emphasis added). But even abstracting from the existence of rents, this claim is not true. It implies that each agent would be just as well off in the absence of the others, that my well-being is independent of the choices of others. But a PCM is pointless unless individuals benefit relative to autarkic production.
The surpluses individuals obtain from market interactions, just like rents, depend on the relations between the factors different individuals control and the choices individuals make (as Gauthier sometimes recognizes, see p. 91, for example). What Gauthier says about Gretzky's rent should apply to the entire surplus over autarkic production: given Gauthier's views, it should all be distributed according to minimax relative concession. The central difficulty is that in a PCM there is no non-morally-arbitrary way to identify an individual's own contribution as determining an individual's income.
4 The Coincidence of Maximization and Optimality
The third part of Gauthier's argument maintains that there is no place for constraints on individual action, because the outcomes are optimal without any.
Choice is neither morally right nor wrong, because the coincidence of utility-maximization and optimization in free interaction removes both need and rationale for the constraints that morality provides, which enable us to distinguish choices as right or wrong. Moral constraints arise only in the gap created by conflict between the two rationality properties, when mutual benefit is not assured by the pursuit of individual gain. We assess outcomes as right or wrong when, but only when, maxmizing one's utility given the actions of others would fail to maximize it given the utilities of others. (p. 93)
Moral assessment of individual choices on a PCM is thus as out of place as is moral assessment of Crusoe's choices.
Despite its apparent force, this argument either fails to establish its conclusion or flirts with the dangers of trivialization discussed before. As Gauthier points out (p. 85), a PCM presupposes a background morality (the absence of force and fraud). Thus, by definition, choices on a PCM involve no force and fraud, and in this way, Gauthier's claim may be sustained (and trivialized). But a hypothetical rational agent, Harold, facing a market that is, apart from Harold's actions, perfectly competitive, might well consider whether force or fraud would better maximize utility than does honest market interaction. If Harold eschews force and fraud, his choices are, to that extent, just, rather than beyond moral assessment. Furthermore, putting aside questions of compliance, one needs also to consider whether agreeing to abide by the rules that make possible the PCM is the maximizing strategy.
Showing this might seem a trivial task, for after all a PCM results in an optimal outcome. But, first, recall that competitive equilibria are not generally unique. An alternative equilibrium (which might be quite different) could benefit a majority at a cost to a minority. Why can there be no moral assessment of the relative merits of alternative equilibria? Why might not rational bargainers prefer an equilibrium that does not obtain to one that does and criticize the one that does on distributional grounds?
Furthermore, how well off someone is in a PCM depends on what initial holdings one actually has. Suppose that those initial holdings satisfy the constraints that Gauthier discusses under the label of the "Lockean proviso" (to be discussed below). Nevertheless it seems that there will be occasions, in Gauthier's own view, in which the results of a PCM would be unjust. Consider the following remarks:
Suppose for example that two persons are of roughly comparable talents, energies, and interests, but that one is provided with an education fitting him for a stimulating and socially valuable career, well remunerated and highly esteemed, whereas the other is denied such an education,....We should of course find this structure unfair... because it fails to relate benefits to the contributions each person would have made had each enjoyed similar opportunities and received similar encouragement.(p. 263)
Suppose that the different educational opportunities result not from prior injustices but from differences in the culture and interests of the particular families in which the two individuals are raised. Such differences can, of course, obtain among individuals in a PCM, and the benefits the individuals receive on the PCM will then be unfair. Benefits must be related not to initial holdings, even if these satisfy Gauthier's proviso, but to the contributions an individual would have made "in that social strcture most favourable to the actualization of his capacities and character traits and to the fulfillment of his preferences..." The optimality of a PCM does not insure that constraints on individual behavior are never needed.
In considering the implications of the optimality of a PCM and of the equality between contribution and income for the moral status of a PCM, something ought to be said about pecuniary externalities. For these, unlike non-pecuniary externalities, are present in PCMs. Suppose that in a society, such as Britain's in the early 19th-century, cloth is woven by hand. Someone then invents power looms. Capitalist Howard builds a steam-powered weaving factory. If the smoke from his factory diminishes the quality of air hand weavers breath or soils their wares, then there is a non-pecuniary externality. If Howard's cheap cloth renders valueless the hand weavers' human and material capital and destroys their way of life, then there is a pecuniary externality. The harms or benefits involved in pecuniary externalities, unlike those involved in non-pecuniary externalities, are all perpetrated through markets and do not lead to sub-optimal results.
In a PCM the many Howard Capitalists who invest in power looms cause great and obvious harm to hand weavers. Why are their actions not subject to moral assessment? Why can the question of their justice or injustice never be raised? Some possible answers: (1) The many Howards are, we suppose, not aiming to harm the hand weavers. But, although the intention may be morally relevant, it does not preclude moral assessment of the action. (2) Each of the Howards, by assumption, makes only a small difference in the well-being of the hand weavers. But, although there is some controversy here, the actions of individuals that contribute only a small portion of a serious harm are still subject to moral evaluation. (3) By assumption, profit-maximizing Howards will necessarily invest in power looms. But "everybody does it" has never been a complete moral defense; one can still ask whether what everybody does is right. (4) One might argue that, given the new knowledge, the looms and skills of the hand weavers are already worthless. But they are not worthless, until the more efficient technology is actually put into place. (5) Finally, replacing hand looms with power looms increases the productive capacity of the economy. Although it is not a Pareto improvement,--for the hand weavers obviously suffer--it is probably a "potential Pareto improvement". Were compensation paid to the hand weavers, it would be possible to make the introduction of power looms an actual Pareto improvement. But neither the superior efficiency (in this sense) of power looms nor the optimality of a PCM shows that the operation of a PCM is beyond justice.
Might not rational individuals prefer an arrangement where compensation for pecuniary externalities is, in so far as feasible, paid? Apart from the administration costs, such an arrangement is no less optimal than a PCM, no less impartial, and seems to leave individuals as close to Crusoe's freedom as does a PCM. If such an arrangement would indeed be preferred by rational bargainers, then PCMs are not morally free zones; they are unjust, and in not paying compensation, the Howards act unjustly.
5 Can Initial Holdings Bear the Moral Burden?
Even if a PCM were a morally free zone, as Gauthier maintains, outcomes of a PCM are not beyond moral criticism. For the initial holdings that individuals bring to the market are subject to moral evaluation. If these holdings reflect prior predation, fraud and violence, then the results of the market will not be fair. In Gauthier's view all questions concerning the justice of outcomes on a PCM are questions about the justice of the initial holdings. But this places more weight on an account of which initial holdings are just than such an account can possibly bear.
The justice of initial holdings is not directly determined by social contract. Individuals do not bargain about what these initial holdings should be, for, in Gauthier's view, these initial holdings are just as much inputs into any bargaining process as they are inputs into market interaction. They are instead determined by the "Lockean proviso". The basic idea is that individuals eschew taking advantage of one another in order to make feasible and stable both market interaction and cooperative bargains. Gauthier sketches a hypothetical history in which individuals convert Hobbes' brutish state of nature into Locke's docile one by not benefitting themselves at the expense of others. Individuals so constrain themselves not because they are altruists or are already moral, but because they recognize that market interaction and cooperative bargains require this forbearance (see below p. ?? and above footnote ??). The culmination of this process enables individuals to interact on the market and to make cooperative bargains in case of market failure.
If some state of affairs comes about as a result of transactions on a PCM, and the initial holdings satisfy the Lockean proviso, then that state of affairs is, Gauthier maintains, just. That state of affairs might, Gauthier suggests, involve extreme inequality:
The rich man may feast on caviar and champagne, while the poor woman starves at his gate. And she may not even take the crumbs from his table, if that would deprive him of his pleasure in feeding them to his birds.
Distressing as we may find this situation, we should not be misled by it. We think of rich and poor within a social context, and we think that his wealth and her poverty are in some way related. If so, then in examining how the situation came about, we may well find a violation, if not of the proviso, then of the principle of minimax relative concession.
Everything turns on the real history of market transactions (and the hypothetical history of bargaining over their normative setting).
Exactly how does the history matter? There are two alternatives here, which are both unsatisfactory. Either what actually happened in the past determines whether present outcomes on a PCM are just or what people believe happened determines whether the outcomes are just. Gauthier, like Nozick endorses the first view. But this implies that two social states can be identical in all detectable current properties (including the beliefs of the agents involved and the evidence concerning the past) yet one be just and the other unjust.
Although such a view is disquieting, it is preferrable to the other alternative, which gives to those who write the history books the power to determine what is just and what is not. Yet it is not clear that Gauthier can avoid this unpalatable conclusion. For what leads people to comply with Gauthier's Lockean proviso and with the bargains and market outcomes that proceed from its basis is the purported fact that compliance with bargains or market outcomes on any other basis will be unstable. Gauthier's arguments for this conclusion are complex and are not the subject of this essay, but they all suppose that some individuals will have grounds for complaint with bargains or market outcomes that proceed from other initial holdings. But if individuals falsely believed that the conditions of the proviso were met, and nothing except the history matters, then bargains and market outcomes will be stable; and if individuals falsely believe that the conditions of the proviso were not met, then the bargains and market outcomes will be unstable.
Since what is just depends not only on what people will comply with, but also on what they will agree to, one might object that this line of argument does not show that beliefs about the past determine whether current outcomes are just. But this response may not be open to Gauthier, because both the proviso and Gauthier's solution to the bargaining problem are in large part determined by the exigencies of compliance.
It is not credible that either beliefs about the past or the past itself could be so decisive in matters of justice. In Gauthier's view, individuals are "constrained maximizers." They have a powerful disposition to do the part that the joint strategies they agreed to demand of them, provided that the joint strategies are impartial and that others will, for the most part, do their part as well. These dispositions must operate on individuals' characters and make them keep their promises, follow the laws, etc. Could these dispositions credibly be refined enough to acquire or lose their binding power depending on what ancient historians announce? And toward exactly whom are the dispositions of constrained maximizers supposed to change when they read Marx's chapter on "primitive accumulation" and discover that not all capitalists began their ascent by working harder than others? Among real people could history matter so much? On the contrary, the woman in Gauthier's parable who watches the birds dining on the crumbs from the rich man's table is not going to be reconciled to her penury by tales about the justifiable holdings of their respective ancestors, what these ancestors would rationally have agreed to, and how market interactions in fact turned out. Market interactions create a joint or social surplus, and whether that surplus is fairly distributed depends, at least in part, on the pattern of current distribution quite apart from historical facts or beliefs. Moral judgment of current market choices is both unavoidable and entirely appropriate.
* I want to thank Nora Freed, Andrew Levine, Alan Nelson, Guy Perez, an anonymous referee and especially Christopher Morris and Julius Sensat for their valuable criticisms of earlier drafts and their suggestions for improvements. I have also profitted from discussions with Cristina Bicchieri and Jean Hampton and from correspondence with David Gauthier. Back to text
1. For a summary of arguments concerning the justice and efficiency of markets, see Allen Buchanan, Ethics, Efficiency and the Market (Totowa, New Jersey: Rowman and Allenheld, 1985). Back to text
2. (Oxford: Oxford University Press, 1986). Page references included in the text will refer to Morals by Agreement. Back to text
3. For criticisms of more common versions of this view see Allan Gibbard, "What's Morally Special about Free Exchange?" pp. 20-28 of Ellen Paul, Fred Miller, Jr. and Jeffrey Paul, eds. Ethics and Economics (Oxford: Blackwells, 1985) and Amartya Sen, "The Moral Standing of the Market," pp. 1-19 of Ethics and Economics. Back to text
4. Christopher Morris usefully distinguishes between nontuism, mutual disinterest, and what he calls "materialism or consumerism", which is required for the standard welfare theorems in "The Relation Between Self-Interest and Justice in Contractarian Ethics," in in Ellen Paul, Fred Miller, Jr. Jeffrey Paul and John Ahrens, eds. The New Social Contract: Essays on Gauthier (Oxford: Basil Blackwell, 1988), p. 123 Back to text
5. This stipulation is not part of the standard definition of perfect competition, but if it is not added, then a PCM can undermine itself and create the possibility for injustice. Back to text
6. If Gauthier intends only the weaker view, it is puzzling why he maintains that individual actions are not subject to moral appraisal rather than that they are all morally permissible or right. Gauthier argues on p. 93 that it is a mistake to regard actions as morally right, because no moral constraints are applicable. But only when force and fraud are somehow eliminated are individuals morally free to do as they choose. For this point and the possibility of distinguishing the weaker interpretation of Gauthier's claim, I am indebted to Julius Sensat. Since I am concerned with the whole laissez-faire tradition, some of my comments will also be directed to the stronger view that assessments of PCM's themselves are out of place. Gauthier repudiates this stronger view in his "Moral Artifice," Canadian Journal of Philosophy 18 (1988), pp. 412-13. Back to text
7. Let us set aside qualms based on the possibility that interactions on a PCM would result in imbalances in political power that would in turn threaten injustices in cooperative ventures, or on the possibility that market life will undermine, as a matter of contingent psychological fact, the background morality that constrains individuals to eschew force and fraud. Back to text
8. "Three Problems with the Treatment of Time in Economics: Perspectives, Repetitiveness, and Time Units," in Gordon Winston and Richard Teichgraeber, eds., The Boundaries of Economics (Cambridge: Cambridge University Press, 1988), p. 47. See also James Buchanan, "The Gauthier Enterprise" in The New Social Contract, p. 89. Peter Danielson's suggestion that the market is a "cooperation-free" zone in "The Visible Hand of Morality," Canadian Journal of Philosophy 18 (1988), p. 367 is thus still too strong. Back to text
9. "Morality, Rational Choice, and Semantic Representation: A Reply to My Critics," in The New Social Contract, pp. 203-4. Back to text
10. Gauthier is unclear in Morals by Agreement on whether the existence of a PCM requires a prior bargain and indeed seems sometimes to suggest that none is needed, but I do not see how he could maintain this. For example, the smooth functioning of a market requires that property rights be precisely delineated, and such a precise delineation of property rights requires prior conventions. Gauthier's "Lockean proviso" could not suffice. See James M. Buchanan, The Limits of Liberty: Between Anarchy and Leviathan (Chicago: University of Chicago Press, 1975), esp. p. 9, "The Gauthier Enterprise," The New Social Contract, p. 89 and Gibbard's, "What's Morally Special about Free Exchange?" Some of Gauthier's remarks (esp. p. 84) suggest that a PCM is a result of bargaining, and, in any event, in his recent "Moral Artifice," pp. 412-13, Gauthier explicitly insists that a PCM presupposes prior agreement. Back to text
11. See Thomas Scanlon, "Liberty, Contract, and Contribution," pp. 43-68 of Gerald Dworkin, Gordon Bermant, and Peter Brown, eds. Markets and Morals (New York: Wiley, 1977), esp. p. 62. Back to text
12. For some further weighty criticisms of the moral significance of the equality between factor price and marginal product see Sen, "The Moral Standing of the Market," p. 16. Back to text
13. So, contrary to the suggestion on pp. 98-99, it will not do to make an exception in the case of rents or to abstract from rents. Julius Sensat helped me to see that the problem extends to the whole surplus over autarkic production. Back to text
14. In addition to rent, one should also mention consumer's surpluses, which depend on the difference between what one pays for a commodity and what one would have been willing to pay. In fact, the distinction between rent and consumer's surplus is superficial and of little theoretical interest. See D. M. Winch, Analytical Welfare Economics (Harmondsworth: Penguin, 1971), pp. 135-37. See also John Harsanyi's discussion of Gauthier's views on rent in his "Review of David Gauthier's Morals by Agreement." Economics and Philosophy 3 (1987), pp. 345-48. Back to text
15. If Gretzky were as fine a baseball player as a hockey player, then his high salary might include no rent. If one considers Gretzky's employment alternatives as positions with other hockey teams, as Jean Hampton suggests in "Can We Agree on Morals?" Canadian Journal of Philosophy 18 (1988), p. 339, then one would regard Gretzky as in fact earning no rent. Back to text
16. And since the proceeds of autarkic production are, we may assume, pitiful, the initial bargaining positions become unimportant, and Gauthier's views have highly egalitarian implications, as noted by Buchanan, "The Gauthier Enterprise," p. 88 and by Russell Hardin, "Bargaining for Justice," in The New Social Contract, p. 73. Back to text
17. Perhaps such large differences in education are unjust. Since Gauthier does not discuss what sort of equality of opportunity justice requires, it is difficult to judge. If need be, one can modify the example to focus on the different personal resources, such as trust, enterprise, or social graces, that families provide. Gauthier emphatically does not want to compensate for differences in character traits, even though these may be as much social products as education and as important to one's life prospects. He insists that these must be regarded as part of a person, lest we fail to take individuals seriously (pp. 237, 253-54). There are obvious difficulties here. Back to text
18. "provided that this structure is a feasible alternative meeting the other requires of Archimedean choice." (p. 264) Back to text
19. Gauthier claims that in a PCM "...no one is affected, whether beneficially or harmfully, by any market activity to which she has not chosen to be party." (p. 96). If this were true, it would rule out pecuniary as well as non-pecuniary externalities, but pecuniary externalities cannot be ruled out, unless it is assumed that a PCM is completely unchanging or that capital, labor and other factors of production can be costlessly redirected with no change in their value whenever there is technological change. But Gauthier himself gives an example of a pecuniary externality (p. 108) and criticizes a utilitarian account of holdings on a PCM on the grounds of its dynamic instability (p. 107). In a static equilibrium, those who would have been better (or worse) off if a different higher-cost technology were in use are affected by the activities of those who employ the actual technology. See Buchanan, "The Gauthier Enterprise," p. 90. To rule out pecunairy externalities by defnition would trivialize Gauthier's views. Back to text
20. In a PCM, there is no unemployment, so hand weavers will move immediately to whatever new employment they most prefer. But they have lost at least a large part of the value of their capital, and the cost of changing their way of life may be large. Back to text
21. In a completely static economy, it is arbitrary to distinguish pecuniary externalities from the general surplus from interaction. But, as Julius Sensat pointed out to me, the dynamics and change are themselves significant. In real economies even in the absence of non-pecuniary externalities, monopolies, and obvious market imperfections, uncertainties are unavoidable, and with uncertainties come possibilities for strategic behavior and suboptimal outcomes. How could a changing PCM avoid uncertainties? What sort of mechanism could enable a PCM to achieve general equilibrium without out-of-equilibrium trades, uncertainties, or any possibilities of strategic behavior? Back to text
22. See Derek Parfit's discussion in ch. 3 of Reasons and Persons (Oxford: Oxford University Press, 1984). Back to text
23. S is a Pareto improvement over T if nobody is better off in (prefers) T and somebody is better off in S. Back to text
24. "Given freedom constrained by the proviso, so that force and fraud are absent from interaction, a market emerges. (p. 261) The story thus makes it seem that the market in a sense "comes first" (hypothetically), and bargaining only arises because of market failure. "Cooperation arises from the failure of market interaction to bring about an optimal outcome because of the presence of externalities." (p. 128) But Gauthier is not prepared to defend this view. See footnote ?? above. Back to text
25. (p. 218) Taking seriously Gauthier's comments about rent, the proviso, the benchmark of how well individuals would have done in the feasible and fair society best suited to them and so forth, then the rich man will be bothered with old women begging crumbs only when the women are handicapped or have suffered extraordinary strokes of bad luck. Notice that although a view such as James Buchanan's is much less egalitarian than Gauthier's, it is also less historical; the current pattern of rights and of the distribution of goods and bads is constrained to reflect the underlying "natural distribution." See ch. 5 of Buchanan's The Limits of Liberty. Back to text
26. Robert Nozick, Anarchy, State and Utopia (New York: Basic Books, 1974). Back to text
27. "Cooperation on terms less than fair is therefore less stable, in failing to gain the whole-hearted acceptance of all participants. (p. 230)
"...each individual's endowment, affording him a base utility not included in the cooperative surplus, must be considered to have been initally acquired by him without taking advantage of any other person...Otherwise those who consider themselves taken advantage of in initial acquisition will perceive society as unfair,...and will lack sufficient reason to accept market arrangements or to comply voluntarily with cooperative joint strategies." (p. 201, my emphasis) Gauthier also has a separate "equal rationality" argument that is ably criticized by Jody Kraus and Jules Coleman, "Morality and the Theory of Rational Choice," Ethics 97 (1987): pp. 715-49. Back to text
28. The historian's powers will not be unlimited, of course. They cannot, for example, justify grossly sub-optimal arrangements. Note that although individuals on PCM's have perfect knowledge of all economically relevant information, they do not necessarily perfect knowledge of history. Perhaps one might avoid the difficulties I suggest by insisting that in a theory such as Gauthier's, which attempts to establish the rationality of justice, it is appropriate to abstract from mistakes and false beliefs. Initial holdings are, on this view, constrained not by the real exigencies of compliance, but by the hypothetical exigencies of rational and fully informed compliance. Back to text
29. Alan Nelson, "Economic Rationality and Morality, " Philosophy and Public Affairs 17 (1988) argues on p. 157 that this disposition must be irresistible. But then there would be no moral freedom. The psychology here is quite obscure. For quite a different view of this disposition, see Edward McClennen, "Constrained Maximization and Resolute Choice," pp. 95-118 of The New Social Contract. Back to text
30. Karl Marx, Capital, vol. 1, tr. S. Moore and E. Aveling (New York: International Publishers, 1967), ch. 26. Back to text
31. As Amartya Sen vividly points out in ch. 1, 5 and 10 of Poverty and Famines: An Essay on Entitlement and Deprivation (Oxford: Clarendon Press, 1981) and in his essay, "The Moral Standing of the Market, pp. 5-7, accounts of justice such as Nozick's or Gauthier's that make historical facts or beliefs decisive can wind up condoning avoidable mass starvation as not unjust. Back to text
This excellent book is a collection of 13 essays (3 previously unpublished) by Joseph Heath meant to develop a very interesting approach to business ethics rooted in market efficiency. Heath, a philosopher with a firm grasp of economics, here attempts to root business ethics not in controversial political or moral notions of egalitarianism or other such principles, but rather, by determining the conditions which would lead to Pareto-optimal market efficiency -- a state where no person's situation can be improved without harming someone else's situation. (79)
Heath's list of proper business rules may be common to many business ethicists, but the difference here is that if you ask "why should I follow these imperatives?" Heath's answer is not rooted in rights, fairness, the greatest happiness principle, social justice claims, or the categorical imperative. He wants to avoid traditional moral controversies and find the source of these ethical imperatives in the market itself -- the market will work most efficiently when we help prevent market failures, and market failures happen because of these types of imperfections, asymmetries, and externalities. Heath claims that the market needs regulation, but beyond that, individuals and companies need to follow ethical imperatives such as (a) minimize negative externalities, (b) reduce information asymmetries, (c) do not exploit diffusion of ownership, (d) avoid erecting barriers to entry, (e) do not oppose regulation aimed at correcting market imperfections, (f) do not seek tariffs or other protectionist measures and (g) do not engage in opportunistic behavior (37). It is an exciting thesis -- to try to derive business ethics from the pursuit of market efficiency itself, rather than to impose it from everyday morality, which may not always usefully apply to business.
In chapter one Heath criticizes many traditionally held economic views. For example, he points out that profit maximization of the firm actually often goes against self-interest of the manager, although these are often conflated. In criticism of a naïve view of invisible hand power, he points out that self interest alone cannot create optimal market efficiency -- à la Kenneth Arrow, he argues that regulations and other self constraints are needed to prevent information asymmetries, externalization of costs onto others, and other similar market failures that are ultimately inefficient (31). Further, he argues that Milton Friedman, in his focus on free and open markets and fiduciary responsibility, was wrong primarily because he focused only on a limited few of the conditions of Pareto optimal markets. Friedman just didn't take into account other market-failure causing practices.
In chapters 2 and 3 Heath takes on stakeholder theory, because it focuses on the wrong things. He thinks that Enron and other market failures tend to happen not because managers are not watching out for stakeholders, but rather, because they aren't even watching out for stockholders, and there are not sufficient mechanisms in place to ensure proper shareholder control. This, he says, has been lost to most stakeholder theorists, in large part because stakeholder theorists tend to assume that managers and shareholder interests coincide, when in fact they often do not (see Enron). Breakdown of governance is the problem, and it is not just a regulative problem -- it is an internal corporate control issue. Heath is concerned, on the one hand, that stakeholder theory gives managers too much latitude to make decisions that are not clearly profitable or beneficial to the firm (similar to Michael Jensen's criticisms (Jensen 2002)), and could lead to Enron debacles where managers aren't acting for shareholders or stakeholders interests. On the other hand, Heath is concerned that with public goods concerns of stakeholder theory as the goal, stakeholder run corporations will end up with problems endemic of public management (at state-owned enterprises (SOEs)). The key issues he raises for stakeholder theory, which he thinks are parallel to those of SOEs, are that you have too many tasks to achieve and too many principals to follow. In this sense Heath's criticism is very similar to Jensen's (2002). While the parallel between SOEs and stakeholder theory is interesting, I think publicly traded stakeholder managed companies have more clear and immediate accountability than state owned companies traditionally have had.
Chapter 3 is perhaps Heath's clearest explanation of what he means by the market failures approach, as well as why stakeholder theory has serious problems. Among the issues he raises are that for stakeholder theory: there is a 'squeaky wheel' bias (well organized groups will get more say), there are very basic difficulties calculating who is harmed or benefitted and to what extent, there are significant issues regarding management accountability (to whom?), and it seems stakeholder theory replaces any specific fiduciary duty with a general duty to social justice. The market failures approach focuses on market efficiency, which is hindered by market failures. The ethical firm does not seek to profit from market failures; "Profiting from such actions is therefore morally objectionable, not because it violates some duty of loyalty to the customer (as stakeholder theory would have it), but because it undermines the social benefits that justify the profit orientation in first place" (89-90). Again, rather than appeals to moral obligations, or moral rights,
the market failures approach takes its guidance from the policy objectives that underlie the regulatory environment in which firms compete, and more generally, from the conditions that must be satisfied in order for the market economy as a whole to achieve efficiency in the production and allocation of goods and services. (90)
Profit seeking is not the source of unethical behavior -- exploitation of market imperfections is what really causes the trouble. Heath says, "If all companies fully internalized all costs, and charged consumers the full price that the production of their goods imposed upon society, I believe it would be impossible to make the case for any further 'social responsibility' with respect to the environment. (90)" This is a provocative claim, and has a lot of merit.
In chapter 4 Heath argues that everyday morality is inadequate for business, and that most business ethics is useless to business and usually perceived as anti-capitalistic and touchy-feely for a simple reason: business ethicists (especially stakeholder theorists) tend to think competition is somehow immoral because it is adversarial. But healthy markets are competitive, just like a good football game is competitive. Competition requires that you are adversaries with your opponent, at some level, and in such a situation the everyday morality of the golden rule can't apply:
Before kicking in the winning field goal, we do not want football players to be thinking, 'How would I like it if the other team did that to me?' Similarly, before lowering prices, we do not want gas-station owners to be thinking 'How would I like it if the station across the street did that to me?' (102)
But Heath says that adversarialism must not be confused with 'anything goes' (as he thinks David Gauthier and Friedman do (109)). The competitive market will have different rules, but there is still sportsmanship -- not just anything goes. There are constraints, and Heath suggests the following as like rules of sportsmanship for business: (a) don't exploit market failure, (b) do not cheat, (c) do not game the rules, (d) take the high road. This would include refusing to lobby against regulations designed to correct market imperfections (113). Business ethics should not require a company to alter its goals of winning the game, but rather business ethics should be in the business of helping determine what kinds of self-restraining actions are required for Pareto-optimal markets.
In chapter 7 Heath argues that efficiency has within it an implicit non-ideal morality, despite the fact that this seems counterintuitive not only because it rejects altruism, but also because in the market efficiency trumps everyday concerns about fairness or equity. This is because in market transactions, the norm is constrained efficiency, according to Heath. A simple example is hotel rooms which may be triple the price on a busy weekend, not because it is a just price, but because there are people willing to pay that price because it is worth it to them. We also see this with labor wages, where more strenuous or difficult work does not necessarily get more pay. Here an essential point is that everyday morality does not apply well to business, because many principles of everyday morality are anti-capitalist, because they find adversarial competition unethical in everyday life.
After arguing against many normative models for the market, Heath comes down to libertarianism -- which Heath claims is crypto-Paretian anyway -- or Paretian social welfare argument -- that "well-structured, competitive market economy produces not just utilitarian gains (where some might benefit while others lose) but Pareto improvements (where everyone benefits)" (197). Concluding, Heath says, the "Paretian approach to business ethics . . . [is] the most that a normative theory can require without becoming anticapitalist. (200). Norms include prohibitions against exploiting market failures, gamesmanship where you follow the letter of the law but not the spirit of the law, and resisting attempts to do end-runs around regulatory constraints. Self-limiting these behaviors certainly goes "beyond compliance," as he says, and flies in the face of "canonical textbooks on business strategy" (referring to Michael Porter (1990)), which "are basically guides for aspiring executives that focus almost entirely on how to make money by 'creating and sustaining market failures'" (201). Everyday morality is too idealistic and optimistic about reality, says Heath, but a market failures approach provides "a more precise way of articulating the way that normative principles and be weakened, in order to render them more incentive-compatible, without being dissolved entirely. (204). Chapter 8 is devoted to a fruitful discussion of two competing interpretations of the nature and mechanism of how the invisible hand works in markets.
In chapter 9 Heath argues against the view that the central functions of the welfare state are all residual (ensuring property rights, preventing anticompetitive practices, internalizing externalities, etc.) -- which happens to be the view of the right, and also against the view that anything beyond these activities are redistributive in character (which the left thinks is good and the right thinks is bad). Heath wants to argue that there are cooperative arrangements in society that are essential to healthy markets, and government involvement in them is neither residual nor redistributive. Five forms of cooperation he highlights are: economies of scale, gains from trade (in consumption and production), risk pooling, self-binding, and information transmission, in which conflict can arise. State activities that impact these forms of cooperation, though, do not fit neatly into "the 'right-wing' view that political action is dominated by 'rent-seeking behavior, and the 'left-wing' view that the primary function of the welfare state is to secure distributive justice" (255). This is why the welfare state needs to be rethought.
Next in chapter 10, after demonstrating that agency theory is not committed to the doctrine of shareholder primacy, and showing that agency theory cannot permit what is forbidden, but can require what is permitted, Heath wrestles with the question of whether or not agency theory treats all motivation as self-interested. He argues that many agency theorists do downplay the fiduciary obligations of agents (Jensen and William Meckling), or downplay the information asymmetries (Clark), but this is agency theory misconstrued, in Heath's view. He also points out ways some agency theorists crowd out moral incentives. Ultimately, Heath thinks the economic model of rational action is problematic because it "classifies all genuine rule-following as irrational" and "Sophisticated practitioners of agency theory are familiar with these limitations, but a large number of enthusiasts are not" (292). Ultimately, Heath provocatively concludes that, when properly understood and critically used, "Agency theory allows us to see that in many cases, the alternative to ethical business enterprises is not the presence of unethical business enterprises, but rather the absence of any enterprise at all" (292).
In chapter 11, Heath argues that moral motivation comes from psychological, not philosophical sources, and that understanding criminal motivations is more helpful for deterring people from rationalizing bad behavior than teaching philosophy. As he says, "there is no particular reason for business ethics courses to focus on moral dilemmas, or to teach fundamental meta-ethical perspectives (Kantian, utilitarian, etc.)." Students don't act unethically because they don't know the categorical imperative accurately; it is more often because they talk themselves into doing something they otherwise wouldn't through rationalizing. So if that is the case, "a more useful intervention, in an ethics course, would be to attack the techniques of neutralization that students are likely to encounter, and may be tempted to employ, when they go on to their future careers" (320).
Chapter 12 is a sustained criticism of virtue ethics. Heath claims that in the face of criticisms from social psychology, sociology and political theory, the only reason philosophers continue to pursue virtue ethics "is not intellectual heroism, but rather just obstinacy" (323). In short, his argument is that virtue theory, in its focus on character, does not focus enough on real problems of organizational environment that influence behavior. The final chapter, chapter 13, is on reasonable restrictions on underwriting in insurance, and provides a concrete example of how Heath approaches a particular problem using a Pareto approach.
This is an engaging book. In nearly every essay, Heath provides provocative, thoughtful criticisms, which tend to take the road less travelled, and show why the common paths of thought are problematic and fallacious. Heath's arguments are clear but detailed, and for those not well versed in economic theory some sections will take substantial effort, but the fruit of that effort is well worth it.
But there are questions to be raised. First, an obvious question to ask Heath is one about motivation: why would a company care more about maintaining Pareto-optimal efficiency, rather than make more profit within the constraints of the law? I take it that his answer would be that the market failure approach is, at least, not anti-capitalistic in the ways that ethics is. But that doesn't in itself provide motivation to lose money to maintain the Pareto-optimal efficiency. In many respects, this is the question any utilitarian faces when pressed to explain why I should pursue what is in the interest of the many, when it seems to not benefit me personally.
Second, beyond motivation, there is a question of value justification -- although he is a philosopher by training, Heath at times sounds like an economist who finds no value claims in the phrase 'Pareto-optimal' -- but when we determine that under such conditions as "no one could be better off without making someone else worse off", we have assumed what worse off and better off mean, and values are assumed. Is the market failure approach in the end crypto-utilitarian, if the reason for pursuit of Pareto-optimality is that it is in the end best for the overall market (many)? It is hard to pin down what the underlying justification is for the market failures approach other than that it will lead to Pareto-optimal markets in theory, which would provide more balanced outcomes for everyone. There are, it appears at times, smuggled in values of greatest good for the most, justice, and perhaps even fairness, which are the basis for decisions, although they are not explicit.
Third, Heath's criticisms of philosophical theory and suggestion that business ethicists simply focus on psychological rationalizing (why people do wrong when they know what is right) is confusing. Philosophical ethics -- and especially business ethics -- is not designed to teach people to know what is right; rather, it is meant to help people rationally and consistently think through what behaviors and practices should arise from one's values. Paying attention to moral psychology is certainly important, but it is no substitute for (or competitor with) philosophical or applied ethics.
Fourth, it appears that a consequence of Heath's view that anything not leading to Pareto-optimal outcomes is not ethical is that positive externalities of business (which may benefit many unrelated third parties) may in fact be unethical. It is one thing to conclude that excessive pollution is unethical; it is another thing to say that all positive externalities are, but that seems to be the resulting conclusion. Additionally, he is perhaps unfair to virtue ethicists, and the very real concern they have for the effects of community and society on character.
But despite these questions, the book is well worth engaging by anyone interested in economics, agency theory, fiduciary concerns, public policy, corporate governance, and of course, business ethics. Heath is to be commended for this provocative book, explaining a provocative approach to business ethics (market failures approach) that sees as its guiding star the always elusive Pareto-optimal market conditions. I know it has informed my own approach to how I will teach stakeholder theory, theory of the firm, and competition in future courses.