Transcript | 3. lecture: About the morals and moralization in economy (Miroslav Beblavý) - University for modern Slovakia

In today’s lecture we will concentrate on the role of the moral arguments in the discussion about economic policy.  Is the economic thinking in the end always only an application of moral principles?

The best example is the current discussion about the crisis. Moral arguments are often used in the discussion about the causes and the solutions of the economical and debt crisis in Europe. One of the best examples is the alleged quote from Tomáš Baťa from 1923, so from a time when the world business crisis peaked. The great businessman apparently said:

“That, what we came to call the business crisis is only another name for a moral poverty. The moral poverty is the cause, the business decline is a consequence. In our country there are many people, who think that it is possible to stop the business decline with money. I’m afraid of the consequences of this mistake. In the situation where we are now, we don’t need any genius revenues and combinations. We need moral attitudes towards people, towards work and towards the public property. Not supporting bankrupts, not creating debts, not throwing out values for nothing, not blackmailing the working ones, doing, what helped us rise from the after-war poverty; to work and to save up and to realise work and saving to be more profitable, more demanded and fairer than laziness and waste. You’re right. Its necessary to overcome the crisis of trust. However it isn’t possible to overcome it through technical, financial and credit measures. Trust is a personal matter. Trust can be renewed only through a moral standpoint and a personal example.

The spread of this quote on blogs and social websites indicates that it is still resonating today. The feeling, that big crises can’t have “technocratic” solutions and have to be linked with a moral renewal of an individual, society and country, is resonating. This isn’t a Slovak particularity. Only a few days ago I’ve seen in the book by Ron Suskind, Confidence Man, describing how Barack Obama as an American president tried to balance out with the great recession in 2009-2010, a nearly identical quote of a journalist, who was describing the thinking of numerous key players of the White House.

If it comes to the importance of values for the business growth, Baťa is not alone. A large professional economical literature talks about the contribution of what ordinary people call moral values. From a long term perspective it is established that the countries, where people trust each other and behave politely, where people steal less and where people live according to the motto – work, save up and invest, explore, have it better. The moral should also be one of the most important barriers that prevents the expansion of many infirmities in the economic sphere, which can be illustrated on a number of examples.

The first of such infirmities is the corruption and with it closely linked nepotism. Mariam Orkodashvili from Vanderbilt University points out the importance of morals as one out of three key aspects (together with a rational calculation and personal intuition), which affect not only individuals, but also corporations and politicians during deciding whether to accept illegal practices in the private and public live. Also the study from The Heritage Foundation points out that in the economically free countries, where there are high, but at the same time strong moral principles, there is much less corruption.

However the importance of morals and principles doesn’t end at the discussion about corruption. We can also see it on many levels at the discussions about economy as a system, where a successful cooperation between people should be at hand. The importance of morals in the economical system has already been described by the founder of economy Adam Smith in his book The Theory of Moral Sentiments, where despite his focus on the egoistic nature of individuals he describes the existence of moral principles as one of the bases of a social system.

The expansion of the importance of the morals for the cooperation of individuals within an economy has been in a more detailed way described by the Nobel prize winner and one of the founders of the new institutional economy Douglas North. North looked at how the society creates rules, which structure or limit the behaviour of individuals or businesses. These limitations are divided into formal rules, some of them for example the constitution, laws, law of property, and informal institutions. Some of the informal institutions are for example habits, traditions, taboo or generally accepted steps. In other words, if something is “done by everyone”, we can talk about an informal institution. North and others showed the importance of informal institutions for the economical growth. In other words, the laws by itself aren’t enough to explain why some societies are more “polite” and reach a greater economical success.

It is here where the morals and informal rules play a key role during the building of wealth in a society. Francis Fukuyama in his book Trust: the social virtues and the creation of prosperity attributes the division of economical successes of the individual countries exactly to the various level of the social trust and “spontaneous sociability”. Countries with a high level of trust and social capital managed to create big, professionally managed societies and corporations. Countries with low levels of social trust have developed mainly through family businesses. This factor has important consequences for individual economies. Small family businesses are good, but steel plants or telecommunication companies are hard to create this way. And exactly for this reason was in such societies a higher tendency of the country to substitute the private sector, what led mainly during problems with trust and social capital to a less effective, or even stolen businesses.

 Knack and Keefer came to similar conclusions, they noticed that the ten percent growth of the population number with a high level of social trust is linked with a one percent increase of the economic growth per person per year.

 In other words, a low level of trust and morals doesn’t have to stop the economic growth – otherwise wouldn’t Italy be in poverty today. However it decreases the way to prosperity, or it can even lead a country completely astray.

 On the other hand, there are three main questions over the simple “flipping” of the actual morals into the economic decisions.

 1. Sometimes are the moral recipes simply wrong

 The Christian church, stemming from Aristotle, considered it to be a sin to ask for interest rates in loans for over a thousand years. According to this view is money a “sterile” good, that doesn’t produce anything by itself and that’s why it’s immoral to ask for a counter-value for its use. Islam sees it this way even today. M. Raquibuz Zaman and Hormoz Moyassaghi from Ithaca College introduce the Islamic concept of usury (riba), which is forbidden by the Koran, the holy book of Muslims, as immoral and unlawful. However without the banking system and financial markets would the modern economy not exist, as it’s proven by the Islamic dances around the so called “Islamic banking”.

We can also look at some more recent examples. Throughout the whole human history there was an unlimited liability of all participating for their commitments in business. If your ship sunk or if you were unlucky in business, you could lose everything you had and very often also your freedom. It’s logical- if the whole success is yours, all the losses should be yours too. How would others come to that, if people can simply walk away from their commitments?

However with such a system it would be impossible to create big companies mobilising a great amount of capital, without which the modern economy cannot exist. Hundreds or thousands of people would refuse to guarantee together for something, over that they have nearly no control. That’s why the companies with limited liability, like llc and joint-stock companies, have been gradually created. At the same time it was found, that in the case of smaller companies were the advantages of the limited liability- for example in the willingness of the young businessmen to take on the business risk- greatly exceeding the risk of frauds. And so the majority of the activity in the market economy is realised by the businesses with a limited liability, that were a few hundred years ago considered to be the peak of hazard and immorality. Because their owners don’t guarantee for their commitment with all their properties, but only up to the level of their deposit.

On both examples it’s interesting that these institutions are, naturally, misusable and they also are misused- banks and loans, but also llcs can lead to speculations or frauds. So their contribution isn’t completely without risks, however this is also what the modern economy is about- about the ability to manage the risks to gain more advantages than losses. The clarity of these advantages is hardly questionable.

2. They often don’t give (also can’t give) definite recommendations, since the “commandments” contradict each other

Tomáš Baťa talks in this introductory quote about the need to “not support the bankrupting, to not create debts”, but “to work and save up”. With this piece of common sense it’s hard to disagree under normal conditions. The economists have a nice term “moral hazard”, for a situation, when people are guarded from the negative effects of their actions. It can sometimes have bad consequences.

However at the same time the majority of ethical systems, including the most important religions, talk about the need for solidarity of the richer towards the poor and stronger towards the weak regardless of the reasons that lead to poverty or weakness. We don’t have to quote Jesus and his quote about: “It's easier for a camel to go through the eye of a needle than for the rich enter heaven.” So if we want to discuss for example the social benefits, or even the European rescue funds, the right answer cannot be derived from the moral rules, because they don’t give and also can’t give a definite answer to where the boundary between moral hazard and solidarity should be. Everyone has to find this out on their own.

3. Timeless values, that are valid for a long time, don’t have to be the correct recipes in times of a crisis or other exceptional situations

There are things, that are valid always and everywhere, such as “thou shall not steal, is a good recipe, momentary but also lasting, immediate and timeless.  With other recipes it’s not so definite with their universality. And here we can come back to Tomáš Baťa. His opinion undoubtedly grasps a lot from what a long-lasting economical success brings to the countries. In the short term, considering the solutions for example of crises, it’s not so apparent.

The rescue from the great economical crisis in the 30’s wasn’t brought by his recipes- better morality or renewal of the trust through personal example. The rescue was brought by such “immoral” things like: the increase of the public expenses linked in some cases with arming or the release of the monetary policy linked with abandoning of the gold standard. In case of the USA, the president Franklin Delano Roosvelt saved the banking system that was falling into the deep ends. He did this through the introduction of such “immoral” thing like the deposit insurance, which is nothing else than a big moral hazard. The American president Hoover, who presided in 1929-1933 during the greatest economical crisis in the American and world history, was according to the accessible information a very polite person. Its naïve to think, that the business during a crisis will recover the fastest with virtuous rulers, or will immediately crumble after the promotion of a maniac. It’s a big loss, but that’s how it is.

Conclusion:

The management of public affairs, including the economic policy, has everywhere and always its moral dimensions. However it’s not a simple or simply looking moral algorithm offering always to everything the same solutions. That’s why we should carry our virtue compass with us at all times, and use it wisely and without dogmatism .