Ethics & Economics, Part 2: The Market

This is the second in an occasional series on the relationship between ethics and economics.

Today’s topic is the market. ‘The market’ isn’t anything magical. It’s just the term we use for the abstract entity that is the aggregate of all actual markets for particular goods — the sum total of the market for cars plus the market for poetry plus the market for pedicures and so on. Seen another way, the market is just a whole bunch of people (and organizations) buying and selling stuff from and to each other.

The market is ethically significant. And in general, that significance is positive: markets are generally morally good. There is an ethical justification for markets, such that, with some exceptions for particular goods, where markets do not exist we wish they did.

Reasonably-free markets have three basic moral virtues. One is freedom. In a free market, each of us is free to buy whatever we want, within the limits of our ability to pay. That’s not the only kind of freedom anyone could hope for. The sense in which everyone is “free” to buy whatever model of car they want is not very compelling for those who cannot afford a car at all. But scarcity is a basic fact about the world, and the freedom to make one’s own choices within the confines of such scarcity is hardly trivial.

The second virtue of free markets is efficiency. For very many goods, reasonably-free markets are not just one way to provide those goods: a reasonably-free market is the most efficient way to provide those goods. I’ll have more to say about efficiency in a later instalment in this series. But very briefly, we can begin to understand efficiency as a moral value if we consider its opposite, namely inefficiency. Inefficiency means wastefulness, or getting fewer outputs from more inputs. Almost no one is in favour of inefficiency. And in a world where many people see their basic needs go unmet, inefficiency is a great evil.

The third great virtue of the market is its ability, famously described by Adam Smith, to turn self-interested behaviour on the part of one person into (reasonably) good outcomes for others. Smith’s point wasn’t that people are selfish, nor that they should be. His point was that everything you own, everything around you, exists because someone made it. And chances are that — hand-made gifts aside — they made it for you not because they love you, but because they needed to make a living. The market turns my needs into a way of satisfying yours, and vice versa. And it generally happens without someone putting a gun to our heads to make it happen.

But markets also have moral failings. One is the very lack of coordination that I referred to as “freedom” above. That lack of coordination means that markets are notoriously bad at providing for the production of genuinely useful public goods, like highways and lighthouses and police forces and so on. For such goods, it’s much more effective to have some central authority, preferably with coercive powers, collect taxes in order to build them.

Markets are also much better at providing what people want than it is at providing what they genuinely need. So markets produce junk food and video games and porn in abundance, but relatively little delicious health-food and educational games and poetry. Of course, in casting the former as “bad” products and the latter as “good” ones, I’m merely appealing to popular stereotypes. In reality, there’s very little rationale for thinking video games are better than poetry. That’s just an elitist bias. But still, it probably is fair to say that there are products that are out-and-out socially bad: it’s no great bragging point for the market that it has brought us so many brands of cigarettes, for example. So if — and this is a very big if — we were much more certain, and much more unanimous, than we are about what things are genuinely good in life, then it might make a lot more sense just to have governments direct the making and provision of those things.

One of the key starting points for any sane consideration of issues in business ethics is the realization that the market serves a moral purpose. It’s an imperfect mechanism, to be sure, but its value for promoting human freedom and wellbeing is such that what we ought to think in terms of balancing various market virtues and vices against each other, rather than thinking in terms of the market as an alternative to important human values.

5 comments so far

  1. Ayman Reda on

    I do agree that markets, as a social construct, do serve a positive moral purpose. They are morally superior to other means of transfering property rights, such as violence, coercion, robbery, prizes, etc.
    With respect to the virtues of markets, I would have replaced ‘freedom’ with ‘mutual consent’, which I believe is a more appropriate prerequisite for markets to achieve their moral purpose. I would even go further and argue for a definition of ‘mutual consent’ that incorporates some version of the ‘golden rule’. This I believe makes it easier for humans to manage under scarcity.
    As for efficiency, I do like your explanation of its meaning in terms of waste and the moral implications of waste. However, the characterization and idolization of efficiency by economists has very often led to disastrous ethical outcomes.
    But my main concern is with the third virtue, where many economists would like us to believe that one’s self-interest, when actively sought, will unintentionally lead to achieving the public interest. This has been described by Duncan Foley, as “Adam’s Fallacy”. He believes that economists have never really proven this link, but have nevertheless raised it to the level of unquestionable dogma. The discussion on this point never ends, and so I cannot fully explain my position. But at the least I would say this much: I am not convinced that the self-interested actions of many individuals would by some force lead to a desirable social outcome not originally intended by the acting agents. In other words, I believe that actions (and their outcomes) are primarily determined by intentions.

    • Chris MacDonald on


      Thanks for the comment.
      I think dispute over the 3rd virtue is only possible if the virtue is exaggerated and presumed to be universal, such that trade is nearly omnipotent. It seems undeniable that one person’s interest in making a living results in that person making things that other people want. Surely *that* part cannot be a fallacy? The fallacy must lie in thinking that this means that self-interest is always good, or can solve any-and-all problems.


      • Ayman Reda on

        Thanks for your reply.
        The fallacy, as you point out, is mainly in the argument about self-interest. There is much debate as to the extent to which Adam Smith intended (or unintended) his ‘invisible hand’ argument to apply. Sometimes it feels that economists and historians are actually arguing over later interpretations, rather than the original Smith himself.
        However, and this point is not intended just for the sake of arguing: is it possible that even in the course of ‘making a living’, the personal(intended) and social (unintended) outcomes vary according to the original intentions? In other words, can society benefit more from my vocation if part of my intention was to consciously benefit society? And if so, why this excessive preoccupation in the field with pure self-interest? Why this fascination with the ‘invisible hand’, when the visible is much more eminent?

      • Chris MacDonald on


        You’re right, it’s an odd emphasis. My understanding (though I’ve not verified this) is that the term “invisible hand” appears just once in The Wealth of Nations.

        I take it that the real point about self-interest is not that self-interest dominates, but rather that the market tends to produce decent results even among mostly-self-interested individuals, or in interactions that benevolent persons have with people who are strangers, or even to whom they bear some animosity.


  2. Ayman Reda on

    You are right, it is rarely mentioned. And that is my earlier point that most of the later discourse is really beyond Smith. Your next point is quite insightful.
    Good discussion, thanks.

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