Given events in the U.S. economy and around the
world over the past year, we thought it might be appropriate to feature a
related discussion. The Becker-Posner Blog offers a unique commentary on
the free market and its potential impact on the morality of businessmen. University
of Chicago economist Gary Becker speaks to several topics of interest to the
Initiative in this discussion, including characteristics of free competition, the
desire for profit maximization, and the effectiveness of regulatory
interventions.
Does the Free Market Corrode Moral Character?
Gary Becker, November 2008
The title of this discussion is
taken from a question put by the John Templeton Foundation to leading
scientists, scholars, and public figures. The foundation published some of the
answers in the New York Times on October19th. It is obvious from the
revelations during this financial crisis, the Enron scandal, and other business
scandals, that dishonest and morally corrupt figures sometimes are among the
leaders in highly competitive industries. Hollywood has often highlighted these
figures, such as the morally bankrupt Gordon Gekko in Oliver Stone's film
"Wall Street", which probably contributed to the general perception
of businessmen as corrupt. Moreover, polls in the United States and Europe
usually find that businessmen get a low rating when people are asked about
whether they respect them, or believe they are honest, although congressmen in
recent polls get an even lower rating than businessmen.
If the question had been put to me,
I would have first discussed whether corrupt and dishonest businessmen make
greater profits than honest and morally admirable businessmen. Honest businessman
would be more successful than corrupt ones when they compete against each other
in a free market, as long as consumers can punish dishonest businessmen by not
giving them repeat business, (when repeat business is necessary to succeed).
Dishonest businessmen may make greater profits in the short run, but honest
businessmen make higher profits in the longer run because cheaters cannot
attract back customers who they cheated.
Two conditions must be operative for
this process to be effective:1) customers must be able to detect when they are
being cheated or misled, and 2) customers must be frequent enough buyers, so
that repeat business is an important determinant of profitability. Both these
conditions often prevail, but one or the other may be absent under certain
circumstances. For example, repeat business is not so important in vacation
areas where tourists seldom come back. Then morally corrupt and dishonest
businessmen may do relatively well, although tourists do get recommendations
from friends who have been there before, or from the hotels where they stay.
Another example deals with certain durable consumer goods since consumers only
infrequently purchase expensive goods like a car or home. Although repeat
business is less important in these markets, consumers will put more time and
research into considering decisions that require large expenditures. In
addition, word of mouth information about the reputations of different sellers
can hurt the dishonest sellers.
Even when repeat business is
important, consumers would not be able to punish corrupt businessmen if they
cannot readily determine whether or not they have been cheated or badly misled.
For example, consumers who buy defective used cars that break down only after a
year or so of driving may blame the breakdowns on their own actions rather than
on the quality of the cars that were sold to them.
Adam Smith claimed that businessmen
were, on the whole, more trustworthy than diplomats. His argument was based on
the importance of repeated interactions. Essentially, Smith argued that repeat
business was usually more important to businessmen than to diplomats. Smith
argued that diplomats frequently broke treaties since treaties are made
infrequently. As a result, the gain from breaking treaties often exceeds the
gain from living up to the obligations imposed by the treaties.
Another, much more famous, result of
Adam Smith shows that under certain conditions, businessmen in competitive
industries would promote the general welfare, even though they were only trying
to increase their profits. These conditions include that businessmen are
prevented from colluding-Smith correctly argued that businessmen try to collude
in order to exercise monopoly power- and Smith assumed consumers could punish
dishonest businessmen.
Many critics judge the performance
of free markets relative to alternatives the way a judge might make her
decision about the winner of a beauty contest between two contestants. She
chose the second contestant after seeing the warts on the first one. Prominent
and not so prominent businessmen in market economies have been involved in
various scandals where they have provided misleading information, lie, sell
shoddy and dangerous products, and the like. When such scandals arise, there is
a clamor for greater regulation in the sectors where the scandals occurred, and
sometimes even for government takeovers of these enterprises. This presumes
that regulators and government officials act with sufficient knowledge about
the industries involved, and with great wisdom and morality. Unfortunately,
often that is not the case.
Aside from the not infrequent cases
of outright bribery of regulators and legislators, many other more subtle ways
exist to bias, even corrupt, officials when their decisions replace the forces
of market competition. Regulators often get "captured" by the
companies they regulate, so that regulations are developed to keep out
competition rather than promote greater honest competition (this capture theory
was given an economic interpretation by our late friend, colleague, and
Nobel-prize winning economist, George Stigler). One of the more notorious
examples is the former Civil Aeronautics Board that was supposed to regulate
competition among airlines, but had trouble giving approval to new airlines to
compete against the established airlines.
Legislators sometimes bail out
companies in financial distress, or restrict competition from abroad in order
to raise the profitability of domestic companies-in effect they become tools of
these companies at the expense of taxpayers and consumers. Why should American
automakers get subsidies from the government during this present crisis, and in
the past, when they have repeatedly made bad production, marketing, and labor
contract decisions during the past 30 years? A free market in the automobile
industry with less government involvement would have given American consumers
faster and easier access to the cheaper and better cars made by Japanese,
German, and now Korean companies.
I might add in concluding that I
have spent my whole career in academia, and I have witnessed many examples of
morally corrupt behavior by professors. So it is far from obvious to me that
businessmen have worse morality than professors, although I may be making the
same mistake in this inference as the judge did in the beauty contest I
referred to earlier who had seen up close only some of the contestants.
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Photo by Emilio Labrador.
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