In September 1970 Milton Friedman published an article in The New York Times Magazine, “The Social Responsibility of Business is to Increase its Profits.” Friedman, who has received the Nobel Prize in Economics in 1976, is probably the most influential economist of the second half of the twentieth century. His views have become the mainstream economic thinking, although few economists today care to state them as boldly as Friedman.
In my recent book Ultrasociety I use the examples of fictional Gordon Gekko (a character in the movie Wall Street) and all-too-real Jeff Skilling (the CEO of Enron) to explain why this view is wrong. Yet I have wondered on occasion, do economists really believe that “the world runs on individuals pursuing their self interests” (to use another Milton Friedman quote) and that businessmen should be motivated solely by self-interest unadulterated by any feelings of sympathy or morality?
This is why I found so interesting the e-mail that Branko Milanovic sent me after reading the first three chapters of Ultrasociety. I asked Branko for permission to publish his letter here and on my blog Cliodynamica, because I think it does a brilliant job of laying out the dominant economic doctrine. I should add, however, that Branko is channeling economic orthodoxy rather than his own views (this did not come out clearly in the letter, which was written spontaneously on a plane). I also asked Herb Gintis and Bob Frank, two “heterodox” economists (although they may disagree with this characterization) to respond, as well as writing my own response. All of these pieces generated a lively discussion, which you can read below.
I think people who want to understand how human societies and economies really work will find these articles interesting, along with Branko’s blog post exploring this issue in greater detail: “Henry and Kant: outsourcing morality.” I’d like to thank Evonomics and Robert Kadar for publishing the whole collection.
Branko Milanovic is author of The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality (2010, Basic Books). He was formerly lead economist in the World Bank’s research department and currently is visiting presidential professor at City University of New York Graduate Center and an affiliated senior scholar at the Luxembourg Income Study.
I am on my way to Moscow and just read the first three chapters of your book Ultrasociety. Let me now give you my first reaction because I am afraid I might go back to the rest of the book only in a week or so (i.e., after Moscow, since my program in Moscow is quite hectic).
I do not know much about biological evolution (biology was never my favorite subject in high school) and just a little bit more about pre-agricultural (or pre-historical) human societies. So there I learned a lot from your first three chapters, and I have nothing to add or comment. But when you discuss more recent, and dominant, economic ideology I do have an opinion. I actually find myself in sympathy with the operations of Gekko, Skilling etc., not because I like them as individuals but because I see an iron logic in their behavior. Let me explain that iron logic as composed of three elements.
- Personal ethics do not exist
- Laws exist and they are supposed to embody the general moral rules so that we know what we can do, insuring that the pursuit of our private interest leads to some greater social good
- We then just follow our private interests.
In a (less than ideal) metaphor, imagine the rules as fences around a path, like in bobsledding. You can do whatever you want on that path, and should never hit the fence. But the fence is designed by somebody else (society) in such a way that while you yourself, never caring about why the fence was set just where it was set, will maximize the speed of your own movement and the overall average speed of all actors.*
I am thus intellectually sympathetic to the view that personal morality exists only outside economics or capitalism. I might like the guys who are nice and ethical, but when it comes to economics I really do not expect them to be so. I even very much doubt when they claim they are. I tend to see them as hypocritical. This is not in their job description.
This is the philosophy that I think motivated Skilling and the others. It is what I called in the attached blog (“Kant and Henry”) the idea of outsourcing morality. Morality is embedded in the fence and I am going to play by the rules (but nothing more) and, even when I consciously do not play by the rules (as for example when I cheat and score a goal by hand), I do not have to feel bad about it. It is the job of the referee to catch me and punish me. In other words, there is no internal ethical mechanism to stop me from scoring a goal by any means I can find.
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This is I think a very powerful ideology which motivates lots of people, all around the world, from China to Africa to the US. It goes back to the Fable of the Bees which I found quite sensible; as I found Smith’s denouncing of the Fable, while accepting its basic idea that private vices lead to public virtue, inconsistent, and actually badly argued in the Theory of Moral Sentiments.
This is also, I think, why capitalism can never inspire “admiration” or “love”. It is a system really built on the best use of our vices, including greed. The sad truth is that systems built on different principles have failed miserably because they accord less well with human nature. Actually, they do a great mischief by insisting on “morality” which is then used by the “bad guys” to pursue their own personal agendas while cloaking it under the name of common good or ethics.
Finally, this is why I also find all moral outrage about the behavior of Wall Street in the run-up to the crisis wrong-headed or hypocritical. The system is built in such a way that the only thing you need to worry about is law, and not being caught (if you fail to observe the law). Since these guys generally behaved within the law (as it was then, or as they helped, by funding it, define it), there is nothing to complain.
But let’s see if I change my mind by chapter 8!
* This does not apply to what you describe as Skillings’ approach to internal organization of the firm which (as discussed in Chapter 4 with reference to sports and any organization) was deeply destructive. My three “iron logic” points apply to what I think is a view of individuals or companies competing against other individuals or companies.
Herbert Gintis is external professor at the Santa Fe Institute and professor of economics at Central European University in Budapest, where he heads a multidisciplinary research project, “The Social and Mental Dynamics of Cooperation,” funded by the European Science Foundation.
I spent several instructive days with Branko Milanovic at the Santa Fe Institute, but we did not discuss this interesting issue (see The Iron Logic of Gordon Gekko). It is worthwhile discussing it in this forum.
What is ‘greed’ in the context of competitive markets? One plausible definition (Greed I) is that greed is the motivation to maximize profit using all legal means and without regard to any side-effects of one’s decisions. A second (Greed II) drops the condition that one’s means be legal. Instead Greed II involves maximizing profits by any means, taking into account the probability of being caught violating the law and the expected penalty (financial, reputational, loss of freedom) if caught.
It is useful to define the term ‘good’ in Greed is Good. It can mean begin greedy is morally acceptable or, alternatively, having lots of greedy people is good for the economy.
I take it from Branko’s letter that he means Greed I is good for the economy because being successful on competitive markets requires Greed I, and Greed I is morally acceptable because it follows logically from the conditions of capitalist competition. I think this view is partially defensible (more on this below), but Branko goes much further than this, and defends Greed II as good. He writes, “even when I consciously do not play by the rules… I do not have to feel bad about it. It is the job of the referee to catch me and punish me. In other words, there is no internal ethical mechanism to stop me.”
It is standard neoclassical economic theory, of course, to claim that the material incentives are sufficient to induce economic actors to behave appropriately, so there is no necessity for moral strictures. But there is no empirical evidence for this notion, and theory on which it is based is quite implausible. The interested reader can refer to my book, The Bounds of Reason (Princeton University Press, 2009) for details. There is no set of rules that would induce individuals in a society of self-regarding agents to behave prosocially. Indeed, our species is evolutionarily successful precisely because there is a strong moral dimension to human social cooperation and collaboration. This holds as much in the economy as in other spheres of social life. See my book with Samuel Bowles, A Cooperative Species(Princeton University Press, 2011), and my forthcoming book Individuality and Entanglement (Princeton University Press, in press).
Despite Branko’s words, it would be hard to make the case that Greed II is good either morally or for the economy. Burning down a competitor’s factory, or writing nasty reviews of a competitor on Hotels.com, on the grounds that the probability of getting caught is low, are obviously not morally acceptable and clearly are not good for the economy. Fortunately, there are strong ethical mechanism that inhibit most people from behaving in this antisocial manner.
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An economy is which Greed II is rare is already a moral economy. Greed II causes moral outrage virtually universally. When Big Pharma hides embarrassing side-effects of a drug, or Volkswagen subverts environmental regulations, or Chrysler refuses to acknowledge life-threatening problems with ignition switches, that is Greed II, and it is not good. The people who engage in these activities are behaving immorally.
When people say that the financial crises of 2008 was caused by greedy bankers, they mean Greed II. But as Branko says, “I also find all moral outrage about the behavior of Wall Street in the run-up to the crisis wrong-headed or hypocritical. The system is built in such a way that the only thing you need to worry about is law, and not being caught (if you fail to observe the law). Since these guys generally behaved within the law (as it was then, or as they helped, by funding it, define it), there is nothing to complain.” I agree with Branko on this very important point. Blaming the financial crisis on greed is like blaming an airplane crash on gravity (a point made by Judge Richard Posner some years ago). The financial crisis was not cause be either Greed I or Greed II, but by complex social dynamics outlined years ago by Hyman Minsky (Google it!), involving imperfect financial regulation.
But is Greed I good? If it were necessary to run the economy, I would judge that it is good. I would not want to run my life according to Greed I, but I would be pleased that others were willing and able to do so. Even here, however, I think that Branko is seriously overstating the case for greed. Why? Because most people are not single-mindedly oriented towards maximizing financial gain. Even heads of companies may have multiple goals guiding their behavior, including a commitment to clients and staff as well a shareholders and their personal financial gain. Honesty, commitment, and loyalty are values cherished by many individuals, certainly enough that most positions of power in the economy can be staffed by ethically-motivated personnel.
By contrast, Branko believes the adage “nice guys finish last.” But there is an equally, of not more compelling adage “they came to do good and did well.” Indeed, there is considerable empirical support for the notion that ethically motivated individuals in the business world are happier and more successful that unidimensional profit maximizers.
Boards of directors of firms would do better to choose leaders who are committed to a broad set of moral and material concerns rather than Greed I types. This is because a Greed I individual will do what is best for himself, not the firm, stakeholders, or shareholders. There is just no way to present a CEO with material incentives sufficient to line his concerns up with shareholder profit maximization.
Societies whose business leaders have moral integrity are successful societies. Of course, it is always good to have some Greed I types around, and it is at any rate impossible to eliminate them. But they are part of a moral mix.
Robert H. Frank is the Henrietta Johnson Louis Professor of Management and a Professor of Economics at the Samuel Curtis Johnson Graduate School of Management at Cornell University. For more than a decade he was a regular Economic View columnist for The New York Times. His most recent book is The Darwin Economy: Liberty, Competition, and the Common Good (Princeton 2011).
Branko Milanovic is not alone in his skepticism about whether private morality has a useful role to play in the capitalist system (see The Iron Logic of Gordon Gekko). The logic of the competitive model does indeed seem to suggest that if people can gain by breaking the rules when no one is looking, they will do so, in the process creating competitive pressure for rivals to do likewise.
Not all interactions, however, are zero sum. Because of widespread economies of scale, individuals who can cooperate successfully with one another often compete successfully against others who lack that capacity. But successful cooperation often requires trust, which, as Professor Milanovic obviously recognizes, can be hard to maintain under intense competition.
There are of course many examples of people who behave in the ruthlessly self-interested manner that Professor Milanovic describes. Yet surely he also recognizes the empirical fact that many others refrain from cheating even when the probability of detection is extremely low. Since evolution presumably favored individuals with higher material payoffs, the interesting question is, how did genuinely honest people—those who value doing the right thing for its own sake—manage to survive in competition with others who reaped material gains by merely pretending to be honest?
A possible answer is suggested by this simple thought experiment:
You have returned from a crowded concert to discover that you have lost an envelope containing $10,000 in cash from your coat pocket. (You had just sold your car late that afternoon and had planned to deposit the money the next morning.) Your name and address were written on the front of the envelope. Can you think of anyone, not related to you by blood or marriage, who you feel certain would return your cash if he or she found it?
Most people say they can, usually adding that they have in mind a longtime friend. Since there would be no way to know if the friend had kept cash found under such circumstances, they implicitly recognize that their prediction isn’t based on directly relevant behavioral evidence. Rather, they seem to feel that it’s possible to know people well enough to make informed character judgments about them. If that’s right, and the evidence I survey in the first four chapters of my What Price the Moral High Ground? (Princeton, 2004) suggests that it is, we can see how an honest person might prosper despite passing up opportunities to cheat when no one’s looking. Such a person is extremely valuable in positions that require trust. Few executives would appoint a someone to such a position if they thought that person would fail to return the envelope in question.
For analogous reasons, we can envision a vibrant role within the capitalist system for firms and other organizations that behave in a socially responsible manner even when the threat of external sanctions is extremely weak. The title essay from What Price the Moral High Ground? explores the relationship between a firm’s perceived social responsibility and its ability to recruit and retain highly qualified workers. Most people would prefer to leave the office each day being able to say to themselves that they’d done something valuable for society, or at least that they’d caused no harm. Firms that can credibly offer this amenity to their employees, it turns out, enjoy an incredibly powerful recruiting advantage. It’s probably the most important way that socially responsible firms manage to overcome what would often be the serious cost disadvantages that make Professor Milanovic skeptical about there being a productive role for morality in the capitalist system.
Peter Turchin is a professor of Biology and Anthropology in the University of Connecticut and Vice President of the Evolution Institute. Turchin has published 200 articles in peer-reviewed journals, including a dozen in Nature, Science, and PNAS. He is author of Ultrasociety: How 10,000 Years of War Made Humans the Greatest Cooperators on Earth.
Thank you for your comment stemming from reading Ultrasociety. It’s a very clear and coherent statement of what many (if not most) mainstream economists believe, although they don’t usually care to formulate it as well as you did. Naturally, I disagree with it—my whole book is an extended argument for the opposite view of how societies really function, and what needs to be done to make them to function better.
Let’s start by making crystal-clear what we are talking about. The main question is whether economic agents, most importantly businessmen (including both corporation officers and business owners), should be motivated solely by self-interest, or should they also be motivated by personal ethics. In your view, businessmen should act as purely selfish rational agents, whose utility functions are based solely on material benefits (to themselves). In other words, they should simply maximize how much money they get. You argue that if they act in this way, externally imposed laws and institutions that embody moral rules will ensure that their private interest will lead to greater social good. As you say, this idea goes back at least to Bernard Mandeville’s The Fable of The Bees: or, Private Vices, Public Benefits.
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Now, what do you mean social good? In economics and evolution we have a well-defined concept of public goods. Production of public goods is individually costly, while benefits are shared among all. I think you see where I am going. As we all know, selfish agents will never cooperate to produce costly public goods. I think this mathematical result should have the status of “the fundamental theorem of social sciences.”
What’s very important, and something that many economists don’t appreciate, is that no amount of “good institutions” changes this fundamental result. No matter how well-designed rules are, and how good is the system of sanctions forcing people to follow the rules, if everybody is a rational agent (in the narrow sense of only maximizing their own material benefits) the system will not work. Crooks will pay the cops to look the other way, while judges would decide in favor of who pays them more.
Good institutions will only work when they are buttressed by appropriate values and preferences. You will get a cooperative society that produces public goods only when enough agents, in addition to valuing material benefits, also have prosocial values. In other words, they value virtues such as honesty and fairness, and prefer socially-optimal outcomes, such as desire that collective goods end up being produced, even at a cost to themselves.
This is actually how our large-scale societies function. A majority of people in them have prosocial values and preferences (in addition to self-interest, naturally enough), and that’s why we are capable of cooperating on very large scales. Purely self-interested people are there, but they are a minority. What good institutions do is decrease the costs for prosocial moralistic punishers, but they don’t eliminate the need for people holding prosocial values.
How such a state of things—our capacity to cooperate in huge groups—came to be is a huge question for evolutionary social science, and my book provides an answer to it.
You may say that you are not talking about cooperation, merely about how economic life should work. However, there are two reasons why cooperation is central to your question. First, economy is based in large degree on cooperation. Second, you cannot separate economy out from the society as a whole, thus leaving cooperation to the non-economic—political?—part.
Economic activities involve both cooperation and competition, which are mixed in different proportions, depending on the level at which you look. Firms internally are largely cooperative—that’s why they are constituted in the first place (otherwise one could simply buy and sell individual services on free market). You seem to accept this fact, because in your footnote you agree with me that the system of cut-throat competition that Jeff Skilling instituted internally in Enron was deeply destructive.
In national markets the primary mode of interaction between firms is competition, but it is tempered by a healthy dose of cooperation. First, not all kinds of competition are good. In particular, taking the expression “cutthroat competition” literally, CEOs are not really allowed to assassinate other CEOs, or burn warehouses of competition. This may sound silly, but that’s how market competition played out in Russia during the 1990s (I’ll get back to Russia in a minute). Good competition, which leads to socially optimal outcomes, is limited to such tactics as cutting production costs, increasing product quality, and advertising (the last one not particularly socially optimal in my view, but at least it’s legal).
Also, firms cooperate with other firms—their suppliers, for example. In real life, businessmen work hard to create trust with their partners and maintain reputations. It’s a bad long-term business strategy to be, or at least appear as, completely self-interested.
Finally, the least amount of cooperation we see in international markets, where such organizations as WTO are either fairly ineffective, or serve the interests of the powerful countries.
The second reason why cooperation is key to our debate is that economy cannot be separated from the rest of society, and how businessmen behave in economic matters has a huge bearing on what happens outside the economy.
One connection is a spillover effect. Businessmen who become accustomed to pursuing self-interest in the business sphere will become more selfish in other ways. There is now a well-established experimental result that teaching economics makes students less cooperative. Economics students are much more likely to free ride in public goods games than students from any other discipline. As a result, their inclusion in an experimental group impedes the production of public goods and increases the amount of resources used for punishing free riders—both not socially optimal results. I don’t see any reason why this effect, amply documented in experimental economics, should not operate in real life. I am sure it does.
Furthermore, self-interested businessmen who acquire great wealth will also have an incentive and the means (since wealth is power) to change the laws in ways that will suit them. They can buy, and in some cases intimidate or simply murder (as in Russia during the 1990s) regulators, judges, and politicians. In other words, they, or a substantial proportion of them, will use their power to corrupt the moral foundations of the society as a whole. There is no impenetrable, unbreakable glass wall between economy and society. We use these concepts for analytical purposes, but we should not forget that it’s just a convenience, not reality.
It is interesting that you are right now in Moscow, attending the Gaidar Forum. Yegor Gaidar, of course was one of the most important architects of the Russian economic collapse during the 1990s. Russia provides a good illustration of the general principles that we are discussing.
Russian transition to market economy was managed by some of the best and brightest Western economists. Instead of an economic miracle that the Russians were promised, the result was the fall of GDP by more than a half, immiseration of the 99 percent of the population, and huge wealth windfall for 1 percent (as well as for the Western advisers, I might add). The reasons are undoubtedly complex, but the most important one was the introduction of the dominant economic ideology. Everybody in power—former party bosses, organized criminals, new entrepreneurs (little different from mafia thugs), and the Western economists pursued their private interests. Those few who retained morals were either killed, or made completely powerless. Of course, a lot of self-interested guys got killed, too. The result was economic collapse and social dissolution—Russia was a failed state by the mid-1990s. It was an example of failure of cooperation on a large scale, and massive production of public “ills.”
Now this is just an illustration. My main argument is logical, not empirical. You cannot have a well-functioning society in which everybody, or even a majority, are pursuing solely self-interest. This applies to the whole society, and to its parts, including the economy. Good institutions are not going to work in the absence of internalized prosocial values held by a sufficient number of people. Telling anybody to pursue their naked self-interest is not a recipe for greater social good. It’s a recipe for social dissolution.