The economic base of virtue

ResPublica's call for more virtue in banking looks like it is out of step with our times. This is an indictment not of ResPublica, but of our times. In fact, virtue is necessary for a healthy free market economy because virtuous men do the right thing without law, and so virtue is an alternative to an arms race between ever-increasing regulation and ever more cunning attempts to game such regulation. Free markets, in this sense, need a moral framework.

This poses the question: what is the economic basis of virtue? If you think this is a Marxian question, you'd be only half right. When Deirdre McCloskey says that markets promote virtue and Dan Ariely says that exposure to centrally planned economies promote cheating, they are agreeing (rightly) with Marx that "the mode of production of material life conditions the general process of social, political and intellectual life."

Now, we know that bankers have been serial criminals. This tells us that there is something anti-McCloskeyan about the industry - that it breeds vice not virtue. But what? Here are six possibilities:

1. Short-term incentives. Annual or quarterly targets for sales or profits encourage people to meet targets now even if this means breaking rules: why bother helping your employer avoid a fine in a few years' time if you fail to make your targets and are sacked before then? Such targets thus create institutionalized criminality - in the sense that future punishments are discounted so heavily as not to be a disincentive. The Bank of England's proposals to claw back bonuses are an attempt to address this problem.

2. Whereas McCloskey might be right that competition for customers encourages virtues of trustworthiness, competition between traders doesn't. It instead breeds a dog-eat-dog mentality.

3. Neoliberalism can be performative; it doesn't just describe the world, but creates it. If you claim that people are amoral and self-interested and that government regulation is inefficient and undesirable, people might act in an amoral way and seek to evade regulation. And if you believe a (misreading?) of Friedman, that "The Social Responsibility of Business is to Increase its Profits" you will aim to maximize profits, come what may.

4. Mere proximity to money can encourage unethical behaviour, and self-interestedness (pdf).

5. Selection effects. Hierarchies can select in favour of some vices such as narcissism, overconfidence, and psychopathy.

6. Diffused pivotality. Big organizations can encourage vice by removing individual responsibility; we can justify behaving badly by believing that we're doing what the boss wants or that if we didn't do it, someone else would.

Now, I'm not claiming that these mechanisms are found exclusively in banks and nowhere else; I suspect that 5 and 6 help explain Ariely's finding that centrally planned economies encouraged cheating. Instead, what I'm suggesting is that there are some mechanisms - which are stronger and more prevalent in some places than others - which undermine virtue. To this extent, Alasdair MacIntyre is right and McCloskey wrong: we lack the institutional and cultural basis for an ethics of virtue.

In this context, ResPublica might have a point in advocating more diverse ownership and governance systems - because some of these might do a better job of promoting virtue than existing structures.

I don't know if they will. But I do know ResPublica is asking the right question, of how to promote the virtues in which a free market does serve the public good. The fact that so few people are taking up this point - preferring instead cheap sneers at the (albeit silly) call for bankers' oaths - makes me suspect that some on the right are more interested in shilling for the rich than in promoting a free market economy.        

Comments

[Frances Coppola (@Frances_Coppola)]

But "virtue" is itself a debased term. Try reading Ayn Rand - she talks about "virtue" all the time, but what she means is not remotely similar to ResPublica's definition. For her, a banker pursuing his own interests at the expense of his customers is virtuous.

[Luis Enrique]

great post.

Although in all industries I am sure you can find examples of people skimping or screwing over their customers, in some industries I think people are more inclined to do the right thing without obvious personal gain because even if they don't think their customers would observe and punish them doing wrong, there's a shared sense between firm and customer of what the right thing to do is (i.e. the civil engineering contractor actually wants to build a good bridge). Where does this exist in banking? In some parts of investment banking, bankers do want to give the right advice (I know people will scoff but I claim there are vestiges of caring about reputation in the industry) but in other parts of banking there is no right thing there is just making money.

[gastro george]

"This is an indictment ... of our times."

Twas ever thus.

"People of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public or some contrivance to raise prices." - Adam Smith

[Socialism In One Bedroom]

Before quoting Dan Ariely's study as the final say on the subject, as the gospel truth (lets all stop worshiping god and worship the scientists!), I would think critiquing it would be a better way to tackle this question than taking the 'great' mans word for it.

[An Alien Visitor]

Usually with serial criminals they throw them in prison and look to instill some virtue from within the prison system. Why are bankers different?

[Dave Timoney]

Virtue in philosophy is right behaviour, which means it is a social construct, not some eternal verity.

Bankers have always considered themselves to be part of a special club, with its own norms and standards. It should come as no surprise that those norms are self-serving.

Much of the current bleating about virtue is unthinking nostalgia for the days when banking was run by "the right sort", which just meant that market-rigging was hushed up for the sake of The City's reputation.

While bankers have power, they will avail themselves of the opportunities.

[Alex]

Chris, I think you may have missed a 7th possibility: a selection effect of who is attracted to the industry and their motivations. People who are interested in helping other people will be attracted to nursing or caring or teaching. People who want to build amazing things become civil engineers or architects. And so on.

For most industries, there is some element of either personal outcome-based motivation or people who enjoy the work and will take pride in doing it well. But finance as an industry is likely to attract people who are more than normally interested in money. I don't have an evidence base for this, but I would guess that people who have an above-average interest in money also have an above-average probability of cheating to gain money. This would be reinforced by your point (4). So even if we fired all the bankers and rebuilt the industry from scratch it would over time become naturally more corrupt just from attracting particular types of people.

[rogerh]

I reckon people start out doing an honest job but then as times get a bit tougher or a more aggressive management style sets in - going public say - then corners get cut, quality suffers. Also the younger workers (after learning the ropes) tend to get put to a rite of passage - to see how they handle a dubious situation. The intelligent and ambitious will usually take the hint and take a few tight curves. The failures don't survive.

Civil engineers cannot afford to cut (many) corners on the work, a fallen bridge is a dead giveaway but contract manipulations are where the action is. Only well seasoned techies get to see those.

Very hard indeed to speak up against this sort of thing, those seen as sissies will never get near the levers of power. Changing the corporate governance structure will require concerted legal changes and I am not sure the cure will not be worse than the disease.

[Robert Salzberg]

The 3 big reasons bankers have a tendency to cheat are:

1. Their customers are insured against losses by the FDIC.

2. The Fed gives them discounted loans.

3. They can loan out much more than they have, essentially creating money.

We should have learned bankers can't be trusted during the Great Depression, the S&L crisis, and the Great Recession or Liar Loan Lazy Days. Fool me once, shame on you, fool me twice, shame on me. Fool me 3 times…Errr, what's the third thing?

[Luis Enrique]

on second thought, there is of course often a right thing to do in banking: only offer loans to people that can afford to repay them. So the question of why this virtue was lost, is important.

[Magpie]

Well, maybe Prof. Ariely would like to try this experiment: visit Cuba **first** and go around the place, alone.

After that, he may freely choose any other Latin American capital city and go around the place, alone.

Just sayin'