18. Economics and Principles

CHAPTER l8

Economics and Principles*

The title does not announce a talk about the Principles of Economics course. Instead, I am going to deliver a sermon—and I use the word in a self-deprecatory sense. So far as my sermon champions principle over expediency, it is directed more toward academics in their roles as self-appointed policy advisers than toward practicing politicians. Politicians could not function without making compromises. Senator Everett Dirksen used to say, quite aptly, “I am a man of principle, and my chief principle is flexibility.”

Now, a sermon is not required on an occasion like this one. Some of my predecessors have talked about technicalities of their special fields. On the other hand, there is plenty of precedent for talking more about the interrelations of topics than about the details of any, for making broad observations and sweeping conjectures, and for including a personal element.

My theme is the two-way relation that exists between economics and general principles of behavior. Economics helps us understand the nature and basis of such principles, their serviceability, and the conditions that tend to support or undermine them.¹

THE ECONOMICS OF PRINCIPLES

Economists can help explain the value of respecting principles not only in the realm of economic policy but also in other interactions among human beings. Relevant strands of economic theory refer to: the concept, made familiar by Hayek (1967, chap. 6) of “results of human action but not of human design” (ethical codes and languages, as well as money and other economic institutions, being prime examples); the importance, for a functioning society, of people’s having some basis for predicting each other’s actions; the inevitable imperfection, incompleteness, dispersion, and costliness of knowledge; the costs of making transactions and of negotiating, monitoring, and enforcing agreements, and the consequent usefulness of tacit agreements and informally enforced rules; applications of methodological individualism and of property-rights theory to analysis of nonmarket institutions and activities; concepts of externalities and collective goods and the supposed free-rider problem; and the principle of general interdependence.

Such concepts enter into explaining the usefulness of ethical rules and even of concern with people’s characters.² Statutory law cannot prevent all bad and enforce all good behavior. Laws attempting that would be prohibitively costly to frame and enforce, as would the mobilization of the necessary information. They would have to be sweeping and vague, would leave dangerous scope for administrative discretion, and would violate the principle of nulla poena sine lege. The law could not enforce ordinary decency, let alone actual benevolence. (“Ordinary decency” means such things as honesty, respect for other people’s rights, and being considerate, as in not throwing bottles into the street or making too much noise.) The very attempt at legal enforcement of decency, though doomed to failure, would spell totalitarian control over people’s lives. This is not to deny that properly enforceable ethical standards exist—far from it, and I shall have more to say about enforcement later on—, but the case is overwhelming for keeping those standards and their enforcement outside the realm of government and for keeping them informal, flexible, and subject to piecemeal, gradual, decentralized reform (Hazlitt 1964, esp. pp. 184—185).³ (Vagueness and flexibility are undesirable, however, as characteristics of government law.)

For insight into the respective merits of voluntarism and law in various aspects of life, let us consider the familiar kind of appeal for voluntary restraint in pricing, in wage demands, in energy consumption, and in spending and investing abroad. Such an approach tends, I argue, to undermine ordinary morality. By and large, it is in a person’s long-run self-interest to behave with ordinary decency and to cultivate the kind of character that leads him to do so.⁴ For this proposition to hold true, social institutions should be such as to hold down tension between self-interest and social interest (ostensible or actual), allowing the invisible hand to work. While legal rules and penalties do have a role in such arrangements, it is tremendously important for social cooperation that people generally be able to trust each other anyway. Voluntary decency is a scarce resource not to be wasted.

“Wasting” voluntary decency means putting an excessive strain on the implicit contract existing among members of society to treat each other decently. Such a strain occurs when, as is likely to be true in the context of appeals to “voluntary” economic self-denial, behavior in the supposed social interest does in fact clash with self-interest. A counterargument to my contention is often more implicit than explicit. It sees value in giving people exercise for their moral muscles—habit-forming exercise in setting aside self-interest in the social interest. I conjecture, though, that plenty of occasions for moral exercise arise anyway in everyday life, when an excessively narrow and short-run conception of self-interest clashes with a fuller conception. I am warning against the kind of exercise that strains and damages moral muscles because the clash between self-interest and supposed social interest is genuine and not merely apparent.

Expecting people to act against their own economic interest tends to undercut the signaling function of prices and the incentive of lossavoidance and profit. How are people to know, then, when it is legitimate and when illegitimate to pursue economic gain?⁵ Why should they suppose that the President of the United States knows best? Why should they respect an attempt to obtain the results of possibly momentous legislation by bypassing the constitutional process?⁶ To exhort people to think of compliance as in their own interest when it plainly is not, or to appeal to self-sacrifice as if it were the essence of morality, is to undercut the rational basis of morality and even rationality itself⁷. It obscures the compatibility between social interest and rational self-interest that can generally hold under appropriate social institutions. This educative effect is especially perverse when the ostensible social interest is not genuine and when the economic controls would be damaging even if enforced by law.

Appeals to voluntary sacrifice promote perverse selection by penalizing the people who do comply to the benefit of others. Mine is similar to Garrett Hardin’s point (1968/1969) about the voluntary approach to population control in an overpopulated country:⁸ the people who comply thereby contribute to the population relatively few persons exposed in their formative years to their own moral standards (and also having whatever genes may be relevant). The noncompliers will have relatively many children, who will grow up exposed to the lower moral standards of their parents (as well as having any relevant “bad” genes). Over time, these others will outbreed the decent people. In economic affairs, similarly, the compliant businessman who holds his selling price below the market-clearing level will have to turn away some customers, who will then buy from his noncomplying rivals. In earning profits and winning control over resources, then, the less public-spirited businessmen will prevail over the more public-spirited. By practicing restraint in driving, public-spirited car owners will leave more gasoline available, and at a lower price than otherwise, to drivers less public-spirited than themselves. Eventually such effects become evident, further supporting the perverse idea that morality is for suckers and dupes.

In contrast with “voluntary” controls, legally enacted penalties against specifically defined violations do tend to make compliance serve the individual’s self-interest. The contrast weakens, though, if supposedly compulsory controls, by their nature, are easy to evade, so that any compliance must in effect be voluntary. The contrast also weakens if the law makes crimes out of actions not otherwise morally wrong, or if the controls become so extensive and complicated that the individual can hardly know just what is expected of him.

My criticism of voluntary economic controls does not imply opposition to voluntarism in all aspects of life. Quite the contrary: precisely because voluntarism is indispensable, we must beware of misusing and subverting it. Far from denying that there are valid distinctions between right and wrong, I am stressing the alternatives to detailed governmental compulsion and prohibition. Many types of wrongdoing can be discouraged, if at all, only in an informal, de-centralized way. Discouragement consists in part of an atmosphere in which wrongdoers bear certain costs, including, perhaps, that of being regarded with appropriate revulsion.

Although dealing with relatively trivial cases, a memorable Newsweek column by Stewart Alsop (1970, p. 100) contains valuable insights. “[T]he man who makes a justified fuss,” said Alsop, “does a public service.”⁹ Alsop cited examples of indifference of clerks at railroad ticket counters and hotel desks as long queues formed, the surliness of waiters, the dishonoring of confirmed air reservations. Professor David Klein of Michigan State University practices rendering the kind of public service that Alsop praised. When a Montreal hotel tried to dishonor his confirmed reservation, Klein gave the desk clerk three minutes to find him a room; otherwise, he would change to his pajamas in the lobby and go to sleep on a sofa. Klein got his room. Klein also makes it his practice to bill business firms for time spent coping with errors on their part. A quiet, well-bred scene does not embarrass him. “[I]f more people did what I do,” he says, “business practices might improve.” If middle-class people used their clout “in the right way, they could make enormous changes in retailing, and in other practices” (Nemy 1974).¹⁰

Alsop and Klein were suggesting that the exceptional victim who does protest deserves admiration for imposing costs on abuses and thereby discouraging their repetition. Because this service is a public good, as Alsop noted, the protester unfortunately reaps only a fraction at best of the total benefit from his action.

A further reason why incentives to protest are inadequate emerges from Helmut Schoeck’s analysis of a case less trivial than those reported by Alsop and Klein. Schoeck’s case may even afford insight into why totalitarian regimes can often enjoy apparent mass support. Schoeck supposes that a new center of power has come into being in some organization, perhaps by foul means. It seeks to bring “under its domination those groups and persons who have not yet submitted to it.” Some groups or persons will already have lined up behind it, “whether out of greed, cowardice, stupidity or genuine enthusiasm. But these men ... are not satisfied with conforming, themselves, and almost invariably develop intense feelings of hostility towards those who continue to stand aside....Tension, usually originating with the conformists, then arises between those who conform and those who do not.” A conformist “begrudges others their courage, the freedom they still enjoy.” He “sees both himself and his chosen power group endangered by those who obviously prefer ... to keep their distance. Those at the periphery of the power center ... now begin to exert pressure on other people ... with the object of getting them to conform as well” (Schoeck 1966/1970, pp. 89—90).

Schoeck could have strengthened his analysis by invoking Leon Festinger’s theory of cognitive dissonance (1957, p. 4, chap. 4 and passim). Those who resist evil not only fail to reap the full benefits of their public service but even risk being reviled for performing it. Others will prefer to be “realistic,” to “get along.” Those who conform out of cowardice or calculation (to use Schoeck’s words) shun facing that fact; such a cognition would be dissonant with their self-image as decent human beings. They have to adjust their cognitions. They come to believe that conformity is proper and moral, that the usurping power is worthy and its tactics honorable. The nonconformists pose an obstacle to this adjustment of cognitions, so the adjustment proceeds until the collaborators can really believe that the others are scoundrels. A further strand to the theory of cognitive dissonance is ironic but understandable: the more nearly just barely adequate was the inducement to collaborate, the stronger is the internal pressure on the collaborator to adjust his cognitions until he believes, sincerely, that he has lent his support to a worthy cause. No one likes to believe that he has betrayed his principles for small stakes, although as Elliot Aronson (1972) says, if a man sells out for a large amount of money, then he has as many cognitions as dollars that are consonant with his having taken a stand he does not really believe in.

For reasons like these, then, prospective resisters may decide not to make the necessary sacrifice in the first place. Why not cultivate a kind of stoicism instead?¹¹ Why not sit back, possibly enjoying a free ride if other people do raise the “justified fuss”?

Such passiveness is reinforced if people actually believe in “turning the other cheek” and in not passing judgment on other people’s actions. Passiveness can create external diseconomies by almost inviting repetition of the wrongs tolerated. There is such a thing as culpable blindness to evil. Harold Macmillan had a point in saying of a certain British cabinet member of the 1930s who remained pacifistic in the face of the Nazi menace that “he was a good man in the worst sense of the word” (quoted in Davis 1975, p. 338).

Let me be clear. I am not calling for promiscuous meddling. I am not calling on everyone to go around hunting for misbehavior to condemn. Instead, I am referring to the role of people directly acquainted with abuses. Silent acquiescence on their part is no virtue.¹² Still, I would not say that they have an actual obligation to speak out at great personal cost. I am urging a good deal less. Anyone who does render that public service deserves at least sympathetic understanding.

Worse than free riding on other people’s carrying the burden of protest against injustices is the free-riding of the culprits themselves. The more prevalent and well based is the belief that people are generally decent and honest, the greater is the chance that culprits have to benefit from the presumption that they too have these virtues. They will enjoy a free ride on, while posing unfair competition with, the warranted credibility of other people. I conjecture that a general atmosphere of decency and trust in society is unstable for at least two reasons. The more prevalent knavery becomes, the stronger is the temptation on the individual to behave likewise, rather than lie down like a doormat (Hazlitt 1964, pp. 155—156). On the other hand, as I have just been arguing, when morality does generally prevail, the individual violator has a correspondingly high chance of profiting from the presumption that he is decent and honest though he is not.¹³

Just as X-inefficiency probably causes more economic loss than allocative inefficiency,¹⁴ so, I conjecture, does the impairment of social cooperation through erosion of the presumption of decency and honesty. That presumption—and its basis in fact—is practically indispensable for coordination of individuals’ diverse activities and so for an economically progressive society. What economists are capable of contributing to analysis of this connection may well have more significance for welfare than further refinements of the analysis of deviations from Pareto-optimality. Already, some of the best writings on economic backwardness and economic development do lay stress on the ethos of society.¹⁵

CONCLUSION

In conclusion and in summary, economic theory helps clarify the usefulness and necessity of leaving much in the realm of good and evil to informal principles and their decentralized, nongovernmental enforcement. It also points out dangers to such principles and obstacles to such enforcement. It helps explain the role of broad principles in assessing economic policies and helps explain why the merits of each specific government intervention, narrowly assessed, are not the only relevant considerations. We should appraise each proposed intervention, as best we can, for its likely legal, political, social, and ethical repercussions—for its repercussions on the system as a whole. If we avoid appraising and comparing alternative economic systems as wholes, if we avoid forming and acting on a coherent conception of the good society, we shall make momentous choices in ignorance and by default. The opposite approach, respecting principles, would go far, I believe, toward reinstating the wisdom of the Founding Fathers regarding the scope and power of government.

REFERENCES

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Adler, Mortimer J. The Time of Our Lives. New York: Holt, Rinehart and Winston, 1970.

Alsop, Stewart. “Let’s Raise More Hell.” Newsweek, 9 March 1970.

Aronson, Elliot. The Social Animal. San Francisco: Freeman, 1972.

Banfield, Edward C., assisted by Laura C. Banfield. The Moral Basis of a Backward Society. New York: Free Press, 1958.

Browne, Harry. How I Found Freedom in an Unfree World. New York: Avon Books, 1974.

Browning, Edgar K. “Why the Social Insurance Budget Is Too Large in a Democracy.” Economic Inquiry 13 (September 1975): 373—388.

Buchanan, James M. “Ethical Rules, Expected Values, and Large Numbers.” Ethics 76 (October 1965): 1—13.

———. “America’s Third Century in Perspective.” Atlantic Economic Journal 1 (November 1973): 3-12.

———. The Limits of Liberty. Chicago: University of Chicago Press, 1975.

———. “The Samaritan’s Dilemma.” Manuscript, 1972. In Altruism, Morality, and Economic Theory, edited by E.S. Phelps. New York: Russell Sage Foundation, 1975.

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Davis, Joseph S. The World between the Wars, 1919—39: An Economist s View. Baltimore: Johns Hopkins University Press, 1975.

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Ellis, Albert, and Robert Harper. A Guide to Rational Living in an Irrational World. Englewood Cliffs, N.J.: Prentice Hall, 1961.

Etzioni, Amitai. “The Grand Shaman.” Psychology Today 6 (November 1972): 88—92, 142—143.

Festinger, Leon. A Theory of Cognitive Dissonance. Evanston, Ind. and White Plains, N.Y.: Row, Peterson, 1957.

Friedman, Milton. Capitalism and Freedom. Chicago: University of Chicago Press, 1962.

Glazer, Nathan. “Towards an Imperial Judiciary?” The Public Interest, no. 41 (Fall 1975): 104—123

Greenfield, Meg. “Food for Thought.” Newsweek, 10 November 1975.

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———. Rules and Order. Vol. 1 of Law, Legislation and Liberty. Chicago: University of Chicago Press, 1973.

Hazlitt, Henry. The Foundations of Morality. Princeton, N.J.: D. Van Nostrand, 1964.

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McKean, Roland N. “Collective Choice.” In Social Responsibility and the Business Predicament, edited by James W. McKie, 109—134. Washington, D.C.: Brookings Institution, 1974.

———. “Economics of Ethical and Behavioral Codes.” Manuscript, 1974.

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———. On Appraising the Performance of an Economic System. Cambridge, U.K., and New York: Cambridge University Press, 1984.

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*Presidential address at meetings of the Southern Economic Association, printed in Southern Economic Journal 42 (April 1976): 559—571.

¹The section “Principles and Policy” in the original version of this article was removed for brevity. Its major points are addressed in chapter 17, “Is There a Bias Toward Overregulation?”.

² A social scientist may take interest in how ethical principles relate to the functioning of a social and economic system without imagining himself to possess superior moral character. It is no coincidence that many eminent economists have pursued such an interest—David Hume, Adam Smith, John Stuart Mill, Henry Sidgwick, J.M. Keynes, and James Buchanan, to mention a few. Without implicating him in any mistakes of mine, I should particularly like to mention my colleague Roland McKean, a former president of our Association, with whose ideas on the economics of morality mine run largely in parallel. See, for example, his two papers of 1974. I should also like to acknowledge a significant parallelism (despite some differences) with the thinking of another former president and a former colleague, James Buchanan, whose The Limits of Liberty (1975) I have read since delivering this address.

³The most basic principles of morality, I would argue, are relatively unchanging, deriving as they do from human nature, including man’s nature as a social animal. But the specific rules that are appropriate do change as factual circumstances and knowledge change. Furthermore, as Hazlitt suggests, there may be such a thing as progress in moral understanding, with a minority of individuals leading the way. In morality as in law, continuity and modifiability both have value. Change is desirable in view of changing circumstances and knowledge, but not change so rapid that people cannot act and form expectations on the basis of a known moral code.

⁴Or so argue writers whom I respect, such as Moritz Schlick (1930/1962), Mortimer Adler (1970), and Ayn Rand (1957 and other novels). In effect they argue that the best prospects for a satisfying life hinge on having the sort of character that sometimes leads one to subordinate one’s immediate narrow interest or whim to one’s more enduring interest. Yet exceptions do occur; and in rare cases, decency will cost a man his life. Still, while a decent character does not guarantee happiness—nothing can—it tends to improve the probabilities. See Schlick 1930/1962, pp. 185—199, but esp. pp. 193—194.

⁵I am referring, of course, to the pursuit of gain as such, not to the methods used. Lying, cheating, and stealing do not become right by being used in the pursuit of otherwise honorable ends.

⁶Furthermore, the voluntary approach tends to obscure responsibility for the unsatisfactory conditions occasioning the appeals to restraint and sacrifice. Appeals to ordinary citizens to “Stop Inflation” by restraint in consumption or in paying increased prices (appeals such as were frequent late in 1971) tend to draw attention away from the real source of trouble.

⁷ As Robert G. Olson says (1965, pp. 12, 126), “the probable effect of urging a man to act contrary to what he rationally regards as his own best interests is either to embitter him or to inspire contempt for reason.” “If ... an economic system is such that honesty puts an individual at a serious competitive disadvantage, the system is at least as much at fault as the dishonest individual, for honesty ought to pay not only with prestige but with profits.”

⁸I cite Hardin only to clarify my point, not to echo his specific recommendation on an issue rather far afield from my present topic.

⁹Alsop deplored “the sheepish docility of most American customers.” “In the public interest, the pricks should be kicked against at every opportunity.”

¹⁰The Southern Economic Association has been victimized by the double-booking of hotel rooms for convention sessions. Vigorous protest in every such case would presumably hold down this sort of abuse, thus conferring external benefits. On the external benefits of what Buchanan calls “strategic courage” in tough individual cases and the external costs of what he calls “pragmatic compassion”—but “pragmatic compliance” might be a better term—, see his 1972/1975. Strategic courage is related to acting on principle, while pragmatic compliance follows from treating each case on its own narrow merits.

¹¹In effect, though not in so many words, this is the advice of such writers as Albert Ellis (1968, esp. chap. 13), and, with Robert Harper (Ellis and Harper 1961), and Harry Browne (1974), the best-selling amateur economist and gold bug.

¹²The Honor System at the University of Virginia depends on the willingness of students who know of violations to accuse the offenders. Silence in such cases is considered dishonorable, subversive of the system. The system applies only to students, not to faculty members and administrators.

¹³Furthermore, as Buchanan (1965) has explained, largeness of the society or group concerned probably increases the temptation on the individual to behave immorally.

¹⁴The standard reference to a burgeoning literature on this topic is Leibenstein 1966.

¹⁵Banfield 1958 has shown the role of “amoral familism” (an excessively narrow and short-run concern for the material welfare of the nuclear family), together with dishonesty, suspiciousness, and envy, in impeding social cooperation and economic development in a town of southern Italy around 1955. The importance of attitudes and culture for development or backwardness is the main theme of Zinkin 1963. While Zinkin does not particularly emphasize trustworthiness and honesty, he does recognize their importance in several contexts. He also notes the importance of bureaucrats’ abiding by principle rather than undercutting predictability by deciding each case on its own merits. See also Wraith and Simpkins 1964, particularly pp. 155,157,189, where the authors note the role of business and accounting in deterring corruption.