Mark Thoma takes us to new research by Drs. Armin Falk and Nora Szech suggesting that markets erode moral values. He’s not quite sure what to make of it. Neither am I, but having gone through the authors’ notes (reading the whole thing) I think it’s important to note a few crucial points thereof. First, let me admit this is a very important study. If we can understand the particular situations in which markets corrode morals, perhaps reforming the excesses on Wall Street will be easier. (Or getting people to buy energy-efficient light bulbs, for something more mundane.)

That all said, the catchy title (and, retrospectively, the whole concept behind the study) is misleading. Let’s look at what the study found:

“Our results show that market participants violate their own moral standards,” says Prof. Falk. In a number of different experiments, several hundred subjects were confronted with the moral decision between receiving a monetary amount and killing a mouse versus saving the life of a mouse and foregoing the monetary amount. “It is important to understand what role markets and other institutions play in moral decision making. This is a question economists have to deal with,” says Prof. Szech.

The market as an institution is very different from what the study tests. When we think of the market as a concept and philosophy perhaps images of Adam Smith go through the mind, or maybe the New York Stock Exchange. The words “capitalism” and “trade” are surely not far off. Also, and this isn’t a joke, in a very carnivorous culture, I cannot take seriously an experiment that associates markets with killing mice.

And in the buzz of economic crisis and general discontent, it is easy to use a study like this to argue that the market system somehow engenders immorality. This study tests nothing of the sort – indeed it would be very hard to prove this at a significant level either way. It captures the microlevel reaction humans have when monetary incentives are introduced in a bilateral transaction.

It is important to note that the participants already exist within a market framework. That is, our culture and way of life is, principally, market oriented. Those who question capitalism (note, I’m not saying the authors are) would be served better proving a significant difference in reaction to the same experiment in a primitive society. This would certainly be limited by the lack of currency as a medium of exchange but, perhaps, coconuts would not be a bad substitute.

Joke aside, let’s see what they did:

A subgroup of subjects decided between life and money in a non-market decision context (individual condition). This condition allows for eliciting moral standards held by individuals. The condition was compared to two market conditions in which either only one buyer and one seller (bilateral market) or a larger number of buyers and sellers (multilateral market) could trade with each other. If a market offer was accepted a trade was completed, resulting in the death of a mouse. Compared to the individual condition, a significantly higher number of subjects were willing to accept the killing of a mouse in both market conditions. This is the main result of the study. Thus markets result in an erosion of moral values. “In markets, people face several mechanisms that may lower their feelings of guilt and responsibility,” explains Nora Szech. In market situations, people focus on competition and profits rather than on moral concerns. Guilt can be shared with other traders. In addition, people see that others violate moral norms as well.

It’s hard for me to believe this means something, even if causal. How many of the participants were vegetarian? I’m guessing not many. Before you pooh-pah me, think about it. We don’t live in a society that thinks killing cows – let alone “surplus” mice – is bad. If people are incentivized to not save one, obviously there will be a “significant” association when markets are implemented. It’s almost tautological.

And this isn’t even to speak of the huge difference between a transaction (what this is) and market (an ideology). In fact, Montesquieu long ago noted that the latter is instrumental for social and moral development:

Commerce is a cure for the most destructive prejudices; for it is almost a general rule, that wherever we find agreeable manners, there commerce flourishes; and that wherever there is commerce, there we meet with agreeable manners.

Racism and homophobia, corporate titans will tell you, is bad business. Alex Tabarrok (link above) goes on to an experiment that suggests this isn’t just anecdotal:

Using randomized control, we find evidence that priming markets leaves people more optimistic about the trustworthiness of anonymous strangers and therefore increases trusting decisions and, in turn, social efficiency. Given the general mechanisms by which priming affects behavior–that an individual’s mental representation of markets is the result of the individual’s experiences with markets–we can interpret our results as evidence in favor of the hypothesis that market participation increases trust.

…Absent markets, economic interactions with strangers tend to be negative. Market proliferation allows good things to happen when interacting with strangers, thus encouraging optimism and leading to more trusting behaviors. Participation in markets, rather than making people suspicious, makes people more likely to trust anonymous strangers.

Rightly, they warn:

Our results seem therefore to corroborate the idea of doux commerce….We stress, however, that this is cautious evidence; a wider array of evidence is necessary for the solidification of this conclusion.

The institutional value of markets – the real question at hand – was demonstrated almost fifteen years back by Paul Zak and Stephen Knack (other evidence exists, but this team has the best name combo – by far):

Why does trust vary so substantially across countries? How does trust affect growth? This paper presents a general equilibrium growth model in which heterogeneous agents transact and face a moral hazard problem. Agents in this world may trust those with whom they transact, but they also have the opportunity to invest resources in verifying the truthfulness of claims made by transactors. We characterize the social, economic and institutional environments in which trust will be high and show that low trust environments reduce the rate of investment and thus the economy’s growth rate. Further, we show that very low trust societies can be caught in a poverty trap. The predictions of the model are examined empirically for a cross-section of countries and have substantial support in the data. Trust is higher in more ethnically, socially and economically homogeneous societies and where legal and social mechanisms for constraining opportunism are better developed. High-trust societies, in turn, exhibit higher rates of investment and growth.

These are real studies. That don’t make the big assumption that people think killing mice is immoral. Trust is an infinitely more cross-cultural and intrinsic measure of morals. Remember, morality is not in anyway universal. Nor is it binary. Many of us believe carbon dioxide emissions are bad for the planet, and support aggressive environmental policies. That doesn’t mean we never use a car. We take that the value of a business meeting might just be more important than the principled adherence to morality at a given point. That is life.

And an important point many have made. The Hindu-Muslim communalism is just far tamer down in South India than up north. A leading reason is that many Muslims came down as merchants and traders which is bound to form relationships based on trust. Markets are moralizing.

The objections to the important study become strikingly clear the more I think about it. The assumptions,  limited scope of experiment, and arbitrary (and probably highly inaccurate) definition of morality makes this, unfortunately, rather irrelevant. These constraints partly derive from the incredible difficulty of a real scientific experiment – let alone in the social sciences. I don’t want to take away from the value of this paper, and I think we can learn a lot about human interactions and monetary transactions. I am just a little more skeptical on the connection to the market as a mechanism.

P.S. Here’s Brad DeLong on the same:

But even Smith’s self-interested and calculating market agents are sociable ones: they exchange, and perhaps they cheat–they don’t kill, rape, burn, and steal. Which is odd, given that fifty years before Smith was born not far from his house there were lots of people who saw others not as potential partners in acts of mutually-beneficial commerce but instead as either (i) clan allies, (ii) clan enemies to be killed, or (iii) strangers to be robbed.