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Law, Economics, and Morality by Eyal Zamir | | Booktopia

Unfortunately, modern economic theory completely ignores matters of morality and ethics. While there are missing elements, it turns out that there are significant unwanted criminal elements in the current market economy, even in the bastions of capitalism. Thus, several major companies in the United States have been found to have illegally manipulated their accounts in collusion with fraudulent accountants and auditors and they have defrauded investors, clients, and business partners.

There have also been revelations about hugely excessive remunerations of chief and senior executive officers of companies, even of those that are unprofitable or have even filed for bankruptcy. Many boards of directors of companies have been found to be ineffective and to be partners in crime with senior management. And the callousness of the senior executives of several companies towards lower and middle level employees have been documented.

One wonders how much of such evil practices are going on in the Nigerian corporate world right now. The corporate scandals might call into question the validity of the market economy. But I believe that the problem is not with the market economy as such. It is with the fact that the market economy operates in a moral and ethical vacuum. Adam Smith , who is widely considered the father and founder of modern economics, published his landmark book, The Wealth of Nations , in , in which he clarified the workings of a market economy.

He explained that if an exchange between two parties is voluntary , it will not take place unless both believe they will benefit from it. No exchange would take place if one or both parties stand to lose. Thus, if all economic activities are based on voluntary exchanges, all the participants in the economy will benefit. In Adam Smith's conception, the market economy operates in a free society, a society of, in his words, "perfect liberty".

To illustrate the importance of self-interest or the profit motive as against benevolence in the market place, he wrote:. It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

LSE Research: The Moral Structure of Legal Systems, pt. 1

Adam Smith was not prescribing how people should behave; he was simply stating how free people do behave, and the consequences of such behavior. And he was convinced that the natural behavior of free people was the best way to ensure that goods and services were produced in adequate quantity and quality and distributed in the most efficient manner.

What is almost invariably missing in the discussion and application of Adam Smith? The first obvious one is that buyer and seller must have alternatives.

What Is the Role of Morality in a Capitalist Economy?

When people say that the financial crises of was caused by greedy bankers, they mean Greed II. Blaming the financial crisis on greed is like blaming an airplane crash on gravity a point made by Judge Richard Posner some years ago. 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. 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. 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. 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?

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.

Economic Morality and Jewish Law

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. 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.

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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. Firms that can credibly offer this amenity to their employees, it turns out, enjoy an incredibly powerful recruiting advantage.

Thank you for your comment stemming from reading Ultrasociety. 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.

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.

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.

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As we all know, selfish agents will never cooperate to produce costly public goods. 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. He authored or edited ten books and published more than thirty articles in Israeli and American law reviews.

Ben Porat , first recipient. Barak Medina is Lawrence D. Biele associate professor at the Hebrew University of Jerusalem, and currently serves as the Dean of the Faculty of Law. He holds an LL. Professor Medina was a visiting professor at Columbia Law School Professor Medina's research interests include constitutional law and intolerant democracy, administrative law, economic analysis of law, and game theory and the law. He authored five books, including the latest editions of the most authoritative textbook on Israeli constitutional law, and published more than thirty articles in Israeli and American law journals.