How Markets Crowd In Morals

Michael Sandel is right that “sometimes offering payment for a certain behavior gets you less of it, not more.” Though you are not likely to see this on the blackboard in any economics class (he’s right about that too), the fact itself is hardly news among behavioral economists. Natural observation and dozens of experiments attest to this crowding-out phenomenon.

He is also right that crowding out often occurs because explicit incentives diminish the salience of intrinsic or ethical motives. A generation ago, psychologists found that when kids were paid for the pictures they had painted, they subsequently chose some other kind of play. In the last decade and a half, economists have found further evidence showing that market-style incentives sometimes frame social interactions in ways that induce self-interested rather than ethical actions. Sandel correctly worries about the cultural consequences of markets. I worry too, though for different reasons, in my forthcoming book, Machiavelli’s Mistake: Why Good Laws Are No Substitute for Good Citizens.

But there must be something wrong with Sandel’s conclusion that “one of the defects of a market-driven society is that it lets these virtues [altruism, generosity, solidarity, civic spirit] languish.” This is not a philosophical statement; it is an empirical, causal claim about how society works. And it is a familiar concern among market critics. More than two centuries ago, the royalist Edmund Burke warned of an “age . . . . of sophisters, economists, and calculators” and after him Karl Marx of a “time of general corruption, of universal venality” when everything “passed into commerce.” Had they been right, liberal, market-based society would have been doomed, for even market enthusiasts know that social institutions—including markets—cannot function if people are the amoral and self-interested calculators of blackboard economics.

But that is not what happened. Markets have held their longest sway in Europe west of the Elbe and north of the Tiber and the Pyrenees, areas distinguished by their vibrant civic culture when compared to those with more short-lived exposure to markets, including the former Communist Party–ruled nations. The United States, readers will be surprised to know, is not far behind northwestern Europe in both survey and experimental measures of generosity, civic engagement, and interpersonal trust.

Even market enthusiasts know that society can’t function if people are the amoral, self-interested calculators of blackboard economics.

A cross-cultural experiment by economist Benedikt Herrmann and his coauthors illustrates this. They implemented a game in which group members could anonymously contribute real money to a common pot whose proceeds would be multiplied and distributed equally for the benefit of all. Later they could pay in order to dock the payoffs of others, once the others’ contributions (but not their identities) were known. This game tells us about three behavioral dispositions that may be considered civic virtues. It shows one’s willingness to contribute to a public good (public generosity) and to penalize those who do not (upholding social norms), both at a cost to oneself. It also shows the degree of positive response to punishment by others (shame at one’s violation of a social norm). Where all three of these dispositions are present, contributions to the public good will be substantial. In the experiment, the subject pools with the highest average contributions to the pot were (in order) populations in Boston; Copenhagen; St. Gallen, Switzerland; Zurich; and Nottingham. The lowest contributions were in Athens; Riyadh; Muscat, Oman; Dnipropetrovsk, Ukraine; and Samara, Russia.

There is nothing intrinsic in market-style incentives that leads people to be less ethical or to care less about their neighbors. As Sandel points out, “The question of where markets belong is really about how we want to live together,” but the appropriate scope of markets also depends on what one takes as the alternative to the market and what one can say about its cultural consequences. The evidence is not favorable to the extant alternatives—none of which, I should add, is what Sandel has in mind when he thinks of shrinking the market. The cultural consequences of markets likewise will vary depending on the social structure in which they operate, including background inequalities of wealth and power.

Does this mean that Sandel is wrong to think that markets sometimes crowd out morals? I do not think so. But it appears that, in conjunction with other attributes of many liberal democratic societies such as the rule of law, a social safety net, and relatively robust equality of opportunity, markets do not, as Sandel fears, lead to a languishing of the civic virtues on which these societies depend. And market-style incentives may crowd in ethical and intrinsic motives. This is evident in the public goods experiment just mentioned, where—unlike Sandel’s Swiss citizens, who became more self-interested when offered compensation for their generosity—the prospect of being fined by a peer for free riding induced greater public generosity, not less.