No Morality, No Markets
[20.05.2009, Samuel Gregg, CONSERVATIVE LETTERS]

Conservative Letters

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice.

Adam Smith

Adam Smith had it basically right when he described the essential pre-conditions for widespread economic prosperity. But if the current financial upheaval teaches us anything, it should be how much market capitalism depends upon most people developing and adhering to some rather uncontroversial moral virtues.

Smith himself always understood this. That's why his Wealth of Nations of 1776 should always be read in light of his 1759 treatise, The Theory of Moral Sentiments.

Of course, numerous economic factors underlie the financial meltdown. These include loose monetary policy, massive bank overleveraging, and the subprime-mortgage implosion, not to mention the social-engineering programs pursued by the government-sponsored, New Deal-esque behemoths Fannie Mae and Freddie Mac.

No matter that free markets have raised literally hundreds of millions of Indians and Chinese out of poverty in recent decades. Instead, continental Europeans such as Germany's finance minister, Peer Steinbrueck, loudly proclaim that "Anglo-Saxon capitalism" is "finished", while blithely ignoring the fact that many of the EU's dirigiste economies are presently lurching toward, or are already in, recession.

A little discussed fact, however, is that the financial crisis has also been driven by widespread moral lapses that have manifested themselves just as much on "Main Street" as on Wall Street. One example is the subprime-mortgage fiasco. We now know that thousands of Main Street borrowers lied about their income, assets, and liabilities when applying for subprime loans. Likewise, many lenders failed to do even the most rudimentary checks on borrowers' credit history.

Recklessness also features among the sins underlying our present financial turmoil. On Main Street, thousands of investors mortgaged themselves to the hilt on the highly-imprudent assumption that house-prices could only continue to soar. Meanwhile on Wall Street, investment banks overleveraged themselves, sometimes at ratios of 30-to-1.

Then there is the rampant materialism that has apparently permeated Main Street and Wall Street to equal degrees. The thrifty, even parsimonious Adam Smith would have been appalled by the "I-want-it-all-now" mentality that has helped the personal savings-rate in America to hover around 0 percent since 2005 - the lowest rate since the Depression years of 1932 and 1933.

It's arguable that the same mindset encouraged many on Wall Street, anxious to enhance their bonus prospects, to sell securities they knew were based on collapsing subprime foundations to Main Street buyers blinded by the prospects of quick profits. Such actions aren't illegal. No-one, however, seems in a rush to ethically defend them.

None of these moral failures amount in themselves to conclusive arguments for re-regulation. They are, however, fuelling populist demands for a return to failed interventionist policies of the past. So far, most free-marketers have tried to stem re-regulation pressures by reminding everyone of the powerful economic arguments against such policies. But relatively few - if any - have engaged the financial meltdown's moral dimension.

One explanation for this silence could be that some market-advocates have embraced, consciously or otherwise, the soft relativism so prevalent in Western societies but which renders coherent moral analysis impossible. It may also be that many free-marketers have long been incapable of articulating more-than-utilitarian arguments for markets in particular and liberty in general.

Make no mistake: The modern case for the market - so painstakingly developed against interventionists of all stripes since Smith's time - has been set back years by the disarray on financial markets. The very same calamity, however, should remind us that if we're going to loosen the political bonds imposed on economic liberty by assorted New Dealers and Keynesians since the 1930s, then society's moral bonds require constant renewal and strengthening.

In short, we're learning the hard way that virtues like prudence, temperance, thrift, promise-keeping, honesty, and humility - not to mention a willingness not to do to others what we wouldn't want them to do to us - can't be optional-extras in communities that value economic freedom. If markets are going to work and appropriate limits on government power maintained, then society requires substantial reserves of moral capital.

At the end of his life, Adam Smith added an entirely new section entitled, "Of the Character of Virtue", to the sixth and final edition of his Theory of Moral Sentiments. His reasons for doing so are much debated. But perhaps Smith decided that as he glimpsed a world in which the spread of free markets was already beginning to diminish poverty, he needed to re-emphasize the importance of sound moral habits for societies that aspired to be both commercial and civilized.

It's advice worth heeding today.

Author is Director of Research at The Acton Institute.

Article was published in Slovak language in Conservative Letters 05/2009, a newsletter of the Conservative Institute.

Samuel Gregg, Director of Research at The Acton Institute, was our guest speaker on May 14, 2009 in Bratislava - more information is available here.

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