The donor registry said its experience is that “a donor system that relies on the human desire to help others is far superior to one that focuses on self-gain.”

Of course, some of us disagree on what the term “superior” means.

At this point in the preface, it is customary to have thank those who helped in the preparation of the book. Here I must make an exception. One organization to which I can offer no thanks is the Institut des Actuaires in Paris. It is one of the very few places where the early volumes of the Journal des Actuares Francais are stored, which contain some articles pertinent to this book. Unfortunately, after I had been given the runaround for approximately half-a-year by an extraordinarily unhelpful secretary, it was only when my wife visited Paris that the articles could be copied. It took her all of fifteen minutes … apparently too much for an unwilling secretary.

Maybe Jimmy Fallon read that quote before his late night show last week. Here is one of his jokes, “France apparently passed a new law that makes it harder to become a French citizen. Most people just get lazy and give up. At which point they’re named a French citizen.”

Would the world be better if more of this happened? I don’t know, but I sure would prefer it. Oh, I should mention the book is pretty cool too. Did you know that the term salary originates from the term salarium, which described the pay of early Roman soliders: salt? I did not know that. I did know that salt bars were popularly used as money until the beginning of the 20th century in East Africa. My bet is that if you traveled there you might still see some in use. Better than the Euro?

Back to the point, should I offer up an observation like that? I think that would get you removed from polite company faster than typical. Stay tuned however, I will offer up a handful of observations in the coming months, it’s not like I have any friends to lose by doing it.

Profit (and loss) is an amoral market signal that guide economic transactions.  It works automatically within the price system to direct goods and services to the persons most willing to pay for them, and this usually reflects society’s collective demand for scarce goods and services.  When demand increases, price increases, which increase profits in the short run to encourage more production of the good or service.  Likewise, when supply increases, prices fall which reduce profits in the short run and production is reduced.  In fact, in any voluntary exchange, both parties profit by necessity; an exchange will not occur unless both the seller and the buyer benefit by it.

Profit also provides the incentive for businesses to be increasingly efficient with resources.  Consider the efficiency in home heating and cooling.  In Germany, the standard house used 30 liters of oil per square meter per year for heating and cooling in 1982.  Twenty years later, that number dropped to 1.5 liters (McDonough & Braungart, 2002).  Without loss, there wouldn’t be an incentive for many homeowners to invest in more efficient windows and insulation.  The link between profit and efficiency can be seen more clearly in regimes that attempt to ban profit.  Although it is theoretically possible to be efficient without markets, profits, and prices, the high informational and computational costs make efficiency unlikely (Prato, 1998).  This is because the coercion that is necessary in a system without profit stifles innovation.  In the Soviet Union, a premier noted that managers avoided innovation like the devil avoids incense (Sowell, 2004).  This is not surprising, considering that in Stalin’s Russia failure was treated like sabotage.  In socialist India, the most popular car was the Ambassador which remained relatively unchanged from the original, which was a copy of the 1954 Morris Oxford (Sowell, 2004).  As Thomas Sowell says, “Profit is a price paid for efficiency” (2004, p. 81).  Without profit, there is little incentive for entrepreneurs or anyone else to take the risks that are necessary to improve efficiency and drive economic development.

Profits tell us nothing about the morality of the market, only the incentive to produce the good.  By looking solely at profit, it is impossible to tell if a company uses slave labor or high wage workers, if the demanded good was drugs or baby formula, nor does it inform us if the transaction was voluntary or under duress.  But we do know that if a market is subject to competition, then the morality of society can be expressed through markets.  For example, even without government regulation, the greediest businesses won’t remain solvent for long if they sell shoddy goods or have prices too high.  In the 1990s, Nike changed its child labor practices due to market pressures.  “The Nike product has become synonymous with slave wages, forced overtime and arbitrary abuse.  I truly believe that the American consumer does not want to buy products made in abusive conditions” (Cushman, 1998).  Although profit is seen as a motive for people to act immorally, this example show that it can also force companies to act morally.  In short, profit is not something that can behave or misbehave; it merely reflects and reacts to real conditions.

Deriding profits as immoral may just be an easy scapegoat for bad policy.  A state representative once told me that the “Law of Unintended Consequences” was the greatest law in the land.  This was because he learned over the years how policy and laws with good intentions can incentivize immoral conduct.  In New York City, the only way for some landlords to avoid massive losses due to the rent control laws was to save money by neglecting services, accepting bribes, or committing arson and selling the land to industrial or commercial uses (Sowell, 2004).  Furthermore, when the laws were changed to compensate tenants who lost their apartments from arson, tenants began to commit arson (Sowell, 2004).  Similarly, the Aid to Families with Dependent Children act in the United States became infamous for its significant immoral consequences prior to 1996; it made fathers uneconomical in the low income levels of society while encouraging single mothers to have more children in order to receive more money from the government program (Codevilla, 2009).  Were the benefits they earned immoral?  No, the profits were an incentive to commit an immoral action; it reflected real conditions as set by law.

Profit is a function of the irreparable laws of supply and demand.  These basic market forces are present in any regime and work to transmit information about how society collectively desires to distribute scarce resources.  In this sense, markets are purely amoral; they provide information about interactions in the economy but are incapable of declaring the morality of the interactions.

References

Codevilla, A. M. (2009). The Character of Nations: How Politics Makes and Breaks Prosperity, Family, and Civility. Basic Books. New York.

Cushman, J. H. Jr. (1998). “Nike Pledges to End Child Labor and Apply U.S. Rules Abroad.” The New York Times, International Business.   http://www.nytimes.com/1998/05/13/business/international-business-nike-pledges-to-end-child-labor-and-apply-us-rules-abroad.html?pagewanted=all (28JAN10).

McDonough, W., Braungart, M. (2002). Cradle to Cradle. North Point Press. New York.

Prato, T. (1998). Natural Resource and Environmental Economics. Iowa State University Press. Ames, IA.

Sowell, T. (2004).  Basic Economics: A Citizen’s Guide to the Economy. Basic Books. New York.

In their discussion of the moral challenges in these questions I often hear things like, “allowing prostitution degrades the sanctity of marriage and sex.” That may be true. I am certainly sensitive to the Hayekian insights that changes in legal and cultural institutions can dramatically change the psychology of a people. More on that in a future post. But as a static matter, I take exactly the opposite position (I think I do at least, I am easily persuadable here). Wouldn’t having the sale of sex be open, regular and legal increase the sanctity of an institution that eschews it? Wouldn’t couples in a committed relationship be sending a message to others and to themselves that the sexual intimacy between them goes far beyond the pursuit of fleshly pleasures alone? Wouldn’t it send a message to others that they are willing to make a more overt sacrifice by being in a committed relationship than by not doing so?

I have the same feeling about kidney sales. It is often asserted that allowing kidneys to be sold degrades the altruistic incentive for people to donate. Indeed some experiments demonstrate that charitable giving decreases when the chance to be paid for such activities increases. I have lots to say regarding that insight, but accept it as true for now. When kidneys can be sold for $10,000 wouldn’t that imply that any charitable donation of a kidney on your part is MORE altruistic? Wouldn’t donating a kidney, when in fact you could have sold it, actually be an even greater act of kindness?

Now, there is a real criticism here, but it is an economic one and not one I suspect the moralists among us have in mind. The criticism? When we make prostitution and kidney sales illegal, the effective “price” for those things is actually higher than we see on the open market, so the dollar value of what one sacrifices when they make a donation is larger when markets are prohibited.

Would Santa Claus be as cool if gift giving were done regularly throughout the year?

I got to thinking about another issue that is analogous to this but with far more unpleasant implications. The issue is nonetheless an issue of composition. I overheard a student talking about how population was overrunning the planet. I suppose his future efforts to mitigate population growth will make him a humanitarian. Now, this final thought is not original to me, but consider if we asked the student to answer which particular people he is talking about … he’s not such a humanitarian anymore now is he. So which is the right view? You know the position I take on it.

The commons problem is an extremely useful way of thinking about many social problems in general. One of those social problems is the establishment of trust institutions among people that are not intimately related. For example, I teach very large classes here at the U of R, and the only way to have them function reasonably well is to have reciprocal trust between me and the students. One particular application of this trust is in the administration of exams and assignments.

But trust is like a commons, no less so than an open-ocean fishery, the air we breathe, and an unowned field. It is very hard to monitor and exclude people from “violating” the trust commons, which leads to some pretty unfortunate consequences. For example, in my Environmental Economics class, I like to give semi-monthly quizzes as take home exercises. The quizzes would typically include a research question, a response to a reading or two, and a practice question from the class materials. Think of how I might write such a quiz in a world where all students honored the contract we have as scholars and students to be honest. But think of how easy it is for a student to break that contract. I ask that students work alone on these take home assignments. I ask that students (I used to) not use the internet to dig up possible answers to particular questions. But it is costly for me to monitor this in a class of 80 or more students. And since students can freely access the trust commons, they tend to do exactly this. I don’t grade on a curve, which I thought would put less pressure on students to violate the commons, but that turns out not to matter much. Think about the position an honest student finds themselves in – their classmates are collaborating on questions despite my protestations against it. Those students get done more quickly with the exercises and get better grades. The honest student, who surely will get more out of the assignment by struggling with it, still must spend more time and find themselves below the class averages on these quizzes. In other words, they’re feeling like a “sucker” for doing the right thing. So eventually all but my most honest students find themselves accessing the trust commons.

This trashing of the commons is unfortunate for several reasons. First, it encourages students to violate an ethical code that ought not be violated. Second, it reduces the amount of learning that occurs in the class. On certain exercises I want students to work on their own, particularly because when they are employees they will be required to do this sort of a thing and they won’t have anyone to bail them out. When they collaborate on these assignments, such as asking each other, “where DID you find that data from?” they never work themselves through the process of using library resources, reading articles to find clues and otherwise using their research skills to figure out how to get the information that is important. Third, think of how it encourages me to alter how I teach the class and put together the assignments. For various reasons I don’t want to do everything in class (that time should be for actual learning, we only get 28 classes each semester), so it forces me to change the way I write the quizzes. Knowing that students will violate the commons, I pre-emptively do things to prevent them from entering it. I write uglier quizzes. The quizzes in fact can be so ugly that no amount of collaboration may be helpful at all in coming up with solutions to particular questions. I also write much longer quizzes – so that even when collaboration is happening, the workload is similar to what I would have expected students to do when they are on their own. I write much more opaque questions – because if students are collaborating then I might as well hope that they have a discussion about, “what the heck is this problem asking anyway?” before they just copy each other’s answers.

Now, you might ask why I don’t just allow for collaboration? Well, I do – that’s what studying is for. There are simply times in life when one must work on one’s own, and when I expect that students are violating this expectation, I try to make sure that independent thinking still occurs in those settings. It’s not perfect. And I do hope that the students are generally trustworthy, but I am increasingly skeptical that they are not.

In a future post, I’ll share some particularly egregious examples of the contempt which some modern students hold academic integrity, I don’t want to be too depressed right now.