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Embracing Morals in Economics: The Role of Internal Moral Constraints in a Market Economy

March 11, 2011

What does it take to bring about a well-functioning market? Almost all economists agree that people should engage in cooperative exchange rather than predation, theft, or fraud, but how to ensure this is a matter of debate. Many neoclassical economists follow Thomas Hobbes and focus on changing legal arrangements to solve prisoners’ dilemma situations (Barzel, 2002, Hirshleifer, 2001; Tullock, 1972). Eliminating unwanted behavior is a matter of imposing optimal fines, the “price of an offense” (Becker, 1968, p.262), to alter the costs and benefits of different choices. Buchanan (2003, p.183) argues there must be “an agency that will in some fashion, offer incentives, positive and negative, that will lead participants to respect behavioral constraints.” This approach assumes that people are knaves and then seeks to designs political and legal institutions that will elicit cooperation even amongst amoral egoists (Brennan and Buchanan, 1985). Notably absent from these scholars’ discussions are appeals to morality. As Oliver Wendell Holmes (1897, p.459) wrote, “A man who cares nothing for an ethical rule which is believed and practised by his neighbors is likely nevertheless to care a good deal to avoid being made to pay money and will want to keep out of jail if he can.” According to this view, one must assume that people are bad and use the threat of force to make them behave positively.

Yet, economists such as Wilhelm Röpke and Adam Smith and philosophers such as Immanuel Kant heavily emphasize the importance of another type of constraint: the internal moral constraint. These are the rules that people choose to follow independent of what the law says; they are chosen from within. Manners, politeness, honesty, and trustworthiness are the most obvious examples of internal constraints that people adopt independent of external rules. But in areas with external constraints (such as laws against force or fraud), are external constraints the only factor influencing behavior, or do internal moral constraints have an influence too?

Most neoclassical economists are reluctant to discuss or appeal to moral constraints since they run contrary to many of the basic assumptions of homo economicus, rational self-interested man. Others may recognize the potential importance of morals, but do not talk about them because they cannot be measured using their scientific method nor can they be easily manipulated using policy. Since many neoclassical economists ignore morality they usually attribute the cooperation they observe to external constraints. But the relative influence of external versus internal constraints is an empirical question. Many or almost all of the observed differences in cooperation might be attributable to differences in people’s internal constraints. Furthermore, whether changes in external constraints or appeals to internal constraints are more effective in influencing behavior is also an empirical question. People who focus solely on external constraints are more likely to believe that changes in laws and regulations (as opposed to changes in morality) are the only way to eliminate opportunistic behavior.

In recent years various behavioral and experimental studies indicate that what I am referring to as internal constraints are not only important, but one of the most powerful methods of inducing cooperation. Not everyone behaves morally, but many people do, even in the absence of external constraints. For example, Ariely (2008) finds that starting experiments by asking subjects to think about the Ten Commandments subsequently makes them more likely to tell the truth, a finding obviously inconsistent with the assumptions of homo economicus. Although some people clearly behave much less morally than others, this paper will offer reasons why economists should embrace the study internal moral constraints, which is latent or explicit in much of the relatively recent research in behavioral and experimental economics. Internal moral constraints may be given to humans by our creator, they might have come about through evolution, or they might be learned through the process of socialization, education, or religion.

Additional research in this area can provide economists with a better idea of when and why people cooperate, for example, and perhaps suggest ways to utilize internal constraints. For instance, in the short run, if people can associate with others who share similar sets of moral beliefs (and can avoid associating with people who do not) the total amount of cooperation can increase. In the long run, although neoclassical economists often focus on changing external constraints, working to influence internal moral constraints might be a better means of eliciting cooperation. A society in which nobody is honest or respects the property rights of others is unlikely to become a successful market economy no matter how many laws exist.

Even though the homo economicus assumption is being overturned by a plethora of research, the normative prescriptions advocated by many economists have not caught up. This article argues that the orthodox neoclassical holdouts should not only embrace studying internal moral constraints, but that many of their normative prescriptions should be reconsidered. Instead of hoping that an external group can “force people to cooperate” (Holcombe, 1987, p.108), a better approach may be to try to bring about changes in internal constraints. Rather than attempting to devise an optimal vector of punishments, advocates of a market economy might better advance their cause by openly studying the moral prerequisites of a market economy.

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Edward Peter Stringham, Ph.D., is the Hackley Endowed Chair for Capitalism and Free Enterprise Studies at Fayetteville State University

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