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The Economics of Virtue Signaling

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In his Theory of Moral Sentiments, Adam Smith described many ways in which people solve problems to be able to work with other people. Trust is a key theme which Smith returns to throughout his works. “We trust our health to the physician; our fortune and some­times our life and reputation to the lawyer and attorney. Such confidence could not safely be reposed in people of a very mean or low condition.”1 Stemming from this issue of trust, another theme of Smith’s can be seen, which is determining the costliness of transactions. The cost of working with a person who can be trusted to be honest is very low; for a person who is dishonest, the cost is very high. How can strangers come to trust each other for doing business or otherwise associating?

In modern economic discussions, trust between strangers may be referred to as an information asymmetry problem. Smith describes how this problem can be overcome in different capacities. One such method is that people signal their virtues to strangers. A way this can be seen is when people join clubs and organizations that have known reputations. This can be as a member of the military, or a religion, or another type of organization which has codes of conduct for their members or required actions for membership. It is the costliness of affiliation with the group which serves the purpose of sending one of these signals. 

What sorts of organizations can service this purpose? To use a basic example: the Knights of Columbus (KoC) which is a philanthropic organization affiliated with the Catholic church. All members must be men over the age of 18 and members of the Catholic Church in good standing.2 In order to be a Catholic in good standing, a person must spend a significant amount of time attending religious events and contributing to the material needs of the Catholic Church.3 Adding on top of that, KoC members practice fraternal self-helping — which is the idea that all members of the organization will contribute financially, or with their labor, to help other members of the organization when it is needed.

As far as signaling one's virtues, what benefits arise from membership? If a person is able to credibly prove their membership to a stranger familiar with the KoC — and if the stranger likes the organization —  the second individual might be inclined to trust the KoC member more than a perfect stranger. In a way, the organization’s reputation will become part of the stranger’s reputation.

What are some implications that can be drawn from this?

First, the concept of virtue signaling is not new, and it certainly is not unique to arguments on Facebook. It is a concept that has existed for centuries as a means of making one's reputation more easily knowable. It builds trust between strangers. Considering no person can reasonably be expected to have a relationship with social groups much larger than 150 people, this substitution is important.4 This method of increasing trust throughout society reduces the cost of doing business between strangers, and increases trade generally. Since trade benefits all parties involved, this is a rather important institution.5 In fact, Adam Smith claimed that the division of labor can only be exploited for everyone’s general benefit if trust has reached at least a certain minimum level. If an acceptable level of trust is achieved, this leads to commerce which then allows a person to not have to raise his own crops, butcher his own animals, or knit his own shirts.6 Division of labor allows for better and more goods to be produced.7 This leads to an overall increase in material prosperity across society.

Note however, that membership in an organization only contributes to building trust levels if that organization imposes costs and requirements on its members. If the costs for joining a group from which to signal one’s virtue are not significant, then trust levels may be damaged instead of improved.

One example of this problem can be found in the intersectionality movement in the USA. A crude summarization of the movement's use of group membership is this: to form several disparate groups with political grievances against another group (or several) for political purposes. This is based on the idea that groups with grievances often have a common enemy to unite against. In other words, if group A is a voting block with 11 members, and groups B, C, D each have 4 members, then if group A can be claimed as an oppressor of B, C, and D, these three latter groups can form a voting block to keep group A from having political power. This tends to not promote trust or commerce.

But how does a member of group B signal to group C their similar interests in joining efforts against group A? Remember that in cases that actually build trust, membership in virtue-signaling groups is expensive and the methods of providing proof of membership is important. Membership might require a significant expenditure of time, effort, or money. For members of "intersectional coalitions," (and similar groups) though, signaling virtue tends to involve little more than use of words or claimed membership in a group without any objective costs imposed on members of the group.

Thus, more or less anyone can claim to be a member of an aggrieved group, and no actual demonstration of virtue is necessary. Instead of completing a degree program at a university, or performing charitable acts as a member of a service group, "virtue" can be demonstrated by merely asserting that one is not a member of a certain group of undesirables, but is part of the virtuous group.

This does little to build trust, and this is where we find the breakdown of trust between members of intersectional coalitions and everyone else.

Without there being barriers to membership in groups that signal certain virtues, claims of virtue are transformed into occasions for mistrust rather than trust.

  • 1. Smith and Oxford University Press, The Glasgow Edition of the Works and Correspondence of Adam Smith An Inquiry into the Nature and Causes of the Wealth of Nations Volume 2 Volume 2.
  • 2. “KoC Frequently Asked Questions.”
  • 3. “Precepts of the Church (Lines 2041-2043 of Catechism of the Catholic Church).”
  • 4. Hill and Dunbar, “Social Network Size in Humans.”
  • 5. "Buying and selling seems to have been instituted for the mutual advantage of both parties, since one needs something that belongs to the other, and conversely." St Thomas Aquinas, writing in the Summa Theologica
  • 6. “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.” (Smith 1776)
  • 7. “Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of fortyeight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certain could not each of them have made twenty, perhaps not one pin in a day; that is certainly, not the two hundred and fortieth, perhaps not the four thousand eight hundredth part of what they are at present capable of performing,” (Smith 1776)

John Rosenberger is a student at the Cevro Institute for International Relations in Prague, working on a Masters of Arts in Politics, Philosophy, and Economics. He holds a Bachelors of Science in Economics from the University of Houston. He was an American soldier for 11 years, and deployed to Iraq and Afghanistan during that span as part of the "War on Terror." After leaving the military, John has been attending university and attempting to devote more of his time to loving his wife and being more available to raise his 6 children.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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