The double-ethic in transitions to market
We Shall Not Go to Market Today, by Paul Gauguin (Date: 1892)
The important transition in the ethical valuation of economic activity is the gradual abandonment of the communitarian conventions of traditional society in favour of universalistic economic rules. Communitarian rules are interpersonal. A separation between the ethics of internal transactions and external transactions holds back the development of markets. Traditional society frowns upon those who profit from transactions with members of their own community, even though economic dealings with outsiders—if permitted at all—may be legitimately conducted with ruthlessness. Economic freedom within the community is limited. External economic exchange is undertaken in an atmosphere of suspicion and hostility. If a community’s maxim is that ‘brothers do not bargain with one another’ then market price determinations will not emerge. Max Weber called it the ‘double-ethic’. He described nationalism as ‘the pathetic pride in the power of one’s own community, or the longing for it’. A most basic condition of transition to modernity in the West was the ‘lifting of the barrier between the internal and external economy, between internal and external ethics, and the entry of commercial principles into the internal economy’. Nationalism preserves the double standard of hostility towards outsiders and favouritism towards insiders.
For society to transition to markets requires a twofold ethical transformation. Firstly, society or the market destroys those ethics that have subordinated economic exchange to social approbation by status, kinship, ritual, prohibitions on usury, and irrational limitation on the kinds of goods that may be exchanged. Second, ethics that legitimise cheating in exchange relations with people outside the community are eliminated.
Dualistic insider-outsider ethics are abandoned as the marketplace gradually breaks down all economically irrational forces of traditional rulership that are obstacles to free exchange. Commercial principles are applied in the internal economy, while ethics of fair dealing are preserved and extended to the external economy. When markets are allowed to follow their own internal tendencies they create impersonal communities where economic behaviour is no longer oriented to obligations of brotherhood or neighbourhood but rather to the matter-of-fact calculation of profits, exchange of commodities, and competitive survival. The principle that prevails is that ‘honesty is the best policy’ for everyone. If the partners in economic interaction want their exchanges to continue in the future they obviously have an interest in ‘fair dealing’, keeping their promises, not infringing rules of exchange, and maintaining trust. Other potential transactors will watch to see what reputations they acquire.
The ethical trend is intensified with industrialisation and entrepreneurship. The innovator in an industry who sets out to profit from new opportunities has to be imbued with the spirit of market exchange. The entrepreneur is an individual of strong character, self-control, and exceptional vision. Around him he sees leisurely business, friendly relationships among business competitors, and traditionalistic approaches towards profits, labour time, and customers. The entrepreneur is not driven by a desire to bust this world apart. He is not motivated by greed. He knows he does not have the power to force others to act against their wishes. He can see there is not even a need to invest large amounts of capital in the new enterprise. He may be a young subcontractor who identifies new ways of exploiting the existing organizations and technology, and calculates how to gain an edge in a slow industry of moderate effort and monopolistic profit. He chooses his employees carefully, improves labour supervision, keeps his prices low, and increases turnover. He develops marketing methods through improved contact with customers, and adapts production to customer needs. He recognises that he must act ethically to secure the confidence of customers, workers, and business partners. As a ‘first innovator’ the entrepreneur encounters the mistrust, hostility, and moral indignation of the monopolists whom he usurps. Once enough innovators have taken similar initiatives, and once the laggards have been swept up and the success of new methods is obvious to all, the effect of an economic ethic may be equivalent to that of the evolution of a general social norm.
The process of economic rationalisation is present where markets exert pressures on labour and capitalists to be methodical and calculative. In this ways market expansion can modify the attitudes of entire societies. Price determinations eventually produce an impersonal self-binding regularity in the behaviour of economic actors. People orient their actions to an impersonal market ethic, which they view as legitimate and binding. The ethic has a function, recognised by most other market participants, of preserving the action system. It is upheld by the likelihood of social disapproval and boycotts against violators. It requires a tolerance for the discipline and risks of market society as well as for the ethical honesty that builds good reputation and oils the wheels of commerce. It requires tolerance for the ultimate penalty of ‘extinction’ for firms that fail to survive market competition. As the rewards become apparent insider ethics are weakened. The clamour for protection against competition and hostility to outsiders subsides as people develop a rational interest in regulated competition.
Traditional collectivist societies tend not to value individualistic ethics of market exchange. Resistance to the spread of economic competition is innate in premodern societies which fear commerce and equate it with cheating. However, since social order in all advanced societies now depends on market ethics, we must ask how this ethic emerges and is sustained. The ethical rules of exchange are, as I have said, the product of extending the experience of exchange in the market. They are not the product of culture, rather they are a reaction against communitarian norms which hold the market back. The mundane economic attitudes towards work, competition, and commerce are the starting points for this process. Ethical change takes shape in a growing tolerance for principles of conduct that are adequate for the development of market freedom, as the rewards for private discipline and private risk rapidly become apparent. The practice of market enterprise creates the demand for collective rules that govern economic exchange and contractual obligations and minimize generalized risk.
The argument begins by recognising the historical role that market forces played. The long-run institutional effect of the expansion of commerce was the evolution of an ethic of market freedom. Informal regulation of market competition evolved as trade and the division of labour revealed the desirability of collective rules for economic exchange. Formal institutions responsible for law, administration, and political representation evolved long after the informal self-regulation of commercial life.
The ‘free market’ is not regulated by ethical or legal norms. The ‘free market’ is the law of the jungle. Instead what developed as modern ‘market freedom’ assumes secure property rights and formal universal rights to compete for profits. Market freedom is characterised by a competitive economic struggle unfettered by personal loyalties or communal obligations, by state intervention on behalf of individual enterprises, or by uncertainty about whether malfeasance will go unpunished. Between free market and market freedom is the ‘market ethic’, a proto-institutional set of behavioural norms and beliefs about the value of market freedom that will eventually be formalised as legally regulated rules. Capitalist ethics do not prevail everywhere that economic activity is ‘competitive’. In rent-seeking markets the competitive struggle is for the appropriation of politically created profit opportunities. Nor can the ethics of market freedom thrive in situations where the state authorities select firms or sectors for ‘privileges to compete’ under protective shelters designed for political ends.
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