By David C. Rose
The Moral Foundation of Economic Behavior explains why moral beliefs can and likely do play an important role in the development and operation of market economies. It shows why the maximization of general prosperity requires that people genuinely trust others - even those whom they know don't particularly care about them. It then identifies characteristics that moral beliefs must have for people to trust others even when there is no chance of detection and no possibility of harming anyone. It shows that when moral beliefs with these characteristics are held by a sufficiently high proportion of the population, a high trust society emerges that supports maximum cooperation and creativity while permitting honest competition at the same time.
The required characteristics are not tied to any specific religious narrative and have nothing to do with the moral earnestness of individuals or the set of moral values. What really matters is how moral beliefs affect the way people think about morality. The required characteristics are based on abstract ideas that must be learned so they are matters of culture, not genes, and are therefore potentially capable of explaining differences in material success across human societies.
The Moral Foundation of Economic Behavior has many theoretical and empirical implications including but not limited to social capital theory and trust-based economic experiments.
Janice Boucher Breuer on Journal of Economic Literature wrote:
"The book is an extended thought experiment launched by this question: “If a society’s sole objective is to maximize general prosperity and it can choose its own moral beliefs, what kinds of moral beliefs would it choose?” (p. 4, emphasis in original). The author proposes a sophisticated, novel, and compelling answer to this question. It therefore deserves to be read by anyone with an interest in how to promote human prosperity. [...] I think this book is one of the most unusual, intriguing, and potentially pathbreaking books I have read in a long time. I have reservations about various parts of the argument, but Rose manages to exploit contemporary results in fields such as game theory, evolutionary psychology, and even moral philosophy to construct a unified and coherent moral and economic theory more plausible than perhaps any other attempt I have seen—and I have seen a great many of them."
Edward S. Hinchman on Journal of Moral Philosophy wrote:
"It is apparent that he has pondered human nature in large, modern, complex societies long and hard. I learned a lot. I could easily see using this book as the textbook for a graduate course by the same title. Economists and scholars in other fields working on culture, trust, and economic development should consider this book. Experimental economists working on trust and trustworthiness who want more insight into these behaviors should, too. [...] Each chapter builds on the previous ones, taking the reader through organized and pointed discussions in building a case for the primacy of duty-based moral restraint to trust to economic prosperity. Human nature is at the core. [...] The conclusion contemplates the role of culture and institutions and offers well-conceived thoughts on directions for future theoretical and empirical work."
David C. Rose takes what philosophers would call a genealogical approach to morality. [...] The approach is genealogical [...] because it rests on two assumptions: that the nature and content of morality derives from how it developed, and that we can understand how morality developed by asking how, within a scientifically realistic account of human nature, economic agents might have come to hold and act from a particular set of moral beliefs in their efforts to minimize the transaction costs inherent in the pursuit of cooperative goods. Unlike many other authors who take this approach, Rose does not discuss cooperation in the abstract but in its economic guise. His question is how morality helps us maximize economic efficiency by minimizing the transaction costs of opportunism. [...] While Rose’s approach to morality is genealogical, he makes one normative argument that does not appear to be genealogical. Throughout the book he conceptualizes cooperative relations in terms of trust, and in Chapter 9 he criticizes other social-scientific theories of trust for failing to frame these relations in terms that let us appreciate the important problems that arise for large-scale economic cooperation. [...] His critique of alternative theories of trust is not itself genealogical; it addresses the nature of trust, not how we must think of trust in order to pursue economic goods efficiently. And proponents of alternative theories may reply simply that Rose does not need to frame his issue in terms of trust. He could just as well describe his argument as revealing how the pursuit of prosperity does not depend on trust relations at all but instead on broader relations of economic reliance. That would prevent Rose from articulating a debate that he wants to pursue with economists who downplay the importance of trust, but it would clarify his contribution to social-scientific and philosophical debates about trust."
1-Hour Lecture on The Moral Foundation of Economic Behavior
About David C. Rose
David C. Rose is Professor of Economics at the University of Missouri-St. Louis. He received his PhD in Economics in 1987 from the University of Virginia. He has published scholarly articles on a wide range of topics in micro and macroeconomics. His primary areas of research interest are behavioral economics, political economy, and organization theory. He frequently contributes to policy debates through radio and television interviews and Op-Eds in outlets like the St. Louis Post-Dispatch, The Word on Business, The School Choice Advocate, Forbes, The Washington Times, and The Christian Science Monitor on topics ranging from social security, monetary policy, fiscal policy, judicial philosophy, education reform, and healthcare reform.
Table of Contents of The Moral Foundation of Economic Behavior
Chapter abstracts taken from / chapters online available at Oxford Scholarship Online.
- Introduction - This chapter outlines the book’s unusual approach. Rather than compare characteristics of moral beliefs to levels of economic performance across societies, it undertakes a thought experiment launched by the following question: If a society’s sole objective is to maximize general prosperity, and it can choose its own moral beliefs, what kinds of moral beliefs would it choose? It briefly discusses how such beliefs provide a moral foundation for economic behavior. It connects moral beliefs to economic behavior through trust behavior, and reviews evidence on the relationship between trust and economic performance. It reviews some of the major issues covered in the book including genuine trust, group size, and the role of culture. In then provides an overview of the central arguments.
- Opportunism - This chapter explains why opportunism is the fundamental obstacle to the development and operation of a market economy. It reviews arguments for why general prosperity is impossible without specialization that is, in turn, impossible without transaction behavior. The threat of opportunism drives up the cost of transacting, thereby reducing the set of transactions through which the gains from specialization can be realized. Opportunism also requires that resources be devoted to safeguarding, and interferes with the emergence and operation of trust-dependent institutions. Opportunism is shown to be a daunting problem because while it is harmful at the group level, it is often rational at the individual level because it is subject to commons dilemma type incentives. Employing concepts from contract theory, opportunism is categorized into three types. The third type is shown to present a serious difficulty for the use of relational contracts.
- Group Size - In this chapter the benefits and costs of group size are discussed to lay the groundwork for establishing later how group size affects moral decision making. The gains from specialization are shown to rise with the scale of production. But it is also shown that the cost of group size increases because the problem of opportunism is worsened. This is because of the strengthening of commons dilemma incentives and greater localization of knowledge. Friedrich Hayek explained how market prices alleviate the problem of local knowledge across society, but Ronald Coase’s work shows why this mechanism will not work within firms. To efficiently employ local knowledge, firm owners must trust that those who possess it won’t engage in opportunism. Echoing Robert Frank, it is argued that since in many cases detecting opportunism is impossible (golden opportunities), prudential restraint is insufficient – only internalized (moral) restraint can work.
- Moral Values - This chapter distinguishes between moral values that encourage us to take positive moral actions and moral values that discourage us from taking negative moral actions. It explains why with regard to economic behavior, “moral exhortations” are superfluous while “moral prohibitions” are very supportive since they combat opportunism and thereby keep transaction costs low. The key to maximizing prosperity is driving up feelings of guilt that result from taking negative moral actions so as to make opportunism irrational. This conserves on resources normally devoted to safeguarding and supports the development and operation of trust-dependent institutions. It is also shown why the obedience of moral exhortations is inherently subjective and therefore incapable of defining universal standards for moral behavior.
- Harm-Based Moral Restraint - This chapter argues that it because humans are naturally reluctant to harm others, most people in most of the world most of the time do not behave opportunistically. It advances a theory of harm-based moral restraint based on how feelings of guilt drive up the internal cost of behaving opportunistically. Guilt is triggered by feelings of sympathy that are, in turn, triggered by empathizing with harmed victims. The origins of the psychological mechanisms of guilt, sympathy, and empathy are discussed. Guilt is shown to have uniquely important qualities for effectuating moral restraint. Empathy, sympathy, guilt, and interpersonal utility effects are all accounted for in a simple model that provides a framework for subsequent analysis in the book.
- The Empathy Problem - In this chapter, group size is shown to pose a serious problem for combating opportunism through harm-based moral restraint. It explains why, if an individual’s implicit theory of moral propriety maintains that wrongfulness is derived solely from harm, then in large groups many acts of opportunism will simply not feel wrong because there is no harmed person to empathize with. It is shown that neither increasing our concern for others nor increasing our capacity for feeling guilty overcomes this empathy problem. Examples of related forms of the empathy problem are presented. It then shows how the empathy problem can be solved by having moral tastes that attach feelings of guilt to negative moral actions themselves rather than their consequences, thereby producing principled moral restraint rather than merely harm-based moral restraint.
- Duty-Based Moral Restraint - This chapter explains why principled moral restraint is a necessary but not sufficient condition for assuring an individual will be trustworthy in circumstances in which golden opportunities may arise. Principled moral restraint is not sufficient because an individual could potentially feel even guiltier about failing to take a positive moral action made possible by a negative one. This chapter explains why, to solve this greater good rationalization problem, moral tastes must also make the obedience of moral prohibitions lexically primary to the obedience of moral exhortations. Three types of lexical primacy are examined. Moral tastes that solve the empathy problem and the greater good rationalization problem are said to produce duty-based moral restraint. Some concerns about duty-based morality are addressed.
- The Moral Foundation - This chapter distinguishes between duty-based moral restraint and duty-based moral advocacy. Duty-based moral advocacy is shown to be inefficient and to undermine duty-based moral restraint. The moral foundation is therefore neither fully consequentialist nor nonconsequentialist in its approach to moral reasoning, but requires that negative moral actions be governed by a nonconsequentialist approach, while positive moral actions are government by a consequentialist approach. If an individual possesses moral beliefs that comport with the moral foundation, then the greater his level of conviction, the larger the set of transactions over which he will be regarded by others as being trustworthy. The moral foundation is compared to earlier work by prominent religious leaders, moral philosophers, political theorists, and economists. Potential problems are then addressed.
- Trust - This chapter compares trust behavior derived from moral beliefs that comport with the moral foundation to trust behavior as conceived under existing theories of trust. It shows that whereas conventional theories do not square well with existing empirical evidence at either the micro or macro level, trust behavior rooted in moral beliefs that comport with the moral foundation does. It discusses the implications this book has for arguments made by institutional theorists against the relevance of trust. It shows why, if a society has a sufficiently high proportion of individuals who abide by the moral foundation, it will enjoy a condition of generalized trust, making it possible for its people to trust each other at the micro level while at the same time making it possible for trust-dependent institutions to exist at the macro level.
- Culture - This chapter explains why moral beliefs that comport with the moral foundation are not plausibly transmitted via genes or discovered introspectively. Instead, they are most plausibly instantiated in sufficient proportion, with sufficient consistency, and with sufficient conviction across the whole of a society through culture. Culture is also shown to have a unique ability to solve a fundamental problem of timing and rationality – that of separating the decision to have certain moral beliefs from the consequences of having them at the time of making moral decisions. Culture is also shown to have a unique ability to overcome dynamic feedback effects that normally impede the emergence of a high trust society.
- Conclusion - This chapter summarizes the main argument. It discusses the implications this book has for the culture versus institutions debate and social capital theory, as well as several other avenues for future work. It proposes several sharp empirical implications. It offers a number of speculations, including what this work has to say about the rise and fall of societies generally, arguing that it is foolhardy to take solace in the fact that much of morality is hardwired. It reviews some interesting ironies, most notably that if neoclassical explanations for moral behavior are right, we would not likely have the kind of economy for which neoclassical economics was invented to study. Finally, a troubling trend is noted – the way we teach moral education today largely undermines the moral foundation.