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Economic Reflections 3 (part 1): Markets Crowding Out Morals

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In ch. 3 of What Money Can’t Buy, Michael Sandel argued that markets can crowd out morals. He discussed economist Kenneth Arrow’s 1972 argument (1) that a commercial blood market may not crowd out altruism and solidarity in blood donation.

Arrow saw a role for virtues in the market: “exchange requires or at least is greatly facilitated by … virtues [such as] truth, but also trust, loyalty and justice in future dealings” (345.) Virtues correct against market failures and externalities; transfusion transmitted hepatitis is much lower in voluntary than commercial blood, as infected altruistic donors do not donate (Arrow, 354.) A virtue is a “commodity in many respects complementary to … economic goods,” originating outside the market and coming as an “unrequited transfer” (346;) I suggest that virtue in exchange is often requited with virtue, though virtues by their nature require no return.

Per Arrow, ethical behavior should be required only where the price system breaks down as “wholesale usage of ethical standards is apt to have undesirable consequences” (355.) He gave two reasons: without sufficient knowledge “ethically motivated behavior may even have a negative value to others,” and one should not “use up recklessly the scarce resources of altruistic motivation” (355.)

Regarding the first reason, I agree that uninformed generosity may result in a non-optimal goods allocation; however, one could conclude that an outcome had negative value from a resource allocation view without conceding that it was negative from a relational view; a virtuous exchange may create or enhance a relational good independent of the goods exchanged.

Regarding the second reason, Sandel countered that virtues are not consumed but are “more like muscles that develop and grow stronger with exercise” (130;) I concur. Analyzing virtues and altruistic motivation as (quasi?) commodities or economic goods misrepresents them. How is altruistic motivation consumed? Is egoistic motivation consumed? Classing virtues as consumable commodities seems a category error. An informed ethic need not subvert the price system; rather, accepting virtues on their own terms, integrating the social role of virtues and the allocation role of markets can yield an environment more conducive to human flourishing than markets alone.

1 Arrow, Kenneth. (1972.) “Gifts and Exchanges.” http://www.jstor.org/stable/2265097

* This is adapted from a series of one page papers I wrote for an independent study in micro- and macroeconomics; the material included the excellent text The Economic Way of Thinking by Heyne, Boettke, and Prychitko, as well as several texts I brought in from communitarian, market anarchy, and experimental economic perspectives.

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