Ethics and the Commercial Society: Ch. 12
Economic Progress and Ethics: Commerce and the Better Life
These revolutions periodically reshape the existing
structure of industry by introducing new methods of
production— the mechanized factory, the electrified factory,
chemical synthesis and the like; new commodities, such as
railroad service, motorcars, electrical appliances; new forms
of organization—the merger movement ...
Every piece of business strategy acquires its true significance
only against the background of that process and within the
situation created by it. It must be seen in its role in the
perennial gale of creative destruction; it cannot be
understood irrespective of it or, in fact, on the hypothesis
that there is a perennial lull (Schumpeter, J. [1942/2012],
Capitalism, Socialism, and Democracy [KL 1519–1521, KL
1844–1847]).
I.
On the Possibility of Progress
A. Introduction
Neoclassical economics and most ethical theories were developed to
explain and evaluate relatively stable social and economic systems. There is
no use of the words progress or growth in Drebeu’s (1959) classic book on
general equilibrium theory. Markets reach equilibrium through price
adjustments that set supply equal to demand in both the short and long run.
There is no use of the word progress in Rawl’s theory of justice. The word
innovation appears just a single time. Principles of justice emerge from a
reflective equilibrium. Ethical principles are regarded as timeless by other
philosophers as well. It was in reaction to earlier equilibrium-based
1
economic and ethical theories that Schumpeter suggested a new model of
economic progress and Spencer developed his evolutionary theory of ethics.1
This chapter explores how ethical dispositions affect economic
development. Ethics plays many roles in dynamic economic and social
systems. Ethics can provide an impulse for economic development insofar
as innovations in ethical theories create new opportunities for exchange and
team production. Personal ethics may support innovation and
experimentation. Civil ethics may support laws and political institutions that
allow or promote economic development or may attempt to retard them.
It bears noting that the notion of progress itself is partly an ethical
concept. To say that change occurs is not to say that the results are good;
many are not. To say that at least some changes are good is to argue that
such changes improve our character, or move us closer to the good or ideal
society. That such improvements are possible has long been recognized.
Aristotle, for example, considers ethics to be a method of self-improvement.
Smith regarded the system of natural liberty to be an improvement over the
medieval system that had previously characterized Great Britain. The belief
that commerce tends to improve the quality of life has been less
commonplace, although part I of the present volume demonstrates that that
too has long been held by at least a subset of educated persons. That
continual improvement is possible has been less commonplace.
That innovation in a commercial society produces progress rather than
degradation is partly a matter of one’s conception of the good life. If the
good life is an active creative life, innovation will be praised and the stimulus
provided by new opportunities enjoyed. Innovators will be praised by such
persons and innovation considered a praiseworthy activity. However, if the
good life is a life of stable patterns of life and thought, innovation may be
regarded as a threat to the good life, rather than a complement to it.
Challenges to one’s private equilibrium in such cases will be unwelcome and
innovators and innovators subject to disapprobation, rather than praise.
More recent critiques of the equilibrium view of social continued through the twentieth century, as in Schackle (1961), Kirzner (1973), Cowen and Fink (1985),
Grossman and Helpman (1991), and Hanusch and Pyke (2007). It should be acknowledged, however, that these critiques and modeling extensions were minority views in
economics for most of the twentieth century. Growth was acknowledged to be possible, but a tendency toward equilibrium growth paths was nearly always assumed.
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It bears noting that Schumpeter’s term “creative destruction” can be
used to describe either the path to material comfort and longer lives
associated with economic progress or a death spiral back to the short brutish
and nasty lives of the Hobbesian Jungle. Either can be consequences of
innovation.
Figure 12.1 An Evenly Rotating Economy
wages
inputs
B. On the Notion of Economic Equilibrium
Neoclassical economics provides an explanation for the existence of an
equilibrium in markets, what von Mises referred to as equally rotating
systems, Schumpeter as the circular flow, and Debreu as a general
equilibrium. Such an equilibrium can be shown to be a consequence of
rational choice in well-known circumstances. Price theory demonstrates that
a vector of prices can generate an all-encompassing equilibrium in
production and exchange across all products and services through time in
static circumstances when tastes are stable and well understood and no
innovation occurs. In such circumstances, there is often a unique best choice
for both consumers and producers. Those choices can be used to
characterize individual, firm, and market equilibria.
goods
Output
Markets
Input
Markets
According to the early twentieth century assessments of Schumpeter
and von Mises, the new more extended markets that emerged in the late
nineteenth century were engines of transformation. Major innovations
created new patterns that destroy or at least alter earlier ones. Lesser
innovations induced significant modifications of previously existing patterns
of life. They also argued that equilibrium notions of equilibrium may have
applied to earlier social systems but not to capitalist ones.
The term equilibrium can be regarded as a reasonable first
approximation of a variety of systems at particular points in time, the orbits
of the planets, the pattern of life in a stable ecosystem, the process of law
making in a stable system of government, a stable pattern of production and
exchange, and so forth. Change may take place within such systems, but so
gradually that it can be ignored for the purposes of analysis or for those of a
human life.
spending
Consumers
inputs
wages
goods
Firms
revenues
C. Cultural Equilibrium
The result is a pattern of life and production that largely repeats itself, as
with the farming cycle of a typical year, the holiday- and season-driven
inventory cycles of grocery stores, or the cycles of human life. The life of
farmers did not change quickly or radically for millennia at a time. It was
largely driven by the seasons and fertility of their land. Celebrations tended
to be associated with those same seasons and with the cycle of human life.
Modest improvements in crops and techniques did occur, but for the most
part life went on as before. The product mix of village stores and
marketplaces also changed a bit from year to year as the color and cut of
“fashionable” food and clothing varied, but the broad outlines of production
and exchange were more or less stable and more or less repeated for
generations at a time.
When beliefs about nature and the good life are stable, successive
generations learn the same natural and normative lessons, as parents and
teachers repeat the wisdom of the ages to their children and students and as
successive generations of scholars and intellectuals debate the properties of
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nature, the divine, epistemology, and ethics in a similar manner, with a
similar focus and depth. Ethics and other routines of thought and conduct
naturally tend to be stable in such periods. Such stable patterns of life were
evident for much of history before the commercial society emerged.
Many aspects of life in society may be stable even during periods in
which knowledge is advancing. The formal institutions of a society may be
stable in this sense. For example, the core legal institutions of the United
States did not change in a major way during the past two centuries, a period
in which knowledge changed rapidly and economic life equally so. There
were modest changes in the standing procedures of governance and law, but
the general pattern of law and constitutional governance was not greatly
affected. Law remained for the most part based on judicial decisions and
precedent. Elections were held and policy decisions made by elected
representatives from the constituent states.
Such stable patterns of life and society were arguably typical in the
world before the commercial society emerged. There are many societies that
appear to have had an equilibrium character for centuries at time, as with the
various Stone Age societies discovered by Western explorers during the
nineteenth and early twentieth centuries. Many societies have exhibited
considerable stability in terms of common ethical and natural beliefs,
patterns of production and consumption, and systems of government and
law. Historians refer to stable periods with terms such as “age,” “era,” and
“period.” Shifts from one “age” to another are often referred to as
“revolutions,” as with the shift from the Paleolithic to the Neolithic period,
the shift from the Stone Age to the Bronze Age and subsequently to the
Iron Age. The term revolution is also used to describe changes in economic
life that produced the commercial society, the Industrial Revolution.
Part of the explanation for societies in equilibrium is the attraction that
stable, reasonably comfortable patterns of life have for humanity. After a
perturbation or crisis, a return to the preexisting equilibrium patterns is very
likely when most persons prefer the certainty and comforts of the recent
2
past to change. Only if a return to familiar patterns is impossible will
changes be grudgingly adopted by such conservatives. Innovations are
discouraged in such societies as deviant behavior, mistakes to be avoided, or
at best passing fads soon to disappear, rather than new possibilities to be
fully explored.
Several early Chinese innovations seem to have been under appreciated
because of such conservative dispositions, including at least two innovations
that subsequently changed the world: steam propulsion and gun powder.2 A
society populated by social conservatives would clearly resist the dynamic
nature of societies with extensive open markets.
The idea of the universe which prevailed throughout the
Middle Ages, and the general orientation of men’s
thoughts were incompatible with some of the
fundamental assumptions which are required by the
idea of Progress…Again, the medieval doctrine apprehends
history not as a natural development but as a series of events
ordered by divine intervention and revelations. If humanity
had been left to go its own way it would have drifted to a
highly undesirable port, and all men would have incurred
the fate of everlasting misery (Bury, J. B. [1921/2011, The
Idea of Progress: An Inquiry into Its Origin and Growth [KL
321–332]).
Whether such evenly rotating societies are the only ones possible in the
long run or not is beyond the scope of this volume. Many but not all social
scientists have assumed that to be the case. Historically, it may be argued
that truly dynamic societies in which progress, as opposed to instability, is a
defining characteristic are not commonplace. Most of us prefer our
comfortable routines to change, often quite sensibly. Many of our routines
were painfully worked out through a long process of trial and error. That
variety may be the spice of life is not always intuitively obvious.
Note that the term “under appreciated” is normative and for most persons in the West an unexceptional interpretation of these Chinese “mistakes.” This perspective
itself reveals a more appreciative perspective on scientific and economic development, that is to say incorporates the idea of progress. A true conservative would regard the
Chinese behavior as appropriate and unexceptional.
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II. On the Nature of Progress
In opposition to what might be called social conservatism is the idea of
progress. Some changes are for the better. However, determining whether
progress is taking place is not as easy as one might first believe. One cannot
simply assert, for example, that an increase in all goods and services makes
everyone better off. At some point, increases in food and drink tend to
reduce, rather than increase, both pleasure and life expectancy. Satiety sets
in, our space becomes cluttered, and our bodies too heavy for pleasant
exercise.
How to determine whether progress is taking place in the short or long
run is not entirely obvious. A dynamic life is not necessarily a better or more
attractive one. Uncertainty can enhance life by keeping it fresh and
interesting, or it can threaten it by undermining one’s core ideas and routines
for living and placing individuals under more stress than is comfortable or
character enhancing. The idea of progress requires both a long-term
perspective and a metric to assess the changes taking place.
The concept of progress is always evaluative and usually normative. It
asserts that some change is an improvement. Some changes are more easy to
discern and evaluate than others. Improvements in technology are relatively
easy to recognize. A new machine that does everything that its predecessors
did and more would clearly be an improvement as long as “more” is a
desired result. The same might be said of a society. However, a machine or
society that broke down more often than its predecessors would not
necessarily be regarded as an improvement even if in other respects it
dominated earlier machines. Some metric of “improvement” is always
necessary. Not all change is for the better.
3
The “distance” to a hypothetical ideal state can serve as such a metric. A
society that gradually approaches an upper bound of knowledge might
gradually approach an equilibrium state of the ideal Spencerian variety but
never reach it. Such a society might be said to exhibit progress, a form of
instability that tends toward “improvement,” here in the sense that a human
society gradually approaches the best possible one. If nature and society are
so complex that no upper bound of knowledge exists or only one that is so
distant that it not likely to bind humanity in the foreseeable future,
improvements in the rules and the product mix of a society may continue
forever without converging to some limiting ideal case.
A path of transformation need not be smooth or obvious to be
recognized as progress. If knowledge increases in discrete steps of different
and unpredictable sizes, the changes induced tend to be unpredictable and of
varying magnitudes. The associated crises may provide adaptations that in
the short run may be regarded as the opposite of progress, as retrogressions
or disasters. In such case, a general trend of improvement might be evident
only after a relatively long series of innovations and adjustments have taken
place. It is such long-term series of improvements that are referred to by the
generalized notion of progress.3
Moreover, it is rarely the case that particular instances of technological
change produce benefits for everyone. The variety and quality of
horse-drawn wagons, buggy whips, and quills is far less than they used to be,
although the variety and quality of automobiles, computers, and cell phones
are much greater.
Judging the degree of material progress requires an assessment of the
gains and losses, and these are inherently subjective. Objective indices and
averages such as GDP and GDP per capita can only approximate the net
J. B. Bury (1921) provides a very nice intellectual history of the idea of progress. He notes that two broad conceptions of progress were present in the West during the
nineteenth century (ch. 12). “Theories of progress are thus differentiating into two distinct types, corresponding to two radically opposed political theories and appealing to
two antagonistic temperaments. The one type is that of constructive idealists and socialists, who can name all the streets and towers of ‘the city of gold,’ which they
imagine as situated just round a promontory. The development of man is a closed system; its term is known and is within reach. The other type is that of those who,
surveying the gradual ascent of man, believe that by the same interplay of forces which have conducted him so far and by a further development of the liberty which he
has fought to win, he will move slowly towards conditions of increasing harmony and happiness. Here the development is indefinite; its term is unknown, and lies in the
remote future. Individual liberty is the motive force, and the corresponding political theory is liberalism” (p. 236).The entire book is available online from the Gutenberg
project: www.gutenberg.org/files/4557/4557-h/4557-h.htm#link2HCH0011.
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effect of a series of changes associated with episodes of innovation and
economic development in commercial societies. As non-material aspects of
life such as stress, the extent of virtue, quality of contemplation, or quality of
family life are added to the mix, it becomes increasingly difficult to assess the
net effects of change.
The utility principle provides one possible all-encompassing index of
the effects of such economic and social developments, albeit with the
caveats mentioned by Spencer and others. If aggregate utility tends to
increase with innovations in products and production methods, utilitarians
would conclude that progress is taking place. Another possible system of
evaluation is provided by contractarians. Contractarians would regard a
series of changes to be progress if all persons in the community of interest
regard the present society to be better on balance than the ones that
preceded it. All individuals do not have to agree on the best measures of
progress, it is sufficient that they agree that improvement has occurred.
Different ethical systems may yield different assessments of the merits
of economic development. As in previous chapters, it is those ethical
theories that support material progress that are of greatest interest for the
purposes of this volume. Many of these have utilitarian or contractarian
foundations, although not all utilitarians of the twentieth century were
proponents of the commercial society.
III. Ethics and Economic Growth Theory
Utilitarian and contractarian assessments of the relative merits of
economic systems, as opposed to societies as a whole, can be undertaken in
Pigovian manner by focusing on measurable sources of material comfort,
holding other things being equal. There are problems with such an approach
as noted by Pigou and indicated by the above, but it provides a good deal of
plausible results about the effects of commerce on individual and human
welfare. As a first approximation, the Pigovian approach simply argues that
the greater the wealth or income of an individual or family, the greater are its
opportunities for welfare enhancing activities. The greater those
4
opportunities are, the greater the realization of happiness or utility tends to
be. Economic progress in this sense can be induced in a number of ways.
The least disruptive of these was the first incorporated into economics.
The early growth theorists analyzed how the accumulation of capital would
affect an economy.
Shortly after World War II, the mathematics of equilibrium growth
paths was worked out. This new equilibrium concept implied that a
commercial equilibrium need not be a circular flow; it could be a smoothly
expanding spiral. Although, there are at least as many kinds of capital goods
as there are final goods and services, the first mathematical models of
growth assumed that just one homogenous type of capital, usually physical
equipment. Human capital was added to the second generation of
mathematical models.
In general, capital increases the marginal product and marginal revenue
product of labor, which implies higher real wages. A person can move more
dirt with a shovel than his hands, with a wheelbarrow than without, and with
a bulldozer than a wheelbarrow. Capital accumulation thereby increases both
the output and the overall demand for goods and services. Human capital
accumulation also tends to increase the productivity of labor and so has
similar effects.
The accumulation of either physical or human capital increases the
outputs of previously produced products in the core neoclassical models. As
a consequence, more consumers can obtain more of all the products they are
familiar with, especially those produced with capital and knowledge-intensive
methods.4
Of course, human capital is as varied as physical capital. Thus, from the
perspective of neoclassical growth theory, much of this book can be thought
of as an effort to understand the impact of changes in the subset of human
capital that consists of internalized rules of conduct. Part II demonstrates
that a subset of ethical dispositions have effects that are similar to other
productive skills. They make individuals, firms, and markets firms more
For an overview of early growth theory grounded in capital accumulation see Solow (1970). For an early model of economic development that includes human capital
accumulation, see Romer (1990).
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Economic Progress and Ethics: Commerce and the Better Life
productive by reducing agency, externality, and coordination problems and
also a variety of risks associated with exchange and production. An increase
in market-supporting ethical dispositions thus produces economic growth in
a standard growth model for much the same reason that increases in other
forms of human capital do.
Toward the end of the twentieth century, the effects of the distribution
and intensity of ethical dispositions in a given population were implicitly
modeled and estimated in the new social capital strand of the development
literature. A good deal of statistical evidence supported the hypothesis that
increases in social capital increase income levels and growth rates.5
Although the term “social capital” applies most naturally to what we
have termed civil ethics, personal ethics can also make societies more
productive and pleasant places in which to live. Insofar as the spread and
support of such values are regarded as signs of nonmaterial progress, social
progress and economic growth can be mutually reinforcing, as argued by
Bastiat, von Mises, and many others.6
the goods and services previously produced, and through innovations in
production methods, rather than more of the same produced in familiar
ways.
Joseph Schumpeter (1883–1950) was among the first to recognize and
analyze the distinctive manner of growth characterized by commercial
societies in the late nineteenth and early twentieth centuries. Writing in the
first half of the twentieth century, Schumpeter argued that innovation and
disruption were essential features of economic development.
The fundamental impulse that sets and keeps the
capitalist engine in motion comes from the new
consumers’ goods, the new methods of production or
transportation, the new markets, the new forms of
industrial organization that capitalist enterprise creates
(Schumpeter, Joseph [1942 / 2012-12-19]. Capitalism,
Socialism, and Democracy [Kindle Locations 1823–1825],
Routledge, Kindle Edition).
Equilibrium models of growth have the nice property that economic
development benefits essentially everyone. More goods and services are
produced and real income rises for all. These effects are partly consequences
of the equilibrium concept and party of assumptions about the nature of
economic growth that tend to make it ethically uncontroversial, except to
those favoring ascetic forms of life. However, capital accumulation is not the
only or necessarily the main driver of economic development.
New products obviously compete with older products for sales and
inputs. Successful product introductions thus affect the equilibrium price
vector and pattern of consumption and employment. Some prices rise and
other fall. Some incomes increase and others are reduced. Similarly, new
production methods such as the assembly line or computer-aided
manufacturing reduce the cost of a subset of existing products either
bankrupt their less efficient rivals or force them to make new investments in
plant and equipment to remain competitive.
IV. Innovation and Progress: The Process of Creative
Destruction
Less costly or higher-quality products may push former producers out
of businesses that they had been in for years. Products that are no longer as
useful become obsolete—as with wadding, buggy whips, or slide rules. They
may no longer be produced. Indeed the words for them may disappear from
common knowledge. Innovation is generated by especially creative teams of
men and women who bring new production methods and products to
factory floors and markets.
Increases in the production of familiar products by familiar methods are
only one of the many forms of economic progress. Much, perhaps most, of
the economic development associated with a commercial society occurs
through the introduction of new goods and services, the transformations of
5
For growth models that include the accumulation of social capital, see Routledge and Ambsberg (2003). Empirical evidence of the positive effect of social capital on
economic growth rates is provided by Knack and Keefer (1997), Temple and Johnson (1998), and Beugelsdijk and Van Schaik (2005) among others.
6
See, for example, Güth and Kliemt (1994), Landa (1994), Ingelhart (1997), Pollitt (2002), or Tabellini (2010).
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A. Innovation Induces both Revolutionary and Evolutionary
Changes in the Commercial Society
brought into the capabilities of telephones as they became voice transmitting
and receiving computers that also played music, took photos, answered
Internet queries, plotted location and routes, and so forth.
In extreme cases, as with the steel, telephone, electricity, the automobile,
the computer, and the internet, innovations launch entirely new industries
B. The Ethics of Innovation
and alter the pattern of life as entirely new possibilities came into existence.
Such transformative products are not simply stronger boards, faster letters,
Both major and minor innovations often disrupt standing patterns of
better candles, or horse carts, although they serve similar human purposes.
life, making many worse off at the same time that benefits are provided for
the innovators and their customers and input providers. As a consequence,
Many innovations reduce the time required to provide the traditional
the process of innovation raises a variety of ethical issues that do not exist in
necessities and luxuries of life. Such innovations free time for leisure, work,
smoothly expanding economies. Changes in market conditions associated
play, and contemplation, at the same time that newpatterns of production,
with innovation impose costs as well as benefits on the individuals living
work, and play emerge. Other products introduced for use in leisure became
within commercial societies.
so central to life at home, that new "necessities" were created. Innovations
do not all simply add another layer or more icing to a preexisting cake.
Generally, however, in the capitalist system, with its rapid
strides in improving human welfare, progress takes place too
It bears noting that major innovations do not usually take place through
swiftly to spare individuals the necessity of adapting
a single revolutionary leap of imagination. Progress in such cases is obvious
themselves to it. When, two hundred years or more ago, a
in incremental improvements. Contemporary automobiles are still steered
young lad learned a craft, he could count on practicing
with a wheel, ride on rubber tires, and is propelled (for the most part) by a
it his whole life long in the way he had learned it,
gasoline engine with cylinders and spark plugs. The modern automobile
without any fear of being injured by his conservatism.
serves the same essential functions and is recognizably the same product.
Things are different today (von Mises, Ludwig
Nonetheless, a century of refinements have caused the modern
[1927/2012]. Liberalism [p. 81]).
mass-produced automobile to be very different from Henry Ford’s model T.
Contemporary radios, heating and cooling systems, mapping programs,
For those who lose their jobs or businesses as a consequence of innovation,
Internet connections, and energy-saving shapes were beyond the imagination the effects can be as devastating as a major earthquake or fire.
of the most creative engineers of 1908. Contemporary automobiles allow
As a consequence, many of the economic and social effects of
one to go farther on less fuel with far greater comfort than possible--indeed
innovation conflict with both traditional norms and others more liberal in
imaginable--with Ford’s “tin lizzy.”
their orientation and history. For example, Mills argued that:
Even more dramatic changes have occurred in many other “ordinary”
[T]he fact of living in society renders it indispensable that
products. For example, innovations in telephones during the past half
each should be bound to observe a certain line of
century produced devices that are less obviously telephones. Contemporary
conduct toward the rest. This conduct consists, first, in
telephones lack rotary dials and cords. They are interconnected through glass
not injuring the interests of one another (Mill, J. S.
rather than copper-wire networks. They use digital rather than analog
[2013-08-16], On Liberty [KL 41041-41043]).
encoding of sounds. These transformations radically improved the quality of
sound associated with long distance conversations and allowed such
This norm is violated every time a new product is successfully
conversations to take place essentially anywhere. Additional tasks were also
introduced, because such products nearly always reduce the income of
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persons producing rival products. New products that bankrupt rival
companies may cause thousands to lose their jobs, many of whom face
lower wages as their skills become obsolete, and lower wealth as housing
near their former place of work falls in value.
Mill argues that utilitarianism implies that government interventions
may be appropriate in such cases:
As soon as any part of a person’s conduct affects
prejudicially the interests of others, society has
jurisdiction over it, and the question whether the general
welfare will or will not be promoted by interfering with it,
becomes open to discussion. (Mill, J. S. [2013-08-16], On
Liberty ([KL 41047–41049]).
Rawls draws a similar conclusion when he states that
Of course, liberties not on the list, for example, the right to
own certain kinds of property...and freedom of contract as
understood by the doctrine of laissez-faire are not basic; and
so they are not protected by the priority of the first
[equal liberty] principle (Rawls, J. [2003], A Theory of Justice
[p. 52]).
One cannot simply assert, as many economic text books do, that “pecuniary
externalities” do not count. Such claims run counter to the utilitarian
foundations of mainstream welfare economics and to contractarian theories
of the good or just society.
Innovation is one of the many cases in which a community might
properly engage in regulation according to Mill and Rawls. And, of course,
many have done so. Even innovations in food and clothing have been
banned or regulated as with the various dietary and sumptuary regulations of
medieval societies.
7
Given the unavoidable negative effects of innovations on the welfare of
others, in what sense can it be moral to innovate? Both utilitarian and
contractarian theories of civil ethics provide possible answers to that
question. From the perspective of both utilitarian and contractarian analysis,
what matters are the long term consequences of a series of innovations,
rather than those associated with a single innovation. Is aggregate utility
generally increased by a series of innovations, or not? From a contractarian
perspective, the issue is whether essentially all persons anticipate being better
off as a consequence of a long series of innovation or not? If so, establishing
considerable liberty to innovate would be appropriate policy and innovation
generally a virtuous and praiseworthy activity. If not, the status quo ante
should be protected and innovations banned.7
Utilitarians require that innovations increase average utility in the society
of interest. Contractarians require that innovations generate essentially net
benefits for essentially all members of the community of interest.
Utilitarians, unlike contractarians, also allow cases in which many expect to
be harmed by innovation, as long as those advantaged gain more benefits
than the innovations impose on those disadvantaged by them.
If there is a consensus that the result is an improvement by whichever
of these normative theories is used, then a contractarian and utilitarian case
has been made for innovation over the status quo ante.8 In such cases, the
result of innovation is considered to be “progress.”
Other moral perspectives can also justify the process of innovation on
procedural grounds. For example, if the essential features of civil law are
accepted as Kantian universal rules, then behavior consistent with those
rules is, by definition, moral or at least not immoral. Natural rights scholars
may also stress procedural notions of proper behavior, noting that both
innovations the individual persons adopting them have engaged in voluntary,
lawful behavior. The victims of innovation have no right to block the
innovators. Such rule and procedural-based arguments, however, need to
Rawls (2003), for example, notes that inequalities induced by innovation are acceptable under his difference principle if the entrepreneur’s “better prospects act as
incentives so that the economic process is more efficient, innovation proceeds at a faster pace, and so on” (p. 66).
8
Disagreements over the consequences of a series of innovations are, of course, possible. Agreement among utilitarians and contractarian theorists requires similar
conclusions to be reached about the long run consequences of innovation.
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Economic Progress and Ethics: Commerce and the Better Life
systematically distinguish between the damages imposed by innovators and
those caused by thieves, arsonists, and murderers. If innovation is to take
place, most inventions have to be exempt from both criminal law and the
civil proceedings of tort laws. Clearly, the opposite conclusion could also be
reached by placing greater weight on a person’s right to the status quo ante.
It bears noting that without a long series of welfare-improving
innovations, most consequentialist ethical theories would also have a
difficult time concluding that innovation is a virtuous activity. If one accepts
the principle that the freedom to swing one’s fist ends at the tip of another’s
nose, one might naturally conclude that the freedom to innovate ends at
another’s property values and income. This tends to be the proper utilitarian
conclusion, if the net benefits from innovation have in the past been very
small or negative.
C. Ethics and the Politics of Innovation
Conclusions about the effects of innovation partly determine the
politics of regulation. For example, if only innovations that harm no other
person are thought to be praiseworthy or acceptable, as is the case for fires,
then only relatively minor innovations would be worthy of governmental
approval or support. A farmer might invent a new method of planting or
harvesting his or her crops, which arguably would increase his profits
without harming any other, as long as it was not widely adopted. However, a
major innovation would affect the farming practices of the entire industry,
which would affect demands for labor, capital, and land, changing prices and
the distribution of wealth. There would be many losers from such
innovations, and these might be banned.
Similar conclusions can also be drawn about innovations in
non-economic spheres of life as well. Major new ethical, scientific, and
religious theories also disrupt patterns of life, as they attract the time and
interest of large numbers of persons in a given society. New dietary ideas
may affect the demand for corn, wheat, beef, and fish. New religious ideas
or interpretations may produce new organizations (sects) whose political
influence may induce new laws and legal reforms. In a truly conservative
society, only conventional ideas and behavior would be deemed
praiseworthy or worthy of political support.
If progress is widely believed to be possible and invention essential to it,
such beliefs would also affect public policies. In democracies, this would
occur though electoral pressure and moral suasion. In cases in which policy
makers are insulated from such pressures, support for innovation would
require the policymakers themselves or their critical supporters to have
concluded that innovation produces sufficient progress to be worth the risk.
If economic progress requires at least some freedom to innovate, civil
and criminal laws would allow innovators to damage others in particular
ways, as with the various price and wealth effects that economists refer to as
pecuniary externalities. Innovations that destroy other businesses in a
manner analogous to intentional or unintentional fires would be exempt
from the criminal punishments associated with arson and any pecuniary
damages associated with innovation would not be included among the bases
for tort proceedings. Other policies such as patents and copyright
production thought to increase rate of innovation might also be adopted.
Support for public education (especially in areas where innovations seem
likely), and subsidies and tax preferences for research and development
might also be provided to further accelerate the pace of innovation.
Without the conclusion that technological advance and
commercialization are engines of progress or excellence, innovation is less
likely to be supported informally through praise and encouragement or
formally through legal exemptions for pecuniary damages. Differences in
ethical systems can thus partially account for differences in the both the
degree of economic development that has taken place in the past two
centuries and for differences in innovation rates among contemporary
societies.
Far less innovation and industrialization would take place in
conservative societies in which internalized norms tend oppose change itself
or all conduct that harms others. More would take place in societies where
widely held normative theories favored change or creativity and accepted
damages as part of the cost of progress, as historically tended to be true in
societies where utilitarian and contractarian theories are widely accepted.
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Economic Progress and Ethics: Commerce and the Better Life
V. Reducing Uncertainty: Innovations in Risk Management
The possibility of progress implies that the future course of life and
society is not entirely certain or knowable. New ideas and inventions may
occur at any time and many will induce individuals and communities to
change many of their standing routines for life, and not always for the better.
As uncertainties and downside risks become recognized, methods for coping
with them will naturally be incorporated into both private and public
routines. This is true at the levels of individuals, families, organizations, and
governments.
As commercial societies emerged throughout the West in the late
nineteenth and early twentieth centuries, economists began to carefully
analyze the effects of uncertainty. Frank Knight (1921) was among the first
to fully integrate risk and uncertainty into economic analysis. He noted, for
example, that markets tend to produce specialization in various risk- and
uncertainty-bearing services.
Uncertainty thus exerts a fourfold tendency to select men
and specialize functions: (1) an adaptation of men to
occupations on the basis of kind of knowledge and
judgment; (2) a similar selection on the basis of degree of
foresight, for some lines of activity call for this endowment
in a very different degree from others; (3) a specialization
within productive groups, the individuals with superior
managerial ability (foresight and capacity of ruling others)
being placed in control of the group and the others working
under their direction; and (4) those with confidence in their
judgment and disposition to “back it up” in action specialize
in risk-taking (Knight, F. [1921/2009-02-05], Risk,
Uncertainty, and Profit [KL 3154-3159]).
In the early twentieth century, several innovations in public policies
were also undertaken to reduce risks associated with commercial societies
and thereby make such societies more attractive. Examples include both
unemployment insurance and efforts to manage the business cycle. These
new policies took the merits of the innovation and the commercial society
for granted and simply attempted to moderate or pool the risks associated
with life in a commercial society.
Many were formally risk pooling efforts analogous to private insurance.
This is evident in their official names (which often include the term
insurance), in their method of funding (often through earmarked taxes
collected from labor income), and in the terms of eligibility for payouts
(being temporarily unemployed). Such insurance-like policies did not
interfere with the core processes of the commercial society but made them
more broadly acceptable for the risk-averse persons living within them.
However, other more radical policies were also considered during the
twentieth century that might have eliminated the commercial society.
Debates over such radical reform proposals included both ethical and
economic arguments.
VI. Reducing Uncertainty: On the Merits of Central Planning
and Regulation
The effect of specialization in risk bearing and risk pooling is to reduce
risks for most persons and to make life in a commercial society more
attractive. Such services and products do not reduce risks by reducing
innovation but reduce the downside risks associated with innovation and
9
other unpredictable shocks such as weather that affect prices, salaries, and
wealth. Innovations in risk and crisis management reduce, rather than
increase, uncertainties although they may also disrupt previous patterns of
life.
Mid-twentieth century utilitarians moved beyond Pigou’s welfare
economics to argue that an economy could, at least in principle, be directed
by a utilitarian central planner who could eliminate commerce, much as
More's magistrates did in his imagined utopia, while increasing aggregate
utility. It was argued by some utilitarians that such a planner could increase
aggregate utility by reducing uncertainty, improving the distribution of
income, and eliminating externality problems.9 Such conclusions were
See for example Lerner (1934) or Lange et al (1938).
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Economic Progress and Ethics: Commerce and the Better Life
consistent with mainstream economic models of the twentieth century,
which implied that a utilitarian ruler analogous to Plato’s philosopher king
could improve on the commercial society by replacing it entirely or by
administering a broad subsection of it.
Indeed, Russia and its Soviet Union maintained that such a system was
successfully being implemented in Northern Asia.10 This was a radical
challenge to mainstream utilitarians, who had long favored commercial
societies. This debate involved many technical economic issues, so it is
unsurprising that the central planning debate took place largely among
economists. What might be surprising is that much of the debate over
central planning relied upon utilitarian reasoning.11
Those who challenged the conclusions of the proponents of central
planning used several lines of attack. First, critics argued that using
neoclassical equilibrium models as the foundation of their analysis generated
a variety of misleading conclusions. The commercial society was far more
innovative and dynamic than those models implied. Moreover, the implicit
informational assumptions of neoclassical models implied that planners and
market participants had far more information at their disposal than they are
likely to have in reality. Second, they argued that the “first best” outcomes of
utilitarian planning were not feasible. This was partly for similar reasons.
Planners would not be able to produce an innovative society, nor would they
have sufficient information to replicate the equilibrium allocation of
resources generated by markets in the short term. It was also argued that the
persons likely to become central planners are not likely to be utilitarians.
Thus, the outcomes associated with even perfectly informed planning would
not be likely to maximize aggregate utility or attempt to do so. As a
consequence of all these factors, critics argued that the result of central
10
planning would far lower aggregate utility (as proxied by economic output)
than generated by a dynamic commercial society.
For example, Friedrich Hayek (1899–1992) reminded proponents of
central planning that information is not freely available at a central
depository but remains disaggregated in the minds of individuals. This, in
combination with the heterogeneity of the knowledge that we each possess
(and our ignorance), implies that planners would not know all that was
necessary to coordinate the behavior of market participants as well as market
prices do.
It is useful to recall at this point that all economic decisions
are made necessary by unanticipated changes, and that the
justification for using the price mechanism is solely that
it shows individuals that what they have previously
done, or can do now, has become more or less
important, for reasons with which they have nothing to do
(Hayek, F. A. [1968/2002], “Competition as a Discovery
Process,” Quarterly Journal of Austrian Economics 5: 9–23).
Hayek also argued that markets take account of far more information
than a real benevolent central planner could.
[T]he two advantages of a spontaneous market order or
catallaxy: it can use the knowledge of all participants,
and the objectives it serves are the particular objectives
of all its participants in all their diversity and polarity.
The fact that catallaxy serves no uniform system of
objectives gives rise to all the familiar difficulties that disturb
not only socialists, but all economists endeavoring to
evaluate the performance of the market order (Friedrich
Note that such a society, without markets but with ideal production and distribution, resembles Thomas More’s Utopia, with its sharing of labor and distribution
squares. It seems clear that such a society could not exist without ethical foundations, insofar as shirking rather than working tends to be more prevalent when work is
unrelated to salary than when it is. The ethical foundations for such a society are beyond the scope of the present volume.
11
A useful collection of essays on the original central planning debate was assembled by Hayek (1935), which has been reprinted several times. Interest in somewhat
more limited forms of central planning continued after World War II, as in Tinbergen (1964). The arguments were not always conducted in terms of utility per se but,
with respect to economic output and growth, more or less in the manner pioneered by Pigou. Late twentieth century commentary and critiques of central planning include
Lavoie (1985) and Boettke (2002).
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Economic Progress and Ethics: Commerce and the Better Life
Hayek [1968/2002], “Competition as a Discovery Process,”
Quarterly Journal of Austrian Economics 5: 9–23).
In Hayek’s view, this ignorance extends to the common understanding
of markets themselves.
Even today the overwhelming majority of people,
including, I am afraid, a good many supposed economists,
do not yet understand that this extensive social division
of labor, based on widely dispersed information, has
been made possible entirely by the use of those
impersonal signals which emerge from the market process
and tell people what to do in order to adapt their activities to
events of which they have no direct knowledge.
That in an economic order involving a far-ranging division of
labor it can no longer be the pursuit of perceived common
ends but only abstract rules of conduct—and the whole
relationship between such rules of individual conduct and the
formation of an order which I have tried to make clear in
earlier volumes of this work (Hayek, F. A. [1979], Law,
Legislation and Liberty, Volume 3: The Political Order of a
Free People [p. 162]).
Another crucial issue was whether the central planner would tend to be
benevolent or not (utilitarian or not), an issue that goes back at least as far as
Plato’s and Aristotle’s analyses of government. Post-war public choice
analysis suggested that the persons most likely to rise to positions of
authority were unlikely to be utilitarians or altruists.
The rapidly accumulating developments in the theory of
public choice, ranging from sophisticated analyses of
schemes for amalgamating individual preferences into
consistent collective outcomes, through the many models
that demonstrate with convincing logic how political
rules and institutions fail to work as their idealizations
might promise, and finally to the array of empirical studies
12
that corroborate the basic economic model of politics—these
have all been influential in modifying the way that modern
man views government and political process.
The romance is gone, perhaps never to be regained. The
socialist paradise is lost. Politicians and bureaucrats are
seen as ordinary persons much like the rest of us, and
politics is viewed as a set of arrangements, a game if
you will, in which many players with quite disparate
objectives interact so as to generate a set of outcomes that
may not be either internally consistent or efficient by any
standards (Buchanan, J. M [1984], “Politics Without
Romance,” The Theory of Public Choice II).
What Hayek, Buchanan, and many other economists suggest is that
feasibility cannot always be deduced from economic models because the
models abstract from many details in order to facilitate theoretical analysis,
which cannot be ignored in practice. The disintegration of the Soviet Union
in 1992 affirmed their conclusions. It revealed that Soviet planners had not
been able to replicate the production efficiency nor the material comforts of
Western commercial societies after more than a half century of active central
management, nor could they be regarded as utilitarian in their choice of
regulations and allocations of resources.
In this case, differences in normative theories were arguably less
important than differences in the predicted nature of central planning. The
debate was largely among utilitarians or persons who had accepted the
neo-utilitarian approach of Pigou.
Nonetheless, assumptions about the ethical dispositions of the persons
in the societies to be centrally managed were relevant. Clearly, a central
planner that had internalized utilitarian theory would do better at maximizing
aggregate utility--to the extent this can be discerned--than a pragmatist
interested in maximizing his own income and authority. Clearly incentives
matter less if all persons have internalized a strong work ethic and rule
following norms.12 Much of the argument in favor of central planning
It is interesting to note that markets tend to reward these core ethical believes insofar as they tend to increase firm profits, individual incomes, and consumer
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Ethics and the Commercial Society: Ch. 12
Economic Progress and Ethics: Commerce and the Better Life
implicitly assumed a very complementary normative foundation for their
society. Without that foundation, it was infeasible.
circular flow tends to increase whenever market-supporting ethical
dispositions become more commonplace or deeply held.
Clearly, the course of public policies and life within the former Soviet
Union would have been far different had their leaders been utilitarians rather
than pragmatists seeking personal authority. They would still be limited by
the information at their disposal and incentive effects on work, innovation,
and adaptation to change. The results could at least conceptually have been
better than they were, but are still not likely to have been as attractive as the
associated with the commercial societies of the West.
The formal institutions that frame choices in a community also partly
determine the scope for commercial activity through their effects on
internalized norms and by changing the marginal costs and benefits of
different courses of action.
VII. Conclusions: Ethics and the Commercial Society
A. Ethical Foundations of a Commercial Society
Human behavior is clearly the primary driver of economic activities. No
other species engages in market activities. That opportunities for exchange
and production are improved by the habits of mind that early philosophers
referred to as virtue is less obvious, indeed entirely neglected in textbook
economics. Of course, opportunities for commercial activity are also
affected by scarcity and our understanding of the physical world, as
emphasized by textbook economics, but without market supporting ethical
theories and fewer of those opportunities tend to be realized--indeed fewer
are possible.
Part II of the present volume demonstrates that trading networks tend
to be more extended and team production more productive when persons in
the community of interest have internalized market-supporting ethical
dispositions. Trade becomes less risky and economic organizations less
prone to agency problems. The analysis of part II thus implies that the
Chapter 11 suggests that both private and public legal systems are partly
grounded in ethical beliefs. That informal rules of conduct precede formal
ones is suggested by the logic of writing laws and by the gradual emergence
of both civil codes and criminal laws.13 Although written rules have existed
since the dawn of history, much, perhaps most, of what is codified in liberal
societies reflects the informal ethical dispositions of the persons writing
them. This is most evident in the English common law system with its jury
trials--where the beliefs of ordinary persons determine what has happened
and judges use their informed understanding of precedent to deal with both
routine and novel cases. But formal civil law codes also emerge from
theories of right and wrong conduct, including ethical beliefs about the role
of commerce in a good society.
The overlap between ethical systems and legal systems has been noted
by such philosophers as Aristotle and Kant. The issue concerning the proper
codification of ethical beliefs was also a concern of Bentham. Rawls
emphasizes that constitutional law is or should be grounded in the theories
of justice held by persons living in the community subject to its rules.
That ethical theories play a continuing rule in economic development is
implied by the same logic. Innovations in ethical theories themselves and the
application of existing theories to new problems can generate changes in
private behavior and public policies that promote or retard commerce. They
satisfaction. Without such market rewards, it is clear that the distribution of internalized norms in centrally planned societies would be different than those of market-based
societies. Market rewards for a work ethic and for rule following behavior tend to cause such ethical dispositions to be more commonplace and strongly internalized, as
demonstrated in part II.
13
The law is another area in which bootstrapping takes place. Written laws are produced partly to solve practical problems and partly to formalize and record a subset of existing beliefs about proper
conduct. The laws on the books, in turn, provide persons in those communities with examples of rules that it is important to internalized--both as a signal of community norms and to avoid punishments.
Subsequent innovations in ethical theories and other norms, partly grounded in the written law, may induce legal reforms, and so on.
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Ethics and the Commercial Society: Ch. 12
Economic Progress and Ethics: Commerce and the Better Life
may increase or decrease the risks and coordination problems associated
with exchange and production. They may encourage reforms of legal
systems that encourage or retard commerce and technological advance.
After 1900, more specialization was evident in Western academics with
the result that fewer persons wrote on both ethical and economic issues. As
a consequence, ethics largely disappeared from economic texts, except
insofar as Pigou's utilitarian ideas continued to provide the foundation for
welfare economics.
B. The Ethics of Economists
Among economists, disagreements about reform and regulation often
reflect disagreements about matters of fact and consequence, that is to say,
on positive as opposed to normative considerations. This is largely because
so many economists have internalized utilitarian theory or Pigou's
modification of it. Determining whether policy X increase the extent of
commerce (average or aggregate income) or not? is just another way of
estimating whether policy X increases aggregate utility or not. If one accepts
the utilitarian ethical framework, what matters is how a new policy or
reforms affects outcomes, rather than some ethical feature of the policy
itself. Thus, the policy analysis of the utilitarian school is substantially driven
by advances in economic theory and new problems, rather than innovations
in ethical theories per se.
With respect to commerce, Pigou made it clear that utilitarian analysis
implies that average income is an imperfect measure of aggregate utility
(welfare), and that a commercial society may be improved through policies
that do not increase income, as with policies to regulate externalities
(environmental law), and intervention to reduce monopoly power (antitrust).
He, and other utilitarians, would argue that the commercial society is made
more attractive through such policies. A long series of such policies could be
a source of growth in the relevant dimension (GNP or aggregate utility) even
if the individual steps do not increase average income.
On the other hand, if the policies are not motivated by utilitarian aims,
as public choice theory suggests will be the case, a long series of such
policies may reduce both aggregate utility and income. This debate among
utilitarian economists produced many pages in academic journals and on the
editorial pages of newspapers.
The past few decades has witnessed a renewed interest in the many
economically relevant effects of ethical beliefs on economic activities. This
book is partly an effort to explore these effects more thoroughly or at least
with a sharper line of analysis than in previous efforts.
Although interest in the connection between ethics and economic
development is by no means mainstream, as indicated by microeconomic
and macroeconomic textbooks at both the graduate and undergraduate
levels, there is evidence of a renewed interest in the interdependencies
between ethics and economics.
C. Ethics and Economic Development
Within most societies, however, there is more variation in the ethical
perspectives of individual than among mainstream Western economists, and
so ethical differences play a larger role in the policy analysis of
nonprofessionals. In democracies, such conclusions are decisive rather than
the blackboard exercises of textbook welfare economics. Unless ethical
dispositions are broadly supportive of market systems, public policies are
likely to make commercial societies less productive and attractive, as when
rent seeking or egalitarian interest determine policies rather than support for
the material comfort, special forms of creativity, and lifestyles associated
with commercial societies. Support for the latter, as indicated by part I of
this volume, are substantially grounded in ethical and other normative beliefs
about the good life.
Chapter 12 has argued that ethical dispositions also affect the extent and
speed of economic development through effects on the rate of innovation,
adoption, and adjustment. In particular, a willingness to treat damages
associated with innovation in a manner different from other areas of life is
necessary. This is mostly likely to be the case when persons believe that
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Ethics and the Commercial Society: Ch. 12
Economic Progress and Ethics: Commerce and the Better Life
economic innovations tend to generate progress, that is, systematic increases
in the average quality of life.
development. These effects create a secondary feedback from markets to the
ethical theories of persons in the communities serviced by those markets.
Without such substantially ethical conclusions, innovators would be
disapprobated and punished rather than praised and rewarded. Public
policies would tend to discourage or prohibit innovation, rather than
support it. Insofar as innovation is an essential feature of a commercial
society, it is clear that this is another area of economic life that benefits from
ethical support, without which a dynamic commercial society is unlikely to
emerge.
To the extent it is possible to recognize ethical dispositions, consumers
tend to reward firms that have internalized dispositions that improve the
quality of their goods and services and reduce their costs. They will punish
firms that fail to provide good service, sell faulty products, and make
fraudulent claims about those products.
D. Ethical Developments and the Emergence and Refinement of the
Commercial Society
Part I of this book demonstrated that many of the most influential
philosophers in the West wrote on both ethical and economic topics, and
many believed that commerce should play a role in a good life. How great a
role varied among those whose ethical theories lent support to careers in
commerce and virtues that tend to increase the productivity of individuals
and teams in commercial enterprises. To the extent that the authors surveyed
in Part I were or became mainstream during the period between 1500 and
1900, their analyses became increasingly supportive of commerce during this
period.
To the extent that this shift in outlook was commonplace, although not
universal, it would have supported the gradual emergence of the commercial
society through effects on work, cooperation, innovation, and public policy.
As to the arrow of causality, if such exists, the claim of the present
volume is that ethical theories and the extent to which they are internalized
within a community is largely determined by non-economic factors but not
entirely so. Philosophers and theologians rarely use markets as the primary
source of their ethical and theological theories, although many find it useful
to use commonplace economic activities to illustrate their theories.
Partly with such effects in mind, firm owners (and the personnel
departments of large firms) will attempt to identify persons with
productivity-increasing dispositions, many of which are ethical in nature.
Competition for such employees tends to increase the employment
opportunities and salaries of persons who have internalized
market-supporting ethical systems.
These larger rewards, as well as the more frequent choice settings in
which ethically relevant choices are made within firms and markets, tend to
encourage the development of those market-supporting dispositions. The
relationship between ethics and commerce is a boot-strapping process,
rather than a unidirectional one.
Nonetheless, the internalized ethics that exist at a point in time play a
central role in societies that commercialize by allowing extended markets to
develop, innovation to take place and by providing broader support for
political institutions and public policies that help trading networks and
economic organizations to flourish. Without these normative dispositions, it
is likely that both the informal and formal rules of the game would inhibit or
block innovation and commercialization, rather than to accept or promote
them.
Without ethical support, markets would still exist in every civil society,
but they would be much smaller and much less productive. In that sense at
least, the commercial society may be said to have moral foundations.
As internalized norms that are supportive of commerce become more
commonplace and more strongly internalized, new market opportunities
emerge along with pressures for political reforms that support economic
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Ethics and the Commercial Society: Ch. 12
Economic Progress and Ethics: Commerce and the Better Life
Inglehart, R. (1997) Modernization and Postmodernation: Cultural,
Economic, and Political Change in 43 Societies. Princeton: Princeton
University Press.
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