Is the moral-economic fallacy universal?

If anyone remembers anything from Adam Smith’s Wealth of Nations (apart from the number of distinct operations required to make a pin, which greatly impressed me at the time), it is that famous sentence that describes human motives for trade:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

scrooge Until recently, I thought this very simple point had become commonsense, at least in educated circles. But then, at a recent dinner in pleasant and civilized company, as I was reflecting how it is such a Good Thing that we have the likes of Samsung, Google and Apple battling it out and giving us ever better products, several people turned to me and said something like: “Poor lamb, are you really that naive? Do you really think they’re trying to make stuff for your benefit? Don’t you know all these people ever want is to make more profit?”

Let us call this the moral-economic fallacy, the notion that the moral tenor of motives for economic action (people want to have more for themselves, which seems both “natural” and not very virtuous) contaminates, so to speak, the effects of such economic action, which cannot really be positive if their are rooted in base motives.

The moral-economic fallacy seems widespread. In a recent draft paper, Amit Bhattacharjee and colleagues report that people intuitively associate profit and social harm. As they say, “otherwise identically-described organizations are seen as providing less value and doing more harm when described as “for-profit” rather than non- profit […] Study 4 demonstrates that people hold a zero-sum conception of profit”. The ever prolific Bryan Caplan posted an economist’s comment on these striking results.

Here I am more interested in the psychological makeup involved: What triggers this kind of belief? From an evolutionary cognitive standpoint, I can see two conflicting perspectives on the question.

If you consider human moral psychology, it seems unsurprising that people would generally expect bad intentions to lead to bad outcomes. That is generally the case, after all… So this would be simply a case of people extending ordinary moral intuitions to a domain where they do not actually apply.

But that’s not quite satisfactory, After all, trade has been going on for eons, certainly before we reach anatomically modern H. sapiens, and capacities for social exchange are certainly part of the evolved cognitive tool-box. Besides, we are told by eminent evolutionists that an important part of moral intuitions evolved as tools for the establishment of mutually advantageous social interactions. But freely transacted trade is the quintessential mutually advantageous interaction.

So what gives? In our cognition and culture perspective, we generally expect that theoretically informed cross-cultural comparisons can provide important evidence concerning cognitive architecture, so I would like to ask the community the following questions:

Q1. Is the moral-economic fallacy widespread in different places, with different degrees of market integration, different economic institutions?

Q2. Is it even actually widespread in modern Western places? After all, there may be important differences depending on social roles, with e.g. shopkeepers being in touch with their inner Adam Smith, while public servants are not?

Q3. If as I suspect we do not have much evidence, why aren’t we studying all this?

Comments (7)
Smith, yes! Mandeville, no!
Olivier Morin
Tuesday, 20 November 2012 09:40
Adam Smith's butcher is (I think) the wrong example to think of here. If Adam Smith's butcher was like today's butchers, he probably made (like most of his colleagues working for the food industry today), pitifully thin margins. He would keep around half a cent for every dollar you gave him. Less than one cent. Financial services keep more than ten cents on every dollar that comes their way. They make more profit than mining, oil and gas, defense, computers, semiconductors, engineering.  

One way to interpret this is to say that financial services are ten times more useful. And I agree that in theory this *might be true. Granted, profit often signals social use. Granted, greed may sometimes be compatible with the public interest. Granted, self-interest does not, by itself, pollute a useful deed.

But just because this interpretation is theoretically coherent does not mean it is the only reasonable one, in every possible situation. Enormous profits may also be a sign that something is going wrong: a sign that somebody is not playing by market rules, is keeping normal competition at bay, is getting an unfair rent from the state, or is making everyone else incurring huge risks. Not a fool-proof sign, just a cue.

Our mutual friend Adam Smith had much to say about the huge profits made by the East India Company: it thrived on corrupting the British government, using its guns and its mercantilist policies to bully the competition. Icelandic banks were abnormally profitable, for a time, because they were taking insane risks. The tobacco industry makes abnormal profits because the public health costs of its activity are suffered by someone else. The financial sector made abnormal profits by privatizing their gains and nationalizing their losses.

I haven't read Bhattacharjee et al.'s study (and apparently, few people read the draft). (Your link is to an abstract included in a conference submission.) But I would not point a finger at the subjects and call them deluded when they see something fishy with enormous profits (the study is about big corporations, not butchers). Nor would I rush to judge your dinner company when they worry that greed in big corporations may lead them to form monopolies, seek rents from the state, harm people's health, put everyone at risk, etc. They may be right or wrong, depending on the case, but I see nothing intrinsically delusional in their misgivings. Do you?
Fallacy or experience-based heuristic?
Radu Umbres
Tuesday, 20 November 2012 18:14
Thanks Pascal for this post! 

I quite agree with Olivier that it does not seem like a clear fallacy on the behalf of people who suspect unbridled self-interest and huge profitability. But there is something which troubles me more here: is it that people are suspicious of markets or market agents? These are two different things, and Caplan seems to brush over the difference. The study did not test attitudes towards abstract market mechanisms per se, but towards outcomes of markets which are often imperfect and opaque. Even other interpretations of their results are problematic:

Problem 1: economists and businessmen are enlightened people who know about the social advantage offered by markets while everyday people are myopic. Interestingly, if there is anything that businesses hate, that is market competition - ask Samsung if they would like Apple to disappear. But ask the same question from a consumer - she would probably want both to exist and as many more as possible. Moreover, your example of Samsung versus Apple is quite interesting: these two giants are now engaged in prohibitively expensive patent suits which are meant to keep other companies out of the game, rather than create efficient markets. If you are a new smartphone company, you now need hundred of millions to pay lawyers to be one of the "big boys". So, am I guided by the "fallacy" i.e. suspicious of monopolistic profits? You bet. And so was Adam Smith when he wrote that whenever businessmen congregate, sooner or later they will discuss about cornering the market, establishing cartels, etc. ( a side note: Caplan's "fun scatter plot" has Dow (of Bhopal fame) and giant banks as rated with little social value and huge profits - I wonder why?) 

Problem 2: The self-interest of the butcher is what provides us with steaks. Well, yes and no. Meaning that self-interest alone is not sufficient for mutually advantageous economic interaction. In one of my thesis chapters I discuss exactly this problem: Romanian villagers have no trouble knowing that pretty much everyone in their village (or world for that matter) is ontologically self-interested. But self-interest is a barrier for exchanges when there are transaction costs: uncertainty, enforcement of contracts, defaults, captive customers, etc. And this is not a problem limited to my village - it is perennial, as Williamson and others have argued. For my villagers, expressions of self-interest alone are dangerous - and most of the times they are right to be suspicious! Business partners which do not make credible commitments to fairness and reciprocity (including a symbolic self-effacing of self-interest) are likely to default. When they succeed in creating markets, it is as much a matter of self-interest as it is a matter of guaranteeing mutual interest. As Massim navigators say, the one who carries on his kula like a gimwali is not to be trusted (noted by Malinowski)

Another way to put is, before Smith there was Hobbes. When Adam Smith wrote WoN, he took the problem of the social contract as solved, but he returned later to the problem in the Theory of Moral Sentiments. Even with strong states, stable property rights, courts and whatnot, unchecked self-interest can find a way to disrupt socially-beneficial exchanges. One of the ways out of this eternal problem is to seek partners which are both self-interested and interested in the other's interest - Adam Smith talks about empathy. The problem is that many economists (and enough anthropologists) make a (fallacious in my opinion) either/or distinction between self-interest and altruism when they often go hand in hand. The butcher who tells you that filet mignon could be better than brisket for your chateaubriand dinner shows concern for his client's welfare and, unsurprisingly, stays longer in the business than the butcher who simply keeps an eye on the profit-and-loss balance. 

My quick answers would be:
A1. it is not necessarily a fallacy. It can be a heuristic evaluation of agents which is indeed widespread and takes multiple cultural incarnations. It could be a disposition evolved a long time before states existed and economic exchanges are policed by agents and third parties rather than impersonal institutions. But the imperfection (possibly unsolvable) created by transaction costs makes the heuristic quite useful in monitoring and judging actors in many economic environments, including advanced capitalism.
A2. Why not the other way around? Public servants (such as economic professors like Caplan or EU regulators) are more in touch with their inner Adam Smith than successful butchers who know that market mechanisms are neither perfect, nor sufficient for good business. 
A3. Some of us are, but a wider comparative analysis is much needed. Thanks again for the thought-provoking post!


fallacy or misunderstanding terms?
Rosalie Esther Ivády
Wednesday, 28 November 2012 04:14

Thank you for the article Pascal.

Olivier and Radu already having stated most of what I also believe to be at the heart of the problem (a posterior expression of gratitude hereby granted to both commentators for making my task easier) I'd only like to add that "profit" may have various interpretations.


As  defined by economists (very simplified here) profit is the difference in total revenue/price and total cost and in the butcher's case total cost I'd assume would include the invariable cost of keeping himself and his family up, which is very much in the interest of customers - unless they would like to go without meat of course. In traceably small communities "profit" as such therefore is either non-existent (also claimed to be true in perfectly competitive markets by some theories) or minimal, and assuming a well-informed community this holds true for every member making it easy not only to recognize, but also to accept others' self-interest.


On the other hand, if profit as such does exist, it is easily inferred that the reason is incurring prices that are (perhaps unreasonably) higher than total costs (including costs of living of the self-interested provider). Further layers are sedimented on the problem in the case of  giant multinationals (particularly if shares or stocks are involved), where "making profit' - i.e. incurring higher prices than total costs, the process often gaining a ghastly overtone of a Dictator Game if the good or service is necessary without complementary goods available - is hardly a secret aim of the organization. The problem is exacerbated further with the separation of management and investors, where the latter are easily perceived as free-riders, because of the lack of personal effort invested to gain benefits, which is not the case for the majority of consumers.


Hence profit is easily reinterpreted as undeserved financial advantage gained using means that are not considered "fair" by the majority of consumers. In addition the widespread knowledge in modern societies about Veblen/Giffen goods and high prices of brand new products that are bound to fall as soon as a new innovation comes out (particularly typical in the techlology sector) reinforces the belief that the costs and needs of the provider can be far below the incurred price. As pricing procedure is not usually public information, customers can never be sure about the fairness of the price and consequenty about whether the amount of self-interest of the provider involved can be considered fair or unfair.


Therefore the question of moral-economic fallacy might be related to the perceived fairness of self-interest, rather than recognizing and (to a certain degree) accepting self-interest as such. As a conclusion let me recap with short answers to the specific questions posed:

Q1. Is the moral-economic fallacy widespread?

I would assume that inasmuch as we consider fairness as a concept widespread and existent though moderated in a culturally idiosyncratic way, so is the moral-economic fallacy.

Q2. Is it even actually widespread in modern Western places? 

The given example itself would strongly indicate that Western societies are perhaps the most likely places where such a fallacy could thrive, given that costs, values and prices of commodities tend to be more hidden from consumers for different reasons, including lack of expertise on all goods (how much does an Apple product really cost in total?), large communities resulting in imperfect information and deliberately non-transparant pricing.

Q3. If as I suspect we do not have much evidence, why aren’t we studying all this?


Now that, I do not know. All I have is a conjecture (or conspiration theory if you like) that it might not be in the best interest of all parties that such studies be conducted, thus research funds might run scarce in the field. The bad news about such conspiration theories (over and above my dislike for them) is that they are like persecutory delusions: the fact that one holds them, does not in and by itself rule out the possibility of the truth of the content of the belief (or to state more briefly: obsession with being pursued, does not necessarily mean that no one is actually after you).



Thank you for the intriguing article and the valuable posts again.

more on zero-sum thinking
Martin Stehberger
Wednesday, 05 December 2012 15:03
Why is all this not studied more? Maybe there is not enough consensus about the underlying economics issues. If enough scholars are themselves victims of the fallacies, so to speak, then debates about the origin of the fallacies will turn into debates about whether they are fallacies after all. The economists themselves do have the necessary consensus, so they should definitely study it much more.

As for the moral-economic fallacy, maybe it can be salvaged as a useful heuristic as Radu describes, but it is also a direct consequence of a clear fallacy, that of a zero-sum world: self-interest contaminates a transaction morally since in a zero-sum world the self-interested person's profit must be offset by someone else's loss.

One writer, in 2004, speaks of the "Pie Fallacy". From paulgraham.com/wealth.html:

When wealth is talked about in this context, it is often described as a pie. "You can't make the pie larger," say politicians. [...] What leads people astray here is the abstraction of money. Money is not wealth. It's just something we use to move wealth around. So although there may be, in certain specific moments (like your family, this month) a fixed amount of money available to trade with other people for things you want, there is not a fixed amount of wealth in the world."

I have written on this fallacy in my comment after your previous post ("Why don't people like markets"). Regarding the relationship between zero-sum thinking and capacities for social exchange, the article by Cosmides and Tooby that you link to for the latter topic has an introductory example (a quote from Marshall 1976) where the zero-sum worldview seems to do fine:

Instead of keeping things, [!Kung] use them as gifts to express generosity and friendly intent, and to put people under obligation to make return tokens of friendship ... In reciprocating, one does not give the same object back again but something of comparable value.

Eland fat is a very highly valued gift ... Toma said that when he had eland fat to give, he took shrewd note of certain objects he might like to have and gave their owners especially generous gifts of fat.

There is no need for reflection on the fact that abstract economic value (different meaning of "value"!) has been created, in addition to bolstering the friendship. In fact, making it explicit might only lead to the awkward question whether this value is shared equally, as, say, the spoils from hunting would presumably be (which don't contradict a zero-sum worldview since there is a clear loser: the hunted animal).











Comments on Pascal's post
Jonathan Mair
Saturday, 22 December 2012 22:35
Thanks Pascal and previous commenters -- there's always interesting things going on on this site...sorry I'm a bit late to the table on this one.

  People often don't like market exchange -- that's clear. But before trying to provide a single explanation for that observation, it is necessary to understand that dislike better. It can't be taken for granted that they dislike it for the same reasons.

  Here are some candidate reasons:

  (1) zero-sum view of profit

  (2) a view that any instrumental/self-interested action cannot also be moral, or, in a stronger version, that such action is necessarily immoral

  (3) a view that market exchange violates norms of reciprocity

  (4) a view that market exchange permits the emergence of inequalities that violate egalitarian norms

  (5) a view that market exchange permits wealth, power and status to flow into the hands of those who possess inferior virtues (wilyness, ruthlessness), rather than those who possess superior virtues (skill in battle, magnanimity, say)

  These views do not logically follow from each other, and we can expect that they may or may not coexist in practical situations.

  For example, the zero-sum view of profit does not entail the view that people who seek profit are up to no good. It may be that seeking wealth and good fortune, even if this has to be at the expense of others *in general* is considered ethically valuable.

  I think this is often the case in my field -- in China -- where wealth and good fortune are highly valued and are often seen as conditions of, and part and parcel of, a virtuous life. That doesn't mean there are no obligations -- wealth brings the opportunity and the obligation to be magnanimous. So my answer to Q1 would be 'no'.

  But what's mostly absent there in my experience is the idea that one can never do good by someone when one is treating them as a means to an end rather than an end in themselves. This is the root of market objection number (2) above, but is not necessarily behind the others.

  I realised how strongly this Kantian principle was embedded among my (mostly British) students in Manchester last year when I was trying to teach them about ethics of self-cultivation in Buddhism. I told them that the goal of ethical action in these traditions was to perfect the self by practising virtues of compassion, generosity, etc. They were extremely resistant to seeing this as anything related to ethics or the good, because the ultimate object of concern is the self, and some of them left the class thinking Buddhists are pretty bad people!

  For the (Taiwanese/international) Buddhists I'm working with at the moment, this appears to be a complete non-issue: everyone works on his or her self, in so doing we work together on society, we all become more beautiful, happy and good people in a more beautiful, happy and good society. They have no problem with responsible capitalistic business -- they are basically with Adam Smith, and they think it's important and even teach government accredited MBAs on three continents.

  I think the Kantian objection to trade goes a long way to answering Q3. Anthropologists and many other academics tend to be strong Kantians. When they see people not liking markets, they tend to assimilate their (diverse) complaints to their own specific objections to trade. I made this argument in a debate recently about the anthropology of 'neoliberalism' -- i.e. that anthropologists writing on so-called 'neoliberalism' often take any criticism of money, markets, penny pinching, etc. to be a criticism of the immoral instrumentality of the market principle. It would, for example, be possible to find complaints among the Buddhists I mentioned about the dangers of consumerism, but it would be completely wrong to extrapolate from this a general opposition to trade, markets and money.

  It would be very interesting to know how widespread the idea that moral and instrumental action are fundamentally opposed is. My impression is that it is not universal. Philosophers of ethics such as Alasdair MacIntyre and Bernard Williams would argue it's the historically exceptional outcome of an Enlightement project.
 
The zero-sum idea of profit seems quite intuitive, but doesn't chime with reports of hunters' gift-relationship metaphors (Nurit Bird-David? am I remembering right?), or with the ideas reported for the areas I have worked in China/Mongolia about beckoning fortune (fortune => more fortune, lose a bit and more will follow it). Perhaps there's more than one intuitive model, just as we intuitively believe the gambler's fallacy, and its opposite, the hot hand fallacy.

  ***

@Olivier -- Off topic here, but financial services taking 10x the margin that a butcher takes does not need to mean they are 10x as useful as a butcher for it to be a good thing they do what they do, right? It is not a given that profit should reflect usefulness. The interesting thing about our views on fairness in economic transactions is how plural and mutually incompatible those views are...a fair profit should reflect demand, reflect the costs that went into the product, reflect the labour that went into the product, reflect the opportunity cost of giving up the product, reflect the opportunity cost of not producing a different product, reflect the usefulness of the product, reflect the needs of the producer to live, reflect the needs of the producer to stay in business, reflect the ability of the the purchasers to pay, reflect established/customary prices...and so on and so on. Most of us think most of these things simultaneously and most of us are capable of adducing several of them in a single conversation, but no two of them are actually compossible except if, by coincidence, the prices under two or more criteria happen to converge.

@Radu -- "The problem is that many economists (and enough anthropologists) make a (fallacious in my opinion) either/or distinction between self-interest and altruism when they often go hand in hand." Exactly. That's the Kantianism I'm talking about, right there -- I also think I agree it's fallacious, though I'm not sure I'm decided about it yet.

@Rosalie -- on fairness. I don't agree that fairness of profit as a function of the relation of price and cost is an issue everywhere. For example, 'Veblen goods' are often considered to have a very important function that wouldn't function if they weren't expensive and exclusive. In fact, in some settings (again, I'm thinking contemporary China, but obviously it's a big place containing very diverse views), not paying full whack for a pricey brand could be considered a bit infra dig, or 'small hearted' (and therefore morally suspicious) for someone of a certain standing, regardless of how much it cost the seller to produce/buy the product.

@Martin - "Maybe there is not enough consensus about the underlying economics issues. If enough scholars are themselves victims of the fallacies, so to speak, then debates about the origin of the fallacies will turn into debates about whether they are fallacies after all." That needn't be a problem -- the same could be said for religion...we don't need to know the truth of the matter in order to observe and attempt to explain widespread attitudes that are underdetermined by evidence. In fact, though mathematicians do understand probability quite well, I don't need to understand probability (I probably don't) or agree with you about it in order for us to have a conversation about why humans seem to have some rather particular intuitions about chance.
Economics and Calvinism
Ilkka Pyysiäinen
Monday, 31 December 2012 16:00

Pascal’s question could be translated in theological language: is something good because “the market” (God) wants it, or does “the market” (God) want something because it is good? Economist Robert H. Nelson has written extensively on economics as a secular religion. Economic progress has become the ultimate legitimating factor and an unquestionable basic premise in modern societies.

Or not quite so; environmentalism has come to challenge the semi-divine status of economics. Nelson interestingly argues that both lines of thinking have their roots in Calvinism. Weber’s thesis on the spirit of capitalism concerned especially Calvinism, but also environmentalism can be seen as Calvinism minus God.

In traditional Calvinism, God could be found in the wilderness, while in modern environmentalism the related Old Testament language has been modernized. Disobedience to God leads to various kinds of natural catastrophes that environmentalism now predicts to follow from human attempts to use natural resources for the benefit of humans who have been set apart from the rest of the biological nature. Nelson calls this tension the “new holy war” (see his book The New Holy Wars, 2010).

 
ex ante/ex post
Olivier Massin
Tuesday, 26 February 2013 14:02

(just discovered this site and  post, both very interesting !). 


(i) what you call the moral-economic fallacy is also called "Montaigne Fallacy" after his claim "that the profit of one man is the damage of another".


(ii) it might be useful pointing out that though economic exchange has to be mutually beneficial ex ante, is does not have to be so ex post. People exchange because they think they will all benefit from those exchanges, but might be disapointed afterwards. Denying that exchanges are, by necessity, mutually beneficial ex post is not a fallacy, and might perhaps help explain the moral-economic fallacy: having bought a disapointing product leads us to retrospectively construe the exchange as unfair.

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