A Final Exam Question for a History of Economic Thought Course

Steven Horwitz

"The great virtue of the free market is that it requires so little virtue to work effectively."

1. What would Adam Smith say in response to this?

2. What would Ludwig von Mises or F. A. Hayek say?

3. What would Frank Knight, George Stigler, or Gary Becker say?

4. What does Deirdre McCloskey say?

5. What would you say?

Comments

[Barkley Rosser]

That we do not need a central bank because they are evil?
:-)

[Rob]

what's your deinition of virtue?

[steve]

I think it requires the virtue of not resorting to force to get what you want. That may be implied by the definition, free market. But, it still amounts to a great degree of virtue.

[Daniel]

Why are your killing Becker? It should say what does Gary Becker say.

[Steve Horwitz]

I used "would" for Becker not because he's dead but because we don't actually know. In Deirdre's case, we DO know what she thinks about that proposition.

[Charles N. Steele]

Great question!

I just finished writing a HET final exam. My class could answer number 1 because they've read "Saving Adam Smith," an interesting novel addressing the relation between Theory of Moral Sentiments and Wealth of Nations. My course stops before the Marginal Revolution, so I don't know how they'd do on 2-4.

Here are my answers:

1. Smith would have a fit.

2. Mises would point out that "work effectively" is normative, as is virtue. I think he would find the statement meaningless. For him, liberalism is a combination of positive economics and normative utilitarian ethics. The ethics are a precondition for the market system to survive, but not to function. I have no idea what Hayek would say.

3. I don't know about Knight -- Stigler and Becker would agree. I am suspicious about lumping Knight with them, because he had a very different view of markets than his Chicago children.

4. McCloskey gave a great lecture at the AEA meetings last year, and she agrees with Smith.

5. I agree with Smith and McCloskey, and Mises as well.

Post more such questions!

[Charles N. Steele]

Correction on 3: Stigler and Becker would agree *with the proposition.*

[Greg Ransom]

I'm at a loss come up with a simple answer for what Hayek might say.

Hayek talks about moral merit, the evolution of negative rules
of just conduct, and such, but not alot about virtue.

[Charles N. Steele]

The friend who told me about this post gives this answer: "I think Hayek would say no. (Based on my reading of Chapter 4 of CoL). Most succinctly he says: …freedom has never worked without deeply ingrained moral beliefs and...coercion can be reduced to a minimum only where individuals can be expected as a rule to conform voluntarily to certain principles. (62) But he seems to intimate these ideas in longer but less clear passages in the same chapter."

I concur. Again, it depends on the definition of "virtue," of course.

[Mario Rizzo]

Yes, the definition of virtue is of the essence here. Consider the vast number of things people have considered virtue: Obedience to the "powers that be" -- ordained by God (St. Paul),dying for one's country,etc.

Adam Smith says that society can survive without beneficence but it cannot survive without justice -- both are virtues. Sometimes I think this talk about *vaguely defined* virtues being necessary for markets is a invention of conservatives who want to enlist free-market economists in their ranks. My bottom line is that let's define terms precisely. Some virtues are necessary and some are not. Not reading pornography, not practicing birth control, not aborting fetuses, not smoking, not overeating are all considered virtues by some people. The market can survive and thrive even if people avoid all of these "virtues."

[Jerry O'Driscoll]

Yes to Mario's comments.

It would be difficult to imagine free markets working w/o truth-telling. And we now bear the economic consequences of trying to have prosperity w/o thrift. A commitment to hard work also helps.

[Flash Gordon]

Smith would say that two businessmen do not confer but that some conspiracy against the public will be afoot. Hayek would say that the spontaneous order that emerges in a free market is superior and will be more virtuous than a centrally controlled economy. I say a free market is the necessary and perhaps the only check on government mischief.

[amv]

I think a common denominator of Smith, Hayek, and Becker is that the economic system does not rely on any kind of individual excellence: that individuals neither need to be of virtue, nor rational, nor 'informed' for the system to converge.

[Charles N. Steele]

Prof. Rizzo's comment hits the mark exactly. "A plus" in HET, at least on the Theory of Moral Sentiments essay.

(I've never before had the opportunity to grade one of my own professors!)

[Mick Rolland]

From a Hayekian political-institutional point of view, this sentence is most true when applied comparatively to the two major other systems: interventionism and socialism.

Managers in state enterprises and politicans have a larger concentration of power and less direct and constant accountability than managers who have to cater to the market. Therefore, if they want to serve society instead of their own personal goals (power, status) they have to be much more virtuous.

Adam Smith's Theory of Moral Sentiments, as other commenters have stated, supplies the rationale for this comparative advantage of private enterprise.

Henry Hazlitt always insisted that capitalism works best when coupled with a very universal and understandable ethics: Respect of others' property and life, honourability (truth-telling) and commitment to one's word and contracts.

Socialism and interventionism require much more sophisticated, demanding and unreliable ethics: self-sacrifice, obeyance to orders, altruism. Witness Robespierre's insistance on virtue as the keystone of revolutionary government.

[Jim Otteson]

Sorry to come so late to the discussion. Thanks, Steve, for the intriguing questions.

I think the Adam Smith question is difficult to answer, because, as others have noted, it all depends on what one means by the key terms.

Smith argues that a market can operate well without assuming an expansive benevolence on anyone's part. He also argues that markets tend to channel people's natural self-interest toward generally beneficial ends, even without anyone's intending to do so. By implication, then, Smith's argument is that a commercial society does not require an implausible transformation of human nature in order to function well.

Where in there is "virtue"? The four central virtues Smith identifies in TMS are prudence, beneficence, justice, and self-command. "Justice" he defines as (1) respecting the "life and person of our neighbour," (2) respecting "his property and possessions," and (3) respecting his "personal rights" that are generated by voluntary contracts or "promises of others." Smith further argues that "self-command" is required to act in accordance with any virtue, so it is a prerequisite for all virtuous behavior, including "just" behavior. Smith's argument, then, is that a commercial society can operate efficiently and well if people employ their "self-command" to respect "justice."

I said that I thought the Smith question was hard to answer. That's because when people ask questions like that, they usually have a conception of "virtue" in mind that is far more expansive than, or at least different from, what Smith articulates. They usually include charity, self-sacrifice, generosity, etc. in the mix. Smith's conception of commercial society does not require those virtues to function well. But that does not mean that Smith's conception requires no virtues, and it does not mean that Smith disdains those other virtues. Justice (and therefore self-command) are, according to Smith, the pillars that uphold the edifice of society; the other virtues constitute the "ornament which embellishes" society, making it much more pleasant to live in.

So I would say that the answer to the Smith question is "yes," meaning that Smith seems to believe that a relatively minimalist conception of virtue is required for markets to function. But I hasten to add that he would find a society in which people displayed no other virtues than self-command and justice not particularly inviting, even if prosperous.

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[Michael J. Smith]

In a true free market there are no controls, therefore, profit motive is everything. Whatever it takes to eliminate competition is critical for busines enterprises. As competitors are eliminated, surviving businesses increase profits. There is no virtue here and none should be expected. Only in reasonable societies where fairplay is important would there be responsible controls to prevent monopolies. Then virtue is part of the mix.

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