Development as Freedom (44 page)

Despite its effectiveness, capitalist ethics is, in fact, deeply limited in some respects, dealing particularly with issues of economic inequality, environmental protection and the need for cooperation of different kinds that operate outside the market. But within its domain, capitalism works effectively through a system of ethics that provides the vision and the trust needed for successful use of the market mechanism and related institutions.

Successful operation of an exchange economy depends on mutual trust and the use of norms—explicit and implicit.
¹⁸
When these behavioral modes are plentiful, it is easy to overlook their role. But when they have to be cultivated, that lacuna can be a major barrier to economic success. There are plenty of examples of the problems faced in precapitalist economies because of the underdevelopment of capitalist virtues. Capitalism’s need for motivational structures that
are more complex than pure profit maximization has been acknowledged in various forms, over a long time, by many leading social scientists, such as Marx, Weber, Tawney and others.
¹⁹
That nonprofit motives have a role in the success of capitalism is not a new point, even though the wealth of historical evidence and conceptual arguments in that direction is often neglected in contemporary professional economics.
²⁰

A basic code of good business behavior is a bit like oxygen: we take an interest in its presence only when it is absent. Adam Smith had noted this general tendency in an interesting remark in his “History of Astronomy”:

What may not cause wonder or surprise in Zurich or London or Paris may, however, be quite problematic in Cairo or Bombay or Lagos (or Moscow), in their challenging struggle to establish the norms and institutions of a functioning market economy. Even the problem of political and economic corruption in Italy, which has been much discussed in recent years (and has also led to radical changes in the political equilibrium in Italy), relates a good deal to the somewhat dualist nature of the Italian economy, with elements of “underdevelopment” in some parts of the economy and the most dynamic capitalism elsewhere in the same economy.

In the economic difficulties experienced in the former Soviet Union and countries in Eastern Europe, the absence of institutional structures and behavioral codes that are central to successful capitalism has been particularly important. There is need for the development of an alternative system of institutions and codes with its own logic and loyalties that may be quite standard in the evolved capitalist economies, but that are relatively hard to install suddenly as a part of “planned capitalism.” Such changes can take quite some time to function—a lesson that is currently being learned rather painfully in the former Soviet Union and in parts of Eastern Europe. The importance of institutions and behavioral experiences was rather eclipsed
there in the first flush of enthusiasm about the magic of allegedly automatic market processes.

The need for institutional developments has some clear connection with the role of codes of behavior, since institutions based on interpersonal arrangements and shared understandings operate on the basis of common behavior patterns, mutual trust and confidence in the other party’s ethics. The reliance on rules of behavior may typically be implicit rather than explicit—indeed so implicit that its importance can be easily overlooked in situations where such confidence is not problematic. But wherever it
is
problematic, overlooking the need for it can be quite disastrous. The emergence of Mafia-style operations in the former Soviet Union has recently received some attention, but to deal with this issue we have to examine its behavioral antecedents, including Adam Smith’s analysis of the far-reaching role of “the established rules of behaviour.”

Behavioral codes vary even among the developed capitalist economies, and so does their effectiveness in promoting economic performance. While capitalism has been very successful in radically enhancing output and raising productivity in the modern world, it is still the case that the experiences of different countries are quite diverse. The successes of East Asian economies (in recent decades), and most notably of Japan (stretching further back), raise important questions about the modeling of capitalism in traditional economic theory. To see capitalism as a system of pure profit maximization based on individual ownership of capital is to leave out much that has made the system so successful in raising output and in generating income.

Japan has frequently been seen as the greatest example of successful capitalism, and despite the longish period of recent recession and financial turmoil, this diagnosis is unlikely to be completely washed away. However, the motivation pattern that dominates Japanese business has much more content than would be provided by pure profit maximization. Different commentators have emphasized distinct motivational features in Japan. Michio Morishima has outlined
the special characteristics of the “Japanese ethos” as emerging from particular features of the history of Japan and its tendency toward rule-based behavior patterns.
²²
Ronald Dore and Robert Wade have identified the influence of “Confucian ethics.”
²³
Masahiko Aoki has seen cooperation and behavioral codes in terms that are more responsive to strategic reasoning.
²⁴
Kotaro Suzumura has emphasized the combination of commitment with a competitive atmosphere and reasoned public policy.
²⁵
Eiko Ikegami has stressed the influence of Samurai culture.
²⁶
There are other behavior-based accounts as well.

Indeed, there is some truth even in the apparently puzzling claim made in
The Wall Street Journal
that Japan is “the only communist nation that works.”
²⁷
That enigmatic remark points to the nonprofit motivations underlying many economic and business activities in Japan. We have to understand and interpret the peculiar fact that one of the most successful capitalist nations in the world flourishes economically with a motivation structure that departs, in some significant spheres, from the simple pursuit of self-interest, which—we have been told—is the bedrock of capitalism.

Japan does not, by any means, provide the only example of a special business ethics in promoting capitalist success. The merits of selfless work and devotion to enterprise in raising productivity have been seen as important for economic achievements in many countries in the world, and there are many variations in these behavioral codes even among the most developed industrial nations.

To conclude the discussion of different aspects of the role of values in capitalist success, we must see the system of ethics underlying capitalism as involving a good deal more than sanctifying greed and admiring cupidity. The success of capitalism in transforming the general level of economic prosperity in the world has drawn on morals and codes of behavior that have made market transactions economical and effective. In making use of the opportunities offered by the market mechanism and greater use of trade and exchange, the developing countries have to pay attention not only to the virtues of prudential
behavior, but also to the role of complementary values, such as the making and sustaining of trust, avoiding the temptations of pervasive corruption, and making assurance a workable substitute for punitive legal enforcement. In the history of capitalism there have been significant variations within the basic capitalist behavioral codes, with divergent achievements and experiences, and there are things to be learned there as well.

The big challenges that capitalism now faces in the contemporary world include issues of inequality (especially that of grinding poverty in a world of unprecedented prosperity) and of “public goods” (that is, goods that people share together, such as the environment). The solution to these problems will almost certainly call for institutions that take us beyond the capitalist market economy. But the reach of the capitalist market economy itself is, in many ways, extendable by an appropriate development of ethics sensitive to these concerns. The compatibility of the market mechanism with a wide range of values is an important question, and it has to be faced along with exploring the extension of institutional arrangements beyond the limits of the pure market mechanism.

Problems related to behavioral codes that have received most attention in recent deliberations include economic corruption and its links with organized crime. In Italian discussions on this subject, the role of what have been called “deontological codes” has been much invoked in public discussions. The possible use of such codes of honor and of duty in combatting illegal and unfair procedures in influencing public policy has received attention, and this line of remedy has been considered even as a way of reducing the hold of the Mafia on government operations.
²⁸

There are social functions that an organization like the Mafia can perform in relatively primitive parts of the economy, in supporting mutually beneficial transactions. The functional roles of such organizations depend greatly on the actual behavioral modes in the legal and above-the-counter economy. One example is the part played by such organizations in ensuring the enforcement of contracts and deals, as Stefano Zamagni and others have discussed.
²⁹
The market system requires arrangements for implementation, to stop a contracting party from letting others down. Such enforcement can either come from the law and its implementation, or—alternatively—be
based on mutual trust and an implicit sense of obligation.
³⁰
Since the effective reach of the government can be limited and slow in this field, many business transactions proceed on the basis of trust and honor.

When, however, the standards of market ethics are not yet established, and feelings of business trust are not well developed, contracts may be hard to sustain. In such circumstances, an outside organization can deal with the breach and provide a socially valued service in the form of strong-arm enforcement. An organization like the Mafia can play a functional role here and can receive appreciation in precapitalist economies being drawn rapidly into capitalist transactions. Depending on the nature of the interrelations, enforcement of this type may end up being useful for different parties, many of which have no interest at all in corruption or crime. Each contracting party may simply need the “assurance” that the other economic agents are also doing the appropriate thing.
³¹

The part played by enforcement organizations to generate such “assurance” depends on the absence of behavioral codes that would reduce the need for such external enforcement. The enforcing function of extralegal organizations would shrink with an increase in trusting and trust-generating behavior. The complementarity between behavioral norms and institutional reform can, thus, be very close indeed.
³²
This is a very general issue to consider in dealing with the hold of Mafia-like organizations, especially in some backward economies.

While the Mafia is a detestable organization, we have to understand the economic basis of its influence by supplementing the recognition of the power of guns and bombs with an understanding of some economic activities that make the Mafia a functionally relevant part of the economy. That functional attraction would cease as and when the combined influences of legal enforcement of contracts and behavioral conformity related to mutual trust and normative codes make the Mafia’s role in this field quite redundant. There is thus a general connection between the limited emergence of business norms and the hold of organized crime in such economies.

The need to go beyond market rules has been much discussed recently in the context of environmental protection. There have been some arrangements—and many proposals—of governmental regulations as well as provision of appropriate incentives through taxes and subsidies. But there is also an issue of ethical behavior, related to environment-friendly norms. This question fits right into the type of considerations that Adam Smith discussed extensively in
The Theory of Moral Sentiments
, though the protection of the environment was not a specific problem that had been prominent at that time (nor one to which Smith had paid much explicit attention).

There is also a connection here, as was discussed earlier (in
chapter 5
), with Smith’s deep worry about the wastefulness that results from activities of “prodigals and projectors.” He had sought to reduce the influence of wasteful investment through the control of interest rates, since he was afraid of the wasteful investor’s greater ability to offer high interest without being able to do much good to the life on this planet.
³³
Smith had linked his support for intervention with the need to control usury—a recommendation for which Jeremy Bentham took him to task.
³⁴

The modern-day “prodigals and projectors” are involved in fouling the air and the waters, and Smith’s general analysis has much relevance to understanding the problems and difficulties they generate as well as the different lines of remedy that may exist. The respective roles of regulation and behavioral restraints are important to discuss in this context. The environmental challenge is part of a more general problem related to resource allocation involving “public goods,” where the commodity is enjoyed in common rather than separately by one consumer only. For efficient provision of public goods, not only do we have to consider the possibility of state action and social provisioning, we also have to examine the part that can be played by the development of social values and of a sense of responsibility that may reduce the need for forceful state action. For example, the development of environmental ethics can do some of the job that is proposed to be done through compelling regulation.