Markets or Morals?

July/August 2000 -- In Human Action, Ludwig von Mises wrote:

The direction of all economic affairs is, in the market society, a task of the entrepreneurs.Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme.

But they are not. They are bound to obey unconditionally the captain's orders.

The captain is the consumer. Neither the entrepreneurs nor the farmers nor the capitalists

determine what has to be produced. The consumers do that. If a businessman does not

strictly obey the orders to the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm.

If Mises has not, strictly speaking, introduced the metaphor of political rule into the economic realm, he has come close. He has introduced the metaphor of the economy as a tightly run business corporation, where some people (the consumers) are bosses giving orders, and others (the entrepreneurs and capitalists) are workers, carrying out orders.

In Capitalism, George Reisman presents a similar but more technical description of the free market:

If the consumers decide to buy more of product A and less of product B, the production of

A automatically becomes more profitable and that of B less profitable. Capital then flows to

A and away from B. The production of A is thus expanded and that of B contracted, until,

once again, both A and B afford neither more nor less than the general or average rate of profit.

For Objectivists, these have to be troubling analyses. How can one reconcile the foregoing descriptions of the market with what is said in The Fountainhead regarding one businessman-entrepreneur: Howard Roark. When Mrs. Wayne Wilmot comes to Roark for an English Tudor house, the following scene occurs:

"You'll have to go to some other architect, Mrs. Wilmot."

She stared at him incredulously.

"You mean, you're refusing the commission?"

"Yes."

"You don't want my commission?"

"No."

"But why?"

"I don't do this sort of thing."

"But I thought architects..."

"Yes. Architects will build you anything you ask for. Any other architect in town will."

Of course, if any other architect in town will build an English Tudor house, then Reisman's principle about the shifting of demand, profitability, and capital will remain true to all intents and purposes.

But suppose no other architect in town will build an English Tudor house, for the same reason Roark will not. And suppose, in addition, that English Tudor houses are being demanded not only by Mrs. Wilmot but by all or most of the people seeking new homes. What, then?

The short answer is that every architect will soon be out of the home-building business, and new-ho

me buyers will be without English Tudor houses. But that is not supposed to happen under Reisman's picture of the market. Consumers who are willing to pay a good deal more than the cost of their houses would nonetheless be unable to obtain houses. Architects who were willing to provide houses at very little more than the cost of production would be unable to find work. What has become of the market's efficiency?

The dilemma may seem unimportant when based on so unrealistic an example as the one above. But it becomes important if we make the example realistic.

There now exist a number of fine libertarian authors, but they could earn far greater fame and fortune if they wrote from a liberal perspective. Does anyone suppose that they check the market for selling out before putting pen to paper?

Take an even more realistic example, though one of vicious values rather than virtuous values. Capitalists, and George Reisman in particular, have argued that racial segregation would disappear under capitalism.

The businessman seeking profit is vitally dependent on the patronage of customers.

This dependency is expressed in such popular sayings as "the customer is king" and

"the customer is always right." Blacks are customers, and, as they rose economically,

would be more and more important customers. It is absurd to believe that businessmen

would want to turn customers away by denying them access to their premises or humiliating them with such requirements as separate drinking fountains.

But evil men can be as true to their values as good men are to theirs. And if any two sayings do not characterize Howard Roark, they are "the customer is king" and "the customer is always right."

So which virtue shall we claim for capitalism? That its producers are free to stick by their values, despite the demands of consumers? Or that producers will overlook all rational and irrational distinctions among people and products in pursuit of money? And if we claim the former, but not the latter, what becomes of our claim that capitalism provides an ever-shifting, always efficient flow of production and capital?

Kirzner's Creative Entrepreneur

Recently, the distinguished economist Israel Kirzner published two articles bearing on this dilemma in Ideas on Liberty, the journal of the Foundation for Economic Education.

In February, Kirzner contributed "Entrepreneurial Discovery and the Law of Supply and Demand." There, he laid out a picture of entrepreneurial behavior in the free market that emphasized the mental processes required of the producer.

The successful businessman-entrepreneur 'sees' what other market participants have not yet seen; the entrepreneur sees opportunities to buy at one price and to sell at a higher price. To see such opportunities will typically call for (a) superior imagination and vision (since the perceived opportunity to sell at the higher price is likely to exist only in the future) and (b) creativity (since such a profit opportunity is likely to take the form of selling what one buys in innovatively different form, and/or different place, than was relevant at the time of purchase.

With this picture of entrepreneurship, Kirzner has displaced the image of consumer-captains giving orders to helsmen-entrepreneurs who passively obey their orders.

Nevertheless, it appears to be Kirzner's view that entrepreneurs devote their imagination and creativity to nothing but anticipating future consumer wishes and striving to satisfy them. Consequently, his final picture of the market does not differ markedly from that of Mises. The market, for him, is an institution that is always shifting toward economic efficiency, as determined by the best available guesses about future demand. In the March issue of Ideas on Liberty, Kirzner put it this way.

Entrepreneurs act imaginatively and creatively, seeking to identify and to grasp market

profit opportunities (generated by earlier entrepreneurial limitations of vision). As a result

of the interplay of such entrepreneurial acts of vision, product prices and quantities of product

offered for sale tend to be nudged systematically in the direction of the market-clearing price/quantity configuration.

In sum, Kirzner recognizes that entrepreneurs do not respond to consumers' commands, but he does not consider and perhaps does not believe that they respond to anything but expectations about future consumer demand. That they might refuse to respond to such expectations because of their own personal values seems not to come up.

Yet surely it happens. For example, most classical-music audiences are tired of the endlessly recycled standards but totally uninterested in typical contemporary works. A musical entrepreneur could probably make a large profit if he created first-rate compositions that were faithful to the core traditions of the Classical era without being in any way imitative of that era. One cannot be sure why first-rate composers do not take the opportunity to reap such profits, but a likely explanation is that they do not desire to compose in that syle.

Micro versus Macro

In response to Navigator's initial publication of this debate, Charles E. Hinkle sent the following letter:

It is a false distinction to argue the relative sovereignty of consumers versus producers in a capitalistic system. Both are free to choose what to buy and what to produce subject to the contexts they operate within. There is also no inherent conflict between free markets and a moral system based on a rational, self-defined value structure.

A defining characteristic of a capitalistic system is the freedom of choice of both consumers and producers to exchange goods and services having equivalent value to both parties in the transaction. If an individual wants to initiate and grow a business, the individual must generate something that is valued by some subset of consumers, either by meeting the existing needs of a group of consumers or by creating needs that can then be met. This free exchange of value for value between parties is the economic context within which both producers and consumers must operate. An individual [who] generates nothing of value to anyone else is not a producer.

While the producer must provide something worth trading for from a consumer's perspective, the producer also has to act in accordance with [his] personal value structure. It is unsustainable for individuals to act contrary to their true personal value structure for an extended period of time. This psychological context of a personal value structure explains why libertarian authors choose to ignore the larger market currently available to those with a more liberal perspective. For these libertarian authors, the integrity of their ideas occupies a higher level in their personal value structure than that of the bestseller list and its financial rewards.

The individual's choice of a particular personal value structure may limit the size of the market available to that individual as a producer, but that individual producer is free to stick to his values under capitalism. Limiting the size of the market being addressed is good business strategy as well, for market segmentation and target marketing are as fundamental to capitalism as existence and consciousness are to philosophy.

Another context that producers operate within is the social environment that influences [their] customers' attitudes and behavior. Prior to the early 1960s a high percentage of the potential U.S. customer base was tolerant of racial discrimination and a significant percentage in fact demanded racial discrimination. Many producers overlooked the irrational distinctions among individuals presented by racial discrimination, but the size of their market was limited until the social environment began changing forty years ago.

The presence of a large number of consumers and an equally large number of potential producers with different personal value structures assures a flexible and efficient flow of production and capital in a pure capitalist system.

Hinkle's solution, then, appears to lie in considering the micro level and the macro level separately. At the micro level, the producer must create something that he can trade. Over the long haul, however, that which he creates must accord with own fundamental values (adapted for others' contexts, of course). Thus, for one who lives with a view to the long term, the market offers no inducement to pander.

So far, so good. This gives us the sort of market behavior that Howard Roark engages in. But can we also defend the Austrian economists in their view that businessmen and entrepreneurs relentlessly stive to meet consumer demand, thus assuring a constant tendency to economic efficiency.

Yes, Hinkle answers, if we switch to the macro level. Each businessman and entrepreneur will produce in accordance with his own fundamental values, but because there exists a large number of entrepreneurs, each with a different value system, there are bound to be a substantial number of them who will respond to each consumer desire. This will not be pandering, because each entrepreneur who responds will be acting in accordance with his own fundamental values. But the wide variety of value systems ensures enough entrepreneurs will respond to each consumer demand that Reisman's and Mises's picture of the market will be true.

Nevertheless, Hinkle's solution raises two questions. (1) Should a businessman place his personal morality above his role as an economic actor? And (2) If he should, does the market's efficiency then depend on the existence of moral error and even of evil?

(1) The first question comes to mind because of comments that some staunchly pro-capitalist businessmen have made regarding business firms and philanthropy. Specifically, when approached for charitable contributions, a number of businessmen have replied that their job, as businessmen, is just to make money. That is their obligation to the people who lend them capital, and it is their obligation to their employees.

Does the same reasoning apply when a businessman has the opportunity to invest in a product that he believes will be successful but that he personally despises? Hinkle maintains that "It is unsustainable for individuals to act contrary to their true personal value structure for an extended period of time." Well, that is one way of squaring the circle. But suppose we are not talking about an extended period of time. Suppose a television network has just introduced a hit show that cashes in on overt sexuality. You are the program director for a rival network, and you have been offered a competing show that is even more sexually explicit. The ratings, on which your network's earnings depend, are here and now. Are you obliged as a businessman to go with the proffered show? Or can you turn it down as degrading? And if you are entitled to turn it down, what becomes of the claim that businesses should concern themselves only with making as much legal profit as they can?

(2) Suppose that we next follow Hinkle's line of reasoning and say that individual businessmen can and should produce only in accordance with their fundamental values (adapted to the context of others). But, we add, that businessmen hold so wide a spectrum of values that countless numbers of them stand ready to respond to any type of consumer demand. That answer preserves the Austrian economists' picture of a flexible, efficient economy. Nonetheless, it is not a happy answer. If shifting demand can yield despicable gross-out movies as well as admirable ones like Sense and Sensibility,then we must have numerous teams of people who will not scruple to produce the former, as well as numerous teams of people who are capable of producing the latter. Hinkle's solution, therefore, seems to imply that the flexibility of the market necessarily requires immoral and even degraded businessmen as well as moral and high-minded ones.

Every Man Has His Price

Several people responded to the dilemma of markets and morals by saying: The puzzle leaves out the crucial phenomenon of price. Entrepreneurs respond to consumer demand only when offered a price that makes production profitable for them. And that is true of Howard Roark.

The difficulty between Roark and Mrs. Wilmot, on this view, is not that morals trump markets. It is just Mrs. Wilmot did not make the deal profitable. Thus, when Roark says that he refuses to build an English Tuor house, he is really saying that he refuses to build it for any price Mrs. Wilmot (or any other human being) can afford. But if (as we may imagine) someone offered Roark $500 billion to build such a house, he might well accept. The trade would consist of producing the design for an Enligh Tudor house (which he is surely able to do) and receiving in return the psychic profit of $500 billion, minus the psychic loss involved in designing a home not in keeping with his aesthetic standards. If Roark's psychic profit minus his psychic loss is a positive sum, he will make the deal and build the home. Indeed, it would be wrong—morally wrong, egoistically wrong—for him to do otherwise.

Some may protest that no amount of money would make Roark's psychic profit greater than his psychic loss, but how can we be sure? With $500 billion, Roark would be forever freed from battling clients. He could build whole cities to his liking. Can we say that putting such a capability in his hands would not be worth the pain of producing one English Tudor house?

It is an interesting question whether the Objectivist morality could sanction such an interpretation of integrity. But it certainly appears to go against the character of Howard Roark as depicted in The Fountainhead. For what else is the novel's intent in contrasting those men of "immaculate integrity" whom Gail Wynand pays to betray their ideals, with Howard Roark, whom he cannot bribe into such a betrayal?

This article was originally published in the July/August 2000 issue of Navigator magazine, The Atlas Society precursor to The New Individualist.

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