The Virtues of the Market: The world runs well if everyone takes care of their own interests

ECONOMICS LESSONS. Luigino Bruni:  independence as a healthy market value

THE WORLD RUNS WELL IF EVERYONE TAKES CARE OF THEIR OWN INTERESTS

It is not a paradox but an economic rule. As Smith said, caring for personal interests is a virtue.Even if today, in complex societies, this rule vacillates

By Luigino Bruni

Published in the weekly Vita, November 5, 2010 

Andrew enters the fish shop below his house to buy fresh fish from Bruno. Andrew gives Bruno 20 Euro in exchange for good swordfish from the Mediterranean. And so, one of the many phenomenon that we call “market exchange” takes place. But what truly happened between Andrew and Bruno inside that fish shop? It depends on one’s point of view and on what we are capable of “seeing”. 

For example, in the sale of that swordfish, a sociologist passing by that store might see all the sailors who are poorly paid and illegally so, thinking of those human relationships which are “hidden under the shell of the market” (in Marx’s words).

A town councilor that observes the scene may be mostly attracted by Bruno, who, in order to withstand the competition of large hypermarkets, has not paid himself for months, squandering his life savings in order to not close the fish shop he inherited from his grandfather.

An environmentalist, instead, might think of the entrepreneur of the sea who makes himself rich by impoverishing the fishing fauna in the depths of our oceans. And we could continue adding other points of view, other perspectives.

The equivalent exchange

But what would an economist “see” in that exchange? Let’s take the reaction of a traditional or standard economist (if we can call him such), that is, one of my many colleagues who teach economic science in the many universities of the world (which are unfortunately all too similar). He would explain the human fact which took place inside that fish shop as an exchange of things, through persons, and if he had a blackboard, he would represent it as the following: A towards B, B towards A, with the specification that the value of the two transactions (the two arrows) is equivalent (the fact that distinguishes it from an exchange of gifts). Then, if he wanted to explain it better, he would say that Andrew’s goal or motivation is obtaining fish, while that of Bruno is having money, and each one gives something to the other as a means of reaching their own goal. 

All of this simple discourse (which I may have complicated) was erected by Adam Smith in 1776 as a cornerstone of the foundation of political economy, and synthesized with one of the most celebrated quotes of the social sciences: “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” (from The Wealth of Nations). This series of articles is dedicated to the virtues of the market. In what sense, then, can we and Smith, call the market exchange based simply on interests a virtue? To better understand Smith’s operation (and do so without being naïve), which is the transformation of personal interest from vice to virtue, we need to know that, just a few lines before that discussion of the butcher, Smith dedicates a long part of his discussion to the beggar. He says that the beggar’s lunch “depends on the benevolence of his fellow citizens”, on the butcher and the baker of the village. Smith comments that it is only the beggar who depends “mainly on the benevolence of his own fellow citizens”.

Rapports among equals

Instead, the free man prefers independence from his benefactors in order to build relationships among equals. We have to keep in mind that the world to which Smith and all classical economists were launching a controversy against was the feudal system. Under feudalism, multitudes of beggars depended on the “benevolence” and alms of a few benevolent patrons in order to live. In a world of feudal dependence, of servants and masters, there can never be friendship between the beggar and the butcher (friendship requires equality), neither in the shop nor the pub. Imagine that the ex-beggar finds work and returns to the fish shop and buys fish. Even if inside the shop the exchange is not friendship (according to Smith, not me – but I’ll talk about this in future installments), after dinner in the pub these two can meet on an equal plane, on a more dignified one, and if they want, even one of friendship.

Virtue, every virtue, requires free people. Whether in the past or today, in a world of beggars, there is no authentic civil virtue. That is why, according to classical economic theory, the invention of the market becomes an instrument of civilization. Even market exchange, though not based on benevolence but self-interest, becomes an expression of virtue

Independence is a virtue, particularly dear to the stoic philosopher (and very dear to Smith). But there is more. A civil society where each person simply follows his own interests works well, because caring for one’s own interests is an expression of the virtue of prudence. For example, if every citizen of Milan cares for the education his own children, does his work well, tends his garden and pays taxes to produce public goods – if we have many “prudent men” in Milan – the city is automatically virtuous as well. 

This is essentially the idea held within the most famous metaphor of economic thought: that of the “invisible hand”. Each person follows private interests, and the society will also providentially find itself with a common good. This prudence is also the reason that for Smith, in protest to the moralists before and contemporary to him (like Mandeville or Rousseau), personal interest is not a vice but a virtue: prudence. This “semantic” operation (the use of the very word, self-interest, changes its moral meaning) was at the base of the ethical legitimacy of the budding political economy and market economy. In fact, it is important to remember that these economies played a role in civilizing the world, if we compare them to the feudal regime. 

But shared goods change everything

There is, however, a very serious problem. The ethical legitimacy of exchange and this virtuous vision of interests (seen as an expression of prudence), worked and works in simple societies, where the good of individuals is directly linked to the good of all, where, using more technical language, goods are mostly private.  If, instead, goods become shared - if the most important and strategic economic goods for us and our posterity, for the poorest and others, are non-renewable resources, forests, lakes, seas, environmental goods, as well as the management of apartment buildings, or the co-habitation in multi-ethnic cities - the discussion gets terribly complicated.

What comes back into play are some of those “views” of those who observe the fish shop. They are views that are different than those of the economist we named in the beginning of this article, and the virtue of prudence is no longer automatically a virtue of the market as well, as it is no longer true that the search for private interests produces shared goods - a crucial theme which we’ll focus on in the next installment.

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