Markets, Governments and Virtues

The story is told of an English philosophy professor who was invited to deliver a lecture at the University of Beijing. Not being able to speak Chinese, he was provided with an interpreter. The day of the lecture arrived, the professor delivered the first sentences of his talk, and waited for the interpreter to translate. The interpreter, however, told him to continue. He would, he said, signal when he wanted him to stop.

After fifteen minutes, the interpreter signalled a break, delivered a brief sentence to the audience, and gestured to the professor to continue. The same thing happened after thirty minutes, and then after forty-five, and again at the conclusion of the talk. As the audience filed out, the English academic went over to the translator and expressed his amazement. ‘I am astonished at your power of compression. I have just given a complex lecture on metaphysics, and yet you managed to translate it into four sentences. What did you say?’ ‘Simple,’ replied the interpreter. ‘After fifteen minutes I said, “So far, he hasn’t said anything new.” After thirty I said, “He still hasn’t said anything new.” After forty-five, I said, “I don’t think he’s going to say anything new.” And at the end I said, “I was right. He didn’t.”’

One of the advantages of being a religious leader is that no one expects you to say anything new; in fact, the more ancient your ideas, the better. Today I want to take a look at economic systems – specifically the market economy – from a distance in time, the distance lent by a religious tradition, one of whose roles is to view the present from the perspective of past and future. Not the least of religion’s tasks is to initiate a dialogue between immediacy and eternity, something necessary at times of great change. From this perspective, it may be possible to gain a clearer picture of some of the wider issues involved in an economic order, especially in the way a market interacts with a culture, shaped by it, and shaping it in turn.

To give an example: The Harvard economic historian David Landes poses a fascinating question in his book, The Wealth and Poverty of Nations.[1] In the Middle Ages, China was far in advance of the West in many aspects of technology. It had been the first country to invent printing, paper, porcelain and explosives. Why then, asks Landes, did the Industrial Revolution take place in Europe, not China? He suggests several explanations, but they have one thing in common. They have to do with culture, specifically with what we call today the Judeo-Christian ethic. The Hebrew Bible, for example, is marked by a revolutionary concept of time – time as a journey toward a destination. This, known as ‘linear time’, is in marked contrast to the cyclical time of other ancient civilisations. To make progress, in other words, a culture has to contain the idea of progress. It needs a linear concept of time.

More broadly, Landes argues, the key factor Europe had, and China did not, was a market economy, one that encouraged free enterprise, rewarded innovation, and protected private property from seizure by kings, emperors or governments. That ethic has its origins in the Hebrew Bible, and the renewed Christian encounter with the Bible as a result of the Reformation. Why then did Judaism value the market to the extent that it did, in both biblical and post-biblical times?

The answer, I believe, is to be found in the two epoch-making journeys with which the faith of Israel begins: Abraham and Sarah’s journey from Mesopotamia in the East, and Moses and the Israelites’ exodus from Egypt in the West. Strkingly, Judaism begins with a rejection of the two greatest civilisations of the ancient world, Mesopotamia with its city-states, and Egypt of the Pharaohs, two cultures which, even today, remain awe-inspiring in their technological achievements. Mesopotamia witnessed the invention of the wheel, the arch, writing and astronomy. Pharaonic Egypt produced architecture on the most monumental scale. What, from a Jewish point of view, was wrong with these social orders?

The answer lies in four explosive Hebrew words in the first chapter of Genesis: na’aseh adam be-tsalmenu ki-demutenu, “Let us make man in our image and likeness.” What is revolutionary about these words is not that a human being can be in the image of God. That was an idea familiar to the ancient world. Sumerian kings and Egyptian Pharaohs were precisely that, gods, or representatives of the gods, in human form. What was new was not that a human being can be in the image of God, but that every human being is. From its inception, Judaism was a living protest against hierarchical societies that give some, but not all, dignity, power and freedom. Instead it insisted that if any individual is sacred, then every individual is, because each of us is in the image of God.

It is a measure of how profound this idea was, and how long it took before it was translated into political structures, that it was not until 1776 that the American Declaration of Independence, largely drafted by Thomas Jefferson, declared: “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their creator with certain unalienable rights, [and] that among these are life, liberty and the pursuit of happiness.” These truths, of course, are anything but self-evident. They have been implicitly denied by most societies at most times in history. They are self-evident only to someone steeped in the Hebrew Bible. Indeed it is worth noting that of the three great political revolutions of modernity, the American, French and Russian, only the American was driven by religious values. The other two were inspired by philosophical values, those of Rousseau in the case of France, Marx in the case of Russia. Precisely these two, inspired by visions of a secular utopia, ended in bloodshed and the suppression of human rights.

To return, then, to Judaism: the central question is, how do we build social structures that honour and sustain the freedom, integrity and creativity of the individual? The brief answer is that the Hebrew Bible is an extended critique of what we would now call big government. At one extreme we have the biblical portrait of ancient Egypt, a nation which builds extraordinary buildings but at the cost of turning human beings into slaves. At an opposite extreme we have the justly famous eighth chapter of I Samuel, in which the people come to the prophet and demand a king. On the instruction of God, Samuel tells them that if they appoint a king, he will eventually seize their sons and daughters, their fields and vineyards, and a percentage of their harvests and cattle. Even constitutional monarchy, in other words, will involve a sacrifice of rights of property and person.  “When that day comes, you will cry out for relief from the king you have chosen, and the Lord will not answer you on that day.”

We can summarise the classic Judaic view as follows: Governments are necessary for defence and the maintenance of social order. As a rabbinic teaching of the first century C.E. puts it: “Pray for the welfare of the government, for were it not for the fear of it, people would eat one another alive.”[2] But state action always stands in need of justification, because any government, however democratically elected, ipso facto represents a curtailment of certain fundamental rights such as the right to enjoy the fruits of one’s own labour. It can only be justified on the grounds that secure possession of those rights depends on the existence of a central power that defends individuals against lawlessness on the one hand, foreign invasion on the other. Long before Hobbes, Locke and Jefferson, therefore, biblical Judaism is a theory of limited government. This principled insistence on the moral limits of power is the only secure defence of the individual against the collective, whether it be the tyranny of kings or what John Stuart Mill, following Alexis de Tocqueville, called the “tyranny of the majority”.

Let me add a personal footnote. From time to time, Elaine and I invite politicians to dinner – from all parties, I hasten to add. When we have finished eating, we say Grace After Meals, and I am always anxious in case any of our guests should take the Grace (at least 2000 years old in its basic formulation) as a party political statement, containing as it does the sentence, “We ask of you, God, not to make us dependent on the gifts of men” – a line that could have come straight from the pen of Milton Friedman or Charles Murray. This is not because Judaism is intrinsically opposed to a welfare state, but because it places a high, and specifically religious, value on economic independence as a component of individual liberty.

The most famous example of this is in Moses Maimonides’ list of the eight rungs of charity.[3] Of these, the highest but one is where an individual gives generously, without having to be asked, and where neither the giver knows the identity of the recipient, nor the recipient the identity of the giver. Even this sublime form of altruism is, however, only the penultimate achievement. The highest is to provide someone with a job or the means to start his own business. How so? Unlike all the other forms of charity, this involves the donor in no financial loss and the recipient in no unearned gain. On the face of it, there has been no act either of giving or receiving. Why then is this the highest form of charity in Jewish law? Because through it, we give someone something more precious than money. We give him back his dignity. In Judaism there is no higher dignity than in enjoying the benefits of our own work, our own creativity. As we say at the beginning of each working week, quoting Psalm 128:2, “When you eat of the fruit of your labour, you shall be happy and you will prosper.”

Looking back, then, with centuries of hindsight with which to test the Hebrew Bible’s foresight, we can say that the market economy did deliver in terms of higher living standards, and no less importantly, in liberating energies and fostering human creativity. As a result, the average citizen of the liberal democracies of the West has, in an average supermarket, a range of choices that would have been, only a century ago, beyond the dreams of kings. He or she can travel the world and communicate globally at speeds unimaginable then. We have better health, longer life expectancy, more access to education and information, than any generation since life first stirred on earth. Above all, despite its inequalities, the market economy is the best means we know for fostering the freedom, dignity and moral responsibility of the individual, as opposed to a privileged elite, whether of power, inherited wealth, or knowledge. At its best, it gives us equal access to hope.

However, I cannot end there, because the human story – as opposed to fiction – never ends with the words, ‘And they all lived happily ever after,’ not least because the human story never ends. There is always another chapter; always what economists call ‘the law of unintended consequences.’ At this point I turn, not to the market economy per se, but to that stage of its development known as late capitalism, which is to say, the present.

One of the turning points of economic history was the justly famous observation of Adam Smith: ‘It is not from the benevolence of the butcher, brewer or 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.’[4] What made the market so potent was that it turned self-interest into collective gain, through the working of what Smith called an ‘invisible hand’. Out of the seemingly disconnected efforts of myriads of people, each pursuing their own advantage, the market created something vast, unintended and benign, namely economic growth. The Internet represents another graphic example. The product of thousands of separate initiatives, it has turned into an extraordinary collective resource from which each of us can benefit.

In the course of the twentieth century, however, an intellectual discovery threatened to challenge the central premise of Smith’s argument. In 1944 John von Neumann invented a branch of mathematics designed to shed light on decision-making. It was called Game Theory, and its most famous paradox, formulated in 1950, was the Prisoner’s Dilemma.

The Prisoner’s Dilemma imagines the following scenario: Police arrest two men on suspicion of a serious crime. They do not have enough evidence to convict them; at most they have evidence sufficient to prove them guilty of a lesser offence. Their aim is to get them to inform on one another. They therefore put them in separate rooms, with no possible communication between them, and offer them a deal. If one informs and the other stays silent, the informant will go free, and the other will receive a jail sentence of ten years. If both inform, they will be sentenced to five years each. If both stay silent, they will be found guilty of the lesser offence and be sentenced to a year in prison.

It does not take long to work out that for each, the optimal decision is to inform. The result, however, is they both receive a five year sentence, whereas if they had both stayed silent, they would have received only one year. The Prisoner’s Dilemma may seem no more than a curiosity, but it is not. It establishes the paradoxical, but deeply significant, fact that two people, each pursuing their own self-interest, generate an outcome which is bad for them, both individually and collectively. Smith’s Law is defeated by Murphy’s Law.

The solution, when it emerged, was equally fascinating.[5] It came in the late 1970s, as the result of a convergence between two disciplines, socio-biology and computer science. What people suspected, and were eventually able to prove, is that the Prisoner’s Dilemma yields its paradoxical result only if it played once. If it is played over and over – the so-called ‘Iterated Prisoner’s Dilemma’ – the parties eventually learn that they are doing themselves, as well as the other person, harm. Once they discover this, they learn to co-operate.

At this point, Game Theory provided socio-biologists with an answer to a question that had long puzzled Darwinians, including Charles Darwin himself. In the struggle for survival, the fittest wins. Despite this, all human societies value altruistic behaviour, and some forms of it can be found in non-human species. What evolutionary advantage could there be from the sacrifice of one’s own interest to the interests of the group? One biologist, Robert Axelrod, had the insight to sense that an answer could be found in the Iterated Prisoner’s Dilemma. This was a schematic way of representing action – human or animal – under conditions of uncertainty. In 1979, he announced a global competition to find the computer programme that performed best in repeated encounters with itself and all other programmes.

The winning programme (incidentally also the simplest and shortest) was called ‘Tit-for-Tat’. It consisted in being nice on the first encounter, and then repeating the previous action of its opponent. If it was aggressive, so was Tit-for-Tat. If it was co-operative, Tit-for-Tat was likewise. The programme, in other words, was the computer equivalent of what the Bible and Shakespeare called ‘Measure for Measure’. No less fascinating was the discovery in the late 1980s of a programme that beat Tit-for-Tat. The work of a Polish mathematician, Martin Nowak, it was called ‘Generous’. Generous overcame the one weakness of Tit-for-Tat, namely that when it met a consistently vicious opponent, it was drawn into an endless and destructive cycle of retaliation; a computer simulation, in other words, of a phenomenon all too familiar from the politics of Bosnia, Northern Ireland, the Middle East and Rwanda.

Generous was similar to Tit-for-Tat with one exception: randomly but regularly it broke the cycle by forgetting the last move of its opponent. It embodied, in other words, the computer equivalent of forgiveness and reconciliation.
I find this an utterly fascinating chapter in the history of thought, and one that has huge implications. Against everything I was taught at university, it now seems that we can establish a rational basis for ethics, indeed a specific form of ethics. What Tit-for-Tat and Generous show is that those populations survive and thrive who practice the two fundamental ethical principles of the Judeo-Christian tradition – reciprocity and forgiveness, or what used to be called justice and mercy. It is no accident, therefore, that these two faiths have survived while so many other civilisations have disappeared.

In addition, we are now better able to understand why Homo sapiens – i.e. us – have an evolutionary advantage over all other species. It lies in our ability to co-operate. Set one man against one lion, and lion wins. Set ten men against one lion, and lion loses. The secret of evolutionary success is co-operation, and the basis of co-operation is trust. So important is this phenomenon that economists have now given it a name. They call it social capital, meaning the level of trust in a society.

What is crucial, though, is to remember how trust is created, namely by the Iterated Prisoner’s Dilemma, in other words by people repeatedly interacting with one another. That, for example, is why crime rates are always higher in inner cities than in villages. Someone is more likely to take advantage of you if you are never going to see him again (the single Prisoner’s Dilemma) than if you are going to meet him in the street tomorrow and the day after. Habits of co-operation depend on the existence of long-term relationships.

I now need to take the argument one stage further. Imagine you are taking a child, a nephew or niece for example, for a ride on the London Eye. As you rise, you see the Houses of Parliament, and you explain to the child that these buildings are the seat of government, the home of politics, and that politics is about the creation and distribution of power.

Next you point out the offices and shops, and in the distance, the Stock Exchange building. You explain that these are the homes of the market, the domain of economics, and that they have to do with the creation and distribution of wealth.

Finally, the child notices the steeples and spires of London’s churches and the great dome of St. Paul’s. What, she asks, are they. You reply that they are houses of worship. ‘And what do they create and distribute?’ she asks. It’s a good question. Perhaps we would be inclined to say that they are not that sort of thing; in which case, we would be wrong. Houses of worship, congregations and communities, do create and distribute something, but it is a special kind of thing.

We can see what this is by a thought-experiment. Imagine that you have total power, and then you decide to share it with nine others. The result is that you now have one-tenth of the power with which you began. Now imagine that you have a thousand pounds, and then you share it with nine others. Again, you have a tenth of what you had before. The reason is that power and wealth are, at any given moment, zero-sum games. The more I share, the less I have. That is why governments and markets are arenas of mediated conflict. That is why we need them.

Now imagine that you have a certain quantum of love, or friendship, or influence, or loyalty, and then you share it with nine others. Do you have less than when you started? No, you have more. I am going to call them social goods, and they have this characteristic in common, that the more I share, the more I have. For this, there is a simple reason, namely that they only exist in virtue of being shared.

The question now is: where are such goods created? Where do we acquire love and loyalty, friendship and trust? The answer is: in families, communities, neighbourhoods and congregations – the places where the ‘We’ takes precedence over the ‘I’. We can now say, in quite unmystical terms, why. These are the homes of the Iterated Prisoner’s Dilemma, where we form long-term relationships with other people and interact with them repeatedly over time. They are the environments in which we learn the grammar of reciprocity and the vocabulary of forgiveness – the essential habits of co-operation. They are places where we are there for other people, knowing that they are there for us. We can now say what they create and distribute: social capital, meaning, relationships of trust.

This brings me, finally, to the great tragedy of late capitalist societies. For at least the past half-century, public debate about society has revolved around two institutions: governments and markets, the domains respectively of politics and economics. The great argument has been which to prefer. The Left tends to favour government action, the right, the workings of the market. Recently a Third Way has been proposed as a synthesis between the two. The taken-for-granted assumption has been that these are the only options. The state represents us in our collective capacity. The market is us as individuals, making choices. What else is there?

The answer is that there is a third sector: the domain of families, congregations, communities, neighbourhood groups and voluntary organisations, all of which are bigger than the individual and smaller than the state. My argument has been that they play a vital role in our social ecology because they are where we learn the habits of co-operation without which the rational pursuit of self-interest fails to produce optimal outcomes. If there is one thing clear about the present condition of liberal democracies throughout the West, it is that these institutions are in disarray. Why is this?

Consider, as an example, the institution of marriage. Let us hear two imagined but typical voices, one from the Right of politics, the other from the Left. The voice from the Right says this: In the past, people married because, in most cases, they had to. There was no one else with whom to share the burden of bringing up children. Today there is. It is called the government. It provides resources in terms of social security, welfare benefits, child-care, social workers and schools. The State has, in effect, become a surrogate father. The result is that it is possible now to sustain a single-parent family, whereas in the past it was not. The State has weakened the family because, while it has privatised much else, it has effectively nationalised paternity.

The corresponding voice from the Left says this: What has destroyed marriage has been the mentality of the market. In the past, virtues such as fidelity, loyalty and respect for the common good were salient forces in society. Today those values have been eroded by a consumer society whose creed includes such axioms as, ‘Buy it, use it and throw it away’, ‘If you find a better deal, go for it’, and ‘Life is a supermarket. All you have to do is choose.’ Those values are incompatible with marriage, which depends on steadfastness and a willingness to sacrifice. A world driven by market values would be one of temporary and provisional loyalties, serial relationships without commitment. That is the world we have.

The Right blames the State, the Left blames the market, and both miss the point, which is that marriage belongs to a realm which is neither State nor market, where relationships are built on trust and not on transactions of power or monetary exchange. The sheer dominance of State and market are slowly but surely driving out of existence those institutions which Burke called the ‘little platoons’, sociologists call ‘mediating structures’, and which we know as families, communities and congregations. What is damaging is neither the State nor the market but the slow attrition of the humanising, virtue-inculcating institutions between.

Why should this matter? Firstly because economic systems are not ends in themselves. They are means to advancing what the American Declaration of Independence called ‘life, liberty and the pursuit of happiness’ and Bentham spoke of as ‘the greatest happiness of the greatest number.’ If I were to ask you what are the sources of your own happiness, you would be unlikely to say, ‘My BMW, my Armani suit and my Rolex watch.’ You are far more likely to say, ‘My wife or husband, my children, my reputation, my friends.’ As the third sector institutions of family and community erode, so too do the sources of our happiness; which is precisely what has, in fact, occurred. For the past fifty years, while average incomes have steadily risen, so too has the incidence of depressive illness, stress-related syndromes, suicide attempts and drug and alcohol abuse, especially among children.

Secondly, our age is one of epoch-making change. Globalisation and the information age, while they will bring huge benefits, will also intensify the strain on our social structures. Employment will become less secure as production, and even clerical tasks, are switched around the world in response to wage rates and currency fluctuations. Communities and neighbourhoods will become even more attenuated as high street shops give way to e-commerce, and face-to-face encounters are increasingly replaced by mobile phones, e-mail, and Internet-based video-conferencing. Wage differentials will continue to rise as we move more deeply into a world dominated by intellectual capital, which favours the gifted few. The social bond will become ever more tenuous. In medieval times the local squire had a real interest in the welfare of those who worked his land. In the nineteenth and twentieth centuries, industrialists had a similar interest in their employees. To be sure, it was not always exercised generously or imaginatively, but it existed. The new economy, by contrast, is for the most part not based on long term relationships with people to whom you can put a face or whom you know by name.

We are, in other words, moving at great speed into an age of rapid and accelerating change with few of the traditional resources that gave people a sense of stability and security – a marriage, a career, a neighbourhood and friends, that stayed with you for life. These were the things that gave us an identity, a set of values and a sense of being at home in the world. Their loss will make change far more unsettling. Presently we are being cushioned from the effects by the longest peacetime boom in living memory. But what will happen if we hit recession, or even if we don’t, but just keep going in the present direction?

It was the unlikely figure of Bertrand Russell who offered a warning. Speaking of his two favourite periods of history, he wrote:

What had happened in the great age of Greece happened again in Renaissance Italy. Traditional moral restraints disappeared, because they were seen to be associated with superstition; the liberation from fetters made individuals energetic and creative, producing a rare florescence of genius; but the anarchy and treachery which inevitably resulted from the decay of morals made Italians collectively impotent, and they fell, like the Greeks, under the domination of nations less civilised than themselves but not so destitute of social cohesion.[6]

That is our clear and present danger, that we too are becoming destitute of social cohesion. I remain, though, an optimist. I believe in free-will. As the Yiddish novelist Isaac Bashevis Singer put it, ‘We must believe in freewill. We have no choice!’ And because we can choose, we can change.

I believe in the market economy, not simply on economic, but on moral grounds. It is our best guarantor of human freedom and creativity, of technological progress and the fight against poverty. But the market depends on virtues that are not produced by the market, just as the State depends on virtues not created by the State. Those virtues – the habits of co-operation which constitute social capital – are born and sustained in families, communities and friendships, that third sector of society in which relationships are built not on power or exchange but on loyalty, reciprocity, forgiveness and trust. That is why Adam Smith wrote not one book but two. One he called The Wealth of Nations. The other he called The Theory of the Moral Sentiments. He remembered what we, at times, forget, that societies need more than governments and markets. They need virtues, moral dispositions, ‘habits of the heart’. We need them now.

If, then, we care for the market and for the personal liberties it creates and protects, we will have to work harder in the future to champion and defend those institutions – marriage, the family, community and congregation – which are the seedbeds of the virtues on which the market depends.

I believe we can do it. I pray we will.

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[1] David Landes, The Wealth and Poverty of Nations, London, Little, Brown, 1998.
[2] Avot (Ethics of the Fathers), 2:2.
[3] Maimonides, Laws of Gifts to the Poor, chapter 10.
[4] Adam Smith, The Wealth of Nations, London, Penguin, 119.
[5] The full story can be found in Robert Wright, The Moral Animal, London, Little, Brown, 1995; Matt Ridley, The Origins of Virtue, London, Viking, 1996; Francis Fukuyama, The Great Disruption, London, Profile, 1999.
[6] Bertrand Russell, History of Western Philosophy, London, George, Allen and Unwin, 1962, 18-19.