Reith lecture: a price for everything but at what cost?

If we’re to reinvigorate public discourse, if we’re to focus on big questions that matter, questions of moral significance, one of the first subjects we need to address is the role of markets, and in particular the moral limits of markets. We’re living with the economic fallout of the financial crisis and we’re struggling to make sense of it. One way of understanding what has happened is to see that we’re at the end of an era, an era of market triumphalism. The past three decades were a heady, reckless time of market mania and deregulation. We had the free-market fundamentalism of the Reagan-Thatcher years and then we had the market-friendly Neo-Liberalism of the Clinton and Blair years, which moderated but also consolidated the faith that markets are the primary mechanism for achieving the public good. Today that faith is in doubt. Market triumphalism has given way to a new market scepticism. Almost everybody agrees that we need to improve regulation, but this moment is about more than devising new regulations. It’s also a time, or so it seems to me, to rethink the role of markets in achieving the public good. There is now a widespread sense that markets have become detached from fundamental values, that we need to reconnect markets and values. But how? Well, it depends on what you think has gone wrong. Some say the problem is greed, which led to irresponsible risk-taking. If this is right, the challenge is to rein in greed, to shore up values of responsibility and trust, integrity and fair dealing; to appeal, in short, to personal virtues as a remedy to market values run amok.

We might call this diagnosis “the greed critique”. But the greed critique is flawed or, at best, partial. Markets have always run on self-interest. From the standpoint of economics, there is no real difference between self-interest and greed. Greed is a vice in personal relations, but the whole point of markets is to turn this vice into an instrument of the public good. This is the moral alchemy that markets are said to perform. We learn this from Adam Smith who said: “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 self-interest.” “We address ourselves not to their humanity,” he said, “but to their self-love. Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow citizens.” This was Adam Smith. So it’s tempting to say that all we need to do is to rein in greed and restore integrity among bankers, business executives and politicians, but this response is mainly hortatory: comforting for a time, but not much help in rethinking the role that markets play in our societies. So what’s the alternative? The alternative is to rethink the reach of markets into spheres of life where they don’t belong. We need a public debate about what it means to keep markets in their place. And to have this debate, we have to think through the moral limits of markets. We need to recognise that there are some things that money can’t buy and other things that money can buy but shouldn’t.

Looking back over three decades of market triumphalism, the most fateful change was not an increase in the incidence of greed. It was the expansion of markets and of market values into spheres of life traditionally governed by non- market norms. We’ve seen, for example, the proliferation of for-profit schools, hospitals and prisons; the outsourcing of war to private military contractors. We’ve seen the eclipse of public police forces by private security firms, especially in the US and the UK, where the number of private guards is more than twice the number of public police officers. Or consider the aggressive marketing of prescription drugs to consumers in the United States. If you’ve ever seen the television commercials in America on the evening news, you could be forgiven for thinking that the greatest health crisis in the world is not malaria or river blindness or sleeping sickness, but a rampant epidemic of erectile dysfunction. Or consider some recent proposals to use market incentives to solve social problems. Some New York City schools are trying to improve academic performance by paying children $50 if they get good scores on standardised tests. In Dallas, they’re trying to encourage reading by paying children $2 for each book they read.

Or consider the vexed issue of immigration policy. Gary Becker, the Nobel prize- winning free-market economist at the University of Chicago, has a solution: to resolve the contentious debate over whom to admit, the US, he says, should simply set a price and sell American citizenship for $50,000, or perhaps $100,000. Immigrants willing to pay a large entrance fee, Becker reasons, would automatically have desirable characteristics. They are likely to be young, skilled, ambitious, hard-working; and, better still, unlikely to make use of welfare or unemployment benefits. Becker also suggests that charging admission would make it easier to decide which refugees to accept — namely those sufficiently motivated to pay the price. Now you might say that asking a refugee fleeing persecution to hand over $50,000 is callous. So consider another market proposal to solve the refugee problem, one that doesn’t make the refugees themselves pay out of their own pockets. An American law professor proposed the following: that an international body assign each country a yearly refugee quota based on national wealth. Then let nations buy and sell these obligations among themselves. So, for example, if Japan is allocated 20,000 refugees a year but doesn’t want to take them, it could pay Poland or Uganda to take them in. According to standard market logic, everyone benefits: Poland or Uganda gains a new source of national income; Japan meets its refugee obligations by outsourcing them; and more refugees are rescued than would otherwise find asylum. What could be better?

There is something distasteful about a market in refugees, even if it’s for their own good, but what exactly is objectionable about it? It has something to do with the fact that a market in refugees changes our view of who refugees are and how they should be treated. It encourages the participants — the buyers, the sellers and also those whose asylum is being haggled over — to think of refugees as burdens to be unloaded or as revenue sources rather than as human beings in peril. What this worry shows is that markets are not mere mechanisms. They embody certain norms. They presuppose, and also promote, certain ways of valuing the goods being exchanged. Economists often assume that markets are inert, that they do not touch or taint the goods that they regulate. But this is a mistake. Markets leave their mark. Often market incentives erode or crowd out non-market incentives.

Let’s go back to the case of cash for kids who make good test scores. Why hesitate to pay a child for getting good marks or for reading a book? The goal, after all, is to motivate the child to study or to read, and the payment is an incentive to promote that end. Economics teaches that people respond to incentives, and while some children may be motivated to read books for the love of learning, others may not. So why not use money to add a further incentive? Economic reasoning would suggest that two incentives work better than one, but it could turn out that the monetary incentive undermines the intrinsic one, leading to less reading rather than more, or to more reading in the short run but for the wrong reason. In this scenario, the market is an instrument but not an innocent instrument. What begins as a market mechanism becomes a market norm. The obvious worry is that the payment may habituate children to think of reading books as a way of making money, and so erode or crowd out or corrupt the intrinsic good of reading.

A study of some Israeli childcare centres offers a good real-world example of how market incentives can crowd out nonmarket norms. The centres faced a familiar problem — parents sometimes came late to pick up their children, and so a teacher had to stay with the children until the tardy parents arrived. To solve this problem, the childcare centres imposed a fine for late pick-ups. What do you suppose happened? Late pick-ups actually increased. Now if you assume that people respond to incentives, this is puzzling. You would expect the fine to reduce, not increase the incidence of late pick-ups, wouldn’t you? So what happened? Introducing the fine changed the norms. Before, parents who came late felt guilty; they were imposing an inconvenience on the teachers. Now parents considered a late arrival a service for which they were willing to pay. Rather than imposing on the teacher, they were simply paying her to stay longer.

Part of the problem here is that the parents treated the fine as a fee. It’s worth pondering the distinction. Fines register moral disapproval, whereas fees are simply prices that imply no moral judgment. When we impose a fine for littering, we’re saying that littering is wrong. Tossing a beer can into the Grand Canyon not only imposes clean-up costs; it reflects a bad attitude that we want to discourage. Suppose the fine is $100 and a wealthy hiker decides it’s worth the convenience. He treats the fine as a fee and tosses his beer can into the Grand Canyon. Even if he pays up, we consider that he’s done something wrong. By treating the Grand Canyon as an expensive dumpster, he’s failed to appreciate it in an appropriate way.

Now the distinction between a fine and a fee is relevant to the debate over how to reduce greenhouse gases and carbon emissions. Should government set limits on emissions and fine companies that exceed them? Or should government create tradeable pollution permits? The second approach says in effect that emitting pollution is not like littering; it’s simply a cost of doing business. But is that right, or should some moral stigma attach to companies that spew pollutants into the air? To decide this question, we have to do more than simply calculate costs and benefits. We have to decide what attitudes toward the environment we want to encourage.

At the Kyoto conference on global warming in 1997 the United States insisted that any mandatory emission standards would have to include a trading scheme, allowing countries to buy and sell the right to pollute. So, for example, the US could fulfil its obligations either by reducing its own greenhouse gas emissions, or by paying to reduce some other countries’ emissions. Rather than tax gas-guzzling Hummers at home, it could pay to restore an Amazonian rainforest or modernise an old coal-burning factory in a developing country.

At the time, I wrote an opinion piece in The New York Times arguing against the trading scheme. I worried that letting countries buy the right to pollute would be like letting people pay to litter. We should try to strengthen, not weaken, the moral stigma attached to despoiling the environment, I thought. I also worried that if rich countries could buy their way out of the duty to reduce their own emissions, we would undermine the sense of shared sacrifice necessary to future global co-operation on the environment.

After my piece ran, the paper was flooded with scathing letters — mostly from economists, some from my own university. I utterly failed to understand the virtue of markets, they said, or the efficiencies of trade, or even the most elementary principles of economic rationality. Amid the torrent of criticism, I did receive a sympathetic e-mail from my old college economics professor. He understood the point I was trying to make, he wrote, but could he ask a small favour: would I mind not publicly revealing the identity of the person who had taught me economics?

I’ve since reconsidered my views about emissions trading to some extent, but I continue to think that in addressing this question most economists miss the crucial point: norms matter. In deciding how best to get global action on climate change, we have to cultivate a new environmental ethic, a new set of attitudes towards the planet we share. We’re unlikely to foster the global co-operation we need if some countries are able to buy their way out of meaningful reductions in their own energy use.

Perhaps the best-known example of market norms eroding or crowding out non-market norms involves the case of blood donation. The sociologist Richard Titmuss compared the United States system, which permitted the buying and selling of blood for transfusion, with the system in the UK, which banned financial incentives and relied wholly on donated blood. Titmuss found that rather than improve the quality and supply of blood, the commercialisation of blood led to shortages, inefficiencies and a greater incidence of contaminated blood. His explanation: putting a price on blood turned what had been a gift into a commodity. It changed the norms associated with blood donation. Once blood is bought and sold in the market, people are less likely to feel a moral obligation to give it out of altruism.

The late pick-ups at childcare centres and the bad blood brought about by the use of market incentives are cautionary tales. They remind us that markets leave their mark on social norms. This does not by itself establish that marketising goods always changes norms for the worse. To decide where the market belongs and where it should be kept at a distance, we have to decide how goods and social practices are properly valued.

My general point is this. Some of the good things in life are corrupted or degraded if turned into commodities, so to decide when to use markets it’s not enough to think about efficiency; we have also to decide how to value the goods in question. Health, education, national defence, criminal justice, environmental protection and so on — these are moral and political questions, not merely economic ones. To decide them democratically, we have to debate case by case the moral meaning of these goods in the proper way of valuing. This is the debate we didn’t have during the age of market triumphalism. As a result, without quite realising it, without ever deciding to do so, we drifted from having a market economy to being a market society. The hope for moral and civic renewal depends on having that debate now.

© Michael J. Sandel. He is the Anne T. and Robert M. Bass Professor of Government at Harvard University. His book Justice is published in September by Penguin. The next three Reith lectures will be broadcast on Radio 4 on Tuesdays at 9am