Sunday, November 28, 2010

The Moral Economy; What “The Invisible Hand” Left Behind

The Moral Economy; What “The Invisible Hand” Left Behind

by Jeff Jacobsen

Philadelphia 1777 was a hot spot for revolution. The colonials had banded together and started their historic effort to pry a new nation from the clutches of the British.

But the banding together did not preclude a community from going after one of their own, even a known patriot. Thomas Boylston was such a neighbor on Britain's enemies list. But he also tried to take economic advantage of the war by withholding coffee and sugar from the local marketplace in order to create a higher price for his commodities. The community chose otherwise for him. Abigail Adams wrote that around 100 women confronted Boylston at his warehouse, took his keys after an argument, and left with their booty, as “a large concourse of men stood amazed silent spectators of the whole transaction.” [Nash, 2005, p. 232]

If one was inclined to believe that this was a unique occurrence from those times, one would be wrong. Three merchants in Longmeadow village raised their prices on sugar, salt, rum and molasses while many men were away at arms. The incensed citizens warned “every man whose actions are unfriendly to the common cause of our country ought to be convinced of his wrong behavior and made to reform, or treated as an open enemy.” When one of the merchants refused after being confronted, a mob took his supplies, sold the commodities at a fair price, and left the funds on the merchant's kitchen table. [Nash, p. 233-4]

This view of community before private gain was brought to the colonies from Britain. All through the 1700s and into the 1800s are many examples of such community “riots” against merchants, farmers and millers who would hold their products hoping for rising prices, or ship their product to London where they could sell for more. When scarcity grew, mobs would look for those who were hoarding. The sheriff of Gloucestershire, England in 1766 wrote of such a mob;

They visited Farmers, Millers, Bakers and Hucksters shops, selling corn, flower, bread, cheese, butter, and bacon, at their own prices. They returned in general the produce [i.e. the money] to the proprietors or in their absence left the money for them; and behaved with great regularity and decency where they were not opposed, with outrage and violence where they was: but pilfered very little, which to prevent, they will not now suffer Women and boys to go with them. [Thompson, 1971, p. 111]

These actions, which have come down to us as “riots,” were in fact the local community attempting to enforce what they saw as “the law” when authorities would not. This pre-Adam Smith notion that community could come before private commercial gain is known as “moral economy.” Moral economy was codified under Charles I in 1630 in the “Book of Orders.” The Orders were a response to a previous time of crop failure that led to starvation. The Orders required the local magistrates to attend food markets and make sure that the poor were “provided of necessary Corne... with as much favour in the Prices, as by the earnest Perswasion of the Justices can be obtained.” [Thompson p. 109]

In other words, the Orders directed that community needs supersede the financial advantage that farmers and millers may gain from times of shortage.

Such concern for community has been left far behind in today's economic theory dominated by Adam Smith's “invisible hand.” Smith's view, according to modern interpretation, is that the self-interest of the marketers along with supply and demand in an open marketplace will adequately distribute goods. The combined effect of this open interaction of buyers and sellers is like an invisible hand that works to maintain a viable economy. This “Laissez-faire” environment, in which government has little or no input, magically distributes through the marketplace those materials where and when they are needed. Since it is the self-interest of the merchants that make the “invisible hand” work, governmental or mob actions that go against this self-interest are seen as detrimental to economic workings.

Not long after Adam Smith's theories were growing in popularity, Charles Darwin published his work on evolution. Darwin's theories gained the shorthand of “survival of the fittest” to explain why some physical attributes were passed on to their offspring. An animal or plant with new attributes that gave them advantage toward survival made them more “fit” and thus more likely to pass on their genes.

Social Darwinism, mostly attributed to Herbert Spencer, derived the notion from “survival of the fittest” that those who survived and thrived economically were thus the “fittest” and those who could not survive were deficient and thus should dwindle in favor of the “fittest.” This notion led to the opposite of moral economy in that the poor and needy were seen as deserving their place in life instead of being viewed as fellow citizens who need help. Andrew Carnegie, the great steel magnate at the turn of the 20th century, believed in social Darwinism;

If his friends, subordinates, and competition suffered in this battle for survival, such was evolution. There was no room for sympathy; after all, Spencer concluded that when the struggle begins “all start with equal advantages,” and then those with natural ability excel. [Peter Krass, p. 154]

Thus, interfering with this social struggle was seen at interfering with Nature.

Economic history is complex, with many philosophical influences such as Smith and Darwin above, and other forces such as mechanization, emigration, weather, wars, and so on. Moral Economy was a philosophical theory that the community was more important than the economic opportunities of any person or business. Smith, Spencer, and others gradually influenced economic theory to favor the free market over community, ostensibly because the free market would supposedly take care of the community in the long run.

In the 1840s Ireland's “potato famine” began. Under control of the British government at the time, many mistakes were made in attempting to overcome the causes of the famine. One of these was the application of the laissez-faire (meaning let it be) economic theory;

Throughout the entire Famine period, the British government would never provide massive food aid to Ireland under the assumption that English landowners and private businesses would have been unfairly harmed by resulting food price fluctuations.

In adhering to laissez-faire, the British government also did not interfere with the English-controlled export business in Irish-grown grains. Throughout the Famine years, large quantities of native-grown wheat, barley, oats and oatmeal sailed out of places such as Limerick and Waterford for England, even though local Irish were dying of starvation. Irish farmers, desperate for cash, routinely sold the grain to the British in order to pay the rent on their farms and thus avoid eviction. []

One million Irish died and one million fled the famine.

After the US Civil War, corporations took on more and more power and size, gradually swelling to huge monopolies that controlled rail, oil, steel, and other commodities. Government was no check on corporate power, and in fact, as Kevin Phillips writes, “for roughly three decades beginning in the 1870s, government would be subservient to corporations and financiers, its role usually that of servant and police force...” [Phillips, p. 210]. The concentration of wealth put power into the hands of a few corporate magnates such as Andrew Carnegie, who made his money in steel. There was little consideration for the average citizen, and in fact, Carnegie throughout his life continuously sought to pay his employers less and less and disregarded their safety in favor of profit.

Henry Ford, founder of the Ford Motor Company and creator of the assembly line system for building products, was probably the most progressive of all corporate magnates. He paid good wages for the time. In 1916 he decided to forgo dividends to stockholders and instead lower the prices of his automobiles, thus making them accessible to those less financially able. Immediately, John and Horace Dodge, large shareholders in the company, sued, claiming that profits belonged to shareholders and no one else. The case Dodge v. Ford set the precedent that “managers and directors have a legal duty to to put shareholders' interests above all others and no legal authority to serve any other interests...” [Balkan, p. 36]. In other words, a corporation has no soul. It's only interest is to make a profit for it's shareholders. This is far from moral economy. In fact, it is the opposite of moral economy.

In the 1970s this amoral principle was clearly exposed by the case of the Ford Pinto. The Pinto had a design flaw that at times led the fuel tank to rupture in a rear-end collision. Ford conducted a “cost/benefit analysis” to decide if it should spend funds to redesign and upgrade the fuel tank, or to pay out the assumed number of lawsuits that were projected if no change was made to the car.

The controversial numbers were those Ford used for the "benefit" half of the equation. It was estimated that making the change would result in a total of 180 less burn deaths, 180 less serious burn injuries, and 2,100 less burned vehicles. These estimates were multiplied by the unit cost figured by the National Highway Traffic Safety Administration. These figures were $200,000 per death, $67,000 per injury, and $700 per vehicle equating to the total "societal benefit" is $49.5 million. Since the benefit of $49.5 million was much less than the cost of $137 million, Ford felt justified in its decision not to alter the product design. The risk/benefit results indicate that it is acceptable for 180 people to die and 180 people to burn if it costs $11 per vehicle to prevent such casualty rates. On a case by case basis, the argument seems unjustifiable, but looking at the bigger picture complicates the issue and strengthens the risk/benefit analysis logic. []

Ford Motor Company, the soul-less corporation that by law must put profit ahead of community, did just that. They weighed the lives of 180 people against profits, and chose profits.

The decision to put profit over people is not uncommon. Another example is drug companies, who in the year 2000 were ignoring tuberculosis, while researching 8 drugs for impotence and 7 for baldness. [Bakan, p. 49]. They go where the money is, not where the societal need is. Enron's price manipulations of electricity, BP's recent oil spill in the Gulf of Mexico, and many other examples could be given where the cost/benefit analysis of the corporation does not factor in human or environmental damage. Profit is the sole motivation, as is required by legal precedent.

So, has the modern economic theory given us a better world? In some ways, yes. But the point of this article is that it has been done at the expense of the moral economy. The needs and even just the protection of the community have been thrown aside in deference to lassaiz-faire and profits. I would like to suggest that moral economy can and must make a comeback before amoral corporatism does any more damage to society.

There have been suggestions on how to do this. Most media and governmental entities use the Gross Domestic Product, or GDP, to gauge how well the country is going. This is simply the aggregation of all the goods and services produced by the country in a year. It is an economic indicator. In 1990 the UN proposed the “Human Development Report” which considers “how economic growth translates - or fails to translate - into human development.” [] This expanded into the Human Development Index, which looks at health, education, and living standards, rather than simple economic output. “The breakthrough for the HDI was the creation of a single statistic which was to serve as a frame of reference for both social and economic development.” [] The well-being of the people, not just business, with the HDI would have to be scrutinized and accounted for.

Another change that could help bring back moral economy is to remove the amorality of commercial corporations. Joel Bakan in his book The Corporation, warns that changes will be difficult, but he provides some suggestions. These include incorporating public-purpose corporations rather than for-profit corporations. Public-purpose corporations, such as the Postal Service, have their social agenda built into their charter. They are not designed solely to enrich their shareholders but rather serve a useful societal role.

Bakan suggests stricter enforcement of corporation charters by the government. Every corporation is a creation of the government. Every charter can be revoked by the government if that corporation is found to be harming society instead of helping it. Government should look more at the societal cost-benefit analysis of a corporation rather than it's job-creating ability or contributor to GNP, and revoke its charter when it is harmful to society.

Finally, the public must weigh in on the dangerous results of our current corporatocracy that has such influence in Congress and within government agencies. The government should be listening to the people more than corporations, but the people need to be politically active for that to happen.

Current economic theory counts dollars to see how society is. Moral economy required that the social well-being of the community must be accounted for as well. We will be a stronger, healthier nation when we look back in history and rediscover the value of ourselves rather than just our pocketbooks.


The Corporation, by Joel Bakan, 2004

Carnegie, by Peter Krass, 2002

The Unknown American Revolution, by Gary B. Nash, 2005

Wealth and Democracy, by Kenneth Phillips, 2002

“The Moral Economy of the English Crowd in the Eighteenth Century,” by E. P. Thompson, Past and Present, No. 50 (Feb. 1971), pp. 76-136

(photos of child labor)

Wealth of Nations, by Adam Smith

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