The Moral Molecule

Neuroscience and economic behavior

Moral Markets

Virtuous Business is Not an Oxymoron
This summer I taught a course for MBA students called Moral Leadership and the Brain at Claremont Graduate University's Peter F. Drucker and Masatoshi Ito Graduate School of Management. Yes, you read that right: business students wanted to learn about the brain basis for morality and how they can use this as leaders. "Of course," you say, "that is one of those courses that look good in the catalog but really don't teach anything useful." You might continue "What students really want is a class in ‘taking no prisoners' management." In the 1990s, all the MBAs I knew were reading Sun Tzu's The Art of War. Is a sea-change going on in business education or just a change in window dressing?

Just as nature is, in Alfred Lord Tennyson's phrase "red in tooth and claw", so are markets. Dog-eat-dog competition eliminates efficiencies in the economy unlike any other known force. Consumers search for the lowest price for a product that is often made in a far-away land where capital and labor are the cheapest. Mangers run lean operations consistently working near capacity, and any shirking earns a pink slip. Boards of directors scrutinize financial statements, revenue forecasts and survey tax options to maximize share prices. Ivan Boesky's exhortation that "greed is good" is immortalized on the big screen, and it seems in all our capitalist hearts, even as Boesky and many other business people have done prison stints for their legal transgressions.

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That self-interest leads to socially optimal outcomes has been part of the DNA of economics since Adam Smith described the dance we do with the butcher and the baker in the Wealth of Nations. We simply accept as a truism that it is self-interest that drives the creation of wealth, not some altruistic tendency to help the other guy.

Encroaching on this "all about me mentality" comes a number of books that argue that profitable businesses promote virtues. A compelling one I read recently was T.R. Malloch's Spiritual Enterprise: Doing Virtuous Business. Malloch shows, though theory and examples, that being in business for the long-haul not only means creating economic value, but creating spiritual value. The theme of Malloch's book is that transcendent values matter for managers, employees, and their customers; as a result, businesses ignore values at their peril. My late colleague Peter Drucker promoted the view that businesses were societies in miniature, and were therefore places individuals sought to fulfill human needs such as the desire for accomplishment and respect, well beyond simply earning a living (see The Essential Drucker: The Best of Sixty Years of Peter Drucker's Essential Writings on Management. Malloch's vision takes this a step further by advocating for the provision of transcendent needs.

Through a series of interesting case studies, Malloch shows that fostering virtues such as compassion, generosity, and trustworthiness results in fewer days lost to sickness, improved morale and higher productivity. All this occurs by changing "work" from a task that one must do, to a calling that draws on our better social natures. Seems reasonable to me, and the companies that have done this are impressive.

Of course, I'm biased. I recently put together book called Moral Markets: The Critical Role of Values in the Economy. This book was the culmination of a three year research program by a transdisciplinary group of scholars funded by the John Templeton Foundation and organized by the Gruter Institute for Law and Behavioral Research. Anthropologists, neuroscientists, philosophers, lawyers, psychologists, and economists came together to ask if there was any relationship between morals and markets. Spanning disciplinary boundaries, we found not only that markets require morals, but that markets can promote moral behaviors. Markets require morals because in modern impersonal exchange, a police officer or lawyer cannot be in every transaction-it is too costly. Thus, most exchange occurs in the shadow of enforcement, but absent explicit oversight and thus requires that parties transact in good will. Anthropological studies have also shown that people in small scale societies are more likely to "play fair" in experiments run in the field when they engage in market exchange. This suggests that they understand that uncoerced exchange benefits both parties, and they have applied the win-win idea to other aspects of their lives (see Joe Henrich's and coauthors' book Foundations of Human Sociality: Economic Experiments and Ethnographic Evidence from Fifteen Small-Scale Societies.

Nearly all market exchange is personal. The human touch is very important because it ennobles all those at work. Harvard Business School professor Michael Jensen, who is inches away from a Nobel prize, has recently been lecturing on the importance of integrity to business organization. Former US Treasury Secretary Paul O'Neil, when he was CEO at Alcoa, designed a system to have someone call every employee who was out sick and find out if they needed help. Injuries and sick days plummeted, and profits went up. Win-win.

So, put succinctly: Markets depend on, and promote, virtue. So, try that out at your next cocktail party and see what people say. Yes, Karl Marx was wrong-capitalism can only survive when it is based on virtue. In a future posting, I'll discuss the brain basis for virtue and the reasons for the bad behavior we sometimes see in businesses like Enron.

Paul J. Zak is a neuroeconomist at Claremont Graduate University in Claremont, CA.  His book The Moral Molecule will be published in 2012.

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