Article For The New Zealand Herald

26 September 1996



Markets and Morality:

A Look at the Facts

Roger Kerr

MARKETS AND MORALITY: A LOOK AT THE FACTS

In an article on this page, Professor Tim Hazledine of Auckland University challenged my statement that the changes to our economy since 1984 have been a powerful force for more ethical conduct in both business and government.

I had argued that by reducing the scope of government over economic life in New Zealand, the liberalisation programme reduced the scope for bribery and corruption. But according to Hazledine such a view is 'precisely wrong' and 'the opposite is true'.

Academics should usually be prepared to produce supporting evidence for their views. Hazledine offers us none.

In fact the available evidence suggests overwhelmingly that freer economies are associated with less corruption, as the attached graph shows. The rising line plots an index of corruption derived from a survey by Transparency International. As the least corrupt country in the survey, New Zealand takes pride of place on the far left of the graph's horizontal axis.

The falling line is an index of economic freedom, derived by averaging the freedom indices calculated by three independent organisations (the Heritage Foundation, the Fraser Institute and Freedom House). Taken together, the two lines tell an unmistakable story: countries like New Zealand with a high degree of economic freedom tend to have a low degree of corruption, while economically unfree countries like India, Russia and Brazil have a high level of corruption.

No one should be surprised by this result. Corruption is much more likely to thrive in countries where the government has extensive powers to help or hinder individual firms because it plays a dominant role in the economy. In contrast, where business has few favours to ask of government, and is largely left to pursue profits through satisfying customers, the incentives for corruption can only be reduced.

Because it requires cooperation, a market economy by its very nature encourages many of the social virtues important to a healthy society. Since reputation and successful long-term relationships are crucial to most businesses, markets strongly encourage the cultivation of those personal qualities that assist in maintaining relationships - honesty, friendliness, courtesy and good faith.

None of us will go to a shop where the staff are surly and unhelpful, and where we have to count our change, if there is just as good a shop down the road where the staff are honest and friendly.

Markets also tend to discourage racial or sexual discrimination based on prejudice, since indulging these prejudices is irrational business behaviour which can only hurt a business's bottom line and encourage entrepreneurs who do not discriminate to enter the market.

Against such arguments for economic freedom, all Hazledine appears to offer is envy dressed up as social concern. He says he does not mind Jonah Lomu being paid a large sum, but objects to the large sums earned by some of our company chief executives.

But both Lomu and our chief executives operate in highly competitive environments in which the need to satisfy the customer is paramount. No one is forced to buy the products of any private company - and in this way contribute towards its chief executive's salary - in the same way that, say, all taxpayers are forced to contribute to the salary of a tenured university professor who has not checked his facts before rushing into print. A chief executive's economic 'value' meets a much stiffer test than the 'value' of many other occupations.

Moreover, under our pre-1984 command and control economy, some people earned fortunes, not through being good at satisfying customers but simply through having the skills and connections to secure government licences. Consumers were gouged with high cost and low quality products. That was genuine privilege: the rest of us were effectively coerced into subsidising the unearned standard of living of a fortunate few.

We were lucky to avoid the worst forms of corruption that such a system usually breeds. But the whole business environment of the times - in which firms and industries were constantly lobbying governments for special favours - was itself only one step away from the real thing.

So too was the political environment, where taxpayers' money was spent and economic policy decisions often made not because politicians believed them justified, but purely in order to win votes. It is arguable that the morality of political actions taken for purely electoral purposes is no less questionable than the morality of taking an outright bribe.

Finally, the social environment of old New Zealand was too often characterised by cronyism, lifetime tenure, the 'old school tie', the "Yes Minister" syndrome, and advancement not on the basis of what you knew but who you knew. A freer system has the moral advantage of putting a greater premium on merit and fostering social mobility.

Events of the 1980s such as the winebox tax transactions were the product of a half-free and half-reformed economy which bears little resemblance to the situation today. Nor is there any ongoing widening of the income gap now that the job market has been freed up and unemployment has fallen sharply. But of course opportunistic and underhand behaviour can occur in business just as it can in the professions, politics, the sporting arena and every other walk of life. As David Green pointed out in his recent book From Welfare State to Civil Society, markets need to be supported by broader codes of personal responsibility and moral conduct.

Nobel laureate in economics Gary Becker has summed up the issues in the following way:

The great economists of the past believed that a market economy was not simply more efficient and produced more output than other economies. In addition, a market economy makes people more self-reliant, more independent and more moral in the fundamental sense of being able to take care of themselves instead of being dependent on governments and others for support. Moreover, a good businessman engages in moral behaviour for very practical reasons - he will get more customers in the future if he acquires a reputation for honesty and reliability. So good business practice not always, but very frequently, produces moral behaviour.

A Nobel prize awaits Professor Hazledine if he can demonstrate the opposite conclusion.

Source: Alejandro Chafuen, Atlas Economic Research Foundation, Fairfax, United States