Looking across the globe, from China to Brazil and from America to Russia, we see businesses of all forms and sizes that operate with less or more interference of the state, and more or less regulatory and legal restrictions. But all businesses experience the same common condition: they cross paths and live within a network of markets. It is in the marketplace they sell their products; they find their employees; and raise the capital they need to fund their operations.
Given the ubiquity and indispensability of markets, it is not surprising that their quality is the main factor by which we also judge the quality of an economic system. The fact that markets are the ground where unethical even criminal business behavior takes place leads to frequent criticism of markets as if they were the actual moral agents. Markets, in reality, are mere mechanisms that bring parties together and facilitate a trade or transaction.
As a social institution, markets are artifacts of human design. Thus, they can be designed to function efficiently or to function poorly. For example, restricting competition prevents buyers and sellers to arrive at a fair price. But the quality – or “integrity” – of markets also depends on the integrity of the buyers and sellers. Good markets result when market participants are honest and trustworthy. So, when I am about to sell you my used car, do I disclose to you what repairs my car has had so far? That’s where personal ethical responsibility comes into place. Thus, to preach something like “make markets moral” misses the point unless this admonishment means “make market participants behave morally”. But market participants do not always behave honestly. Therefore, we need to have laws and regulations to ensure markets work with more not less integrity.
Interestingly, even in the absence of laws and regulations, markets, like living organisms, can defend themselves as if they had an immune system. Although, they can be corrupted (infected) by bad participants (the bacteria or viruses) they can also counterattack in order to prevent the infection from spreading or becoming endemic.
Thus, if corporations try to manipulate information about their operations in order to boost the value of their shares (the overvaluation infection), when the true information comes out, share prices collapse even below their fair level due to the loss of the market’s trust. This happened in the case of the dot.com mania of the late 1990s that led to the burst of the stock bubble in 2000. Managerial malfeasance and irresponsible or misguided forecasts by analysts had pushed prices to fantastic levels disconnected from reality. The same way, lenders (like banks) that are stiffed by borrowers, or bondholders that are stiffed by bond-issuing firms refuse to do business with such unscrupulous borrowers. Sometimes, investors are unable to tell which firm’s stocks, bonds or loans can be trusted. In that case, investors reduce or avoid their participation in the market for such financial instruments across all firms. The most serious case was that of the disappearance of the market for mortgage-backed securities in the wake of the housing market collapse in 2008.
Other times, the malfunction affects the product markets because of unethical business practices. False advertisement, subpar quality of products or poor delivery of services can betray the consumers’ trust and cause losses. Again, reaction by consumers is the only way a market can cleanse itself from bad participants.
Markets also can discipline firms that adopt or foster a culture of irresponsible actions related to how they operate. The case of setting up fictitious accounts of unsuspected customers of Wells Fargo is an example. In other cases, businesses have been accused of wrong doing in regard to the compensation, working conditions, or rights of workers. Business practices related to the environment and sustainability are also being subjected to scrutiny and ethical judgment.
In general, markets not only facilitate transactions, they can also serve as disciplinary mechanisms that allow participants and society at large to check the behavior of businesses when they are not honest about their value or their products, or fail to fairly treat their employees, their communities or the environment. But to function as a disciplinary mechanism, markets need responsible participants who are willing to act on their values.
For a society to efficiently monitor and discipline businesses through the market mechanism, it needs to have enough information so that it can react appropriately. To that effect, we need sufficient disclosure from law and regulatory enforcement agencies, from the press and other media, and even other private sources. In sum, we need to have an unfettered system of information disclosure that exposes the behavior of market participants.
Even so, in some extraordinary cases, our choice about a market is reduced to a binary decision. We either decide to enter a market or not. The clearest example is Facebook. The disclosure of news regarding the use of customers’ data and the privacy issues raised have created a lot of unease and resentment against Facebook. But absent a real alternative, what choices do consumers have, if they want to be on a social platform? Similar cases exist in other markets with extremely limited choices for consumers. In such cases, the remedy may lie with political action that either regulates firm behavior or expands consumers’ choices so that the market can regain its disciplinary function.
In sum, ethical markets require that we behave ethically as market participants. And for markets to perform their monitoring and disciplinary function, we need sufficient information about business behavior as well as people willing to act on this information.
But I need to add a cautionary note. Because we can use the markets to reveal our economic, social and political preferences, it doesn’t mean each one of us will get the outcomes we like. If the majority of people are indifferent to the environment, they will keep buying gas guzzlers (like SUVs) and there is nothing the market can do. If enough people are willing to patronize a misbehaving firm, again, the market will not correct that. As in politics, the integrity and disciplinary power of markets as well as the outcomes depend on the choices and morals individuals bring to the marketplace.
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