GF: Are markets inherently fair? How should we think about fairness and the economy?
LP: I have been surprised at the extent to which economics views markets as amoral — that is, inherently neither fair nor unfair. This characterization may be adequate in the abstract. What concerns me is how markets function in practice. Ensuring fairness in the economic marketplace is an important job not just for public policy, but for each and every market actor.
In a speech I gave several years ago at a meeting on global governance, I suggested five types of fairness that are important for the efficiency, legitimacy and sustainability of markets — fair dealing, fair competition, fair access, fair administration and fair distribution.
Fair dealing concerns fairness between parties in an economic exchange whether products and services, labor services, asset transfers, etc. Fair competition governs relations among rivals. Fair access tries to ensure that everyone has the opportunity to participate in the economy. Fair administration ensures that rules, regulations and procedures are applied in an even-handed way. Fair distribution concerns the allocation of costs and benefits generated by the market’s functioning, including the wealth created and the damages incurred.
GF: Where do you think we have the biggest fairness challenges?
LP: We have a pretty well-developed set of ideas around fair dealing, fair competition and fair administration — what they entail and what they forbid. The law spells out basic norms in each of these categories. This is not to say that these issues are always clear-cut or that offending behaviors like economic fraud, corruption and abuse of market power have been eliminated in practice. The unfair dealing in the run-up to the financial crisis of 2008 shows we still have a lot of work to do.
With that said, our collective thinking is much less developed when it comes to fair access and fair distribution — especially when systemic rather than transactional issues are involved. Not surprisingly, that is where the political and policy debates are most heated.
These are areas crying out for better theories and better management. When I was doing research with my colleagues Joe Bower and Dutch Leonard for our recent book, Capitalism at Risk, we spoke with business leaders in different regions of the world about the future of capitalism.
We were surprised to learn that the growing gap between rich and poor within and across countries was one of their top concerns. Fairness is becoming an increasingly important and I would argue urgent issue not just within markets but also between those who benefit from the market system and several billion worldwide who are on the margins or entirely outside the system.
GF: The Occupy movement echoes the theme that 1 percent of the society is doing well and the rest are not. While inequality has gotten much worse in the past decade, the financial crisis seems to have touched off a fairness debate that is much more enduring than in the past. What is going on here?
LP: The financial crisis stoked doubts about some basic tenets of what might be called “the American Dream belief system.” Americans have historically been quite tolerant of disparities in wealth and income, based on a belief that the economic system is open to all and that economic success is achieved through skill and honest effort. Our credo has been “equality of opportunity,” not “equality of outcomes.”
Our official response to the crisis, necessary or not, felt like a direct attack on those beliefs. Banks that precipitated the crisis got bailouts. Executives who arguably should have prevented the crisis got million-dollar retention packages.
Meanwhile, innocent bystanders lost their homes and their jobs in the post-crisis recession. Instead of getting bailed out, distressed homeowners faced foreclosures and worse.
The crisis also fed into a growing sense that our economic system is not so vibrant an engine of economic and social mobility as once thought and added to suspicion that the system is rigged in favor of the wealthy. In a recent Harvard Business Review article, my co-authors and I talk about the need for a surge in entrepreneurship and call on business leaders to spearhead the effort. We think a visible display of leadership by the business community on the jobs issue could help restore confidence in the fairness of our system; but, even with positive action, this crisis of trust represents a very deep and serious problem.
GF: You have the unique perspective as both a philosopher and a lawyer. How do law and regulation enforce fairness? Are institutions failing in that regard?
LP: A good place to begin is to think of the law as a formal system for enforcing basic ethical norms, such as norms against deceit, breaking promises (contract law), theft, and injury to the person and property of others. These basic protections are crucial for society and for the effective functioning of the market.
The law is, however, a poor device for inspiring excellence. Moreover, it is ill-equipped to deal with moral complexity — situations that involve nuanced judgment or competing ethical considerations.
The law works best for policing certain types of well-defined wrongs and for enforcing negative injunctions that tell us what not to do. Because it applies to everyone, it can’t be too demanding.
I worry when people look to the law for answers to questions about fair pay for executives or fair treatment for workers whose jobs have been outsourced. The law by its very nature is a crude instrument and these situations vary enormously.
GF: In my Commentary, I address Adam Smith’s perspectives on human morality and how human beings strike a balance between their own interests and the interests of others. In no case does he condone greed or any other “proper motive for hurting our neighbor.” Have we moved too far in the direction of self-interest and thus moved away from what might be called the communal consciousness? Is this a source of the present national discontent? How do we get back?
LP: To respond to your question, let me go back to Capitalism at Risk. We began this project in connection with planning for the Harvard Business School Centennial well before the financial meltdown of 2008. In the discussions we had with small groups of business leaders around the world, we were somewhat surprised by the extent to which business leaders in every region were concerned, often deeply so, about potential disruptors to the capitalist system. These disruptors include the fragile financial system, the growing gap between rich and poor, environmental degradation and resource depletion, corruption, and deteriorating health and education, among others. What’s perhaps most disturbing is that the business leaders we spoke with don’t believe that existing public and private institutions are capable, at least as they currently function, of addressing these forces.
Thinking about this overall picture, it’s hard to avoid the conclusion that something is wrong. Is it an excessive focus on self-interest by the various actors in this system? Perhaps, but I tend to frame the problem more as a case of myopia — individual and collective — because it involves an excessively narrow focus along a whole series of vectors, not just self versus others.
In the extreme, it involves systematic inattention to damaging effects of our actions on third parties and the general public (what economists call “externalities”); indifference to the longer-term consequences of actions that are short-term beneficial (i.e., “short-termism”) ; and indifference to maintaining the public goods on which private action often depends (e.g., transportation infrastructure, legal system, educational system, good government, etc).
This brings me to your question of how to get back — how to contain these destructive tendencies and to rebalance our decision making. It may sound paradoxical but a useful starting point is to think seriously about what we mean by self-interest — as individuals, companies, countries and the global society.
Too often we forget that being part of a well-functioning society or being trusted by others or that providing for our own future is all in our self-interest. These outcomes can only be achieved if we can moderate the myopic tendencies that seem to be driving the dysfunctions plaguing society.
Many thinkers have talked about “self-interest rightly understood,” and I think it is a very powerful idea. We don’t spend much time giving it real content. We think we know what’s in our self-interest, and it is what we happen to want very badly at any given time. Pardon my bluntness, but that is a truly dumb idea of self-interest. We need to get smarter about our self-interest.
We also have to think about the broader system and structures of society because many aspects of the system as it currently operates only worsen these myopic tendencies: lack of full accountability for negative consequences of economic activity, short-term investing in the extreme, excessive reliance on short-term performance measures in companies, and complex structures and organizations that fragment information and sever any sense of connection between action and consequences. I would emphasize that the issue is one of striking a healthy balance between self and others, now and the future, private and public, rather than choosing one versus the other.
GF: One of the roles of what I might call “communal” morality is that it establishes the order and the rules that we play by in the context of Doug North’s description of how order and disorder shape economic progress. Are we in a state of disorder?
LP: Shared morality — a set of understandings and beliefs about rights and duties, right and wrong, fair and unfair, good and bad — shapes relationships and behavior in a way that provides for the orderly and predictable conduct of our affairs, whether economic, social or political.
By setting standards for what people can expect of one another, a shared morality helps create the trust and cooperation necessary for common effort, which is essential to any human endeavor. Oxford philosopher Geoffrey Warnock put it well in The Object of Morality, where he wrote that the purpose of morality is to make life go better than it might otherwise go given that we live in a world of limited resources, limited rationality and limited human sympathies. Increasingly, scholars are investigating the role of morality in economic development through empirical research.
As to whether society is in a state of disorder, I’d say “not yet.” Capitalism at Risk points to a range of forces that, if not adequately addressed, threaten to disrupt the global market system in serious ways. These disruptions could occur through any number of mechanisms — a crisis of legitimacy, the collapse of natural systems, political upheavals fueled by social unrest, breakdowns in other conditions needed for the system’s effective functioning.
I would say that the United States remains relatively well-ordered. However, because the United States has historically been remarkably resilient in the face of disruptive forces, cracks in the foundations of this order are particularly troubling.
Whether it is the challenge to our notions of fairness from the financial crisis, the lazy ethics that led up to the crisis, or the extreme partisanship that shape today’s political debate, it is clear that our moral solidarity and national ability to solve problems are under attack. While dissent and disagreement are essential to the democratic process — indeed, to all creative processes — the current level of partisanship makes it difficult to deal with the serious issues facing the country. More effective governance in both business and government are crucial to preventing a slide into major disorder in the United States.
 Bower, Joseph L., Herman B. Leonard, and Lynn S. Paine. Capitalism at Risk: Rethinking the Role of Business. Harvard Business Review Press, 2011.
 Bower, Joseph L., Herman B. Leonard, and Lynn S. Paine. “Global Capitalism at Risk: What Are You Doing About It?” Harvard Business Review 89, no. 9 (September 2011).
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