The Moral Conditions of Economic Efficiency (review)

In his preface Schultz writes, "I hope this book contributes to a better understanding of the interconnection between morality and economic behavior" (xi). I believe he achieves his purpose.

Schultz explores two questions. The first relates to what he refers to as "Adam Smith's so called Invisible Hand Claim" (1): "Can a population of strict rational egoists achieve efficient allocations of commodities through market interaction in the absence of moral normative conditions?" (1; emphasis in original).

His device for exploring question 1 is "the First Fundamental Theorem of Welfare Economics [(FWT)] . . . which is commonly understood to be a proof of the Invisible Hand Claim" (4). With admirable rigor Schultz lays out his definitions and proceeds to a proof of the FWT "given a set of standard assumptions under which efficient allocations of commodities are socially achieved" (15). Then having completed the proof he says, in effect, Ah ha! But we've assumed away noncompetitive behavior and externalities that lead to Pareto-inferior outcomes.

With respect to noncompetitive behavior, Schultz demonstrates that people will have every incentive to pursue any means possible to secure advantage, since to do so yields a benefit in this strategic game. Perfect information doesn't solve this problem; instead, it leads to paralysis (54). The solution lies in boundaries set by moral normative constraints (MNCs) (55).

But wait! While strict rational egoists (SREs) may not be able to establish an efficient system of exchange de novo, what about the "spontaneous order objection . . . , [the claim] that the social behavior of selfish individuals will converge into regular patterns, which, in turn, will be sufficient to produce optimal outcomes of trade" (12)? Schultz's response: Can't happen. "Conventions" (59) may emerge among SREs, but conventions simply coordinate behavior, they don't constrain it. If regular patterns are to lead to Pareto optimality, they must both coordinate and constrain; thus they depend on MNCs. But MNCs cannot emerge among SREs. Internally policed MNCs are inconsistent with the concept of an SRE. Externally policed MNCs would fail because there could never be enough police to constrain individuals from all the opportunities to exploit advantage.

As for externalities, Schultz cites three forms: "intentional, accidental, and incidental" (74). A moral person would not intentionally cause an externality, and such a person would compensate an injured party for any unintended externality. Thus morality also solves the externality problem.

From externalities Schultz segues to an analysis of boundaries of desire (77). These boundaries are important because one person's boundary defines the autonomous space of another. For example, if I'm a homosexual, is that an externality, "an uncompensated cost," for another who abhors the thought of such behavior? Not if it's beyond the boundary of morally enforceable desires, a boundary defined by MNCs. Such boundaries are essential for autonomy and autonomy is essential for "free" markets, so "economic efficiency requires morality" (82).

This brings Schultz to his second question: What are the necessary and sufficient MNCs, in particular "rights" (89), for Pareto optimality to be achieved? "Rights . . . express specific restrictions on agents' natural strategy domains" (92). For a right to have force there must be compliance with the correlated rule (90). This raises a "compliance problem" (94): How are the rules enforced?

External enforcement can't work. If it's centralized, who will control the controllers? If it's decentralized, no individual would have an incentive to be an enforcer: everyone will free ride. Successful compliance must be internally enforced, and sources of such enforcement are "moral principle" and "dual utility" (98).

Schultz identifies four "specific moral rights that make efficient outcomes of trade possible" (99). Two are property rights (Schultz lists thirteen elements that constitute full ownership) and a "right to true information" (100). Individuals must know who owns what and be able to trust. Third is a "right to welfare" (101). This is included to insure constructive participation by...