Here is the seventh chunk of the argument. To return to the sixth chunk, click here. To advance to the eighth chunk, click here. The complete essay is posted here.

Robert Frank (1988) could hardly be accused of attempting to provide a moral vision for a free society, but he makes a case for one way of resolving the moral contradiction of the free society. He attempts to show how a seemingly selfless adherence to the moral principles that support the efficient operation of the free market might ultimately be justified in egoistic terms after all. The basic strategy is to reap the long term benefits of playing by free market rules by foregoing the short term gains that can be made by breaking them. Of course, this depends on finding other agents who also obey the free market rules—and enabling them to find you. Otherwise, as Frank shows, the strategy will be undercut and ultimately defeated by rule breakers.

How this strategy works can be illustrated by the case of honesty. Honest behavior is economically selfless on those occasions when one could gain by dishonesty (for example, perhaps by not paying the bill of a supplier who is about to go bankrupt or the bill of a small contractor who can’t afford to sue). Now, suppose you committed yourself to a policy of strict honesty. If others knew this, they would have reason to prefer doing business with you over others, to give you easier credit, etc. For, they could be confident that you would not rip them off; i.e., impose costs on them through dishonesty. In North’s terms, doing business with you would lower their transactions costs. Thus, by foregoing the occasional rip off, you reap the rewards of doing more business on better terms. And notice, by the way, that even if other people adopt the same honesty strategy, thereby undercutting your “market edge,” your terms of doing business will still be better. Transactions costs are still lowered, even if everybody becomes completely honest (indeed, they are lowered even more).

Of course, this works only if people know you are completely honest. Continue reading →