Though written and translated a few years ago, this essay is dedicated to Jim Buchanan on the occasion of his 80th birthday as it tries to cover some of the ground we have in common in our thinking. When forming my views I had the benefit of reading what he wrote, and when we occasionally met, I greatly benefited from stimulating discussions though my memory is not so reliable as to allow me to say specifically and in writing when and where we agreed, or merely agreed to disagree.
My point in the present essay is this: The phenomenon of globalisation includes the high mobility of investment capital and hence the competition of countries and locations for new capital and jobs. Competition forces countries and local institutions to invest in intangible as well as tangible assets. Reputation is a competitive asset not only for peaceful rivalry among individuals and institutions but also for competition among locations. People identifying themselves with their country of birth or their location of residence benefit from - and contribute to - the up and down of the rating which the place is accorded on the moral stock exchange. Local communities - like individuals and firms - are under competitive pressure to behave decently in the sense that they meet the implicit expectations for which they were rewarded in the form of relatively cheap credits. Competition for mobile resources is then likely to lead to the emergence of a cosmopolitan system of values. Countries and locations which prove to be unreliable and do not catch up with the prevailing level of moral expectations are likely to pay a high price, e.g. in the form of a spectacular capital market crisis. Note that the following text, written in German and translated by Wolfgang Kasper, was prepared well before the Asian crisis of 1998.
There has been a mighty increase in locational competition at the international level during recent decades. This happened when many countries opened their markets and lifted border controls on capital flows. Investment capital is today highly mobile amongst nations. Nations are competing for the favours of investors who create jobs. There is more and more political discussion about whether a country or a region has lost its competitiveness, or has gained on the score. One is reminded of international competition in sport; only that the prizes are not medals, but jobs.
In locational competition it is those who own the mobile resources who put a value on the immobile assets. Ultimate locational decisions are made by people looking for high returns on capital assets or wanting to find the best place to live and work. The owners of mobile resources are faced with the competition amongst localities, land owners and people unwilling or unable to move around. As a consequence, the owners of land and the immobile workers will benefit from a region having a reputation for attractiveness.
The choice of location involves numerous considerations. In the final analysis, firms search for a location where the enterprise, and those who will have leadership positions in it, can expect the highest returns. But the expectation of maximum profit is only a part of the answer in the search for the best location. Apart from cost advantages and market access, non-material costs and benefits count in the choice of location. These are probably playing a growing role in the competition amongst locations for business and jobs. We shall call these factors the 'soft location factors' to distinguish them from the 'hard factors' that are covered by the economic calculus of business costs and revenues.
When thinking of soft location factors one has nowadays to consider the natural environment. People do not want to stay or go where they dislike the environment, unless they receive additional pay to make up for environmental shortcomings. As people compare locations, they include the environment indirectly in their economic calculus. The natural environment matters to economic decisions whenever mobile people, who have the last say in the decision process, give it an important role.
The location factor, 'culture', plays a similar role. A good offering of theatre, plays and concerts creates the image of a cultured city, as do educational institutions of good repute. City councils are therefore well advised to help support school education, artists, and universities, and to maintain museums and public memorials. There is a return in terms of attractiveness - though of course a limited one. Thus, locational competition promotes not only the economy, but also culture and the arts. Would we have the chance to admire Europe's medieval cathedrals, had there not been many centuries of intense locational competition within the church? What was at stake here was of course not profit, but reputation.
International competition occurs not only between government administrations, but also between national labour markets. Competitiveness requires not just workers with skills and flexible labour markets, but also a good work culture: a strong work ethic, a willingness to perform, reliable work practices, cooperative union behaviour, and positive attitudes towards technical progress. These competitive attributes of course change over time. Once it used to be said, for example, that Germans were working too much, were too dedicated and perfectionist, and that they saved too much. Nowadays, critical voices abroad have less reason to be envious; the have come to a different verdict on the work culture of the location Germany.
Moral judgements about economically relevant facts have economic consequences and should therefore count among a society's assets and liabilities in a broad sense. They form part of the reputation that is integral to the name of a location, just as it is to a person, firm or organisation. Concepts like prestige, goodwill, and renown belong to the same category. One might also speak of 'intangible capital'. Like physical capital, it is subject to valuation. Somewhere I picked up the phrase 'image market'. It seems an apt term, carrying the right connotations but vague enough to encompass all those evaluation processes with moral content.
But image markets differ from product markets, in that there is no-one who demands an image a such, who offers a payment and therefore puts in a stake of his own. This increase the volatility of image markets and facilitates glorification, as well as vilification. Those whose image is at stake face verdicts that may affect their very existence to a much larger extent than is the case in other markets in which goods are traded. Moreover, product markets give rise to cooperative partnerships and commercial relations that are of durable value to suppliers and buyers, especially when they make use of the division of labour and economise on information and transaction costs. Finally, product markets are positive-sum markets where both sides of the exchange can realise their aim of gaining utility and wealth, in contrast to zero-sum markets, such as the image market, where the 'suppliers' compete amongst themselves, often producing mutual-admiration cliques and, at the same time, tendencies to denigrate outsiders.
Locational competition extends both to the positive-sum competition for wealth-creating mobile resources and to the zero-sum competition for reputation and the kind of prestige that flatters the patriotism and pride of the resident citizens. Consequently, we have to recognise the positive-sum morality (or mentality) of the traders and investors who are after wealth, and the zero-sum morality (or mentality) that revolves around pride and honour. For example, Germans before the First World War used to deprecate the English in the international competition of nations for harbouring a trader mentality. The Germans saw themselves as superior in that they strove for recognition in the world, not just mere lucre. Much has of course changed in Germany as elsewhere. Yet, much of what is now going on in Europe and elsewhere in the world cannot be fully understood if one disregards the competition for prestige. Just think of the international rivalry for world exhibitions and the Olympic Games.
It is likely that locational competition, once it was allowed to develop at the end of the Middle Ages in Europe, became the midwife of what we are today calling the market economy, the world economy, capitalism, Western civilisation, and the open society. We should note the following remarks which Max Weber made in his General Economic History that was published posthumously in 1923, and translated into English in 1927. He points out that the cities of medieval Western Europe enjoyed many freedoms which Russian cities did not, and that the West European cities lost these freedoms subsequently, just as the cities of Antiquity had few freedoms under Roman rule. Weber goes on:
... in contrast with antiquity, the (the West European cities of the Renaissance) came under the power of competing national states in a condition of perpetual struggle for power in peace and war ... This competitive struggle created the largest opportunities for modem Western capitalism. The separate states had to compete for mobile capital, which dictated to them the conditions under which it would assist them to power. Out of this alliance of the state with capital, dictated by necessity, arose the national citizen, the bourgeoisie in the modern sense of the word (Weber 1927/1981: 337). (Footnote 1).
The rise of Western civilisation has without doubt been facilitated by a certain type of morality: the civic morality of the bourgeoisie, the civil society of free citizens. This morality constitutes, nowadays and in the future, a positive competitive asset in locational competition. It consists of the ethics of property which respects the property rights of others; the ethics of contracts which facilitate the exchange of goods and services, the division of labour, and the advancing of credit; the ethics of individuality which demands freedom from coercion and makes self-responsibility a duty; and a sense of community spirit which brings self-interest into harmony with the shared values and public demands of the location, thus contributing to the peaceful coexistence of individuals.
Let me clarify civic morality by contrasting it with two other moralities: first, a tribal morality of the small group based on instinct, and second, a collectivist morality that aims to transfer the norms of the small group, the morality of the tribe, to modem mass society.
A plausible hypothesis says that tribal morality has genetic roots. For tens of thousands of years and hundreds of generations, humankind survived in small gangs or hordes, in kinship groups and tribes - een from today's angle in dire material penury and often at the fringe of mere survival. Those who gathered or obtained much less food than the average could not survive.
Small-group morality is instinctual, community-oriented, communistic. The individual is understood above all as a member of a closed whole that guarantees better chances of survival than an equally sized group of individuals who each separately pursue their own aims. The communal morality of the small tribal group has been cultivated quite naturally within the family. There, it is supported mainly by the genetic altruism of parental love and in the reciprocal altruism of the marital relationship. (Footnote 2). Beyond this, small-group morality comes to bear within neighbourhood communities, amongst friends, in cooperatives and clubs.
In Germany much of the instinctual morality of the tribe was taken up and abused by National Socialism in an esoteric-romantic variant to exploit the readiness of people to submit. 'You are nothing, your people is all', 'The banner is worth more than death' - these were typical slogans by which the propaganda of the 'Thousand Year Reich' tried to transfer tribal morality to macro society. Socialism was presented in the guise of a domineering nationalism. This appealed, above all, to the natural instincts of the young. A similar effect was obtained later in the USA when John F. Kennedy said: 'Don't ask what your country can do for you. Ask what you can do for your country!'. The 'country' thus became the symbol for 'us', some sort of community, but in this case fortunately without the taint of nationalist superiority and envy. Later, politicians did not hesitate to appeal to the 'moral equivalent of war' to solve a political task. The glorification of war and a leadership cult could of course also be observed in the Soviet system, in Cuba, China and North Korea. We shall later return to the question of totalitarian coercion.
In the socialist reality of recent decades - as before under Stalinism - we again discover the collectivist attempt to transfer the tribal morality to macro society. But, just as the communistic experiments of religious zealots in earlier ages were condemned to failure, so were and are the great social experiments of the recent past and the present bound to fail. This is so because ultimately any subordination of self-interest under the interest of the large collective requires coercion. One simply cannot rely on voluntary subordination. Lenin was quite frank when he said: 'Control is better'. This is the control by secret agents and informers, by police and bureaucrats. Mental coercion is then unavoidable. Instead of utilising the knowledge which is decentralised in millions of human minds and which grows by invention, if the need arises, or by mere curiosity, socialism has to rely on the all-knowing central committee. The 'pretence of knowledge', as Hayek (1988) correctly foresaw, was the real cause for the failure of the socialist experiment this century. There is an increasing demand for additional knowledge in the global competition of economic systems and locations. To ignore this is fatal.
Knowledge is especially important nowadays. We therefore have to assign a high moral. rank to the institutions which create, multiply and help apply knowledge or help to economise on required knowledge. The institutions that we have to think of in this context are the liberty of the individual who wants to discover and invent; the principles of science which apply standards and rules to separate worthwhile from irrelevant ideas; and the competition in the market for ideas which spontaneously generates a global, flexible division of labour amongst human minds.
The division of labour which really creates knowledge has to be horizontal, not hierarchic, so that individuals can exhaust their creative potential. Inventive productivity is enhanced by voluntary cooperation in a team, often held together by the competition with other teams. As soon as cooperation is imposed from above, activities are centrally coordinated and bureaucratically administered, and one gets waste and obstruction. Above all, the information flow from the bottom to the top dries up. This applies to hierarchical structures, whether they be in government, business or any other type of organisation.
One therefore has to wonder why the reduction of communications costs, which we now observe, is not always thought to favour the horizontal division of labour but has sometimes been invoked to justify business concentration. Whether people who construct big business concerns will actually uncover the synergies that they are searching for remains to be seen; one has to have great doubts.
Even greater reservations seem justified against the tendency towards a centralist integration in politics. This can for example be observed with the 'deepening' of the European Union. just at the time when the megastructure in eastern Europe collapsed, West Europeans busy themselves with fashioning a super-state. Fortunately, one special exemption has been obtained - by the British Eurosceptics on social policy. This will allow us to gain experimental insights into the welfare and labour market policies of the European Community. After all, the discovery procedure of competition works when at least one participant is allowed the freedom to do something different from the others - while the others are left to pursue their follies.
If we return to the narrower confines of economic life, we can perceive competition as a moral institution of a special kind: It translates the self-interest of one side of the market, however one may evaluate this on moral grounds, into a performance that helps the other side of the market. The customer is king when suppliers compete. And when the demand side competes, suppliers are able to protect their independence and their freedom to decide. Without the active pursuit of profit, there would only be night-cap competition, and, without the discipline of competition, the greed of suppliers would lead to the exploitation of consumers by powerful monopolists. Thus, we, the consumers, owe our good provisions, as Adam Smith said, not to the charity of the baker or butcher, but to their self-interest. Competition converts second-best motives of second-best human beings into decent performance. The same holds true of governments. They only become the servants of citizens when they compete with other governments for mobile resources. This points to the moral quality of locational competition.
Conversely, substantive perils exist when business concentrates and government centralises. People are deprived of alternatives and restricted in their freedom of choice; and as time goes on the mentality and morality of the subservient subject are dictated and cultivated. Bootlickers then make headway; civil courage becomes a scarce moral asset. Those at the top of large business concerns then get less and less information about what their customers want. Those at the top of centralised administrations have no clue what citizens are really concerned about. And peevish uninterest in politics becomes a dumb form of protest.
From the viewpoint of tribal morality, competitive behaviour appears damnable and depraved. Critics miss warm-hearted comradeship and human sharing. instead of a comfortable order under a distributing authority, they perceive a fight of all against all, 'Elbow society' is their term to revile competition, or they speak of the 'law of the jungle'. Those in the competitive game who render services to others are depicted merely as high-income earners who deserve no better than to be handed over to the Tax State for fleecing! Populists demand that governments should produce social justice, not simply establish the rule of law. Equality before the law and court rulings without regard to the person are not considered to be fair enough. Instead, government is urged to bring about the equality of outcomes by cutting back top incomes and guaranteeing everyone a sufficiently high minimal income: To everyone according to their need.
Real-life experience, however, has shown (for example in Sweden) that a government's capacity is overtaxed by the promises of the welfare state. Assistance, which is not conditioned on self-help and own effort, is also becoming morally dubious. It generates dependence on assistance and it gives rise to moral hazard and a claims mentality. People simply adjust to the conditions they are confronted with, just as they react in the market when they buy more of a product once a greater supply has brought down its price.
By contrast, moral behaviour is fostered in well-functioning small groups, including the family, which monitors adherence to norms and taboos which have proven their worth as rules of conduct. Such groups combine - so to speak - material assistance with an encouraging pat on the shoulder. They cultivate habits of gratitude among recipients of assistance, and provide other opportunities to earn gratitude or recognition.
The macro society with its welfare state, on the other hand, has to impose strict controls so that its redistribution system is not exploited. Once solidarity is turned into a legal claim, there is need for coercion. Therefore, the price of more equality of outcomes in the modern mass society is the impairment not only of the family as a self-reliant support organisation, but also of individual liberty. The extreme case was elicited by German poet Friedrich H÷lderlin when he wrote: 'What has always made the state a hell on earth has been precisely that man has tried to make it his heaven' (quoted after Hayek 1944/1972: 24).
Those who have lived under a totalitarian regime need no further explanation or evidence to accept the conclusion that the morality of the small group cannot be extend to apply to the anonymous mass society for a long time without continuous indoctrination and severe restrictions on individual liberty. Some countries like Cuba and North Korea are still in such a deplorable situation. others are on the way to a more open society. The driving force is the decline of communication costs, which gives rise to a growing competition among systems, locations, ideas and knowledge. This competition will limit the importance of tribal ethics to the small group where it has its comparative advantage.
Civic ethics, by contrast, is an ethics of individual responsibility; it is the morality of the open society. It promises liberty, and in exchange it demands that individuals are prepared to bear responsibility for their own actions. It implies and recommends that individuals are educated in self-discipline. Responsibility for one's own affairs becomes a duty. (Footnote 3). Those who do not act responsibly fall quickly outside the morals of the open society. Liberty is, in the first instance, the freedom to gain knowledge from experience, to learn from mistakes and to avoid mistakes by participating in an exchange of experiences.
The civic mentality endorses a progressive ethics which is not constructed according to a design but is the outcome of an evolutionary process. In a progressive order, new questions and challenges are coming up continually. One or the other participant in the debate may feel it within him- or herself to design and suggest new ethical answers. This gives innovative impetuses to moral discourse in ways similar to the stimulation of market competition by new products or - in the market of ideas - by new thoughts and concepts. To use a metaphor: one might say that moral discourse meanders through unknown terrain, like a river through the moral landscape. Many a solution which this discourse turns up will fail to prove its value. It will be jettisoned and forgotten. But much will become part of the moral tradition that is worth conserving because it has proven its usefulness. (Footnote 4).
The moral evolution of an open society does not proceed according to the principles of Darwinian theory. Our instincts may be inherited and that may make us susceptible to the temptations of collectivism, especially at a young age. But we owe the behavioural rules of Western civilisation - as Hayek showed - to the passing on of acquired knowledge along the lines of Lamarck's evolutionary theory. Over time, civilisations that are more efficient tend to expand. They gain more adherents, because they fit prevailing conditions better. Other civilisations recede because people turn away as they cannot expect sufficient life opportunities from them. just think of the collapse of 'real socialism' or of the economic decline of Africa in the maelstrom of ethnic conflict.
The ethics of Western civilisation emerged as an economic morality that was assisted by the locational competition of cities and states (as the quote from Max Weber indicated), though its roots read back further. It is a morality of efficiency, tailored to the anonymous division of labour over great distances. This division of labour is based on exchange, specifically purchases and sales. It is predicated upon individual property rights. In this context, communal property does not count as it cannot be efficiently traded. What I do not own exclusively, I cannot offer someone else for exclusive use. And what I cannot use exclusively, does not have full value for others - or for me. Moreover, what belongs to many will only rarely be conserved and cultivated, at least not spontaneously.
The inviolability of property is a fundamental legal principle which is morally supported by the commandment: 'Thou shalt not steal'. Violence against property, as the 1968 generation advocated, has similarly damaging consequences as violence against persons. Both narrow the scope for the division of labour and for trade. Both forms of violence raise the costs of security, irrespective of whether these costs come about in the form of taxes or insurance premiums. Locations with high criminality against property tend to lose their attractiveness for investment and job creation. The bill is paid by the land owners, immobile labour, and governments which face a shrinking revenue base.
Similarly important for the division of labour and trade is adherence to the principles of trust and credibility; they too are cost-saving. But trust and faithfulness do not mean in this context blind faith of the sort required to save on the costs of control in vertical hierarchies; rather they refer to that sort of dependability in interpreting and fulfilling voluntary contracts which encourages future reliance and trust and which allows material gains from further specialisation. This principle gives rise to the secondary virtues which are the virtues of the honest trader and artisan: precision, punctuality, warranty, compensation for damage, high reliability in paying one's bills. People reap personal gain in cultivating these virtues because honouring these maxims creates recognition in the image market, and hence creditworthiness so that they do not have to mortgage assets or pay a high risk premium. A man's honesty becomes his good reputation only with the passage of time, after the market has tested whether he is creditworthy.
We can contrast the good standing of the honourable merchant with the distrust that bourgeois society reserves for ambulant salesmen, those migrant birds hunting after the fast buck. One can get a good feeling for the locational advantage of a community with a high civic morality if one thinks of current conditions in the former communist countries of eastern Europe. Their shortfall of traditional economic ethics is now an obstacle to the development process; things will probably improve only gradually with generational change and intensive learning processes in economic ethics (Voigt 1993).
Where one can have trust in the safety of life and property and the ready fulfilment of contractual obligations, one can expect gains from the division of labour. Insurance premiums are low; police protection need not be elaborate, and the courts have little business. In such a society, there are not only low security and transaction costs, but also low information costs: people do not lie. Whereas it is necessary to dissimulate the truth behind courtesies and formalities in hierarchical systems, abuse, lies and fibs soon have negative feedback and incur penalties in the open, transparent society. The truth comes out sooner than one may expect. Part of the ethics of the open society is also a certain tolerance for errors. One is simply told more if one does not immediately show misgivings; people then have less reason to come to the fearful conclusion that 'silence is golden'.
The civic virtues describe to a large extent the ethics of the market place. They inspire a type of behaviour which is worth cultivating because high costs arise if people are unreliable - in short, dishonest and without honour. Let us underline that the honour of the merchant differs fundamentally from the honour of the vassal who subjects himself to blind obedience. Since markets are based on legal property rights, the honour of the merchant demands respect for the law and preparedness to compensate for damages and torts. Civil law only steps in where civic virtues and good manners do not suffice.
As noted above, creditworthiness cannot be built up quickly. For good reasons, people do not trust those whom they do not yet know. Long-time residents often suspect strangers or mobile entrepreneurs to be speculators, after the fast buck and with no lasting commitment to productive effort. However, this suspicion is based at least partly on a misunderstanding. For to speculate means to think about the future and to derive valuations for the present from future scenarios. Of necessity there is a risk in each future-oriented engagement. However, in reality, everyone who owns property incurs a risk for the future, even if he or she only holds on to the assets or fails to sell them out of inertia. Those who say that they do not speculate either refuse to take future eventualities into account, or believe simple-mindedly that everything will always remain as it is. This may have held true in the peasant culture of yesteryear, also for the rigidified craft economy of the guilds and corporations of Middle Age Europe. But nowadays we are faced with a continuing change of structures and conditions that is driven by world market forces. Those who are not on the alert and fail to adjust by anticipating change run the risk of being left behind, to be run over and to become dependent on the help of others. After all, one cannot only make mistakes by doing something, but also by failing to act.
Another critique of speculation is aimed not so much at the seemingly effortless acquisition of wealth as at the fact that money is involved. Money, though not considered as dirty per se, marks the borderline between the tribal morality and the civic ethics of the open society. Those who have paid their debts are free to leave. They are, so to say, free of the duties of allegiance that bind them to the family. Those who have acquitted themselves are free to quit. They are seen a little bit as deserters, outsiders, anonymous nobodies. Thus it is the money payment that symbolises the loss of the tie to the small tribal group. Those who offer something for money may wish to be seen as strangers and can be treated as outsiders. They are on the way to the open society, free of tribal ties. And that may cast a dubious light on them. In this context, we must appreciate that openness and the anonymity of the market are placing constraints and disciplines on tribal morality. But these constraints are, of course, discomforting and therefore not liked without reservation.
Speculation also means that one does not pursue a cause, or does not own an object, for its own intrinsic value, but that one invests because it is valued highly by others and therefore has an exchange value. The speculator consciously acts according to market forces, even when he exploits the whims of the market. Seen from the viewpoint of those imbued with tribal ethics, the speculator thus acts without respect for tradition and hence without honour.
Being oriented towards the future and discounting the past may be equally offensive. It used to be said in my youth that 'traders don't give you anything for bygones', or as the English say 'let bygones be bygones'. The cost that matters is not past effort which was duly recorded in the account books when it was expended. Rather, the cost is the future benefit forgone that we would have obtained otherwise. Curiosity about the future becomes a virtue for those who act in the market place and who act swiftly.
The market economy thrives on information. Sheer muscle power does not matter all that much, but an alert mind does. People who hear the proverbial grass grow succeed. This points the way to how the capitalist ethic fits into the modern information society and never-ending structural change: we are urged to hurry along with the times, to put curiosity before greed and to be on the alert. Such characteristics are not, as yet, widely seen as virtues. But more and more people know what characterises modern competition: time is money. It is amazing with what speed huge, complex transactions are made in share and foreign-exchange markets, if we compare this with cumbersome real-estate deals. Here one telephone call, there time-consuming contracting through solicitors and entry in a land registry! One can observe from the lifestyle of the yuppies that markets have a great influence over the mentality of the participants in these markets, whether one approves or not. When we are speaking of the lifestyle, we again have to think of locational factors. Wall Street is not Harvard, the London financial district is not Oxford. Of course, like and like associate with each other because similar customs, conventions and moral concepts save on communications and transaction costs. Many an idea will spread more easily among people with similar cultural backgrounds.
Human behaviour is made predictable by good manners. They dominate the middle ground of social intercourse between the tribal entity and the cosmopolitan, open society. Good manners matter in the spatial framework of local communities, regions and linguistic and cultural communities. Their content relates to what is 'proper', what earns respect and approval, what conforms to the usual expectations. Good manners facilitate human interaction in ways similar to a shared language, but they also constitute a sign of identification - if we compare differences in space - and hence constitute a locational factor. What is considered good manners has been passed down in customs; they are cultivated like a piece of land. Emotionally, they are like a piece of the home turf. Yet, conventions and good manners make economic sense only if they are of more use to those involved than what they cost to uphold or the damage they do.
Amongst friends we promise each other mutual support - a kind of reciprocity on a multilateral basis, a fraternity of cooperative help to help ourselves. This serves as a kind of private insurance on the basis of loose reciprocity, which economises on insurance costs. But fraternity may also turn into a cartel which disadvantages third parties, a conspiracy to eliminate competition or at least to make it 'fairer', or even a compact to gain a monopoly. It is possible that shared norms of behaviour serve to economise on transaction costs, to avoid certain taxes or to turn cumbersome decisions into easy routines. Thus, we pay waiters a tip of a certain percentage because everyone does it; one goes to the polls although it is of no relevance to oneself; one becomes politically engaged (or opts out) because that is prescribed by shared conventions or because one has turned one's civic duties into something like part of the family tradition. There are many examples of people engaging in a good cause although this only serves the common good of those with whom they live. Much of this may appear irrational and hard to explain. Not a few will suspect that there is such a thing as a collective rationality which ensures that selfless action pays that good manners are reciprocated and engagement for the common good earns a return. This sphere of manners and conventions, which lies between tribal morality and the ethics of the global society, is highly relevant to civilisation. We should not underrate its importance.
To be sure, economic man has to be self-interested to remain the race, but he does not pursue the narrow-minded, but the wider self- interest, taking the non-economic effects of his actions, or inactions, into account and by looking at externalities which may boomerang back through the market. Thus, one's reputation counts in similar ways as one's tangible assets, as we saw. Most people who want to conclude their lives successfully in both respects - earning wealth and a good reputation - will tend to become sponsors of some good cause.
The difference between self-interest and good causes can illuminated by the concept of 'non-tuism' which the English economist P.H. Wicksteed put forward. Wicksteed wrote: 'What makes ... an economic transaction is that I am not considering your desires except as a means by which I may gratify those of someone else - not necessarily myself. The economic relation does not exclude from my mind everyone but me, it potentially includes everyone but you' (Wicksteed 1933: 174). You may dispose of your private income or wealth as altruistically as you have to for your emotional peace - now or when you pass on your inheritance. However, in business there are no moral grounds for making altruistic concessions to contract partners. Only when business considerations come to bear fully will prices reflect relative scarcities without distortions, so that the prices can serve to overcome those scarcities. Coffee planters, for instance, are not helped by offering them artificially high prices out of friendship or compassion. Higher prices would only induce more suppliers to offer more output. How much excess production and waste is generated by such concessions can be seen by looking at Europe's common agricultural policy. This is why assistance should always be given directly and outside the market, so that market prices do not get polluted.
Non-tuism creates the resources to be altruistic. The great English economic theoretician Dennis Robertson once asked the question what it is that the economist economises by teaching and applying the economic principle (Robertson 1961). His response was: love, love in the form of charity. Charity is in such short supply and so valuable in private life that one should not waste it on economic relations where it only does damage. Indeed, the sharper the calculating pencil which we apply in business, the more will be left for what we can give to the family, the church, the Salvation Army, the Third World, more generally what satisfies altruism. There is much scope for expressions of philanthropy and community spirit, also in the form of voluntary transfers - which replace government transfers - to those for whom we feel sympathy.
The community spirit in a given location or region will become an increasingly important location factor. Locational competition will slim down the size of governments, including the welfare state with its system of redistribution. Many now seem to fear that this will lead to a dismantling of social security, doing damage to social cohesion. To be sure, social peace and harmony are assets in inter-locational competition. But the more intensely locations are competing for mobile capital, and for the jobs it creates, the less resonance there will be in society for outdated calls to class struggle. As within firms, competitive pressures from without enforce cooperation within. And when people can hope for economic growth, they are less likely to be envious.
Civic morality has its protective walls. Visitors and immigrants have difficulties in joining the establishment, the circle of established insiders, the local clubs and associations whose doors are more widely open to the sons and daughters of old-established families. Admittedly, the city is naturally more open than the village, the metropolis is more liberal than the provincial town. Distrust of strangers need not always go as far as xenophobia, but there is a general expectation that immigrants will not so easily be accepted as part of the home crowd if they act differently, and especially if they are successful.
All social systems have an inherent tendency to rigidify, not to change with the times and to close themselves off. The old does not always readily give way to the new as internal structures resist the pressures, impacts and changes that come from outside. We call this protectionism, an artificial closure of systems of thinking and acting, of morality and mentality. Xenophobia is the worst, local patriotism a harmless, manifestation of this. Protectionism seems to be supported by genetically inherited instincts which suggests to us that the exclusivist tribal mentality is only natural. We feel a certain inner warmth when we are not dealing with anonymous market forces, but with human beings whom we know and who share our joys, fears and pains. There seems to be a difference between emotional values which we share with our friends and which are reliably stable, and cold prices which change with scarcity and inform us continuously of events in the anonymous outside world, mercilessly forcing us to adjust. One might say that economists are cynics who - according to Oscar Wilde - know the price of everything and the value of nothing.
The fundamental principle of cosmopolitan morality is non-discrimination: treat those who are more distant from you no worse than your friends and close neighbours, the coloured person with no less respect than the white man, those of a different creed no different from your coreligionists or those who share your philosophy. It focuses on the question of the price to be offered and demanded, not on the person's values, philosophies or religion. The principle of non-discrimination can be universalised along the lines of Kant's Categorical Imperative: It can serve as a global law.
The cosmopolitan morality spread in its philosophical guise from Scotland and England to become the ethics of Western civilisation across Europe and North America. It is the individualist ethics of the bourgeoisie, of capitalism and the merchants. It stands in contrast to nationalism and socialism which derive from the ethics of the small tribe. Instead of acclaiming the state and national heroes, it serves trade and daily life, markets and money, in short: commercial affairs. This ethics is drawing more and more nations under its influence - in Central and Eastern Europe since the fall of the Wall, in the small Asian Tiger countries who follow in the wake of Japan's ascendancy; in China and in future possibly in India, and again and with partial success in Latin America. This morality now has gained global currency and will be imitated for the simple reason that it has been successful elsewhere. Its very success has great practical power to convince, more so than the critique of intellectuals or moral preachers, new sects and movements who decry the adoption of the cosmopolitan morality as a decay of the value system. It is true that capitalism 'created' the proletariat in its early history; but that happened when the paupers who otherwise would not have survived into adulthood were given the chance to survive by working for their daily bread in the factories. In our age, too, the market economy is laying bare quite a few cases of the misery of marginalised groups. In general, however, it enhances life opportunities because it allows a great diversity of talents to become productive in the global division of labour. As a consequence, a big world population can enjoy so much more affluence than would be possible if many small tribal communities existed in autarchic isolation alongside each other.
Scarcity prices and their changes are in a certain respect the specific expressions of a cosmopolitan morality. They tell you to adjust because the global division of labour demands it. The cosmopolitan morality that tells a community to obey market signals is a competitive asset in inter-locational rivalry. After all, some countries grant themselves exemptions from the cosmopolitan imperative, from the principle of free trade, non-discrimination and most-favoured nation treatment. In the long run, protectionist countries of course pay a price for their infringement of the free-trade rule; they pay with losses in economic welfare. This is why markets are being liberalised almost everywhere. It is thanks to the surge of cosmopolitan morality, of free trade and non-discrimination, that a greatly increased population has been fed in recent history and has at the same time become more wealthy.
The principle of non-discrimination comes automatically to bear when markets are free and open, when prices are equilibrium prices and when market participants maximise utility and profits. If markets are continually cleared by price competition, there are no queues, there is no opportunity to ration things arbitrarily, to discriminate without cost. Conversely, an intervention like minimum wage legislation, which creates unemployment, gives employers the opportunity to give preference to certain employees without incurring a cost penalty. It is of course possible that people have some bias, for more or less valid reasons, and wish to follow it, but then let's make sure that they incur a cost penalty. Public opinion often prefers the imposition of a non-pecuniary penalty for discrimination: pointing the finger and castigation in public. Admittedly, markets with free prices may not be as just as we would like them to be, but they guarantee more anonymity and random selection, and hence more equality of opportunity.
Many of course dislike such a blind, anonymous mechanism. In particular, they reject it in the political market where votes are bought and sold and where some voters demand preferments, and politicians are inclined to supply them. Such political horse trading may not be completely avoidable. But when so many citizens suffer from disillusionment with political life as now seems to be the case in many countries, there is too much power in the hands of government and the politicians, relative to their morality and competency. If support for the political process in the West with its long civic tradition is so poor, how is it to work out in Eastern Europe where governments have collapsed under pressures to reform and the civic ethics is not coming to the fore? Instead, Mafia organisations with no respect for the rule of law fill the gap! Can we in such circumstances advise investors, who have to take on many risks anyway, to try their luck in environments where political ethics and power structures offer so much scope for discrimination and intervention? The resulting locational disadvantages are borne, as we saw, by the immobile workers in those countries. If things get bad, the most courageous may migrate to look for their economic fortunes in a better moral environment. Those left behind suffer the more.
In many of the developed industrial countries, industry, governments and local authorities are now facing the pressures of structural change which threatens jobs, even entire industry locations. Should governments then intervene to protect people from change? Seen from the standpoint of tribal ethics the answer seems an unreserved 'yes'. After all, those affected draw attention to their plight by demonstrations in front of TV camera teams that invariably just happen to have been notified. What politician would dare to reject the demands for help from groups of people who are under fire, by pointing to the costs of assistance or protection which have to be borne by the majority of fellow citizens who remain anonymous? They would soon be typecast as cynics and as cold-hearted economic rationalists.
From the standpoint of the open society, the perspective is different. Here, structural risks present themselves as the mirror picture of growth opportunities. Many a structural weakness which befalls advanced countries can fortunately be predicted as a danger. One only has to analyse the structural dynamics of the new industrial countries. Thus, the crisis of the European steel industry could be predicted as long as two decades ago. Many enterprises indeed adjusted in an anticipatory manner, changed their product mix in response to the changed location conditions and modernised their production methods.
Other firms, who chose not to adjust, now lay siege to the subsidy state. Such management failures no doubt relate also to the readiness or otherwise of governments to yield to demands for assistance, which may, if necessary, be extorted by massive pressure. Those who promise help, provoke negligence, the need for help and moral hazard. If this attitude prevails, then the morality of the open society decays. The location loses its attractiveness for the very resources that can drive economic growth forward. It becomes less attractive for people who are sure that they will be among the high income earners and taxpayers, rather than among the needy subsidy-hunters. Protectionism thus inevitably turns into a negative location factor and into a competitive liability.
Who is paying the price for protective assistance which government is granting those who are known and beg for compassion? The answer is that the bill is footed by the many anonymous fellow citizens. They include the bulk of domestic consumers and taxpayers, the workers and firms who have to draw on overpriced inputs, and all those in the new industrial nations whose income and job opportunities are diminished if the rich countries resist structural adjustment. Seen in this light, the principle of free trade and non-discrimination, which stands in the way of protectionist industry policies, is a moral shield which protects the life opportunities of those we do not know. It deserves the rank of a universal principle to counter the influence of protectionist lobbies which are laying siege to governments. Those who advocate free trade are often derided as theoretical purists. But that criticism turns against the 'pragmatists' who raise it. Confused pragmatism grows of its own accord in the jungle of politicised interventionism. 'Purist theory' therefore may at least serve to give pragmatists, who earn their keep from representing particular interests, a bad conscience and thus serve as a corrective for their myopic judgments and all-too-pragmatic inclinations.
Without at least an intuitive comprehension of the spontaneous order of the market, one cannot comprehend the ethics of the open society or explain it to others. Markets are certainly not perfect, but they are without doubt the greatest invention in human history. Markets were invented wherever individual property was safeguarded, and they spread where conditions were favourable, above all the ethical preconditions.
Economic ethics, which markets demand and generate, is apt to promote the self-responsibility and the spontaneous order of free citizens. This takes the weight off hierarchical structures like the state. It creates the scope for privatisation, deregulation and liberalisation. Bureaucrats and many a politician of course take a different position than the citizens who are now showing their disdain for politics. Mature, responsible citizens find themselves in a tussle with authorities that claim a right to regiment them. Where and to what extent economic morality will be able to replace governmental authority will ultimately be decided by the competition of locations. We should note in this context that the spread of global competition since the early 1980s, and even before, has been paralleled by a turn towards supply-side policies, that is policies which are aimed at liberating producers rather than controlling them.
Ludwig Erhard, when German Economics Minister, did not hesitate to preach economic ethics, rather than issuing decrees. He used to admonish the citizens to save and the business people to invest ahead of demand. He demanded discipline in wage demands from the unions and price discipline from industry. Thus, he hoped to suppress inflationary tendencies not by direct government controls, but by moral suasion. But that had probably little durable effect. Those at the receiving end of his admonitions gradually came to ridicule his moralising speeches and his posturing as 'the massage of our souls'. But they nonetheless felt that he took them seriously by his appeals and therefore counted him as one of the fathers of Germany's post-war success.
Social compacts and accords that remind those in power of their overall responsibilities are desirable in open systems which compete with each other. One does not have to be concerned about social accords when the winds of global competition sweep in, because internal cooperation will develop anyway. Once the winds of competition are blowing in from the outside, the insiders band together, antagonism wanes, and all begin to cooperate out of sheer necessity. In such an atmosphere there is advantage not only in overcoming class conflicts between capital and labour, but also between incumbents and immigrants. When this happens within firms, competition promotes efficiency. When this happens among nations or locations, all residents gain new opportunities and prosperity.
One can also hope that the competition of locations will give rise to a competition of moral systems and that this moral competition will lead to quality improvements. When we speak of morality here, we do not think of something temporary or superficial as is implied when people speak of 'morale', that is motivation and sentiment. Rather we mean ethical rules which deserve to be turned into universal principles. But we must put up a warning sign: morality is directed against the degeneration of locational competition into protectionism. Universal ethical principles of competition should above all induce us to oppose the subsidy race and industrial and agricultural protectionism which is the consequence of short-sightedness. It overlooks the long-term damage done by the discrimination against those who are unknown and in favour of those who are known to, and closely connected with, policy makers.
The image of the cosmopolitan economic citizen lets one expect certain characteristics and modes of behaviour. One may describe the ideal type of the economic citizen (even as a poignant caricature) by about 100 adjectives and terms from the popular language. A list of these associative terms is attached, although it will have gaps.
There are still many words which remind us of the civic virtues and have positive connotations in popular culture. Linguists and literary critics may be able to tell us how the image of open-minded citizens has changed over time by analysing the language of the old and the young. That would offer us insights into future modes of thought and behaviour. A linguistic atlas that provides national regional and local information of this type might help us in rating locations for their assets of civic morality. This could supplement statistical information about murder and theft, fraud and corruption, accidents, strikes and many other such locational factors that define the social competitiveness of regions and nations.
Finally, a few words to sum up: locations have attributes which make them more or less attractive to mobile resources. The behaviour of the residents - more precisely, their economic ethics - is amongst the more important competitive factors. Just as tribal morality fits in well with the warmth of family life, so the global competition of firms and locations demands a morality of efficiency which is based on honesty. What is honest is decided in the image market which is also influenced by moral discourse. What has proven its worth is preserved, new concepts are tried out, successes are imitated, failures are rejected. Moral competition results from what Hayek called a 'discovery procedure' and Schumpeter a 'process of creative destruction'.
The global competition of locations has finished off socialism as a constructivist attempt to force tribal morality onto modern macro society. The universal principle of non-discrimination which is valid at the individual and the cosmopolitan levels has stood the test. Between the two poles on the social scale, the individual and global society - in a zone of tension with increasing chill - there are the family, the club, the neighbourhood, the city, the nation, the European Union, modem civilisation. Smaller communities will need more openness. These create moral ties for the individual who may accept them with gain or reject them out of a thirst for independence. But genuine independence is only enjoyed by those who accept many advantageous ties voluntarily and do so voluntarily out of self-discipline. The German poet Goethe put this concisely when he wrote: 'He who toys with life, will always remain in strife. He who does not take command of himself will remain a serf.
In locations, where such an attitude is conserved as a custom, there need be no great concern that economic morality will remain a competitive asset.
A responsible economic citizen is or should be
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1) Following in Max Weber's footsteps, historians of the long term, such as Jones (198187) and Rosenberg and Birdzell (1986) have shown that the miracle of Western civilisation is owed to the locational competition amongst the small European states, and why this came about. Also see Weede (1990; 1995). The hypotheses of Findlay (1992) are also worth noting. He shows that small communities such as Venice, Geneva, Portugal and Holland earned their revenues from long-distance trade, not from taxing the land. He also showed that inter-state rivalry in commerce promoted the journeys of discovery and, through defence technology, the industrial revolution. Inward-looking states that covered large areas had no choice but to imitate the smaller, more open maritime nations.
2) The family offers tribal morality a firm place even in the free, open society. The moral principles of the macro society come to bear in competition between families, including loose partnerships. In this way, the social ethics of the family is being controlled today by the ethics of the open society. Young people and married couples who feel overly constrained by the ethics of the family will emancipate themselves. The latent threat of leaving the family makes it more open, but leads to a decay of traditional values or, to use a neutral term, to a transformation of social values.
3) If you want no more than a minimum of coercion from above, you have to exercise and demand self-discipline as a quid pro quo for liberty. Self-discipline thus becomes a pedagogical task and part of the education for liberty. Free people must reign themselves in to stay within the rules of civic ethics, so that government does not have to act as a guardian and may instead concentrate on matters that can only be solved by collective action, such as the protection of life and property. The limits of liberty - for example n the area of the trade in human organs, dangerous weapons and environmentally damaging goods - are contentious and will probably remain so for a long time yet on the agenda for moral discourse. There are probably no alternatives to exporting the limits of liberty by conducting limited and controlled experiments.
4) Those who believe, like myself, that civic morality flows from cultural selection processes will have to entrust the further evolution of morality to experiments and experiences, trial and error, venturing and correcting. Thus, one might for example ask whether thefts by drug addicts would decline if soft drugs were as freely available as is the case with nicotine and alcohol. How long would it take till drug taking falls, as cigarette consumption now does? Are prohibitions more effective than bitter experience, belated in the twenties encouraging or rather discouraging? Might drug-driven criminality be reduced without major drawbacks by treating addicts as sick people in need of permanent medication? Such questions cannot be answered solely from behind a desk, for they depend on human behaviour under differing circumstances. This is why the competition of alternative locations, which we can visualise as a process of experimentation to discover, is so fundamental and promising for the evolution of our civilisation. In contrast to centralism, decentralisation is a system capable of teaching us solutions, including to moral problems. The competitive process itself is a learning process.