Tuesday, August 04, 2009

How the Free Market Makes Us Act Ethically

Over on EconLog, Bryan Caplan has an interesting article on Insurance, Reputation, and Kristallnacht. The gist of the story is this: after Kristallnacht, it was discovered that the affected Jews had insurance with Aryian-owned insurance companies. When the German government offered to let them get out of their contracts, the owners refused -- and even went so far as to threaten to fight the Nazi government on the issue. Why did they do this? Certainly not because they loved or even like the Jews. Hardly. No, they insisted on living up to their contracts because it would hurt them economically if they didn't. Here is a case where people who would have otherwise acted immorally were strongly encouraged by the free market to nonetheless act ethically. It's an amazing episode, if you think about it. Certainly, I have always been of the opinion that the markets do in fact have this effect on people, but here is a specific historical episode where it occurred. Of course, the Nazi government figured out a way to screw the Jews out of the money anyway, but the insurance companies would have nothing to do with doing it themselves, directly. It took government intervention for racism to be enforced, despite the influence of the free market.

Here, though, is a horrifying thought: what do you suppose people would do now if the same situation were to arise? It seems that more and more, people are determined to lay off the blame on someone else. Can't get a job? Blame your school. Can't get an A? Blame your teacher. If our government told CEOs to do something, and that they wouldn't have to shoulder the blame, that the government would do so, how many would insist on nonetheless being responsible to their customers?
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