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Economics and the VirtuesBuilding a New Moral Foundation$

Jennifer A. Baker and Mark D. White

Print publication date: 2016

Print ISBN-13: 9780198701392

Published to Oxford Scholarship Online: March 2016

DOI: 10.1093/acprof:oso/9780198701392.001.0001

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Can Trust, Reciprocity, and Friendships Survive Contact with the Market?

Can Trust, Reciprocity, and Friendships Survive Contact with the Market?

Chapter:
(p.217) Chapter 11 Can Trust, Reciprocity, and Friendships Survive Contact with the Market?
Source:
Economics and the Virtues
Author(s):

Seung (Ginny) Choi

Virgil Henry Storr

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198701392.003.0012

Abstract and Keywords

Critics of markets have often asserted that markets undermine morality and that market dealings are unfair and corrupting. In their perspective, the expansion of the market and market values taint the nature of the goods being exchanged and the relationships between the parties to the deal. This chapter gives reasons to suspect this critique of markets and attempts to push back against these complaints. It argues that the market is a social arena where individuals not only pursue their material goals but also exercise their moral selves; after all, meaningful social bonds characterized by trust and trustworthiness can and do develop in market settings. The market depends on and promotes trust and trustworthiness as well as fairness and reciprocity and these values, as suggested by experimental economic evidence, play important roles in successful market exchanges.

Keywords:   Market, trust, trustworthiness, morality, social bonds, economic experiments

The market is a tool. It is a social machine that links prospective buyers with prospective sellers. It is a social arena where prospective buyers compete with one another to secure the goods and services that they desire, and where prospective sellers compete with each other to attract customers for their wares. If a buyer and a seller agree on the terms of the trade (including the price), the buyer gives the seller something of value (for example, money or a money equivalent) in exchange for the good or service that the seller is offering. Buyers succeed in the market when they secure the goods and services that they want at the price that they are willing to pay (when the utility they gain from the good is greater than the utility that they gain from what they must give up to purchase the good). Sellers succeed in the market when the selling price is greater than the cost (when they earn a profit).

Like any tool, the market can be used for good or for ill. A hammer can be used by a carpenter to build a house and can also be used by the murderer to crack the skull of his victim. A computer can be used to do homework and can be used to bully a classmate. A radio can be used to transmit vital information about evacuation routes in the hours before a major storm and can be used to direct armed militia intent on genocide to their next victims. In each of these cases, it would be a mistake to praise or blame the tool for the praiseworthy or blameworthy purposes that they were used to advance. Instead, in each of the cases above, it is the person and their purposes and not the tool that should be praised or blamed. The same is true of the market. The market can be used to buy books, food and homes, and it can also be used to purchase sex and illicit drugs.

Nonetheless, individuals must often have certain skills or be in possession of certain knowledge in order to effectively use certain tools. To effectively wield a hammer to hit a desired object with a desired level of force, you must have a (p.218) minimum level of strength and hand–eye coordination. To effectively use a computer to accomplish a particular function, you must possess a certain level of computing knowledge. Moreover, the more that you use a tool to perform a certain function, the more facility you gain with the tool and the more dexterous you become with it. In the case of social tools, the skills that you are likely to develop are social skills, and some of these social skills are socially relevant moral habits or virtues.

The market, then, is a social arena where individuals not only pursue their material goals but also exercise their moral selves. The goods and services that market participants desire and offer, the trading partners with whom they are willing to exchange, and the manner in which they conduct themselves during their market dealings, are all shaped at least in part by their morality. Moreover, to the extent that market participants prefer to deal with certain kinds of people and demand to be treated a certain way by would be trading partners, success in the market will incentivize actors to exhibit certain character traits.

In related work, Storr discusses the moral teachings of the market, that is, the moral sentiments individuals are likely to acquire and develop as they engage in the market.1 As he writes, “For the market to promote vice it would have to expose us to circumstances where vice received praise and was thought to be praiseworthy, where the individuals that we encountered were relatively more vicious than the individuals we tended to encounter in other contexts, and where we were rewarded for immoral behavior. None of this appears to be the case in the market.”2 Rejecting the notion that the market is amoral or that it has negative moral consequences, Storr argues that the market is a moral teacher that tends to punish vices and reward virtue. It places them in circumstances where they are forced to interact with diverse others in a way where they have to be concerned with their desires. Moreover, not only can social bonds survive their contact with the market without being corrupted, but the market can encourage the development of meaningful social bonds.3 As such, the market makes individuals morally better people.

This is, of course, not a novel view: as McCloskey writes, “Capitalism has not corrupted our souls. It has improved them.”4 It is also not an uncontroversial view: for instance, it has been argued that markets can destroy individual judgment and conduct,5 weaken societal and corporate morality,6 hurt altruism and cooperation,7 and have unintended adverse effects on social norms and informal institutions.8 This chapter is an attempt to push back against these complaints and to further the argument that the market is a moral teacher. Specifically, we argue that the market depends on and promotes trust and trustworthiness as well as fairness and reciprocity. Additionally, we argue that the market is an arena where meaningful social bonds characterized by trust and trustworthiness can and do develop.

Summarizing the arguments offered by Michael Sandel, Section 1 briefly engages a common but often persuasive critique leveled against the market (p.219) that market dealings are unfair and corrupting. Sections 2 and 3 use evidence from the experimental literature to highlight the important roles that trust and trustworthiness, as well as fairness and reciprocity, are likely to play in successful market exchanges. Section 4 explores the notion that injecting market values into social relationships is necessarily damaging to those relationships and argues, as has been suggested elsewhere, that the market is a social space where meaningful social bonds can and do develop. Section 5 offers concluding remarks.

1. The Market’s Moral Limits

Michael Sandel has argued that markets undermine morality and, in particular, worries about the recent expansion of markets and market values.9 Although he believes that an increase in greed has undoubtedly accompanied this “market triumphalism,” the most worrisome consequences of this growth of markets has been “the expansion of markets, and of market values, into spheres of life where they don’t belong.”10 There are perverse moral consequences, he argues, associated with our moving to a world “where everything is up for sale.” Specifically, as Sandel explains, “markets leave their mark on social norms. Often, market incentives erode or crowd out nonmarket incentives.”11 Moreover, Sandel argues that markets in certain goods and services under certain scenarios are likely to be unfair and corrupting.

As Sandel explains, “the fairness objection points to the injustice that can arise when people buy and sell things under conditions of inequality or dire economic necessity.”12 This suggests that market exchanges are not always fully voluntary and that desperation can force people to buy or sell goods and services that otherwise they would not buy or sell if they were in less dire economic circumstances. “Market choices,” Sandel explains, “are not free choices if some people are desperately poor or lack the ability to bargain on fair terms. So in order to know whether a market choice is a free choice, we have to ask what inequalities in the background conditions of society undermine meaningful consent.”13 Think here of the child forced to work in a sweatshop, the woman forced into prostitution, and the man forced to sell an organ, because each is extremely poor; think also of the indigenous producer of some export commodity in the developing world who is not able to bargain for fairer terms for her product when transacting with her certainly richer and potentially more sophisticated trading partners in the developed world. As Sandel explains, “a peasant may agree to sell his kidney or cornea to feed his starving family, but his agreement may not really be voluntary. He may be unfairly coerced, in effect, by the necessities of his situation.”14

(p.220) In addition to his fairness concerns, Sandel also worries that market relationships can be corrupting in some circumstances, an objection that “points to the degrading effect of market valuation and exchange on certain goods and practices. According to this objection, certain moral and civic goods are diminished or corrupted if bought and sold.”15 This suggests that giving away certain goods and services can be morally neutral or even virtuous while exchanging the same goods and services for money can be morally problematic. This also suggests that introducing money into certain relationships can pervert or poison those relationships. Think here of the monetization of certain activities, like sex in the case of prostitution, which many view as being inherently degrading to both the buyer and the seller. Think also of the sister who charges her brother for doing a favor and the attempt to buy a friendship rather than earning it; both types of relationships, according to Sandel, would be damaged by the introduction of market dealings. He also mentions the selling of blood, which he claims ends up reducing rather than increasing the availability of blood relative to the current system that relies on donations.

Sandel, thus, suggests that certain transactions are likely to be unfair or corrupting because of either the nature of the goods being exchanged or the relationships between the parties to the deal. In a sense, Sandel’s claims are not controversial. Going where you do not belong is bound to have perverse consequences or at least unfortunate or unhappy consequences. There are, however, reasons to worry about his claims. For instance, whether or not Sandel draws the line correctly around where the market should and should not go remains an unsettled question. Moreover, his rationale for drawing the boundaries where he does draw them is arbitrary at best and appears to be based on tradition or his subjective perception that certain goods ought to be widely available and that certain goods should not be for sale.

However, even if we were to accept Sandel’s claims, several key questions remain unanswered. First, what is the moral character of market transactions and values when they occur in spheres where, in his perspective, they do belong—that is, where the exchange is truly voluntary and the good is not corrupted by being sold? Are market transactions involving the appropriate goods or the injection of market values between appropriate parties also likely to be unjust and corrupting? Second, are injustice and corruption the only possible, likely, or even dominant morally relevant outcomes of transacting in goods that “should not be traded” and of transactions between individuals who “should not trade” with one another? Is it possible that engaging in market activity and adopting market values can be virtuous even when they occur where and when they should not occur?

Section 2 attempts to answer these questions, albeit indirectly. Markets, we argue, depend on, as well as engender, trust and trustworthiness, and fairness and reciprocity. Absent trust and trustworthiness, market transactions can (p.221) become prohibitively costly, and absent fairness and reciprocity, market transactions can become prohibitively uninviting. Moreover, rather than corrupting social bonds, markets benefit from and can encourage the emergence of meaningful social friendships.

2. Trust and Trustworthiness in Market Dealings

By trust we mean the belief that others will not betray us and might even act beneficently towards us in uncertain or risky situations when they are not required to do so and when it is not in their short-term interest to do so.16 To be trustworthy is to prove deserving of trust by keeping your promises and not betraying confidences or commitments. There is a great deal of research that speaks to the important roles that trust and trustworthiness play in economic activity as well as how economic activity can engender trust and trustworthiness.

Economic agents are said to have either game-theoretic or preference-based reasons to trust (in any context). The former equates trust with an individual’s prior belief that his opponent will act cooperatively in a repeated game. The latter motivation (that is, preference-based reasons) presupposes that individuals have preferences for fairness and cooperation. Here, individuals trust anonymous partners even in one-shot games because they expect the same behavior from them. Together, they suggest that markets depend on and engender trust.

The idea that markets depend on trust is not new. As Arrow explained, “virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time. It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence.”17 Studies of prosperous societies highlight the pivotal role of trust in economic performance.18 For example, La Porta and his colleagues showed that the proportion of trusting people was negatively correlated with inflation rates and positively correlated with GDP growth across countries.19 Zak and Knack found the positive correlation between generalized trust, GDP growth and investment levels.20 Dyer and Chu examined whether trust generates economic value and found that the level of supplier trust in a buyer was correlated with greater (confidential) information-sharing between the exchange partners and also resulted in lower (ex post) transaction costs (such as monitoring costs) and substantively better financial performance.21 Guiso, Sapienza and Zingales discovered that greater bilateral trust between two countries is associated with higher volumes of trade between the countries.22 Zaheer and colleagues investigated how firm performance is influenced by interpersonal and inter-organizational trust and (p.222) found that negotiation costs were a function of interpersonal and inter-organizational trust: where interpersonal trust between employees of partner firms was low, inter-organizational trust remained high and accounted for the low negotiation costs.23 Furthermore, higher trust societies are also associated with other factors that influence economic success like less crime,24 efficient judicial systems,25 high quality government bureaucracies,26 less government intervention,27 as well as less corruption and better financial markets.28

Trust matters in a market setting for two main reasons. First, as suggested above, trust has the propensity to lower transaction costs since it can complement and substitute for contractual and bureaucratic mechanisms for cooperation.29 Firms often devote a large amount of resources while engaging in expensive negotiations before entering business together to screen for unreliable or untrustworthy partners (that is, ex ante and ex post opportunism).30 Vetting all possible partners each time an individual wishes to engage in trade is costly, however, and conducting business with traders with good reputations (or with whom others have had “good” personal experience) can reduce the uncertainty arising from the risk inherent to the reliability of partners. As such, individuals have incentives to build lasting relationships with trustworthy others. In addition, there are added benefits to forming such relationships. For example, two trusted partners may not need written contracts and, even when there is one, may not need to stipulate every possible contingency. Furthermore, citizens in high-trust societies are less likely to devote a large amount of resources to protect themselves from violations of their property rights or criminal acts, whether they are in the form of private security or bribes.

Second, trust can inspire not only information-sharing between trading partners (and even competitors) but also confidence in the information that is shared. Through information-sharing, trust can shift focus from short-term returns to long-term returns and thereby encourage investment (in physical and human capital), innovation and specialization. Moreover, entrepreneurs would have more time to engage in ventures and streamline existing processes if they could spend fewer resources on monitoring potential wrongdoings by partners and their employees because they trust them. Additionally, trust can promote greater efficiency by enabling each party to be more flexible in responding to changing market conditions and in reaching a mutually beneficial solution; after all, individuals can be assured that their partners would reciprocate in the future if they compromise first.31

Markets not only depend on trust and trustworthiness but also promote them. As Granovetter notes, “individuals with whom one has a continuing relationship have an economic motivation to be trustworthy.”32 Several studies, for instance, have suggested that the greater the individuals’ exposure to markets, the more likely they are to be trusting and trustworthy. One implication of these studies is that commercial activities—including labor market (p.223) participation—train individuals to trust and to act trustworthily. Henrich and colleagues, for instance, concluded that market integration explains a large portion of the behavior variation across societies that are observed in economic experiments.33 The more the market is integrated into a community the higher levels of prosociality they exhibit in ultimatum games. Tracer also found that there was some (albeit weak) support for the notion that a greater level of market integration at both the community and individual level leads to greater prosociality.34 Ensminger found that exposure to markets was a predictor of offer size within ultimatum and dictator games.35 Tu and Bulte explored the links between trust and market integration and concluded that trust (as measured using a trust game) is positively associated with labor market participation.36 Fehr and List observed a significantly higher display of trust and trustworthiness by coffee mill executives than students in their experiment in Costa Rica.37 Using a market-priming task followed by a trust game, Al-Ubaydli and colleagues concluded that market priming (encouraging subjects to adopt a market mindset) significantly increased levels of trust and trustworthiness.38 Finally, Choi and Storr found that individuals develop relationships characterized by trust and trustworthiness in market settings.39

3. Fairness and Reciprocity in Markets

By fairness we mean not only impartiality and equanimity but also treating others in a manner that is consistent with how they “deserve” to be treated. To treat someone fairly is, thus, to treat them justly. The existing empirical and experimental research suggests that fairness concerns shape market activity and that, in turn, market activity promotes and encourages people to be concerned with fairness. This should not be surprising, for (at least) two reasons. First, the most profitable businesses are those that are able to develop relationships with trading partners and so encourage repeat business with customers and suppliers. Because people are likely to avoid dealing with those that they believe have treated them unfairly (so long as alternatives exist), businesses have an incentive to deal fairly with their trading partners. Second, it has been well established that norms (regardless of their content) color economic behavior. We should, therefore, expect market activity and outcomes to be impacted by fairness concerns to the extent that norms of fairness exist within a particular culture.

Concerns about fairness can have an impact on market competition, cooperation, and incentives.40 Ample empirical evidence suggests that fairness motivates firm and individual behavior. Kahneman, Knetsch and Thaler, for instance, reported that the public has strong feelings about what constitutes a fair price (set by firms), about firms adjusting their prices in the short-run in (p.224) response to changing market circumstances, and about firms exploiting their market power (in particular, monopoly status).41 Franciosi and colleagues have suggested that buyers who expect to be treated fairly believe that prices should only rise when a seller’s production costs rise.42 Sellers who accept this fairness norm will not raise prices in the short-run unless the price rise can be justified by an increase in their production cost.

Likewise, employees’ perception of fair wage constrains the firms’ ability to freely set its wages and their willingness to lower them when market conditions decline.43 Bewley explained that persistent downward wage rigidity for both existing and new employees during recessions was the result of employers’ beliefs about employee motivation and morale.44 Specifically, data collected from interviews suggested that employers want employees to identify with their companies and their objectives and to encourage positive cooperation with their colleagues and supervisors. Refusing to cut wages is not only consistent with the practice of rewarding good performance but also with keeping good worker morale and with maintaining social cohesion and productivity within the firm.

Additionally, experimental research based on a simple bilateral bargaining game called the ultimatum game also illustrate that a non-trivial number of participants do not care solely about monetary payoffs. In this game, the first mover is asked to divide a given monetary endowment between himself and the second mover, who has the right to take or reject the division. If the division is rejected, both players earn nothing. Game-theoretic predictions dictate that the self-interested first mover should offer as little as possible to the second mover, who, likewise, should accept even the minimum amount offered. This asymmetric division, however, tends to appear unfair to many people, and dozens of replications of ultimatum games support this view. Typically, first movers offer an average of 40 per cent of the endowment to second movers and second movers frequently reject offers of less than 20 per cent. This observation holds even at higher stakes of $100 and $400.45 One interpretation of second mover rejections is that some players respond to unfair treatment with negative reciprocity (that is, by harming the person who treated them unfairly even at their own expense). Undoubtedly, negative reciprocity can be observed in social settings (such as ugly friendship breaks and divorces) as well as economic settings (such as boycotts).

Dozens of ultimatum games from around the world corroborate the general observations from the small-stakes games conducted in the United States. Cross-cultural comparisons of behavior in ultimatum games revealed similarities in offer distributions and acceptance rates between student populations in America, Japan, Slovenia, and Israel.46 These cross-cultural similarities suggest that an “overwhelming market influence [may be dominating] any cross-cultural notions of fairness or norms of exchange.”47 Supporting this view, Henrich and colleagues concluded that the levels of market integration and (p.225) fairness—even in brief, one-shot exchanges—are positively correlated, based on data collected from basic experimental games (including the ultimatum game) administered over fifteen distinct small-scale societies.48

4. The Sociality of Commercial Exchanges

Zelizer has criticized what she describes as the “separate spheres” and “hostile worlds” views of the relationship between economy and society.49 The separate spheres view holds that the two arenas of social life, one characterized by sentiment and mutuality and the other characterized by rationality and exchange, can co-exist peaceably alongside one another. The “hostile worlds” view, however, suggests that these two spheres inevitably “contaminate” each other if and when they intersect: “penetration of rational calculation into the sphere of sentiment would disrupt solidarity, just as the penetration of sentiment into the sphere of rationality would disrupt [rational] efficiency.”50

Interestingly, Hayek seemed to endorse the “hostile worlds” view, writing that

we must constantly adjust our lives, our thoughts and our emotions, in order to live simultaneously within different kinds of orders according to different rules. If we were to apply the unmodified, uncurbed, rules of the micro-cosmos (that is, of the small band or troop, or of, say, our families) to the macro-cosmos (our wider civilisation), as our instincts and sentimental yearnings often make us wish to do, we would destroy it. Yet if we were always to apply the rules of the extended order to our more intimate groupings, we would crush them.51

Zelizer has rejected this style of thinking in favor of “a more fully social conception of economic activity.”52 The dichotomy between the world of the family and the world of the firm, she suggests, is a false one.

It is possible for social relationships to survive contact with the market without being corrupted. In fact, as suggested above, social relationships can facilitate economic activity. Stated another way, economic activity is embedded within a context of ongoing social relations and individuals can utilize their social connections as they pursue their economic goals. Additionally, it is possible for social relationships to develop within market contexts and for commercial relationships to develop into social friendships. Indeed, the market is a social space where meaningful social connections do occur and meaningful social bonds do deepen. Even if Sandel is correct that the introduction of market values do sometimes and under certain circumstances corrupt social bonds, it does not appear to be the case that the introduction of market values necessarily corrupts social bonds. Moreover, there appears to be the potential that market activity can be enhanced by social relationships and that social relationships can be deepened by market activity.

(p.226) 4.1 The concepts of embeddedness and social capital

“Actors,” Granovetter writes, “do not behave or decide to behave as atoms outside of social structure, nor do they adhere slavishly to a script written for them by the particular intersection of social categories that they happen to occupy.”53 Instead, economic action is embedded within social structures. Specifically, he argues that concrete relationships reduce transaction costs by engendering trust and reducing the likelihood of malfeasance.54 Elsewhere, Granovetter has likewise discussed the persistence of large family firms and ethnic trade groups in advanced economies.55 More recently, he has pointed out that social structures can affect and influence a variety of economic phenomena including prices, productivity and innovation.56

Others have profitably employed the concept of embeddedness to explain how social structure affects economic activity.57 Uzzi and Lancaster, for instance, have discussed how firms’ embedded relationships can affect the prices of both standard and complex legal services.58 Similarly, Uzzi has argued that firms are embedded in organizational networks that can both promote and retard economic performance.59 Romo and Schwartz have made the case that the market and non-market relationships that develop within regional economies eventually create dependencies that work to constrain the migration of manufacturing firms out of the region, even when migration would result in monetary savings.60

The social capital literature has, similarly, discussed how individuals utilize their social relationships as they pursue their economic goals. Coleman, for instance, has explained that “social capital is productive, making possible the achievement of certain ends that in its absence would not be possible.”61 Like other forms of capital, it is a tool that is heterogeneous, with some social capital better suited for some purposes, and some better suited for other purposes.62 Social capital, Coleman explains, exists within and is inextricable from “the structure of relations between and among actors.”63 According to Coleman, social capital comes in several different forms, including mutual trust, information channels, norms, and effective sanctions.64 For instance, as he describes, social ties between Jewish diamond traders in New York act as a kind of insurance, eliminating the need for purchasing expensive insurance devices, lowering transaction costs, and therefore facilitating transactions that would not otherwise be possible. Similarly, social capital within the family and within the community can act as a resource that facilitates the attainment of human capital by children. The closer the relationships between parents and children and the closer knit the community to which they belong, he concludes, the less likely it is that these children will drop out of school.

Others have used the concept of social capital to explain how individuals deploy their social networks and the resources embedded within their social networks as they pursue their economic goals. Granovetter, for instance, has (p.227) described how individuals rely on weak ties in order to secure employment.65 Podolny and Baron have described how peoples’ informal ties within an organization affect their advancement.66 Uzzi has found that social relationships between corporate bankers and borrowers can lower loan prices by facilitating the flow of information and the establishment of informal enforcement mechanisms.67 Torsvik has likewise found that social capital as social norms reduces transaction costs in the economic sphere and, so, promotes social cooperation.68 Also, Knack and Keefer found that economic performance and social capital in the form of norms of civic cooperation and interpersonal trust are positively related.69

Although there is some discussion in the literature on the possible costs associated with belonging to particular networks,70 most studies tend to focus on how social relationships, and the resources that individuals can access through their social networks, affect economic performance. Moreover, when they do discuss the formation of social relationships within the economic sphere, scholars tend to focus on the formation of weak ties within commercial organizations and not on the possibility that strong ties can and do develop within commercial places.71

4.2 Social relations as economically conditioned

Even though studies within the embeddedness literature tend to focus on how these relationships affect individual or organizational economic performance, some point to the possibility of social bonds developing between participants in a market setting.

While Ingram and Roberts, for instance, focus on the economic function of the relationships that can develop between competitors, they nonetheless acknowledge the possibility that these relationships can form.72 Similarly, Granovetter is aware that social action can be economically conditioned: as he acknowledges, “business dealings [sometimes] spill over into sociability…especially amongst business elites.”73 Additionally, in explaining why consumers tend to trust and prefer “our own past dealings” as sources of information, Granovetter notes “continuing economic relations often become overlaid with social content that carries strong expectations of trust and abstention from opportunism.”74 Although he stops there and does not tease out the implications of his observation that social feelings often grow out of commercial relationships, the observation that market relations often develop into relationships characterized by trust is important in itself.

Indeed, as Adam Smith argued, “the necessity or convenience of mutual accommodation very frequently produces a friendship not unlike that which takes place among those who are born to live in the same family. Colleagues in office, partners in trade, call one another brothers; and frequently feel towards (p.228) one another as if they really were so.”75 More generally, as Silver discussed, commercial society can actually promote meaningful social connections.76 Seabright has pointed out that markets work because human beings in market contexts and governed by market institutions are “willing to treat strangers as honorary friends.”77 As Storr observed, markets can be social spaces “where both economic and extraeconomic relationships are developed and maintained.”78 By extraeconomic relationships, Storr is referring to social relationships that begin as economic or commercial relationships (that is, relationships between co-workers, employers and employees, mentors and apprentices, and so on) that morph into genuine social friendships characterized by deep bonds of trust and affection. As he continues, “markets are not only embedded in the community but can also promote and sustain the community.…Many meaningful conversations beyond negotiations occur within the conversation of the market.”79

There are a few studies within the industrial sociological and management studies literature that speak to the potential of commercial relationships to morph into social friendships as well as the potential benefits and negative aspects of deep commercial friendships. For instance, many have described how strong bonds develop between workplace friends because of their common experiences and circumstances.80 Think of co-workers on the factory floor who invite each other over for barbeques on the weekends, or office workers who reconvene after work for happy hour before heading home. These relationships, it turns out, are not only important for job satisfaction but can also represent deep social bonds. Similarly, other studies have discussed how workplaces can facilitate office romance because co-workers often have similar backgrounds and so much time is spent at work associating with colleagues.81 Also, as yet others describe, even principal–client and seller–buyer relationships can develop into close friendships.82 Again, the trust that is necessary for their work relationships to function well and the trust fostered during their non-work interactions can reinforce one another. As Price and Arnould found, “commercial friendships, similar to other friendships, involve affection, intimacy, social support, loyalty and reciprocal gift giving.”83

Admittedly, these commercial relationships may not be as deep as the social bonds that develop in other contexts. The social unions between neighbors, schoolmates, church members, or lodge brothers may very well be closer, by their very nature, than workplace friendships.84 And, of course, family ties may trump any relationship that might ever develop in the workplace. The point in highlighting these relationships is not to privilege them over non-commercial friendships but merely to suggest that these relationships can play important roles in people’s lives.

In addition to being spaces where commercial friendships are formed, businesses also provide spaces where non-commercial relationships grow and develop. Amongst the range of goods and services that businesses provide, (p.229) one key and easily overlooked one is the provision of environments where social bonds that developed in, say, the synagogue, church, university, or the neighborhood playground, can be cemented. That two friends can spend a Saturday afternoon at the mall, that a family can share a meal on Sunday night at their favorite restaurant, that friends at different firms can find places to meet for lunch in the middle of a busy work day, that a couple can go out to dinner, dancing and a movie on a Friday night, are important aspects of what businesses provide in addition to goods and services. To be sure, friends, couples, and family members found spaces for conviviality before there were restaurants and shopping malls. Indeed, homes, churches, parks, and museums remain important social spaces. The point is simply to emphasize that market spaces can serve a similar function.

5. Conclusion

There has been a long-standing debate around the sociality and morality of markets. On the one hand, markets are said to be socially and morally problematic. Market dealings are said to be inherently unfair and potentially corrupting. On the other hand, markets are said to have an ameliorative effect. Commerce, it is argued, engenders gentle manners (the “doux commerce thesis”),85 cordializes mankind,86 and enhances virtues.87 This chapter attempted to indirectly engage this debate by discussing how trust, reciprocity, and friendships are affected by market dealings. Specifically, we argued that markets engender trust and trustworthiness as well as fairness and reciprocity. Moreover, we argued that the market is a social space where meaningful social relationships characterized by trust and reciprocity can and do develop. Rather than trustworthiness, fairness, and friendships being put at risk when individuals engage in market activity, the market crucially depends on and actively encourages their development.

Notes:

(1.) Virgil Storr, “The Impartial Spectator and the Moral Teachings of Markets,” David Schmidtz (ed.), Oxford Handbook of Freedom (Oxford: Oxford University Press, in press).

(3.) Virgil Storr, “Why the Market? Markets as Social and Moral Spaces,” Journal of Markets and Morality 12(2009): 277–96.

(p.230) (4.) Deirdre N. McCloskey, The Bourgeois Virtues: Ethics for an Age of Commerce (Chicago: University of Chicago Press, 2006), 23. See also Albert Hirschman, The Passions and the Interests (Princeton: Princeton University Press, 1997), and Paul J. Zak, Moral Markets: The Critical Role of Values in the Economy (Princeton: Princeton University Press, 2008). For additional discussions of this view, see Virgil Storr, “Why the Market? Markets as Social and Moral Spaces,” Journal of Markets and Morality 12(2009): 277–96; Ryan Langrill and Virgil Storr, “The Moral Meanings of Markets,” Journal of Markets and Morality 15(2012): 347–62; and Chapter 12 by Brennan in this volume.

(5.) For example, Thorstein Veblen, The Theory of the Leisure Class (London: Penguin Books, 1899/1994), and Armin Falk and Nora Szech, “Morals and Markets,” Science 340 (2013): 707–11.

(6.) For example, Karl Marx, “On Authority,” in Robert Tucker (trans.), Marx-Engels Reader (New York: W.W. Norton, 1872/1972), 730–3; Andrei Shleifer, “Does Competition Destroy Ethical Behavior?” American Economic Review 94(2004): 414–18.

(7.) For example, Samuel Bowles, “Endogenous Preferences: The Cultural Consequences of Markets and Other Economic Institutions,” Journal of Economic Literature 36(1998): 75–111.

(8.) For example, Bruno S. Frey and Felix Oberholzer-Gee, “The Cost of Price Incentives: An Empirical Analysis of Motivation Crowding-Out,” American Economic Review 87(1997): 746–55; Edward L. Deci, Richard Koestern and Richard M. Ryan, “A Meta-Analytic Review of Experiments Examining the Effects of Extrinsic Rewards on Intrinsic Motivation,” Psychological Bulletin 125(1999): 627–68; Armin Falk and Michael Kosfeld, “The Hidden Cost of Control,” American Economic Review 96(2006): 1611–30; Michael Sandel, What Money Can’t Buy: The Moral Limits of Markets (New York: Farrar, Straus and Giroux, 2012).

(9.) Sandel, What Money Can’t Buy, 7. Sandel’s view is not all that different than the arguments advanced by Alasdair McIntyre: “the tradition of virtues is at variance with central features of the modern economic order and more especially its individualism, its acquisitiveness, and its elevation of the market to a central social place” (After Virtue: A Study in Moral Theory, 3rd ed., Notre Dame: University of Notre Dame Press, 2007, 254). McIntyre worries that the profit motive and competition, both essential elements of the market, undermine virtue.

(10.) Sandel, What Money Can’t Buy, 7.

(11.) Ibid., 64.

(12.) Ibid., 111.

(13.) Ibid., 112.

(14.) Ibid., 111.

(16.) Margaret Foddy and Toshio Yamagishi, “Group-Based Trust,” in Karen Cook, Margaret Levi and Russell Hardin (eds.), Whom Can We Trust? (New York: Russell Sage Foundation, 2009), 17–41.

(17.) Kenneth Arrow, “Gifts and Exchange,” Philosophy and Public Affairs 1(1972): 343–62, at 357.

(18.) For example, see Robert Putnam, Making Democracy Work: Civic Traditions in Modern Italy (Princeton: Princeton University Press, 1993); Francis Fukuyama, Trust: The Social Virtues and the Creation of Prosperity (London: Hamish (p.231) Hamilton, 1995); Stephen Knack and Philip Keefer, “Does Social Capital Have an Economic Payoff? A Cross-Country Investigation,” Quarterly Journal of Economics 112(1997): 1251–88; Paul J. Zak and Stephen Knack, “Trust and Growth,” Economic Journal 111(2001): 295–321.

(19.) Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny, “Trust in Large Organizations,” American Economic Review 87(1997): 333–8.

(20.) Zak and Knack, “Trust and Growth.”

(21.) Jeffrey H. Dyer and Wujin Chu, “The Role of Trustworthiness in Reducing Transaction Costs and Improving Performance: Empirical Evidence from the United States, Japan, and Korea,” Organization Science 14(2003): 57–68.

(22.) Luigi Guiso, Paola Sapienza and Luigi Zingales, “Cultural Biases in Economic Exchange?” Quarterly Journal of Economics 124(2009): 1095–131.

(23.) Akbar Zaheer, Bill McEvily and Vincenzo Perrone, “Does Trust Matter? Exploring the Effects of Interorganizational and Interpersonal Trust on performance,” Organization Science 9(1998), 141–59.

(24.) William J. Wilson, The Truly Disadvantaged: The Inner-City, the Underclass and Public Policy (Chicago: University of Chicago Press, 1987).

(25.) Niclas Berggren and Henrik Jordahl, “Free to Trust: Economic Freedom and Social Capital,” Kyklos 59(2006): 141–69.

(26.) Putnam, Making Democracy Work.

(27.) Philippe Aghion, Yann Algan, Pierre Cahuc and Andrei Shleifer, “Regulation and Distrust,” Quarterly Journal of Economics 125(2010): 1015–49.

(28.) La Porta et al., “Trust in Large Organizations”; Guiso, Sapienza and Zingales, “The Role of Social Capital in Financial Development,” American Economic Review 94(2004): 526–56.

(29.) Diego Gambetta, Trust: Making and Breaking Cooperative Relations (Cambridge: Blackwell, 1998).

(30.) For example, A. Michael Spence, “Time and Communication in Economic and Social Interaction,” Quarterly Journal of Economics 87(1973): 651–60; Oliver Williamson, Markets and Hierarchies (New York: The Free Press, 1975); Amy Farmer and Andrew W. Horowitz, “The Engagement Game,” Journal of Population Economics 17(2004): 627–44.

(31.) For example, Richard E. Walton and Robert B. McKersie, A Behavioral Theory of Labor Negotiations (New York: McGraw-Hill, 1965); Ronald Dore, “Goodwill and the Spirit of Market Capitalism,” British Journal of Sociology 34(1983): 459–82; Dyer and Chu, “The Role of Trustworthiness.”

(32.) Mark Granovetter, “Economic Action and Social Structure: The Problem of Embeddedness,” American Journal of Sociology 91(1985): 481–510, at 490.

(33.) Joseph Henrich, Robert Boyd, Samuel Bowles, Colin Camerer, Ernst Fehr, and Herbert Gintis (eds.), Foundations of Human Sociality: Economic Experiments and Ethnographic Evidence from Fifteen Small-Scale Societies (Oxford: Oxford University Press, 2004); Joseph Henrich, Robert Boyd, Samuel Bowles, Colin Camerer, Ernst Fehr, Herbert Gintis, Richard McElreath, Michael Alvard, Abigail Barr, Jean Ensminger, Natalie Smith Henrich, Kim Hill, Francisco Gil-White, Michael Gurven, Frank W. Marlowe, John Q. Patton, and David Tracer, “‘Economic Man’ (p.232) in Cross-Cultural Perspective: Behavioral Experiments in 15 Small-Scale Societies,” Behavioral and Brain Sciences 25(2005): 795–855.

(34.) David P. Tracer, “Market Integration, Reciprocity, and Fairness in Rural Papua New Guinea: Results from a Two-Village Ultimatum Game Experiment,” in Joseph Henrich et al. (eds.), Foundations of Human Sociality (Oxford: Oxford University Press, 2004), 232–59.

(35.) Jean Ensminger, “Market Integration and Fairness: Evidence from Ultimatum, Dictator, and Public Good Experiments in East Africa,” in Henrich et al., Foundations of Human Sociality, 356–81.

(36.) Qin Tu and Erwin Bulte, “Trust, Market Participation and Economic Outcomes: Evidence from Rural China,” World Development 38(2010): 1179–90.

(37.) Ernst Fehr and John List, “The Hidden Costs and Returns of Incentives-Trust and Trustworthiness Among CEOs,” Journal of the European Economic Association 2(2004): 743–71.

(38.) Omar Al-Ubaydli, Daniel Houser, John Nye, Maria Pia Paganelli, and Xiaofei Sophia Pan, “The Causal Effect of Market Priming on Trust: An Experimental Investigation Using Randomized Control,” PLOS One 8(3), 2013, e55968. doi:10.1371/journal.pone.0055968

(39.) Seung (Ginny) Choi and Virgil Storr, “The Emergence of Social Relationships in Markets,” working paper, 2014.

(40.) Ernst Fehr and Urs Fischbacher, “Why Social Preferences Matter: The Impact of Non-Selfish Motives on Competition, Cooperation, and Incentives,” Economic Journal 112(2002): C1-C33.

(41.) Daniel Kahneman, Jack Knetsch, and Richard Thaler, “Fairness as a Constraint on Profit Seeking: Entitlement in the Market,” American Economic Review 76(1986): 728–41.

(42.) Robert Franciosi, Praveen Kujal, Roland Michelitsch, Vernon Smith, and Gang Dong, “Fairness: Effect on Temporary and Equilibrium Prices in Posted-Offer Markets,” Economic Journal 105(1995): 938–50.

(43.) For example, Alan S. Blinder and Don H. Choi, “A Shred of Evidence on Theories of Wage Stickiness,” Quarterly Journal of Economics 105(1990): 1003–15; Jonas Argell and Per Lundborg, “Theories of Pay and Unemployment: Survey Evidence from Swedish Manufacturing Firms,” Scandinavian Journal of Economics 97(1995): 295–308; Trumen F. Bewley, “A Depressed Labor Market as Explained by Participants,” American Economic Review Papers and Proceedings 85(1995): 250–4.

(44.) Bewley, “A Depressed Labor Market.”

(45.) Elizabeth Hoffman, Kevin McCabe, and Vernon Smith, “Social Distance and Other-Regarding Behavior in Dictator Games,” American Economic Review 86(1996): 235–57; John List and Todd Cherry, “Learning to Accept in Ultimatum Games: Evidence from an Experimental Design that Generates Low Offers,” Experimental Economics 3(2000): 11–29.

(46.) Alvin E. Roth, Vesna Prasnikar, Masahiro Okuno-Fujiwara, and Shmuel Zamir, “Bargaining and Market Behavior in Jerusalem, Ljubljana, Pittsburgh, and Tokyo: An Experimental Study,” American Economic Review 81(1991): 1068–95.

(p.233) (47.) Michael Gurven, “Does Market Exposure Affect Economic Game Behavior?”, in Henrich et al., Foundations of Human Sociality, 194–231, at 195.

(48.) Joseph Henrich, Jean Ensminger, Richard McElreath, Abigail Barr, Clark Barrett, Alexander Bolyanatz, Juan Camilo Cardenas, Michael Gurven, Edwins Gwako, Natalie Henrich, Carolyn Lesorogol, Frank Marlowe, David Tracer, and John Ziker, “Markets, Religion, Community Size, and the Evolution of Fairness and Punishment,” Science 327(2010): 1480–4.

(49.) Viviana A. Zelizer, Economic Lives: How Culture Shapes the Economy (Princeton: Princeton University Press, 2011).

(50.) Ibid., 5.

(51.) Friedrich von Hayek, The Fatal Conceit: The Errors of Socialism (Chicago: The University of Chicago Press, 1988), 18.

(52.) Zelizer, Economic Lives, 387.

(53.) Granovetter, “Economic Action and Social Structure,” 487.

(54.) Granovetter, “Economic Action and Social Structure,” 490.

(55.) Mark Granovetter, “The Strength of Weak Ties: A Network Theory Revisited,” Sociological Theory 1(1983): 201–33.

(56.) Mark Granovetter, “The Impact of Social Structure on Economic Outcomes,” Journal of Economic Perspectives 19(2005): 33–50.

(57.) See Greta R. Krippner and Anthony S. Alvarez, “Embeddedness and the Intellectual Projects of Economic Sociology,” Annual Review of Sociology 33(2007): 219–40 for a discussion of the research that applied and extended the concept of embeddedness.

(58.) Brian Uzzi and Ryon Lancaster, “Embeddedness and Price Formation in the Corporate Law Market,” American Sociological Review 69(2004): 319–44.

(59.) Brian Uzzi, “The Sources and Consequences of Embeddedness for the Economic Performance of Organizations: The Network Effect,” American Sociological Review 61(1996): 674–98.

(60.) Frank P. Romo and Michael Schwartz, “The Structural Embeddedness of Business Decisions: The Migration of Manufacturing Plants in New York State, 1960 to 1985,” American Sociological Review 60(1995): 874–907.

(61.) James S. Coleman, “Social Capital in the Creation of Human Capital,” American Journal of Sociology 94(1988): S95–S120, at S98.

(62.) Coleman, “Social Capital in the Creation of Human Capital”; see also Emily Chamlee-Wright, “The Structure of Social Capital: An Austrian Perspective on its Nature and Development,” Review of Political Economy 20(2008): 41–58.

(63.) Coleman, “Social Capital in the Creation of Human Capital,” S98.

(64.) Ibid., S101.

(65.) Mark Granovetter, “Strength of Weak Ties,” American Journal of Sociology 78(1973): 1360–80, and “The Strength of Weak Ties: A Network Theory Revisited”; see Ted Mouw, “Social Capital and Finding a Job: Do Contacts Matter?” American Sociological Review 68(2003), 868–98.

(66.) Joel M. Podolny and James N. Baron, “Resources and Relationships: Social Networks and Mobility in the Workplace,” American Sociological Review 62(1997): 673–93.

(p.234) (67.) Brian Uzzi, “Embeddedness in the Making of Financial Capital: How Social Relations and Networks Benefit Firms Seeking Financing,” American Sociological Review 64(1999): 481–505.

(68.) Gaute Torsvik, “Social Capital and Economic Development: A Plea for the Mechanisms,” Rationality and Society 12(4) 2000, 451–76.

(69.) Knack and Keefer, “Does Social Capital Have an Economic Payoff?”

(70.) For example, Uzzi, “The Sources and Consequences of Embeddedness”; Mauricio Rubio, “Perverse Social Capital: Some Evidence from Colombia,” Journal of Economic Issues 31(1997): 805–16; Michael Woolcock, “Social Capital and Economic Development: Toward a Theoretical Synthesis and Policy Framework,” Theory and Society 27(1998): 151–208; Alejandro Portes, “The Two Meanings of Social Capital,” Sociological Forum 15(2000): 1–12.

(71.) For more on social capital and virtue, see Chapter 10 by Rose in this volume.

(72.) Paul Ingram and Peter W. Roberts, “Friendships among Competitors in the Sydney Hotel Industry,” American Journal of Sociology 106(2000): 387–423.

(73.) Granovetter, “Economic Action and Social Structure,” 495.

(74.) Ibid., 490.

(75.) Adam Smith, The Theory of Moral Sentiments, D.D. Raphael and A.L. Mackie (eds.) (Indianapolis: Liberty Fund, 1976), 223–4.

(76.) Allan Silver, “Friendship in Commercial Society: Eighteenth-Century Social Theory and Modern Sociology,” American Journal of Sociology 95(1990): 1474–504.

(77.) Paul Seabright, The Company of Strangers: A Natural History of Economic Life (Princeton: Princeton University Press, 2010), 12.

(78.) Storr, “Why the Market?” 143.

(80.) For example, Michael Argyle and Monika Henderson, The Anatomy of Relationships: And the Rules and Skills Needed to Manage Them Successfully (London: Penguin, 1985); Patricia Zavella, “‘Abnormal Intimacy’: The Varying Work Networks of Chicana Cannery Workers,” Feminist Studies 11(1985): 541–57; Keenan Bridge and Leslie A. Baxter, “Blended Relationships: Friends as Work Associates,” Western Journal of Communication 56(1992): 200–25; and Randy Hodson, “Group Relations at Work: Solidarity, Conflict, and Relations with Management,” Work and Occupations 24(1997): 426–52.

(81.) Christine L. Williams, Patti A. Giuffre, and Kirsten Dellinger, “Sexuality in the Workplace: Organizational Control, Sexual Harassment and the Pursuit of Pleasure,” Annual Review of Sociology 25(1999): 73–93; and Charles A. Pierce, Donn Byrne and Herman Aguinis, “Attraction in Organizations: A Model of Workplace Romance,” Journal of Organizational Behavior 17(1996): 5–32.

(82.) Linda L. Price and Eric J. Arnould, “Commercial Friendships: Service Provider–Client Relationships in Context,” Journal of Marketing 63(1999): 38–56; and Diana L. Haytko, “Firm-to-Firm and Interpersonal Relationships: Perspectives from Advertising Agency Account Managers,” Journal of Academy of Marketing Science 32(2004): 312–28.

(83.) Price and Arnould, “Commercial Friendships,” 50.

(84.) Yet these non-commercial relationships, when soured, could be more malicious and vindictive than commercial relationships. We often hear of irreconcilable (p.235) family feuds, ugly divorces, vindictive ex-best friends, and ostracism of former members of religious groups.

(85.) Charles Montesquieu, De l’esprit des lois (Paris: Garnier, 1748/1961); Hirschman, Passions and the Interests.

(86.) Thomas Paine, The Rights of Man (New York: Penguin Books, 1791/1984).

(87.) Smith, Theory of Moral Sentiments; Maria Pia Paganelli, “The Moralizing Role of Distance in Adam Smith: The Theory of Moral Sentiments as Possible Praise of Commerce,” History of Political Economy 42(2010): 425–41.