Economist's new book reveals underpinnings of economic disasters

Second edition of 'Morals and Markets' includes prescriptions for a sensible balance between the two

Daniel Friedman
UC Santa Cruz economics professor Daniel Friedman
Cover of 'Morals and Markets'

One might say Daniel Friedman was ahead of his time. At least a year ahead.

The UC Santa Cruz economics professor finished the manuscript for his book Morals and Markets in December 2007, nine months before the beginnings of the worst economic crash since the Great Depression. Many of the book's observations and insights were borne out by events in the weeks and months that followed.

The day Morals and Markets was released – September 18, 2008 – the Dow jumped 410 points after two perilous drops. It climbed sharply the next day, too, before losing 25 percent over the next three weeks. It was a beginning of a period that saw bankruptcies of hallowed financial firms, government bailouts on an unprecedented scale, soaring unemployment, and widespread economic misery.

Clearly, something was out of balance.

Dangerous balance

A compelling second edition of Morals and Markets (Palgrave/MacMillan, 2013) has just been published in paperback with the new subtitle: The Dangerous Balance. More than half the material is new and the rest significantly edited and rearranged.

This time around, Friedman and co-author Daniel McNeill, a journalist and childhood friend, are able to point to the excesses and reactions to the 2008-2009 crash in the U.S. and subsequent economic events in Europe.

"The crash and the subsequent events illustrate beautifully our theme," Friedman said. "The human species gets by through cooperation; our success depends on cooperation.

"A moral system is what makes us human," Friedman said. "It's a hard thing to describe," he admits, "like the air we breathe." Morals first developed among humans on the African savanna 2½ million years ago. The concept of markets followed much later. Financial markets got started in Antwerp and Amsterdam in the early to mid 1600s, and in London decades later.

Rewards and punishment

"Morals tend to reward selfless traits like generosity, trustworthiness, and esprit de corps," Friedman said, "and punish selfish ones like betrayal and theft.

"Markets have made us lords of the earth," he said. "They are competitive arenas that reward pursuit of self-interest—yet they rely on a moral infrastructure. When participants vie fairly, and buyers and sellers trust each other, they can work magic."

It's the often-unstable balance between them where trouble can arise. Morals can choke markets and markets can corrupt morals.

Friedman's book is accessible to the general public and filled with everyday examples straight out of the news–Greek austerity measures and the riots that followed, the agony of the Eurozone, the ethics of bailouts, as well as acid rain, the Russian Mafia, poker, and the rescue of the halibut fishery.

'Hands off' regulation

In the first edition of Morals and Markets, Friedman argued that an ideologically driven "hands off" attitude toward regulation since the mid-1990s allowed the economic system to get dangerously out of balance. Today, nearly five years after the 2008 crash, Friedman says, we must understand the dangerous balance of morals and markets—or we're in for more economic, political, and social debacles again and again.

"Aligning morals and markets so they work together is the premier challenge of our world today," he writes.

Friedman, who received his masters and Ph.D. in mathematics at UCSC, joined the economics faculty in 1985. He has published widely in leading academic journals in economics, finance, psychology, and politics, and is the author of several previous books for an academic audience.