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Morals and Markets: the Dangerous Balance (Palgrave Macmillan, 2013)

Daniel Friedman 鈥�68

By Nisma Elias 鈥�12

What does the violence between the Serbs and Croats, Hutu and Tutsi, Catholic and Protestant Irish, Sunnis and Shiites have in common with the sovereign debt crisis in Europe and the Great Recession in America? The answer, Daniel Friedman suggests, can be traced back to the “savannah code” rooted in ancient Africa.

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A well-known economist and evolutionary game theorist, Friedman majored in math at Reed, got a PhD in math from UC Santa Cruz, did a stint in the private sector, and returned as a professor of economics at UC Santa Cruz. He has long grappled with the dynamics between ethics and economics. Is it right to bail out careless high risk takers like AIG, the insurance giant rescued by the Federal Reserve at a cost of $85 billion? Should the Germans be forced to bail out the Greeks who lied about their financial situation to enter the EU? And, most worrying of all, is the global economic system rigged?

Friedman and coauthor Daniel McNeil take a comprehensive intellectual and historical view of these issues, starting from about 2.5 million years ago, when the first member of the human genus, Homo habilis, appeared shortly after the retreating Ice Age created a drier Africa. What allowed these prehistoric tribes to cooperate with each other and survive was the concept of kinship. Humans have been wired to rationalize behavior in terms of “us versus them”; morals can essentially be defined as shared understandings among a group to control selfishness and smooth cooperation within the tribe itself.

The point that Friedman emphasizes is that this moral code, developed over millennia of human existence, can also help understand the working of markets, most recently the debt crisis in Europe. He traces how in the face of looming defaults from Greece, Ireland, and Spain, other members of the EU, such as France and Germany, thought it unfair for them to foot the bill for deeds they played no role in. This is a cautionary tale in moral hazard—one that can be corrected by regulation based on sound morals. A similar situation ensued in the U.S., where the fear mainly was that there would be a tide of defaults as the housing market crashed and many homeowners went underwater. Yet, curiously, most homeowners chose not to bail, but to stay put instead, and recent research suggests that the reasons were largely moral. Friedman argues that it was the code of the savannah—of not abandoning one’s neighbors in times of trouble—which averted even greater damage to the economy. 

The book does a fascinating job of connecting the dots through a vast array of topics such as Latino prison gangs, the green movement, the Al Qaeda network, the Chinese sprint to wealth, and the collapse of the cod industry, although one wonders along the way about certain examples—for instance, whether the modern world’s greatest defense against terrorism and gangs really is the market system itself. Nonetheless, in its depth and scope, the book demonstrates the key role played by the market in the modern world and how badly we need a moral infrastructure to balance it.