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Economics Needs Ethics

Economics Needs Ethics

No amount of regulation will restore our sense of honor andshame.


The continuing disclosures about excessive pensions and payoffs, salaries and bonuses for people at the top stir in us feelings for the oldest of human bloodsports: the search for a scapegoat. But they ought to lead us to think more deeply about the values of our culture as a whole.

Often, these past months, I have found myself going back to one of the most painful conversations I have had. It was with one of Britain's leading industrialists. He had led his company to consistent success for decades. When I met him he had retired and was near the end of his life.

He was not a religious man but he was a deeply moral one. He spoke of the principles that had guided him in business and of the salary he had drawn. It was not negligible, but it was modest. What pained him was that his successor had awarded himself a salary ten times that amount, while systematically destroying the company he had so carefully built.

I recall another conversation with a successful investment banker. He told me that the first thing he had to establish was his character, his reputation for trustworthiness and honesty. Without that, he would have been unable to trade. Nowadays, he said, deals no longer depend on character but on lawyers. Common to these stories is the gradual disappearance of the cluster of principles that went by the name of morality.

Whatever its source -- religion, conscience, custom or code -- it meant that there are certain things you don't do because they are not done. You don't reward yourself when customers, clients or shareholders or employees are suffering losses. You don't pay yourself out of all proportion to what you pay others. You don't take advantage of your position just because you can. You are guided, even if no one is watching, by a sense of what is responsible and right. Without that internalized code of honor and trust, no institution can be sustained in the long run.

Somehow, between the 1960s and 1980s the idea prevailed that we could do without the moral sense. Who needed it any more? In the 1960s we thought that the State would take care of our problems. In the 1980s we thought that the market would. Self-imposed restraints were dismissed as outmoded and killjoy. Greed was good. The guy with the most toys when he dies, wins.

The result was that we began to lose our understanding of the vital distinction between the value of things and their price. The key example -- at the heart of the entire financial collapse -- was housing. The value of a house is that it is a home. It's a shelter, a haven, personal space in an impersonal world. For many, it's where we sustain a marriage and build a family. It's where love finds its local habitation and name. At a point in time, some began to think of houses not as homes but as capital investments. They began to borrow more and spend more. Building societies duly obliged.

House prices kept on rising. Their attraction as investments grew, and so the cycle fed itself: ever higher prices, ever bigger mortgages, until house prices and borrowing lost all connection with average incomes and sustainability. Those who just wanted a home had no choice but to join the game, at great expense and risk. The speculators were convinced they had become richer, but in real terms they hadn't. The value of housing had changed not an iota, because value is not the same as price.

It was bound to collapse, and anyone who had thought it through, said so. The investor Warren Buffett called sub-prime mortgages "financial weapons of mass destruction" as long ago as 2002. In the collective madness, no one was listening.

After financial collapse many questions are being asked. Should there be more regulation? State ownership of financial institutions? Have we reached the end of the market economy? They are good questions, but they get nowhere near the heart of the matter.

The market economy has generated more real wealth, eliminated more poverty and liberated more human creativity than any other economic system. The fault is not with the market but with the idea that the market alone is all we need.


Markets need morals, and morals are not made by markets.


Markets don't guarantee equity, responsibility or integrity. They can maximize short-term gain at the cost of long-term sustainability. They don't distribute rewards fairly. They don't guarantee honesty. When it comes to flagrant self-interest, they combine the maximum temptation with the maximum opportunity. Markets need morals, and morals are not made by markets.

They are made by schools, the media, custom, tradition, religious leaders, moral role models and the influence of people. But when religion loses its voice and the media worship success, when right and wrong become relativized and morality is condemned as "judgmental", when people lose all sense of honor and shame and there is nothing they won't do if they can get away with it, no regulation will save us. People will outwit the regulators, as they did by the securitization of risk so no one knew who owed what to whom.

The big question is: how do we learn to be moral again? Markets were made to serve us; we were not made to serve markets. Economics needs ethics. Markets do not survive by market forces alone. They depend on respect for the people affected by our decisions. Lose that and we lose not just money and jobs but something more significant still: freedom, trust and decency, the things that have a value, not a price.

This article originally appeared in The Times.


March 28, 2009

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Visitor Comments: 7

(7) David Cohen, March 30, 2009 9:41 AM

"In the 1960s we thought that the State would take care of our problems. In the 1980s we thought that the market would. Self-imposed restraints were dismissed as outmoded and killjoy." It isn't a lack of "self-imposed" restraint that led to the current recession, it's a lack of societally imposed restraints. You say in the 1960s we thought the state would save us and in the '80s that markets would save us. But it was only the idea that markets would save us that led us to dismantle the state, and it was that dismantling that enabled free reign to those avaricious tendencies that, in check, make capitalism so successful. Regulation is important precisely because, without it, capitalism rewards only those who think only of their own short-term game over the long-term needs of themselves, their company and society. Sure, some will find ways around regulations, but a) if they have to work much harder to break the rules, fewer will, b) fear of prison will work on many powerful people who are not moved by yiras shamayim, and c) the regulations at least encode that, as a society, we do not stand for unbridled avarice as the ultimate good. It is not just with regard to murderers and rapists that Rabbi Chanina the deputy Kohen says in Pirkei Avos, "Pray for the welfare of the government, for if not for its fear, a person would swallow his fellow live."

(6) Norma Fares, March 29, 2009 6:20 PM

Reading is not just an act.

Words have sense. Words have meaning. Reading is not just an act. It's a act to understand. I wish such a great article hit the whole world as Morale and Ethics, as your well mentioned, does not only lacke in Economics i.e. Media but in the heart of materialist souls. Thank you so much, Rabbi Sir. Jonathan Sacks for your second-to-none article! From Lebanon...with Love:)

(5) Ralph, March 29, 2009 12:18 PM

You forgot the greedy politicians's role

Your analysis is spot-on: "no amount of regulation will restore our sense of honor and shame" . It's true that market were meant to serve us. It's also true our elected leaders were meant to serve us as well. So my question is: How do we get our elected officials and the markets to serve us again? The current crisis will inevitably cause our law makers to enact new laws and more regulations. The ultimate irony in all this, which your article omitted to mention, is our politicians, as well as unscrupulous mortgage borrows, played a major role in causing this crisis - not just the greedy capitalists and other self-serving characters. Virtually every politician who runs for office will tell you they're "running to service the public". The truth is they usually serve themselves. They 're addicted to power and self-interest and it's the vote that sustains them. During the Clinton administration there was pressure put on banks (both by Democrat & Republican Leaders) to loosen underwriting guidelines so the poor and credit challenged people could buy homes. The new underwriting guidelines resulted caused a huge injection of subprime loans into the marketplace. Politicians then urged (more like forcing) Fannie Mae and Freddie Mac to buy these sub-prime loans. This was the genesis of our financial crisis. Senator Dodd, Barney Franks et al were warned of the ticking subprime time-bomb but they chose to ignore the signs and warnings (they were the ones who forced the banks & Fannie Mae to loosen credit). Why? You don't want to be on the record opposing and policies which might benefit the poor (regardless if the policy is sound on not). It's not good for re-election. Thanks to our politicians, home ownership was elevated to a right not a privilege.

(4) dovid, March 29, 2009 9:30 AM

Without belief in G-d, one has no incentive to be moral. He is afraid that on a world w/o G-d, no one polices moral / immoral / amoral behaviour, and therefore, others will take advantage of him if he chose to act morally.

(3) Avraham Broide, March 29, 2009 9:05 AM

history repeats itself

I would be more impressed by this diagnosis if this crash was the first in history. It is not. In early centuries you had the Tulip Bulb bust and the South Sea Bubble, and in the 20s you had the Great Depression, all caused by unrealistic expectations when market values started leaping upwards. The fact that people have always been greedy seems forgotten every time there's a new crash. There are plenty of honest people out there and there are plenty of crooks. Always have been.

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