Should we worry about social capital and trust in market settings? I found an interesting example in Cicero, De Officiis, Book III, Chapters 14-5.
My colleague and friend, Aquillius…when he was asked for a definition of criminal fraud, he replied, “When one thing is pretended, another done.”
But if the definition of Aquillius is correct, pretence and concealment should be entirely done away with… All falsehood, then, must be removed from contracts. The seller must not employ a sham purchaser, nor the buyer one to depreciate the article on sale by too low a bid. Let either party, if it comes to naming the price, say once for all what he will give or take.
Quintus Scaevola, the son of Publius, when he asked to have the price of an estate that he was buying named once for all, and the seller had complied with his request, said that he thought it worth more, and added a hundred thousand sesterces.
There is no one who would say that this was not the act of a good man; but men in general would not regard it as the act of a wise man, any more than if he had sold an estate for less than it would bring. (emphasis mine)
The example is striking, and especially so for those of us who live in booming real estate markets, where offers above the “asking price” are common, but only because buyers are trying to outbid other buyers. As Yale (2021) put it: “For many buyers, paying more than list price for a home goes against the grain—or, more specifically, the sense they’re always supposed to negotiate in real estate transactions. Still, sometimes paying more than list price might be warranted.”
In other words, the motivation to bid more than the asking price is expedience, not morality. And if expedience did not require bidding more, than only a good, but not a wise, person would be willing to pay the extra 100,000 sesterces for an underpriced condo in San Francisco. Caveat venditor, when it comes to real estate prices.
But we should take a step back. Of course buyers and sellers disagree about value; that is actually a necessary condition for any transaction to take place. Paradoxically, any agreement on price requires a disagreement about value: the seller perceives the value of the thing as less than the price (that’s why she is willing to sell) and the buyer perceives the value as greater than the price (that’s why he is eager to buy).
Cicero is talking about something else, the just price in the marketplace. Note that Scaevola did not just think the price was below his value for the estate; he though the asking price was lower than what the seller could easily get from another buyer. Or, what amounts to the same thing, Scaevola thought that the “market price”—the general value of estate if it were put up for sale and examined by many buyers, who would compare to property to other estates offered by many sellers—was higher than the seller was asking. Of course, this problem of “what stuff is worth” was considered later by Thomas Aquinas (as I discuss here), and by John Locke (as discussed here and at greater length here).
But the main reason that the example is striking is not that Cicero strikes an Aristotelian chord on natural price. Cicero is making a point about rationality, and the obligations of the individual in a society. He continues:
This, then, is the mischievous doctrine, — regarding some men as good, others as wise, according to which notion Ennius writes that the wise man who cannot provide for his own advantage is wise in vain. I would readily account this saying true, if I were agreed with Ennius as to what one’s advantage is.
I see, indeed, that Hecato of Rhodes, a disciple of Panaetius, says, in the books on Duties which he dedicated to Quintus Tubero: “It is a wise man’s duty, while he does nothing contrary to morals, laws, and customs, to have regard to his private fortune. For we desire to be rich, not for ourselves alone, but for children, kindred, friends, and most of all for the state, — considering that the means and resources of individual citizens are the wealth of the state.”
Cicero goes on to contrast the “good” and the “wise,” saying that “The act of Scaevola just named cannot, then, be in any way pleasing to Hecato.” Because Scaevola’s act was “good,” he reduced his own private fortune, betraying his “children, kindred, friends, and most of all” the state. But Cicero telegraphs his own view, calling this a “mischievous doctrine.” Self-interest, for Cicero, is properly understood as uniting both the “good” and the “wise” course of action.
[I]f he is a good man who does good to those to whom he can and injures no one, of a certainty we shall not easily find that good man. We conclude, then, that it is never expedient to do wrong, because wrong-doing is always disgraceful; and because to be a good man is always right, it is always expedient.
If every dimension of every contract had to be monitored, enforced, and litigated, the costs of even simple exchanges would be prohibitive. Complex transactions, such as buying a house, would be next to impossible. As Russ Roberts put it, on Econtalk in 2018 (edited for length):
A house is an extremely large transaction, and a contract for selling a house is full of all kinds of details about what expectations are that are written out and explicit. But there’s a whole other set of details that’s not written out, that’s implicit; that is probably very different in different cultures. And, we all interact with each other, and we are bumping into each other, economically, socially in ways that are much easier in America, for example, because we have certain expectations of trust.
My wife and I had spent the night in Big Sur–a beautiful part of California. Problem was, it was a two-night minimum; we could only stay for one night. And I didn’t have time to get the owner a check or pay in advance. So, the owner said, ‘That’s okay. I’ll leave the door unlocked, and when you leave, just leave the money in cash on the table. And my cleaning lady will pick it up.”
As an economist, I’m horrified by that. There’s so many places that that story can go wrong. The cleaning lady can pocket the money; I can not leave the money and claim the cleaning lady took it; the cleaning lady could give the money to the owner and the owner could say, “I never got it;” I could say, after only one night, even though I promised I’d pay for the two-night minimum, “Well, that’s not fair. That’s absurd. I’ll just leave payment for one night. That’s enough.”
[But] I left the money on the table (though I took a picture of it with my phone!), and walked out, not worrying deeply that this was going to go awry. I contacted the owner a couple of days later: “Did you get the money?” “Yes.” “Thanks! I had a great time. Appreciate it.”
The ability to trust–the amount of social capital that was built into our interactions–including the maid, who I never met, who worked for money for this owner of the property–the amount of social interaction there and the amount of trust and social capital was enormous. And, without it, my wife and I wouldn’t have had a wonderful time in a beautiful place. And the owner wouldn’t have had the X-hundred dollars to spend on something that she held of value.
People make fun of me, probably rightly, for always talking about “transaction costs.” But Cicero recognized that distinguishing good actions from wise actions in market settings was, and is, a “mischievous doctrine.” To recognize that it is to your own advantage to trust, and to be trustworthy in turn, is the key to living together in a market economy.
As Adam Smith summed it up:
Society …cannot subsist among those who are at all times ready to hurt and injure one another. The moment that injury begins, the moment that mutual resentment and animosity take place, all the bands of it are broke asunder, and the different members of which it consisted are, as it were, dissipated and scattered abroad by the violence and opposition of their discordant affections. If there is any society among robbers and murderers, they must at least, according to the trite observation, abstain from robbing and murdering one another….Society may subsist, though not in the most comfortable state, without beneficence; but the prevalence of injustice must utterly destroy it….Justice …is the main pillar that upholds the whole edifice [of society]. If it is removed, the great, the immense fabric of human society …must in a moment crumble into atoms (TMS, p. 86).
This article, The Good, the Wise, and the Just, was originally published by the American Institute for Economic Research and appears here with permission. Please support their efforts.