Norms, Rules, and Morality

Megan McArdle has a very interesting blog post (http://meganmcardle.theatlantic.com/archives/2009/12/personal_finance_1.php) where she discusses the importance of norms for the functioning of the economy.

She correctly points out that the health of the economy, particularly as it pertains to credit, borrowing, and financial markets, relies at least as heavily on societal norms as it does on actual laws. For instance, many individuals currently own houses that are worth less than the mortgages that they took out. For a good portion of these individuals, they probably could benefit financially from simply walking away from their mortgage. Indeed, some people act on this very fact, and yet most of people in this situation still attempt to make their payments as long as they can afford to do so. This is because it is a societal norm in America that when you take out a mortgage, you are expected to try your best to make the payments. If this norm were to disappear, then no matter what laws we might pass, we could expect credit to dry up for many people and mortgages to become much more difficult to obtain.

There are many other norms that help the economy function, and many of them have no real absolute moral underpinning (though there are definite exceptions, in my opinion). Instead, they have simply become accepted by our culture due to various reasons, and as such we become outraged when they are violated. It will be interesting to see how these norms evolve over time, particularly as a result of the economic upheaval that we are currently going through.

For a much more thorough and engaging discussion, you should check out Megan's post.