How can anyone possibly argue these days that markets are moral and that trade leads to fair behavior? Given the criminal actions of Bernie Madoff, the outrageous shenanigans of Wall Street traders, the bloated bonuses of corporate CEOs, the shady business practices of sub-prime mortgage lenders, the oil company sponsorship of oil-industry regulators and its consequences in the British Petroleum catastrophe (David Letterman: “By the way, Sarah Palin, if you’re watching, how’s that offshore drilling working out for ya?”), not to mention the recession, it must surely seem oxymoronic to claim that capitalism has any moral legs on which to stand. A daily barrage of proclamations of the death of capitalism washes over our collective consciousness. Bring on the regulators! Reign in Wall Street! Crack down on corporations! Even Alan Greenspan, the long-time Fed head and one-time student of Ayn Rand (the self-proclaimed “radical for capitalism”) in reference to his free-market ideology told the House Committee on Oversight and Government Reform on October 23, 2008: “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”

Tranquilo, Maestro. This too shall pass. As Matt Ridley writes in his 2010 book, The Rational Optimist: How Prosperity Evolves, “the world will pull out of the current crisis because of the way that markets in goods, services and ideas allow human beings to exchange and specialize honestly for the betterment of all.” As all economists know, free trade is the greatest prosperity generating machine ever invented, despite the (painfully) obvious imperfections and animal spirits that lead us to fear the boom and bust (see the rap video of that title for what is arguably the best short lesson in Economics 101 ever produced):

But free trade is not simply an ugly wealth-producing machine. What I want to argue is that free trade between people leads directly and measurably to greater levels of trust, generosity, and fairness. There are four lines of experimental evidence to support this hypothesis, two primate and two human (thereby cementing the deep evolutionary foundation of this relationship).

For the first line of evidence, don’t think of trade as just the quotidian exchange of money for goods and services. Although Adam Smith wrote in The Wealth of Nations, “Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog,” some primates unconsciously trade favors and exchange them later for alliances, food, and sex, as the ethologist Nicola Koyama and her colleagues at Liverpool John Moores University discovered in their chimpanzee charges. In their studies they found that if chimp A groomed chimp B, then chimp B would be more likely to support chimp A in a fight with others the next day, especially if it was chimp A who was going to start the fight. The scientists interpreted this as meaning that chimpanzees curry political favor through trade in anticipation of a possible future need.

A second line of evidence comes out of the primate lab of Frans de Waal at Emory University. In his 1982 book, Chimpanzee Politics, de Waal describes behavior on the part of his chimp charges that are clearly “direct payment for services rendered,” concluding from his collective observations: “Chimpanzee group life is like a market in power, sex, affection, support, intolerance and hostility. The two basic rules are ‘one good turn deserves another’ and ‘an eye for an eye, a tooth for a tooth.’” In his 1989 book, Peacemaking Among Primates, de Waal presented substantive evidence that chimpanzees and other primates experience both sympathy and empathy and they console one another after a fight, most notably in the form of the all-too-familiar hug or arm-about-the-shoulder embrace. Relationships are the very foundation of trust and trade in an exchange economy.

In studies with both chimpanzees and capuchin monkeys de Waal and his colleagues found that when two individuals work together on a task for which only one is rewarded with a desired food, if the reward recipient does not share that food with his task partner, the partner will refuse to participate in future tasks and expresses emotions that are clearly meant to convey displeasure at the injustice. In another experiment in which two capuchin monkeys were trained to exchange a granite stone for a cucumber slice, they made the trade 95 percent of the time. But if one monkey received a grape instead—a delicacy capuchins greatly prefer over cucumbers—the other monkey cooperated only 60 percent of the time, sometimes even refusing the cucumber slice altogether. In a third condition in which one monkey received a grape without even having to swap a granite stone for it, the other monkey cooperated only 20 percent of the time, and in several instances became so outraged at the inequity of the outcome that they heaved the cucumber slice back at the human experimenters! Although apes and monkeys cannot communicate their outrage over such injustices through language, clearly the moral emotion of a sense of fairness is there and expressed nonverbally, unequivocally and unabashedly so!

A third line of evidence comes out of the lab of economist Paul Zak at Center for Neuroeconomics Studies of Claremont Graduate University. “We know that trust is a very strong predictor of national prosperity, but I want to know what makes two people trust one another,” Zak told me in an interview. A 1996 study on trust in 42 countries, for example, asked people in their native language, “Generally speaking, would you say that most people can be trusted, or that you cannot be too careful in dealing with people?” The results were as diverse as they were striking. At the low end of the trust scale, only 3 percent of those surveyed in Brazil and 5 percent in Peru believe that their fellow citizens are trustworthy, compared to 65 percent of Norwegians and 60 percent of Swedes who trust one another. In the middle of the scale was the United States at 36 percent and the United Kingdom at 44 percent. The rankings remain essentially unchanged even when controlled for income, where trust is high in the countries of Scandinavia and East Asia but low in the countries of South America, Africa, and especially in the former Communist block. “The simple correlation between national rates of investment (gross investment per Gross Domestic Product) and trust is strongly negative,” Zak explains, so that “when trust is low, investment lags. The same negative correlation holds for GDP growth and trust.”

So, trust, fairness and prosperity are all correlated, but what are the economic mechanics of this relationship between trust and prosperity? “Trust facilitates transactions by reducing the number of contingencies that must be considered when ‘doing a deal,’” Zak continues. “A deal sealed with a handshake between principals can only occur in a high-trust situation. Let the lawyers work out the details—we have a deal. Conversely, when trust is low, negotiations are protracted, and therefore more costly. When transaction costs are higher, fewer transactions occur and investment and economic growth are lower. Trust is among the most powerful stimulants for investment and economic growth that economists have discovered. In seeking to understand why some countries are poor and others are rich, it is, therefore, crucial to understand the foundation for interpersonal trust.” What Zak has discovered is that in order for a nation to achieve prosperity it is vital to maximize positive social interactions among its members in order to increase trust. Zak even went so far as to compute the differences in living standards that trust can effect, whereby “a 15 percent increase in the proportion of people in a country who think others are trustworthy raises income per person by 1 percent per year for every year thereafter.” For example, increasing levels of trust in the U.S. from its present 36 percent to 51 percent, would raise the average income for every man, woman, and child in the country by $400 per year, or $30,000 lifetime. Trust has fiscal benefits.

A fourth line of evidence may be found in a March 18, 2010 article in Science entitled “Markets, Religion, Community Size, and the Evolution of Fairness and Punishment.” The University of British Columbia psychologist Joseph Henrich and his colleagues engaged over 2,000 people in 15 small communities around the world in two-player exchange games in which one subject is given a sum of money equivalent to a day’s pay and allowed to keep or share some or all of it with another person. This is called the Ultimatum Game. Let’s say I give you $100 to split between yourself and your game partner. Whatever division of the money you propose, if your partner accepts it, you are both richer by that amount, but if he rejects it neither of you receives any money. How much would you offer? Why not suggest a $90-$10 split? He isn’t going to turn down a free ten bucks, is he? He is. Research shows that proposals that deviate much beyond a $70-$30 split are usually rejected. But not universally so. It turns out from Henrich’s research that people in hunter-gatherer communities shared about 25%, while people in societies who regularly engage in trade gave away about 45%. Although exposure to a major world religion was a modest factor in making people more generous (since the encouragement of generosity through tithing, donations to charities, and other acts of kindness are a sine qua non of most modern religions), the strongest predictor was “market integration,” defined by the authors in this study as “the percentage of a household’s total calories that were purchased from the market, as opposed to homegrown, hunted, or fished.”

trust and cooperation with strangers lowers transaction costs and generates greater prosperity for all involved, and thus market fairness norms “evolved as part of an overall process of societal evolution to sustain mutually beneficial exchanges in contexts where established social relationships (for example, kin, reciprocity, and status) were insufficient.” In other words, we are naturally inclined to be fair and generous with our kin and kind because of genetic relatedness and reciprocal connectedness, but to get people to be fair and generous to strangers in other tribes requires something altogether different from what evolution could have endowed us with, and these are the cultural institutions of trade and religion, but especially trade.

These four lines of evidence support the hypothesis that I presented in my 2008 book, The Mind of the Market, that we evolved an innate sense of right and wrong that is expressed through the moral emotions, that we have a dual nature of being both selfish and generous, and that free trade is an integral component to breaking down the normal tribal barriers blocking trust between strangers. Trade makes people more trusting and trustworthy, which makes them more inclined to trade, which increases trust…and round and round it goes in a positive feedback loop that in the long run not only generates generosity but prosperity as well.

Unintended consequences indeed. As Adam Smith so eloquently explained it over two centuries ago:

“Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.”

This is true whether we think of barbarism as deficiency in earthly goods or as deficiency in moral sentiments.