English

Abstract

Both success and failure of free market economy could be explained through its understanding of human nature. Its great success in production comes from its principles based on “self-interested” human nature driven by animal souls and egoistic desires. The system achieves higher productivity by providing many incentives to motivate people whose goals are to maximize their interests. On the other hand, the failure of the free market system comes from its lack of moral principles to balance irrational and irresponsible decisions/behaviors of animal souls and ego. For that matter, the paper argues that the 2008 crisis was essentially a moral crisis of capitalism with its root going back as far as the Enlightenment. It suggests that during the crisis, the “invisible hand” of free market turned to “stealing hand” through market games driven by the irrational and irresponsible behaviors of politicians, creditors, and consumers. The paper concludes with few lessons learned from the crisis. First, the crisis created a great opportunity to acknowledge the need for moral values for efficient market system. Second, we should revise our assumptions of human nature and behaviors in economics and finance to include predictably irrational decisions of individuals. Third, we should include moral education in education system at K-12 levels, not at the college. Finally, we should revise our economic models to capture the importance of moral and spiritual capital as endogenous variables.   Key words: Moral economy, business ethics, financial crisis, free market, moral failure, Islamic finance.