Does the market inspire people to greater practical virtue, or does it eviscerate what little virtue any of us have?

Far from draining moral goodness out of us-as many think-the free market serves as a "school of the practical virtues." Rather than elevating greed and self-sufficiency, the market fosters interdependence and cooperation. Its rewards do not go to those who are the most isolated, self-absorbed, or cut off from society, but to those who sustain mutually prosperous relationships with others.

Adam Smith made a striking observation more than 200 years ago in his treatise, The Theory of Moral Sentiments. In a commercial society, he wrote, "every man becomes in some sense a merchant." If Smith is right, what does that imply for the development of character in society? Is the market economy more likely to produce a Bernie Madoff or a Dave Ramsey? Does the market tend to erode character traits such as honesty, loyalty, courage, and the responsible stewardship of resources?

Culture-oriented critics of the market on both the left and the right have always attacked the acquisitiveness or self-serving aspects of the market that supposedly emanate from its core. Within the religious community especially, self-interest, which is not a sin, is often identified with selfishness, which is. The market economy is thus a school of vice rather than of practical virtue.

But there is another side to this story, one that is optimistic about the moral effect of the market economy on culture. According to the optimistic view, the market economy is constantly in the process of replenishing its stock of moral virtues. Free-market thinkers believe that commercial society will encourage a "more polished" (not perfect) human person-one that is more honest, reliable, orderly, and disciplined, as well as more friendly and helpful.

So, how does this work?

One possibility the culture critics overlook is that the practical virtues may not only be socially beneficial, but they may be a source of private economic benefit as well. Those who cultivate the practical virtues may be more successful in the marketplace than their counterparts who do not. The normal operation of the market may reward-and so, reinforce-the practical virtues.

Let's look briefly at four practical virtues to see how the market economy might accomplish this positive result.

Trustworthiness. Why do people keep their promises? There are surely many reasons. According to Smith, one of the more prominent is self-interest. He writes: "Where people seldom deal with one another, we find that they are somewhat disposed to cheat, because they can gain more by a smart trick than they lose by the injury that it does to their reputation." Thus, the principal sanction that holds dishonesty in check is the loss of business that would follow the damage to the businessperson's reputation. A reputation for being trustworthy will create business opportunities, while even a hint of suspicion of untrustworthiness may preclude such opportunities.

Self-Control. Trustworthiness assumes self-control. What, after all, is promise-keeping if not the ability or disposition to pass up an immediate advantage or gratification? That explains why, for Adam Smith, "self-command is not only itself a great virtue, but from it all the other virtues seem to derive their principal lustre." Self-control is not a tradeoff between self-interest and the public interest; it is instead a tradeoff between short-term and long-term self-interest.

Sympathy. In a market economy, the fortune of an economic agent depends upon successfully meeting the needs of other people. To the extent that sympathy-or what might be called empathy-helps an entrepreneur to anticipate those needs, it contributes to economic success. Smith knew that sympathy is indirectly linked to self-interest because it might be in our self-interest to work to understand the needs of others.

Fairness. Like the other practical virtues, a reputation for fairness or equity is likely to create business opportunities. Since it is virtually impossible to regulate complex transactions by means of simple written contracts, in many cases parties prefer to restrict their business to those on whom they can rely not to take advantage of them if circumstances change. They are spared considerable transaction costs such as attorneys, auditors, and inspectors of all kinds.

Many people insist that the market is the cause of a great deal of individual moral failing. But I am suggesting that many of the character traits we call practical virtues are rewarded by the market economy. As a result, market activity may actually inculcate values and moral habits that make us better citizens, colleagues, employers, and employees. Thus, far from undermining morality, markets reinforce character traits that strengthen the foundation of the market economy.

Stephen Grabill is executive editor of the Journal of Markets & Morality.