I would like to object to a particular assertion made by Skidelsky
"On the other hand, it crowds out virtues that have no economic utility, like ... honor." I think that, so long as an apparent sense of honor can't be simulated by the dishonorable, a sense of honor is highly rewarded by the market system. Clearly if we can tell who is honorable, honorable people will enter into mutually beneficial agreements even if they are not effectively enforceable in courts. Thus they would succeed compared to dishonorable people.
Now, in theory, it is possible for someone with no sense of honor to simulate one until the gains from behaving dishonorable outweigh the reputational cost. Such an agent would do better than the genuinely honorable and the openly dishonorable.
Now, on the topic of economists and moral sentiments I invoke Adam Smith. I pretty sure that, if someone had told him about game theory, he would have argued in "The Theory of the Moral Sentiments" that, in the long run, rewarding both true honor and effectively simulated honor will promote true honor as a habit of mind.
Also, I think that the theoretical argument makes unreasonable demands on mere human efforts to be rational (as usual). I think that the vast majority of dishonorable people are not capable of effectively simulating honor (nor are honorable people able to hide that sometimes inconvenient characteristic). Psychologists say we have an amazing ability to detect people who are trying to cheat us. True honorability is favored in a market system full of people with that ability.
A deeper problem is that mores can evolve, so that the requirements of a sense of honor change. Once it was dishonerable in the extreme to charge interest on loans. The new mores under which made it is honorable (indeed which make interest free loans suspect) was selected. If Skidelsky objects to the market because it promotes behavior which he has promised himself he won't do, he objects because it does not favor his ideal of honor, not because it does not favor honor in general.
update: Welcome DeLongians. I must say that I am particularly flattered by a link from Brad to a post which praises "The Theory of the Moral Sentiments" and aims to get on Skidelsky's nerves as Brad excels in both of those fields.
I fear however, that the link also reflects the fact that, exactly because Brad excels in those fields, he has taken the post above to be proof that I am on his team*. Ah that is what I want to write about. Markets don't promote honor compared to what ?
Another alternative form of organization is a hierarchy or chain of command as in the military, the civil service (with less saluting) and large corporations (with executive wash rooms). Another is a traditional village or clan ("It Takes a Village" means "markets aren't enough"). Finally yet another is a team. A bit hierarchical with a coach and in American football a quarterback, but something else.
Why low and behold, we are told that team sports and the military promote honor. Oh really ? My sense is they promote treating people on your team very differently from the other guys. Within the team behave honorably or be cut (or at least shunned). With the other team get away with what you can. Work the refs.
That's not what I call honor. So how do markets promote a more honorable honor ? Well what was Marx writing about when he wrote "everything sacred is profaned. Everything solid melts into air" ? It was about how market relationships are brief and frequently disrupted.
Is that so bad ? That way we don't know which people we will have to ask to trust us in the future. That way, we can't count on saying "sure I lied to x but you are on my team( a fellow employee, a member of my clan ) so why do you care ?" when we ask someone to trust us.
The stable relationships do not promote adherence to universal principles of honorable conduct. One's reputation only matters within the group and only concerns whether one betrays the interests of the group or of its other individual members.
Loyalty to the team is not the sort of honor which I think should be promoted.