The Morals Of Capitalism

Capitalism has been the topic of much debate in recent times, and many disparaging remarks have caused politicians to call for all kinds of better capitalism, fairer capitalism, responsible capitalism and other such phrases. In order to put some sense and perspective to our current crisis it seems necessary to define capitalism and compare it to what we see in modern times in order to restore confidence in the word. 

Those who do not busy themselves with such definitions tend probably to have a negative reaction to the word capitalism. The USA is generally regarded as the most capitalist country on Earth and this is contrasted to Communism, previously embodied in Soviet Russia and now most famously in China. We read of how China has delivered the fastest ever period of economic growth and how the economies of the west are stagnating. Recession looms in the west and many begin to doubt capitalism as a system that delivers economic prosperity in a fair and sustainable manner. 

We have proven that capitalism works, economically that is, in that it is the most efficient way of fostering innovation and enriching a population with material wealth. All the great achievements in our history, in industry and technology, have come about not by government directed projects, but by individuals pursuing their own interests in a free society.

Critics of capitalism do not normally dispute this but instead tend to come at it from a moral standpoint, saying that the system does not deliver by some moral, ethical or spiritual measure, and that the inequalities it creates are not ‘fair.’ In order to understand why capitalism should be embraced, it is necessary to talk about what the word ‘fair’ actually means, and to understand that there has never been an alternative system proposed that adequately rewards everyone’s individual contribution to society.

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In short, capitalism is the private ownership of the means of production, and the use of the free market in the mutual exchange of goods and services.

People that accumulate wealth, create capital. This capital is used to create wealth for other people through businesses that create jobs and products for other people to buy. Capital that is not productively used by its owner is saved or invested. Capital is invested in other companies in the form of shares or bonds, or it is saved in a bank, in which case it is lent out to other businesses and entrepreneurs; either way it will in some way be utilised productively to create wealth for other people.

The type of capitalism, depends on what role the government plays in this system. In a free market system, government is only required to protect people’s property, rights to life and freedom to trade without coercion and theft etc. This means that the scope of government in a free market capitalist model is only to provide a police force and legal system to uphold the law.

By increasing taxes, the government can have a more active role in capitalism by spending our money on government industry (state capitalism), or giving preferential treatment to select groups (crony capitalism).


Perspective

The word ‘capitalist’ or ‘capitalistic’ is more often used negatively than positively. Karl Marx once used the word synonymously with the word ‘bourgeois,’ referring to everything that was bad and against the interests of the common man. Similarly today, people use the word to imply that something is characteristic of selfishness or greed.

If we actually take a step back and compare our standard of living in the west with other countries or indeed our own countries 50 years ago, we enjoy exorbitant luxuries that our ancestors could only have dreamed of. Millions of people have been lifted out of poverty and we all owe our prosperity to the capitalistic system of property rights and free exchange. Socialism and communism have been tried and tested to varying degrees, but each and every time they have proved to be disastrous and unsustainable.

In world GDP indexes China ranks between 90th and 100th in the worlds rich list; it is a relatively poor country. The USA ranks between 7th and 9th.

China’s rapid economic growth in the last 20 years can be attributed to the country’s embrace of capitalist values, namely the privatisation of industry and the decentralisation of decision making, but it still retains a model of state capitalism, whereby the Communist party is unopposed and the government exerts varying degrees of control over all industry across the country.

Centralised government ownership of the means of production amplifies the effect and scope of bad decisions, disincentivises prudent decisions and breeds inefficiency and corruption. The Soviet Union suffered from these same economic truths and its citizens were impoverished as a result. The USSR’s failure to initiate a more capitalist system eventually brought about its own downfall.


Benevolence

When you look at the free market for what it is – free people undertaking their own risks and entering into mutually beneficial exchanges and contracts – what could be more ethical than that? There are of course some people in society who lack the ability or the drive to get by on their own, presenting a case for a social model of wealth distribution in order to ‘fight’ poverty. Few people would argue against this.

The key argument is not whether or not we should help the needy, but about exactly how we help the needy and what effect this has on them.

When people receive handouts from the government, they start to get used to it and then slowly begin to adjust their affairs to qualify for the handouts instead of improving their lives for themselves. By getting something for nothing, people can become trapped in dependency. Help being given to others is best administered by those close to that person who can see exactly what help that person needs. In terms of economics, this means people spending their own money on helping others and not having the government spend our money for us on whoever meets the specific criteria of being ‘needy.’

On the act of donating money itself, the capitalist takes the moral action, and indeed the personal satisfaction, by giving to charity or helping others directly, whereas the socialist takes the moral argument, but assumes that the moral action itself should not be the choice of the individual but the role of a central authority to obligate people to help others indirectly. The more of our money that the government spends on charitable aid, the less likely individuals are to be helpful to others as we all begin to assume that the needy should get help from the government and not from their neighbours and friends. In other words, once philanthropy becomes compulsory, the moral argument elevates itself above the moral action itself.

For example, Corporate Social Responsibility, promoted by many large companies, is quite often a real act of generosity on behalf of the employees by getting together and helping communities and less fortunate people, but the financing involved is all too often just funnelling shareholder money to selected charities, which undermines its virtuosity. There is nothing selfish about opposing compulsory donations in favour of voluntary donations; not only does it make the donor feel better about how her money is being spent, but more importantly it is more likely to attend the specific needs of the recipient and encourage more philanthropic activity in the future.


Greed

Capitalism is not without malpractice. In all systems, people can choose to act immorally. There will always be bad men that try to rip off others. The best we can do is to create a system which encourages good behaviour and punishes bad behaviour.

Capitalism utilises mankind’s natural greed to reward those who best serve the needs of all other people in society, whereas socialism rewards those who best serve the needs of those in power. In a socialist economy, where the state exerts control over the means of production, malpractice and corruption become semi-legal. Much of what we have seen in recent times such as lobbying for special favours and taxpayer bailouts, where big businesses appear to play the system and get rich at our expense, resembles socialism much more than capitalism.

Whatever economic system is used, greed will always play an important part in motivating people. Our goal should be to make sure this greed is harnessed and used to the benefit of everybody and not a centralised authority.


Fairness

You may remember David Cameron’s recent speech where he spoke about 'popular capitalism.' Here is short extract. Cameron mentions what he calls the ‘true conservative sense’ of the word ‘fair.’ This refers to being rewarded adequately and appropriately for one’s input in society, or 'getting out what you put in,' as opposed to the 'left' meaning of the word fairness which many would regard more similar to the word ‘equality,’ in that it relies on the assumption that the existence of rich people is unfair and wealth redistribution is needed in order to restore fairness.

In a theoretical sense, you cannot have both fairness and equality. In an imaginary ideal word of real fairness, where everyone has an equal opportunity in life, equal upbringing, equal schooling and job prospects etc, then we would naturally have inequality, as the more intelligent or more entrepreneurial or more innovative people succeed in obtaining more wealth.

Reversely, in an ideal world with total equality, there would need to be constant transfers of wealth from anybody who earned more than the average wage to whomever earned less than the average wage, which would be decidedly unfair - it would only be fair if it were proven that those who increased their wealth did so unjustly.
   

Critics of capitalism often target big businesses and millionaires, especially in the financial sector.

Market failures do occur and sometimes the rewards received do not match the work put in. Certain corporate players tend to favour restricting free trade and competition to create regional monopolies, cartels and international protectionism in order to further their own interests. Needless to say, this is not ‘true’ (free market) capitalism. In many cases it is necessary for the government to step in with regulations to ensure that the free market works properly.

The system of social competition, where individuals and businesses seek to outdo each other, and where winners and losers are created, is not immoral. Businessmen that accumulate lots of wealth have been rewarded by their masters for their services to mankind. Their masters are the consumers, you and me. With our choice, to buy or not to buy, we collectively decide which businesses are to be successful and which are to fail. We are indiscriminate in our decisions, and show little loyalty to previous decisions when a better or more affordable product becomes available. When businesses fail, or lose their popularity and have to downsize, their owners lose wealth and their new social standing becomes better aligned with their contribution to society. Through our ‘vote’ in deciding what, when and from whom to buy, we the consumers assign everybody their societal position.

The alternative to free market capitalism would be a socialist system where a central planner allocates everybody his or her task in society and there is neither competition nor profit ambition to motivate people to better serve the interests of consumers.

In the current period of recession, when most people are feeling their real incomes shrink, and with the recent socialist injustices of the bank bailouts, the issue of fairness has become more popular and hence capitalism has been thrust back into the debate.

Let us hope that we can steer the ship through the storm without loosing our faith in the system that has served us so well in the past.

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In this BBC debate – ‘Are there alternatives to capitalism?’ - Labour MP Tristram Hunt tries to explain the case for more socialist thought.

Below, the late Milton Friedman responds to a question about greed in capitalism.