The Morality of Capitalism

Bryan Cheang

Bryan Cheang

Bryan Cheang is a graduate student at King’s College London in the Department of Political Economy. He researches into the political economy of development and also applied economic policy. He is currently researching into the development strategies employed by the city-states of Hong Kong and Singapore.

Free market capitalism has a bad rap today. This is despite its global spread, especially since the end of the Cold War and the fall of socialist states within the iron curtain. In fact, many blame unregulated markets for the most recent financial crisis in 2008. While free markets are generally considered the most efficient system of economic organisation, however begrudgingly, many feel that it is at best a necessary evil, and at worse, a system of exploitation of the poor. Thus, the efficiency of capitalism is mostly accepted, but its morality is heavily questioned.

In this article I will seek to argue that free market capitalism, is not just an efficient system of socio-economic organisation, it is also the most moral. Along the way I seek to also refute popular myths leveled against capitalism that have misrepresented it tragically. I will do this, in part, by copying out some excerpts from the works of the great defenders of capitalism.

 

Ayn Rand: Defender of Reason, Individualism and Capitalism

I will start with the arguments made by Ayn Rand, one of the greatest defenders of individualism ever in history.

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Ayn Rand (1905 -1982) was a Russian-American novelist, philosopher, playwright, and screenwriter. She is known for her two best-selling novels, The Fountainhead and Atlas Shrugged, and for developing a philosophical system she called Objectivism, a radical defense of reason and individualism.

Rand does not regard capitalism as an amoral or immoral means to some “common good”—as do most of its defenders—but as a profoundly moral social system. It is, she wrote, “the only system geared to the life of a rational being.”

In Capitalism: The Unknown Ideal, she and others explain the social system that she held has “never been properly understood and defended—and whose very existence has been denied.” That system is laissez-faire capitalism: a social system in which the government is exclusively devoted to the protection of individual rights, including property rights, and therefore in which there exists absolutely no government intervention in the economy. (This is also the definition that I hold and will use throughout this article)

The main reason, for Rand, behind capitalism’s morality, is that it is based on voluntary cooperation and bars the mutual initiation of physical force and fraud. As such, it is the only system that is compatible with the preservation of an individual’s rights within a society:

“The recognition of individual rights entails the banishment of physical force from human relationships: basically, rights can be violated only by means of force. In a capitalist society, no man or group may initiate the use of physical force against others. The only function of the government, in such a society, is the task of protecting man’s rights, i.e., the task of protecting him from physical force; the government acts as the agent of man’s right of self-defense, and may use force only in retaliation and only against those who initiate its use; thus the government is the means of placing the retaliatory use of force under objective control.”

Her unique argument was that the life of man rests on the use of his rational mind; since physical force is anti-mind, it is therefore anti-life.

Capitalism thus makes the life of man itself possible because it safeguards a human’s primary means of survival: his mind. Through upholding individual rights, capitalism recognizes the fact the each and every human being must use his own mind to grasp reality and act accordingly to better his own life. Capitalism is the only political system that is based upon man’s true nature as a being who possesses the faculty of reason — capitalism is the only system that recognizes that human beings can think. Indeed, individual rights and capitalism not only protect the individual person and property of each human being, but most importantly, they protect the individual mind of every human being.

Why specifically? This is because the economic freedom of capitalism allows the rational mind to be used unimpaired.

“Since knowledge, thinking, and rational action are properties of the individual, since the choice to exercise his rational faculty or not depends on the individual, man’s survival requires that those who think be free of the interference of those who don’t. Since men are neither omniscient nor infallible, they must be free to agree or disagree, to cooperate or to pursue their own independent course, each according to his own rational judgment. Freedom is the fundamental requirement of man’s mind. A rational mind does not work under compulsion; it does not subordinate its grasp of reality to anyone’s orders, directives, or controls; it does not sacrifice its knowledge, its view of the truth, to anyone’s opinions, threats, wishes, plans, or “welfare.” Such a mind may be hampered by others, it may be silenced, proscribed, imprisoned, or destroyed; it cannot be forced; a gun is not an argument. (An example and symbol of this attitude is Galileo.) It is from the work and the inviolate integrity of such minds—from the intransigent innovators—that all of mankind’s knowledge and achievements have come. (See The Fountainhead.) It is to such minds that mankind owes its survival. (See Atlas Shrugged.)” – Rand

In a society plagued by the anti-capitalistic mentality, the best minds are persecuted against, because of egregious policies like “fair share laws” and redistribution. The future of our world, and the motor of society, rests on their shoulders. What if Atlas, who holds the weight of the world on his shoulders, merely shrugs? The heroic individual who exercises his identity and his reason is the most important unit of society; capitalism enables that best, and therefore, propels society forward.

 

Doesn’t capitalism promote greed?

Yet, the common criticism against capitalism is that it “rewards greedy behaviour” and promotes greed. Well, greed and self-interest are different. Self-interest is unavoidable. All people are self-interested, even when acting altruistically, because they believe the action will get them closer to where they want to be than inaction. Greed is unknowable to anyone but the greedy person. As Milton Friedman reminded Phil Donahue, greed can’t be prohibited by any system. Capitalism realizes this, and rather than wishing greed away, it provides an incentive structure that channels self-interest, whether greedy or not, to produce the least harm and the most good.

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This is the fundamental insight of Adam Smith, that the butcher doesn’t provide meat out of love for his customers, but out of regard for his own self-interest. It’s not good if the butcher is greedy, but even if he is, good can result if he’s in a capitalist system. Capitalism is not harmed if he is a selfless person, nor is it harmed if he’s greedy. In fact, if he is a greedy jerk, it is likely to hurt his business because customers may not like buying from him. Bigots, jerks, scoundrels and greedy people won’t ruin capitalism, but capitalism might ruin them.

Contrast this to government, where officials and bureaucrats are supposed to do not what is good for them, but what is “good for society”. For government programs to achieve their goals, it would require people—voters, politicians, employees—to be always selfless. Voters don’t bear the cost of casting selfish votes; politicians can spread the costs of “pork” across millions of taxpayers and concentrate the benefits to a few; and the government bureaucrats don’t fear losing your business if they treat you poorly. Governmental solutions are not honest about human greed, and they cannot channel it to create benefits for all like the market can.

In addition, government regulation and intervention, which limits the market, is not necessarily selfless and in the “common good”. The public choice theorists like Milton Friedman explained that special interests almost automatically get sucked in, and in the process corrode the very intervention that was meant to “help the public”. This is one form of government failure, called the “incentive problem”; because of this, we cannot merely assume that capitalists and businesses are greedy, while assuming in the wisdom and good character of those politicians and bureaucrats assigned to regulate them. Political self-interest, is not more virtuous than economic self-interest. This is the key: government usually works in its own interests or get captured by special interests; capitalism works in the interests of the masses of consumers.

Actually, we could even go one step further to defend not just self-interest, but selfishness, like Ayn Rand famously did in The Virtue of Selfishness. It is not necessary to defend selfishness/ethical egoism like Rand to defend capitalism, but it is a provocative idea.

 

Virtues and Responsibility

Capitalism is not a religion, and by itself cannot prescribe any moral values for individual to follow. However, capitalism allows for individual freedom and choice, and because of that allows individuals to choose and discriminate between moral options. There is no morality police in capitalism compelling individuals to buy bibles only and not pornographic magazines. The individual cannot and will not be punished by the cane if he consumes pornography. And this is good.

Poet and theologian John Milton famously argued for free speech by saying that without it, the ability to become a morally responsible individual would cease. Milton said that without the freedom to choose wrongly what books to read or doctrines to believe, there would be no concept of choosing rightly. People would not become moral, but would be of a weaker character and less able to resist evil when they encountered it. There is no righteousness in not making bad choices that are not available to you. A truly free market leaves open the possibility of bad decisions, but any system that does not allow these decisions makes us less, not more, morally responsible.

Also, since capitalism is a negative system in which we can’t force people to do what we want, we must learn patience and peaceful persuasion. We have to be ready to accept the consequences of our decisions and learn to act prudently. Freedom allows us to become responsible.

 

Peaceful cooperation

Capitalism rests on voluntary agreements between two parties for mutual gain. Because it bars the use of force, capitalism actually promotes peace in more than one way.

  1. First and foremost, because capitalism is based on win-win agreements, both parties come out of an exchange better off. But political allocation is win-lose, that’s why people fight over politics, because so much is at stake. If the government benefits one group, it must always been at the expense of another group.
  2. Second, it promotes democratic and liberal values (which is explained below). These values, when spread around the world, increase harmony, tolerance, and mutual respect. The ideas of free trade and interdependence in a global capitalist economy raises the cost of violence. In a free market, the cost of belligerence is very high. When governments come in and restrict trade or subsidize violence by building up large militaries, the cost of belligerence is lowered, and the benefits of peace are reduced. It is the state, not trade, which creates conflict. There is a famous saying, attributed to Frederic Bastiat, “If goods don’t cross borders, armies will.”
  3. Third, capitalism discourages discrimination.  Think of this: a store-owner who chooses not to sell to members of a certain race is bound to lose much revenue from that segment of the consumers. He is compelled by self interest to serve the public to his best abilities. In capitalism, we do not judge people by the colour of their skin, their religion, or on other arbitrary factors, but merely ask the question: does he serve my needs well?

The famous line from Adam Smith expresses it clearly: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” Additionally, Milton Friedman feels that competitive capitalism is especially important to minority groups, since impersonal market forces protect people from discrimination in their economic activities for reasons unrelated to their productivity.

 

Inequality and “social justice”

What about the great maldistribution of wealth and income in capitalist economies? Even if we do not resort to full fledged socialism, at least we can redistribute wealth and regulate the excesses of capitalism? A more “socially responsible” capitalism maybe? Social democracy?

First, let us distinguish between two types of inequality. There is the natural inequality that is a fact of humanity, ie. some are born smarter than others, some are luckier and just more talented. Then there is the inequality that is a result of artificial factors ie. I steal from you for ten years, resulting in a great wealth gap between the both of us. It is important to note here, two different points:

  1. The natural inequality of the market is not necessarily a bad thing. In fact, we need this natural inequality to play out in the market, it is essential for our very survival and progress. Mises explained, “Inequality of wealth and incomes is an essential feature of the market economy. It is the implement that makes the consumers supreme in giving them the power to force all those engaged in production to comply with their orders. It forces all those engaged in production to the utmost exertion in the service of the consumers. It makes competition work. He who best serves the consumers profits most and accumulates riches.” Without this inequality, then the very idea of free competition makes no more sense! It is precisely because consumers in the market can reward some and choose to punish others that certain firms and entrepreneurs become rich, and others not as rich. Steve Jobs and Bill Gates gained their wealth and prosperity (creating an inequality between them and myself) precisely because consumers chose them to be rewarded.
  2. The eradication of this natural inequality, to achieve material equality of outcomes, is itself unjust. Besides the fact that redistribution can only be done through the use of force, material equality of outcomes is incompatible with another kind of equality that we hold dear: equality before the law/equal protection of the law. There is no better way of capturing this idea than this quote: “From the fact that people are very different it follows that, if we treat them equally, the result must be inequality in their actual position, and that the only way to place them in an equal position would be to treat them differently. Equality before the law and material equality are therefore not only different but are in conflict with each other; and we can achieve either one or the other, but not both at the same time” – Hayek.

Capitalism puts freedom first before equality, while socialism puts equality first before liberty. Which do we value more? Friedman argued that societies that place liberty first will have a good measure of both, but societies that emphasise equality (material), will end up losing a lot of both.

Second, calls for more equality and “help” for the poor assumes the idea of social justice. It is common to see big banners with these words scrawled on them during anti-globalisation marches against “corporate tyranny”. Yet, this idea itself is flawed.

Hayek called the term “social justice” nothing more than a “mirage”: “one of my chief preoccupations for more than 10 years” has been coming to terms with the idea that social justice is a mirage”. Why would justice so conceived be a mirage? Hayek says, “there can be no distributive justice where no one distributes” In Hayek’s words, “considerations of justice provide no justification for ‘correcting’ the results of the market” So long as traders are voluntarily making pareto-superior moves, there is nothing else that can be said or needs to be said by way of justification.

What Hayek means is that the distribution in a market is a result of many many small exchanges and transactions by different parties, in the “daily repeated plebiscite” (to quote Mises again), and whatever the result has nothing to do with justice. It is not an issue of justice if Steve Jobs got rewarded by the consumers but I was punished by them because I am not as good in serving their needs. It may be an issue of charity, but its neither just, nor unjust.

Robert Nozick, perhaps more than anyone else, destroyed the left-wing notion of “social/distributive justice” in his book Anarchy, State, Utopia.

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Nozick agreed that distribution of wealth in a society is neither just or unjust, they just are. Talk about “distributive justice” is inherently misleading, Nozick argues, in that it seems to imply that there is some central authority who “distributes” to individuals shares of wealth and income that pre-exist the distribution, as if they had appeared like “manna from heaven.” Of course this is not really the way such shares come into existence, or come to be “distributed,” at all; in fact they come to be, and come to be held by the individuals who hold them, only through the scattered efforts and transactions of these innumerable individuals themselves, and these individuals’ efforts and transactions give them a moral claim over these shares. Talk about the “distribution of wealth” covers this up, and unjustifiably biases most discussions of distributive justice in a socialist or egalitarian liberal direction.

But, he did propose an “entitlement theory of justice” as an alternative also. Nozick proposes a 3-part “Entitlement Theory”. If the world were wholly just, the following definition would exhaustively cover the subject of justice in holdings:

  1. A person who acquires a holding in accordance with the principle of justice in acquisition is entitled to that holding.
  2. A person who acquires a holding in accordance with the principle of justice in transfer, from someone else entitled to the holding, is entitled to the holding.
  3. No one is entitled to a holding except by (repeated) applications of (a) and (b).

The complete principle of distributive justice would say simply that a distribution is just if everyone is entitled to the holdings they possess under the distribution.

Some social liberals like Rawls will insist that individuals do not deserve their riches or their talents, and were simply lucky. First, it does not logically follow that force must be used to redistribute what I do not deserve. Second, just because I don’t deserve a million dollar inheritance from a rich dad does not mean I am not entitled to it, after all, I don’t deserve my eyeballs also?

The key insight of Nozick’s theory is that liberty and patterns are mutually exclusive. Allowing individuals to freely use what they have or their talents will inevitably destroy any specific pattern of distribution advocated by theories that are not based on Nozick’s entitlement theory. The implication here is that enforcing a specific pattern will thus destroy freedom. Attempts to enforce a particular distributional pattern or structure over time will necessarily involve intolerable levels of coercion, forbidding individuals from using the fruits of their talents, abilities, and labor as they see fit.

As Nozick puts it, “the socialist society would have to forbid capitalist acts between consenting adults.” This is not merely a regrettable side-effect of the quest to attain a just distribution of wealth; it is a positive injustice, for it violates the principle of self-ownership. Distributive justice, properly understood, thus does not require a redistribution of wealth; indeed, it forbids such a redistribution.

 

Final reminder

I believe the morality of capitalism is the plain truth. We must be aware of this truth. Sadly, emotionalism seems much easier.

A protestor was marching with the Occupy Wall Street movement recently, decrying what he called “corporate tyranny” and “corporate control”. A journalist saw him using his Apple MacBook and asked him, “is there such a thing as a non-corporate computer”? What’s his response? I leave it to your imagination.

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Bryan Cheang

Bryan Cheang

Bryan Cheang is a graduate student at King’s College London in the Department of Political Economy. He researches into the political economy of development and also applied economic policy. He is currently researching into the development strategies employed by the city-states of Hong Kong and Singapore.