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7

Can profit seekers be virtuous?

Michael C. Munger and Daniel C. Russell¹

Cicero, in On Duties III.15, tells of a man who asked the price of an estate he was trying to buy. When the seller named the price, the buyer replied that the price was too low and insisted on paying more. “There is no one,” Cicero writes, “who would deny that this was the act of a good man, but people do deny that it was the act of a wise man, just as if he had sold for less than he could have. This, then, is that mischievous doctrine: they consider some people to be good, and other people to be wise,” that is, worldly-wise: shrewd, sharp, and calculating.² Is that mischievous doctrine correct, or can profit seekers be virtuous people as well as clever people?

In popular thinking, the answer is that they can’t. People see profit seekers as wise for their effectiveness but non-profits as good for their noble intentions (Aaker et al. 2010), and profitable firms are seen as creating little value for the rest of society, sometimes for no other reason than that those firms are profitable (Bhattacharjee et al. unpublished). So, in popular thinking, profit seekers cannot be virtuous because what they do is bad: taking from society by whatever amount they profit. But even if profit seekers made positive contributions to society, many would still say they couldn’t be virtuous, because what they intend isn’t good—they intend only to make profits. At best profit seeking is no virtue. At worst, it is a vice. Or so says the mischievous doctrine.

We believe the mischievous doctrine is false. Profit seekers can also be virtuous people, if three conditions are all met:

When the first two conditions are met, profits arise from creating value for others, unlike rent seeking that extracts value from others.³ Under these conditions, what profit seekers do is not bad—on the contrary, it is beneficial. More than that, profit seekers act with virtuous intent when they intend to earn real profits by participating in a competitive process that creates real value rather than by seeking rents. Also, while there is never a guarantee that profit seekers will be virtuous persons, market forces that limit profit opportunities to real profits are far more favorable to good character than political forces that reward rent seeking (Arnold 1987).

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Virtue, in the sense we intend it, is founded in character. For our purposes, then, the most useful definition of virtue is that provided by Miguel Alzola:

Roughly, a virtue is a deep-seated trait of character that provides (normative) reasons for action together with appropriate motivations for choosing, feeling, desiring, and reacting well across a range of situations. The traits of character traditionally postulated as virtues have at least two fundamental features. First, they have a tendency to influence conduct. The virtues characteristically yield appropriate behavior. If someone is, say, honest, we assume that he has a character of a certain sort that makes us expect that he habitually behaves honestly (when he acts in character) over time. Second, character traits are global in the sense that someone who possesses the trait of, say, benevolence is inclined to behave in a benevolent manner across a broad range of circumstances.

(Alzola 2012: 380)

The question posed by Cicero is, in effect, whether the virtuous character can seek profit, so we turn now to an example of profit seeking.

Can profit seekers be virtuous?

Profiting as taking: the mancgere

Sharon Turner’s History of the Anglo-Saxons preserves an eleventh-century account of the retail merchant, or “mancgere,” which is simultaneously a defense and an indictment of his trade:

“I say that I am useful to the king, and to ealdormen, and to the rich, and to all people. I ascend my ship with my merchandise, and sail over the sea-like places, and sell my things, and buy dear things which are not produced in this land, and I bring them to you here with great danger over the sea; and sometimes I suffer shipwreck, with the loss of all my things, scarcely escaping myself.”

“What things do you bring to us?”

“Skins, silks, costly gems, and gold; various garments, pigment, wine, oil, ivory, and orichalcus [brass], copper, and tin, silver, glass, and suchlike.”

“Will you sell your things here as you brought them here?”

“I will not, because what would my labour benefit me? I will sell them dearer here than I bought them there, that I may get some profit, to feed me, my wife, and children.”

(Turner 1836: 115–16)

It’s all there: risk, greed, profit. The mancgere of 1050ad is the epitome of the middleman in any age, buying cheap and selling dear without improving the product. Admittedly, his customers may concede that he deserves something for packaging and transporting goods, but he doesn’t only charge for transportation; he charges the highest price he can. Isn’t the mancgere preying on other people, adding no real value?

Aristotle said that in a fair trade the things traded must be of equal worth (1934/1999, Nicomachean Ethics V.5), which naturally raises the concern that in commercial trade the only way to make a profit is to sell a thing for more than it is worth:

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[Acquisition] has two forms: one that concerns commercial trade, and another that concerns household management. The latter is necessary and well regarded, whereas the former mode of exchange is rightly objected to, since it is not natural but operates at the expense of others.

(Aristotle 1995, Politics I.10, 1258a38-b2)

The age-old complaint is not that middlemen trade but that they trade for profit. Profits are made “at the expense of others” and so profit seeking is a vice. And yet the mancgere objects that he is no parasite—in fact, he insists he is “useful.” But though the mancgere may be wise, could he also be good?

Sharpening the question

Unlike other approaches to “business ethics,” a virtue-based approach calls attention to what business does to the character of businesspeople, and the assessments range from pessimistic to optimistic.⁴ The pessimistic answer is that while businesspeople need virtues, unfortunately virtue is exogenous to business—at best business won’t improve one’s character, and at worst it may corrupt it. Alasdair MacIntyre (1981: Chapter 14) argued that virtues are excellences of doing well at things that are worth doing for their own sake and are shared within a community and a tradition. But business is something people do for the sake of other things, like profits, and because those other things aren’t shareable business doesn’t unite people but separates them into winners and losers. Virtue therefore doesn’t grow within business, but at best must infiltrate business from the outside.

Not all pessimists are that pessimistic, though. Geoff Moore (2002) observes that besides obligatory profit seekers, businesses also house people who love the very practice of law (say), or fishing, or other crafts with shareable rewards and a heritage of their own. But while this view makes room for virtue within a business, there still seems to be no such thing as virtue that belongs to business: on the business side of a business, virtue is still exogenous. So the pessimistic answer is that some are wise, others are good, and the difference is profit seeking.

By contrast, optimists think that virtue is endogenous to business. Edwin Hartman (2015: Chapter 5) argues that although business goes on for the sake of other goods—“to get some profit,” in the mancgere’s unvarnished words—that doesn’t have to keep businesspeople from also treating the very work of business as a craft. On the contrary, even crafts like law and fishing are worth doing for their own sake only because they also serve some further purpose. Why should managing or accounting be any different? If anything, businesspeople may be especially prone to getting wrapped up in their work, because, as Deirdre McCloskey (2006: 461, 469) puts it, “the bourgeoisie thinks of work as a calling,” a calling with an ancient and noble heritage (see also Solomon 1992: Chapter 13; Swanton 2016).

What’s more, despite the “dog-eat-dog” cartoon of business life, the life-blood of everyday business is not so much competition as cooperation, both within and between firms.⁵ Getting work done requires cooperative relationships, but not every contingency that might destroy those relationships can be written into contracts ahead of time. One of the most valuable business assets is therefore “social capital”—being known to be reasonable, honest, and trustworthy. Most business relationships extend over long periods, requiring that both parties expect to benefit from the relationship. This means that those who make and sell products must develop and exhibit the virtues we associate with social capital (Storr 2009). Those who do not will lose customers and suffer a decline in the value of their reputations and brand names.

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Not only does virtue support business. Business also supports virtue, as one must work with different people, come to reasonable agreements, resolve and avoid disputes, put long-term gains ahead of short-term temptations, and constantly try to discover what other people want and how to bring it to them at a low cost.⁶ And even though profit per se may not be the direct object of for-profit work, profit can be ennobling, evidence of the virtuous intent to do something so valuable that others will find it worth paying for (Brennan 2012; McCloskey 2006: 476).

But what about the mancgere? There is nothing to stop him from treating his business as a craft, but that wasn’t the complaint; there is nothing to stop the mancgere from being honest in his dealings, or from doing valuable work, but that wasn’t the complaint either. The complaint was about the very intent of seeking profit—that intent is at best no virtue and at worst a vice.⁷ So far, optimists have been somewhat quieter on this question, and that’s surprising considering how deep and enduring the suspicion of profit has been in human history. Worse, it risks giving pessimism the last word: virtue requires virtuous intent, but what profit seekers intend is at best nothing good and at worst something bad.

Our aim is to extend the optimistic answer even to this further and tougher question: not whether there is just any respect in which a profit seeker can also be virtuous, but whether one can be virtuous in respect of seeking profits. For that reason, we focus on entrepreneurship, which is actually defined in terms of profit seeking. Entrepreneurial profit is not merely profit in the accounting sense of revenue in excess of costs; rather, it is profit in excess of the next-best profit-making opportunity. In other words, by definition entrepreneurs seek extraordinary profits, as opposed to ordinary profits available from ordinary opportunities. Can the intent to realize entrepreneurial profits be a virtuous intent?

The best work on virtue and profit is informed by the economics of profit seeking, and assesses profit seeking in comparison with alternative intents. We hope to continue in that spirit, by arguing that the key to seeing the potential virtue in the intent to seek profits is to appreciate the difference between seeking real profits versus seeking artificially created rents. And the first step is to understand what real profits are and why they get created in the first place.

Profits in the entrepreneurial process

Euvoluntary exchange: the prison camp

Imagine people making direct exchanges (as in Aristotle’s “household management”) that we can all agree are fair. Would the entrance of a middleman who exchanges for profit inject unfairness where there was none before? A British economist, Richard Radford (1945), described a natural experiment of just that sort, in a POW camp during World War II. Every month, prisoners received identical Red Cross packets with milk, beef, cigarettes, and other goods. Everybody in the camp therefore had the same endowments, but preferences differed, making mutually beneficial trades possible. Suppose Allan prefers beef to milk, and Barry has beef but prefers milk. There is increased value—to both men—in correcting the mistake in allocation that would result from Barry eating beef when he could have had milk, or from Allan drinking milk when he could have had beef.

Such a trade is fair because it is truly voluntary: no one is stealing, defrauding, or threatening, and neither is so desperate to trade that he is “coerced by circumstances.” This notion of euvoluntary exchange accommodates the moral suspicion that trade is not truly (eu-) voluntary when there are profound asymmetries in bargaining power. Guzman and Munger (2014) argue that exchange is euvoluntary if, but only if, all the following conditions are met:

Categories (1)–(4) are standard requirements in the common law of contracts, and categories (5) and (6) could be summarized as the common-law requirement of “no duress.”

Because each party to a euvoluntary exchange is truly free to walk away from it, the exchange will take place only if each party will be better off for it. In fact, Radford made a striking observation about exactly that:

Very soon after capture people realized that it was both undesirable and unnecessary, in view of the limited size and the equality of supplies, to give away or to accept gifts of cigarettes or food. ‘Goodwill’ developed into trading as a more equitable means of maximising individual satisfaction.

(1945: 191)

The prisoners discovered that exchange was more equitable than relying on gifts or charity. They were right, because truly voluntary exchanges clearly make both parties better off.

Enter the entrepreneur: the itinerant padre

But what if neither party is aware of the potential trade opportunity? Radford (1945: 191) explains that the prisoners faced exactly this problem shortly after their capture—and an unlikely entrepreneur discovered a profit opportunity:

We reached a transit camp in Italy about a fortnight after capture and received ¼ of a Red Cross food parcel each a week later. At once exchanges, already established, multiplied in volume. Starting with simple direct barter, such as a non-smoker giving a smoker friend his cigarette issue in exchange for a chocolate ration, more complex exchanges soon became an accepted custom. Stories circulated of a padre who started off round the camp with a tin of cheese and five cigarettes and returned to his bed with a complete parcel in addition to his original cheese and cigarettes; the market was not yet perfect.

With the “itinerant padre,” a middleman enters the picture. The padre is an arbitrageur, “discovering sellers and buyers of something for which the latter will pay more than the former demand” and keeping the difference as profit (Kirzner 1973: 39). If anything looks like profiting “at the expense of others,” arbitrage does: the product is not improved, just resold at a higher price. It certainly looked that way to the other prisoners: “Taken as a whole,” Radford (1945: 199) says, “opinion was hostile to the middleman.”

That hostility is paradoxical. On the one hand, the itinerant padre didn’t steal from people’s bundles; he didn’t force anyone to give him what he wanted; he didn’t misrepresent any of the goods he was trading; there was no disparity in bargaining power. Since each exchange the padre made was euvoluntary, his trading partners must have been better off. But, on the other hand, no new rations entered the camp, so how could the padre return with an extra Red Cross parcel—his profits—except at the expense of others?

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That latter perspective is incorrect, though. Yes, middlemen buy cheap and sell dear, without improving the product, so they appear to profit without creating value. But that appearance is misleading. Suppose Allan was willing to pay six cigarettes for a tin of beef, and Barry would accept three cigarettes for his tin of beef. The padre, by searching across trade opportunities, found he could sell beef to Allan for five cigarettes after buying it from Barry for four. Allan and Barry were better off by one cigarette each and the padre “profited” one cigarette by finding the euvoluntary exchange opportunity to correct the misallocation.

But wouldn’t Allan and Barry have been even better off without the middleman, exchanging with each other directly? The problem is that the exchange between Allan and Barry cannot be taken for granted, because finding those opportunities was costly and uncertain—in other words, transactions costs were high. They “traded” via the padre because each valued relief from trouble (where will I find the trade?) and risk (is there a trade to be found?) more than the profits they paid to the padre. Put into perspective, the individuals who traded benefited enormously from the padre’s activities, and the padre earned his profits by specializing in the valuable but underappreciated service of arbitrage, lowering transactions costs for others.

But then why was opinion “hostile to the middleman”? Frédéric Bastiat (1850/2011) argued that such problems are generic, because people focus on what is easy to see and ignore what is hard to see. In the camp, the profits were visible and concentrated: an extra parcel in the hands of the padre. By contrast, the benefit to consumers was invisible and scattered: greater satisfaction with each parcel, for dozens of people across the camp. The story of the itinerant padre illustrates that we cannot understand the gains on one side of a euvoluntary exchange in isolation from the gains on the other side. Unfortunately, that is exactly how people tend to see them: gain implies offsetting loss, rather than mutual benefit.

Profit seeking as service-provision: the verger

But even if entrepreneurs deserve profits, do they really deserve extraordinary profits? Entrepreneurs seek opportunities no one else has noticed—which means they capture extraordinary profits while competitors scramble to catch up. Wouldn’t consumers be better off if entrepreneurs could earn profits but not extraordinary profits?

That reasoning confuses cause and effect, because it takes extraordinary profits for entrepreneurs to try to discover new ways of creating value in the first place. Somerset Maugham (1952) illustrated this aspect of entrepreneurship in his short story, “The Verger.” In the story, Mr Foreman has worked well as a verger at St Peter’s Church for more than 30 years. A new vicar is assigned to St Peter’s, and is shocked to learn that the verger cannot read or write. Foreman is sacked, and wanders, dejected. He looks to buy a cigarette, but notices there are no tobacco shops anywhere on the busy street. Risking his meager savings, Mr Foreman opens a shop, and makes considerable profits. Before long, he opens another, and then several more, amassing a small fortune. His bank manager urges him to invest the money, but Foreman demurs, saying he can’t manage other investments since he cannot read. The banker, amazed, wonders what Foreman might have done if he had been literate. “‘I can tell you that sir,’ said Mr Foreman, a little smile on his still aristocratic features. ‘I’d be verger of St Peter’s.’”

Mr Foreman’s strategy was simple: find a busy street with no tobacconist, and open a shop there. He invented nothing, and brought no new products into the country. What he really sold was convenience, not tobacco. No one else had noticed the misallocation of commercial space.

“Correcting misallocations” is really shorthand for the multiplicity of services that are easy for consumers to overlook but costly—and risky—for entrepreneurs to provide. Israel Kirzner (1973) observed that entrepreneurship is the exercise of alertness to new possibilities waiting “around the corner” that would create value for others if they were noticed and realized. Entrepreneurs like Mr Foreman exercise alertness to new ways of bringing people things they want. Entrepreneurs also exercise alertness through innovation, imagining new things that people might want. Innovation corrects misallocations by discovering new uses or combinations of available resources to satisfy demand that has so far gone unnoticed. In both of these ways, entrepreneurs specialize in the unusual service of imagining an alternative future on behalf of others. But until someone earns profits for correcting a misallocation, it’s not clear that there is a misallocation to correct. This has to be discovered, and profits are motivation for and signal of such a discovery. The discovery process is therefore ultimately driven by consumers, not entrepreneurs, because an entrepreneur who thinks he has discovered something consumers want, but then loses money, was wrong.

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Israel Kirzner (1973: 32) described entrepreneurs as trying to discover what people will find worth paying for, even when those people don’t know what that will be. But anyone who invests resources in guessing the future risks losing that investment, in addition to the lost opportunity to invest in safer alternatives. So entrepreneurs don’t just exercise alertness and make new discoveries on behalf of consumers. They do so while also relieving consumers of the risks of alertness and discovery.

This fact about entrepreneurial profits is important to understand but easy to overlook. A world where we could enjoy new products and services without also paying entrepreneurs extraordinary rates of profit doesn’t, and couldn’t, exist. The prospect of ordinary profit could never motivate someone to take entrepreneurial risks, because ordinary profit just is what’s available from lower-risk investments. A world without entrepreneurial profits is a world without entrepreneurs.

Profit, incentive, and desert

But just how “extraordinary” do entrepreneurial profits need to be? Even if profit spurs entrepreneurs to create value, do they really need the hope of the enormous profits they sometimes earn? Did the verger need to amass so great a reward for bringing new shops to the neighborhood (and tobacco shops at that)? Did the padre need nothing less than an extra Red Cross parcel to induce him to trade? Did Bill Gates need that much money to create Microsoft?

This is to ask what the price of entrepreneurial services should be. As tempting as it is, though, it is a mistake to guess in advance of euvoluntary exchange what “the price” of anything should be. In fact, another service that entrepreneurs provide is to discover prices. When transactions costs in the camp are high, milk will sell at different prices in different places. Price disparities create arbitrage opportunities by signaling misallocations. But as the padre bought and sold milk, “the price” of milk was discovered, because it leveled out across the camp. And, of course, another price discovered through entrepreneurial activity is the price of entrepreneurial services themselves—a price that fell to zero once prisoners began trading via bulletin board instead.

But aren’t entrepreneurial profits often out of all proportion to the merits of entrepreneurs? Absolutely; Mr Foreman was mostly lucky, and even clever entrepreneurs may be only marginally cleverer than others who didn’t see the opportunity (von Mises 1952: 120–1). Isn’t there something wrong with disproportionate profits for entrepreneurs who do so little to merit them?

There would be, if profits had to be justified by personal merit. In reality, the justification for entrepreneurial profits is the benefits entrepreneurs create for consumers: the greater the misallocation corrected, the greater the profit (Arnold 1987: 398). Put another way, the question is not whether the success of any particular entrepreneurial success carries moral weight. The question is whether the institution of entrepreneurship carries moral weight. Individual entrepreneurs would then be deserving if their profits were acquired within an institution that carries weight.⁸ And that institution does carry weight, because profits taken by entrepreneurs are a tiny fraction of the benefits entrepreneurship creates.

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Private and public middlemen

Within a process of profit and loss, entrepreneurs are not net takers but net creators of value. But wouldn’t consumers be even better off with a different process altogether? Wouldn’t consumers pay lower prices, uninflated by entrepreneurial profits, if products and services were more under the direction of public functionaries seeking the public good, and less under the control of private entrepreneurs competing for their private good?

Frédéric Bastiat asked exactly this question, focusing on perhaps the worst entrepreneur imaginable: one who profits from importing food during famine.

“What can be the use,” they say, “of leaving to the merchants the care of importing food from the United States and the Crimea? Why do not the State, the departments, and the towns, organize a service for provisions and a magazine for stores? They would sell at a just price, and the people, poor things, would be exempted from the tribute which they pay to free, that is, to egotistical, individual, and anarchical commerce.”

(1850/2011: 19)

There is a misallocation of resources—hungry people in one place, grain grown by farmers in hopes of selling to hungry people in another place—so there is a valuable service to be provided in correcting that misallocation. Bastiat’s question is how to provide it:

When the hungry stomach is at Paris, and corn which can satisfy it is at Odessa, the suffering cannot cease till the corn is brought into contact with the stomach. There are three means by which this contact may be effected. First, the famished men may go themselves and fetch the corn. Second, they may leave this task to those to whose trade it belongs. Third, they may club together, and give the office in charge to public functionaries.

(1850/2011: 20)

The first option is no option at all, so the question is whether to hire private entrepreneurs or public functionaries. Since entrepreneurs will take profits above cost, surely public functionaries should provide the service at cost, passing the savings on to hungry Parisians?

The problem, though, is that the cost of delivering grain to Paris is determined by the incentives and information the method of delivery creates. The profit and loss process creates information and incentives to be cheap and fast. Because competition constantly drives prices down, profit seeking forces entrepreneurs to keep finding new ways to reduce costs and transport grain as cheaply and quickly as possible. By contrast, public functionaries have no such incentive to reduce costs; their “price” will always be their “cost,” because the process outlaws profits. Within the political process, the main incentive is to avoid expensive efforts to improve quality, expedite delivery, or reduce prices. Worse, for political reasons the non-price costs to consumers—queuing, favoritism, discrimination—may even go up.

When comparing the services of private and public functionaries, it’s important not just to focus on the costs that are seen but to look for the savings that are not seen. Profits are a cost we can see, but that cost is less, often much less, than the costs of forgone innovations we never see.

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Putting competition in its place

But even if the process of entrepreneurial competition is better at providing some services, isn’t unrestricted competition wasteful? Shouldn’t governments subsidize the most promising entrepreneurial ventures—wouldn’t that bring consumers the benefits of entrepreneurship without the wasteful proliferation of entrepreneurial startups, most of which will fail anyway?

It would make sense to eliminate waste owing to entrepreneurial experimentation and failure if there were a less costly way of discovering which ventures would make the best use of the resources invested in them. The problem is that no such way could exist, because the only way that entrepreneurs ever manage to see around corners is within the entrepreneurial process of trial and error, profit and loss.

The political process works by inhibiting or even preventing competition, which of necessity turns away innovation. In the 1950s, Japan’s Ministry of International Trade and Industry decided to “rationalize” Japan’s automobile industry by limiting it to just two manufacturers. This “streamlining” left no room for an entrepreneur named Soichiro, who was allowed to make other sorts of machines but forbidden to make cars. Nonetheless, in 1959 he produced his first car, and he eventually made enough profits that he was allowed to open a car company too, but only after overcoming terrible obstacles from a government that had decided it didn’t need this new company called Honda. The reason the company exists today is that Soichiro Honda created value. How do we know? Because he earned profits, creating cars that cost him less to make than people were willing to pay for them.

But what about ideas that are so obviously good that there’s no need for an entrepreneurial discovery process? The problem is that ideas are “obviously” good only in hindsight. One of the earliest personal computers—designed and built in a garage—was a metal box that attached by a wire to a television screen. It had no fixed memory and only 16 kilobytes of RAM, but its designers Steve Wozniak and Steve Jobs put it on sale in 1976 for $666 (about $3,000 today). By all appearances they had no chance of success, and if they had asked the government whether they should go ahead the government would have said no, because voters didn’t know they wanted that metal box.

Political decision-making works at the median: any new possibility must always wait until the median politician and the median voter are convinced it’s a good idea. If personal computing had been put to the vote in 1985, more than 90 percent of American households would have voted no, and it wasn’t until 2003 that a majority of American households had personal computers (File 2013). Entrepreneurial decision-making works at the margin: new possibilities spring to life as soon as there are just enough people who value them more than it costs to provide them.

But what about the failed entrepreneurial ventures that competition inevitably creates—aren’t those failures wasteful? Actually, those failures are very valuable, because they provide information as to which discoveries do, and which do not, produce value. In hindsight, an invention like the smartphone has obvious value, but there would have been no smartphone in the absence of discoveries made possible by both the successes and failures—such as the short-lived Apple “Newton”—of different approaches to the mobile technology market. Make no mistake: state provision really does reduce the waste of failed entrepreneurial ventures. But that “waste” is the price of discovery. Restricting competition chokes off discovery and locks in existing misallocations of resources, which are even more wasteful. The difference between entrepreneurship and politics is not the presence or absence of “waste,” but the availability or unavailability of information that signals which allocations of resources bring more satisfaction to consumers.

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Virtuously seeking profits

It is no vice for entrepreneurs to seek profits, but is there such a thing as entrepreneurial virtue? Thomas Aquinas was pessimistic:

Business, taken by itself, has a certain sordidness about it because, due to its purpose, it doesn’t entail any respectable or necessary goal. Nevertheless, even if profit, which is the goal of business, doesn’t entail anything respectable or necessary due to its purpose, it doesn’t entail anything vicious or opposed to virtue due to its purpose, either.

(2012, Summa Theologiae II–II.77.4)

Entrepreneurs may create benefits for others, and someone who was an entrepreneur could even act virtuously—but not because he was an entrepreneur. Virtuous action requires not just doing good but also the intent to do good for its own sake (Aristotle 1934/1999, NE II.4), so that the act is done for the right reason (II.6). Virtuous acts require virtuous intent. True—but what exactly is virtuous intent?

Virtuous intent: the “what” and the “how”

Giving to help the needy is an act with virtuous intent; giving as a pretense of concern for the needy is not. The difference is what one intends to do: to help in the one case and to show off in the other. But besides what one intends to do, there is also the question of how one intends to do it. Suppose the money donated to help the needy had already been promised to another in repayment of a debt. Being “generous” by giving away someone else’s money is unjust, so virtuous intent involves not only what one intends to do but also how one intends to do it.

What’s more, it is possible to act with virtuous intent, even when what one intends to do is nothing special. Someone who walks for exercise does something that is neither virtuous nor vicious on its face, but how he intends to do it will make it one or the other. Does he intend to go for a walk even though it means breaking a promise to take his kids to a ballgame? Does he intend to walk for exercise even though his regimen calls for lifting weights? Does he intend to walk briskly no matter how many people he bowls over? Here, how someone intends to do something makes the entire difference as to whether his intent is virtuous or not.

Nor is how-one-intends-to-do-it any less important than what-one-intends-to-do—on the contrary, virtue makes its greatest impact on our lives in how we do everyday things. To restrict virtuous intent to the what-one-intends-to-do variety is to think of virtuous actions as rare cases involving special goals, islands in an ocean of character-neutral behavior. But in the circumstances of real life, character is in everything we do, like how one does one’s job: honestly, fairly, diligently, even if, like most jobs, it doesn’t involve any specifically virtuous goal. Of course, there are some actions that we cannot do in a virtuous way at all (Aristotle 1934/1999, NE II.6, 1107a8-27); there is no virtuous way of stealing or defrauding. These are the islands where what-we-intend-to-do really does make all the difference, when it is vicious on its face. But, for the most part, life happens on the ocean of actions that are neither virtuous nor vicious on their face, but only become virtuous or vicious depending on how we go about them.

The Stoic philosophers of ancient Greece and Rome thought of virtuous intent in exactly this way—in fact, walking with virtuous intent was one of their favorite examples:

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Right actions are things like these: being prudent, being temperate, fair dealing, being joyful, doing good, being in good spirits, walking prudently, and anything that is done with correct reasoning.

(Arius Didymus 2002, Summary of Stoic Ethics 11e)

The Stoics liked examples like “walking prudently” precisely because of their humdrum nature. The Roman statesman and Stoic philosopher Seneca was especially fond of reminding people that virtue inheres in everyday acts, because virtue and vice lie in all the choices we make as we go through our day.

When I choose the sort of clothes it’s appropriate to choose, when I walk as I should, when I dine as I ought, it’s not the dinner or the walk or the clothes that are good, but my intention in these acts, insofar as they observe on each occasion a manner suitable to right reason. Indeed, mankind is naturally a neat, tasteful animal, and so while neat clothes are not good in their own right, the selection of neat clothes is, because goodness is not in a thing, but in a certain sort of selection.

(Seneca 1989, Letters 92.11–12)

There is nothing virtuous or vicious in eating dinner, getting dressed, or going for a walk. But it is always a matter of character how we choose to do each of these things, in what Seneca called the “selection” of them. Here, how-we-intend-to-do-it is what makes it virtuous or vicious.

Entrepreneurial intent: seeking real profits

Aquinas was right to say that there is neither virtue nor vice in what profit seekers do. But to say no more than that would be to ignore—as pessimists about business virtue do ignore—the ways in which profit seekers can be virtuous in how they intend to seek their profits (see also Swanton 2016). First of all, entrepreneurs can be virtuous in seeking profits when they intend to earn those profits within a process that ties profits to value created for consumers.

An ancient parable depicts vicious people seated around a table spread with food, but because their spoons are as long as the people are tall, they starve in front of this magnificent feast because they can’t get their spoons back to their mouths. Strikingly, virtuous people sit before an identical feast with identical spoons, but they all eat sumptuously because each uses his spoon to feed the person across from him.

There is a difference in virtue between the people around these two tables, but the difference is not in what they intend to do. The difference is in how they intend to do it. At both tables, each person sits down to eat; the virtuous diners are not virtuous for sitting down to a dinner they only intend someone else to eat. What makes the virtuous diners virtuous is their intent to feed themselves by participating in a positive-sum process, a process of giving and receiving. Their intent is virtuous, not because of what they intend to do but because of how they intend to do it.

Adam Smith perceived a similar intent in everyday buying and selling:

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 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.

(1776/1904, Wealth of Nations: I.2.2)

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If we look at the selling side of exchange in isolation, we’ll focus on what the butcher, brewer, and baker intend to do—“that I may get some profit”—and that makes it hard to see what could be virtuous about being a butcher, brewer, or baker. But Smith offered a subtler perspective, putting both sides of exchange into clearer view: “Whoever offers to another a bargain of any kind, proposes to do this: Give me that which I want, and you shall have this which you want, is the meaning of every such offer.” Both parties intend to seek their own advantages, but Smith focused on how each of them intends to do so, sitting down to eat by offering to feed the person across the table. What makes Smith’s insight great is his perception of the reciprocity embedded in truly voluntary exchange within a competitive process of profit and loss, where people persuade others to meet their needs by first offering to meet theirs.

Entrepreneurial intent: forbearance from rent seeking

The flip-side of the intent to seek real profits is a second variety of virtuous entrepreneurial intent: the intent to forbear from rent seeking.⁹ What is a “rent,” and what is “rent seeking”?

Earlier we distinguished between accounting profits, which are simply revenues above cost, and economic or entrepreneurial profits, which are in excess of the next-best profit opportunity. But a second and perhaps more important difference is that accounting profits include revenues from all sources, even those that result from restraint of trade, government subsidies, or higher prices due to trade protection, regulation, or price controls. An economist would deny that these are real profits, because instead they are “rents.” Rents are excess of revenues over cost that the firm is not entitled to receive, save by virtue of its effectiveness in political lobbying. Rents are a transfer from taxpayers to firms, in the form of either direct subsidies or artificially high prices.

Wherever the political process replaces the entrepreneurial process, it also eliminates entrepreneurial profits. But that doesn’t mean that profit seeking is thereby banished. Instead, participants focus on rent seeking, as accounting “profits” now come from obtaining favors from bureaucrats instead of creating value for consumers. The political process doesn’t eliminate profit seeking; it just turns it into rent seeking.

The political process doesn’t eliminate competition either, but makes it more wasteful. Tollison (1982) defined rent seeking as competition for artificial prizes created by public functionaries, rather than competition that creates value for consumers. For example, in many American states it is illegal to braid hair commercially without a license, and licensure often requires 1,000 hours or more of training in hair-braiding (Bayham 2005). Occupational licenses of this sort make it difficult and costly for new competitors to enter the market, and as a result consumers pay higher prices and established businesses make greater profits—not real profits, but rent seeking profits that create no value. On the contrary, rent seeking destroys value for consumers by misallocating resources, like the time and talents spent obtaining a braider’s license, or lobbying the legislature to make unlicensed braiding illegal.

To ask whether it can be virtuous to seek profits within the entrepreneurial process is really to ask, “Compared to what alternative process?” (as posed by Arnold 1990). The difference between the entrepreneurial process and the political process is not profit seeking, or competition, but the shapes that profit seeking and competition take within these processes. In both processes, profit seekers try to avoid competition, reduce risk (“sometimes I suffer shipwreck”), and acquire capital. One way to avoid competition is to correct misallocations that no competitor has noticed yet; but another is to create misallocations by lobbying for laws that erect barriers to entry. One can reduce risk by exercising prudence; but the assurance of a taxpayer-funded bailout can make it prudent to take even more risks. One way to acquire capital is by selling stock to people betting with their own money; but another is to obtain subsidies from politicians who bet with taxpayers’ money.

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When exchanges are euvoluntary, and free of artificial constraints—subsidies, barriers to entry, restrictions on who can produce, etc.—entrepreneurs can earn real profits only by creating value for consumers who are free to turn down the exchange unless they think it will make them better off. It is not real profits but rents that really do come “at the expense of others.” So it is not profit seeking but rent seeking that cannot be virtuous, because rent seeking cannot create value.

By contrast, it takes virtue to earn real profits when this means forgoing the opportunity to seek rents. Of course, virtue requires more than a resolve not to do wrong, but then, forgoing rent seeking is more than merely “not doing wrong.” Rents do still count as accounting profits, so the pressure to seek rents can be enormous, whether that pressure comes from shareholders dissatisfied with managers who forgo more profitable rent seeking opportunities, or from public functionaries looking to sell favorable policies or extort bribes. Faced with such pressures, entrepreneurial virtue requires a particular strength of personal character, a fiercely independent desire to forgo rent seeking opportunities. Profit seeking in its pure form is virtuous; rent seeking in most of its forms is vicious, and the character of the virtuous entrepreneur naturally and habitually seeks out profits arising from creating value while eschewing accounting profits accruing to rents. The way this distinction cashes out in the real world may be murky, but the analytic distinction as a tendency of character is clear.

Entrepreneurial virtue in commercial society vs. rent-seeking society

Of course, nothing we have said guarantees that entrepreneurs will be virtuous. Actually, the absence of such guarantees is precisely our point: the entrepreneurial process offers no guarantee of entrepreneurial virtue, but neither does the political process. So the remaining question is, which of these two non-ideal processes is less detrimental to the character of entrepreneurs?

Commercial society

It is a paradox of entrepreneurship that those who seek profits as a proximate goal are less successful, and actually make smaller profits, than those who are committed to creating value. Profits are a byproduct of a focus on creating value, because successful sellers need healthy, successful customers. In this way, commercial society regularly selects for entrepreneurs whose main assets are character and a reputation for probity.

The first venture capitalist with that job title was Georges Doriot, who co-founded the American Research and Development Corporation in 1946. The company’s objective was to connect people sitting on piles of cash accumulated during World War II with servicemen returning with lots of energy and big ideas. The transactions costs were high—investors didn’t know which ideas were likely to be profitable, and the new entrepreneurs had few contacts with investors—so Doriot and ARDC undertook to rate investment opportunities and target those with the greatest chances of success. Doriot’s own description of his strategy is striking: the correct estimates count character more than the quality of the idea itself.

“Always remember that someone, somewhere, is making a product that will make your product obsolete,” was typical Doriot advice. . . . “Doriot taught me the commitment and sense of responsibility needed to succeed in business,” said American Express Chairman James Robinson III. Former Ford chairman, Philip Caldwell, said, “I can still hear him saying, in his French-accented voice, ‘Gentlemen, if you want to be a success in business, you must love your product.’”

(Fisher 2007: 147, emphasis added)

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Doriot’s view of venture capital emphasized the importance of caring about the idea itself, and emphasized character as if it were an asset in its own right. The reason for his emphasis was simple: he doubted his ability, and anybody else’s, to predict consumers’ reaction to an idea, particularly one that was genuinely new. “A grade-A man with a grade-B idea is better than a grade-B man with a grade-A idea. . . . When someone comes in with an idea that’s never been tried, the only way you can judge is by the kind of man you’re dealing with” (Fisher 2007: 147).

This insight has far-reaching implications for other transactions as well. The problem of enforcing agreements in an uncertain business environment elevates character and reputation to the status of an asset, one that might even be listed on a balance sheet as brand name or “good will” (for further discussion, see Maitland 1997: 21–25). When financier J.P. Morgan was asked before Congress in 1912 whether loans were “based primarily upon money or property,” he replied, “No, sir, the first thing is character. . . . Because a man I do not trust could not get money from me on all the bonds in Christendom” (US House of Representatives 1912).

Again, none of this is to say that most managers or CEOs of corporate enterprises cultivate these character traits. Commercial society offers no guarantee that only virtue will be rewarded with commercial success. In fact, a system of impersonal relations, with separation of ownership and control and contracts that focus on short-run gains measured by changes in stock price, may have the effect of winnowing out the entrepreneurial virtues in favor of much less attractive character traits. But the question is, how favorable is the process of profit and loss to the good character of entrepreneurs, compared with the alternative bureaucratic process?

Rent-seeking society

While nothing guarantees virtue, rent seeking society is actively corrosive to virtue, because one can “profit,” or even just survive, only at the expense of others. Perhaps the most striking illustration of rent seeking society is found in the remarkably candid statements by Dwayne O. Andreas, CEO of farm and chemical giant Archer-Daniels-Midland Corporation. Mr Andreas saw courting politicians as an important part of his job (Weiner 1996), and ADM’s political importance as a sign of his success: “How is the government going to run without people like us? We make 35 percent of the bread in this country, and that much of the margarine, and cooking oil, and all the other things” (Carney 1995). James Bovard put it this way: “ADM’s political strategy has long been based on the ideas that politicians should control prices and markets, and that ADM and Andreas should control politicians” (Weiner 1996).

To his credit, Mr Andreas made no effort to justify his rent seeking by saying “everyone does it.” In fact, no one “did it” as much, or as successfully, as ADM. His reasoning was that the political environment, and especially the food industry where ADM had positioned itself as “the supermarket to the world,” was not really a market system at all:

There isn’t one grain of anything in the world that is sold in a free market. Not one! The only place you see a free market is in the speeches of politicians. People who are not in the Midwest do not understand that this is a socialist country.

(Carney 1995)

If entrepreneurs can be virtuous within a process governed by profit and loss, the question is, could virtuous entrepreneurs survive within political processes that are governed by rent seeking? In a modern setting, where there are very few limits on the scope and magnitude of subsidies, bailouts, and regulatory assistance in creating barriers to competition, it may be impossible to avoid acting as both an economic and a political entrepreneur. In that environment, one profit-making opportunity is to serve consumers within the entrepreneurial process, but another is to seek rents within the political process. If a virtuous entrepreneur forgoes rents that shareholders perceive as accounting profits, the firm’s stock price will be reduced, at least compared with ADM-style management, leaving that firm susceptible to hostile takeovers by firms less hesitant to seek those rents. Rent seeking society thereby selects against entrepreneurial virtue, so even if it is possible to be a virtuous entrepreneur, in that environment there is a real question as to whether virtuous entrepreneurship is sustainable.

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The key, then, is to ensure that government does not encourage such adverse selection by offering rents to the highest bidder. But this requires virtue on behalf of government officials, and it is a virtue we should not expect to observe: offering rents to producers in exchange for quasi-legal payments, campaign contributions, and other forms of political support captures enormous competitive advantages for incumbent politicians (Buchanan 2003). Thus, while entrepreneurial virtue is possible, it may not be sustainable (even with the best will in the world) in publicly traded firms within an expansive regulatory environment that rewards rent seeking.

So, the mischievous doctrine is false: profit seeking can be virtuous as well as clever. The really difficult question is, can politicians be virtuous? Will the political system say no when rent-seekers come asking for (say) an occupational licensing requirement that has no basis in merit but serves only to restrict competition, raising prices and harming consumers? What would help entrepreneurs be virtuous is for politicians to be virtuous enough to take politics out of the economic process and leave entrepreneurs no option but to earn profits by creating something that other people want to buy. The crucial question about entrepreneurial virtue, therefore, is whether there is any hope of political virtue, since it is in everyday political vice that the worst dilemmas of character originate for entrepreneurs.

Concluding remarks

So far, most work on virtue and for-profit business—pessimistic and optimistic alike—has been done in the shadow of MacIntyre’s approach. But we hope to have shown that there is no benefit in defining virtue and business in such a way that never the twain could meet; we would prefer to conclude, with Alzola, that in for-profit business, “Virtue is possible” (see Alzola 2012: 396).

Putting that behind us, for all that we have said here several questions still await exploration, in multiple disciplines:

Essential readings

Essential works on the values of virtue and character in entrepreneurship include Cicero, On Duties, Book III; Burton Folsom, The Myth of the Robber Barons (2010); Edwin Hartman, Virtue in Business (2015); Deirdre McCloskey, The Bourgeois Virtues (2006); and Gordon Tullock, Rent seeking (1993). For a comprehensive review of many of the best arguments against our position, see Allen E. Buchanan, Ethics, Efficiency, and the Market (1985), Chapters 2 and 3.

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For further reading in this volume on Aristotle’s conception of virtue, see Chapter 2, Theorists and philosophers on business ethics. On virtue as a kind of non-consequentialism, see Chapter 5, Consequentialism and non-consequentialism. For a discussion of virtue in business leadership, see Chapter 25, Leadership and business ethics. On conceptions of entrepreneurship, see Chapter 16, The ethics of entrepreneurship. On political decision-making and rent seeking, see Chapter 21, Regulation, rent seeking, and business ethics. On political decision making and the economic crisis, see Chapter 23, The economic crisis: causes and considerations.

Notes

1    For their constructive comments on earlier drafts, we thank Julia Annas, Jonathan Anomaly, Peter Boettke, Geoffrey Brennan, Ed Friedman, Jerry Gaus, Brian Kogelmann, Mark LeBar, Tristan Rogers, Dave Schmidtz, Danny Shahar, John Thrasher, Mario Villarreal-Diaz, Lawrence White, and the editors of this volume.

2    All translations are original, except Bastiat (1850/2011). The translated versions given in the bibliography are for the use of the reader.

3    “Rent seeking” is variously defined; for background see Krueger (1974), Tollison (1982), and Tullock (1967, 1993). For our purposes, the definition of rent seeking is “the pursuit of artificially high accounting profits obtained through special privileges or protection from competition awarded through political action by state actors.” A classic example is the special combination of subsidy and protected monopoly position awarded to Edward Collins to deliver US mail by steamship in the nineteenth century, as described in Folsom (2010, Chapter 1).

4    Maitland (1997). For general overview of virtue in business, see Audi (2012); Hartman (2013), (2015); Kline (1998); Solomon (1992).

5    Brennan (2016); Choi and Storr (2016); Hartman (2015), Chapters 3, 5; Klein (2003); Rose (2016); Solomon (1992), Chapter 6.

6    Brennan (2016); Choi and Storr (2016); Koehn (2005); McCloskey (2006, 1–53, 507–8); Maitland (1997); Smiles (1859, Chapter 8); Solomon (1992, Chapters 19–22).

7    For example, although Solomon is generally an optimist, he agrees with Aristotle that profit seeking is “parasitic,” especially when one doesn’t “make” anything (1992, 13–16, 101–3).

8    See Nozick (1974, 151–2); Schmidtz (2008, 198–9); see also Marx (1875/1970, Part I, §§1, 3).

9    Cf. Hartman (2013, 259–60); Heath (2013, 119–20). See also Heath (2014, 71).

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