Moral Arguments for Capitalism

Notwithstanding the early opposition of the Church, there were powerful arguments—powerful moral arguments—to be made for capitalism, and those arguments were advanced by the most profound thinkers of the era.⁴ In the brief paragraphs below I summarize the views of this new method of organizing economies as they were expressed by Voltaire, Adam Smith, and Hegel.

Voltaire

By the time The Wealth of Nations appeared in 1776, capitalist economies had already flourished for more than a century. Hence Smith and his fellow “economists”⁵ were not speculating about a type of political economy that might prove fruitful—they were describing and praising a system that had existed for many decades and that had proved itself remarkably adept at improving the condition of men and women.

Well before The Wealth of Nations appeared, the earliest and most prominent proponent of capitalism was Voltaire, who had moved to England in the 1720s to escape persecution by the French Catholic Church and government. The first public intellectual in the modern sense of the word, Voltaire was immeasurably impressed by the accomplishments of the market economy that had transformed the lives of ordinary people in Britain. Compared to the traditional French, the population of England was better dressed, better fed, and better housed. Material objects that the English considered no more than absolute necessities were still almost unknown among the mass populations on the Continent.

But what really captured Voltaire's attention was the moral impact of capitalism. He had been appalled by the almost continuous warfare on the Continent, the dreadful political machinations of the Church and the royal parties, the religious zealotry that dominated every aspect of society. Such strife had seemed to be inherent in the human condition. Say what you will, Voltaire pointed out, men will act, and the only question is whether their energy will be directed toward discord and chaos or toward more constructive ends. For Voltaire, the great thing about the market economy of Britain was that the extraordinary energy of men was put to work constructively. Not only was human energy absorbed by the pursuit of wealth through commerce, but the outcome of that pursuit was the improvement of the condition of all men, not just those who proved most successful in the competition. Referring to the London Stock Exchange, Voltaire observed, “Here the Jew, the Mohametan and the Christian deal with one another as if they were of the same religion, and reserve the name ‘infidel’ for those who go bankrupt.”⁶

Voltaire met head-on the charge that capitalism relied on selfishness, whereas a stable social order must be based on altruism. Blaise Pascal had powerfully argued this point, writing, “Each of us tends toward himself. That is against all order. We must tend toward the whole; and the tendency toward self-interest is the beginning of all disorder in war, in government, in economy, etc.”⁷ Absent a market economy to channel the self-interest of men, Pascal was probably correct. But in the context of capitalism, self-interest was transformed from a source of unrest to a source of concord and progress.

One key problem with the pursuit of self-interest in a free market economy was that it clashed with medieval and religious notions of luxury. One person's luxury is, of course, another person's necessity—better yet, an earlier generation's luxury is almost always, in market societies, a later generation's necessity. But in the later seventeenth and early eighteenth centuries, luxury was a charged word. Static notions of social order reserved luxury goods for the upper echelons of society—royalty and the aristocracy. For the masses to aspire to material well-being wasn't viewed as a natural, human inclination, but as a dangerous threat to social and religious order. Instead, Church and State encouraged monkish “virtues” such as self-denial and asceticism.

Voltaire attacked these static ideas, and glorified the struggle for material well-being, in his controversial poem “The Worldling,” and its successor, “The Defense of the Worldling.” The first poem—published in Paris without Voltaire's permission—caused him to flee France again, this time to Russia (where he wrote “The Defense of the Worldling”). Centuries before Abraham Maslow developed his hierarchy of needs, Voltaire asserted in these poems that prosperity was an absolute prerequisite to the progress of civilization. Voltaire even defended the “conspicuous consumption” (as we would call it) of the affluent, pointing out that demand for luxury goods increased the need for labor, which ultimately improved the lives of the nonaffluent.

In short, Voltaire correctly saw capitalism as the only serious antidote to antirational forces such as religious zealotry and absolutist governments, forces that had led to constant strife and warfare. Capitalism worked its magic, undermining extremist, antihuman forces by refocusing the attentions and energies of people into constructive, rather than destructive, activities. As the pursuit of those constructive activities raised the material welfare of the population, people began to see themselves not as helpless victims of larger forces, but as serious, independent actors, responsible for their own fate. They became far less susceptible to extreme forms of thought, religious or otherwise, and far less tolerant of being dictated to by arbitrary governments.

Adam Smith

We tend to think of The Wealth of Nations—then and now the finest book ever written about market economies—as a dry economic text. But it was not so perceived by Smith's contemporaries, who made the book an instant sensation and Smith an instant celebrity. Much of Smith's book is devoted to a brilliant analysis not just of what free markets can accomplish, but precisely how and why such accomplishments occur. Smith spoke not just at the level of economic theory, but at the level of the factory floor. He described in detail how the individual self-interest of workers led to greater productivity, how the division of labor allowed production to increase geometrically without longer hours or harder work. He demonstrated over and over again how capitalism rewarded efficiency, and how efficiency drove living standards.

Smith was a Scot, and he lived at a time when he could not fail to be impressed by the differences in conditions between the north and south of Scotland. In the Lowland industrializing cities of Glasgow and Edinburgh, market forces had so rapidly improved living standards that ordinary workers could, for the first time in human history, support their families on one job. In the backward Northern Highlands, however, the primitive clan culture still dominated, local chiefs wielded absolute power, market forces had not yet penetrated, and the population lived in medieval conditions. (These are, of course, precisely the conditions that continue to dominate societies that have not adopted free market systems.)

But mere material progress was not what really impressed Smith. A professor of moral philosophy at the University of Glasgow, he was far more impressed with the ethical progress that capitalism promoted among the population. Precapitalist societies were marked by superstition, a conviction of powerlessness, suspicion of anyone outside the family, and an indolence that had to be overcome by force. But populations subject to market forces quickly developed a far different character. Citizens developed behaviors characterized by fundamental decency: nonviolence, prudence, openness to the opinions of others, the ability to postpone gratification and to work for long-term objectives. These were, perhaps, modest enough virtues. But compared to the condition of men in precapitalist societies, they were cause for celebration.

Capitalism, Smith argued, encouraged good behavior because, in a market society characterized by trade and exchange, each person was dependent on others. This dependency was utterly unlike the dependence of a serf on the protection of his lord. It was a dependency of equals on equals, intermediated by the use of cash as the medium of exchange. Thus, if I treat people fairly and deliver value, people will treat me fairly in return and my living standards will rise. If I don't treat people fairly, they won't treat me fairly in return—indeed, they will refuse to deal with me at all—and I will therefore fail in my endeavor to improve conditions for myself and my family. For Adam Smith then, what Muller calls the “moral balance sheet” of capitalism⁸—its dependence on innate selfishness on one side of the ledger versus its ability to improve living conditions and the quality of human interaction—fell solidly into the black. What organized religion had failed to do for thousands of years, capitalism had succeeded in doing in a few decades, namely, enabling masses of people to live “a morally decent existence.”⁹

Hegel

Adam Smith published The Wealth of Nations roughly half a century after Voltaire moved to England and began his observations of the British market economy. Half a century after Smith's book appeared, the moral character of capitalism was taken up in turn by Georg Wilhelm Friedrich Hegel, the German philosopher who was perhaps the most influential thinker of the nineteenth century (at least, now that Marxism is largely dead). The moral attraction of capitalism, for Hegel, lay in its ability to reify the dignity of men without resort to some higher power. In the Philosophy of Right (1820), and especially in the student lectures that preceded and followed publication of the book, Hegel contrasted the failure of the French Revolution with the success of capitalism.

Hegel pointed out that the leaders of the Revolution had failed because they had profoundly misunderstood the nature of liberty, considering all institutions to be impediments to human freedom. In fact, freedom cannot exist, cannot have any meaning, outside the context of institutions that are broadly accepted by members of society. If someone asserts, “I am a separate and independent person, fully entitled to all the dignity of a free man,” what can that mean? What are the characteristics of such a freedom? Where does it begin and end? Absent an acknowledgement from the rest of society, such a person is not really free but only, at best, a deluded slave and, at worst, a madman.

The great thing about capitalism for Hegel was that its institutions—especially private property, the sanctity of contracts, and the need for citizens of market societies to engage in mutually beneficial trade and exchange—reified men's assertions of their separate existence, their dignity, their freedom. When a person asserts, “This is my property, no one can take it from me except with my consent and for value delivered,” it may not have the same noble ring as the assertion of freedom, but in fact it is a far more profound and meaningful affirmation. Because other members of society acknowledge the institutions of private property and fair exchange—not out of some abstract benevolence, but because it is in their own interests to do so—the assertion has meaning and permanence. And because the institutions that grow up in market economies—courts, for example—define the meaning and limits of concepts such as private property, contracts, and what constitutes fair trade, there is broad understanding of and agreement about what those concepts signify.

In the Hegelian market economy, then, citizens achieve their dignity not via supplication to some higher power (a lord, the State, the Church) but by what amounts to common consent. The morality of property arises out of this common consent: men in market economies are equal, despite the fact that wealth outcomes will differ, because they are mutually acknowledged to be equal in dignity.

Contemporary Discussions

Modern discussions of the ethical nature of capitalism have strayed far from the realities of the lives of human beings, tending to turn on complex philosophical concepts such as “freedom” versus “unfreedom.”¹⁰ Perhaps this was a natural response to the horrific reality of communism under Stalin and Mao—real-world free market societies proved to be so clearly morally superior to real-world Marxist societies that the discussion could continue at all only at a theoretical level far removed from our actual experience.

Nonetheless, what all the critiques of the moral basis of capitalism have in common is their scorn for the market's focus on mankind's selfish instincts; their concern about capitalism's tendency to pull down traditional societies; and, of course, the unequal economic outcomes that occur in market economies. The defenses of capitalism respond by noting that the market's focus on selfish instincts is simply a realistic view of the dual nature of humankind; that traditional societies restrict the ability of people to achieve their full potential; and that unequal outcomes are acceptable in capitalist societies because the average outcome is far higher than in other economic communities.

The Moral Basis of Private Capital

What keeps the moral balance of capitalism in the positive zone is this emphasis not on what capitalism does for successful capitalists, but what capitalism does for the rest of society—the greatest good for the greatest number. Thus, let's ask ourselves the following question. We know (see Chapter 1) that private capital is at the very center of the remarkable success of the spectacularly vigorous American version of capitalism. But what is the moral argument for private capital once it has been earned and is no longer contributing directly to economic progress, no longer building new companies?

That capital is now likely to be invested passively, in portfolios consisting mainly of stocks and bonds. It might be invested wisely (see Chapters 9 through 22) or unwisely. What role does this capital play? This is, after all, the wealth that supports the lifestyles of generations of members of wealthy families, most of whom had nothing to do with the hard work of earning the wealth in the first place. Is it simply a deadweight on the American polity, an unfortunate legacy of an otherwise useful capitalist economy? Or is it perhaps a neutral element, supporting the economy's need for capital,¹¹ but not contributing anything of a positive nature?

My conclusion is that it is neither. This wealth—what I will call “creative capital”—is deployed in ways that enrich human lives far more than any other civil institution anywhere in the world. Creative capital—capital that has already been earned and that is being stewarded either by the founders or by subsequent generations¹²—is so critical because it is used overwhelmingly to support ideas. Ideas drive the destiny of mankind and capital is the essential nourishment that allows ideas to flourish.

Having money available to people and institutions with interesting ideas is important in two ways. First, an idea that can't be deployed, that can't be implemented or tested, is an idea that is useless to society. But it costs money to test a new idea, whether that idea is for a new business, a new arts organization, or a new intellectual journal. Creative capital supplies that money. Second, the knowledge that money is available to support new ideas encourages ideas to be generated. Creative capital acts like rainwater in the desert, encouraging that proliferation of ideas in all fields of human endeavor that is so characteristic of American society.

Let's take a look at how creative capital works and why it is so central to American preeminence in so many fields wholly unconnected to business competitiveness.