The ethical wonder of the free market.
Editor’s note: The following is the fifth installment of the FrontPage series “Capital, Capitalists and Capitalism” by Dr. Mark Hendrickson. Click the following for Part I, Part II, Part III and Part IV.
The opponents of capitalism charge that capitalism concentrates power and wealth unjustly in the hands of an elite, to the detriment of the masses of people. Let’s take a look at power first.
Large private corporations are a favorite bogeyman of anti-capitalists. There can be no denying their economic importance and impact, but power? Power to do what to whom?
Under capitalism, corporations don’t have the power to compel anybody to invest in their business, give them supplies, or lend them money. They certainly can’t compel consumers to buy their products. Instead, they have to win the patronage of consumers, gain market share, and earn profits (i.e., succeed) on their own merit—their efficiency, their adroitness at serving consumers, their adaptability, skill, talent, and effort.
In a free market, even the largest and most prestigious firm today will shrivel and perhaps die if it fails to keep abreast of what the ever-changing sovereign consumer prefers. If you don’t think so, check out a list of the mega-corporations included in the Dow-Jones Industrial Average over the last century. You will see that many of the corporate giants of yesteryear no longer exist.
Whatever happened to American Can, Pan Am Airways, Studebaker, Smith-Corona, Montgomery Ward, Circuit City? They are just a few of the allegedly powerful corporations to whom the sovereign consumer gave a thumbs down and revoked their lease to serve them. Think, too, of the A&P grocery stores, Howard Johnson restaurants, and other once-dominant firms that barely survive. What kind of power do they have?
It may appear today that Wal-Mart and Apple Computer will dominate their respective markets indefinitely, but in fact, there are only two ways for them to remain Number One in the decades to come: Either they will continue to excel over their competition in giving the consumers the most value for their dollars, or their position will be protected by some sort of alliance with government, whether that be by subsidies, legal or regulatory protection against competition, or some form of nationalization.
“But wait,” you say, “You can’t deny that American corporations today wield enormous political influence through their lobbying activities. Just look at all the bailouts, corporate welfare, etc.” Yes, exactly so. In that sense, corporations indeed gain some power at the expense of consumers and taxpayers. But if a corporation is enriching itself through the political process, that does nothing to discredit capitalism, for, as we have already said, such political favoritism constitutes cronyism and is the antithesis of capitalism.
The only businesses that wield any true power over consumers are the businesses in non-capitalistic systems that are propped up by the power of the state. The most extreme example of business enterprises having power to depose the sovereign consumer is in the very system that those who complain about corporate power advocate as an alternative: socialism. Under socialism, the state compels resources to be diverted to state-owned enterprises, and then it continues to prop them up regardless of whether consumers are satisfied with them. Under socialism, the counterfeit pseudo-capitalists (the political appointees) in charge of these enterprises are unaccountable to the people. They have the full power of the state behind them. This enables them to treat consumers badly and operate the business inefficiently with impunity, insulated from the financial loss and failure that a privately owned business behaving so poorly would suffer.
The greater the state support of business enterprises, the more sovereign power is taken away from consumers. Those concerned about power and justice need to understand that consumer sovereignty is the ultimate economic democracy. Consumer sovereignty means that everyone’s economic values and choices help to shape and determine the pattern of economic production. Every dollar vote counts. Under this economically democratic system, power is diffused over the entire population.
By contrast, under socialism, economic power is concentrated in the hands of a tiny elite, the government planners. Socialism thus subverts rather than strengthens democracy. Similarly, to the governments in various mixed economy systems use their power to commandeer resources, and to tax, spend, and regulate, they indeed overrule the will of the people in terms of what is produced and who produces it. When speaking of economic power, only governments have the power to force their desired outcomes on an unwilling public; capitalistic businesses do not.
It is simply incorrect to assert that capitalism concentrates power in the hands of private businesses. The second allegedly unfair aspect of capitalism—that it enriches businesses at the expense of the citizenry—is also a myth. Yes, in capitalistic systems, businesses can accumulate spectacular riches. More precisely, some businesses can. The critics of capitalism tend to forget that under capitalism, a majority of U.S. business enterprises fail within four years,1 and that, as recently mentioned, even the most successful corporations eventually die out.
The pertinent question is: Is there anything inherently illicit or objectionable about some corporations amassing billions of dollars of profits? In the absence of force or fraud, the answer is “no.”
The beauty and fairness of capitalism is that people prosper in proportion as they supply economic value to others. Henry Ford, for example, earned a fortune many, many times as large as that earned by his fellow automobile maker, Henry Royce, because Royce delivered value to a small number of people while Ford delivered economic value to millions of people. Indeed, it is in the nature of capitalism the largest business fortunes result from having rendered economic value to large numbers of people.
The economically illiterate tend to look at hugely successful businesses and speak of them as if they are a menace to society. It is a strange mentality indeed that regards economic benefactors as an antisocial pestilence. What such critics generally fail to grasp is the actual economic significance of profits earned in a free market in which all transactions are voluntary and uninfluenced by government intervention.
What does it mean when a corporation earns gonzo profits? To answer that question, we need to know why consumers willingly paid the prices that produced a spectacular rate of profit. In a free market, voluntary exchanges are positive sum, meaning that the buyers valued what they bought more highly than they valued the money they paid (perhaps quite a bit more than what they paid—what economists call consumer surplus). In other words, however gaudy a business’s profits, they created more than that amount of value for their customers.
To assert that it is somehow unfair for an exceptional capitalistic enterprise to earn large profits is to assert that it isn’t fair for one entity to create so much value for others. On what ethical grounds can one say that it is fair to limit how much good any individual or corporate enterprise can do for others? To seek to impose higher taxes on such economic benefactors is to punish beneficence. It is also unfair to workers, because profits are a major source of the new capital that will fund new jobs, produce new goods and services, and further uplift standards of living.
The ethical essence of capitalism is that it rewards voluntary service to others. By contrast, government intervention uses state power to support some enterprises over others. Those firms don’t have to excel at meeting the needs of consumers. Often they don’t have to take into consideration consumers’ wishes at all. They are subsidized and supported according to their political pull rather than their economic service. They benefit from privileges that the rest of us don’t have—a manifest injustice.
The fact is, there is no system of interpersonal economic relations other than capitalism that is predicated on the principle and practice of doing unto others as you would have them do unto you. In truly free markets, the only legitimate way to enrich oneself is to render unto others something of value to them.
The ethical principle that wealth in any amount is legitimate, so long as it is acquired through honest service to others will not satisfy those who are committed to what they perceive as the ethical principle of egalitarianism. A full rebuttal of egalitarianism lies beyond the scope of this short work, but it is self-evident that each individual human being is different in terms of abilities, talents, skills, drive, discipline, industry, etc. Economic differences, then, are built into the cake of human society. Egalitarians are at war with either God or evolutionary nature—whichever they believe is responsible for the present human condition of differentness. They are obsessed with wanting to correct what they believe to be a cosmic blunder. Their solution is always the use of government force, redistributing property from productive citizens and businesses to favored recipients (presumably the less productive, although the subsidies to firms like GE and Archer-Daniels-Midland show that the well-to-do often are on the receiving end of supposedly just redistribution).
Ethically, the egalitarians and redistributionists have a problem. Their agenda rests on the problematical premise that some people have a right to property taken from others without compensation. Such compulsory transfers of property are technically unconstitutional according to the Fifth and Thirteenth Amendments. The Fifth guaranteed that no person “be deprived of life, liberty, or property, without due process of law” (i.e., a judicial proceeding, not a legislative act); the Thirteenth abolished chattel slavery and “involuntary servitude,” which would include being compelled to surrender part of one’s income to others upon whom the state had bestowed a special privilege.
Those in favor of government redistribution of property have another ethical problem: Where is the principle that tells them how far to go in the process of redistributing property? Once they decide the state should bestow a favor on Mr. A, why shouldn’t they do something for B, C, D, et al.? Furthermore, if the state does favors 1, 2, and 3 for some citizens or businesses, why not 4, 5, 6, etc., too? The fact is, there is no ethical guideline showing how far it is right to proceed along these lines. What happens in practice, then (as is the case in the contemporary USA), is that whatever political coalition has enough votes simply bestows however much property it has the power to dole out. This is the crude, primitive ethical precept, “might makes right.”
With ethical principles as primitive as “might makes right” supporting their political agenda, it is little wonder that the opponents of capitalism try to change the subject by condemning capitalism for breeding greed. This is a red herring. In the first place, greed can surface in any human society. Indeed, some of those who denounce capitalism manifest a virulent greed for power, fame, and privilege. More importantly, though, capitalism has built-in defenses against greed, so that greed becomes irrelevant.
One of the more interesting curiosities of the pro-capitalism intellectual camp is the vigorous debate between followers of Ayn Rand, who insist that selfishness is the basis of capitalism, and George Gilder and others, who insist with equal vehemence that capitalism is essentially altruistic.2
What matters in a free-market economy is not someone’s intent or motivation, but his actions. Let’s assume a particular merchant is ambitious, driven, and greedy, obsessed with getting rich. Some critics have made such accusations against highly successful American entrepreneurs, such as Richard Sears, under whose leadership Sears became a retail titan. Are those accusations true? Maybe, but it doesn’t matter (at least, not to the public, although an obsession with success may cause serious problems in one’s family life, but that is a private matter). In a free market, in which force and fraud are outlawed, how can any greedy person achieve great wealth? The means to that end is to out-compete others in serving the economic wants of others, and to do it over and over for more and more people.
Contrariwise, let’s assume someone is impelled by altruistic motives so that their primary goal is to be of service to others by supplying them with what they need for a lower price than anyone else. The only viable way to be able to continue doing this year after year (absent having an inexhaustible source of wealth from inheritance or donations from others) would be to earn enough of a profit to be able to afford to continue doing good for others. As Ludwig von Mises summarized it nine decades ago:
“In the society based on division of labor and cooperation, the interests of all members are in harmony, and it follows from this basic fact of social life that ultimately action in the interests of myself and action in the interest of others do not conflict, since the interests of individuals come together in the end. Thus the famous scientific dispute as to the possibility of deriving the altruistic from the egoistic motives of action may be regarded as definitely disposed of.”3
In sum the ethical gap between capitalism and alternative economic systems is immense. At the risk of over-simplifying, it boils down to one fundamental antipodal difference: Capitalism rejects the use of force, whereas interventionism relies on force; in capitalistic systems, economic transactions are voluntary; interventionism compels involuntary exchanges; capitalism sides with individual rights against the encroachments of state power; interventionism exalts, to varying degrees, state power above individual rights; where there is capitalism, all people, rich and poor, are equal before the law; where there is interventionism, George Orwell’s warning from Animal House comes into play: “All animals [citizens] are equal, but some animals are more equal than others.”
Read Part VI of this series in the next issue of FrontPage Magazine.
1 U.S. Bureau of Labor Statistics cited in Amy E. Knaup, “Survival and longevity in the Business Employment Dynamics data,” Monthly Labor Review, May 2005, p. 51.
2 One of the most famous passages in the history of economic literature is Adam Smith’s discussion of the importance of self-interest in human commerce, but Smith clearly sees that where no force is used, self-interest conduces to peaceful cooperation and reciprocal benefit. See Smith’s Wealth of Nations, Book 1, Chapter II.
3Mises, Socialism, pp. 397-8.
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