The Moral Case for Capitalism

In 1978, Alexander Solzhenitsyn wrote in National Review: “It is almost universally recognized that the West shows all the world a way to successful economic development.” He then added a cautionary note: “Many people living in the West are dissatisfied with their own society.” A statement, sad but seemingly true. The question is: Why?

Charles Murray, in this past weekend’s issue of the Wall Street Journal (“Why Capitalism Has An Image Problem,”) noted an empirical truth – that from the dawn of history until the 18th Century the world was impoverished, with only a thin veneer of wealth on the top. The Industrial Revolution and the emergence of capitalism changed everything. National wealth began to increase and poverty began to recede. In those parts of the world where capitalism did not take root, poverty persisted.

The rise of capitalism, which was concomitant with the Industrial Revolution that began in England around 1750, has been remarkable. James R. Otteson, a professor of economics and philosophy at Yeshiva University, wrote recently for the Manhattan Institute: “Since 1800 the world’s population has increased six-fold; yet despite this enormous increase, real income has increased 16-fold.” In America, he added: “Even while the population increased 58-fold [since 1800], our life expectancy doubled, and our GDP increased almost 36-fold. Such growth is unprecedented in the history of humankind.” That phenomenal growth over two centuries is a manifestation of the positive impact of the free enterprise system. While it is true that some benefit more than others, all benefit.

Yet the term capitalism has taken on negative connotations. There are those, like many West Europeans, who agree that capitalism delivers the goods, but argue that Socialism is morally superior. These people point out that capitalism generates inequality, in allowing some to become wealthier than others, and that it threatens social solidarity, as it permits individuals priority over their communities. Guilty, on both counts.

In every society, there will be winners and losers. What makes a free society different is that dissenters can be vocal in their disagreements. In the United States, while we are born equal in terms of our rights within the State, none of us is equal in terms of intelligence, physical aspects, or aspiration. With globalization, the term “community” has assumed a new definition. In the “community of markets” it may define anyone with whom one trades. And globalization has increased the level of competition. Europeans remain mired in their own version of regional nationalism.

Arthur Brooks, President of the American Enterprise Institute, has laid out what he feels to be the three principles for the moral case for capitalism: Free enterprise safeguards lasting happiness; it promotes real fairness, and it does the most good for the most vulnerable. He argues that earned success, not money, is the foundation of happiness. Examples of “earned success” can vary from owning one’s own business to raising children. “Earned success,” Mr. Brooks writes, “is the belief you are creating value in your life and in the lives of others.”.

In terms of fairness, Mr. Brooks uses the example of school report cards. Should school grades be distributed equally, regardless of performance? Students who work hard and do well inevitably say, no. Why, then, should wealth be any different? In terms of doing good, since 1970, the percentage of the Earth’s population that lives on less than $1 a day has declined by 80%. That improvement was not a result of foreign aid (which too often ends up in the pockets of the country’s leaders); it was due to globalization and the increase in free trade, “fundamental aspects of free enterprise,” as Mr. Brooks points out.

Liberty and capitalism are inextricably intertwined, each dependent on the other. “Excessive government and economic control,” writes John Taylor in First Principles, “will tend to constrain people’s freedom to speak out…” Without private ownership of capital, businesses would become dependent on indulgences from government. “We understand instinctively,” wrote John Hayward, staff writer for “Human Events”, “that the suppression of free speech indicates a dangerous lack of respect for individuals by the State, but we have been conditioned to forget that a lack of respect for property is at least as disturbing.”

The constant condemnation by the President of “millionaires and billionaires” is not only divisive; it is anti-capitalist, and therefore alien to our history. Contrary to the President’s admonitions, the progressive nature of our tax code had, as of 2009, the bottom 50% earning 13% of all income, but paying only two percent of all Federal taxes. In contrast, the top one percent of income filers earned 17% of all income, yet paid 37% of all Federal income taxes.

A problem with a successful democratic capitalist system is that it sows the seeds of its own destruction. The wealth that a democratic capitalist society generates permits government to transfer income, thereby increasing dependency on a growing percentage of the populace. The Scottish history professor, Alexander Tyler (1747-1813) purportedly once wrote: “A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury.” From that moment on, Professor Tyler allegedly predicted, democracies collapse over fiscal policies. We are frighteningly close to that point.

Every society produces winners and losers. In a totalitarian, or an allegedly Socialist system, the wealth is controlled by a thin wedge at the top of the societal pyramid. A democratic system provides dissenters a platform from which they can vent their feelings, as we have seen throughout this nation’s history, as we saw a year ago with the Occupy Wall Street movement in Zuccotti Park, and, in fact, as we now see with the President’s demonization of capitalism.

Throughout history, Utopian societies have promised that men and women can live peacefully and equitably in an Eden-like place. However, they are generally promoted to justify iniquities. Max Eastman (1883-1969), a Socialist who became an advocate of free markets, once wrote: “The notion of an earthly paradise in which men shall dwell together in millennial brotherhood is used to justify crimes and depravities surpassing anything the modern world has seen.” Some of the best examples occurred in the last century and arose from civilized countries with long histories of art, music and literature – Nazism in Germany, Fascism in Spain and Italy and  Communism in Russia, China and a host of smaller nations. Today, we see similar signs in places like Venezuela, North Korea and in Islamic nations where political parties like the Muslim Brotherhood promise Shangri-la, but practice hatred and exclusion.

When the President says that they [Republicans] tell us the market will take care of everything, he is either, nicely, using hyperbole to make a point, or, more likely, simply lying. No one believes that the “market” is the sole answer. A capitalist system can only function under a rule of law, and that can only happen with a popularly elected (and respected) government. Among its many requirements, capitalism requires a strong, but limited, central government that enforces property laws and protects consumers, but denies irrational liability laws. It needs a defense system that can ensure the exchange of international commerce. It needs to implement simple, understandable, predictable regulations and then enforce them. And, it needs to provide fiscal and monetary policies that are conducive to economic growth, including a flatter, broader tax rate that does not favor one industry, or one individual, over another.

There will always be those who steal, or in some way take advantage of the system, which is why rules should be known and enforced. Fairness demands it. “Capitalism is not perfect,” James Otteson wrote two months ago. “But no system created by humans is, or ever will be, perfect…The benefits of the free-enterprise society are enormous and unprecedented; they have meant the difference between life and death for hundreds and millions of people…We should wish to extend those benefits rather than to curtail them.”

The moral case for capitalism has always been difficult to explain because it requires an acceptance that outcomes will never be equal. It means that everyone, no matter how small their income, should make some contribution to the national purse. Politicians have long known that people, naturally, prefer to receive, not give, so they play to those behavioral instincts. And, it relies on an understanding of history, a subject too often neglected in our schools.

The alternative to capitalism is the “Road to Serfdom” immortalized by Friedrich Hayek in 1943, who saw first hand what was happening in so-called “civilized” States in Europe. The flip side of Arthur Brooks’ “earned success” is “learned helplessness,” which is what our culture of dependency is creating. To equate “fairness” with redistribution, as the President does, is unfair if one believes success should be rewarded, whether it is a student in class, a hedge fund manager, an Olympian in competition, or a candidate in a Presidential race. The decline in poverty over the past two hundred years – while not by any means complete – is the living manifestation of the virtues of capitalism and why its cessation would doom millions. It is capitalism that has paid for children’s schools in China and for Aid’s victims in Africa.

Faith in capitalism does not demand a blind allegiance to a draconian selfish system, but a belief in the collective wisdom of markets. And markets are comprised of people. The lackluster recovery of our economy has not been because of the “depth of the hole” that Mr. Obama inherited. It is because he has an innate distrust of free markets. He believes that investment decisions are best left to government, rather than individuals and businesses. There is a fundamental difference between the President and Mr. Romney. The President’s way – interventionism, increased regulation, higher taxes on a host of services – has not worked. Despite the fact that GDP has risen – very nominally – for twelve consecutive quarters, there are fewer people working today than when he took office.

Charles Murray ends his note with a reminder to the most successful among us: It is that your “principled stewardship can nurture and restore our heritage of liberty. [Your] indifference to that heritage can destroy it.” Amen.