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Washington Post columnist Steven Pearlstein recently touched on several important tensions that arise in our conceptions of capitalism—tensions that lie at the core of America’s modern polity (“Is Capitalism Moral?” March 15) . He notes that most defenses of capitalism have focused on its effectiveness to create wealth. Indeed, beginning in the late 18th century, it enabled the world economy to increase by a factor of about 200 , allowing billions to escape poverty in the process. That the utilitarian, pragmatic defense of capitalism is well proven is hardly controversial.
Pearlstein, however, notes that a utilitarian defense doesn’t play so well in the aftermath of the financial crisis and the trends of the last decade. Yet the fact that such a pragmatic defense has failed to give capitalism a lasting aura of legitimacy is not new. This problem was explored long ago by Joseph Schumpeter in his classic tome, Capitalism, Socialism, and Democracy , in which he noted:
“[I]n naïve bewilderment [many industrialists ask] why should the capitalist order need any protection by extra-capitalist powers or extra-rational loyalties? … Cannot a perfectly good [utilitarian] case be made out for it? … [Wouldn’t] a sensible workman … well come to the conclusion that, everything considered, he is not doing so badly and that the advantages of this bargain are not all on one side. Yes – certainly, only all that is quite irrelevant.” (pp. 143-144)
He goes on:
“Utilitarian reason is in any case weak as a prime mover of group action. In no case, is it a match for the extra-rational determinants of conduct.” (p. 143)
Schumpeter goes on to note that, while capitalism improves the well being of people from all walks of life, many soon come to discount those improvements and see them as inevitable. Instead, they criticize capitalism for allowing both economic downturns and inequality. These factors, Schumpeter believed, predispose many people against the market process. But the task of crystallizing these disparate complaints into a coherent attack on capitalism itself is the work of intellectuals.
Intellectuals, Schumpeter argued, find capitalism distasteful because of what they perceive as the disproportionate rewards that flow to those in business—asking themselves, “If we’re so smart, why are they so rich?” Thus, as the crafters of the narratives that influence public opinion, intellectuals play a powerful political role. Their utopian romantic narratives appeal to far more people than the prosaic explanations of economics. Schumpeter put it well: “The stock exchange is a poor substitute for the Holy Grail.” (p. 137)
In response to these realities, Pearlstein suggests, defenders of capitalism have turned to moral arguments. But he sees this as a defensive ploy rather than a reflection of serious conviction. While Pearlstein is right that there has been a recent flowering of articles and books discussing capitalism in terms broader than those used by neoclassical economists, the shift, I believe, is much more genuine than Pearlstein admits. Rather than a mere public relations-inspired move, it reflects the growing realization among classical liberals that in a democratic market economy no system can gain legitimacy purely on utilitarian grounds. It must also be seen as a good—that is, moral—system, and that to be seen as moral it must be moral. Material progress is but one of the many values core to understanding the human condition.
This shift in thinking is reflected in deeds, too. For instance, John Allison, when he was CEO of the bank BB&T, refused to lend to projects sited on land that had been seized from private owners through eminent domain. Under Allison’s guidance, BB&T also found the lending practices encouraged—indeed, almost mandated—by the Community Reinvestment Act and other aggressive housing ownership promotion policies reckless and ethically dubious and therefore avoided them.
I believe that the moral dilemmas faced by individuals operating in a mixed—and thus highly distorted—economy underlie many of Pearlstein’s concerns. Such dilemmas challenge our current and ideal systems, and classical liberal academics are finally considering the questions they pose.
Can capitalism and the culture it nourishes restrain exploitation that is encouraged by legislation and regulation? Is morality simply adhering to the set of legal prohibitions or does it require something more? Does capitalism merely demand that one avoid sins of commission but not those of omission? Do capitalists have a duty to fight against legislation that encourages morally questionable acts like offering loans to individuals who are highly unlikely to be able to repay them? Should capitalists refuse to engage in practices whose risks have been shifted onto the taxpayers?
Whether Pearlstein sees these questions as important I do not know. But they merit the morally defensible answers that can help capitalism attain the legitimacy it has long merited.