My colleague Fred Smith has a new study out today on the morality of capitalism, in particular discussing how we think about corporations as economic actors. Is capitalism good just because it’s efficient at producing wealth, or does it have more compelling human qualities? How should corporations talk about their mission and respond when criticized?
Fred likes to lead into this discussion with what I call the Adam Smith dichotomy. Smith is known for extolling the benefits of specialization and free trade in his most famous book, The Wealth of Nations. He emphasizes that it is primarily through self-interest that we advance and make economic gains. In perhaps the book’s most famous passage, Smith tells us that “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.”
But Adam Smith was also a professor of moral philosophy and the author of The Theory of Moral Sentiments, in which he argued that human beings have an innate sense of sympathy for the feelings of others. As Smith put it in 1759:
How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.
When it comes to the morality of capitalism, this provides us with two perspectives: people specialize, work, and compete to make money for themselves. But they also have a concern for the well-being of others. Both are aspects of our nature, and both factor into the innumerable decisions we make about how to create value in society and how to treat our friends and neighbors. As Fred puts in the new study:
The case for the morality of capitalism lies in its voluntary nature and its synthesis of self-interest and empathy, two of mankind’s most virtuous and important traits. Self-interest focuses business leaders on advancing their goals as efficiently as possible, while empathy encourages them to understand and recognize the viewpoints of others.
This essay develops that argument, noting that capitalism is moral, based on its voluntary nature and its reliance on virtuous core human traits. Furthermore, it shows how the entity that embodies capitalism in the market, the firm, hones and enhances these virtues through a vast array of mutually beneficial exchanges, which in turn enable other types of interactions beyond the realm of business.
Capitalism operates in the real world through its key institution, the firm or corporation, a cooperative venture that must consider the values and wants of everyone in its community—customers, employees, suppliers, and investors.
This new publication, The Morality and Virtues of Capitalism and the Firm: Defending Capitalism in Theory and Practice, is an extension of many of the important themes Fred has been writing about in recent months, including “What CEOs Should Be Saying about Inequality” and his column on the 2016 election, “Capitalism and the Candidates.”
Today’s study is also the third in the “Profiles in Capitalism” series, which includes (with Ryan Young) Virtuous Capitalism: Why There Is Less Corruption in Business than You Think and (with Marc Scribner) Reviving Capitalism: Lessons from the Near-Death and Rebirth of American Railroads.