Among the issues most commonly discussed are individuality, the rights of the individual, the limits of legitimate government, morality, history, economics, government policy, science, business, education, health care, energy, and man-made global warming evaluations. My posts are aimed at intelligent and rational individuals, whose comments are very welcome.

"No matter how vast your knowledge or how modest, it is your own mind that has to acquire it." Ayn Rand

"Observe that the 'haves' are those who have freedom, and that it is freedom that the 'have-nots' have not." Ayn Rand

"The virtue involved in helping those one loves is not 'selflessness' or 'sacrifice', but integrity." Ayn Rand

27 March 2013

The Falsely Framed Moral Evaluation of Capitalism

The Washington Post ran a long article on page 1 of its Outlook section on Sunday, 17 March 2013 entitled Is Capitalism Moral?  It was written by Steven Pearlstein, a Post columnist.  He claims that much of the reason for the stalemate in Washington is because the Republicans and Democrats have not really faced up to the question of whether Capitalism is moral or not.  He says that

The grand experiment with communism has been thoroughly discredited, a billion people have been lifted from poverty through free-market competition, and even European socialists have given up on state ownership and the nanny state.  Here at home, large swaths of the economy have been deregulated, and tax rates have been cut.  A good portion of what is left of government has been outsourced, while even education is moving toward school choice.  In embracing welfare reform, Americans have acknowledged that numerous programs meant to lift up the poor instead trapped them in permanent dependency and poverty.
This introduction to the Pearlstein article seems to bow to the power of Capitalism to do good, though it is always jarring to read that deregulation characterizes our government's efforts when about 80,000 pages of new regulations are added each year and the EPA is carrying out the Obama threat to kill the coal industry and coal-fired electric plants and to give us skyrocketing European gasoline prices.  The outsourced government continues to grow its many tentacles and keeps developing new tentacles such as those that sprout from the recent and still developing ObamaCare and Dodd-Frank "Too Big to Fail" acts.

Pearlstein notes that books by Arthur Brooks, of the American Enterprise Institute, and John Allison, of the Cato Institute, make a moral case for "even-freer-market capitalism than we have now."  The books he is referring obliquely to are:

Arthur C. Brooks, The Road to Freedom: How to Win the Fight for Free Enterprise, Basic Books, 2012.

John A. Allison, The Financial Crisis and the Free Market Cure: Why Pure Capitalism is the World Economy's Only Hope, McGraw Hill, 2012.

Pearlstein characterizes their argument for capitalism as
As they see it, regulation is an infringement of individual liberty, while income redistribution, in the form of a progressive tax-and-transfer system, is nothing more than thievery committed against the most talented and productive by those who are not.  Regulation and redistribution, they contend, also undermine the vital incentives that drive capitalism, which throughout history has been the best system for freeing large masses of human beings from lives of misery and poverty.  What could be more moral, they ask, than that?
 Pearlstein even credits John Locke, Adam Smith, and Ludwig von Mises for their moral defenses of capitalism, before noting that the novels and writings of Ayn Rand really caused the idea of the morality of Capitalism to catch hold among "right-leaning intellectuals and politicians."

The remainder of this article mostly examines whether Capitalism is moral from Pearlstein's and frankly that of most people's perspective.  That perspective is implicit in the question he asks at the end of the article in his very last sentence:
If our moral obligation is to provide everyone with a reasonable shot at economic success, within a market system that, by its nature, thrives on unequal outcomes, then we ought to ask not just whether government is doing too much or too little, but whether it is doing the right things.
Basically, Pearlstein and most people believe that Capitalism is moral only if it is fair.  The bulk of the article is devoted to his belief that it is not really fair and loaded with implications that it must be controlled by government to see to it that it is as fair as possible.

One problem with judging the morality of Capitalism on the basis of whether it is fair or not is that even a toddler soon has a concept of fairness which need not have firm roots at all in a deep moral understanding.  It is extraordinarily common for the child to complain that it is not fair that her older brother always wins when they play Monopoly.  It is common that the younger sibling claims it is unfair that the older sibling can stay out to midnight on a Friday night with his friends or maybe even until 3 AM.  For many people, that concept of fairness evolves very little as they become adults.

The Founding Fathers and the Framers of the Constitution understood that what government should do was not governed by fairness.  They understood that the legitimate role of government was, as stated in the Declaration of Independence, the protection of our equal, inalienable individual rights to life, liberty, and the pursuit of happiness.  The role of government was simply to see that we were not forced by government or by others to give up making our own choices of values and prevented from taking action to try to acquire and keep our values, so long as we did not initiate the use of force against others.  Government had no role in deciding what values we should seek and no role in the distribution of those values among the people.

Those, who like Pearlstein, claim that the central government role is to ensure fairness in the distribution of values among the people must push government to decide what values really matter and how they will be distributed.  Commonly, they then think almost entirely in terms of income and worldly goods as the values of importance and those to be redistributed.  To concede that government has such a fairness role, is to concede that the Nanny State is proper.  It is to concede that the less developed person is right to constantly challenge the more developed person, or at least that those who have fewer worldly goods are right to challenge the government to redistribute those goods more in their favor or even totally unto equality in the distribution.

Of course a more developed concept of fairness might recognize that someone who chooses to watch NBC and CBS every evening for hours rather than working 12 or 14 hours in a day does not have a moral claim on the earnings or wealth of a person who did make the choice to work the longer hours.  After all, the TV watcher does not trade his relaxation and laughter in front of the TV in any meaningful way for the proceeds of the many additional hours worked by someone making a very different value choice.  Yet, most Americans exercise their limited sense of fairness to think that the TV watcher deserves to have a significant part, maybe even more than half, of what the hard worker made in his additional hours of work.

To a large degree, most people think fairness is about equality.  Yet, people are too complex and too highly differentiated for them to be equal.  They may have equal rights, but that is about the only way in which people are equal.  The Founding Fathers understood this, but they feared democracy largely because they understood that most people are governed too much by a desire for a simple-minded fairness, which drove them to desire equality and the redistribution of money and goods.  Yet, it cannot be fair to deprive the person who has acquired income and goods without the use of force of what he has acquired.  No system based on a forced redistribution can be fair.  Why set out in the name of fairness to redistribute income and goods when this necessarily means that one is unfairly doing harm to many and that fairness cannot be achieved?  Even Pearlstein allows that it is hard to know when to stop the process of redistribution.

The morality of Capitalism has the same basis as the morality of the entire private sector, only some of whose activities are devoted to the values of income and worldly goods.  There is no role for government in choosing who my friends will be and how many hours I am to spend with each of them for our mutual enjoyment.  The government that tried to redistribute my friendship time and effort would clearly be recognized as a tyranny.  There is no role for government in determining how fair it is that a woman of good character may or may not be loved by the man she wants to love her.  There is no role for government in deciding who we may choose for our domestic partner or partners, though that issue is still hotly debated with respect to same-sex marriage.  Many of the greatest values in each of our lives are properly seen by most of us as beyond the sphere of government rules for distribution.

Yet, for some childish and foolish reason, most adults do think that government has a role in re-distributing income and wealth.  I believe this is in large part because they ignore the fact that this is really a theft of the time an individual put into acquiring that income and wealth, including the time he may have spent preparing himself for earning it, as in his studies, his thinking about markets over many years, and his careful attention to details in his work.  Many seem to think that they have not subjected someone to slavery just because they are taking by force only half of every added dollar he earns rather than all of it.  In fact, a paper by Peter Diamond (MIT) and Emmanuel Saez (UC Berkeley) is making its rounds among the Progressive Elitists now that claims that the correct marginal tax on high income people is 73%.  I frankly cannot understand how they so deceive themselves that taking half or 73% of every additional hour worked from someone is not the moral equivalent of slavery.

Most slave owners in the Antebellum South allowed their slaves to spend a few hours working in their own gardens to grow some of their own food.  Did this mean that they were really not slaves because the slaveholder did not have them in his cotton or rice fields 100% of the time?  The Progressive Elitist might argue that they only make slaves of those who choose to be very productive in the marketplace, so if you participate in the market you are choosing to be a slave.  Of course they fear to be that honest, but they do say that if you make a lot of money you are choosing to pay the progressive taxes.

Yet, the person who spends time on other values, such as watching TV, going fishing, running, or spending time with friends or family is not taxed in any way.  That is not fair.  If it is right to progressively tax the person who chooses to spend time making money, then it is unfair to give the person who could have made money, but did not, a tax deduction for the money he failed to make.  Fairness demands that he be taxed for the value of his time that he spent in a different choice of values.  Yet, government knows that people will not stand for it to discourage other values such as time with family with a tax, so it acts in a manifestly unfair way on those who spend productive time making money through voluntary trades with others.  It does this even though it is generally recognized, even by Pearlstein, that such economic activity has done wonders in improving the standard of living for almost everyone, even the inveterate TV watcher.

Pearlstein's characterization of the market as much more free than it is provides him with some of his arguments that free markets do not work so well.  He also treats the arguments of people like Allison  unfairly.  For instance, he says
The conservative case against regulation, for example, is premised on the proposition that everything that has gone wrong with the markets is the government's fault.
 Well no, free market advocates realize that many businesses will fail in a perfectly free market and that there will be a business cycle in a free market with recessions from time to time.  They just object to the fact that government action in the market has the consequence of causing more business failures, more frequent and deeper recessions, and in the present case a recession that seems to have no foreseeable end.

Pearlstein claims that free market advocates say that
Because pursuit of self-interest is the essential ingredient in a market system, it somehow follows that individuals and firms are free to act as greedily and selfishly as they can within the law, absolved from any moral obligations.
I do not think there are many who believe they are "absolved from any moral obligations" in their actions.  Pearlstein in particular seems to imply that Allison holds this view.  I have not read his book, but the way Pearlstein describes Allison's viewpoint leaves quite a large leap to the conclusion that Pearlstein seems to impose on Allison's viewpoint.  I surely do not believe that a businessman is only morally obliged to obey the law and that he is morally allowed to otherwise act immorally.  Indeed, that is a clearly immoral viewpoint, which an advocate of Capitalism on moral grounds is most unlikely to make.  But Allison correctly notes that when government uses a heavy hand in making moral decisions in the marketplace, the many laws that claim to define moral actions and value choices in the marketplace will naturally become a substitute morality for many people.  If Pearlstein wants everyone in the market to act morally, then he should remove the government from the market as much as possible so that people will understand that they must act morally in the market, rather than just obeying the laws.  Government morality acts as bad money does to drive good money out of the market.

Pearlstein repeats the liberal argument that economic success often is due to dumb luck.  Some have the good fortune to be born with the right genes and the right parents, to grow up in a good community, to be better educated, to be better mentored, and to be at the right place at the right time.   They argue that the market should reward virtue, not dumb luck.

Well OK, we like to see virtue rewarded.  But, in a system in which market success means that everyone involved in a voluntary transaction has entered into it because he believes he is better off for having participated in it, how is anyone hurt if someone in the transaction was lucky?  Everyone still benefited.  We all want the freedom to be lucky, do we not?  We may be lucky in a business transaction one day also.  Or, maybe we were lucky enough to meet the love of our lives 40 years ago.  Apparently liberals believe that luck should be re-distributed also.  So, why is it only luck in financial terms to be redistributed?  Did I not realize a greater value in having the luck to meet Anna than someone else has had who is unhappily married for the third time?  As in the marketplace, virtues and luck both play roles in our love lives.  Luck is not something to be redistributed and rationed among us.  Our luck and misfortunes are generally properly beyond the reach of government.  Yes, we may well choose to recognize that some people have suffered more misfortune in life than others in our private charity work or contributions, but this is not a proper function of government.  Rightly, there is no grant of power for the purpose in the Constitution.

Pearlstein continues to argue against the perceived fairness of the marketplace.  He says that 20 years ago wage and salary earners reliably captured about 75% of the national income, with the rest going to capital providers.  More recently, labor has only received about 67%.  I expect there are reasons for such a shift that make sense.  One is that there is a decrease in union labor in the private sector.  Another is that there is an increase in the importance of knowledge and professionalism and both are more and more often tied to capital and the founders of businesses.  Still another is that complex law and regulation has insulated very large companies from upcoming competition.  Another is the huge influxes of taxpayer money to companies such as Goldman Sachs, CitiBank, Bank of America, GE, GM, Lockheed Martin, Solyndra, and A123 Systems in recent years.  Corporate welfare seems to be a staple of Progressive Elitist government even as it pretends it is not.

Pearlstein claims that 50 years ago, the typical corporate executive earned less than 50 times the pay of the average front-line worker.  He says the ratio is now 350 to 1.  He implicitly believes this is a statement that morality is defied here.  I expect he is comparing the few large corporations of 50 years ago in a much smaller US economy with today's corporations acting in a much larger US economy and in a much larger world economy.  If he chose to compare the mid-sized companies and large small businesses today with similar sized businesses by income of 50 years ago, the ratios would be much more similar.  That is, compare the ratio in a $100 million income company today with a $100 million income company of 50 years ago and the ratio will be much less dissimilar.  Neither 200 years ago, 100, 50, or last year did most companies even have a 50 to 1 ratio.  That ratio is a phenomena of size.

Pearlstein laments the fact that inequality of income in the market threatens to overwhelm the ability of a progressive tax-and-transfer system to keep up with it.  So yes, Pearlstein simply assumes that income equality is a requirement of a moral economic system, despite the fact that almost no one advocates equality in other aspects of our private lives.  His, and that of most Progressive Elitists, is a very childish moral code.  It is manifestly biased in the application of equality and it absolutely refuses to recognize that individuals are highly complex and differentiated.  It refuses to recognize that as a result, we make very different value choices and bring very different abilities to bear on acquiring the values we choose.  It just assumes that using force to redistribute income and wealth is good.  It just assumes that largely enslaving those who make good money in the voluntary and mutually beneficial marketplace is justified as for the greater good.  It also assumes that it is right and proper to redistribute luck, but only luck operating in the market.  What an absolutely weird, yet common, idea of morality this is!

A society with a very limited government whose only function is to protect our equal, sovereign individual rights to life, liberty, property, the ownership of one's own body, mind, and labor, and the pursuit of personal happiness is the only society in which people are free to be moral.  They are then free to be moral in the entire private sector of their activities, including that subset of economic activities in the market.  Capitalism is moral for the same reason that other human action dedicated to the free choice of values and the freedom to pursue them is moral.  Capitalism is moral because it allows these choices of value by each individual in the marketplace.  It is moral as an exercise in our individual right to freedom of association to cooperate with others as we choose for financial reward, just as in other aspects of our lives we are free to associate with others as friends and lovers and family.  Our labor belongs to each of us by right and we trade it with others in some cases for monetary gain and in other cases as part of a family to instruct a child or to do the dishes and laundry.  Government has no moral obligation to equalize any of the rewards that we get from exercising our freedom of association or the use of our time.  Indeed, if it tries to do so, it has violated our individual rights and done an evil deed.


Ken Huston said...

David Hume explained in An Enquiry Concerning the Principles of Morals, that he believed in unequal distribution of property, since perfect equality would destroy the ideas of thrift and industry. Perfect equality would thus lead to impoverishment he was therefore a vigorous opponent of efforts to impose egalitarianism, or “perfect equality” because first, “man’s different degrees of art, care, and industry will immediately break” it, and second, it will “reduce society to the most extreme indigence; and instead of preventing want and beggery in a few, render it unavoidable to the whole community.”

James Madison, "the father of the Contitution" was a great student of David Hume and Adam Smith, participants in the Scottish Enlightenment in the university centers of Glasgow and Edinburg, thus Madison opted for free-market capitalism over the collectivism which was rearing its ugly head in Europe as a result of the French revolution.

Bernard Siegan, my Conlaw professor, wrote a book titled "Economic Liberties and the Constitution" which was viciously attacked by liberal "scholars" on the left because they don't believe the Constitution guarantees any economic liberty.
Ken Huston (From Soda Head.)

Charles R. Anderson, Ph.D. said...

Don Watkins of the Ayn Rand Institute has also addressed the Pearlstein article on 27 March in an article entitled Fair Pay Under Capitalism at

Charles R. Anderson, Ph.D. said...

Hi Ken,

Thanks for your comment. I have a copy of Siegan's Economic Liberties and the Constitution based on your recommendation of some time ago. I have not yet read it, however.

Unlike many, I have always believed that moral action is supportive of our rational self-interest. The fact that collectivism has had such disastrous results when practiced should be a strong signal that it is not morally good for individuals and therefor not for mankind either. One of the favored collectivist tenets has always been income equality. You are right that a government that attempts to achieve income equality among its people will harm them greatly. An attempt to force people to be equal in anything but their individual rights is a disaster.