Capitalism is the favorite whipping boy of the leftists (such as the Democratic presidential candidates Elizabeth Warren and Bernie Sanders). It gets blamed for whatever is perceived to ail society: inequality, climate change, trade wars, among others.
As the attacks on capitalism have grown louder, some traditional defenders of business and free markets have resorted to appeasing the critics.
Business Roundtable, the lobby group of 200 CEOs of the largest American corporations, recently issued a statement redefining the purpose of a corporation. Roundtable’s new-found corporate purpose is to serve all stakeholders (customers, employees, communities, suppliers, shareholders) equally, instead of prioritizing the shareholders.
The Financial Times, another defender of business and free markets, also has loudly (on a bright yellow front page in contrast to its traditional pink newsprint) called for “resetting” capitalism, according to Business Roundtable’s new definition. (Read more in Terence Corcoran’s excellent Financial Post analysis).
Is business and its defenders finally seeing the light and changing their ways to become moral, as some argue? Or what is going on here?
As another op-ed writer in the Financial Post notes, the Roundtable CEOs and Financial Times are bowing to pressure from large institutional investors to “do more” for society, instead of “merely” focusing on creating shareholder wealth. But that still does not explain why the institutional investors are compelled to exert such pressure.
I think it comes down to a fundamental failure to understand capitalism and its role in human well-being.
This was manifested in a recent faculty meeting, where my fellow business professors discussed the role of business in society (in response the Roundtable’s re-definition of corporate purpose). For example, one colleague argued that the pursuit of self-interest—which capitalism encourages—is harmful, because it would require an inordinate number of expensive regulations to protect everybody from others’ pursuit of self-interest (misconceived as evil exploitation).
So what is capitalism? Why is it not the cause of today’s ills but rather, a cure?
Capitalism is not the mixed economy prevailing in most western countries, including the United States. As defined by Ayn Rand, capitalism is “a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.” Such a system does not exist today, but was most closely approximated America in the 19th century, after its founding on the principle of individual rights. Some Asian countries today also have systems resembling capitalism. Most notable is Hong Kong, before the recent restrictions of freedom there by the Chinese communist regime.
Capitalism is a system of freedom, protected by the individual rights to life, liberty, property, and the pursuit of happiness. Each individual can live their lives and pursue their goals as they see fit, without interference from government or others. Individuals’ freedom is bound by one condition: they cannot violate the rights of others. In other words, they cannot initiate physical force or fraud; they can only deal with others through persuasion and trade.
In capitalism, it is the role of government to protect individuals’ freedom against force and fraud. This it can do relatively simply, by operating the armed forces, the police, and the law courts. No “inordinate number of expensive regulations” that my colleague was envisioning, are needed.
Capitalism can hardly be blamed for climate change. The climate is always changing from natural causes, and the widest fluctuations happened before humans appeared on the planet, and much before the Industrial Revolution. If anything, the wealth created by the relatively free markets and the technologies it has enabled, help protect us against dangerous climate, including the portion of the changes that are attributable to human activity.
As for trade wars, they are not a feature of capitalism. They are initiated by governments, which under capitalism do not have a role in the economy and do not create trade or any other policies. Government’s only role under capitalism is to protect freedom of individuals, including the freedom of trade.
Capitalism is also a system of competition. It allows individuals to pursue whatever goals they set for themselves, striving to do their best to produce values—goods and services—that others would want to trade with them. Due to volition and differences in capability, some will be more productive than others and will create more wealth, leading to inequality.
But inequality is not an ill, as capitalism’s critics claim. We all benefit from higher productivity of others, in the form of better and more affordable products and services and more job opportunities. Even the very small fraction of people who cannot produce at all due to disability, benefit from others’ productivity, through private charity that wealth makes possible.
Capitalism is truly the pro-human social system superior to its alternatives. Those who recognize (or should recognize) this—such as the Roundtable CEOs, business school professors, and anyone who values prosperity over poverty—should take the moral high ground and defend capitalism, instead of appeasing its critics and perpetuating the myth that freedom and wealth creation are not necessary to human flourishing.