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THE UNDEMANDING ETHICSOF CAPITALISM

W illiam A. Niskanen

The United States and many odier countries are now experienc-ing die first major financial crisis in over75 years, a condition diat toomany people have been quick to blame on an outbretik of greed d iatthey claim is characteristic of capitalism. Blaming a financial crisis ongreed, however, is like blaming aiq^lane crashes on gravity.

Greed and gravity are always widi us, and capitalist markets usual-ly channel self-interest into mutually beneficial behavior. On occa-sion, die public and private institutions that have die responsibility tomonitor economic behavior fail to perform dieir roles before diereare large losses to odier parties. The Securities and ExchangeCommission, for example, was slow to react to early informationabout die misleading accounting by die Enron CoqDoration and themassive Ponzi schem e by BernardMadoff, and d ie private credit rat-ing agencies are often among die last to recognize d iat diey have sub-stantially underestimated die risks of some securities. The cuixentfinancial crisis, however, is primarily a consequence of public policiesto promote hom e ownership that have long been supported by politi-cians of bodi paities combined with recent changes in die privatemarket for mortgages, policies and market institutions that have ledto massively unwise behavior but with little evidence of a knowingunediical exploitation of odier people.

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Forms of Human Interaction

An understanding oftlie market requires tliat we put it in contexof other forms of human interaction. All forms of human interainvolve one or m ore of three types of relations: caring, exchangethreat. In a caring relation, one person does what anotlier pewants (or needs) because he (she) cares for die otlier person. Iexchange relation,each person does what tlie otiier person wants. Ia tlireat relation, one person tlireatens to do what tlie otlier pedoesnot want unless die other person does what tlie direatening son wants.

Caring

A caring relation is inherendy limited to one's family, friendsodiers widi whom one wants to maintain a close relation. InTheTheory of M oral Sentiments,Adam Smidi rejected die idea diat manwas capable of forming moral judgm ents beyond a limited spheactivity centered on his own self-interest, stating:

The administration of the great system of the universe ... thecare of the universal happiness of all rational and sensiblebeings, is the business ofGod and not ofman.To man is allot-ted a much humbler department, but one much more suit-able to the weakness ofhis powers, and to the narrowness ofhis comprehensionthe care of his own liappiness, ofthat ofhis family, his friends, his country [Smith (1759) 1976: 386].

Similarly die late Paul Heyne, who may have been the mthoughtful contemporary writer about the relation between theoand economics, concluded that die New Testament ediics of facface relationships have almost nothing to contribute to undersing how large-scale social systems are or should be organized. Aextensively documented tlie inconsistency and fooshness of temporary dieologians and others that have judged commercial

ety by die morality of face-to-face relationsliips (Heyne 2008). Asame, even children learn quickly that there is also some role for

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Exchange

Tbe market, of course, is tbe interaction in wbicb consensualexcliange is tlie distinctive relation. Tliis makes it possible to baveeconomic transactions witli almost countless people tbat one doesnot know and for wliom one has no specit caring. Tliis makes it pos-sible to bave a mucb finer division of labor tban is possible witbin afamily, among friends, or witbin a firm, and tlie combination ofincreiised trade and comparative advantage leads to a liigber level ofoutput and income for most everyone.

Economic relations also accommodate some amount of caringeven if not especially dependent on it. I learned tliis lesson from myfatlier, wlio owned two quite different small businesses, in one ofwhicb I worked summers tlirough college. On occasion, my fatherwould tolerate som e tem porary lack of responsibility by a usud ly reli-able employee, supplier, or customer I never understood whetlierthis represented genuine caring or was merely a good business prac-tice, but that did not matter because only my fadiers wealth was at

risk to these decisions.I am more skeptical of tlie case for social responsibility by larger

firms with a broad ownership. In these ctises, executives dem onstra tetheir caring by spending part of tlie wealtli of tlie otlier owners; Idoubt whetiier most such m anifestations of corporate social respon-sibility are consistent witli tbe expectations and interests of the otherowners. A reputation for social responsibility may best benefit theowners if it leads to some fiscal or regulatory preference by tlie gov-ernment but, of course, at tlie expense of tlie owners of other firmsthat do not benefit from tliis prefierence. The strange Chevi-on bill-boards that encourage people to reduce their energy use, for exam-ple, may benefit the Chevron shareholders if tliey lead to additionalfree allowances under tlie pending cap and trade legislation.

I am profoundly skeptical of the views expressed in tlie recentencyclical by Pope Benedict XVI (2009) that calls for a new globaleconomic order based on social responsibility, concern for tbe digni-ty of tlie worker, a respect for ethics, and stronger and more repre-sentative international organizations The encyclical asserts:

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tical ones). ... Only inchanty, illumined hy the light of rea-son and faith, is it possible to pursue development goals thatpossess a more humane and humanizing value.

Pope Renedict expresses special concern diat die competitionamong govemment economic policies to attract foreign businessesmay weaken trade unions and social safety networks. My primaiyconcern about diis encyclical, however, is that it is too demanding ofdie human spirit, asserting diat "solidarity ... a sense of l-esponsibili-ty on die part of everyone with regard to everyone" is necessaiy toimprove the human condition. I pray that diis encyclical generatessufficient intellectual debate within die CadioHc Church to challengePope Benedict in terms of their shared values.

A comment by die economist C. Lowell Harris illustrates diisissue:

Reality cannot compete with dreams, at least not "firly." Howeasy to romanticize, perhaps about free enterprise, perhapsahout possibilities of improvingthe worldby some governmen-ttd policywhich will restrict the freedom of others: Mr. Dooleymade a good point when he smd, "A man that'd expect to trainlobsters to fly ina year is called a lunatic; but a man that thinksmen can be turned into angels by an election is called areformer and remains at large" [Harris1972: 4].

A recent event illustrates diis comparison: This summ er, Remard

Madoff began a150 year sentence for organizing a $60billion privatePonzi scheme, but presidents Roosevelt and Johnson are honored forleaving us with a debt of $100trillion for tbe govemment Ponzischemes called Social Security and Medicare.

A market economy, in contrast, is very dependent on some mini-mal level of direat, primarily to enforce property rights and contracts.In diis sense, as Adam Smith observed inThe Wealth of Nations,every firm is dependen t "on the powerful arm of die civil magistrate"(Smith [1776] 1937: 670). Several roles for die govemment odierthan enforcing property rights and contracts may increase economic

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relation tliat is usually more valuable in more intimate forms ohuman interact ion, and i t minimizes the necessary dependence onthe awesome instniments of t l i reat .

Nobel Laureate economist James Buchanan makes much thesame point in a comment about Adam Smit l isWealth of Nations:

"It is not from the benevolence of the butcher, the brewer, orthe baker, that we expect our dinner, but from their regard totheir own interest." This statement is, perhaps, the mostrenowned in this classic book on political economy. From

Smith onwards, the appropriate function of political econo-my, and political economists, has been that of demonstratinghow the market system, as a perfectible social organization,can, and to an extent does, channel the private interests ofindividuals toward the satisfaction of desires other than theirown. Insofar as this crude r instinct of man tow ard acquisitive-ness, toward self-preservation, can be harnessed through theinteractions of the market mechanism, the necessity forreliance on the nobler virtues, those of benevo lence an dself-sacrifice, is minimized. This fact, as Sir De nnis Robertson haseloquently reminded us, gives the economist a reason forexisting, and his "warning bark" must be heeded by thosedecision makers who fail to recognize the need for economiz-ing on "love" [Buchanan 1965: 1].

Buchanan would surely agree witl i the more obvious conclusion t l iati t is also im po rtan t to m inimize the d ep en de nc e on t l ireat as a m ean s

of organizing socii interaction.At a Cato book forum in June 2008, my colleague Will Wilkinson

came to an even broader conclusion: "Capit iism makes us betterpeople ." He argues .

The expansion of the cooperative order and the prosperityand freedom that it tends to bring, simply makes life seemless cheap and expendable. But it also creates situational con-

texts in which cooperation and peace are reinforced over andover again. The much derided "bourgeois virtues" in the endb h k i di i d l [Wilki

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Threat

The government, of course, is the one institution that is almostcompletely dependent on die institutions of threat, in the form oftaxes or regulations, to accomplish its objectives. Some govemmententerprises, such as die Postal Service, are financed primarily by theexchange of services for revenue, bu t even such enterprises are usu-ally dependent on some exercise of threat to raise the revenues forsubsidies or to restrict competition. Many govemment programsmay be m otivated by some targeted caring by tlie dominant coalition,but the implementation of diese programs requires revenues diat areraised by threat or regulations that are enforced by direat. The sev-eral health care bills now before Congress, for example, reflect diecombination of a targeted caring for those widiout health insuranceand of several types of both taxes and regulations. Moreover, onlysome competition am ong govemm ents assures diat there are any netbenefits to diose who are no t part of the dominant coalition in a spe-cific governm ent. In summary, governm ent has an essential but lim-ited role.

The core principle for determining die limits on the powers ofgovemment is best described in John Stuart Mills classic statementOn L ibertij:

Th e only purp ose for which pow er can be rightfully exercisedover any member of a civilized community, against his will, isto prevent harm to others. ... O verhimself, over his own body

and mind , the individut is sovereign [Mill (1859) 1869: 9] .

Conclusion

Of all die major forms of social interaction, capitalism is die leastdependent on die inherendy limited supply of caring, a relation diatis better applied to more intimate social interactions, and it mini-mizes the dependence on direat. The public and private institutions

of a capitalist economy are not im mune to error, even m ajor erro r asthe current financial crisis is evidence, but most of these errors are

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understand die conditions that a re likely to lead to the next major cri-sis and the courage to act on this intelligence.

ReferencesBuchanan, J. M. (1965) "Foreword." In G. Tullock,The Politics of

Bureaucracy. Washington: Public Affairs Press.Harris, C. L. (1972) "The Productivity of Freedom."The Freeman

(September): 1-4.Heyne, P. (2008) Are Economists Basically Immoral? Indianapolis:

Liberty Fund.Mill, J. S. ([1859] 1869) On Liberty. 4di ed. London: Longman,

Roberts, and Green . Available at ww w.bardeby.com/br/130.html.Pope BenedictXVI (2009) Caratas in Veritate. Rom e: Vatican Press.Smith, A. ([1759] 1976) The Theory of Moral Sentiments.

Indianapolis: Liberty Glassies (Liberty F un d) .([1776] 1937) The Wealth of Nations. Edited by E.

Gannan. New York: The Modem Library (Random House).

Wilkinson, W. (2009) "Gapitalism Makes Us Better People."CatoPolicy Report 31(3): 9-10.

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