Monday, August 30, 2010

Markets and Morality

The Wall Street Journal in the weekend edition ran an article on corporate social responsibility and on Monday, the letters "hit the fan." Although the following is quite long, it captures my attitude toward markets and morality. In essence, free market capitalism is the only moral system.

Business Ethics and Capitalism

Every time an economic crisis occurs, there is a thunderous call for teaching more "business ethics" at the university level. This is particularly the case when it is widely thought that a lapse of ethical behavior led to the crisis. What does it mean “to teach ethics”? Is ethics just a branch of philosophy so that spending time with Aristotle and Locke is satisfactory? A few courses are taught as a branch of philosophy. Or is ethics a branch of religion and spending time in the new or old testaments what is desired? Very few courses delve into the “book”. Or is ethics a list of what shouldn’t be done?
The latter seems to be the most common approach to teaching ethics. Isolated examples of unethical behavior in the business world are used to illustrate actions that should not be undertaken. Many of these illustrations demarcate legal and illegal behavior as if what is legal is moral and what is illegal is immoral. Some courses are based on some aspect of social justice. For instance, many devote considerable time arguing that companies need to take a stakeholder view rather than a shareholder view. The implicit assumption is that a moral company does more than simply earn profit for its shareholders. It takes care of all of its stakeholders – employees, suppliers, local community, larger community, the environment, shareholders, and anyone else affected by actions of the firm. A common statement from professors of business ethics is: We object to the all too common tendency for business managers to focus on very short-term profits for a very limited constituency (typically stockholders).
A Moral system defines right and wrong and ethic is based on the Moral system. Ethics seeks to address questions such as how a moral outcome can be achieved in a specific situation, how moral values should be determined and what morals people actually abide by. Morality is conduct that enables the human to flourish. Morality can only occur if people are free to reason and act on their reason without coercion.
Morality is consistent only with free market capitalism, what we will call capitalism. Morality requires that people can do what they want with what they own as long as it does not harm others. In other words, a moral system is a system of private property rights and non aggression. Yet, few are willing to say that capitalism is moral. With the fall of communism, many commentators and politicians grudgingly acknowledged the practical value of capitalism, that the free market is the best system for producing wealth and promoting prosperity. But this has not led to an acceptance that capitalism is moral. Quite the opposite: coercion and the state have only grown.
If capitalism is recognized as the only practical economic system--then why is it losing out to state control? The reason is that most people consider capitalism to be immoral. It leads to inequality, companies that exploit workers and consumers and despoil the environment. Consider George Soros’ Atlantic Monthly article.
The Capitalist Threat" by George Soros
Atlantic Monthly, Volume 279, No. 2, February 1997
Popper showed that fascism and communism had much in common, even though one constituted the extreme right and the other the extreme left, because both relied on the power of the state to repress the freedom of the individual. I want to extend his argument. I contend that an open society may also be threatened from the opposite direction -- from excessive individualism. Too much competition and too little cooperation can cause intolerable inequities and instability.
Insofar as there is a dominant belief in our society today, it is a belief in the magic of the marketplace. The doctrine of laissez-faire capitalism holds that the common good is best served by the uninhibited pursuit of self-interest. Unless it is tempered by the recognition of a common interest that ought to take precedence over particular interests, our present system -- which, however imperfect, qualifies as an open society -- is liable to break down.
Soros’ view is not a minority view. Many argue that capitalism has to be constrained if it is to be moral. The firm must be forced to take a stakeholder view of its business – the recognition of a common interest --rather than just a shareholder view. A corporate stakeholder is commonly defined as any identifiable group or individual who can affect or is affected by the firm. Since the stockholder approach assumes that the interactions between business organizations and those affected by their operations are most effectively structured as marketplace activities. So, if what is central to capitalism and the stockholder concept is that business relations should proceed along market lines, then the stakeholder view says the market has to be replaced with something else.
This view is wrong. It is coercive and counter to man’s reasoning. Human flourishing requires reasoned self interested action. Capitalism is based on this fact. It requires individual or private property rights and non-aggression. Each individual has a right to act on his own judgment for his own sake, so long as he does not violate the same rights of others. This is why Capitalism is moral. It enables human flourishing. Acting in one's rational self-interest while respecting the rights of others to do the same is the basic requirement of human life. The essence of capitalism is that it bans the use of physical force and fraud in men's economic relationships. All decisions are to be left to the "free market"--that is, to the un-coerced decisions of buyers and sellers, manufacturers and distributors, employers and employees. Capitalism also recognizes the necessity of responsibility. Thus, it seeks to match the liberty of making a decision with the responsibility for the consequences of making said decision. Hence, creators get to own whatever they create, whether it's good or bad. Destroyers are responsible for what they destroy, whether it's good or bad.
But we are told by Soros and many others that capitalism fails to promote social justice; instead it leads to inequality. Capitalism does not lead to egalitarianism but does require that everyone has equal rights to life, liberty, and the pursuit of happiness, and this is moral. It is social justice or egalitarianism that is immoral. By definition social justice does not treat everyone equally. It penalizes hard work and skills and rewards the opposite. Most importantly, it is coercive, taking from some to give to others.
We are also told that capitalism leads to bad dealing by businesses. The fact is that free markets lead to just the opposite. It is coercion and control that leads to bad dealing and corruption. Under free markets when a business does engage in bad dealing, the market penalizes it. Customers refuse to do business with the company and/or the company is sued, and the firm's stock price plummets. Capitalism does not guarantee ethical behavior, but it does reward it with profits. Under capitalism businesses can not gain unless they serve the public, not cheat it.
We are told that capitalism means exploitation of employees, not treating employees “fairly”. The result of the free market is just the opposite. Capitalism demands that workers be treated fairly in the sense that they are not exploited. A business that does not treat employees in what the employees deem to be fair, will lose those employees and have to work harder to attract new ones.
In a free-market economy, everyone is driven by his own ambitions for wealth and success. That's what free trade means: that no one may demand the work, effort, or money of another without offering to trade something of value in return. If both partners to the trade don't expect to gain, they are free to go elsewhere. All parties to a voluntary transaction must gain.
A system that sacrifices the self to society is a system of slavery--and a system that sacrifices thinking to coercion is a system of brutality. This is the essence of any anti-capitalist system, whether communist or fascist. And "mixed" systems, such as today's regulatory and welfare state, merely unleash the same evils on a smaller scale. Only capitalism renounces these evils entirely. Only capitalism is moral. Only capitalism protects the individual's freedom of thought and his right to his own life.
So much of what goes on in existing economies is immoral because behavior is coerced. Consider the 2008 financial crisis and aftermath. Under capitalism, if an individual or corporation chooses to create a bank, he or it is free to establish the policy that the bank will offer loans only to individuals and businesses the bank regards as creditworthy. The government may not force the bank to lend money to those it regards as unable to repay a loan or as too risky for business. Nor may the government dictate or limit the interest rates or other terms or conditions that the bank chooses to offer. The bank owner or owners are free to decide how they will run their business at every step and turn; free to open new branches, to purchase other banks, to purchase insurance companies, and to expand or diversify their bank in countless other ways. They are free to maximize their profits and to grow and thrive and prosper to the best of their ability. The only thing they are not free to do is to use physical force or fraud (indirect force) against people. If the bank’ policies lead to success, its success is good for the bank, good for its owners, and good for its customers. Remember, the bank can only succeed if it serves customers, that is, gives them what they want and value. If the bank’s policies lead the bank to failure, it may not seek a bailout from the government; nor may the government offer to bail out the bank. Under capitalism, bankers and banks, like all individuals and businesses, are responsible for the consequences of their decisions, whether good or bad, profitable or not. Consequently, under capitalism, if a bank fails, it files bankruptcy or offers itself for sale on the cheap or goes out of business; its owners suffer losses; and its customers find other means through which to save or borrow money.
But none of this occurred; government forced banks to behave as government demanded and government bailed out and took over banks.
Under capitalism, an automaker is free to manufacture and market cars and the company is free to succeed or to fail accordingly. The government may not force the company to sell a particular kind of car, nor force it to pay its employees a particular minimum or maximum wage, nor force it to contract with a particular vendor, nor a union, nor anyone else. The automaker is free to make all such decisions according to the judgment of its owners. If the automaker uses good judgment and succeeds, it is free to keep, use, and dispose of its profits. If it uses poor judgment and fails--or if its competitors outperform it such that it cannot remain profitable--the automaker may file for bankruptcy or offer itself for sale or close its doors. But it may not seek a bailout from the government. Under capitalism, individuals and corporations legally own not only their profits but also their problems, and the government is prohibited from intervening in the marketplace. But, the government has dictated what kinds of autos, their sizes and performances, and the wages that they had to pay employees.
In a system such as the mixed economy, when actions occur because of coercion from government, the system is immoral. Under capitalism, the initiation of physical force is barred from human relationships. Citizens may delegate the use of retaliatory force to their government, which may use force only in retaliation and only against those who initiate its use. Those who initiate force against others are met with force by the law. Government regulation, by contrast, coerces behavior. It subordinates the businessman's judgment to the decrees of government officials, who impose their will, not by reason, but by physical force.
So why teach business ethics as if morality was anything other than free market capitalism? Just teach what is required for free markets and capitalism to exist and endure and you have taught ethics.

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