Is capitalism immoral?

Smith also believed in the power of the market beyond its money-making power. His Theory of Moral Sentiments placed individuals in the context of a wider society, and brought morality to bear on self-interest. He saw the pursuit of individual life ambitions, not the maximisation of riches, as the key goal in life.

By using the market, he argued, we can more easily and cheaply meet our material needs, but that would also leave more time and resources for us to fulfil whatever non-material goals we may have. Rather than the Church imposing its own view of what our goal should be in life, Smith believed we should answer to our inner selves – to an “impartial spectator” that sits inside each one of us. That is the freedom markets provide, and why accusations of immorality are misplaced.

Here are four reasons why a defence of markets is a defence of much more than money.

First, as Adam Smith well knew, the prospect of profit encourages us to solve problems and meet the needs of our fellow citizens, making our lives longer, less arduous and more pleasurable – just think of the life-saving drugs, the household appliances and the technological devices we take for granted. Markets mean that we are incentivised to care about each other much more than we otherwise would. How else does the capitalist make money but by serving the consumer?

Second, by connecting people across distant lands, and from different backgrounds, markets encourage tolerance. To quote Voltaire: “Go into the London Stock Exchange… and you will see representatives from all nations gathered…Here Jew, Mohammedan and Christian deal with each other as though they were all of the same faith”.² Markets are the enemy of intolerance. Markets thrive off diversity.

Third, markets allow us to escape social practices which are exploitative. For centuries, communities have persecuted or abused ‘non-conformists’ and the vulnerable – burning certain women as witches, mutilating women’s genitals, breaking the toes of young girls in order to bind their feet, oppressing the LGBT community and those considered “second class” on the basis of the colour of their skin. For those who see society as something other than a happy and harmonious place, the market provides an escape mechanism. Markets provide us with the ability to be financially independent. They allow us to engage with one another anonymously – in a way that ensures we are fed and clothed without having to acquiesce to another’s world view.

Fourth, while the competition which markets enable might on the one hand encourage selfish behaviour, it also weeds out immorality. With competition, individuals are, in general, better able to escape individual cases of abuse or mistreatment compared to a situation in which there is one sole employer, the state.

The film The Lives of Others, which follows a group of young intellectuals in communist Berlin in the early 1980s, highlights just one individual story of abuse, whereby a senior official uses his power to sexually exploit women, demanding favours in return for overdue promotions. Without competition to expose them, the state can cover-up wrongdoing, meaning that abuses continue. Indeed, the state has an incentive to do so (much like the Church), precisely in order to hold on to its reputation for the “social good”.

In the marketplace, while cover-ups can and do happen, competition pushes in the direction of rooting out wrongdoers. Where poor practice, even abuse, is taking place, consumers can exercise their choice to move to another provider. Workers can also move to another employer. Of course, the mechanism for this to happen is far from perfect – consumers do not always find out the full facts and workers facing abuse are not always mobile – but at least markets provide the possibility of punishment and escape that is missing when the state has a monopoly of power, and, importantly, a monopoly of force.

There is, however, a caveat: markets can be made more (or less) moral. As Steven Pearlstein wrote in the The Washington Post under the headline: “Is capitalism moral?”

“[T]he way markets distribute rewards is neither divinely determined nor purely the result of the ‘invisible hand’. It is determined by laws, regulations, technology, norms of behavior, power relationships, and the ways that labor and financial markets operate and interact. These arrangements change over time and can dramatically affect market outcomes and incomes…In our current debate over capitalism, too much attention is focused on whether, how or how much to redistribute the incomes that markets have produced, with too little focus on the institutional arrangements that determine how that income is divided up in the first place.”

This notion – that there is no single, divinely determined market outcome – is now commonly associated with the Left-leaning idea of ‘Predistribution’. However, Classical Liberals were well aware of the way in which market outcomes depended on the foundations on which they were built. Academic Valeria Mosini argues that Leon Walras, 19^th-century economist best known for his mathematical proofs of the benefits of markets, had a much more nuanced view of markets than he has been given credit for.³ While he argued that the market worked well, he pointed out that the outcomes depended on the context.

In thinking about the appropriate backdrop for markets, these early economists confronted numerous questions about what is or is not “fair” (as well as what is or is not efficient). This included debating laws on bankruptcy, the responsibilities of central banks, whether the state should guarantee our savings, whether owners of stocks and shares should be personally liable for the debts of the companies they invest in, and whether inventors should be able to patent their ideas. The ‘Institutional School’ of J.R. Commons went on to make the now largely forgotten point that institutions – the rules of the game which we choose to construct for markets – reflect what society thinks is right or wrong, which can have big implications for class, gender and race.

All of which means that markets can be redesigned to work ‘better’ – to deliver more equitable and environmentally sustainable outcomes. But in redesigning markets, economists and policymakers cannot escape what society deems to be ‘good’ or ‘bad’ – what we deem legal to buy and sell (sex for example), and the types of incentives we choose to put in place for market actors, such as through discrimination law, taxes, subsidies, and regulations.

It wasn’t that long ago, after all, that economists argued against (rather than in favour of) equal-pay-for-equal-work legislation on the basis that women have vital work to do within the home and that equal pay would disincentive such work. Their thinking was muddied by a moral code that concerned what people ‘should’ or ‘should not’ be doing. Society is always the limiting factor in market design. As society advances – often as a result of the very freedoms that markets support – the rules of the market must be redesigned.

The market is far from perfect, but it must be understood in the context of an imperfect society, one which becomes worse when cloaked in the heavy hand of the state. The market is much more moral than we today like to think. When Mandeville’s Fable of the Bees attacked puritan values in 1714, questioning the commonly held notion that it was Christian morality that “held society together” and suggesting that private vices can in fact be to public benefit, there was an outcry.

Individual freedom could not have been seen as more radical – leaving people to their own devices, it was thought, would wreak havoc. Today the failings of capitalism are the failings of society to effectively design the rules of the game. Markets are not the problem; the problem is the actors that shape them.

---

Dr Victoria Bateman is Fellow in Economics at Gonville and Caius College, Cambridge. She writes regular economic commentary for Bloomberg View and CapX, and is known for her stance on Brexit and for using art to explore perceptions of the female body.

vnbateman