Free market capitalism is being knocked around a lot these days. Presidential candidates openly reject it and declare their wish to replace it with morally superior socialism.
Capitalism’s history includes a lot of critics. In its earliest days, during the later Middle Ages when religion played a central role in European lives, most of the criticism stemmed from concerns about its effect on morality.
Up until the late 18th century, then, investigations into the workings of capitalism were focused especially on the question of whether it was immoral or sinful. Adam Smith, who is now called the “father of economics,” was not an economist but a doctor of moral philosophy. His investigation of capitalism’s morality was a byproduct of his book published in 1776, “An Inquiry into the Nature and Causes of the Wealth of Nations.”
The date is an important one in America’s history, of course, and the two events, Smith’s book and our Declaration of Independence, are linked by more than coincidence. Both were acts of rebellion against mercantilism, the prevailing form of British economic thought and policy at the time.
Mercantilism was based on a misunderstanding of the role of money, especially of gold and silver. It involved the economic exploitation of every resource, including humans, that existed outside of England itself. The outsiders, including colonies, would provide raw materials which would be transformed into finished goods in the homeland and sold back to the outsiders – returning the profits to the home country’s treasury.
In the American colonies, many of the hated laws imposed by England – the Townsend Laws and the Stamp Act, for example – were efforts to enforce mercantilist controls of trade. The Declaration of Independence was in no small part a rebellion by the colonists for being treated not as loyal subjects of the king but simply as economic resources to be exploited.
Adam Smith’s book contained a revolutionary idea, certainly, and was therefore rebellious in its nature. Instead of severing ties to a government as our Declaration did, though, the book’s argument severed the ties to legitimacy of the government’s guiding policy, mercantilism.
Smith was able to do this by showing that a country’s strength and prosperity lay not in how much gold and silver it had salted away somewhere but in its productivity – its ability to produce goods efficiently and affordably for its people. And this process was energized by trade; neither exploitation nor protective tariffs were necessary.
In an equally powerful argument, he showed that in a free market, the sellers’ motives such as self-interest didn’t matter. The market forces would move these sellers, as if guided by an “invisible hand” to the most efficient, equilibrium price.
In its own way and language, Adam Smith’s “invisible hand” analysis was the eighteenth century version of Gordon Gecko’s “greed is good” speech in the movie, “Wall Street.”
Smith’s book and analysis were more than that, however. In the process of attacking mercantilism, he legitimized free market capitalism by loosening it from moralism. By his analysis, there was nothing morally wrong or sinful in charging a higher or lower price. Following the market force was morally neutral. Ultimately, this force would have a greater impact than the battle against mercantilism.
The catch in all this is that it only works if the market is free — meaning easy entry of buyers and sellers and price movements free of constraints. And that takes rules, constant monitoring, and the power to force rule-breakers to stop or leave. It is a constant battle. Even Adam Smith, writing in capitalism’s infancy, observed that “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivances to raise prices.”
The important concept here, though, is that the market itself, when working properly, doesn’t care whether the participants are saints or sinners. It is a strict disciplinarian. Sellers try to maximize their profits and buyers try to minimize their costs.
Free market capitalism provided a home for production efficiency through technology development and division of labor that brought unprecedented prosperity to the world.
The record of socialism is not as attractive. Hunger unto starvation seems to dog socialism’s footsteps no matter when no matter where. And, sadly, it sometimes has also provided a gateway to murderous thugs as leaders. Certainly, its history does not support its claim to occupy a higher moral ground than capitalism.
Free market capitalism is not perfect, but it can seem so in comparison with its alternatives. That is why so many who live elsewhere in this world people want to come here. We are very lucky people and free market capitalism has been a big part of that luck.