Issues 2012
M I
No. 12 May 2012
M A N H A T T A N
I N S T I T U T E
F O R
P O L I C Y
R E S E A R C H
AN AUDACIOUS PROMISE:
THE MORAL CASE FOR CAPITALISM
James R. Otteson
“The market will take care of everything,” they tell us…. But here’s the problem:
it doesn’t work. It has never worked. It didn’t work when it was tried in the
decade before the Great Depression. It’s not what led to the incredible postwar
booms of the ’50s and ’60s. And it didn’t work when we tried it during the
last decade. I mean, understand, it’s not as if we haven’t tried this theory.
Published by the Manhattan Institute
—President Barack Obama, Osawatomie, Kansas, December 6, 2011
Milton Friedman once said that every time capitalism has been tried, it
has succeeded; whereas every time socialism has been tried, it has failed.
Yet President Obama has oddly claimed that we’ve tried free-market capitalism, and it “has never worked.” This is rather remarkable. Since 1800,
the world’s population has increased sixfold; yet despite this enormous
increase, real income per person has increased approximately 16-fold.
That is a truly amazing achievement. In America, the increase is even
more dramatic: in 1800, the total population in America was 5.3 million,
life expectancy was 39, and the real gross domestic product per capita
was $1,343 (in 2010 dollars); in 2011, our population was 308 million,
our life expectancy was 78, and our GDP per capita was $48,800. Thus
even while the population increased 58-fold, our life expectancy doubled,
and our GDP per capita increased almost 36-fold. Such growth is unprecedented in the history of humankind. Considering that worldwide
per-capita real income for the previous 99.9 percent of human existence
averaged consistently around $1 per day, that is extraordinary.
What explains it? It would seem that it is due principally to the complex
of institutions usually included under the term “capitalism,” since the
main thing that changed between 200 years ago and the previous 100,000
years of human history was the introduction and embrace of so-called
capitalist institutions—particularly, private property
and markets. One central promise of capitalism has
been that it will lead to increasing material prosperity. It seems fair to say that this promise, at least, has
been fulfilled beyond anyone’s wildest imagination.
Yet people remain suspicious of capitalism—and
more than just suspicious: as the Occupy Wall Street
movement is only the latest to have shown, we seem
ready to indict capitalism for many of our social
problems. Why?
Issues 2012 No. 12
A widespread consensus is that capitalism might be
necessary to deliver the goods but fails to meet moral
muster. By contrast, socialism, while perhaps not practical, is morally superior—if only we could live up to
its ideals. Two main charges are typically marshaled
against capitalism: it generates inequality by allowing
some to become wealthier than others; and it threatens
social solidarity by allowing individuals some priority
over their communities. Other objections include:
it encourages selfishness or greed; it “atomizes” individuals or “alienates” (Marx’s term) people from
one another; it exploits natural resources or despoils
nature; it impoverishes third-world countries; and it
dehumanizes people because the continual search for
profit reduces everything, including human beings,
to odious dollar-and-cent calculations.
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The list of charges against capitalism is long. But some
of the charges are not as strong as might be supposed.
Take community. Capitalism gives us incentives to
trade and associate with people outside our local community, even complete strangers, not on the basis of
our love or care for them but out of our own—and
their—self-interest. So capitalism enables people
to escape the strictures of their local communities.
But is that bad? Capitalism creates opportunities for
people to trade, exchange, partner, associate, collaborate, cooperate, and share with—as well as learn
from—people not only from next door but from
around the world—even people who speak different
languages, wear different clothing, eat different foods,
and worship different gods. The social characteristics
that in other times and under different institutions
would lead to conflict—even violent, bloody conflict—become, under capitalism, irrelevant—and thus
no longer cause for discord. Capitalism encourages
people to see those outside their communities not as
threats but as opportunities. It gives us an incentive
May 2012
to look beyond our narrow parochialisms and form
associations that would otherwise not be possible.
Capitalism therefore does not lead to no community
but rather to differently configured ones. Consider
this remarkable passage from Adam Smith’s 1776 The
Wealth of Nations:
The woollen coat, for example, which covers the
day labourer, as coarse and rough as it may appear, is
the produce of the joint labour of a great multitude
of workmen. The shepherd, the sorter of the wool,
the wool-comber or carder, the dyer, the scribbler,
the spinner, the weaver, the fuller, the dresser, with
many others, must all join their different arts in
order to complete even this homely production.
How many merchants and carriers, besides, must
have been employed in transporting the materials
from some of those workmen to others who often
live in a very distant part of the country! How much
commerce and navigation in particular, how many
ship-builders, sailors, sail-makers, rope-makers,
must have been employed in order to bring together
the different drugs made use of by the dyer, which
often come from the remotest corners of the world!
What a variety of labour too is necessary in order
to produce the tools of the meanest of those workmen!... [I]f we examine, I say, all these things, and
consider what a variety of labour is employed about
each of them, we shall be sensible that without the
assistance and cooperation of many thousands, the
very meanest person in a civilized country could not
be provided, even according to, what we very falsely
imagine, the easy and simple manner in which he
is commonly accommodated.
This is a celebration for Smith. It represents not the
total independence demanded by the eighteenthcentury French philosopher Jean-Jacques Rousseau,
who envisioned a kind of solitary orangutan-like
existence as the ideal for humans; but neither is it
the atomism that some critics of capitalism claim.
It contemplates a set of social institutions that allows us to transcend the confines of our small-group
instincts by engaging in far-flung cooperation. If we
were instead to restrict cooperation only to those exchanges that could be based on personal caring and
bonds, the loss of gains from forsaken trade would
sharply reduce our standard of living—causing us
to regress steadily to the status quo ante of human
existence—namely, $1 per day. By contrast, markets
allow us to “serve” one another even when we do not
love one another—even when we do not know of one
another’s existence. That implies an extensive, deep,
and pervasive interdependence—which is a real, if
different kind of, community.
What about inequality? Capitalism does allow—and
perhaps even requires—inequality. Because people’s
talents, skills, values, desires, and preferences vary
and because of sheer luck, some people will be able
to generate more wealth in a free-enterprise system
than others will; inequality will result. But it is not
clear that we should worry about that.
Keeping people in poverty seems too high a price to
pay in the service of equality. One is tempted to say
that only a person who has never experienced poverty
could think differently.
Consider that allowing these inequalities actually
reflects a respect for individual dignity. In a famous
passage in The Wealth of Nations, Smith writes: “It is
not from the benevolence of the butcher, the brewer,
or the baker, that we expect our dinner, but from their
regard to their own interest. We address ourselves, not
to their humanity but to their self-love, and never talk
to them of our own necessities but of their own advantages.” Some read that and hear selfishness. But Smith
saw in the dynamics of such exchanges not selfishness
but respect. Perhaps that sounds counterintuitive, but
consider the assumptions in such negotiations. Each
person is saying to the other: “I understand that your
life is yours to lead, and rather than trying to trump
your schedule of values with mine, I will respect and
recognize your schedule. Thus I do not second-guess
or question you; instead, I propose that we meet each
other as peers and cooperate.” That is a surprisingly
profound way to respect others. Consider, by contrast,
the assumptions when we want to prevent others from
mutually voluntary cooperation: “We do not believe
that you are competent to lead your own life, so we
shall do it for you.” That may be a proper way to treat
children or the mentally infirm, but it is a demeaning
and disgraceful way to treat adults—and unacceptable
for a free people.
Consider first that the voluntary exchanges that take
place in the free-enterprise system are positive-sum,
not zero-sum—meaning not that one person benefits
only at another’s expense but rather that all parties
to the transaction benefit. If you and I agree that I
will complete a task for you for $100, that means
that I value the $100 more than the labor and other
forsaken opportunities that it costs me, and you value
the completed task more than the $100 that it costs
you. That we voluntarily strike this deal means that
we both benefit, each according to his respective
schedule of values. What capitalism proposes is to
expand the frontiers of possibility for such mutually
beneficial transactions so that more and more people
can work together in more and more ways. This
increasing cooperation means increasing benefit in
new, unpredictable, and yes, unequal but nevertheless Smith wrote: “Little else is requisite to carry a state
substantial, ways.
to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable
Even if we do not all get rich at the same rate, we all administration of justice: all the rest being brought
still get richer. To see the importance of this point, ask about by the natural course of things. All governyourself: If you could solve only one social ill—either ments which thwart this natural course, which force
inequality or poverty—which would it be? Or sup- things into another channel, or which endeavour to
pose that the only way to address poverty would be arrest the progress of society at a particular point, are
to allow inequality: Would you allow it? This seems unnatural, and to support themselves are obliged to
a no-brainer: poverty is a far larger factor in human be oppressive and tyrannical.”
misery than is inequality. If we could have steadily
fewer people suffering from grinding poverty, is that There is a profound naturalness to, as Smith called
not something to wish for, even if it comes with it, the “obvious and simple system of natural liberty”
inequality? This appears to be the position in which that he contemplated. Once we get a “tolerable adwe find ourselves. The only way we have discovered ministration of justice” and are protected from interto raise people out of poverty is the institutions of national and domestic aggression, and once a scant
capitalism, and those institutions allow inequality. few public services (roads, canals, elementary educa-
An Audacious Promise: The Moral Case for Capitalism
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tion) are put into place, stand back: the “invisible
hand”—motivated by people’s desire to better their
own condition and guided by the freedom to exploit
their local knowledge as well as the responsibility
of facing the consequences of their decisions—will
generate prosperity, leading, according to Smith, to
“general plenty” and “universal opulence.” That was
an audacious promise, and the fact that it seems to
have been fulfilled in those places in the world that
have enjoyed Smithian institutions over the last
two centuries is a remarkable vindication of Smith’s
model—not to mention a tremendous benefit for
those fortunate enough to live in those places.
Capitalism’s success at its stated goals has been so enormous and unprecedented that we might easily think
that that is all that can be said on its behalf. Rescuing
hundreds of millions of people from grinding poverty
is, however, nothing to sneeze at—and nothing to take
for granted. The rest of human history has shown us
just how nasty, poor, and brutish the default for human life is; even the twentieth century—that age of
democratic enlightenment—has vividly demonstrated
how quickly civilization can turn to barbarism. Peace,
the rule of law, and steadily rising standards of living
are the exception, not the rule, and the institutions
that uphold them are fragile and require constant
maintenance and nurturing.
Issues 2012 No. 12
But capitalism is part of a larger set of social institutions
that has another justification for itself than increasing
material prosperity, as important as that is. And that
is its presumption of the dignity and preciousness of
each individual and the respect that that demands.
Capitalism assumes that each of us is a free moral agent,
capable of leading his own life, of holding his head up,
not begging leave or permission before he acts, not
subject to correction from his superiors: a citizen, not a
subject. Capitalism does not suppose that we are infallible; on the contrary, it is because no one is infallible
that capitalism denies any of us absolute authority over
others’ lives. It assumes only that as free moral agents,
each of us has authority over himself and that each of
us is sovereign over his own life.
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Adam Smith wrote: “In civilized society [man] stands
at all times in need of the cooperation and assistance
of great multitudes”; and “man has almost constant
occasion for the help of his brethren.” Yet Smith also
wrote that man’s “whole life is scarce sufficient to gain
the friendship of a few persons.” We cannot depend,
therefore, on personal bonds of love, care, or friendship and still expect to live above subsistence levels.
What the free-enterprise system—Smith’s “obvious
and simple system of natural liberty”—proposes, then,
is the adoption of those political and economic institutions that manage to combine not one but two great
moral imperatives: allowing people the opportunity
to rise from the impoverished existence that seems
to be humanity’s miserable, if equal, status quo; and
respecting people as the irreplaceable and precious
individuals that they are. That is a sublime conjunction of material prosperity and moral agency, the likes
of which no other system of political economy has
ever contemplated, let alone achieved.
Capitalism is not perfect. But no system created by
human beings is, or ever will be, perfect. The most
we can hope for is continuing gradual improvement.
To this end, we must honestly examine the prospects
of the available systems of political economy. The
benefits of the free-enterprise society are enormous
and unprecedented; they have meant the difference
between life and death for hundreds of millions of
people and have afforded a dignity to populations that
are otherwise forgotten. We should wish to extend
these benefits rather than to curtail them.
It would be all too easy for us, among the wealthiest
people who have ever lived, in one of the richest places
on earth, to disdain the institutions that have enabled
us to escape the strictures of poverty and disrespect
that have plagued humanity for the vast majority of
its existence. Our crime today, however, would lie not
in our inequalities but rather in our refusal to uphold
the institutions that give humanity the only hope it
has ever known of rising out of its natural state of destitution. The great and precious blessings of freedom
and prosperity that we Americans have enjoyed, and
Capitalism, moreover, does not suppose that we are that some, but not enough, others around the world
atoms, isolated from and unconnected to others. As have also experienced, deserve nothing less.
James R. Otteson is joint professor of philosophy and economics, and chair of the Philosophy Department, at Yeshiva University in New York.
May 2012
Copyrighted Material
CH A PTER ONE
Introduction
Every December brings the same nightmarish vi
sion. It begins at a deserted mall stacked with a
million dollars’ worth of products. Customers form
a perimeter a thousand feet outside the mall.
Then, out of nowhere, a red tornado strikes—just
the mall and not the crowd—and lifts the cloth
ing and appliances and books and DVDs into the
air. As quickly as the cyclone landed, it rises back
up to the sky. Then the products rain gently down
on the crowd.
“Hey, I got a toaster,” says someone in the
crowd.
“Look, I got a red sweater, not my size or
color,” says another.
“Wow, I got a singing fish.”
And these are the lucky ones.
Miraculously, no one is hurt, everyone gets
something, and neither the building nor any of
the products are damaged. But after the thrill of
free stuff wears off, people realize that they do
not have what they want.
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CHAPTER ONE
I go around with a clipboard asking people in
the crowd how much they would willingly have
paid for what they got. A few got things they
wanted, or now realize they want after reading
the packaging. But most are unenthusiastic about
their windfalls. They would not have been willing
to pay anything close to the purchase price, if
anything at all. When I tally the responses, peo
ple are willing to pay an average of twentyfive
cents on the dollar of retail price.
I’d like to say you can rest easy because these
events never happened. But they did, and they
do every year in much of the world. The red tor
nado is Santa Claus. And despite the warm feel
ings he evokes in children, his tornado of giving
does a perennially poor job of matching stuff with
people. In so doing, he destroys a lot of value,
just as he turned our million dollars’ worth of
products into a mere $250 thousand worth of sat
isfaction for the shoppers encircling the mall.
Every holiday season in the living rooms of
families in rich countries we experience some
thing similar to the red tornado, only without the
actual funnel cloud. For months before the big
day, mothers and fathers—mothers, mostly—run
around trying to find the right gifts for their loved
ones, young and old. Some gift recipients are
easy to secondguess. It takes little imagination to
predict that a fouryearold will like a doll or a toy
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INTRODUCTION
truck. As kids get older, it gets tougher to find a
surprise gift that they’ll appreciate, but older kids
often take out the guesswork with specific requests
for this year’s fashionably conformist clothes. And
then there are the adults for whom we are obliged
to get something. We know that Uncle Jim and
his wife and kids will be there, so we have to get
him something. But what sort of music does your
nephew like this year? Does his tongue piercing
provide a clue? And grandma’s coming. You have
no idea what she wants, but—believe me—she
has even less of a clue about what you and your
kids over seven want.
When the day arrives, families—and extended
families—gather around a tree or a hearth or a
menorah to exchange holiday gifts. Kids squeal in
delight as they open their dolls and trucks. With
young children especially, the gifts matter less
than the ritual of ripping off wrapping paper and
bows. Teenagers feign surprise—for grandma’s
benefit—and register actual approval for the gifts
they specifically requested. They roll their eyes at
the music and movies you buy them. Because
you’ve raised them well, they manage a smile for
grandma’s gifts. What kid doesn’t need a candle?
But the fabricated smiles aren’t limited to the
teens. The adults all arrange their faces into ex
pressions of pleasure as they unwrap items they
would never buy for themselves. “A cribbage
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CHAPTER ONE
board? You shouldn’t have,” we tell our mothers
inlaw. Indeed.
Christmas provides the occasion for a large
amount of spending in predominantly Christian
developed countries. In the United States, for ex
ample, retail sales during the month of Decem
ber tower visibly over the volume in adjacent
months. In some categories—with familiar Yule
tide wares—December sales account for a huge
share of the year’s sales, over a fifth at jewelry
stores, about a sixth at department and discount
stores, and about a seventh at clothing, electron
ics, sporting goods, hobby, and book stores.
What’s distinctive about all of this spending is
that, except for the prearranged gifts for teenag
ers, the choices are not made by the ultimate
consumers. For the rest of the year, the people
who will ultimately use the stuff choose what they
buy. As a result, buyers normally choose things
they correctly expect to enjoy using. But not at
Christmas. As a result, the massive holiday spend
ing has the potential to do a terrible job matching
products with users. Throughout the year, we
shop meticulously for ourselves, looking at scores
of items before choosing those that warrant
spending our own money. The process at Christ
mas, by contrast, has givers shooting in the dark
about what you like, recalling the way the imagi
nary red tornado distributes gifts. To make mat
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INTRODUCTION
ters worse, we do much of this spending with
credit, going into hock using money we don’t yet
have to buy things that recipients don’t really
want.
If you discovered a government program that
was hemorrhaging money—say, spending $100
billion of taxpayer money per year to generate a
benefit of only $85 billion—you would be out
raged. You might even email your elected repre
sentatives to demand an end to the wasteful pro
gram.
Despite our good intentions, in the private
sector we also generate billions less in satisfaction
than we could with what we spend. In this book I
will show you the size of annual Christmas spend
ing—and the amount that’s waste—in the United
States and around the world. I’ll also show you
how presentday Christmas compares to the
Christmas of our grandparents, and how we’ve
shifted from saving up for Christmas to maxing
out our credit cards to finance the gift storm. I’ll
make the case that in many circumstances it
would be better to not buy presents for the holi
days. Finally, I’ll point to some solutions that can
stop the waste and make holiday giving a force
for good.
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