In Defense of Capitalism — White Pine Advisory

Part I: The Defense of Capitalism

From The Wealth of Nations, by Adam Smith (Book 4, Chapter 2)

“Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society. […] He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it…he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention…By promoting his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”

A number of years ago I served as a Peace Corps Volunteer in Cameroon, a chicken-shaped country in Central Africa. I lived in the neck, where Cameroon is squeezed between Nigeria and Chad.

I joined the Peace Corps straight out of college, where I had been a literature major. My friends and I were suspicious of anything to do with the private sector and made sure to steer clear of anyone or anything to do with the business school. I took a couple of economics classes but didn’t find them very congenial.

A few months after I arrived at my post in Garoua, a bustling city by a big river, the government office I was working in helped to put on a multi-day training program for rural leaders of villages where the European Union had just installed deep wells to ensure access to clean water. The program was held in the school of a large village whose residents could accommodate the several dozen people attending.

I don’t remember much about the program except that every meal seemed to be dried okra stew (not my favorite), but one notable event was that for the two nights we were there the French consulate in Garoua showed movies on a big screen in the schoolyard. The first night only a hundred or so people attended but they laughed enthusiastically at Chaplin’s “The Kid”. By the second night word had got out and the crowd was probably in the thousands. Locals with pickup trucks had sold passage in the truck bed to people from villages all around. Others had set up a night market lit by kerosene lamps selling not just drinks and snacks for enjoying during the show but all kinds of household staples like soap and matches. All of this had seemingly appeared out of nowhere. It was exhilarating to see this kind of ingenuity and I’ve never forgotten it.

As I got to know Cameroon better, I realized that all around me were people buying and selling and trading goods. The area around Garoua produced a lot of onions. Local traders would load up pickups with onions and sell them in Nigeria: illegally because Cameroon banned the export of food and Nigeria had closed the border altogether, but somehow neither restriction had much effect. They would return from Nigeria with their trucks loaded with enamelware dishes that would be distributed all through the north of Cameroon and then the pickups would return to Garoua with avocados and yams from the province to the south and other goods from farther north. Women would earn money braiding their neighbors’ hair or selling fabric to their social circle. Farmers would pay for manufactured goods by growing lettuce and tomatoes for city-dwellers’ salads. Long distance traders from far off Sudan and Senegal passed through regularly on trade routes that seemed to have existed for centuries. Pilgrims to Mecca financed their trip by loading up at the duty-free shops in Saudi Arabia with things to sell back home Everyone seemed to know where to get something more cheaply and where to sell it more expensively. The whole city buzzed with commerce.

And all of this activity was from the bottom up. The authoritarian and corrupt Cameroonian government did a decent job in those days of building and maintaining the roads and railroads and running an education system that reached nearly every child in the country. When it came to business, though, the government preferred that the economy be dominated by state-owned monopolies and big French companies. Entrepreneurs were tolerated at best and frequently harassed by bureaucrats who would not approve anything at all unless every single document was complete with all the t’s crossed and the I’s dotted and by police at the ubiquitous checkpoints verifying identification and demanding bribes from anyone whose situation was even slightly irregular. I encountered an example of this once when taking a trip to visit a friend who lived in a small city about 30 miles from the nearest train station. Normally this journey would be taken in a large van that looked like a giant bread truck with unglazed windows. People would be crammed in until no one could move. But on this occasion, I discovered that there was now the choice to pay a third more for a seat in a much more comfortable Peugeot station wagon. I happily paid the extra money and scored a seat by the window, casually noticing that my ticket said I had paid the standard fare. We had only traveled a short distance when we hit a checkpoint. After the usual identity checks the policeman asked to see my ticket and then asked me if the amount shown on the ticket was what I had paid. I hesitated since it wasn’t, quickly realized what was happening and said “Yes, of course”. He waved us on. One of the other passengers said to the driver “You’re helping us so we’re helping you” and I suddenly understood that the rules did not allow us to be charged a premium for a nicer journey, yet we were all happy to pay it and grateful that the service was being provided. The policeman had asked me because he thought a white man would be naïve enough to answer his question truthfully and then he could either enforce the rules or demand a bribe for not doing so.

By the time I left the Peace Corps my thinking on capitalism had swung 180 degrees. Ever since I have believed that capitalism is the best tool we have for building flourishing societies and that entrepreneurial creativity is every bit as human as artistic creativity.

But that’s just one story. Let me give a few examples from our own society.

Let’s start in Renaissance Italy back in the 15th century. The home of the “rebirth” of European art, architecture, philosophy, and literature was also the birthplace of modern capitalism, giving us the first banks and double entry bookkeeping. This is not a coincidence. The rise of wealthy bankers and merchants meant that for the first time since antiquity European artists and thinkers did not have to depend on the inherently conservative patronage of Kings, Emperors, and the Catholic Church. Innovation in business funded innovation in the arts and humanities and capitalism gave us intellectual and artistic freedom.

The leading cultural and financial center of the time was Florence, a republic dominated by the Medici family, who had made their immense fortune in banking. Lorenzo de Medici, called “The Magnificent” used his wealth to patronize the great artists and scholars of the day. Among the beneficiaries of his fortune were the artists Leonardo da Vinci, Michelangelo and Botticelli and the humanist philosopher Giovanni Pico della Mirandola.

Pico della Mirandola is especially significant to UUs today because of his works “Oration on the Dignity of Man” and “The 900 Theses”, which syncretized Jewish, Islamic, and ancient Greek thought together with Christian theology to express humanistic values that were a precursor to ours. After it was published in Florence in 1486 under Lorenzo’s auspices, the 900 Theses became the first printed book to be banned by the Catholic Church. Most copies were burned and della Mirandola himself was imprisoned by order of the Pope until Lorenzo was able to get him released and give him refuge in Florence.

By Mongolo1984 - Own work, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=35666432

In 1485 Lorenzo commissioned the architect Giuliano da Sangallo to build the Villa Poggio a Caiano in the Tuscan countryside. This was one of the first unfortified elite country residences to be built in western Europe since Roman times and its design was hugely influential. Following della Mirandola’s idea of “philosophical leisure”, the villa was designed to relax and reinvigorate the mind. To create this ideal setting its large airy salons were decorated with both Roman antiquities and wall paintings by some of the leading artists of the day and integrated with the gardens and the countryside beyond. Lorenzo also had an experimental farm here featuring the first dairy cattle in Tuscany and a wetland used for growing rice.

Allori, Siface di Numidia che riceve Scipione, 1578-82 ca

I hear you saying “But what about Here? What about Now?

I assume most New Englanders recognize this iconic skyscraper on the Boston skyline. Not only was it built by an insurance company and named after a founding father who was also a wealthy merchant, but it represents centuries of technological progress funded by capitalism. It was the profit motive of capitalism that led to the creation of steel, plate glass and elevators and combined them with new engineering techniques into skyscrapers. Capitalism even enabled the filling of the marshland that the John Hancock stands on.

Part II: The Invisible Hand Becomes Visible. What to do about it?

Chicago

Carl Sandburg

Hog Butcher for the World,

Tool maker, Stacker of Wheat,

Player with Railroads and the Nation’s Freight Handler;

Stormy, husky, brawling,

City of the Big Shoulders:

They tell me you are wicked and I believe them, for I have seen your painted women under the gas lamps luring the farm boys.

And they tell me you are crooked and I answer: Yes, it is true I have seen the gunman kill and go free to kill again.

And they tell me you are brutal and my reply is: On the faces of women and children I have seen the marks of wanton hunger.

And having answered so I turn once more to those who sneer at this my city, and I give them back the sneer and say to them:

Come and show me another city with lifted head singing so proud to be alive and coarse and strong and cunning.

Flinging magnetic curses amid the toil of piling job on job, here is a tall bold slugger set vivid against the little soft cities;

Fierce as a dog with tongue lapping for action, cunning as a savage pitted against the wilderness,

Bareheaded,

Shoveling,

Wrecking,

Planning,

Building, breaking, rebuilding,

Under the smoke, dust all over his mouth, laughing with white teeth,

Under the terrible burden of destiny laughing as a young man laughs,

Laughing even as an ignorant fighter laughs who has never lost a battle,

Bragging and laughing that under his wrist is the pulse, and under his ribs the heart of the people,

Laughing!

Laughing the stormy, husky, brawling laughter of Youth, half-naked, sweating, proud to be Hog Butcher, Tool Maker, Stacker of Wheat, Player with Railroads and Freight Handler to the Nation.

I presented a rosy picture in the first part of my talk, but Carl Sandburg knew that the exuberance of industrial capitalism was accompanied by misery. in the last two centuries modern capitalism has created businesses whose size and power are beyond anything Lorenzo de Medici could have imagined. My friend Amadou from Garoua, selling onions across the border and returning with a load of dishes took his markets as he found them and had little effect on the society around him. Jeff Bezos and Jamie Dimon affect the lives of hundreds of millions of people every day as they manage their mega corporations. As workers, as consumers and as citizens we feel helpless in the face of such power and concentration of wealth.

There is a dark side to my story about Cameroon: at the end of the two-and-a-half-day program there was a big closing ceremony attended by all of the local dignitaries, followed by a reception in the school room with all kinds of food and drink for the dignitaries and a few select other people, including me. The reception had just gotten underway when a crowd of men and boys – both attendees and local villagers - came bursting through the open windows. The food and drinks were all seized and consumed while the elite guests fled. Within minutes there was nothing left but overturned tables and broken glasses that were going to have held Johnnie Walker Red. This is what happens when power is concentrated, and extreme inequality leads to desperation.

And of course, there is climate change, the issue of our time and the consequence of over two hundred years of ever-growing fossil fuel consumption to power the industrial economy. To many this seems like the prime example of capitalism run amok.

To paraphrase the historian Alfred Chandler’s conclusion in “The Visible Hand”: a critical issue of modern times is how managers can be made responsible for their actions – actions that have far reaching consequences. How do we redress this imbalance of power? If we don’t the consequences could be dire. A business that pays no attention to its effect on the society in which it operates cannot survive for the long term. The same holds true for the capitalist system as a whole.

I hope I made clear in the first part of this reflection that I don’t believe that throwing out the economic system that has brought us prosperity and technological progress, enabled artistic creativity, and given us freedom from centralized control and a degree of social mobility because of its real and serious imperfections is the answer. As tempting as it might be to grab the food, turn over the tables, drink the whiskey and smash the glasses, it is not a long-term solution.

So how do we save capitalism from itself? How do we get more people invited to the reception? As citizens, as workers and as investors we have a voice and collectively we have power. We just need to use the tools that are already available to us, including the economic incentives that are built into the capitalist system.

In the early 20th century President Theodore Roosevelt and the Progressive movement recognized that the power of big business had grown to such an extent that Adam Smith’s “Invisible Hand” had become all too visible. The government needed to become a countervailing force to big business that pushed back against its abuses of power and protected ordinary people, giving them the ability to improve their lives. This realization led to anti-trust enforcement that broke up the big monopolies, the creation of the Federal Reserve so that JP Morgan would no longer have to be called on to rescue the financial system in a crisis, restrictions on working hours and child labor, and the beginnings of a social safety net. FDR and the New Deal build on this framework to strengthen the safety net, guarantee the right to organize so that unions could protect workers’ rights and enforce rules to turn the financial markets from a rigged game for insiders into a universal engine of wealth creation. None of these reforms were anti-capitalist. On the contrary, they were all intended to save capitalism by making it work for everyone.

For decades we have been building on these achievements but the pushback from big capital has been constant. Our job as citizens is to keep the pressure on so that our government remains a countervailing force that keeps the excesses of capitalism in check.

And we are not just citizens but also shareholders. Roughly 60% of Americans own shares in the stock market. Informed and organized shareholders have the ability to demand that the management of the companies they invest in consider the environmental and social consequences of their decisions. This isn’t just about feeling better about what your money is doing. Companies that pay close attention to the context in which they operate are generally better long-term investments. They are less likely to produce nasty surprises since they are not as narrowly focused on short-term profits. The goodwill they generate from customers, employees, communities, and other stakeholders is a major asset that can generate better returns for their shareholders.

As for climate change, count me among the optimists. As I tell my students at Duke: “the market got us into this situation and the market will get us out”. For most of modern history industrial pollution – including carbon emissions – has been an externality. Companies could spew whatever they wanted into the air and the water at no cost to themselves. Even free-market ideologue Milton Friedman thought this was wrong. These costs need to be internalized so that companies have to pay them instead of offloading them on to the rest of us. Companies in the EU, the UK and Korea have to account for every ton of carbon they put into the air. Big oil companies such as BP and Shell have incorporated this cost into their financial projections, and this has led them to cancel projects and charge off billions of dollars in oil reserves. The same market mechanisms that can be used to make it more expensive to emit carbon are already sharply reducing the cost of clean energy by stimulating technological progress. The simple act of setting a price on carbon to be paid by those who emit it and letting innovation loose to find the most efficient and cost-effective ways to generate energy can go a very long way towards getting us toward net zero.

A more local problem that can also be addressed by unleashing market forces is the housing shortage that is making it so expensive to live in Massachusetts, California, New York and elsewhere. We desperately need to build more housing, especially in areas with good public transportation. This would be good for the economy, good for society and good for the environment. By far the simplest way of getting this accomplished is to ease up on the zoning restrictions that make it difficult or even impossible to build multi-family housing and invite private sector developers in.

I decided to give this talk because for years I have been frustrated by the common anti-capitalist sentiment among many in my social circle. By sharing my own intellectual journey and my thoughts on where to go from here I hope I have convinced at least some of the skeptics that while capitalism is far from perfect, it is the best system we have for unleashing human potential, provided we continue to exert ourselves as citizens and as shareholders to keep it running smoothy and fairly.