Capitalism, a Positive Moral Force?

Socialist Utopianism

Of all the many misperceptions surrounding capitalism now days, perhaps the most enduring is the widespread acceptance of its ethical inadequacy. Arguments on the subject generally go something like this: capitalism, although now reluctantly accepted as being more productive, is immoral because it brings out the worst in people, pitting individuals and corporations against one another in an endless competitive struggle. Socialism on the other hand (despite its obvious failings as a wealth generator) is still considered morally superior in the sense that it is seen as promoting harmony and human cooperation.

The connection between communal ownership and cooperation is deeply embedded in western thought. Consider the following from Thomas More’s Utopia (1515): “in Utopia where every man has a right to everything, they all know that if care is taken to keep the public stores full, no private man can want anything; for among them there is no unequal distribution, so that no man is poor, none in necessity, and though no man has anything, yet they are all rich; for what can make a man so rich as to lead a serene and cheerful life, free from anxieties.” More recent thinkers such as Rousseau, Fourier and Robert Owen have expressed similar idealistic sentiments about the joys of communal ownership. The common thread in this line of thought is the notion that true social justice and the greater good are somehow incompatible with the individualized ownership of property.

This utopian line of reasoning has had a tough innings in the 20th century. Friedrich Hayek1, amongst others, has attacked it in theoretical realm, while in the practical world organized socialism has failed to deliver on its utopian promise2: where far from encouraging cooperation, socialism in the 20th century has been associated with political authoritarianism and, in a number of celebrated cases, a stifling ‘beggar thy neighbour’ attitude – clearly not what idealists intended.

Aristotle’s Perspective

Given the experience of the past century we may perhaps have been wiser to take counsel from Aristotle, who saw advantages in private property ownership, and went so far as relating the presence of private ownership to both the willingness and ability of humans to cooperate.

Aristotle felt that private ownership was superior to communal ownership in important ways: “Property should be in a certain sense common, but, as a general rule, private; for, when everyone has a distinct interest, men… will make more progress, because every one will be attending to his own business.3” Importantly, however, Aristotle observed a relationship between individualized ownership and cooperation. His linkage between ownership and cooperation was pragmatic, simply stated he believed that a man who owns nothing has nothing to share or be generous with, and therefore no ability or incentive to cooperate: “liberality is a matter of property. No one, when men have all things in common, will any longer set an example of liberality or do any liberal action; for liberality consists in the use which is made of property.4”

The ‘Barn Raising’ Tradition Of The Prairie West

Principals such as those expressed above were applied to good effect in the developmental stages of the American Republic. As one of the most successful economic development initiatives in history, 19th century homesteading created a broadly based property owning democracy, which successfully linked individualized ownership with social cooperation in the prairie west.

The Homesteading Act of 18625 was brilliant in its simplicity. An immigrant family arriving on the American frontier a century or so ago could gain access - at no charge - to an underdeveloped asset (160 acres of land), in many cases simply by arriving at the land office and applying. The size and nature of the homesteading asset varied over time but the principal was wonderfully sensible: a homestead needed to be large enough to financially support a hardworking family. The possession of this asset engendered a great pride of ownership amongst new immigrants, but homesteading’s success was due in large part to it’s ability to leverage the labour expended in their exertions; building buildings, clearing land and otherwise improving the value of the homestead. A homestead gave the family ownership of an accruing asset that was essentially storing their labour in its escalating value, as well the homestead was a source of income from the production and sale of grain, cattle etc, and – no less important - a ready built-in subsistence for their family. As a consequence there was little doubt as to the motivation in homesteading; asset ownership essentially compounded the utility value of labour; which goes some way to explaining why homesteaders were so highly motivated and hard working.

Making under-utilized land assets available to as many deserving people as possible in a young America created a win-win situation. More importantly the subtleties of the homesteading model were deliberately designed to encourage cooperation6 on the prairie west. Ownership of a homestead was conditional, with full title passing only upon the achievement of various milestones; a minimum (usually five year) tenure, the clearing of a specified amount of land, the planting of various crops etc. Now many of the milestones in homesteading could be met by the family themselves, but building a barn generally required the neighbours’ help. As a consequence a cooperative ‘Barn Raising’ tradition spontaneously emerged amongst homesteaders in the prairie west, as a direct result of the need to meet this obligation both individually and collectively.

There is no doubt that behind prairie cooperation was the allure of individual ownership, with the financial and social independence it created. But homesteading seemed to reinforce the Aristotelian premise; the promise of ownership encouraged prairie families of many differing backgrounds and nationalities to cooperate with each other to both individual and collective advantage. And although the motivations may have been complex, ownership gave immigrants both the means and the interest to cooperate. And collaborate they did, the homesteading experience helped create a sense of community spirit and cooperation that survives on the western prairies to this day.

The Cooperation in Competition

Homesteading was a wonderfully constructed program, but does the presence of private ownership encourage cooperation in modern economies in general? Let’s face it market capitalism is characterized by the private ownership of property. Property interests when they arrive in a market situation, necessarily collide. It’s no surprise then that ‘competition’ (and not cooperation) is considered as the primary driver of market capitalism; with cooperation (where it is considered at all) a distant unrelated consequence.

Competition is adversarial by definition; it is accepted in western economies on the basis that it has (over several centuries) demonstrated an ability to allocate scarce resources efficiently and relatively impartially. However, while there is general agreement that competition is a somewhat necessary evil, few appreciate the extent to which market competition and cooperation are entwined, and in many ways co-dependent. Importantly for our discussion competition, precisely because it is rooted in the rights and vulnerabilities of ownership, tends (almost in spite itself) to advance the Aristotelian premise and encourage human cooperation.

To start with, before business-like competition can even begin there needs to be an initial act of cooperation. The agreement to have rules, to limit or mitigate the use (or threat) of force constitutes a foundational act of social cooperation, essential to the effectiveness of market capitalism. This cooperation is rooted in the sensible desire of competitors to place boundaries on the competitive struggle. The reasons for this are fairly straightforward. Where there are no rules - no mutually agreed ethical limitations - competition tends to extremes. Consider competing against a Colombian drug gang or the Mafia. In these criminal situations competition is a very high-risk undertaking; competitors, when they do emerge, quickly become the hunter or the hunted – there being no middle ground in a winner takes all struggle.

Consider more conventional commerce in the absence of this foundational cooperation: present day Russia comes to mind. Pity the fate of Canadian oil company Norex Petroleum, who at one point a few years ago owned a majority interest in Yugraneft, a Russian oil company. One day in July of 2001 thugs armed with AK 47s arrived at their board meeting and, after spraying the room with fire, forced a takeover resolution through the board. That completed, the competitor then proceeded to occupy the company's headquarters in Siberia and seize its main asset, a nearby oil field7. Pretty extreme. Let’s face it, even the most ‘hostile’ of takeovers in the west, pale in comparison to armed assaults. The truth is for capitalist type competition to be effective there must be limits based upon a generalized respect for individual ‘rights’8. Indeed, even accepting the need for adversarial behaviour in capitalism, it is clear that the willingness and ability to compete depends upon an underlying civil consensus, a degree of social cooperation that is singularly lacking on the Siberian frontier.

The Presumption of Equality

Competition, as we understand it in the west, is really only possible in a civil, rule’s based society, but the theory of market competition also presumes an approximate equality in ‘rights’ between competitors in exchange situations: another advanced form of social cooperation. Consider the prospect of competition in an aristocratic society between a feudal lord and his penniless dependent serf. The inequality is most obvious in wealth and stature, ownership and entitlement are united in the former and violently absence in the latter. In this admittedly extreme situation there is no basis for equality, and therefore no possibility for meaningful competition. In general, in economies where inequality is institutionalized through social custom or law, competition is discouraged because the outcome of any meaningful engagement is a forgone conclusion.

In modern democratic economies, the equality of rights is expressed through the openness of the competitive playing field. Capitalist economies generate competitors large and small; they maintain a more or less level playing field by ensuring an equality of access to markets and consumers. In open market economies, companies as large and prestigious as General Motors are forced to compete on more or less equal terms with many smaller, often nimbler competitors. Indeed GM’s major competitor today, Toyota was a mere speck on the horizon thirty years ago when it began to seriously challenge GM’s market share. In tolerating an equal standing with new more innovative competitors, established companies (with powerful vested interests) in our capitalist economy agree to cooperate, in this sense to sacrifice some part of their own ultimate power for the greater economic good9. While this may seem altruistic, it is really the old republican notion that respecting others’ rights (property or otherwise) is a necessary precondition to ensuring the preservation of one’s own rights.

All capitalist economies depend upon a generalized acceptance of this principal (to some degree) in order to function optimally, however let’s not forget that there are powerful property related incentives to the contrary. Indeed even Adam Smith warned against certain types of ‘cooperation’ between merchants: “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 contrivance to raise prices.10” Ultimately, however, all these so called ‘cooperative’ activities, price-fixing agreements, cartels, arrangements to reduce capacity or quotas to restrict imports etc, are actions undertaken by groups of producers (or governments) to betray someone else’s rights (competitors or consumers). In deliberately advancing particular and not general rights, this is selfishness masquerading as cooperation11. Ironically it is the lack of this equality of rights and social cooperation that leads to stagnation in socialist and other restrictive economies12.

However, as important as this foundational cooperation has been, it is only part of the story. Modern capitalism continues to evolve along Aristotelian lines, demonstrating a tendency as it advances to even greater cooperation.

Cooperation Advancing as Capitalism Evolves

Clearly a degree of adversarial behaviour is unavoidable in market economies if the principal of rights and the equality of rights are to be respected, however almost from the beginning, governments have worked to mitigate the more counter-productive elements of competition in their economies. Elements which if allowed to escalate without restraint would impinge property rights, discouraging or reducing active participation in the market. Two principles, formed by the interests of property ownership have had a large influence shaping the character of market competition over the ages. Principle number one, predicated on the equality of property rights, is the notion that competition should be open and non-discriminatory. Principle number two is a risk management principal suggesting that: as individuals, the less we have to lose the more likely we are and the more willing we are to compete aggressively.

One of the greatest threats to open and fair competition is the presence of monopolistic practices, behaviour that restricts access to markets even in the presence of willing participants. Capitalism in the late 19th and early 20th century responded vigorously to just such a challenge in order to maintain open and free competition. Antitrust legislation was introduced in the United States to combat the growth of monopolistic ‘trusts’ that emerged initially in rail transport, and later in sugar, steel, tobacco and most importantly oil. This legislation had as its objective the preservation of an open and free competitive economy, which was being threatened by heavy-handed practices of the trusts, most famously John D. Rockefeller’s Standard Oil Trust13.

In respect to managing individual risk, one of the earliest champions was Edward Pleydell-Bouverie who, as President of the Board of Trade, forced through a conservative United Kingdom Parliament the world’s first Limited Liability Act in 185514, a risk reduction factor that opened the door to unprecedented growth in Victorian England. Governments have ever since (for better or worse) played a significant role maintaining openness and non-discrimination in the economic system. Where they have been successful, legislation has modified competitive forces in ways that have managed individual’s risk while increasing their willingness and ability to participate actively in the market.

But many other restraints on competition, which some would describe as cooperative, have occurred organically from within the capitalist system as it has evolved over time. For instance, the present transition from industrial to knowledge-based economies is encouraging greater cooperation up and down the supply chain. Value in a ‘knowledge’ economy is found increasingly in intangibles; assets which are unlimited in quantity and basically accessible to anyone with the ability to innovate. As a result, competitive advantage is more likely to be found today in people, in the ability to innovate, as opposed to the machines of the industrial age. As a consequence modern management is increasingly focused on ways of unleashing the innovative potential of their employees, and building or sustaining a variety of complex win-win supply-chain relationships. As a result ‘co-opetition’ is more characteristic of modern business today than traditional competition. These changes represent quite a change from the past, when corporations felt wholly justified in mistreating employees, beating-up on suppliers, stealing trade secrets, etc. And while incidences of cutthroat competition still occur, (Microsoft comes to mind in more than a few cases recently) the post-industrial economy today is increasing the need and value of ‘soft power’, rewarding the ability to network, innovate and build collaborative relationships.

The question is, does this observable advance in the degree of cooperation in capitalism, have a relationship to ownership? Well, over the past century there has been a vast widening in the estate of ownership in western economies; massive increases in the numbers and proportions of individuals who own their own home15, own shares in public companies, or who have more direct ownership of small privately-held businesses16. More indirectly, ownership of various forms of ‘human capital’ have been realized in western society due to the almost universal commitment by western government to advanced education and technical training of all sorts. As a result the proportion of individuals ‘owning’ economic assets and able to compete in today’s economy is much greater than it was in the past. All this has occurred despite a recent and quite staggering concentration of wealth upward in the economy.17 As a result (and despite abundant evidence to the contrary) there does seem to be evidence that these changes do seem to reinforce the Aristotelian premise.

Capitalist Utopianism?

This is all very good news, but in order to avoid falling into a kind of capitalist utopianism, it’s appropriate at this point to remember that Aristotle’s observations on property and cooperation were just that. He understood that property ownership gave individuals the means and ability to cooperate, but not the certainty that they would. He established a causal link between the private ownership of property and increased cooperation, but had little to say on the process, the mechanism to achieve that cooperation. And let’s not forget that private ownership of property is a legal form of exclusion, which can lead on many occasions to self-centredness and mean spiritedness.

Ownership of property is about ‘rights’, the possession of these rights can be greatly empowering for individuals and is clearly enriching for society, but the flip side of the coin of ownership rights is responsibility. There are well-understood personal responsibilities in private ownership that are associated with the care and productive use of private property, but there are also important societal interests that need to be met as well, conduct which Roger Bootle described as “a balance between self-seeking and competitive behaviour on the one hand and the forces of community and solidarity on the other.18” As was the case with homesteading, private ownership can lead to increased cooperation naturally if the system itself is structured to align individual and social interests. That there are abuses of private ownership is well known. But as Aristotle observed, capitalism can be a positive moral force, encouraging greater human cooperation. Achieving this desirable end in modern economies would seem to be less a function of utopianism (either of the socialist or capitalist variety) than the logical outcome of individual interests combined at the political level with policy calculations of a progressive but thoroughly pragmatic nature.

1 F.A Hayek, The Fatal Conceit, The Errors of Socialism, Routledge Press, 1988

2 The Failure of Socialism and Lessons for America, by Richard M. Ebeling, March 1993 details in rather graphic terms the failure of socialism on the Soviet model in three critical areas: (1) the theory of a planned economy, (2) the belief in collective or group rights, and (3) the notion of socialized or state-provided social services. Whether Mr. Ebeling will be as forthright and analytical in documenting the failure of modern capitalism remains to be seen.

3 Aristotle, The Politics, Penguin Classics, see Book II, section V on the Ownership of Property, specifically page 115 of the 1951 edition

4 Aristotle, IBID, page 115 of the 1951 edition. It is admitted that Aristotle had decidedly unpopular views on property, for instance he including both wives and slaves as legitimate forms of privately own-able property. Nevertheless his observations on the ethical impact of private ownership are well worth a read and more than relevant to the modern reader.

5 http://www.nps.gov/home/homestead_act.html President Lincoln signed the Homesteading Act into law in May of 1862, literally in the fire of Civil War as a means of preventing the western spread of slavery, in essence guaranteeing the development a property owning liberal democracy in the American West. A similarly constructed Homesteading act was passed shortly thereafter (with similar effect) in the newly formed Dominion of Canada (Confederated 1867) by Sir John A. MacDonald’s Conservative government.

6 Homesteading also played an important role in nation building in America. Between the end of the Civil War in 1865 and the turn of the 20th century 25 million immigrants arrived in the United States hoping to acquire ‘free’ land. These immigrants, mostly poor and from dozens of differing nations, were, through their prairie homesteading experience, welded into a nation: property-owning citizens with a great pride in their ‘new’ American identity.

7 http://www.globalethics.org/newsline/members/issue.tmpl?articleid=0716011345348 Ironically the Russian parties involved were also minority shareholders of Yugraneft. All this took place in the week of July 8, 2001; the competitor/shareholder seized the board, its assets and took control of the $30 million bank account at the point of a gun. It will come as no surprise to learn that the competitor is linked with a regional governor who has close ties to the Kremlin.

8 Certainly this must include a respect for property rights, but the respect must extend beyond the simple notion of property to including more basic human rights, including the right to engage in commerce without the imposition of violence and the threat of violence.

9 Trapped in the lawless Chinese business jungle, Joseph Kahn, The New York Times. (Tuesday, November 1, 2005) For those who doubt the importance of this initial act of cooperation, consider the fate of poor David Ji, a Chinese-American electronics entrepreneur, who is presently locked in a Chinese prison after falling into dispute with a powerful politically connected corporation in China.

10 Book I, Chapter X, page 144. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, published 1976 by the University of Chicago Press, Edited by Edwin Cannan, first published in 1904 by Methuen and Co.

11 German philosopher Immanuel Kant (1724 – 1804) advanced a premise that any act if it is to be consider ethical should pass a universality test, which he called his categorical imperative: “Act only on the maxim by which you can at the same time will that it should become a universal law.”

12 Recent developments in Russia, in particular, are chilling. Political leaders are returning to a bias in favor of certain producers, or actually drawing certain property rights back into government control itself. The violation of property rights and the principal of equality, while politically expedient given the circumstances will lead to demands down the road for greater openness and access as the rights pendulum in Russia swings back, as it eventually must.

13 http://www.socialstudieshelp.com/Lesson_46_Notes.htm, this educational website provides a useful summary of major events around the Antitrust issue and the evolving logic of social responsibility in commerce, even by private interests.

14 The Company: a Short History of a Revolutionary Idea, John Micklethwait and Adrian Wooldridge, A Modern Library Chronicles Book, New York, 2003, p 51. The Limited Liability Act of 1855 granted limited liability to incorporated companies. Robert Lowes, who replaced Edward Pleydell-Bouverie as President of the Board of Trade championed the landmark Joint Stock Companies Act of 1856, which removed all restrictions and qualifications on limited liability in the United Kingdom, setting the stage for vastly increased middle class participation in commerce and as he described it, a substantial withdrawal of the state from the marketplace.

15 http://www.ncbi.nlm.nih.gov/entrez/query.fcgi?cmd=Retrieve&db=PubMed&list_uids=2731620&dopt=Abstract, in the US and the UK home ownership today stands at about 70%, this is up from approximately 30% home ownership at the end of the 19th century.

16 http://clinton4.nara.gov/WH/Accomplishments/Small_Business.html, again US government statistics support an explosive growth in small business ownership. These statistics from the Clinton era are typical of the late 90’s. Similar trends are present in the UK and other western economies.

17 http://www.endgame.org/primer-wealth.html, The facts are indeed staggering and could potentially be fatal to western capitalism, In the late 1970s, the top one percent of the US population held 13 percent of the wealth; in 1995 it held 38 percent, today it is over 40%.

18 Roger Bootle, Money for Nothing, 2005, revised edition, see his excellent chapter on Good Governance P 174.