Chapter 30: The Ethics of Capitalism

1. A Socialist Smear Word

It is commonly assumed that there is little relation between the ethical and the economic point of view, or between Ethics and Economics. But they are, in fact, intimately related. Both are concerned with human action, (1) human conduct, (2) human decision, human choice. Economics is a description, explanation, or analysis of the determinants, consequences, and implications of human action and human choice. But the moment we come to the justification of human actions and decisions, or to the question of what an action or decision ought to be, or to the question whether the consequences of this or that action or rule of action would be more desirable in the long run for the individual or the community, we have entered the realm of Ethics. This is also true the moment we begin to discuss the desirability of one economic policy as compared with another.

Ethical conclusions, in brief, cannot be arrived at independently of, or in isolation from, analysis of the economic consequences of institutions, principles, or rules of action. The economic ignorance of most ethical philosophers, and the common failure even of those who have understood economic principles to apply them to ethical problems (on the assumption that economic principles are either irrelevant or too materialistic and mundane to apply to such a lofty and spiritual discipline as Ethics), have stood in the way of progress in ethical analysis, and account in part for the sterility of so much of it.

There is hardly an ethical problem, in fact, without its economic aspect. Our daily ethical decisions are in the main economic decisions, and nearly all our daily economic decisions have, in turn, an ethical aspect.

Moreover, it is precisely around questions of economic organization that most ethical controversy turns today. The main challenge to our traditional "bourgeois" ethical standards and values comes from the Marxists, the socialists, and the Communists. What is under attack is the capitalist system; and it is attacked mainly on ethical grounds, as being materialistic, selfish, unjust, immoral, savagely competitive, callous, cruel, destructive. If the capitalistic system is really worth preserving, it is futile today to defend it merely on technical grounds (as being more productive, for example) unless we can show also that the socialist attacks on ethical grounds are false and baseless.

We find ourselves confronted at the very beginning of such a discussion with a serious semantic handicap. The very name of the system was given to it by its enemies. It was intended as a smear word. The name is comparatively recent. It does not appear in The Communist Manifesto of 1848 because Marx and Engels had not yet thought of it. It was not until half a dozen years later that either they or one of their followers had the happy idea of coining the word. It exactly suited their purposes. Capitalism was meant to designate an economic system that was run exclusively by and for the capitalists. It still keeps that built-in connotation. Hence it stands self-condemned. It is this name that has made capitalism so hard to defend in popular argument. The almost complete success of this semantic trick is a major explanation of why many people have been willing to die for Communism but so few have been willing to die for "capitalism."

There are at least half-a-dozen names for this system, any one of which would be more appropriate and more truly descriptive: the System of Private Ownership of the Means of Production, the Market Economy, the Competitive System, the Profit-and-Loss System, Free Enterprise, the System of Economic Freedom. Yet to try at this late date to discard the word Capitalism may not only be futile but quite unnecessary. For this intended smear word does at least unintentionally call attention to the fact that all economic improvement, progress, and growth is dependent upon capital accumulation -- upon constant increase in the quantity and improvement in the quality of the tools of production -- machinery, plant, and equipment. Now the capitalistic system does more to promote this growth than any alternative.

2. Private Property and Free Markets

Let us see what the basic institutions of this system are. We may subdivide them for convenience of discussion into (1) private property, (2) free markets, (3) competition, (4) division and combination of labor, and (5) social cooperation. As we shall see, these are not separate institutions. They are mutually dependent: each implies the other, and makes it possible.

Let us begin with private property. It is neither a recent nor an arbitrary institution, as some socialist writers would have us believe. Its roots go as far back as human history itself. Every child reveals a sense of property with regard to his own toys. Scientists are just beginning to realize the astonishing extent to which some sense or system of property rights or territorial rights prevails even in the animal world.

The question that concerns us here, however, is not the antiquity of the institution, but its utility. When a man's property rights are protected, it means that he is able to retain and enjoy in peace the fruits of his labor. This security is his main incentive, if not his only incentive, to labor itself. If anyone were free to seize what the farmer had sown, cultivated, and raised, the farmer would no longer have any incentive to sow or to raise it. If anyone were free to seize your house after you had built it, you would not build it in the first place. All production, all civilization, rests on recognition of and respect for property rights. A free enterprise system is impossible without security of property as well as security of life. Free enterprise is possible only within a framework of law and order and morality. This means that free enterprise presupposes morality; but, as we shall later see, it also helps to preserve and promote it.

The second basic institution of a capitalist economy is the free market. The free market means the freedom of everybody to dispose of his property, to exchange it for other property or for money, or to employ it for further production, on whatever terms he finds acceptable. This freedom is of course a corollary of private property. Private property necessarily implies the right of use for consumption or for further production, and the right of free disposal or exchange.

It is important to insist that private property and free markets are not separable institutions. A number of socialists, for example, think they can duplicate the functions and efficiencies of the free market by imitating the free market in a socialist system -- that is, in a system in which the means of production are in the hands of the State.

Such a view rests on mere confusion of thought. If I am a government commissar selling something I don't really own, and you are another commissar buying it with money that really isn't yours, then neither of us really cares what the price is. When, as in a socialist or communist country, the heads of mines and factories, of stores and collective farms, are mere salaried government bureaucrats, who buy foodstuffs or raw materials from other bureaucrats and sell their finished products to still other bureaucrats, the so-called prices at which they buy and sell are mere bookkeeping fictions. Such bureaucrats are merely playing an artificial game called "free market." They cannot make a socialist system work like a free-enterprise system merely by imitating the so-called free-market feature while ignoring private property.

This imitation of a free-price system actually exists, in fact, in Soviet Russia and in practically every other socialist or communist country. But insofar as this mock-market economy works -- that is, insofar as it helps a socialist economy to function at all -- it does so because its bureaucratic managers closely watch what commodities are selling for on free world markets, and artificially price their own in conformity. Whenever they find it difficult or impossible to do this, or neglect to do it, their plans begin to go more seriously wrong. Stalin himself once chided the managers of the Soviet economy because some of their artificially-fixed prices were out of line with those on the free world market.

I should like to emphasize that in referring to private property I am not referring merely to personal property in consumption goods, like a man's food, toothbrush, shirt, piano, home, or car. In the modern market economy private ownership of the means of production is no less fundamental. Such ownership is from one point of view a privilege; but it also imposes on the owners a heavy social responsibility. The private owners of the means of production cannot employ their property merely for their own satisfaction; they are forced to employ it in ways that will promote the best possible satisfaction of consumers. If they do this well, they are rewarded by profits, and a further increase in their ownership; if they are inept or inefficient, they are penalized by losses. Their investments are never safe indefinitely. In a free-market economy the consumers, by their purchases or refusals to purchase, daily decide afresh who shall own productive property and how much he shall own. The owners of productive capital are compelled to employ it for the satisfaction of other people's wants.(3) A privately owned railway is as much "dedicated to a public purpose" as a government-owned railway. It is likely in fact to achieve such a purpose far more successfully, not only because of the rewards it will receive for performing its task well, but even more because of the heavy penalties it will suffer if it fails to meet the needs of shippers or travelers at competitive costs and prices.

3. Competition

The foregoing discussion already implies the third integral institution in the capitalist system -- competition. Every competitor in a private-enterprise system must meet the market price. He must keep his unit production costs below this market price if he is to survive. The further he can keep his costs below the market price the greater his profit margin. The greater his profit margin the more he will be able to expand his business and his output. If he is faced with losses for more than a short period he cannot survive. The effect of competition, therefore, is to take production constantly out of the hands of the less competent managers and put it more and more into the hands of the more efficient managers. Putting the matter in another way, free competition constantly promotes more and more efficient methods of production: it tends constantly to reduce production costs. As the lowest-cost producers expand their output they cause a reduction of prices and so force the highest-cost producers to sell their product at a lower price, and ultimately either to reduce their costs or to transfer their activities to other lines.

But capitalistic or free-market competition is seldom merely competition in lowering the cost of producing a homogeneous product. It is almost always competition in improving a specific product. And in the last century it has been competition in introducing and perfecting entirely new products or means of production -- the railroad, the dynamo, the electric light, the motor car, the airplane, the telegraph, the telephone, the phonograph, the camera, motion pictures, radio, television, refrigerators, air conditioning, an endless variety of plastics, synthetics, and other new materials. The effect has been enormously to increase the amenities of life and the material welfare of the masses.

Capitalistic competition, in brief, is the great spur to improvement and innovation, the chief stimulant to research, the principal incentive to cost reduction, to the development of new and better products, and to improved efficiency of every kind. It has conferred incalculable blessings on mankind.

And yet, in the last century, capitalistic competition has been under constant attack by socialists and anti-capitalists. It has been denounced as savage, selfish, cutthroat, and cruel. Some writers, of whom Bertrand Russell is typical, constantly talk of business competition as if it were a form of "warfare," and practically the same thing as the competition of war. Nothing could be more false or absurd -- unless we think it reasonable to compare competition in mutual slaughter with competition in providing consumers with new or better goods and services at cheaper prices.

The critics of business competition not only shed tears over the penalties it imposes on inefficient producers but are indignant at the "excessive" profits it grants to the most successful and efficient. This weeping and resentment exist because the critics either do not understand or refuse to understand the function that competition performs for the consumer and therefore for the national welfare. Of course there are isolated instances in which competition seems to work unjustly. It sometimes penalizes amiable or cultivated people and rewards churlish or vulgar ones. No matter how good our system of rules and laws, isolated cases of injustice can never be entirely eliminated. But the beneficence or harmfulness, the justice or injustice, of institutions must be judged by their effect in the great majority of cases -- by their over-all result. We shall return to this point later.

What those who indiscriminately deplore "competition" overlook is that everything depends upon what the competition is in, and the nature of the means it employs. Competition per se is neither moral nor immoral. It is neither necessarily beneficial nor necessarily harmful. Competition in swindling or in mutual slaughter is one thing; but competition in philanthropy or in excellence -- the competition between a Leonardo da Vinci and a Michelangelo, between a Shakespeare and a Ben Jonson, a Haydn and a Mozart, a Verdi and a Wagner, a Newton and a Leibnitz, is quite another. Competition does not necessarily imply relations of enmity, but relations of rivalry, of mutual emulation and mutual stimulation. Beneficial competition is indirectly a form of cooperation.

Now what the critics of economic competition overlook is that -- when it is conducted under a good system of laws and a high standard of morals -- it is itself a form of economic cooperation, or rather, that it is an integral and necessary part of a system of economic cooperation. If we look at competition in isolation, this statement may seem paradoxical, but it becomes evident when we step back and look at it in its wider setting. General Motors and Ford are not cooperating directly with each other; but each is trying to cooperate with the consumer, with the potential car buyer. Each is trying to convince him that it can offer him a better car than its competitor, or as good a car at a lower price. Each is "compelling" the other -- or, to state it more accurately, each is stimulating the other -- to reduce its production costs and to improve its car. Each, in other words, is "compelling" the other to cooperate more effectively with the buying public. And so, indirectly, -- triangularly, so to speak -- General Motors and Ford cooperate. Each makes the other more efficient.

Of course this is true of all competition, even the grim competition of war. As Edmund Burke put it: "He that wrestles with us strengthens our nerves and sharpens our skill. Our antagonist is our helper." But in free-market competition, this mutual help is also beneficial to the whole community.

For those who still think this conclusion paradoxical, it is merely necessary to consider the artificial competition of games and sport. Bridge is a competitive card game, but it requires the cooperation of four people in consenting to play with each other; a man who refuses to sit in to make a fourth is considered non-cooperative rather than noncompetitive. To have a football game requires the cooperation not only of eleven men on each side but the cooperation of each side with the other -- in agreeing to play, in agreeing on a given date, hour, and place, in agreeing on a referee, and in agreeing to abide by a common set of rules. The Olympic games would not be possible without the cooperation of the participating nations. There have been some very dubious analogies in the economic literature of recent years between economic life and "the theory of games"; but the analogy which recognizes that in both fields competition exists within a larger setting of cooperation (and that desirable results follow), is valid and instructive.

4. The Division of Labor

I come now to the fourth institution I have mentioned as part of the capitalist system -- the division and combination of labor. The necessity and beneficence of this was sufficiently emphasized by the founder of political economy, Adam Smith, who made it the subject of the first chapter of his great work, The Wealth of Nations. In the very first sentence of that great work, indeed, we find Adam Smith declaring: "The greatest improvement in the productive powers of labor, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed or applied, seem to have been the effects of the division of labor." (4)

Smith goes on to explain how the division and subdivision of labor leads to improved dexterity on the part of individual workers, in the saving of time commonly lost in passing from one sort of work to another, and in the invention and application of specialized machinery. "It is the great multiplication of the productions of all the different arts, in consequence of the division of labor," he concludes, "which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people." (5)

Nearly two centuries of economic study have only intensified this recognition. "The division of labor extends by the realization that the more labor is divided the more productive it is." (6) "The fundamental facts that brought about cooperation, society, and civilization and transformed the animal man into a human being are the facts that work performed under the division of labor is more productive than isolated work andthat man's reason is capable of recognizing this truth." (7)

5. Social Cooperation

Though I have put division of labor ahead of social cooperation, it is obvious that they cannot be considered apart. Each implies the other. No can can specialize if he lives alone and must provide for all his own needs. Division and combination of labor already imply social cooperation. They imply that each exchanges part of the special product of his labor for the special product of the labor of others. But division of labor, in turn, increases and intensifies social cooperation. As Adam Smith put it: "The most dissimilar geniuses are of use to one another; the different produces of their respective talents, by the general disposition to truck, barter, and exchange, being brought, as it were, into a common stock, where every man may purchase whatever part of the produce of other men's talents he has occasion for." (8)

Modern economists make the interdependence of division of labor and social cooperation more explicit: "Society is concerted action, cooperation.... It substitutes collaboration for the -- at least conceivable -- isolated life of individuals. Society is division of labor and combination of labor.... Society is nothing but the combination of individuals for cooperative effort." (9)

Adam Smith also recognized this clearly:

In civilized society [Man] stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons.... Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favor, and show them it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this: Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. 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 advantages. (10)

What Adam Smith was pointing out in this and other passages is that the market economy is as successful as it is because it takes advantage of self-love and self-interest and harnesses them to production and exchange. In an even more famous passage, Smith pressed the point further:

The annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of the industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavors as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labors to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, 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. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more efficiently than when he really intends to promote it. (11)

This passage has become almost too famous for Smith's own good. Scores of writers who have heard nothing but the metaphor "an invisible hand" have misinterpreted or perverted its meaning. They have taken it (though he used it only once) as the essence of the whole doctrine of The Wealth of Nations. They have interpreted it as meaning that Adam Smith, as a Deist, believed that the Almighty interfered in some mysterious way to insure that all self-regarding actions would lead to socially beneficial ends. This is clearly a misinterpretation. "The fact that the market provides for the welfare of each individual participating in it is a conclusion based on scientific analysis, not an assumption upon which the analysis is based." (12)

Other writers have interpreted the "invisible hand" passage as a defense of selfishness, and still others as a confession that a free-market economy is not only built on selfishness but rewards selfishness alone. And Smith was at least partly to blame for this latter interpretation. He failed to make explicit that only insofar as people earned their livings in legal and moral ways did they promote the general interest. People who try to improve their own fortunes by chicanery, swindling, robbery, blackmail, or murder do not increase the national income. Producers increase the national welfare by competing to satisfy the needs of consumers at the cheapest price. A free economy can function properly only within an appropriate legal and moral framework.

And it is a profound mistake to regard the actions and motivations of people in a market economy as necessarily and narrowly selfish. Though Adam Smith's exposition was brilliant, it could easily be misinterpreted. Fortunately, at least a few modern economists have further clarified the process and the motivation: "The economic life . . . consists of all that complex of relations into which we enter with other people, and lend ourselves or our resources to the furtherance of their purposes, as an indirect means of furthering our own." (13) Our own purposes are necessarily our own; but they are not necessarily purely selfish purposes. "The economic relation . . . or business nexus, is necessary alike for carrying on the life of the peasant and the prince, of the saint and the sinner, of the apostle and the shepherd, of the most altruistic and the most egoistic of men.... Our complex system of economic relations puts us in command of the cooperation necessary to accomplish our purposes." (14)

"The specific characteristic of an economic relation," according to Wicksteed, "is not its 'egoism,' but its 'non-tuism.' " (15) He explains:

If you and I are conducting a transaction which on my side is purely economic, I am furthering your purposes, partly or wholly perhaps for my own sake, perhaps entirely for the sake of others, but certainly not for your sake. What makes it an economic transaction is that I am not considering you except as a link in the chain, or considering your desires except as the means by which I may gratify those of some one else -- not necessarily myself. The economic relation does not exclude from my mind everyone but me, it potentially includes every one but you. (16)

There is a certain element of arbitrariness in making "nontuism" the essence of "the economic relation." (17) The element of truth in this position is merely that a "strictly economic" relation is by definition an "impersonal" relation. But one of Wicksteed's great contributions was to dispose of the persistent idea that economic activity is exclusively egoistic or selfregarding. (18) The real basis of all economic activity is cooperation. As Mises has put it:

Within the frame of social cooperation there can emerge between members of society feelings of sympathy and friendship and a sense of belonging together. These feelings are the source of man's most delightful and most sublime experiences.... However, they are not, as some have asserted, the agents that have brought about social relationships. They are fruits of social cooperation, they thrive only within its frame; they did not precede the establishment of social relations and are not the seed from which they spring....

The characteristic feature of human society is purposeful cooperation.... Human society ... is the outcome of a purposeful utilization of a universal law determining cosmic becoming, viz., the higher productivity of the division of labor....

Every step by which an individual substitutes concerted action for isolated action results in an immediate and recognizable improvement in his conditions. The advantages derived from peaceful cooperation and division of labor are universal. They immediately benefit every generation, and not only later descendants. For what the individual must sacrifice for the sake of society he is amply compensated by greater advantages. His sacrifice is only apparent and temporary; he foregoes a smaller gain in order to reap a greater one later.... When social cooperation is intensified by enlarging the field in which there is division of labor or when legal protection and the safeguarding of peace are strengthened, the incentive is the desire of all those concerned to improve their own conditions. In striving after his own -- rightly understood -- interests the individual works toward an intensification of social cooperation and peaceful intercourse....

The historical role of the theory of the division of labor as elaborated by British political economy from Hume to Ricardo consisted in the complete demolition of all metaphysical doctrines concerning the origin and operation of social cooperation. It consummated the spiritual, moral and intellectual emancipation of mankind inaugurated by the philosophy of Epicureanism. It substituted an autonomous rational morality for the heteronomous and intuitionist ethics of older days. Law and legality, the moral code and social institutions are no longer revered as unfathomable decrees of Heaven. They are of human origin, and the only yardstick that must be applied to them is that of expediency with regard to human welfare. The utilitarian economist does not say: Fiat justitia, pereat mundus. He says: Fiat justitia, ne pereat mundus. He does not ask a man to renounce his well-being for the benefit of society. He advises him to recognize what his rightly understood interest are. (19)

Mises expounded the same point of view in his earlier book, Socialism . Here also, and in contradiction to the Kantian thesis that it is wrong ever to treat others merely as means, he emphasizes the same theme that we have seen in Wicksteed:

Liberal social theory proves that each single man sees in all others, first of all, only means to the realization of his purposes, while he himself is to all others a means to the realization of their purposes; that finally, by this reciprocal action, in which each is simultaneously means and end, the highest aim of social life is attained -- the achievement of a better existence for everyone. As society is only possible if everyone, while living his own life, at the same time helps others to live, if every individual is simultaneously means and end; if each individual's well-being is simultaneously the condition necessary to the well-being of the others, it is evident that the contrast between I and thou, means and end, automatically is overcome. (20)

Once we have recognized the fundamental principle of social cooperation, we find the true reconcilation of "egoism" and "altruism." Even if we assume that everyone lives and wishes to live primarily for himself, we can see that this does not disturb social life but promotes it, because the higher fulfilment of the individual's life is possible only in and through society. In this sense egoism could be accepted as the basic law of society. But the basic fallacy is that of assuming a necessary incompatibility between "egoistic" and "altruistic" motives, or even of insisting on a sharp distinction between them. As Mises puts it:

This attempt to contrast egoistic and altruistic action springs from a misconception of the social interdependence of individuals. The power to choose whether my actions and conduct shall serve myself or my fellow beings is not given to me -- which perhaps may be regarded as fortunate. If it were, human society would not be possible. In the society based on division of labor and co-operation, the interests of all members are in harmony, and it follows from this basic fact of social life that ultimately action in the interests of myself and action in the interests of others do not conflict, since the interests of individuals come together in the end. Thus the famous scientific dispute as to the possibility of deriving the altruistic from the egoistic motives of action may be regarded as definitely disposed of.

There is no contrast between moral duty and selfish interests. What the individual gives to society to preserve it as society, he gives, not for the sake of aims alien to himself, but in his own interest. (21)

This social cooperation runs throughout the free-market system. It exists between producer and consumer, buyer and seller. Both gain from the transaction, and that is why they make it. The consumer gets the bread he needs; the baker gets the monetary profit which is both his stimulus to bake the bread and the necessary means to enable him to bake more. In spite of the enormous labor-union and socialist propaganda to the contrary, the relation of employer and employed is basically a cooperative relation. Each needs the other. The more efficient the employer, the more workers he can hire and the more he can offer them. The more efficient the workers, the more each can earn, and the more successful the employer. It is in the interest of the employer that his workers should be healthy and vigorous, well fed and well housed, that they should feel they are being justly treated, that they will be rewarded in proportion to their efficiency and that they will therefore strive to be efficient. It is in the interest of the worker that the firm for which he works can do so at a profit, and preferably at a profit that both encourages and enables it to expand.

On the "microeconomic" scale, every firm is a cooperative enterprise. A magazine or a newspaper (and as one who has been associated with newspapers and magazines all his working life I can speak with immediate knowledge of this) is a great cooperative organization in which every reporter, every editorial writer, every advertising solicitor, every printer, every deliverytruck driver, every newsdealer, cooperates to play his assigned part, in the same way as an orchestra is a great cooperative enterprise in which each player cooperates in an exact way with his particular instrument to produce the final harmony. A great industrial company, such as General Motors, or the U.S. Steel Corporation, or General Electric -- or, for that matter, any of a thousand others -- is a marvel of continuous cooperation. And on a "macroeconomic" scale, the whole free world is bound together in a system of international cooperation through mutual trade, in which each nation supplies the needs of others cheaper and better than the others could supply their own needs acting in isolation. And this cooperation takes place, both on the smallest and on the widest scale, because each of us finds that forwarding the purposes of others is (though indirectly) the most effective of all means for achieving his own.

Thus, though we may call the chief drive "egoism," we certainly cannot call this a purely egoistic or "selfish" system. It is the system by which each of us tries to achieve his purposes whether those purposes are "egoistic" or "altruistic." The system certainly cannot be called dominantly "altruistic," because each of us is cooperating with others, not primarily to forward the purposes of those others, but primarily to forward his own. The system might most appropriately be called "mutualistic." (See Chapter 13.) In any case its primary requirement is cooperation.

6. Is Capitalism Unjust?

Let us turn now to another consideration. Is the free-market system, the "capitalist" system, just or unjust? Virtually the whole burden of the socialist attack on the "capitalist" system is its alleged injustice -- its alleged "exploitation" of the worker. A book on ethics is not the place to examine that contention fully. Such an examination is a task of economics. I hope the reader will forgive me, therefore, if, instead of examining this socialist argument directly, I merely accept the conclusion of John Bates Clark, in his epoch-making work, The Distribution of Wealth (1899), and refer the reader to that and other works on economics (22) for the supporting arguments for his conclusion.

The general thesis of Clark's work is that, "Free competition tends to give to labor what labor creates, to capitalists what capital creates, and to entrepreneurs what the coordinating function creates.... [It tends] to give to each producer the amount of wealth that he specifically brings into existence." (23)

Clark argues, in fact, that the tendency of a free competitive system is to give "to each what he creates." If this is true, he continues, it not only disposes of the exploitation theory, that "workmen are regularly robbed of what they produce," but it means that the capitalist system is essentially a just system, and that our effort should be, not to destroy it and substitute another utterly different in kind, but to perfect it so that exceptions to its prevalent rule of distribution may be less frequent and less considerable. (24)

Certain qualifications must be made in these conclusions. As Clark himself points out, this principle of "distribution" (25) in the free market represents a tendency. It does not follow that in every instance everyone gets exactly the value of what he has produced or helped to produce. And the value of his contribution that he gets is the market value -- i.e., the value of that contribution as measured by others.

But whatever the shortcomings of this system may be from the requirements of perfect "justice," no superior system has yet been conceived. Certainly, as we shall see in our next chapter, that system is not socialism.

But before we come to our final moral evaluation of this marvelous free-market system, we must notice one other great virtue. It is not merely that it tends constantly to reward individuals in accordance with their specific contribution to production. By the constant play in the market of prices, wages, rents, interest rates, and other costs, relative profit margins or losses, the market tends constantly to achieve not only maximum production but optimum production. That is to say, through the incentives and deterrents provided by these ever-changing relationships of prices and costs, the production of thousands of different commodities and services is synchronized, and a dynamic balance is maintained in the volume of production of each of these thousands of different goods in relation to each other. This balance does not necessarily reflect the wishes of any one individual. It does not necessarily correspond with the utopian ideal of any economic planner. But it does tend to reflect the composite wishes of the whole existing body of producers and consumers. For each consumer, by his purchases or abstentions from purchase, daily casts his vote for the production of more of this commodity and less of that; and the producer is forced to abide by the consumers' decisions. (26)

Having seen what this system does, let us now look at the justice of it a little more closely. It is commonly regarded as "unjust" because the unthinking ideal of "social justice," from time immemorial, has been absolute equality of income. Socialists are never tired of condemning "poverty in the midst of plenty." They cannot rid themselves of the idea that the wealth of the rich is the cause of the poverty of the poor. Yet this idea is completely false. The wealth of the rich makes the poor less poor, not more. The rich are those who have something to offer in return for the services of the poor. And only the rich can provide the poor with the capital, with the tools of production, to increase the output and hence the marginal value of the labor of the poor. When the rich grow richer, the poor grow, not poorer, but richer. This, in fact, is the history of economic progress.

Any serious effort to enforce the ideal of equality of income, regardless of what anyone does or fails to do to earn or create income -- regardless of whether he works or not, produces or not -- would lead to universal impoverishment. Not only would it remove any incentive for the unskilled or incompetent to improve themselves, and any incentive for the lazy to work at all; it would remove even the incentive of the naturally talented and industrious to work or to improve themselves.

We come back once more to the conclusions we reached in the chapter on Justice. Justice is not purely as an end in itself. It is not an ideal that can be isolated from its consequences. Though admittedly an intermediate end, it is primarily a means. Justice, in brief, consists of the social arrangements and rules that are most conducive to social cooperation -- which means, in the economic field, most conducive to maximizing production.

And the justice of these arrangements and rules, in turn, is not to be judged purely by their effect in this or that isolated instance, but (in accordance with the principle first pointed out by Hume) by their over-all effect in the long run.

Practically all arguments for the equal distribution of income tacitly assume that such an equal division would do nothing to reduce the average income; that total income and wealth would remain at least as great as they would have been in a free-market system in which everyone was paid in accordance with his own production or his own contribution to production. This assumption is one of unsurpassable naivete. Such an enforced equal division -- and it could only be achieved by force -- would cause a violent and disastrous drop in production and impoverish the nation that adopted it. Communist Russia was quickly forced to abandon this equalitarian idea; and to the extent that communist countries have tried to adhere to it, their people have paid dearly. But this is to anticipate the discussion in our next chapter.

It may be supposed -- and it is everywhere popularly supposed today -- that there is some "third" system, some "middle-of-the-road" system, that could combine the enormous productivity of a free-market system with the "justice" of a socialist system -- or that could, at least, bring a nearer equality of income and welfare than that produced in a completely free economic system. I can only state here my own conclusion that this is a delusion. If any such middle-of-the-road system did remedy a few specific injustices, it would do so only by creating many more -- and incidentally by reducing total production compared with what a free-market system would achieve. For the basis of this conclusion I must refer the reader to treatises on economics. (27)

7. Is the Market "Ethically Indifferent"?

We come now, however, to a position very frequently taken by economists in recent decades, a position for which Philip H. Wicksteed, in his Common Sense of Political Economy (1910) may have helped to set the fashion. This is that the economic system is an "ethically indifferent instrument." Wicksteed argues for this position in a passage of great eloquence and penetration, from which I quote a substantial portion:

We have now seen that the taint of inherent sordidness which attaches itself in many minds to the economic relation, or even to the study of it, is derived from a faulty conception of its nature. But, on the other hand, the easy optimism that expects the economic forces, if only we give them free play, spontaneously to secure the best possible conditions of life, is equally fallacious, and even more pernicious. It is, indeed, easy to present the working of the economic forces as wholly beneficent. Have we not seen that they automatically organize a vast system of co-operation, by which men who have never seen or heard of each other, and who scarcely realize each other's existence or desires even in imagination, nevertheless support each other at every turn, and enlarge the realization each of the other's purposes? Do they not embrace all the world in one huge mutual benefit society? That London is fed day by day, although no one sees to it, is itself a fact so stupendous as to excuse, if it does not justify, the most exultant paeans that were ever sung in honor of the laissez-faire laissez-passer theory of social organization. What a testimony to the efficiency of the economic nexus is borne by the very fact that we regard it as abnormal that any man should perish for want of any one of a thousand things, no one of which he can either make or do for himself. When we see the world, in virtue of its millions of mutual adjustments, carrying itself on from day to day, and ask, "Who sees to it all?" and receive no answer, we can well understand the religious awe and enthusiasm with which an earlier generation of economists contemplated those "economic harmonies," in virtue of which each individual, in serving himself, of necessity serves his neighbor, and by simply obeying the pressures about him, and following the path that opens before him, weaves himself into the pattern of "purposes he cannot measure."

But we must look at the picture more closely. The very process of intelligently seeking my own ends makes me further those of others? Quite so. But what are my purposes, immediate and ultimate? And what are the purposes of others which I serve, as a means of accomplishing my own? And what views have I and they as to the suitable means of accomplishing those ends? These are the questions on which the health and vigor of a community depend, and the economic forces, as such, take no count of them. Division of labor and exchange, on which the economic organization of society is based, enlarge our means of accomplishing our ends, but they have no direct influence upon the ends themselves, and have no tendency to beget scrupulousness in the use of the means. It is idle to assume that ethically desirable results will necessarily be produced by an ethically indifferent instrument, and it is as foolish to make the economic relation an idol as it is to make it a bogey.

The world has many things that I want for myself and others, and that I can get only by some kind of exchange. What, then, have I, or what can I do or make, that the world wants? Or what can I make it want, or persuade it that it wants, or make it believe that I can give it better than others can? The things I want, if measured by an ideal standard, may be good or bad for me to have or for others to give; and so with the things I give them, the desires I stimulate in them, and the means I employ to gratify them. When we draw the seductive picture of "economic harmony" in which every one is "helping" some one else and making himself "useful" to him, we insensibly allow the idea of "help" to smuggle in with it ethical or sentimental associations that are strictly contraband. We forget that the "help" may be impartially extended to destructive and pernicious or to constructive and beneficent ends, and moreover that it may employ all sorts of means. We have only to think of the huge industries of war, of the floating of bubble companies, of the efforts of one business or firm to choke others in the birth, of the poppy culture in China and India, of the gin-palaces and distilleries at home, in order to realize how often the immediate purpose of one man or of one community is to thwart or hold in check the purpose of another, or to delude men, or to corrupt their tastes and to minister to them when corrupted. (28)

I have quoted Wicksteed at such great length because his is the most powerful statement I have ever encountered of the thesis that the free market system is "ethically indifferent" or ethically neutral. The thesis, nevertheless, seems to me open to serious question.

Let us begin by confronting it with one or two statements of the rival thesis that the free market economy does have a positive moral value. The reader will recall the passage from Ludwig von Mises already quoted on page 312, in which he contends that "feelings of sympathy and friendship and a sense of belonging together . . . are fruits of social cooperation" and not the seed from which social cooperation springs. A similar contention is put forward by Murray N. Rothbard:

In explaining the origins of society, there is no need to conjure up any mystic communion or "sense of belonging" among individuals. Individuals recognize, through the use of reason, the advantages of exchange resulting from the higher productivity of the division of labor, and they proceed to follow this advantageous course. In fact, it is far more likely that feelings of friendship and communion are the effects of a regime of (contractual) social co-operation rather than the cause. Suppose, for example, that the division of labor were not productive, or that men had failed to recognize its productivity. In that case, there would be little or no opportunity for exchange, and each man would try to obtain his goods in autistic independence. The result would undoubtedly be a fierce struggle to gain possession of the scarce goods, since, in such a world, each man's gain of useful goods would be some other man's loss. It would be almost inevitable for such an autistic world to be strongly marked by violence and perpetual war. Since each man could gain from his fellows only at their expense, violence would be prevalent, and it seems highly likely that feelings of mutual hostility would be dominant. As in the case of animals quarreling over bones, such a warring world could cause only hatred and hostility between man and man. Life would be a bitter "struggle for survival." On the other hand, in a world of voluntary social co-operation through mutually beneficial exchanges, where one man's gain is another man's gain, it is obvious that great scope is provided for the development of social sympathy and human friendships. It is the peaceful, cooperative society that creates favorable conditions for feelings of friendship among men.

The mutual benefits yielded by exchange provide a major incentive . . . to would-be aggressors (initiators of violent action against others) to restrain their aggression and co-operate peacefully with their fellows. Individuals then decide that the advantages of engaging in specialization and exchange outweigh the advantages that war might bring. (29)

Let us now look a little more closely at Wicksteed's thesis. It is true, as he so eloquently points out, that capitalism, as it functioned in his time and today, is not yet a heaven filled with cooperating saints. But this does not prove that the system is responsible for our individual shortcomings and sins, or even that it is ethically "indifferent" or neutral. Wicksteed took for granted not only the economic but the ethical merits of the capitalism of his day because that was the system that he saw all round him, and therefore he did not visualize the alternative. What he forgot when he wrote the passage quoted above is that modern capitalism is not an inevitable or inescapable system but one that has been chosen by the men and women who live under it. It is a system of freedom. London is not fed "although no one sees to it." London is fed precisely because almost everybody in London sees to it. The housewife shops every day for food, and brings it home by car or on foot. The butcher and grocer know that she will shop, and stock what they expect her to buy. The meats and vegetables are brought to their shops in their own trucks or the trucks of wholesalers, who in turn order from shippers, who in turn order from farmers and order railroads to transport the food, and the railroads exist precisely to do that. All that is lacking in this system is a single dictator who ostentatiously issues commands for the whole thing and claims all the credit for it.

True, this system of freedom, this free-market system, presupposes an appropriate legal system and an appropriate morality. It could not exist and function without them. But once this system exists and functions it raises the moral level of the community still further.

8. The Function of Freedom

Wicksteed does not quite seem to have realized that in describing a market economy he was describing a system of economic freedom, and freedom is not "ethically indifferent," but a necessary condition of morality. As F. A. Hayek has put it:

It is ... an old discovery that morals and moral values will grow only in an environment of freedom, and that, in general, moral standards of people and classes are high only where they have long enjoyed freedom -- and proportional to the amount of freedom they have possessed. That freedom is the matrix required for the growth of moral values -- indeed not merely one value among many but the source of all values -- is almost self evident. It is only where the individual has choice, and its inherent responsibility, that he has occasion to affirm existing values, to contribute to their further growth, and to earn moral merit. (30)

If the morality of a given free-market system falls short of perfection, this is no proof that the free-market system is ethically indifferent or ethically neutral. If a prior morality is necessary for it to come into existence, its existence none the less promotes a wider and more sustained morality. The habit of voluntary economic cooperation tends to make a mutualistic attitude habitual. And a system that provides us better than any other with our material needs and wants can never be dismissed as ethically negligible or ethically irrelevant. Morality depends upon the prior satisfaction of material needs. As Wicksteed himself so memorably put it in another context: "A man can be neither a saint, nor a lover, nor a poet, unless he has comparatively recently had something to eat." (31)

Ironically, precisely because capitalism does make it possible for men to meet their material needs, and often amply, it has been deplored as a "materialistic" system. To this an excellent answer has been given by F. A. Hayek: "Surely it is unjust to blame a system as more materialistic because it leaves it to the individual to decide whether he prefers material gain to other kinds of excellence, instead of having this decided for him.... If [a free enterprise society] gives individuals much more scope to serve their fellows by the pursuit of purely materialistic aims, it also gives them the opportunity to pursue any other aim they regard as more important." (32)

To which I may add that in a free economy everyone is free to practice generosity toward others to any extent he sees fit -- and better able to.

As voluntary economic cooperation makes us more interdependent, the consequences of breaches of cooperation or a breakdown of the system become more serious for all of us; and to the extent that we recognize this we will become less indifferent to failure or violation of cooperation in ourselves or in others. Therefore the tendency will be for the moral level of the whole community to be kept high or to be raised.

The way to appreciate the true moral value of the free-market economy is to ask ourselves: If this freedom did not exist, what then? We undervalue it, not only economically but morally, only because we have it and think it secure. As Shakespeare has put it:

For it so falls out That what we have we prize not to the worth Whiles we enjoy it, but being lack'd and lost, Why, then we rack the value; then we find The virtue that possession would not show us Whiles it was ours. (33)

Writing in 1910, Wicksteed had an excuse which we do not have for regarding the capitalist system as morally indifferent. He did not have the stark alternatives before him. He had not been reading or experiencing daily, for years, the results of statism, of government economic planning, of socialism, of fascism, of communism. We will examine in our next chapter the morality, or rather the immorality, of these alternatives.

To sum up: The system of capitalism, of the market economy, is a system of freedom, of justice, of productivity. In all these respects it is infinitely superior to its coercive alternatives. But these three virtues cannot be separated. Each flows out of the other. Only when men are free can they be moral. Only when they are free to choose can they be said to choose right from wrong. When they are free to choose, when they are free to get and to keep the fruits of their labor, they feel that they are being treated justly. As they recognize that their reward depends on their own efforts and output (and in effect is their output) each has the maximum incentive to maximize his output, and all have the maximum incentive to cooperate in helping each other to do so. The justice of the system grows out of the freedom it insures, and the productivity of the system grows out of the justice of the rewards that it provides.

Notes

1. Cf. Human Action, by Ludwig von Mises, a book on the principles of economics.

2. Human Conduct, by John Hospers, a book on the principles of ethics.

3. Cf. Ludwig von Mises, Human Action, Socialism, etc.

4. The Wealth of Nations (1776), Book I, Chap. 1. The phrase had already been used and the theme stated in a passage in Mandeville's Fable of the Bees , pt. ii (1729), dial. vi., p. 335.

The reader will notice a certain overlap and duplication in the quotations in this chapter from Adam Smith and Philip Wicksteed and those from the same authors in Chap. 6, "Social Cooperation." But I think these duplications are justified in the interests of emphasis and of saving the reader the inconvenience of turning back to that chapter to remind himself of the few sentences repeated here.

5. Ibid. (Cannon ed.), p. 12.

6. Ludwig von Mises, Socialism: An Economic and Sociological Analysis (English translation; Macmillan, 1932), p. 299.

7. Ludwig von Mises, Human Action, p. 144.

8. The Wealth of Nations (Cannon ed.) p. 18.

9. Ludwig von Mises, Human Action, p. 143.

10. The Wealth of Nations (Cannon ed.) I, 16.

1l. Ibid., I, 421.

12. See Murray N. Rothbard, Man, Economy, and State (Princeton: Van Nostrand; 1962), I, 440, footnote. See also Ibid., I, 85-86.

13. Philip H. Wicksteed, The Common Sense of Political Economy (London: Macmillan; 1910), p. 158. The whole chapter on, "Business and the Economic Nexus," from which this and later quotations are drawn, is a brilliant exposition that deserves the most careful study.

14. Ibid., pp. 171, 172.

15. Ibid., p. 180.

16. Ibid., p. 174.

17. Cf. Israel M. Kirzner, The Economic Point of View (Princeton: Van Nostrand; 1960), p. 66.

18. See Professor Lionel Robbins's Introduction to the 1933 edition of Wicksteed's Common Sense of Political Economy: "Before Wicksteed wrote, it was still possible for intelligent men to give countenance to the belief that the whole structure of Economics depends upon the assumption of a world of economic men, each actuated by egocentric or hedonistic motives .... Wicksteed shattered this misconception once for all." (p. xxi).

19. Ludwig von Mises, Human Action, pp. 144-147.

20. Ludwig von Mises, Socialism: An Economic and Sociological Analysis (English translation; Macmillan, 1932), p. 432.

21. Ibid., pp. 397-398.

22. E.g., Eugen von Bohm-Bawerk, Karl Marx and the Close of His System (1896); Ludwig von Mises, Socialism (1936) and Human Action (1949). Practically the whole of modern economic literature, in its acceptance of the marginal productivity theory of wages, is in effect a refutation of the Marxist exploitation theory, and a substantial acceptance of the conclusions of J. B. Clark.

23. The Distribution of Wealth, pp. 3-4.

24. Ibid., p. 9.

25. The older economic textbooks (i.e., of the late nineteenth and early twentieth centuries) commonly devoted separate chapters or even separate sections to "Production" and "Distribution" respectively. This was misleading. Wealth is not first "produced" and then "distributed." This is a socialist misconception. If a farmer raises a crop by himself he gets the whole crop because he has produced it. It is not "distributed" to him; it is merely not taken away from him. If he sells it on the market, he gets the monetary market value of the crop in exchange just as a worker gets the monetary market value for his labor.

26. For a fuller description of this process, see Henry Hazlitt, "How the Price System Works," Economics In One Lesson (Harper, 1947; MacFadden, 1962), Chap. XVI.

27. See especially the works of Ludwig von Mises, including his more popular Planning for Freedom (South Holland, Ill.: Libertarian Press; 1952), particularly the chapter, "Middle-of-the-Road Policy Leads to Socialism." I may refer interested readers also to my own Economics In One Lesson.

28. "Business and the Economic Nexus," The Common Sense of Political Economy, Chap. V, pp. 183-185.

29. Man, Economy, and State (Princeton: Van Nostrand; 1962).

30. "The Moral Element in Free Enterprise," in The Spiritual and Moral Significance of Free Enterprise (New York: National Association of Manufacturers), pp. 26-27.

31. The Common Sense of Political Economy, p. 154.

32. "The Moral Element in Free Enterprise," in The Spiritual and Moral Significance of Free Enterprise (New York: National Association of Manufacturers), pp. 32-33.

33. Much Ado About Nothing, Act IV, scene 1, line 219.

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