Capitalism, Adam Smith, and living by the rules
Rebecca Lann
by Fred Kiel & Doug Lennick -- Recent disgust with the excesses and
betrayal of trust in U.S. corporations tempts us to condemn
capitalism. Don't blame capitalism. And don't think the grass is
greener on the other side of the fence. The other system for
organizing economic life tried in the past 100 years was a disaster.
Capitalism is by far the best economic system ever invented and holds
great promise for our collective future. But in recent years,
something has been missing from our understanding of capitalism. The
underlying beliefs about our free-market capitalistic system are
usually attributed to the Scottish economist and philosopher Adam
Smith. In his classic, "The Wealth of Nations," (1776) he said the
free market system is the best way to obtain the greatest good. Adam
Smith believed that when people act in their economic self-interest,
it amounts to an "invisible hand" that creates good for all.
So let's focus exclusively on satisfying our own needs and everybody
wins, right?
Well, that's not quite what Smith said. What's usually not mentioned
when Smith's ideas are discussed is that he was actually better known
as a philosopher who wrote a best seller called "The Theory of Moral
Sentiments." In it he stated that we are all born with a "moral sense"
-- that is, he believed humans are innately equipped with consciences.
Because of this assumption, he thought that the "invisible hand" of
economic self-interest would be governed by the peoples' moral sense.
Economic self-interest, yes, but in the context of what's good for
all. Smith did not envision the "invisible hand" as a competitive,
cutthroat economic system where you take and grab what you can for
your personal gain and do your best to destroy your competitors.
He envisioned it as a people working competitively and productively
for individual gain and cooperatively for the overall good of society.
We think he got it right. Basically, this is what has happened in the
past two centuries. By all measures, a significant number of people on
the face of the Earth have experienced unprecedented prosperity,
living much better today than royalty lived 200 years ago. We all know
that we have a long way to go before all of humanity has even the
basics, but it was a lot worse before.
[Following the rules]
Capitalism's successes all hinge on people trusting the system --
trusting that when I engage in commerce with you, that you will not
cheat me. Smith's underlying assumption was that we are all moral
individuals and we will operate our market by playing by the rules.
And the rules were moral rules: Keep your word. Be responsible for
your actions. Tell the truth. Do unto others as you'd have them do
unto you.
Daily news accounts detail the numerous ways in which business
executives have not played by those rules.
New rules seem to have crept into the system. The common assumption
seems to be, "Yeah, being highly ethical and moral in business is the
right thing to do, but it's naive to think that this is the way the
world works. Sometimes you just have to do things to survive. Playing
hardball means you have to bend the rules."
Such thinking is bad business. The cost of moral stupidity is reported
daily. Marsh McLennan, the world's largest insurance broker, just paid
$850 million in fines for cheating customers, and three of its
executives have pleaded guilty to bid-rigging. Andrew and Lea Fastow,
both senior executives at Enron, are either in jail or heading there
for the massive fraud that led to the Enron disaster. (Actually,
they're taking turns in jail so their kids don't have to be taken care
of by nannies all the time. Why don't ghetto kids get such
consideration?)
The Arthur Andersen accounting firm no longer exists, another casualty
of Enron. And then there's the mutual fund industry. Strong, Putnam,
Janus and several others are struggling to recover from their
after-hours trading sins. And who can forget Worldcom, HealthSouth,
Tyco and Boeing? Boeing fired two CEOs, and two other former
executives are serving prison terms for contracting scandals. The list
is long and getting longer. True, HealthSouth CEO Scrushy was
acquitted last week. But he is the exception.
Playing by these new but morally bereft rules has cost billions of
dollars for shareholders, lost jobs and retirement funds for
employees, and lost commerce for the merchants and others who did
business with the failed firms. But these criminals have done great
damage to the most precious commodity of all: trust in the system.
Investor confidence is a fragile commodity and must be carefully
nurtured. Sarbanes-Oxley legislative solutions and other regulations
are one reaction. But legal solutions will never address the core
issue: the quality of the moral sense of the individual capitalist.
It is time to deliberately train business leaders to think in a
morally grounded way before their world views are "baked in." The most
important skills for our collective well-being are moral competencies
-- honesty, responsibility, compassion, forgiveness and an underlying
world view that guides these human actions.
All world cultures agree that these are universal virtues -- and we
certainly believe that they can be taught to our young. But it takes
more than a family to teach these beliefs -- it takes a global
village.
Business schools should take notice. This is their job -- but it's
also the job of each employer. Business and organizational life is
becoming the most powerful social force on the planet. More powerful
than governments, family, and yes, even churches.
Because of this fact, employers are becoming de facto moral educators,
shaping the moral practices of their employees. As a capitalist and
business leader, your responsibility is to step up to the task and
invest in maintaining the system by teaching the next generation the
moral competencies and beliefs needed to ensure that capitalism
continues to bring prosperity to humans around the world. Silence on
this subject simply reinforces the status quo.
No, capitalism is not basically an immoral and selfish system. It is,
has been and can continue to be a wonderful economic system that
provides great benefits for the individual and for the common good.
But we must live by the rules.
(c) 2005 Star Tribune
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