Capitalism is often criticized as an amoral, dog-eat-dog system based on greed and survival of the fittest.
However, it is argued that capitalism is the most humane economic system, promoting democratic values like hard work, cooperation, generosity, and the rule of law.
The morality of capitalism has been debated for generations, gaining relevance after financial crises and recessions.
Criticisms of Capitalism
Critics point to events like the Enron collapse, predatory lending in the subprime mortgage crisis, and Ponzi schemes like Bernard Madoff's as evidence of capitalism's immorality.
These events are seen to demonstrate that the free market is a ruthless jungle where the dishonest triumph, greed rules, and people exploit others.
While bad behavior exists in any society, capitalism as a system is argued to be more moral than alternatives.
The Moral Case for Capitalism
Capitalism has produced the world's highest standard of living by promoting cooperation, democracy, and free choice.
Milton Friedman argued that capitalism's most significant contribution is its moral influence.
Capitalism is about fulfilling the needs and wants of others, not selfishness.
Enterprise and Innovation
Michael Novak defines the capitalist economy by enterprise: inventing new goods and services and finding better ways to deliver them to the public.
Adam Smith's "invisible hand" describes how market exchanges benefit both sides, allocating resources effectively.
The abundance of entrepreneurial businesses and diverse goods and services in democratic capitalist economies meets needs people didn't even know they had.
Progress and Prosperity
Since the emergence of democratic capitalism, humankind has made unprecedented advances in income, living standards, social mobility, and longevity.
Capitalism's ability to provide for people's material well-being is a moral significance often overlooked.
Regimes restricting personal and economic freedom, like Venezuela, North Korea, and the former Soviet Union, have caused extreme deprivation.
Democratic capitalism is moral because it allows people to meet their needs and desires by serving others, generating widespread prosperity.
Freedom and Choice
Europe's religious belief in progress became a key underpinning of capitalism, allowing them to surpass China which was technologically ahead in metallurgy and shipbuilding for centuries.
Milton Friedman emphasized that capitalism is about being "free to choose," leading people towards democracy.
Michael Novak noted that every democracy protecting human rights is based on a free capitalist economy.
Free markets allow people to express their desires and make choices through voluntary relationships, respecting the individual's sanctity.
Moral Lessons and Social Etiquette
Democratic capitalist economies foster cooperation, discipline, and moral lessons, such as showing up for work, responsible money management, and teamwork.
The emphasis on meeting others' needs is reflected in American etiquette, like fast-food servers greeting customers with "Have a nice day."
In contrast, post-Soviet Russia struggled with customer service due to a repressive government controlling resources, making meeting people's needs alien to the culture.
Charity and Generosity
Capitalism has fostered charitable giving in America, with Americans donating more income and time than any other nation.
The U.S. gives twice as much as the next most charitable country, totaling about 300 \text{ billion} annually.
This generosity extends across all income levels and includes helping those in need after natural disasters worldwide.
A Global Perspective
Ayaan Hirsi Ali believes that American free enterprise has higher moral standards than other great powers due to its meritocracy.
Democratic capitalism offers the greatest opportunity for people to pursue their goals, innovate, and excel.
Ali considers democratic capitalism superior to oppressive systems like the former Soviet Union and welfare states that corrode individual responsibility by encouraging dependency.
The Pursuit of Perfection
Innovation thrives when liberty takes precedence, while welfare states prioritizing equality can stifle human resourcefulness in a free-market society.
Ali believes that innovation and the open exchange of ideas within democratic capitalism encourages people to seek resolutions to social problems.
While acknowledging imperfections within the American system, Ali warns that the pursuit of a perfect society can have immoral consequences.
Seeking moral perfection in society can lead to theocracy, authoritarianism, or violent anarchy.
Working with human flaws and increasing individual happiness can be achieved through free markets and political freedom.
Greed vs. Trust
The notion that free markets rely on greed is a common misconception.
Gordon Gekko's (a Wall Street financier) cynical view of greed is often associated with the perception of the free market economy.
Self-interest is not greed and greed is one of the seven deadly sins.
Adam Smith noted that the transaction happen between a brewer and the baker, because the brewer wants money. That's self-interest.
Greed is taking more of something that you may not deserve. Most free markets are based on verbal promises and written agreements, and cooperation with one another.
People rely on trust such as knowing that customers will pay. Or that paychecks comes.
The auction site, eBay, is a prime example of capitalism's "web of trust" where customers buy and sell anonymously.
Trust, not greed, was the reason so many people were duped by Bernard Madoff.
Examples of Success
Jeff Bezos founded Amazon.com to do a better job selling books.
Oprah Winfrey made wealth by bringing wealth to others.
Henry Hillman inherited his family's steel fortune. He invested in real estate, medical technology and has been one of Pittsburgh's most active philanthropists.
James Sorenson made a fortune from medical devices, including a patented plastic catheter and a disposable surgical mask.
John Drummond started his business, Unicycle.com, because he wanted the sense from bringing something good to others.
Politicians often claim that capitalism is based on greed and sell government imposed remedies.
Political solutions serve the the narrower concerns but the real needs of the people who make up a market.
The Reality of Self-Interest
The self-interest driving democratic capitalism is different from greed, which ignores the needs of others and fails in a free market.
Profit and Pricing
Profit is critical indicator of consumer demand.
Profit is the only way to ensure that there will be a sufficient supply of anything.
Profit is among the smallest components of drug and oil prices.
There's moral outrage about high oil and drug prices.
Politicians call for "get tough" measures on oil companies.
There's indignation directed at the pharmaceutical industry.
Critics accuse drug companies of "gouging."
Bernie Sanders said that oil company profits were the highest in history.
Tom Allen suggests that newly developed brand-name drugs can cost more in America than in other countries.
Lipitor costs about 60 \text{ cents} per pill in Paris and around $4 dollars in Philadelphia.
These accusations reflect a misunderstanding of pricing and profit.
A major factor driving up oil prices was the weak value of the dollar on currency markets and the high demand for oil, driven by rapid growth in India, China, and eastern and central Europe.
In nonrecessionary times, the typical net profit margin of oil companies is around 8 \text{ percent}. Banks (over 19 \text{ percent}), software companies (17 \text{ percent}), and food producers (more than 9 \text{ percent}) profit margins are higher.
Pharmaceutical profit margins are ordinarily around 18 \text{ percent} or 19 \text{ percent}. Each drug that makes it must generate enough revenue to cover the development costs of the ninety-nine drugs that didn't.
Bringing a single drug to market costs a major pharmaceutical company anywhere from 800 \text{ million} to 1.5 \text{ billion}.
If a drug company does not come up with new drugs, profits stagnate and stock plummets.
Some people believe that pharmaceutical makers and oil companies shouldn't be allowed to make a profit and how it functions.
Profit is also the way our economic system mobilizes people to provide for others. Profit is a critical barometer of demand.
If demand soars for coffee, producers will raise their prices. The lure of higher profits encourages producers to grow and process more. New coffee suppliers may also be enticed to enter the market. The result: supply increases.
Higher profits bring more players into the market. To compete, producers have to slash prices. The result: profits eventually fall.
Xerox made made great proficts with its first copiers, attracted countless competitors. Today they're so cheap that even students can afford desktop models.
A few years ago flat-screen TVs cost ten thousand dollars or more. Now you can get them for under five thousand dollars.
When companies aren't allowed to generate profits no barometer exists to adjust supply to meet demand. One ends up with shortages of essential products and sometimes surpluses of things no one wants.
After President Richard Nixon imposed controls on the price of oil in the 1970s there were shortages of gasoline, which led to gas lines.
The Impact of Taxes on Profits
Taxing profits destroys investment capital companies use to expand operations, innovate, and create jobs.
Jimmy Carter enacted the Windfall Profit Tax to punish avaricious oil companies, domestic production plunged.
The Windfall Profit Tax was widely considered a disappointment and was eventually repealed.
Newly developed medications are more expensive in the United States because drug makers charge more in this country to recover the costs of selling to Canada and European nations whose state-run heath-care systems keep drug prices artificially low.
Critics say profit is merely a bribe to get businesspeople to provide products and services.
Profit is essential to achieving innovation and a higher standard of living.
Peter Drucker emphasized that without profits, there is not capital to build the advances of the future. If you don't have profit, you don't get change.
Profit is essential to a healthy economy. It's immoral is not allowing people to make it.
The Subprime Mortgage Crisis
The subprime-mortgage crisis is a classic case of the moral hazard that results when government insulates people from the consequences of risky behavior.
Critics believe that low-income people are harmed by market fluctuations, using the subprime-mortgage debacle as an example.
Predatory lenders trapped low-income borrowers with lenient subprime loans, leading to defaults and foreclosures.
Bad subprime loans were blamed for a 53 \text{ percent} rise in delinquencies and foreclosure proceedings on 1.5 \text{ million} homes in 2007.
Hillary Clinton called for curbs on abuses by unscrupulous brokers. John Edwards compared the mortgage market to the wild, wild West.
The crisis ripped through the economy as people suffered such as New Century Financial and American Home Mortgage. Countrywide Financial Corporation was sold to Bank of America at the fire-sale price of about 5 dollars per share.
The collapse and economic devastation were not the fault of unfettered markets. It was a classic case of moral hazard.
Government Intervention and Moral Hazard
Gerald P. O'Driscoll says government programs and policies often insulate individuals from the full consequences of their actions. Subsidized federal flood insurance leads individuals to build more homes in flood plains than would otherwise be the case.
Overly low interest rates and an overabundant money supply, combined with well-intentioned though misguided policy, encouraged lenders to engage in risky behavior.
The Federal Reserve Bank kept interest rates too low for too long after the dot-com bust of 2000 and 2001.
Prices kept rising without end in sight. Lenders lowered their standards because there was a way out: sell your house for more money or refinance later.
Fannie Mae and Freddie Mac
The government-created mortgage giants, Fannie Mae and Freddie Mac, inflated the bubble further.
President Franklin Roosevelt set up Fannie Mae during the Great Depression to indirectly boost the flagging housing market.
Freddie Mac, a Fannie Mae clone, was launched in 1970.
Fannie's and Freddie's money comes from selling their own bonds, as well as stock, to investors. They had emergency lines of credit with the U.S. Treasury Department. Investors thereby believed that the companies were implicitly backed by the government.
Fannie and Freddie were responsible for some 1.6 \text{ trillion} worth of less-than-prime mortgages by 2008 from banks and mortgage brokers, packaging them as securities and selling them to investors.
Without money flooding the market, some lenders didn't bother documenting whether borrowers had any real income. These were dubbed "no doc" loans.
The Crash
The Fed started to raise interest rates between 2005 and 2006. But now those ultralow teaser rates have to go up.
The market for home mortgages began to cool.
The whole thing crashed in the summer of 2007. Subprime borrowers particularly speculators or flippers faced increased monthly payments and could not refinance or sell. They were stuck.
Redlining And Government Influence
Some people who criticizes subprime lenders, condemned banks in the 1970s for not lending to low-income communities. The practice was demonized as "redlining."
The outcry resulted in the 1977 Community Reinvestment Act, which required banks to offer credit to their entire market area and not just wealthier neighborhoods.
The Department of Housing and Urban Development urged lenders to provide loans requiring no down payment for low-income people right up to the bust.
Conclusion
Had the government not artificially lowered interest rates, we would not have seen the recklessness that so distorted markets and led to the subprime meltdown.
People in the subprime crisis suffered not because of the immorality of free markets, but because of markets that weren't free enough.
White-Collar Crime and Corruption
Critics assert that capitalism encourages white-collar crime, citing corporate-governance scandals like Enron and WorldCom.
Some believe that less capitalism and more state control would reduce corruption.
Real World experience suggests the opposite: free markets encourage less corruption.
One international study by Transparency International claims, that the United States is one of the least corrupt countries in the world when it comes to bribery. About 10 \text{ percent} of U.S. respondents reported paying bribes.
Bribery is a daily fact of life in many of these nations The corruption of a bureaucratic agency may begin with the clients of the agency, such as the members of a regulated industry.
In the Soviet Union bribes were necessary to secure everything from drivers' licenses to medical care and even higher education, as well as goods.
Cuba as an Example
Cuba, with its controlled prices and black markets, illustrates that the difficulty of making ends meet has turned ordinary Cubans into petty criminals….
The Definition of White-Collar Crime
One reason many people think prosperity brings more white-collar crime is that the definition of what constitutes white-collar crime changes with the political climate.
To be a criminal, an individual had to do an act with willful intent to violate the law or with knowledge of the wrongful nature of his conduct, today it is possible to be found criminally liable and imprisoned for a substantial term of years for the failure to do an act required by law, without any actual knowledge of the law's obligations and with no wrongful intent whatsoever.
Prosecutors are increasingly launching criminal prosecutions of individuals who do not meet the traditional test of "mens rea," or criminal intent. For example, in the middle of this decade nineteen employees of the accounting firm KPMG were accused of issuing "abusive" tax shelters.
The Role of Government
More control means bigger government, and government is even less transparent than the private sector.
Some 1 \text{ trillion} worldwide is paid each year in bribes to government officials.
In Africa alone, more than 400 \text{ billion} has been looted by government officials and stashed in foreign countries.
Taxpayer money is regularly pilfered for questionable purposes through congressional earmarks.
The Case of Paul Kanjorski
FOX News reported on Pennsylvania congressman Paul Kanjorski, who earmarked 10 \text{ million} in taxpayer dollars that ended up in a family-run company, Cornerstone Technologies, that eventually went bankrupt.
The Key to Capitalism
Capitalism's dependence on winning the trust of consumers, as well as the rule of law, discourages corruption and encourages the most transparency.
Post-Communist Russia
Critics cite the crime and corruption of post-communist Russia as evidence of capitalism's immorality.
In 2009 the Heritage Foundation, the noted free-market think tank, gave Russia's economy a 50.8 \text{ percent} rating, calling it "mostly unfree."
Putin's authoritarian "managed democracy" is more intrusive in the economic lives of its citizens than that of his predecessor, Boris Yeltsin.
Steps have been made toward the creation of Western-style property rights, but there is still not the kind of rule of law and property-rights protections that we take for granted in the United States.
Obstacles to Free Markets
Grigory Yavlinsky has noted: "We do not have independent courts in Russia…. The law enforcement system is corrupt and has been transformed into an instrument of revenge and the grabbing of property."
Getting a new business license still involves plenty of red tape, taking "much more than the world average of 18 procedures and 225 days."
The Illusion of Capitalism
Success or failure in the Russian marketplace depends on political favors, i.e., paying bribes and protection to officials or their cronies.
Russia's oil wealth has helped to create this appearance of affluence-the phony capitalism.
Russia's corruption is the product not of free markets, but of an authoritarian government that hasn't permitted them to flourish.
Democratization and Free Markets
Democratization occurs faster in some countries than others.
Despite free-market reforms, some countries have experienced a setback in global freedom.
Capitalism does not magically turn nations into American-style republics overnight, but political scientists have documented the relationship between free markets and free societies.
The most economically open countries are three times more likely to enjoy full political and civil freedoms as those that are economically closed.
The Link Between Economic and Political Liberty
Free markets not only demand, but teach, the skills needed for political self-governance.
Free markets require an open flow of information. A Silicon Valley can emerge only when people have the freedom to develop and exchange ideas.
Capitalism also fosters democracy by encouraging the growth of a better-educated middle class-people who are more likely to make demands of public officials.
China's Progress
Both Russia and China allow more personal freedoms than they did under communism.
The days of murderous Maoist campaigns like the Cultural Revolution and the Great Leap Forward, which took the lives of tens of millions, are over. People now have property rights to their apartments and the ability to travel. Tens of thousands of entrepreneurs have created new businesses.
China's growing middle class is increasingly pushing back against authoritarian rule. They have poured their energy into everything from establishing co-op boards to spar with landlords, to organizing real estate market boycotts to force down prices.
Russia's Challenges
Even so, most Russians today have more personal liberties than they ever had in their blood-soaked history.
The reason Russia hasn't democratized is because it is still a state-dominated economy. Most of the country's vast wealth comes not from free markets but from revenue produced by its oil and other natural resources.
Since the new oil boom that started in 2004, huge windfalls have bolstered the economies of not only Russia, but also countries like Iran and Venezuela.
Chile's Example
Democratization of authoritarian nations can be achieved only by genuinely free markets and not by the bloated, phony capitalism of resource-rich countries.
In 1973, the radical Socialist government of Salvador Allende sought to turn Chile into a Cuba-style dictatorship. By the time that government was overthrown, the annual inflation rate was 286 \text{ percent}.
Pinochet established an authoritarian government, instituted free-market reforms, removing price controls, opening trade, and privatizing some state enterprises, and unleashed a wave of prosperity.
The prosperity created an ever-larger middle class that grew increasingly dissatisfied and demanded more political freedom.
The emergence of a free Chilean economy has been largely credited with helping the nation return to democracy.
Pay Disparities
Capitalism still moral, even if there's base ball players that get paid more than nurses.
The median income for a nurses is around 65,000. Derek Jeter plays baseball and earned around 23 \text{ million}.
Jeter got to be paid 23 \text{ million} a year because Jeter is one of the best shortstops in baseball's history.
The Paradox of Value
Why do diamonds, which have very little practical use, command a higher price than water, which is essential to life? Also known as the paradox of value.
What matters is not the value of water or diamonds to society, but their worth to the individual consumer.
Few baseball player have the skills of Derek Jeter, whose performance has made baseball history.
The market is efficient. An alternative would be to have some centralized government decide Derek Jeter's salary. That would be less democratic and less fair.
Advertising and Manipulation
Ads are often looked at as an example of the immorality of free markets.
Advertising is a long list of critics and seen as propaganda.
Consumer Behavior
Evidence suggests that advertising is often far less persuasive than people think.
In fact, many ads fail for viewer attention, which is the current condition. People need to run at least three ads before people before they can remember.
Many ads are based on a faulty business premise. People preferred to pick up pet food as they shopped for groceries, which led to Pets.com which was bought out by Petsmart.
The Role of Advertising in the Economy
Advertising enables America's early entrepreneurs to build the nation's young economy, and provide more of what people needed.
Ads continue to be a critical driver of our economy, building the brands of America's companies and spurring the buying and selling that creates wealth for millions.
Advertising and Free Speech
Advertising is the reason that the U.S. media is larger, more vigorous, and more outspoken than the media in most other nations.
Ads underwrite the vital institutions that provide outlets for free speech.
McMansions and Wealth Democratization
McMansions may be architectual masterpieces.
They are the result of the democratization of wealth enabling more people to enjoy luxuries once reserved only for the very rich.
The real story in real estate isn't the McMansions; it is the fact that the average house built in the US is nearly double the size of its counterpart in the 1950s
The Spread of Luxuries
These luxuries have proliferated not because there are more rich people, but because middle-income people have more buying power.
Inflation-adjusted prices of a number of luxury goods and services have declined dramatically over the last twenty-five years as capitalism allows more people to enjoy luxuries once reserved for the rich.
Social Tensions and Home Values
The over McMansions tensions occur when large numbers of people move up the income ladder, causing discomfort to those both above and below.
Efforts to outlaw such homes have also been criticized for being arbitrary.
Layoffs and Corporate Responsibility
Layoffs are seen by the public as not ethical. Layoffs carried out by highly paid executives can be especially difficult for some to accept.
Layoffs are immensely disruptive to lives and communities. Not to lay off people means a company/industry may not survive.
One widely acknowledged reason that the U.S. auto industry lost its competitive edge was the burden of billions of dollars of legacy costs.
The Wall Street Journal told of the Jobs Bank, a windowless room where employees who otherwise would have been laid off are paid six-figure salaries to sit idle. The program cost the auto industry as much as 2 \text{ billion} annually.
Workforce and Layoffs
Layoffs can often be the only way a company can survive in a competitive market.
The ability of U.S. companies to respond to a changing market and lay off people is one reason our economy is more flexible, better able to respond to change and, as a result, a far more robust job creator than the sluggish nations of Western Europe.
Allowing companies to lay off people during a recession can help a company bounce back and enable a downturn to end sooner.
IBM, for example, had to lay off sixty thousand people but as things improved, they were able to hire more people.