The “Capitalism Based on Greed” fallacy says that greed and selfishness are inherent in capitalism.
The assertion that capitalism is based on greed and selfishness is one of the most common fallacies. There are many layers to this fallacy but the first thing we must acknowledge is that greed does exist within capitalism, just as it does in every human economic system! Greed extends all the way back to Adam and Eve exiting the Garden. Furthermore, greed is not confined to the wealthy. It exists among all classes of people and it always has. Greed is a given concerning the human condition until Christ returns. But is it the basis for capitalism?
Capitalism gradually emerged in Europe over several centuries. Many factors led to its development. New crop rotation methods created a boom in agriculture production more than a millennium ago. Monasteries, who owned vast tracts of lands, put these new methods to work. Their strong work ethic combined with these improvements created an agricultural surplus, freeing some for work other than subsistence labor. As the monks prospered, markets began to form around monasteries. Merchants moved close by and sought trade with the monks and other merchants. Cities eventually sprang up around these markets. New methods of international business sprang up with the Knights Templar as they facilitated pilgrimages to and from the Holy Land. Beginning in the 13th century the Medici family in Italy founded a banking system that encompassed all of Europe. Double-entry bookkeeping was invented. Greater and greater precision was developed in monitoring and analyzing production and trade.
By the 18th century Adam Smith identified key elements that were contributing to the expansion of wealth in Europe. Just like Darwin synthesized observations about biology into a coherent model, Smith did the same for economics. At the core of his analysis were the ideas of labor specialization and trade.
Rather than have each individual develop a myriad of skills to provide for all the things he needed in life, Smith observed that each individual should specialize in those activities he does best. He should pay others to do those tasks he does less well. This would result in all work being done at the best quality and with the most efficiency. (Smith expanded this idea to trade between nations with nations each specializing in specific goods. This is at he core of the compartive advantage model.)
I exchange my goods with you (which I produced at better quality and more efficiently than you could) for the goods you produced at better quality and efficiency than I could. Because we each have specialized in our labor, we are able to produce our respective goods at low cost. We sell them for more than it cost to make them, but for less than what it is worth for the buyer to make them herself (otherwise the buyer would make her own.) If I’ve made 100 tables and you've made 100 plows, then we can each exchange our excess products. One of my tables is going to be worth more to you than it is to me and one of your plows is going to be worth more to me than it is to you. We each win in the exchange and wealth is created purely by the exchange. (See the “Trading Game” example I wrote of earlier in the Zero-Sum Game post.) Money faciliates these transactions so that we are technically swaping goods directly. The kewy point is that specialization and trade, results in endless win-win transactions. Endless win-win transactions are the basis of capitalism, not greed.
Profit is another word disparaged by critics. The difference between what it cost the producer to create the good and what the buyer paid for the good is the profit. Many people falsely characterize profit as greed because the seller gets more for something than it cost the seller to make.
First, no item on the face of the planet has intrinsic economic value. Economic value is whatever amount someone is willing and able to pay. If a non-coerced buyer with (relatively) complete information chooses to buy a product for more than it cost the producer to make the product, then that is the economic value of the product.
Second, profit is a premium paid to the seller for the risk the seller took in brining the product to market. It serves as an incentive to do more of the same. A portion of the profit may be extracted by the seller for personal consumption but most businesses and corporations use the profits to improve and expand production, generating more wealth, jobs, and profits. Any producer focused exclusively on profit will ultimately collapse because of inattention to customers. But if there is no profit the enterprise will die as well. Profits are to business what food is to the body. They are essential but not the ultimate purpose for existence. Set the price to high and buyers will not buy. Set the price to low and production costs will not be covered. Sellers can not go out and charge what they please just because they are greedy.
Yet another layer to the “Capitalism Based on Greed” fallacy is the widespread misconception that, dating back to Adam Smith in the 18th century, capitalism has been explicitly based on selfishness. Adam Smith wrote two major works that must be treated as a unit: Theory of Moral Sentiments (1759) and The Wealth of Nations (1776). Smith never affirmed selfishness. He did affirm appealing to the self-love or self interest of others (terms he used interchangeably.) Selfishness excludes concern for the other while self-interest/love can incorporate concern for others. In Theory of Moral Sentiments, Smith makes explicit use of Jesus admonition to “love others as you love yourself.” In The Wealth of Nations we find this famous but widely misunderstood passage:
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. (Wealth of Nations)
Notice that Smith is not asking us to act according to our self-love. He is saying that in our economic exchanges we should appeal to other peoples’ self-love as the basis for meeting our needs. Smith wasn’t the most orthodox theologian but he did seem to have a Calvinistic notion of human depravity. Smith did not believe an economy could function with people simply depending on others to behave benevolently and with good will. It is far better for the butcher, brewer, and baker to see their fortunes tied to our own fortune. We become economically integrated by seeing other peoples’ happiness and satisfaction as directly linked to our self-love/interest.
For Smith, this integration of behavior based on interlocking self-love was not the highest expression of human behavior. In Theory of Moral Sentiments he wrote:
And hence it is, that to feel much for others and little for ourselves, that to restrain our selfish, and to indulge our benevolent affections, constitutes the perfection of human nature; and can alone produce among mankind that harmony of sentiments and passions in which consists their whole grace and propriety.
In short, Smith thought human nature necessitated an economic system of interlocking self-interest but he believed society should produce individuals that aspire to higher virtues of compassion and benevolence. There have been Modernist thinkers who have promoted a Social Darwinist approach to economics, particularly in the late 19th to early 20th century. Yet something more akin to Smith’s view has predominated in Western society.
Another, advantage of Smith’s perspective is that it made the expansion of markets to total strangers more feasible. Sustained benevolence and compassion requires social and geographic proximity and that is possible only with a limited number of people. But an arrangement where the entire populous sees their personal interests tied up in meeting the needs of complete strangers allows for an enormously greater number of market opportunities.
Finally, we have to introduce the issue of capital into our discussion. With the advent of steam power, and later combustion power, it became possible to produce factories that exponentially increased productivity. It made canal and railroad construction technological possibilities. But undertaking these enterprises required the amassing of large sums of capital that were beyond what any one individual or small group of individuals could gather and put at risk. Corporations with share ownership and limited liability emerged to facilitate this process. When people see the net worth of billionaires on display they too often envision a bank account with stacks of money in it. In fact, the great majority of their wealth exists in a variety of debt and equity instruments invested in productive enterprises. That capital is at work creating goods and services, as well as jobs and other benefits, for society. Opposition to owning this much “money” becomes an expression of opposition to private large scale enterprises, whether it is intended to be or not.
Some will no doubt point out the mansion, yachts, and other extravagances some wealthy folks indulge in but those extravagances provide jobs for many people who supply the goods and services to the wealthy. There is no zero-sum game at work here, whereby the wealthy having nice things causes the poverty of others. We may reflect on what impact extravagent living is having on the spiritual wellbeing of the very wealthy and we may question their generosity toward others, but the presence of selfish and greedy people within a capitalist system is a far cry from the accusation the capitalism and free markets are based on greed.