Free-Market System Not Driven Solely by Greed

Capitalism is once again under assault. Its recent resurgence seems to have started with Gordon Gekko’s address in 1987’s film, “Wall Street.” In speaking to shareholders of a fictitious corporation, Gekko describes capitalism thus:

“The point is, ladies and gentlemen, that greed … for lack of a better word … is good.

Greed is right.

Greed works.

Greed clarifies, cuts through and captures the evolutionary spirit.

Greed in all of its forms … greed for life, for money, for love, knowledge … has marked the upward surge of mankind.”

The most recent Great Recession has accelerated the attack. Just Google “Capitalism is Dead” and you will see listed scores of articles, books and commentaries telling us that the free market system is a failure and its demise is near.

Many of us are ignorant of the economic and philosophic foundation of capitalism. I counted myself in that category.

Being naturally inquisitive, I wanted to find out just how capitalism came to be adopted as the accepted economic system worldwide. All paths of my research led me to one name – Adam Smith.

Adam Smith was a Scottish philosopher and economist who is often referred to as the “Father of Capitalism.” His seminal work, “The Wealth of Nations,” published in 1776, is considered one of the most influential books ever written, read by many of our founding fathers, including Jefferson and Madison, and influential in the formation of the structure of this new nation.

In Smith’s day, people equated national wealth with a country’s stock of gold and silver. Importation of goods from abroad was considered damaging because, to acquire them, a country had to give up these precious metals. Exporting goods was good because these precious metals came back to protect their wealth. Therefore, countries practiced protectionism, subsidizing exporters, protecting domestic industries and levying large taxes on imports.

Smith considered this economic philosophy to be foolish. He argued for a free exchange in which both sides would benefit. Simply put, Smith saw that no one would trade if they expected to lose from it. Therefore, the old system stifled trade and, as a result, a nation’s wealth was reduced.

Smith saw that in a free exchange, the buyer profits just as the seller does. Imports are just as valuable to one country as exports are to others. Because trade benefits both sellers and buyers, said Smith, it increases a country’s prosperity. Therefore, a nation’s wealth is not measured by the quantity of gold or silver it possesses, but the total of its production and commerce – in what today we would call a gross national product.

This production capacity depends on the accumulation of capital which makes it possible. By utilizing a free exchange of goods, producers of goods accumulate capital which they will use to invest in an expansion of their business, requiring more labor and increasing workers’ income. The more capital, the more is invested in productive processes and the more wealth is created for the nation and its people.

In Smith’s view, this system is automatically directed by the “invisible hand” of the marketplace. When goods become scarce, people are prepared to pay more for them. Producers then make more profit in supplying them and these profits (capital) are invested to produce more goods to meet demand. Where there is an excess in goods, prices drop and producers switch their capital elsewhere. Industry automatically adjusts to changes in the economy and, therefore, central direction from government is not needed.

But what of the Gordon Gekko philosophy that “greed is good?”

Smith would reject “greed” as a corruption of the system. He believed that the market economy he endorsed can function and deliver its benefits only when its rules are observed – when prosperity is secure and contracts honored. The maintenance of “justice” is vital to Smith.

This sense of “justice” is best described in a book authored by Smith prior to “The Wealth of Nations.” In “The Theory of Moral Sentiments,” Smith posits that man is driven by two divergent motives – self-interest and sympathy.

As individuals, we are impelled to look after ourselves. Yet as social creatures, we are also endowed with a natural sympathy or empathy for our fellow man. This is the foundation of “morality” which is built into us as social creatures.

Therefore, Smith would argue that if capitalism is not guided by this “morality,” it is hollow and unjust. Gordon Gekko, therefore, is at best amoral and his understanding of capitalism is deeply flawed since it is missing a necessary driving moral force.

“The Wealth of Nations” is no endorsement of economic greed. While self-interest may be the impetus driving the economy, the men who drive it must also employ it as a force for the social good of the nation as a whole.

Guest columnist Bonenberger is an attorney who lives and practices in Wheeling.