The Right Morality for Capitalism

This is not a good time to defend the morality of capitalism. Even the dismal economic failure, not to mention the appalling inhumanity, of socialism did not produce a new affection for the free-exchange, property-based system. Its alleged greed-driven, anti-social ethic has never gelled with the moralism of the modern intellectual, who is more likely to be educated in sociology or English literature than economics or finance. His very unworldliness is a virtue, and his ignorance of the mainspring of human action, a ubiquitous self-interest, is a mark of moral superiority.

The most that was conceded to capitalism was the grudging admission that it worked—but at some cost to our highest moral purposes. Indeed, some apologists for the market system have agreed with this ethically unpromising verdict. In describing the development of commerce at the beginning of the eighteenth century, Bernard Mandeville, in his comic, metaphorical poem, The Fable of the Bees, wrote in approval of the morally debased agents that powered the social system, and noted the beneficial outcomes their egoism generated: “Each part was full of vice/ But the whole mass an earthly paradise.”

Of course, when the bees “got morality” they became fractious and unproductive. This delightful paradox of private vice and public virtue that Mandeville posed was sanitized by Adam Smith, but it has remained instructive to this day. We still seem to be faced with a choice between economic success and ethical perfection. But Mandeville was exaggerating. He recognized a difference between conventional morality and the moral fervor of his times. He made a distinction between the harmful and the useful “vices,” and it was the latter that he was encouraging.2

Of course, the latest business scandal is seized on as further example of the incompatibility of ethics and business. In the 1980s we had Michael Milken (who was persecuted by Rudolph Giuliani but was innocent) and Ivan Boesky (probably the only genuine business villain of the era), and we have had Enron, WorldCom and others in the early 21st century. What is overlooked in all this are the gross crimes and sufferings of collectivism. Yet the comparative minor failings of capitalism, exposed by a free-market press, are greeted with glee by the moralists.

There is a reason for this strange ethics. The collectivists are assumed to have the right moral motivation. They may have made a few mistakes (100 million deaths?) in the execution of their noble dreams, but at least everything was done for the right reasons. No paradox of virtue here. The crimes of the capitalists are not a consequence of the attempt to save mankind but the result of pure greed, and this is always condemnable whatever its outcomes.

So once again we have to go through a cleansing process to clean up the market and make it respectable so that its benefits are not tainted by anything so vulgar as self-interest. We are assailed on all sides by the demands for “corporate social responsibility.” Capitalism is allowed to function but only so long as shareholders are relegated to just one of a great clutch “stakeholders” (any group of malcontents who can claim some vague connection with the firm), so long as individual self-interest is subordinate to the never-ending demands of the “community,” and so long as messy, immoral things like takeovers and the search for shareholder value are eschewed. In other words, capitalism is okay as long as its players don’t behave like proper capitalists. Those etiolated surrogates in Germany and Japan are the proper role models.

Furthermore, the critics of contemporary capitalism have cleverly confused two moral issues in today’s business world: the undoubted anger that people rightly feel at the moral wrongs that we read about and the ethical demand that commercial players should display the kind of morality that would not be expected of ordinary people. Thus we have the “moral responsibility” of business, which goes beyond conventional morality. For example, you are not expected to take account of the needs of ethnic minorities or the community when you buy a new suit or sell a car, but socially responsible firms are expected to do so in their employment practices and investment policy.

But despite the heroic assumptions made by some adventurous (or outrageous) defenders of business, it is not in principle an immoral activity, and sensible defenders of the “greed is good” philosophy are not advocating a suspension of normal moral constraints in the business world. They are simply saying that if the individualistic talents of entrepreneurship and innovation are to be harnessed for the benefit of an anonymous public, they should not be inhibited by the need to perform extraneous and supererogatory moral duties. Business agents must honor contracts and promises, respect property rights, and treat their competitors and employees as rational agents entitled to respect: in short they must obey the law, even that designed to drain capitalist enterprise of its vitality, and respect a noncontentious conventional morality (not that of Oxford, Cambridge, or Harvard).

But this has nothing to do with corporate social responsibility. Indeed, in America the well-publicized display of charitable activities by executives and highly successful business agents is often a shield behind which breaches of basic and uncontroversial morality go on insouciantly. All the companies involved in the present scandals had high public moral profiles, none more so than WorldCom and its founder, Bernie Ebbers. A particularly egregious example of this comes from Dennis Kozlowski, formerly chief executive of Tyco. He donated vast amounts of Tyco money to educational charities and kept a high moral profile, yet all the time he took at least $135 million in shareholders’ money for his personal consumption. His reckless management has a once-successful company in serious difficulty.

The Corporation

There is a particular target of the business moralist: the publicly quoted business corporation. The capitalist world might be just about acceptable if it were inhabited by single proprietors or partnerships (as in the professions, whose class affiliation is close to that of the moralists). But apparently the shareholder-owned firm, especially in its multinational manifestation, is allegedly immune from both competition and government regulation. The “fat cats” are thought to be free from most restraints, and their defenders are apparently under the illusion that real wealth can be created by shuffling paper around and watching numbers on a screen. We are repeatedly told that the stock market is a casino, while the rival capitalist systems of Germany and Japan are admired because they rely much less on it than do the Anglo-Saxon systems of Britain and America.3Of course, it is easy for the moralists to concentrate on the public company. It has never been held in very high esteem, even in America, and its funds, despite ultimately being the savings of ordinary people through their pension schemes and insurance policies, are easy quarries for avaricious governments.

But it is never realized by the moralists that the corporation, if it observes the law and conventional morality, is a quintessentially benign organization. People pool their assets and hire professional managers to use them effectively, for the obvious purpose of securing a return. It is a process from which almost everybody benefits. Although now governed by statute, the corporation emerged spontaneously through free action under the common law. And despite many government-inspired depredations, it is still the fiduciary duty of managers to run the organization in the interests of owners, that is, the shareholders. It is the aim of the moralists to change all this and make the “community” a beneficiary of the success of the corporation. This in itself is a deadly compliment, for it is a concession that the publicly quoted business enterprise is the most important contribution that Western capitalism has made to the production of wanted goods, to widespread employment, and to general prosperity. The strategy of the moralist is to transfer that wealth from its legitimate owners to the politically favored.

The current crises of corporate capitalism are a gift for the moralists, for they can use them as a convenient ethical shroud behind which they can proceed to bring about the downfall of capitalist enterprise. But the only genuine solutions to today’s problems must come from within capitalism itself, with only minor help from legislation. Government attempts to moralize the firm will only debilitate it.

The first thing to stress about the morality of today’s capitalism is that its agents must return to core moral values. They must forget about the social responsibility of business and concentrate only on those basic moral principles that govern a free society. Of course, company employees rather like the former. Working for the community and doing social good for non-owners is morally pleasing, and corporate employees are no more resistant to moral vanity (costless ethical action) than the rest of us. It is certainly easier than working for the shareholder, which is their primary legal and moral responsibility. Indeed, one of the most distressing features of modern business is the willingness of large corporations to surrender to the latest moral fad: today’s company reports are replete with moral “mission statements.” Of course, this is all done for self-interested reasons (having the appropriate moral image is good for the share price), but corporate owners and directors don’t realize the long-term harm it will cause.

Easier to Detect

Breaches of conventional ethics are easier to detect than failure to fulfill the demands of social responsibility, which are theoretically unlimited. One example of the former came from the Enron scandal. At one point in the crisis, top managers were recommending to low-level employees that they should invest in the company’s pension scheme and buy the stock when they knew that the organization was in desperate trouble. The managers themselves were unloading stock at the then-high prices. It is, of course, true that employees were not compelled to invest in Enron stock and they were always free to diversify. It is also the case that the stock price did not originally fall dramatically, but the descent was rapid enough to wipe out the value of many 401(k)s. Thus the actions of top officials, and this is not to mention their fraudulent distortion of the share price, were reprehensible by the tenets of conventional morality.

Companies like Enron and WorldCom were eventually caught, as always happens under capitalism, but there were victims before the market process could have its curative effect. The danger is that if firms do not take ameliorative action, government will impose more repressive and counterproductive measures. Firms will have to learn through experience that proper ethical action benefits business.

The difficulty that corporate capitalism faces arises from the logic of the public company itself. It is characterized by the separation of ownership from control. Passive shareholders are normally at the mercy of active and knowledgeable managers who are likely to act in their own interests, not the shareholders’. And they are more likely to take moral risks. One prevalent example is the temptation of managers to boost the share price artificially if they are offered stock options. They are not arrangements likely to enhance either the efficiency or morality of the public company.

The main victims of the current crises, then, are shareholders. Corporations have used highly dubious, indeed fraudulent methods, to raise profits. And in America especially, the audit is in too many cases something of a sham. The stock market then ceases to be an accurate measure of a company’s value, and investors are systematically and deliberately misled. It requires considerable shareholder activism to enforce right conduct on the companies they theoretically own. In recent years, the shareholder activists have often been those who do not have the interests of the company at heart. They are anti-capitalist agitators who buy a few shares in a firm and attend annual general meetings with the sole intention of diverting it from its main task. This is where the demand for the corporation’s social responsibility often originates.

In addition there is the more serious “collective action” problem: normally the difference one person’s efforts can make is derisory, so he has no rational incentive to make it. If shareholder pressure is to count, it must come from institutional owners, who will hold a significant amount of stock and can more easily hold management to account.

There are many areas where vigilant shareholders can encourage prudent conduct. I have already mentioned the problem of the audit, but it seems to have been forgotten that auditors are formally appointed by stockholders to look after their interests. In practice, however, auditors seem to collude with management. This is partly to do with the fact that they earn lucrative fees from consultants’ contracts with the firm. That obviously creates a conflict of interest: they are less likely to be concerned about accurate auditing if they are dependent on commercial contracts with the company. But this does not require legislation to correct. It can be achieved by diligent shareholders demanding that such collusion not take place.

The same applies to excessive corporate remuneration, about which there is so much moralizing. Salaries tend to be awarded by remuneration committees that consist of personnel from other companies. There is obviously an opportunity for an alliance, unconscious or not, between executives of the various companies to exploit the shareholder.

We read of the Marconi example in Britain, where a successful firm, General Electric, left its successor organization (Marconi) nearly £2 billion in cash and a number of successful, if unglamorous, business enterprises. The executives of Marconi embarked on highly adventurous new activities, dissipated its cash pile, and burdened the company with massive debt. Its share price is now under 1 penny, and it is being reorganized under a debt-for-equity arrangement. Under the new scheme the original stockholders will get a mere 0.5 percent of the company. The executives who had so grossly mismanaged the firm walked off with massive redundancy payments and enhanced pensions. A more active shareholder movement would constantly monitor salaries to prevent such outrages, and it would not write employment contracts that reward failure. There are already signs that institutional owners are following this course.

Genuine Business Ethics

It is much more important that firms concentrate on their core activity of delivering shareholder value. They must not be seduced by the meretricious allure of corporate social responsibility. Genuine morality is more secure the less demanding it is. We can safely assume that attempts to moralize business personnel will fail. Human nature is unchanging, and people do not often act morally in a purely voluntary manner. As David Hume said: “[as] it is impossible to change . . . anything material in our nature, the utmost we can do is to change our circumstances and situation, and render the observance of the laws of justice our nearest interest and their violation the most remote.”4

If the moralists are worried by the excesses of Anglo-American capitalism, a glance at its communitarian rivals should assuage their guilt. The Japanese stock market has fallen from its high point of 40,000 (as measured by the Nikkei index) in 1990 to less than 10,000 now. Among the victims were millions of Japanese housewives who gambled the family income on the market. The big players, often criminals, protected themselves against such a catastrophic fall in value. The virtuous Japanese economy is, in effect, a conspiracy of top company executives and banks against the small shareholder, who is paid a derisory dividend and excluded from all influence on the company. Germany has had its fair share of business scandals too.

Naturally, in the light of business intemperance there is always demand for government action: more laws, more regulations, and more inhibitions on the free actions of individuals in market society. There are two points here. The assumptions are that business cannot regulate itself and that the egoism of capitalism is so heinous that ordinary rules and laws are inadequate to restrain its excesses. There is a danger of overreaction. Already the familiar restraints are working. Enron and WorldCom are virtually bankrupt (the perpetrators of fraud will face ordinary criminal law), and the dot-com bubble has been punctured by natural market processes.

It would be fatal if morally inspired governments were to protect individuals from their own folly. People invest in the stock market because they want to earn more money than is obtainable from bank accounts and other “safe” investments. No capitalists complained about the extra returns from the bull market of the 1990s, so they shouldn’t object to today’s losses. That is capitalism—a risky but ultimately beneficial economic system.

Contributing editor Norman Barry is professor of social and political theory at the University of Buckingham in the U.K. He is author of An Introduction to Modern Political Theory (St. Martin’s Press) and Business Ethics (Macmillan).


  1. Bernard Mandeville, The Fable of the Bees, ed. F. B. Kaye (London: Oxford University Press, 1924 [1705]), p. 24.
  2. Ibid., p. 10.
  3. See Norman Barry, Business Ethics (London: Macmillan, 1998), chapters 3 and 4.
  4. David Hume, A Treatise on Human Nature, book 3 (London: Fontana, 1973 [1740]), p. 22.

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