The Virtues of the Free Economy

It is fitting, I believe, that this 1982 meeting of the Mont Pelerin Society be held in West Berlin, for it is in this place that the realities and ironies of the free economy and collectivism stand as stark and clear as the Schandmauer, the oppressive Wall of Shame that surrounds this free city in a sea of totalitarianism. If we are to present the case of the superiority of capitalism over collectivism, this is as good a place as any to begin.

Were I a lawyer presenting the case of economic freedom, I would be tempted to use Berlin as my example. After all, the good economic fortune of West Berliners is well-known, especially by East Berliners who have been kept from the western sector of their city by the imposing barrier of concrete, barbed wire, land mines and machine guns for longer than twenty years. In the free West Berlin, people move at liberty throughout the city; in communist East Berlin, the Bereitschaftspolizei, the civil police, harass and intimidate citizens at will. The West Ber-liner’s income is higher than that of his eastern counterpart, whose wages, while the highest in the communist bloc nations, would place him below the poverty line in the West. There is no question that West Berliners are freer, wealthier and happier than their eastern counterparts.

Western Intellectuals Persist in the Denigration of Capitalism

But the minds of men are confused and muddled on the subject of economic freedom. The western world in the last two centuries has been a showcase for the virtues of economic freedom, yet, as theologian Michael Novak points out, “Few themes are more common in Western intellectual history than the denigration of capitalism.”[1] George Gilder, in his perceptive Wealth and Poverty, notes with sadness that many who give intellectual support to free enterprise do so not because they agree with its ethos (which they see as morally bankrupt), but simply for utilitarian reasons: it creates more wealth than does collectivism.[2]

Yet, if capitalism is to continue to be a vibrant part of the world order, it must be seen as having virtues beyond its immense productive capacities. Those who wish to enlist economic freedom in the quest for human progress, for justice, for an end to world hunger, for freedom it self, must see capitalism not only as an efficient dispensary for human greed, but basically as a conduit for moral actions. Capitalism is an economic way of life that can help promote not only material well-being, but also spiritual well-being.

At the present time, however, people—even many West Berliners—are abandoning the road to economic freedom and supporting, instead, the ethos of collectivism as they seek values they deem worth owning. But such a road, Walter Lippmann wrote, “leads down to the abyss of tyranny, impoverishment and general war.”[3] It is the purpose of this essay to examine this western abandonment of capitalism and to show that the alternative to collectivism, the free economy, is, indeed, a worthy and moral choice by individuals and by nations.

The Paradox of Freedom

The free economy is a study in paradox. Persons vote against it at the polls and vote for it with their dollars. Collectivist governments place it at the top of their enemies lists, yet turn to it to help cure their economic ills.[4] Clergymen denounce the capitalist spirit as immoral, yet the very foundation of the free market is dependent upon what Novak calls “the exercise of moral character of certain sorts.”[5] The free market seems to have become a social prostitute: people of all income, education and cultural levels denounce it publicly for its alleged sins while at the same time seeking it in times of economic need.

Perhaps this is not surprising. After all, the intellectual and legal basis of capitalism—that the individual is free, has the ability (and responsibility) to make moral choices, and has certain rights that cannot be pre-empted by his government—runs counter to the deeply-held tenets of pantheistic traditional thought that have ruled human minds since the beginnings of civilization. At the heart of traditional thinking, whether or not it be articulated by a Plato, a Confucius, a Rousseau, a Castro or a Mao, is the contention that one’s identity begins not with himself but rather with his community, his guild, his tribe, his predetermined social class, or, in modern terms, his state.[6]

While it is true that Christianity (and especially the legacy of Protestantism) has undermined traditional thought—and gave spark to the rise of capitalism—the communal ideology of pantheism, with its emphasis on “aristocracy,” social order and varying rights and privileges to be granted to persons of different castes, became officially mixed with the Christian religion in the Middle Ages. Nor did the Protestant Reformation and its resulting doctrines instantly change the long-held conception of “superiors” and “inferiors” in the social order.[7]

The superiors included the clergy, the university professors, royalty, political figures and soldiers of high rank; the inferiors were the serfs, the merchants (who were especially distrusted) and other townspeople born of less than nobility. As one can imagine, such a “moral” order was more than popular with the upper classes, for along with being the natural heirs to leadership over the masses, they were free to impose their “superior” values upon their subjects, and that meant sumptuary laws and thousands of rules governing business practices.[8]

The historian Arthur M. Schlesinger Jr. certainly showed an affinity for the pre-capitalist structures when he wrote of mercantilist England, “Power was held to imply responsibility, and all classes were to be brought together in harmonious union by a sense of reciprocal obligation”[9] Yet, as demonstrated by the numerous peasant uprisings that periodically threatened the foundation of the feudal order, it is clear that the masses did not share Schlesinger’s enthusiasm for their plight. And well they did feel discontent; their lot was a most miserable one. The lower classes were as poverty-stricken then as the poorest villagers in destitute Third World nations today.

The vast number of regulations restricting price, supply, manufacturing procedures and—above all—competition, served as effective barriers to limiting economic growth. Only the nobility could be wealthy; after all, believed the superiors, wealth was fixed and could only be divided, not expanded. It was unthinkable for one of a lesser social order to gain wealth. So when it came to gaining riches in the old world, “the worldly order,” wrote Lippmann, “was to be predatory.”[10] Neighbor plundered neighbor, city plundered city and nations constantly plundered nations.

It is of little wonder, then, that the aristocratic upper classes in post-mercantilist Europe neither appreciated nor understood the new capitalist economic and social revolution. After all, as one grasps when reading The Wealth of Nations, Adam Smith developed the concept of Natural Liberty precisely for the benefit of the poor, not the rich. The aristocrats could not comprehend the fact, as Lippmann put it, “that the Golden Rule was economically sound.”[11] They could not envision the self-interest of the merchant being freely channeled to serve others, nor could they accept the merchant’s gaining not only wealth but social prestige as well. The Industrial Revolution, in reality, was a revolution of the common man, and those who had once set the public agenda were left behind in democratic capitalism’s wake.

And despite the vast increase of wealth and power capitalism has brought to the western world, and despite the great steps that have been made in eliminating the once-common poverty in the industrial nations, the free market is still an anathema to many of those outside the business realm—the New Class, as Kristol calls them—who seek to determine the “social agenda.” These people are hostile to business, but the reason for their hatred, in my opinion, has little to do with social and economic inequalities that exist within our society. After all, the traditional societies for which many of capitalism’s critics share an affinity are often wretchedly poor with inequality the norm. As Kristol has noted, the reason for their contempt of the free market is the lack of social and political power the liberal, individualistic capitalistic order gives to them.[12] Within a society that permits a free market, power lies within the market itself, and “is dispersed among so much of [the] population rather than concentrated solely in a governing elite.”[13]

Novak, commenting upon the hostility many clergymen seem to hold toward capitalism, writes:

In traditional societies, church leaders (whether in Rome or in Geneva) were able to impose their own values on the entire civil society. It is difficult for church leaders to play such a role within a differentiated society. Thus there is often a secret hankering, a lingering nostalgia, for a planned society that would once again permit church leaders to be in alliance with civil leaders in suffusing an entire society with their values. This new Constantinianism appears today as socialism in totalitarian states, and as statism in mixed economies.[14]

Democracy in the Market

Critics of the capitalist system, especially those who might share the paternalistic biases of Kristol’s “New Class,” simply are not impressed with the democracy inherent within a market system. The aristocracy never had confidence in democratic institutions, especially during the pre-capitalist era; their descendants—though they may espouse a belief in democratic equality—have as little confidence in free choice as their forebears. For when they speak of equality, they talk not of a state of equality under law, but rather a state of equality brought about by the law. Their religion demands an equality of results to be administered by a governing elite.

Such a concept of law—that it restrain some and unleash others—is rooted not in the spirit of equality manifest by the rise of 19th-century liberalism, but rather in the despotic mentality of ancient tribalism. Therefore, the modern results of a legal system of equality by coercion—including progressive tax rates, transfer payments, housing subsidies, food stamps and other welfare programs, or the brutal results of collectivism seen in the past 50 years in the Soviet Union and Asia—reflect not some sort of advanced social compassion, but rather a mental leap backward into an age of monarchs who thought themselves to rule by divine fiat.[15] And such a mentality, it needs to be stressed, mutually excludes the liberal view of equality before the law. For where inequality before the law prevails, so prevails the specter of despotism, of tyranny, of poverty, and loss of personal freedom.

Henry Hazlitt, Gilder, Kristol and others have intelligently argued that government poverty programs based on legal inequality actually retard potential economic gains poor persons can make. What they have not pointed out, however, is the link between today’s agenda of statism and the paternalistic ethos of ancient times. And it is here that nations can learn from the past, for it is the indisputable fact of history that legal inequality, enforced economic isolation (called self-sufficiency) and the throttling of the free market leads not to the desired ends of justice and prosperity, but to the reverse. It has only been the practice of free division of labor, free markets, and equality before the law that has led to freedom and economic growth. It has long been the contention of traditional man that he must choose between liberty and bread; the experience of freedom has demonstrated the opposite. Liberty leads to more bread, and much else besides.

Ultimately, it is both the liberty and prosperity inherent in the democratic capitalist order that brings those grounded in ancient ideals of society to distrust of the free market. For the liberty of this order permits those who once labored under the domination of despots to govern themselves, while the prosperity brought about by the free market system allows those who once were desperately poor to support themselves and not be dependent upon the paternalistic whims of the aristocracy. Lippmann once commented about those who seek, in effect, the older order:

. . . the only instrument of progress in which they have faith is the coercive agency of government. They can imagine no alternative, nor can they remember how much of what they cherish as progressive has come by emancipation from political dominion, by the ]imitation of power, by the release of personal energy from authority and collective coercion.[16]

And it was Frederic Bastiat who so eloquently predicted the results in store for those who seek coercion under the guise of freedom:

Capital, under the impact of such a doctrine, will hide, flee, be destroyed. And what will become, then, of the workers, those workers for whom you profess an affection so deep and sincere but so unenlightened? Will they be better fed when agricultural production is stopped? Will they be better dressed when no one dares build a factory? Will they have more employment when capital will have disappeared.”[17]

Giving and Receiving

One who gives is held in far greater esteem than one who receives, and it is widely believed by those era-bracing traditional views that capitalism is simply the economy of receiving; that is, the poor labor and the rich receive. Hence the view, articulated by John C. Bennett, president emeritus of Union Theological Seminary, that the free economy, if not altered by forces of government, is “morally intolerable.”[18]

Economic freedom as demonstrated by two centuries of unparalleled fiscal growth, has given those nations that practice it wealth that far exceeds even the richest monarchies of ancient times. And yet, the spirit of economic freedom is seen by critics as just “the unguided lust of the businessman for profit.”[19] Schlesinger, an outspoken advocate of the planned economy, describes the philosophy of free enterprise as an anarchic creed of “everyone for himself and the devil take the hindmost.”[20] And Ronald J. Sider, author of Rich Christians in an Age of Hunger, dismisses capitalistic economic growth as simply the product of covetousness.

One cannot read the parable of the rich fool [in the New Testament] without thinking of our own society. We madly multiply more sophisticated gadgets, larger and taller buildings and faster means of transportation not because such things truly enrich our lives but because we are driven by an obsession for more and more. Covetousness—a striving for more and more material possessions—has become a cardinal vice of Western civilization.[21]

Such charges—and they are legion-bring one to ask obvious questions, and they are: Have the vast improvements in the material quality of life, life-saving drugs, mass education, the elimination of famine, the breaking down of structures that once enslaved persons of little means and the concept of individual liberty simply arisen from greed, from covetousness, from the desire to harm one’s neighbor? Have the economic gains made in the past two hundred years by the descendants of those once legally bound as serfs simply been a moral blight on history?

I leave the reader of this essay to answer those questions for himself. But my point is this: Capitalism has brought vast economic improvements to nations practicing it; that is not in dispute. However, if the free market order is seen by a majority of men—and especially those who have the power to set social agendas—as a license for greed, decadence, and moral bankruptcy, then nations will continue their slide toward collectivism and statism and what is left of the free market will disappear into the dishonesty, graft and bribery that is the black market.[22]

In establishing moral criteria for judging capitalism, I believe the free market must pass two tests. First, it must be consistent with the principles of the ancient time-honored Golden Rule; second, the society that produces the capitalist system must be a moral one that measures up to certain moral principles.

Living by the Golden Rule

In a predatory economy, the Golden Rule, “Do unto others as you would have them do unto you,” cannot be easily practiced. If wealth can be gained only by extraction, then it seems logical to assume that one cannot become rich and simultaneously live by the Golden Rule. Either one steals (and no one likes to be called a thief) or one is poor (which demonstrates why poverty has been held in such esteem in traditional religious thought). Traditional thinking dictates that a society governed by the Golden Rule be poor; it is not difficult to understand, then, why a mind governed by such ideas would interpret the’ capitalist society as rapacious.

But, as Lippmann, Mises, Gilder and others have articulated, the prosperity of the free market order has developed not as the result of theft, but rather by the forces of mutual cooperation and trust between individuals. Lippmann’s thesis of The Good Society was that a moral, cooperative society could come about only by the practice of free market principles. He wrote:

All of this [western prosperity] did not happen by some sort of spontaneous enlightenment and upsurge of good will. The characters of men were not suddenly altered . . . . For the first time in human history men had come upon a way of producing wealth in which the good fortune of others multiplied their own. It was a great moment, for example, in the long history of conquest, rapine, and oppression when David Hume could say (1742) . . . “I shall therefore venture to acknowledge, that, not only as a man, but as a British subject, I pray for the flourishing commerce of Germany, Spain, Italy, and even France itself.” It had not occurred to many men before that the Golden Rule was economically sound.[23]

For one to gain wealth in the capitalistic system, notes Gilder, one must first give, not receive. “The gifts of advanced capitalism in a monetary economy are called investments . . . . The gifts will succeed only to the extent that they are altruistic and spring from an understanding of the needs of others.”[24] Wrote Mises:

Wealth can be acquired only by serving the consumers. The capitalists lose their funds as soon as they fail to invest them in those lines in which they satisfy best the demands of the public.[25]

Within such a system of freedom, one is rewarded only if his neighbor is also rewarded. “A” profits only—when voluntary choice prevails—by giving “B” either a product or a service which “B” feels will meet his needs or desires.[26] If this interaction were to cease, the intricate web of cooperation that supports the capitalist system would quickly break down. Retailers would not sell if they could not trust their producers; consumers would not buy if they had no confidence in the products and services available. Investment would not be possible if those with the means to save and invest had neither confidence in nor concern for the future.

As demonstrated by Leonard Read in his 1958 article, “I, Pencil,” even the basic products made within the capitalist system involve the cooperation of thousands of persons, even persons who by sight or creed might hate each other. Such is the power of the free market. It is no coincidence, then, as Hans Sennholz points out, that the capitalist 19th Cen-tury- so condemned by its critics as a hundred years of exploitation—was the most peaceful century in human history.[27]

The Moral Foundations

When Adam Smith in 1776 laid out his thesis in The Wealth of Nations, he envisioned the free market order to arise not from a people controlled by avarice, greed and ill-will, but rather from a society in which moral values were considered to be important, where creativity, sympathy, thrift and the postponing of present gratification for future reward were upheld as virtuous. Such an order had already arisen in Puritan New England, where the virtues so vital to the establishment of a growing free market had become the basis of the region that gave birth to Yankee Ingenuity.

Puritanism gave the pursuit of such interests (work, thrift and enterprise) divine sanction and showed that this working of divine will through an individual’s daily work could be advantageous to society at large . . . . It was because the Puritan . . . . was satisfied to postpone or delay his gratification, that capital accumulation was made possible and that investment leading to new kinds of productivity emerged.[28]

Conversely, one might add, the societies which are predatory and show little of the moral virtues as have been described, are also societies that show little or no economic promise. For as Novak has so eloquently stated, capitalism is not the end result of materialism. Rather, materialism—that is the insatiable desire for instant material gratification—works against the free market. He notes:

Sustained economic growth does not consist solely in material abundance; it springs from and it continues to demand the exercise of moral character of certain sorts. Should such character disappear, so would sustained economic growth. A hedonistic, narcissistic culture is not likely to invest in its own future or to make the necessary sacrifices for its own posterity.[29]

Outstanding Economic Growth a Consequence of Freedom

Despite the fact that breathtaking economic growth has occurred for more than 200 years, those two centuries, when placed in the context of the millennia of human history, are but a blink of an eye. The rise in the living standards of men once destined to live in squalor and oppression has come, perhaps too quickly for most who have participated in or have been caught up in the capitalist order. Men have profited greatly from the free economy, but few have ever understood why this sudden increase in prosperity even occurred. Thus, men, who are inclined to follow the traditional philosophies so firmly etched in their minds, easily fall prey to those who would offer them coercion and collectivism as the road to an even better life.

But the genie of freedom has been allowed to escape, and men, even while not understanding fully how freedom has given them economic opportunity, have still tasted of its fruits. Because of the phenomenon of individual freedom, the shackles that bound the serfs—and even their oppressive monarchs—in the pre-capitalist era have, at least, been temporarily discarded. Therefore, men can dream of a better life where their ancestors could only accept the poverty of their day.

The experience of the free economy ]eaves one both optimistic and pessimistic at the same time. One is optimistic, because it has been demonstrated for 200 years that freedom works, brings a better life to all, and is not a force to be feared. But one is also pessimistic, because so many have failed to understand the virtues of the free economy and, therefore, turn to collectivism and statism in hopes that coercion will allow them to fulfill their dreams.

The free economy allows men to be virtuous, to practice trust and honesty and be rewarded for it, to bestow a good life for their fellows, to help rid the world of plagues, hunger and other blights that prey upon the weakest of those in our midst. It promotes cooperation instead of conflict; it encourages peace instead of war.

When Lippmann exhorted his peers to turn from the drive to statism in the 1930s, he was jeered and declared by many of his fellow “liberals” to be a “reactionary.” And, yet, many of his insights were correct, many of his predictions of coming wars accurate. They are true today as well.

The message of Lippmann, and the message 200 years of liberty has proclaimed is this: the Good Society, one in which men can strive for justice, virtue and a better life for all can come about only by the practice which “preserves and strives to perfect the freedom of the market.”[30]

This is not a utopian dream, for those who believe in utopia believe also that man can be coerced into perfection. I cannot accept the idea that somehow man in the world as we know it will lose his willingness to sin. But while man is in his imperfect state, the free economy will help him to create a more prosperous, a more tolerant, a more just, and a more virtuous world.

1.   Michael Novak, “The Economic System: The Evangelical Basis of a Social Market Economy,” The Review of Politics, Vol. 43 (July, 1981), p. 355.

2.   George Gilder, Wealth and Poverty (New York, 1981), p. 4.

3.   Walter Lippmann, The Good Society (Boston, 1937), p. 204.

4.   Lenin’s New Economic Policy of 1923, Stalin’s introduction of differential wages and other “capitalist” practices in 1931, and the encouragement of small, private enterprises in present-day Communist China are notable examples of despotic, collectivist governments seeking help from the free market.

5.   Novak, p. 365.

6.   J. Kautz expressed the traditionalist ideals in his 1860 work Die geschichtliche Entwickelung tier Nationökonomik when he described the pantheistic views of Hindu India. “Above all,” wrote Kautz, “as a controlling fundamental of the entire social and economic theory of India can be placed the esthetic self-denial and renunciation, the unreserved recognition and glorification of absolute political despotism, the denial of the personal worth of man . . . .”

7.   The Calvinistic Westminster Confession of Faith, composed from 1643-1648, deals with the Fifth Commandment (Honor your father and mother) by extending the concept of parents to include social “superiors” as well.

8.   For example, during the French monarchy from 1666 until 1730 the French textile industry faced a mountain of regulations contained in four quarto volumes of 2200 pages and three supplementary volumes.

9.   Arthur M. Schlesinger, Jr., “Neo-Conservatism and the Class Struggle,” The Wall Street Journal, June 2, 1981, p. 30.

10.   Lippmann, p. 194.

11.   Ibid.

12.   Irving Kristol, Two Cheers for Capitalism (New York, 1978), p. 28.

13.   Robert Heilbroner, quoted from Time, April 21, 1980, “Is Capitalism Working?” Heilbroner is an advocate of the planned society.

14.   Novak, Toward a Theology of the Corporation (Washington, D.C., 1981), pp. 11-12.

15.   See “Inside North Korea, Marxism’s First ‘Monarchy,’” Reader’s Digest, Feb., 1982.

16.   Lippmann, p. 5.

17.   Quoted in William H. Peterson, “Creating a ‘Negative-Sum’ Society,” Business Week, November 16, 1981, p. 32.

18.   John C. Bennett, “Reaganethics,” Christianity and Crisis, December 14, 1981, p. 339.

19.   “The New Deal in Review, 1936-1940,” The New Republic, 102 (May 20, 1940), p. 707.

20.   Schlesinger, p. 30.

21.   Ronald J. Sider, Rich Christians in an Age of Hunger (Downers Grove, Illinois, 1977), p. 123.

22.   For in-depth looks into how a state-strangled economy invites black market activity, read Antonio Martino, “Measuring Italy’s Underground Economy,” Policy Review (Spring, 1981), and Ken Adelman’s description of black market corruption in socialist Tanzania in “The Great Black Hope,” Harper’s, July, 1981.

23.   Lippmann, pp. 193-194.

24.   Gilder, pp. 24, 27.

25.   Ludwig von Mises, The Anti-Capitalistic Mentality (South Holland, Illinois, 1972), p. 2.

26.   In a planned society where the state makes economic choices for its citizens, people must “choose,” then, whatever the state gives them. Under these conditions, however, the products and services usually leave much to be desired and the result is a bullied, dissatisfied customer.

27.   Hans Sennholz, “Welfare States at War,” The Freeman (January, 1981).

28.   James T. Laney, “The Other Adam Smith,” Economic Review, October, 1981, p. 28.

29.   Novak, “The Evangelical Basis of a Social Market Economy,” pp. 365-366.

30.   Lippmann, p. 207.