Free markets are not morally defensible because greed is useful. They are morally defensible because properly earned profit rewards people for creating value and serving the needs of others.
The State of the Debate
The state-sponsored socialism vs. free-market capitalism debate has officially taken center stage. While there is no monolithic agreement between or among different political tribes about what these systems entail, they frame much of our media-led discourse about current events.
At the risk of oversimplifying, I think it is fair to say that the conflict is fueled more by emotional-ethical energy than economic mechanics. The prevailing sentiment is that socialism is animated by communal empathy aiming at social equity, while capitalism is driven by individual greed, leading to dystopian corporatism. Senator Bernie Sanders’s recent anti-oligarchy tour comes to mind.
To illustrate the psychic tension in the debate, consider the Disney vision of Pocahontas (socialist symbol) versus the Dickens’ character of Ebenezer Scrooge (capitalist symbol). Sweet Pocahontas lived in blissful harmony with nature, untainted by scarcities manufactured by profit-seeking Scrooges. The poor Tiny Tims of our world don’t need the philanthropic largesse of wealthy profiteers. Instead, we all need a return to the non-exploitative ethos of indigenous communitarians or visionary collectivists like Chairman Mao. Socialism is pro-love, and capitalism is pro-money.
I’m being a bit facetious, but I think you catch my drift. The discussion does not tend to center around HOW wealth and well-being are created in the aggregate. It is about the perceived inequities, motivations, and aspirations embedded within competing economic systems. And if I may offer my own opinion, it appears that the socialists are winning the public argument.
Flawed Conservative Rhetoric
But before I turn my attention to our socialist-leaning friends, I must stop to recognize that the rhetoric of capitalist greed is often an explicit product of many conservatives on the right. It is not simply a matter of being tarred by a leftist’s propaganda brush. No, we so-called conservatives have often promoted a dangerously flawed economic rhetoric. Channeling the spirit of Wall Street’s Gordon Gekko, we have cheekily embraced the mantra that “Greed is good.”
How so? We have simply played a little word game and redefined greed as neutered “self-interest.” And we have said that this brute realism about human nature is part of what grounds our capitalist thinking. We try to sell it as the least bad system for coping with internally broken humans.
For people steeped in Christian theology about the innate moral fallenness of individuals and communities, the opening premise about coping with self-interest can be quite compelling. But in the face of a more secular humanist point of view, it is frequently rejected.
In fact, many would say that naked self-interest is not necessarily central to human nature but is an unintended consequence of capitalist systems. In other words, the Pocahontas communitarian is not ready to admit that humans are inherently greedy. They believe that to whatever limited degree humans may be self-interested, it is magnified and mutated into greed by an external capitalist system that rewards greed. Greed is not an unavoidable premise of fallen human nature to begin with, but a consequence that should be systemically avoided.
To be clear, I am not saying that all self-interest is immoral or that it is remotely equivalent to greed. And I am most certainly not saying that free-market capitalism lacks bad actors who act on greed. While I absolutely agree with classic economic theory that observes human behavior following incentives, I think we must be careful about the packaging of that message in the context of today’s debate about economic morality and empathy.
Understanding Socialist Assumptions
The thought experiment we are grappling with today is whether we can have a productive mental engagement over economic mechanisms. Instead of debating first principles about human nature or disputing over different kinds of historic/present outcomes (socialists will always fixate on perceived inequities), what if we focused on HOW wealth and well-being are most widely distributed in complex economies and societies?
Underneath the socialist utopian vision is a notion that corporate profit maximization is an exploitative monetary excess that creates unnecessary scarcities and inequalities. To socialists, profit-seeking itself underlies the social problem. Pocahontas didn’t thrive on profits… Profit-seeking is a Western European Scrooge thing.
Let’s think about it more deeply. Consider the socialist visions of universal healthcare, universal housing, universal basic income, universal education, etc. Pair it with an affinity for price controls on the “basic necessities” of life. (Are iPhones included? I’m asking for a friend…)
Socialists can think in these terms because of two underlying presuppositions. First, they believe that modern “free” markets are often illusory and fail to efficiently allocate resources. Second, they believe that corporate price-setting and profit-taking degenerate into imbalanced power plays by those with resources against those without resources. Socialists believe that economic hardships in capitalist systems are a reinforcing negative feedback loop that warps self-interest into the vice of greed.
If housing is too expensive, it is because landlords and builders are greedy for profit. They intentionally limit the supply and opportunistically control the prices. Apply this formula to any industry of your choice…
A Positive Pivot
Setting aside quasi-theological questions about human nature, is this socialist cynicism about free markets well-deserved? Is it true that things like healthcare, housing, and education are best provisioned and allocated by communally appointed specialists and committees? And is it true that mega-corporate prices and profit-seeking are manifestations of exploitative power?
If we want to make a strong argument for free-market capitalism, we must do much more than cast a critical vision of the human person. We cannot blithely dismiss human suffering as a wrongful exercise of personal freedoms. The defense of capitalism should not simply be that greed is inevitable. We should not camp out on the thesis that greed is useful.
Free markets should be defended because voluntary commerce channels human creativity, cooperation, risk-taking, and service toward the needs of others. We must assertively retake the aspirational and optimistic high ground.
Profit as Transformational Value
So, let’s get to the most basic free-market economic mechanism of profit. What is it? Is it monetary exploitation of disempowered people or is it something else?
If I were speaking with a socialist, I would start by acknowledging their concerns about immoral exploitation in the form of greed. Extracting resources from disadvantaged people on the basis of trickery or fake scarcities is to be condemned. Profits can arise from fraud, coercion, political favoritism, regulatory capture, or the absence of meaningful competition. Those are not arguments against profit itself. They are arguments for the legal and cultural institutions that preserve voluntary exchange and contestable markets.
But I want to quickly flip the script and make the case that profits from voluntary exchange are actually MORAL and GOOD for humans. Profits are not produced by a nefarious system to feed personal avarice. Actually, profit is the financial evidence that an enterprise has created value by serving the needs of others. As Dave Ramsey once quipped, “profits are a thank you note.”
Perhaps it would be best to begin with a remarkably mundane, yet complex product like a tube of toothpaste. I think we can agree that a tube of toothpaste has more economic value than the raw sum of its uncombined constituent parts. The toothpaste maker doesn’t make tubes of toothpaste out of sheer altruism and doesn’t trade them for the mere sum of its material and labor input costs. When the toothpaste manufacturer marshals and risks vast resources to procure, assemble, and transform the components into a tube of toothpaste, they have done this to create value by meeting a human need.
The mechanism for translating this value creation is the market price the toothpaste sells for. And that price is a function of how much subjective value buyers assign to the tube of toothpaste. The toothpaste maker cannot simply charge whatever they wish – even if they were the only toothpaste maker around. At some price, buyers will seek alternatives.
In a free market economy, buyers of the tubes of toothpaste are not coerced into parting with their hard-earned money to enrich the deleterious toothpaste maker owned by a mega-conglomerate. Rather, the buyer recognizes value in the transformation that the toothpaste manufacturer has rendered. And they figure that it is well worth parting with $4 to procure the toothpaste even though the raw inputs might cost the manufacturer and retailer $2. The buyer hasn’t been financially exploited, and the free exchange leaves neither party impoverished. There is a free-will and voluntary exchange of value between a willing buyer and a willing seller.
Granted, many products and services are far more complex, expensive (scarce), and necessary to life than toothpaste. However, the same principles hold whether we’re talking about buying a home, hand surgery, or gasoline at the gas pump. In each case, complex human needs are being met and rewarded through voluntary exchange fueled by the mechanism of profit.
Profit for Progress
Systemic voluntary profit-seeking is powerful because it encourages suppliers to deliver goods and services with surplus transformational value to meet the needs and wants of humans. And where there are profits, there will be competition for profits – which keeps prices in check and value high.
But wouldn’t we prefer communal cooperation over competition? The question presents a false choice. Competition requires vast amounts of cooperation among vendors and service providers. If you’ve ever worked for a business of any size, you realize just how much cooperation it takes to bring value to the market. Eliminating competition won’t strengthen cross-vendor or intra-organizational cooperation. It will result in less urgency and less efficient coordination in delivering value to consumers. Imagine if the DMV had competition for registering vehicles!
Socialists may agree with this in the abstract but complain that as corporations gain economic power, they eliminate or merge with competition to corner markets and squeeze consumers. Think of Amazon squeezing out mom-and-pop retail stores on Main Street. Isn’t Amazon destroying legions of small businesses to enrich Jeff Bezos?
It is true that the profit motive and its attendant progress lead to creative destruction. But Amazon didn’t become successful by coercing consumers into something they didn’t need or want. Quite the contrary. Amazon identified a human desire for more convenient buying options delivered more quickly and provided that value to consumers. Amazon’s success did not merely transfer wealth from small retailers to Jeff Bezos. It created new forms of distribution, employment, logistics, third-party commerce, investment returns, and consumer surplus. It is not a zero-sum game where Jeff Bezos wins, and everyone else loses.
But isn’t it wrong for Jeff Bezos to generate so much wealth for himself? This question not only ignores the vast number of Amazon employees and investors who have become wealthy in the Amazon enterprise, but it also ignores the way asymmetric profits encourage risk-taking.
If prices are fixed across the marketplace, the incentive to invest in certain kinds of risks is squelched. Why build a better technology product that will have greater cost inputs if prices are fixed? Why take the risk in pursuit of progress? And how much risk can be reasonably taken given the reward?
Elon Musk accumulated extraordinary wealth for many reasons, but one is that he and his investors took asymmetric, outsized risks in pursuit of transformational value.
Profit as Incentive and Signal
Before we condemn successful actors in a free-market system, we would do well to remember a truism taught by the famed economist, Thomas Sowell. He poignantly observed that free market capitalism is not just a profit system; it is a profit-and-loss system. In other words, profits are not guaranteed. In fact, in a free-market system it is entirely possible that suppliers of goods and services lose money. Lots of money. Bankruptcy is a real and necessary possibility to avoid malinvestment and mismanagement of resources.
Losing money is a signal that the underlying goods or services are not in demand or not providing enough surplus value at their current price. As Thomas Sowell observed, when cars began being mass-produced, the horse saddle making industry was disrupted. This wasn’t a function of automaker greed or social inequity. The market shift in available transportation alternatives sent a profit signal that saddle production would have to radically change.
Imagine if there had been a government bureau or committee that was responsible for overseeing the manufacture of horse saddles? What do you imagine they might do in the face of consumers switching to cars? I can comfortably assure you it would not be as rational or efficient as suppliers facing economic losses. Would you rather have bureaucrats directing the pivot from leather saddles to other kinds of leather goods? Or would you rather have free-market demand guide the decision? This is the essence of free market capitalism.
Profit as Wealth Engine
But the real magic of a profit-based economic system is that it creates wealth broadly in society.
Let’s turn again to mechanisms. When profits accumulate into wealth created by successful enterprises, what happens with the financial resources? Are they buried in the backyard of mansions in the Hamptons? Does Jeff Bezos frolic in piles of gold like Scrooge McDuck? Hardly. In fact, wealth is either reinvested in the enterprise, other enterprises, or deposited with banks. And guess where that money goes? It is lent or invested back into the productive economy, where other people put it to work in pursuit of further profits. Wash, rinse, and repeat at scale, and you get a society that is becoming wealthier in the aggregate.
In other words, profit-based economies proliferate a VIRTUOUS cycle. It does not eliminate all vices, but it is not systemically or intrinsically vicious. Does it solve every problem faced by society? No, it does not. But does it provide the best chance to provide a context for wealth and well-being? Yes, it does.
The abstract intentions of socialism may sound compelling, but the alternative mechanisms that suppress profit-seeking and capital formation have repeatedly produced scarcity, stagnation, misallocation, and human suffering.
Profits and Poverty
The internal logic of this may not be enough to surmount the concern that many people in capitalist systems seem to be left behind. You do not have to travel far in America to see people who may appear to be non-participants in the American Dream.
The relevant question is not whether free markets eliminate poverty or inequality. No economic system does. The question is which system most effectively expands productive participation, raises living standards, creates jobs, rewards skill and risk-taking, and gives more people the opportunity to contribute and benefit from the creation of wealth.
Is poverty best resolved by regulators collectively confiscating resources to dole out to the disenfranchised? Or would poverty in the aggregate be best resolved by supplying people with good jobs, excess savings, and opportunities to invest?
This is not to deny the reality of disability, mental illness, temporary hardship, or other circumstances that can limit productive participation. Those realities may justify prudent safety nets. But they do not answer the broader question of which economic system enables the greatest number of people to participate in creating and sharing in the benefits of wealth.
There will always be people who want to live off the largesse of the state or some third party. But I believe that most people will delight in the dignity of participating in the virtuous cycle that free-market capitalism provides.
Humans don’t need less freedom and more central planning. We all need a healthy profit-seeking system to participate in. And as David Bahnsen often says, “It is to that end we work.”
Brett Bonecutter
Private Wealth Advisor
