Reforming capitalism for freedom

MICHAEL M. MILLER writes that our economy needs serious reform — business as usual is not acceptable. However, a correct diagnosis of the problem is in order before making significant changes. He also argues that the free market requires serious moral restraint — especially on the part of those with power like big businesses and government  . . . . 

Michael M. Miller

In the wake of the financial crisis, one of the recurring themes among business and political leaders is the need to reform capitalism and create new ways to think about business and the role of profit.

The common narrative is that “business as usual” doesn’t work. We’ve tried the free market and while it made money for some, it also caused the housing boom, the financial crisis, and created a society where all that matters is making as much profit as possible. The financial crisis is calling us to come up with new models of how we should arrange the economy. There are two issues here: first, a new way of looking at business and second, the reform of the current economic system. Let me address both, beginning with business.

It’s good that business leaders are making an effort to understand that business is about more than just profit. Profit is important, of course, but as Blessed John Paul II reminded us, profit is not the main purpose of business. The main purpose is to serve human needs and wants. Profit is one of the indicators that reveals whether you are meeting those needs.

I also agree that business as usual is not enough. We’ve had some serious moral crises in business from fraudulent accounting to big banks colluding with the government to receive special bailouts. What’s more, business is not outside the requirements of morality. Most corporate social responsibility programs have a serious flaw — they are relativistic. You can’t build a culture of business ethics if there is no truth and no right and wrong. Though mainstream business leaders rarely talk about it, business has the moral and social responsibility to cultivate a healthy moral ecology. This means honesty and obeying the laws; it also means respecting families and not exploiting women to sell products.

Let’s move to the issue of reforming the economy. There is incessant talk about the need to reform capitalism, but my first question is: What do we mean by capitalism? Unfortunately, the term “capitalism” has become proxy for “that which is bad” and often becomes a substitute for the sins of greed and avarice. There’s another problem — and a more serious one. In common parlance word “capitalism” is usually identified with a free-market economy both by its detractors and defenders. But capitalism and the free market are not always the same thing. There are many different varieties of capitalism: oligarchic capitalism, corporate capitalism, crony capitalism, managerial capitalism, and free-market capitalism to name a few.

Most of the critics of capitalism lament so-called “market fundamentalism” or “unfettered markets,” but we don’t have anything of the sort. What we have in the U.S. is a type of managerial-crony capitalism where big business and big government collude to make regulations that serve their interests. When things went wrong with our managerial capitalist system, instead of assigning blame correctly we blamed this mythical free market.

Our economy does need reform, but if we are going to address a problem we have to identify it correctly. The problem is that our diagnosis is wrong. The source of the financial crisis was not “market fundamentalism” but a complex interrelationship of government regulation, lobbying by interest groups, the manipulation of interest rates and the money supply, big business and government collusion, and political and social policy all mixed in with age-old vices like greed and imprudence.

There is a tendency to think that the default position of capitalism is a free market and that regulations and government interventions are necessary to resist this return to what is called “unfettered” or “savage” capitalism. But this is a serious misconception. In practice, the free market requires serious moral restraint — especially on the part of those with power like big businesses, government and interest groups. They have to exercise restraint and virtue not to use their power to gain an unfair advantage by colluding or lobbying the government for protection. One of the most important, though often neglected, elements of authentic corporate social responsibility is for companies to help maintain and encourage a free and competitive economy that enables entrepreneurs to compete — even if this means a possible loss to their own business. Too often companies, once they become successful, look to government to undermine the free and competitive economy that they benefited from.

Free economies are like free societies. As William Allen said well, you cannot have self-government without self-governors. In the same way you cannot have a free economy without free and virtuous people. A real free and competitive market, to use Lord Acton’s line, is “the delicate fruit of a mature civilization.”

MICHAEL M. MILLER is a research fellow at the Acton Institute and director of PovertyCure, which promotes entrepreneurial solutions to poverty in the developing world.