Morality and Capitalism

Contrary to what some may believe, I am a committed capitalist. Capitalism is by far and unquestionably the most efficient system for the creation of wealth ever designed or imagined by the mind of man. I can think of no other economic system that even comes close.

I would be terribly disappointed to see it collapse or be destroyed.

However, we capitalists desperately need to remember that, like any other social system, and a lot more than most social systems, capitalism depends on many delicate balances to function properly. If any of those necessary balances gets skewed in one direction or another, the capitalist system loses efficiency in direct proportion. If any of them gets skewed too far, the capitalist system will cease to function at all.

One of those delicate balances is the sharing of the wealth created among those who helped to create it.

A few observations about wealth are necessary. All of these observations come, directly or indirectly, from Adam Smith's epic work, "The Wealth of Nations."

First, money is not wealth. Money represents a right to acquire wealth, and a right only to the extent that right is supported by the social structure. But, money itself is not wealth. Corn is wealth. Gold is wealth. Iron is wealth. Cars and houses and land and tables and bed linens and even ideas are all wealth, but money is not wealth.

Second, no matter what the wealth may be, no matter what form it takes, it requires two things to create new wealth: capital and labor. Certain kinds of wealth require more labor and less capital to create. Other kinds require more capital and less labor. But, all new wealth is created by a combination of labor applied to capital.

Third, any system can create only a finite amount of new wealth in a given interval of time. This is because the amount of existing capital and available labor in any system is finite, so they can only be combined, even at maximum efficiency, in a way that produces a finite amount of new wealth in a given interval of time.

Take, for example, iron ore. Iron ore is capital. When it is in place in the ground, it is a form of real property, with a certain value - a measure of the wealth it is. When it is removed from the ground, its value - the measure of the wealth it is - increases. But, it cannot be removed from the ground without the application of labor. By applying the labor of mining to the capital of iron ore in the ground, new wealth is created. New capital is not created. There is no more iron ore than there ever was, but the value - the wealth that ore is - increases.

Likewise when the iron ore is smelted and becomes iron. And then when the iron is combined with other elements and becomes steel. Then when the steel is fabricated into automobile parts. Then when those parts are assembled with other elements to become an automobile. Then when the automobile is transported to the dealership. At each of these steps, labor is applied to capital to create new value - new wealth. Remember, no new capital is created, only new wealth.

So, to gain the advantage of the incredibly efficient system for creating new wealth that we call capitalism, we must have both capital and labor. Without capital, labor is merely wasted time. Without labor, the value of capital remains static; no new wealth is created.

The question then becomes, how should we share the new wealth that is created by applying labor to capital? Specifically, how much of that new wealth should become the property of the person who owns the capital, and how much should become the property of the person who contributed the labor?

I have not used the word "should" by accident. The question is, how should we divide the new wealth created by this partnership of the person who supplies the capital and the person who supplies the labor. I submit that this question is a moral question, in addition to being an economic question.

Allow me to elaborate. The options for sharing the new wealth lie along a spectrum. At one end of the spectrum, the person who contributes the labor gets all the new wealth created and the person who contributes the capital gets none of it. We have a name for this end of the spectrum. It is called communism.

At the other end of the spectrum, the person who contributes the capital gets all the new wealth created and the person who contributes the labor gets none of it. We also have a name for this extreme of the spectrum: slavery.

There may be some who would disagree, but in general, people will recognize that it is immoral to take soemone's capital - his or her property - and give him or her nothing for it. Likewise, people generally understand that it is immoral to take someone's labor and give him or her nothing in exchange for it. So, people will recognize that both ends of the spectrum that illustrates how the new wealth can be shared are immoral.

It follows, therefore, that there is some area in the center of the spectrum - that area where the capital contributor and the labor contributor - both get some of the wealth they jointly create. Now, clearly, people will disagree about where that "moral" range is. Some will argue that it is somewhere closer to the laborer, and others will argue that it is somewhere closer to the capitalist. But, to argue that such a "moral" range for sharing the new wealth does not exist is to ignore the obvious fact that both extremes are immoral, therefore somewhere in the middle there has to be a compromise that is, at the very least, not immoral.

I am convinced that we need to have a clear-eyed discussion about what we think is a moral compromise for the sharing of new wealth created by our incredible economic system. If we don't, we run the risk that one side or the other will decide that what they are getting for their contribution is simply unfair. If, when that happens, the other side has so much of the wealth that they can force the other side to participate at whatever "compromise" they dictate, the result will be the destruction of the system.

We will have, in our greed, destroyed the goose who laid all our golden eggs.

Let us hope we will not be so foolish.