In praise of capitalism, the noble path that leads to profits

Contrary to modern myth, profits are not always a result of greed, but a signal of virtue. Stuart Watkins reports.

Anticapitalist demonstrators
The youth are revolting
(Image credit: © Erik McGregor/LightRocket via Getty Images)

Not so very long ago, Millennials (those born between 1981 and 1996), and the generation coming up after them (“Zoomers”), were lambasted for being politically disengaged and apathetic. Now the criticism emanating from conservative circles is more likely to be that they’re fomenting a Maoist cultural revolution, shutting down debates they dislike, harrying folk with the wrong views out of their jobs, making Jeremy Corbyn leader of the Labour party, screaming: “How dare you!” at insufficiently green global leaders... and so on.

Surveys show that this is not a product of the fevered imaginations of crusty old reactionaries, as a report by Kristian Niemietz for the Institute of Economic Affairs (IEA) revealed earlier this year. “Younger people really do quite consistently express hostility to capitalism and have positive views of socialist alternatives of some sort,” says Niemietz.

Around 40% of Millennials, for example, agree with the statement that “communism could have worked if it had been better executed”. Seventy-three per cent of young people agree that capitalism fuels selfishness and greed, and that a socialist system would promote solidarity and compassion, for example. Sixty-seven per cent say they would like to live in a socialist system. And it’s not just Britain: a 2019 Gallup poll in the US found 43% saying socialism would be good for the country; the socialist candidate, Bernie Sanders, came close to winning the Democratic nomination for president in 2020.

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But haven’t youngsters always leaned left before the inevitable mugging by reality puts them right? This time it’s different, according to Niemietz. New surveys commissioned by the IEA confirmed what the data already showed – that there are now no detectable differences between the attitudes of people in their late teens and those in their early 40s on economic matters. The youth is refusing to grow up. Supporters of capitalism, says Niemietz, “should take ‘Millennial Socialism’ far more seriously than they currently do. They should treat it as a challenge and engage with it, rather than dismiss it or deny it exists.”

In praise of capitalism

Ed Yardeni, an American economic research analyst, has stepped up to that challenge with a new book explicitly aimed at converting the reds – In Praise of Profits (YRI Press, 2021). He dedicates his book to progressives and hopes they will read it with a view to becoming better informed about the views of their opponents, even as he celebrates what is positive in theirs. In Yardeni’s view, we should thank leftists for expanding the social safety net provided by the government, for winning the argument on progressive taxation, and for identifying and proposing solutions to entrenched and serious problems – child poverty, inequality, providing universal health care, calling out crony capitalism and excessive pay for executives, and so on.

Yet they have also succeeded in making profits a “four-letter word” – to the extent that even business executives now prefer not to mention it. And that, says Yardeni, just doesn’t make sense. For all the socialist rhetoric, few people these days seek a Bolshevik revolution – rather, they call on governments to act differently and to redistribute wealth more fairly. But to redistribute wealth you must be in favour of its creation in the first place – and that means profits. “Market-driven profit is the source of prosperity, not its nemesis. Ironically, profit is what drives the progress in living standards that progressives champion.”

It’s true, as Yardeni admits, that income inequality is an unavoidable consequence of capitalism. Indeed, it is to be expected that such inequality will get worse during periods of rising prosperity. The rich do indeed get richer – but then, so does almost everyone else. This is what Karl Marx got wrong. He portrayed the making of profits as a zero-sum game – what the capitalists greedily took for themselves as a matter of ownership and power was really, he thought, the stolen fruits of the labour of the workers and more rightfully belonged to them. The inevitable result is class warfare over the distribution of those profits.

What this ignores, says Yardeni, is that, in competitive markets, profits are available to any ambitious entrepreneur with access to the right resources and who has figured out a way to serve consumers better or more cheaply than their competitors. When they do this successfully, they get rich – but in doing so they also make the lives of consumers better, create jobs, and start the process that ultimately generates the wealth that leads to progress and higher wages. Ultimately, Marx “failed to understand that the only class that matters in capitalism is the consumer class, which includes everybody”.

Markets are good for the soul

This purely economic case for the market system is probably familiar and is so well established that it is accepted as uncontroversial by a broad consensus of all parts of the political spectrum within mainstream economics, as Walker Wright pointed out in a paper for the IEA in 2018. The idea that markets can also lead to moral growth is, however, more controversial – despite a growing body of evidence that this is the case. Historical periods of economic growth have tended to foster greater tolerance and social progress, according to analysis by Benjamin Friedman.

Economist Deirdre McCloskey has presented historical evidence that commercial life can foster the “bourgeois virtues” and shape market participants into more virtuous individuals. Wright’s paper brings together a number of studies to show that market exchange helps create the conditions in which liberal values flourish; refines our sense of fairness; promotes cooperation with those who are different from ourselves; develops networks of mutual trust and trustworthiness; generates tolerance and respect towards others; and undermines hostility and conflict.

These results should be of interest to socialists who avowedly pursue these goals, and suggest a way out of the culture wars – if you want to be truly “woke”, why not start a business, or take your place within the competence hierarchy of an already existing one, and serve to the best of your ability within it?

Ironically, the argument that capitalism is based on selfishness can be traced to Adam Smith – the political economist from whom Marx gleaned many of his ideas. Smith, in The Wealth of Nations, famously argued that it “is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest”. This was bad marketing, says Yardeni, and can only have come from a professor with no experience as an entrepreneur.

“The butcher, the brewer, and the baker get up early… and work all day long, trying to give their customers the best meat, ale, and bread at the lowest possible prices,” says Yardeni. “They don’t do so because of their self-love, but rather because of their insecurity. If they don’t rise and shine early each day, their competitors will, and put them out of business.

Entrepreneurial capitalism is therefore the most moral, honest, altruistic economic system of them all. Among its mottos are: ‘The customer is always right’, ‘Everyday low prices’, and ‘Satisfaction guaranteed or your money back’.”

Saints in the boardroom?

Leftists faced with such arguments are generally somewhat discombobulated. Public opinion, at least since the financial crisis and at regular historic intervals before then, has been dominated by the view that, whatever the virtues of markets may be in terms of generating filthy lucre, it is folly to expect anything from them but greed and immorality – that’s why they must be restrained by regulation if they are to be harnessed to the public good. But if that is wrong and markets actually foster moral growth, then why do folk generally turn for moral guidance to the Dalai Lama, say, and not the board of JPMorgan?

There are two answers to this – on the face of it, reasonable – objection. The first is that the butcher, the brewer and the baker, having made a success of their respective trades, might be tempted to band together with others of like trade and the government to protect what they have already won, as Yardeni explains. In doing so, they turn from the noble path of serving consumers to protecting themselves from competitors, and “crony capitalism” is born. That’s why government must seek, not to cherish and protect the businesses that have already been built, but the capitalist system itself. For this system to function, in its role of generating both wealth and the bourgeois virtues, the overt or heroic acts of selflessness that we tend to celebrate as true moral behaviour are not required. The result is virtue nonetheless.

The second is that no system will work if you don’t. In other words, no social arrangement can be expected to generate noble outcomes if the people working within it aren’t striving to be noble themselves. Those who defend markets in the face of mounting attacks on their immorality – from conservatives who see a bigger role for the state as well as from the left – “must provide a vigorous response”, says Richard Reinsch on the Law and Liberty website. But the problem such defenders will have is that the arguments that stand their ground in that battle of ideas were once backed by the “biblical understanding of the audience and a bourgeois work ethic of integrity, thrift, diligence and honesty”.

Since the cultural revolution of the 1960s, those values have been in decline, leaving a “spiritual vacuum” that has been filled by egalitarianism and other ideologies. German economist Wilhelm Röpke recognised the problem when he and others sought to create a new Germany among the ruins created by Nazism. The market economy requires, Röpke wrote, “a firm moral, political and institutional framework (a minimum standard of business ethics, a strong state, a sensible ‘market police’, and well-weighed laws appropriate to the economic system) if it was not to fail and at the same time destroy society as a whole by permitting the unbridled rule of vested interests”. Röpke argued, says Reinsch, for a “liberalism with deep moral roots”. We must seek purpose as well as profits.

How to pursue profit

The nature of the tricky path through these seeming contradictions is well illustrated by economist John Kay in his book Obliquity (Profile Books, 2011). The most profitable companies, he argues, are not, paradoxically, the most profit-oriented.

He gives the example of Boeing, once the most powerful market leader in world business. While creating its dominant position, the company was led by Bill Allen, who said that the aim was to eat, breathe and sleep aeronautics: “The greatest pleasure life has to offer is the satisfaction that flows from participating in a difficult and constructive undertaking,” he said.

A later transformation in the corporate culture, following Boeing’s acquisition of its principal US rival, was exemplified by the new CEO who said that the focus from then on was to be on unit costs and return on investment. The result was, however, not a profits boom, but a huge fall from grace.

Seek to serve your customers (or your employers), and do it well, and profits might flow. Seek profits as an end in themselves, and you have left the noble path to prosperity.

Stuart Watkins

Stuart graduated from the University of Leeds with an honours degree in biochemistry and molecular biology, and from Bath Spa University College with a postgraduate diploma in creative writing. 

He started his career in journalism working on newspapers and magazines for the medical profession before joining MoneyWeek shortly after its first issue appeared in November 2000. He has worked for the magazine ever since, and is now the comment editor. 

He has long had an interest in political economy and philosophy and writes occasional think pieces on this theme for the magazine, as well as a weekly round up of the best blogs in finance. 

His work has appeared in The Lancet and The Idler and in numerous other small-press and online publications.