December 9, 2005

Excerpts: The Battle For The Soul of Capitalism - Part III

By: 800-CEO-READ @ 7:27 PM – Filed under: Management & Workplace Culture

Capitalism—The Virtuous Circle

Capitalism, Webster’s Third International Dictionarytells us, is “an economic system based on corporate ownership ofcapital goods, with investment determined by private decision, and with prices, production, and the distribution of goods and services determined mainly in a free market.” Importantly, I would add, it is “a system founded on honesty, decency, and trust,” for these attributes too have been clearly established in its modern history.

During the eighteenth and nineteenth centuries, as the world moved from its agrarian roots toward an industrial society, capitalism began to flourish. Local communities became part of national and, later, international commerce; trading expanded; and large accumulations of capital were required to build the factories, develop the transportation systems, and fund the banks on which the new economy would depend. Surprising as it may seem today, according to an article by James Surowiecki in Forbes, the Quakers were at the heart of this development.

In the 1700s and early 1800s, Quakers dominated the British economy, probably because their legendary simplicity and thrift endowed them with the capital to invest. They owned more than half of the country’s ironworks and played key roles in banking, consumer goods, and transatlantic trading. Their emphasis on reliability, absolute honesty, and rigorous record-keeping infused them with trust as they dealt with one another, and other observant merchants came to see that being trustworthy went hand in hand with business success. Self-interest demanded virtue.

This coincidence of virtue and value, of course, is exactly what the great Scottish economist and philosopher Adam Smith expected. In The Wealth of Nations in 1776, he famously wrote, “The uniform and uninterrupted effort to better his condition, the principle from which [both] public and private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improvement. ...Each individual neither intends to promote the public interest, nor knows how much he is promoting it...[but] by directing his industry in such a matter as its produce may be of the greatest value, he is led by an invisible hand to promote an end which was no part of his intention.

And so it was to be, the Forbes essay continued, that “the evolution of capitalism has been in the direction of more trust and transparency and less [purely] self-serving behavior; not coincidentally, this evolution has brought with it greater productivity and economic growth. . . . Not because capitalists are naturally good people, [but] because the benefits of trust—of being trusting and of being trustworthy—are potentially immense, and because a successful market system teaches people to recognize those benefits...a virtuous cycle in which an everyday level of trustworthiness breeds an everyday level of trust.”

Said differently, capitalism requires a structure and a value system that people believe in and can depend on. We do not need a Pollyannaish faith in the goodwill of mankind, but we do need the confidence that promises and commitments, once made, will be kept. We also need assurances that the system as a whole does not unduly benefit some at the expense of others. It is these elements that led capitalism to flourish.

link to book