Home inFocus The Issues Issue (Winter 2020) Recovering the Case for Capitalism

Recovering the Case for Capitalism

Yuval Levin Winter 2020
Adam Smith

After decades of defending one tree or another, many friends of capitalism have lost sight of the forest – of what democratic capitalism is, of its virtues and vices, its strengths and weaknesses, its political and moral as well as its economic justifications. Our task is therefore a recovery of that understanding, which will clarify both our objections to the policy direction of the moment and our prescription for a better way.

Adam Smith’s Moderate Virtues

As always, when we want to become reacquainted with ourselves, we Americans would be wise to start with a refreshing dip into the late 18th century, when our way of life was born. In this case, we should begin by dipping into Adam Smith, and the original case for capitalism, before returning to our own time.

The father of modern economics was a moral philosopher, a student of human nature and social institutions. His theories of political economy were thus one element of his larger project for the direction of human passions and appetites.

Smith began with a middling view of human nature, neither utopian nor cynical. He believed that even though human beings are fundamentally self-interested, we can be guided toward sympathy and benevolence.

Smith said plainly that there is no use in trying to persuade men to be virtuous. No amount of rational argument or recitation of a catechism will do the trick. Rather, it is the experience of life in society, and the modest sympathy and conscience that develop through that experience, that build in human beings the moderate virtues that he thought of as essential – prudence, restraint, industry, frugality, sobriety, honesty, civility, and reliability. These are the virtues of the liberal society. They are solid virtues, and yet low ones, attainable by more than just a noble few. They allow for stable and productive lives, helping to form people who can be trusted with a great deal of freedom, and so make moral coercion by the state less necessary.

These moderate virtues are in a sense all just versions of one larger virtue: self-command, or self-control. This is what Smith thought of as the key to the liberal society. “Self-command,” he wrote, “is not only itself a great virtue, but from it all the other virtues seem to derive their principal lustre.” And he defined self-command as the capacity for delayed gratification and restraints upon the appetite – in a word, discipline.

The Commercial Society

The question Smith sought to answer was, given that men are profoundly imperfect, can they be made to want to do good, so that they do not have to be forced to do good? Smith insisted throughout his writings that the answer is yes, and that the free market is one important means of making that happen. It involves the direction of appetite, not an unleashing of appetites. It is a case for the possibility of discipline and self-restraint, not an argument against the need for them.

But as Smith might be the first to say, the fact that this was his intention hardly guarantees the consequences. And without question, the moral case for capitalism – and especially the case for capitalism as a system of discipline – has long been subject to serious criticism. To recover the case for capitalism beyond Adam Smith’s original formulation, we have to take those criticisms seriously.

The Trouble with Capitalism

There is not today, and perhaps there never has been, a serious economic critique of the fundamental tenets of capitalism. There are only moral critiques. Even those opponents of capitalism who proposed alternative systems – like socialists and communists – generally offered moral systems, and not genuine economic theories that tend to fall into two categories.

One, popular with those socialists and communists as well as with many less hostile liberal critics, is that capitalism is unjust to the poor. This meant at first that capitalism degraded the condition of the poor: Some early critics of capitalism contended that the circumstances of workers, especially in manufacturing occupations, were worse than anything the poor had ever experienced before the advent of free-market economics and the Industrial Revolution. But no such case could be sustained today. It is true that inequality persists, of course, but the standard of living of the poor has risen dramatically under capitalism, and the potential for escaping poverty is nowhere greater than in capitalist economies.

Today, the focus of such critics is on inequality itself. The condition of the poor, they say, generally does not improve as swiftly as that of the rich, so that the gap between the wealthiest and poorest is expanding – to the detriment of social cohesion and basic justice. There is some truth to this, at least sometimes, but it only amounts to a moral indictment of capitalism if we believe that an equality of conditions is the essence of justice. Otherwise it would be foolish to reject the greatest source of material progress for the poor in human history on the grounds that it allows others to progress even faster. Moreover, it is far from clear that some systemic feature of the market economy holds back the poor. Today in America, the causes of persistent poverty have far more to do with culture than with economic injustice.

But that very point brings us to the second and more serious moral critique of capitalism: that it empties social life of any higher meaning, and so leaves society morally bankrupt even as it grows materially wealthy. Is capitalism in fact just a means of replacing material poverty with spiritual poverty? Is the market a money-making machine that burns social capital for its fuel, leaving in its wake a society of opulent nihilists?

“Trade aimed at profits,” wrote Saint Thomas Aquinas, “is most reprehensible, since the desire for gain knows no bounds.”

Adam Smith expected, on the contrary, that the market would discipline society and set bounds on our appetites. But as it turns out, our capitalist age is generally not an age of discipline. Far from it: our society in most respects is a study in unbounded appetite. Our chief public-health problem is obesity. Our foremost social pathologies result from an absence of sexual restraint and personal responsibility. Our popular culture much of the time is a diabolical mix of Babylonian decadence and Philistine vulgarity. And our public life is a gluttonous feast upon the flesh of the future – we use more than we need, spend more than we have, and borrow more than we can pay. For all of our immense wealth, we somehow manage to live far beyond our means. In fact, it is almost fair to say that we lack for nothing except discipline. But as Adam Smith could tell us, discipline above all is what we require to be free.

This is no small problem for the case for capitalism.

What happened? In part, Adam Smith surely understated – and perhaps underestimated – the challenges of sustaining moral norms amid economic dynamism. His expectations rested on an assumption of what to us seems like exceptional social and moral consensus, but what to him was the reality of British life in the late 18th century. The loss of such consensus, brought about in no small part by our capitalist economy itself, is a defining fact of American life in the 21st century. And the challenge of sustaining our way of life in light of that loss is the defining problem of our political economy.

Moreover, an economics of growth and an ethic of restraint make for an awkward match, and the disciplining signals of the market alone are not enough to bridge the gap. Indeed, the ethic of the capitalist producer and the ethic of the capitalist consumer are in some ways worlds apart. The prosperity engine of capitalism depends on consumer desires that exceed pure needs, and so on some spirit of excess that has to be kept in balance by a spirit of temperance.

At the very least, Smith was mistaken to assume that capitalism could produce sufficient moral authority to provide that balance on its own. Such authority would have to come from more traditional moral and cultural institutions beyond the market. And our case for capitalism must therefore also be a case for those institutions – for the family, and for religion and tradition. Democratic capitalism at its best combines the strengths of these institutions with the power of the market – never an easy mix, but one America has often managed.

But in part, we have also corrupted Smith’s vision of capitalism in ways that undermine precisely its civilizing powers, and that make it increasingly difficult for us to reap the benefits of the market system as we correct for its deficiencies. The two key moral features of Smith’s political economy – its democratic or popular character and its disciplining effect – have been under assault in our time: the first by a growing collusion between government and large corporations, and the second by a welfare state expanding its reach well beyond the needy. The case for capitalism is nothing if not a case against these two ruinous trends.

The Technocratic Turn

Neither trend would have shocked Adam Smith. He knew that some among the wealthy and powerful would always look for exemptions from the rigors of competition, and he urged legislators to resist the pressure to grant such exemptions. Though he was a champion of free markets, Smith was no fan of big business, believing it should be subject to the rules of open competition without exception – rules that will turn their self-interest toward more constructive paths. Otherwise, both the efficiency of the market and the public’s confidence in the fairness and legitimacy of the system will be dangerously undercut. Capitalism is a fundamentally populist enterprise governed in the interests of the mass of consumers, and it depends upon a clear separation between government and business.

Meanwhile, Smith also makes clear that the near-universality of the market is essential to its civilizing effects on individual workers, as well as large companies. As more individuals, too, are shielded or excluded from the market, the organizing and disciplining power of the system will wane dramatically, leaving a vacuum that will no doubt be filled by eager legislators brimming with bad ideas.

The modern welfare state has just this effect.

Welfare arose as an understandable response to the dislocations wrought by capitalism and to the poverty that we will always have with us. And when it comes to the poorest of the poor, who cannot subsist without help, a decent society is not only right but obligated to offer help. But the modern welfare state extends well beyond the indigent. The largest portion of our entitlement system by far is directed to the elderly, and is not means-tested to ensure that only those among them who need help receive it. Other middle-class entitlements abound, and policymakers in Washington today are busy designing even more. The way they are now constructed, these enormous entitlements are not paid for, and their imminent bankruptcy casts a giant shadow over the future of our country. But even if they were paid for – as they probably will be someday, by an enormously expanded tax burden – they would undercut the basic logic of the capitalist economy: Citizens would increasingly give over their wealth to legislators who would then decide how to allocate it, rather than letting the market play the mediating role.

This is not about public aid for the destitute. It is a gradual but unmistakable transformation of the character of our political economy. Both the growing collusion of big business and government and the growing middle-class welfare state are expressions of a longstanding technocratic distaste on the left for the market economy, and especially for the democratic character of capitalism. They are attempts to allocate capital more efficiently than the whims of consumer preferences could, and to provide material benefits to the public without the discipline of market rules.

The core of Adam Smith’s argument, borne out by two centuries of evidence, was that such micromanagement and concentration of power are neither more efficient nor more benevolent than the market. Smith was scornful of the statesman who is confident he can get it all just right:

He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon a chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.

Legislators simply cannot know enough, and cannot sufficiently avoid the influence of political motives and interests, to micromanage the market successfully. But the technocratic itch persists, because capitalism can never be tidy enough to satisfy the deep progressive urge for rational control.

Defending the Market

America has great reserves to draw upon. To begin with, it is crucial to see that for all the problems it faces, the free-enterprise system works, and works well.

Properly understood, the case for capitalism is not a case for license or for laissez faire. It is a case for national wealth as a moral good; for the interest of the mass of consumers as the guide of policy; for clear and uniform rules of competition imposed upon all; for letting markets set prices, letting buyers make choices, and letting producers experiment, innovate, and make what they think they can sell – while protecting consumers and punishing abuses. It is a case for avoiding concentrations of power, for keeping business and government separate, and for letting those who can meet their own needs do so. It is a case for humility about our ability to know, and therefore about our capacity to do.

And it is a case for the moderate virtues, encouraged by market pressures but finally drawn from deeper wells – from the wisdom of tradition, the love of the family, and the divine and mysterious tug of a love beyond love, all of which must in turn be supported, encouraged, and strengthened. This is perhaps the most daunting challenge confronting the friends of capitalism today.

Adam Smith was right to say that the virtues of self-command and discipline are utterly essential to capitalism and to the liberal society more generally. But he was wrong to think that democratic capitalism could produce them on its own. These virtues in fact sometimes run against the grain of our liberal capitalist culture, and so have to be sustained by a constant resistance and friction, and a constant recurrence to older pre-liberal sources of wisdom. This can be unpleasant, and it is a duty all too easy to shirk. The cause of restraint, frugality, and discipline certainly lacks visceral appeal. Without that resistance, we could not hope to remain strong and wealthy enough to be of use to the poor of the world. Free and prosperous societies are in constant need of a prosaic social conservatism to remind them of the less-than-obvious truth that their freedom and prosperity depend upon restraint and self-command.

But on this front, too, our country is well suited to the challenge we face. Americans are a churchgoing people, with a long-running strain of social conservatism and a history of moral revivals geared toward bolstering a humble self-command. Our social indicators are by no means on a one-way trip to the abyss – indeed, we have seen some important ones, like crime, drug use, and teen pregnancy, improve in our time, and we know that dramatic changes for the better are possible. We should look for ways to encourage such changes, but must also know that for the most part they will not be matters of public-policy prescriptions but of moral and cultural progress.

We are after all in need of balance, not of transformation – of securing and reviving what we have, not looking for a new ideal. The fact is that the American case for capitalism in all of its facets, and even in our difficult time, is a case for preservation more than a case for change. It is a conservative case – both economically and morally, and one that should help fiscal and social conservatives see that they are fighting the same fight, on the same side.

Our purpose is to protect and strengthen our way of life, to stand up for a social and economic system that has lifted billions out of poverty and vastly improved our world in countless ways, and to avert a careless slide toward social-democratic melancholy and decline. This general purpose, of course, has to take form in specific instances and choices, and exactly how the broad conceptual argument for capitalism should be translated into policy is always a matter of case-by-case prudence. But that does not mean that we can do without the broader argument – the argument first framed by Adam Smith, and refined by two centuries of theory and practice, especially in our country. It is an argument for individual freedom amid moral order, and for prosperity sustained by sympathy and discipline. It is an odd modern hybrid: a conservative case for the liberal society. As such, it is also an integral piece of the case for America.

Yuval Levin is director of social, cultural, and constitutional studies at the American Enterprise Institute and editor of National Affairs. This essay is adapted from a Bradley Lecture delivered at the American Enterprise Institute.