Content provided by Steve Donahoe, CLS Senior Portfolio Manager

A colleague recently mentioned a book to me that I thought had an interesting title: The Morality of Capitalism: What Your Professors Won’t Tell You. The book is edited by Tom G. Palmer.

I consider myself a capitalist to the bone because, if for no other reason, I cannot fathom ever being retired. After all, if I’m not taking care of me, who will? I don’t like the answers to this question that come to mind. Given my capitalistic views, this seemed like a book I should read.

Before reading the introduction to the book, I derived my personal definition of capitalism from a speech I heard many years ago. The speaker said something along the lines of, “capitalism is defined as the unequal distribution of wealth as opposed to socialism being the equal distribution of poverty.”

If you just take the first portion of that definition (unequal distribution of wealth), capitalism seems unfair from the start. But life is not fair and in my opinion, pretending that it should be fair is waste of resources that can be used to better one’s position in whatever aspect of life a person chooses. In my opinion, rewards should flow to those who not only show up every day, but also add value.

Now, I do believe we have an obligation to those who are less fortunate, but we shouldn’t make being unfortunate too easy to accomplish. In other words, I believe we should avoid the equal distribution of poverty.

Following are some points on capitalism noted in the introduction of the book. Considering my view of the world, I found them both interesting and refreshing.

The term “capitalism” refers not just to markets for the exchange of goods and services, which have existed since time immemorial, but to the system of innovation, wealth creation, and social change that has brought to billions of people prosperity that was unimaginable to earlier generations of human beings.

…capitalism rests on a rejection of the ethics of loot and grab, the means by which most wealth enjoyed by the wealthy has been acquired in other economic and political systems. (In fact, in many countries today, and for much of human history, it has been widely understood that those who are rich are rich because they took from others, and especially because they have access to organized force—in today’s terms, the state. Such predatory elites use this force to gain monopolies…

It’s only under conditions of capitalism that people commonly become wealthy without being criminals.

Capitalism is about creating value, not merely working hard or making sacrifices or being busy.

Adding value by growing potatoes in Idaho or by etching silicon in Taipei is adding value. Comparative advantage1 is a key to specialization and trade; there is nothing degrading about producing value, as a farmer, as a furniture mover (I worked with three movers today to move much of my library and I have a very solid sense of how much value they added to my life), as a financier, and so on. 

The market—not arrogant mercantilist politicians—shows us when we are adding value, and without free markets, we cannot know.

…[Capitalism] is about adding value through the mobilization of human energy and ingenuity on a scale never seen before in human history, to create wealth for common people that would have dazzled and astonished the richest and most powerful kings, sultans, and emperors of the past. 

It’s about the replacement of envy by accomplishment. 2

Modern free markets are not merely places of exchange, as were the market fairs of old. They are characterized by waves of “creative destruction”; what was new ten years ago is already old, superseded by improved versions, by new devices, institutional arrangements, technologies, and ways of interacting that were unimagined by anyone. That is what distinguishes modern free markets from the markets of old. The best available term to distinguish the free-market relations that have made the modern world from those markets that preceded it, in my opinion, is “capitalism.”

Capitalism isn’t a form of disorder, though. It’s a form of spontaneous order, which emerges from a process.  

…[Corrupt crony-capitalism] shouldn’t be confused with “free-market capitalism,” which refers to a system of production and exchange that is based on the rule of law, on equality of rights for all, on the freedom to choose, on the freedom to trade, on the freedom to innovate, on the guiding discipline of profits and losses, and on the right to enjoy the fruits of one’s labors, of one’s savings, of one’s investments, without fearing confiscation or restriction from those who have invested, not in production of wealth, but in political power.

Wealth has causes, but poverty does not; poverty is what results if wealth production does not take place…  

In the end, you may completely disagree with my view of the world and that is fine. But the concepts in the book as communicated in the introduction make me feel good because I know there are at least some people out there thinking the way I do.

At CLS, we look for innovative ways to add value to our clients’ portfolios. Risk budgeting itself is a unique way to add value as it moves us from a simple stock-to-bond approach to an approach centered on risk and how it changes over time…just like real peoples’ lives do.

1For a simple arithmetic explanation of the principle of comparative advantage, see
2Envy as an impulse harmful to social cooperation and inimical to free-market capitalism has been studied by many thinkers. A recent and interesting approach that draws on the Indian classic epic The Mahabharata can be found in Gurcharan Das, The Difficulty of Being Good: On the Subtle Art of Dharma (New York: Oxford University Press, 2009), esp. pp. 1-32.


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