At home and abroad, we all need to be reminded of the moral virtues of capitalism

I LOVE free market capitalism. The reason is simple: I hate famine, disease, misery, and oppression. I’m on a tour around the world to promote the liberating power of free-market capitalism.

I’ve edited a book on the subject, The Morality of Capitalism, which is coming out in at least 16 languages. Last week I was in Afghanistan, where these ideas are urgently needed. This week I’m in the UK, celebrating capitalism in one of the most important countries of its birth.

So what is “capitalism”? It’s a legal, social, economic, and cultural system of decentralised innovation – what the economist Joseph Schumpeter called “creative destruction” – that relies on the voluntary cooperation and exchange among legal equals. Capitalist culture celebrates the entrepreneur, the scientist, the risk-taker, the innovator, the creator. Although derided as materialistic by some, capitalism is at its core a spiritual and cultural enterprise. As Joyce Appleby noted in her recent book The Relentless Revolution: A History of Capitalism, “Because capitalism is a cultural system and not simply an economic one, it cannot be explained by material factors alone.”

Far from being an amoral arena for the clash of interests, capitalist interaction is highly structured by ethical norms and rules. Capitalism rests on a rejection of the ethics of loot and grab, the means by which most wealth enjoyed by the wealthy is acquired in other economic and political systems. For much of human history, those who were rich were rich because they took from others, and especially because they used their power to gain monopolies and to confiscate the produce of others through taxes. It’s only under conditions of capitalism that people commonly become wealthy without being criminals.

The term “capitalism” has an interesting history. The historian Fernand Braudel traced the term “capital” to the period spanning the twelfth and thirteenth centuries, when it referred to “funds, stock of merchandise, sum of money, or money carrying interest.” Of the many uses of the term “capitalist” that Braudel catalogued, he noted dryly, “The word is never... used in a friendly sense.” The word “capitalism” emerged as a term, generally of abuse, in the nineteenth century. The French socialist Louis Blanc defined it as “the appropriation of capital by some to the exclusion of others.” Karl Marx used the term “capitalist mode of production,” and it was his ardent follower Werner Sombart who popularised the term in his influential book Der Moderne Kapitalismus.

Despite its critics, capitalism is a uniquely powerful, uniquely liberating system. It is about creating value, not merely working hard, or making sacrifices, or being busy. Those who don’t understand capitalism support “job creation” programmes. The economist Milton Friedman was once shown construction on a canal in Asia. When he noted that it was odd that the workers were moving huge amounts of earth and rock with small shovels, rather than earth-moving equipment, he was told: “You don’t understand; this is a jobs programme.” His response: “Oh, I thought you were trying to build a canal. If you’re seeking to create jobs, why didn’t you issue them spoons, rather than shovels?” Voluntary enterprise creates value, while governments usually just create busyness (and sometimes not even that).

It’s important to distinguish free-market capitalism from crony capitalism, a system that has mired many nations in corruption and backwardness and is, sadly, on the rise. In many countries, if someone is rich, there is a very good chance that he (rarely she) holds political power or is a close relative, friend or supporter – in a word, a crony – of those who do hold power, and that his wealth came not from being a producer of valued goods and services but from enjoying the privileges that the state can confer on some at the expense of others.

Sadly, crony capitalism can with increasing accuracy be applied to the economy of the United States, a country in which failed firms are routinely bailed out with money taken from taxpayers, in which the national capital is a gigantic hive of lobbyists, bureaucrats, politicians, consultants and hacks, and in which appointed officials of the Treasury department and the central bank reward some firms and harm others.

Such corrupt cronyism shouldn’t be confused with free-market capitalism, which is based on the rule of law, on equality of rights for all, on the freedom to choose, on the freedom to innovate, on the guiding discipline of both private profits and private losses. Under American cronyism, the many are bought off with subsidised home loans, the economy generates a huge bubble, the financial system crashes and the powerful get bailouts, only to be followed by more bailouts, easier money and another cycle.

The cronyist system of private profits and socialised losses hasn’t worked out too well. Give me free-market capitalism any day.

Tom Palmer is executive vice president of the Atlas Network and works with over 400 free-market think tanks around the world.

Capitalist culture celebrates the creator, the risk-taker, the scientist, the innovator

City A.M.'s Opinion pages are a place for thought-provoking opinions and views. These are not necessarily shared by City A.M.

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