Capitalism: Still the Best System
Minneapolis Star Tribune
Fred Kiel and Doug Lennick

Recent disgust with the excesses and betrayal of trust in U.S. corporations tempts us to condemn capitalism. Don't blame capitalism. And don't think the grass is greener on the other side of the fence. The other system for organizing economic life tried in the past 100 years was a disaster.

Capitalism is by far the best economic system ever invented and holds great promise for our collective future. But in recent years, something has been missing from our understanding of capitalism.

The underlying beliefs about our free-market capitalistic system are usually attributed to the Scottish economist and philosopher Adam Smith. In his classic, "The Wealth of Nations," (1776) he said the free market system is the best way to obtain the greatest good. Adam Smith believed that when people act in their economic self-interest, it amounts to an "invisible hand" that creates good for all.

So let's focus exclusively on satisfying our own needs and everybody wins, right?
Well, that's not quite what Smith said. What's usually not mentioned when Smith's ideas are discussed is that he was actually better known as a philosopher who wrote a best seller called "The Theory of Moral Sentiments." In it he stated that we are all born with a "moral sense" -- that is, he believed humans are innately equipped with consciences.

Because of this assumption, he thought that the "invisible hand" of economic self-interest would be governed by the peoples' moral sense. Economic self-interest, yes, but in the context of what's good for all. Smith did not envision the "invisible hand" as a competitive, cutthroat economic system where you take and grab what you can for your personal gain and do your best to destroy your competitors.

He envisioned it as a people working competitively and productively for individual gain and cooperatively for the overall good of society.

We think he got it right. Basically, this is what has happened in the past two centuries. By all measures, a significant number of people on the face of the Earth have experienced unprecedented prosperity, living much better today than royalty lived 200 years ago. We all know that we have a long way to go before all of humanity has even the basics, but it was a lot worse before.

Following the rules

Capitalism's successes all hinge on people trusting the system -- trusting that when I engage in commerce with you, that you will not cheat me. Smith's underlying assumption was that we are all moral individuals and we will operate our market by playing by the rules.

And the rules were moral rules: Keep your word. Be responsible for your actions. Tell the truth. Do unto others as you'd have them do unto you.

Daily news accounts detail the numerous ways in which business executives have not played by those rules.

New rules seem to have crept into the system. The common assumption seems to be, "Yeah, being highly ethical and moral in business is the right thing to do, but it's naive to think that this is the way the world works. Sometimes you just have to do things to survive. Playing hardball means you have to bend the rules."

Such thinking is bad business. The cost of moral stupidity is reported daily. Marsh McLennan, the world's largest insurance broker, just paid $850 million in fines for cheating customers, and three of its executives have pleaded guilty to bid-rigging. Andrew and Lea Fastow, both senior executives at Enron, are either in jail or heading there for the massive fraud that led to the Enron disaster.

(Actually, they're taking turns in jail so their kids don't have to be taken care of by nannies all the time. Why don't ghetto kids get such consideration?)

The Arthur Andersen accounting firm no longer exists, another casualty of Enron. And then there's the mutual fund industry. Strong, Putnam, Janus and several others are struggling to recover from their after-hours trading sins. And who can forget Worldcom, HealthSouth, Tyco and Boeing? Boeing fired two CEOs, and two other former executives are serving prison terms for contracting scandals. The list is long and getting longer. True, HealthSouth CEO Scrushy was acquitted last week. But he is the exception.

Playing by these new but morally bereft rules has cost billions of dollars for shareholders, lost jobs and retirement funds for employees, and lost commerce for the merchants and others who did business with the failed firms. But these criminals have done great damage to the most precious commodity of all: trust in the system.
Investor confidence is a fragile commodity and must be carefully nurtured. Sarbanes-Oxley legislative solutions and other regulations are one reaction. But legal solutions will never address the core issue: the quality of the moral sense of the individual capitalist.

It is time to deliberately train business leaders to think in a morally grounded way before their world views are "baked in." The most important skills for our collective well-being are moral competencies -- honesty, responsibility, compassion, forgiveness and an underlying world view that guides these human actions.

All world cultures agree that these are universal virtues -- and we certainly believe that they can be taught to our young. But it takes more than a family to teach these beliefs -- it takes a global village.

Business schools should take notice. This is their job -- but it's also the job of each employer. Business and organizational life is becoming the most powerful social force on the planet. More powerful than governments, family, and yes, even churches.
Because of this fact, employers are becoming de facto moral educators, shaping the moral practices of their employees. As a capitalist and business leader, your responsibility is to step up to the task and invest in maintaining the system by teaching the next generation the moral competencies and beliefs needed to ensure that capitalism continues to bring prosperity to humans around the world. Silence on this subject simply reinforces the status quo.

No, capitalism is not basically an immoral and selfish system. It is, has been and can continue to be a wonderful economic system that provides great benefits for the individual and for the common good.

But we must live by the rules.

About the authors: Fred Kiel (left) and Doug Lennick (bottom) are the Minnesota-based authors of "Moral Intelligence: Enhancing Business Performance and Leadership Success," Wharton School Publishing, 2005. They can be reached at kiel@krw-intl.com and dlennick@lennickaberman.com.