Capitalism and Western Civilization - Exchange

William H. Young

In Part II of his April 2011 essay Is Our Civilization a Bubble? Stephen Balch argues that “the great miracle of our lives rests on the anomalous triumph of exchange over command, of making over taking that has showered upon us so much wealth and security.”

This article begins a series which examines that “great miracle,” the American economic system, its place within the context of Western civilization, and its benefits, flaws and features, including inequality from differential achievement. This promises to be a prime subject of debate in the year ahead.
The fundamental ideas underlying an economy based on mutually beneficial exchange—of private property by individuals, or products by producers, in a free society with competitive markets—were first elaborated by Adam Smith in his seminal work, The Wealth of Nations(1776), and his lesser-known treatise on ethics, The Theory of Moral Sentiments (1759). Smith argues that economic progress depends upon a trinity of individual prerogatives: pursuit of self-interest, division of labor, and free trade.
He devised an abstract theory or model of a system organized on the basis of the actions of profit-seeking entrepreneurs in a market with natural liberty (what we call capitalism, or the free-enterprise system), and on the economic factors involved, which would be developed into the science of political economy, later called economics. He introduced three elementary principles that now are seen as common sense, but which were at the time revolutionary: voluntary exchange benefits both parties; the trick to economic gain is comparative advantage; and private economic transactions add up to produce a societal good. Smith changed forever the age-old assumption that wealth is a limited pie over which governments and men fight to get the biggest piece. That wealth can grow without limits was perhaps Smith’s most revolutionary idea.
Dr. Balch avers that
where the route to wealth is via exchange, members of society, especially the most talented and energetic, are motivated to produce more wealth in order to trade it for the wealth produced by others. Relationships tend to become mutually beneficial, overall wealth increases, and inventive ways are found to produce ever more of it.
The Wealth of Nations is often attacked as a justification for amoral greed and selfishness. To the contrary, material cooperation is its central theme. In The Theory of Moral Sentiments, Smith discusses what he calls “fellow-feeling” or “sympathy,” an innate sense of empathy for other human beings that will generally guide the individual’s self-interest. In voluntary exchange, each party’s self-interest is mutually satisfied. Man’s inclination to buy and sell provides the market consumption mechanism by which the division of labor is governed. Wealth depends on specialization, and specialization depends on scale of production and ultimate consumption.
Smith proclaimed the principle of the “invisible hand”: every individual in pursuing his or her own gain is led, as if by an invisible hand, to promote the public good or interest. An economy is a vast system of interdependent and essentially self-regulating markets in which prices constitute an automatic feedback device, the “invisible hand.” Smith supported individual liberty and honest enterprise, unconstrained by power and privilege. He helped produce a world of individuality, autonomy, and personal fulfillment.
In Part I of his essay, Dr. Balch considers whether our civilization has created its own mega-bubble by its runaway expectations of entitlement and concludes that “an accompanying misunderstanding of humanity’s condition is what threatens to puncture it.” “Our people suffer from ‘historical amnesia’ about the competitive struggles of our ancestors to bring our prosperous order into being and the vigilance required to maintain its efficacy.”
Surveys (such as those conducted for the Council for Economic Education) show that much of our contemporary society, including students, lacks a basic understanding of how our economy works and poorly comprehends even the most elementary and agreed-upon principles of economics, contributing to our historical amnesia. And unfortunately, too many of today’s students are incapable of learning economics, which is abstract and mathematical. 
George Leef of the Pope Center reports in “Capitalism on Campus?” that “many students enter college with a jaundiced view of capitalism and the free market.” Only a small minority of students takes any economics classes and even there, the focus is often more on technical analysis rather than “the big questions.” “American college professors are predominantly hostile to laissez-faire capitalism,” ranging from liberals who want “ever-increasing economic regulation” to Marxists, who would “abolish private property,” with socialists in between.
“It is only a slight exaggeration to say that most recent college graduates learned everything they know about capitalism from Barbara Ehrenreich,” writes Charlotte Allen in “More Adam Smith, Please…and less Barbara Ehrenreich” (The Weekly Standard, November 29, 2010):
Ehrenreich’s book Nickel and Dimed was compulsory summer reading for entering freshmen throughout most of the past decade at countless campuses….At none of these campuses were students at any level, from freshmen to graduating seniors, required to read a single word written by Adam Smith.” Ehrenreich, a self-proclaimed socialist, makes the Marxist zero-sum argument that “people are poor because the rich systematically steal from them.”
In “Moral Misunderstanding and the Justification of Markets,”The Region (December 1998), Paul T. Heyne, the late senior lecturer in economics at the University of Washington, suggested that “many of our students, including some of our most thoughtful ones, are reluctant to let themselves be captured by the economic way of thinking because they see economic theory as at bottom an elaborate justification for an immoral society.” Far too few students leave our courses with a genuine understanding of how commercial societies work, societies in which everyone specializes and lives by exchanging. Many believe “that the activity of pursuing one’s own interests, which generates supply and demand functions and through them the prices that coordinate production, is, if not wicked, at least somewhat immoral.” “In a commercial society, everyone uses others as a means to their own ends.” They see that as “basically immoral.”
Such idealism is ironic, coming from our postmodern narcissists and relativists. But they can’t help it, having been schooled in such beliefs and influenced by Hollywood in films such as Wall Street(1987), in which Michael Douglas’s character explains that business “is all a zero-sum game: somebody wins and somebody loses.” But if morality includes serving each party’s mutual self-interest as well as the general interest, Adam Smith’s capitalism is an impeccably moral system.
Most of our postmodern college-educated academic and leadership elites have never even been exposed to the principles of capitalism and an exchange or market economy enunciated by Adam Smith, adopted at the founding, and responsible for our past prosperity. Instead, they are steeped in egalitarianism and entitlement rather than exchange, and rights rather than reciprocity: taking rather than making. And the sustainability ideology now dominant on college campuses would turn America into a “command” economy, as I argued in The Reverse Metamorphosis of Sustainability (Economy). For sustainable development, the state would command a zero-growth economy, ration natural resources and scarcity, and set wages for all on a worldwide rather than national basis. Americans would become more uniformly poor.
A liberal education in colleges and universities should include coverage of the basic ideas underlying our capitalist economic system (the big questions), not just the technical analysis of economics courses. Liberal education should also include discussion of both exchange and command economies in Western civilization as addressed in Is Our Civilization a Bubble? Such knowledge is sorely needed to inform the national economic debate, which outcome will likely determine whether Dr. Balch’s bubble will be re-inflated or deflated in the future.
Next week’s article will show that our economic system was structured take advantage of the innate features of human nature.
This is one of a series of occasional articles applying the lessons of Western civilization to contemporary issues relevant to the academy.
The Honorable William H. Young was appointed by President George H. W. Bush to be Assistant Secretary for Nuclear Energy and served in that position from November 1989 to January 1993. He is the author of Ordering America: Fulfilling the Ideals of Western Civilization (2010) and Centering America: Resurrecting the Local Progressive Ideal (2002).
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