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CHAPTER 23: What Is the Responsibility of Business Under Democratic Capitalism? * - Paul Heyne, “Are Economists Basically Immoral?” and Other Essays on Economics, Ethics, and Religion 
“Are Economists Basically Immoral?” and Other Essays on Economics, Ethics, and Religion, edited and with an Introduction by Geoffrey Brennan and A.M.C. Waterman (Indianapolis: Liberty Fund, 2008).
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What Is the Responsibility of Business Under Democratic Capitalism?*
“What is the responsibility of business under democratic capitalism?” The topic assigned to me sounds so suspiciously like a sermon title that I’ve been emboldened to choose a text. Two texts, actually, but both from the scripture according to Adam Smith. The first is quite familiar. The second is less well known.
From Book IV of The Wealth of Nations, Chapter 2:
Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to the society.
And a few paragraphs later Smith writes:
He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. . . . [H]e intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.
My second text is also from Book IV, the last chapter (Chapter IX), the second last paragraph:
All systems either of preference or restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.
I want to spend the first part of this lecture defending Smith’s outrageous claim that people in business promote the public interest most effectively by pursuing their own advantage, or, more precisely, the largest possible net revenue for their own enterprises. It’s the social responsibility of business, in short, to maximize profits. I want to defend that claim by showing why it isn’t outrageous at all. Some of my arguments have often been made before and won’t be strange to most of you. Other arguments may be less familiar and perhaps more controversial.
But the cogency of the entire argument depends ultimately on how we read eleven words in that second text: “. . . as long as he does not violate the laws of justice.” That is a very important qualification to every policy argument that Adam Smith ever makes in The Wealth of Nations. Smith has been seriously misinterpreted by those who have overlooked the role that justice plays in his system of political economy. I want to show you why the first argument, the case for profit maximization, makes no sense without this qualification. And I hope to persuade you that Adam Smith had a conception of what “the laws of justice” entail that is still deserving of attention today. Indeed, it may deserve especially close attention in an age such as ours, where unexamined and incoherent concepts of justice exercise so much control over public policy.
An economy or economic system is a social system through which people cooperate in using what they have to obtain what they want. This is the function of all economic systems: primitive, modern, socialist, capitalist, democratic, oligarchic, coordinated, or confused. Systems differ enormously with respect to whose wants they serve and how effectively they work. But all economies are systems of social interaction, through which people are induced to work, to consume, to save, to invest, to risk: all more or less; and all, of course, in specific, concrete ways.
The primary problem that modern, industrialized economic systems must solve is the problem posed by the scarcity of information. We are inclined to overlook these difficulties and to take their resolution for granted, because we take for granted the remarkable mechanism of social coordination through which we gather and disseminate the knowledge that is essential to the system’s functioning. In overlooking the knowledge or information problem, we focus undue attention on a different scarcity, the scarcity of goodwill. We erroneously suppose that goodwill can resolve problems that can in fact be resolved only through the accumulation of additional information. Moreover, many of our proposals for increasing the amount of goodwill in the economy fail completely to attain their objectives, but do manage to subvert the crucial information system.
Modern economies are incredibly complex. Indeed, they are unmanageably complex. But note carefully that something can be unmanageably complex and still work quite satisfactorily. Not everything that works is managed. Some systems can only work, in fact, if they are not managed, for the simple reason that no manager could possibly have command of all the information essential to the system’s effective functioning. Our economy is just such a system.
Have you ever pondered the unsettling truth that none of us knows how to produce goods upon which we are dependent for our very survival? In the case of many such goods, no one knows how to produce them. That is to say, no one knows. The required knowledge is scattered among millions of people. Moreover, it is necessarily scattered in this fashion, because no single mind could possibly grasp and comprehend all the information that must be known if, for example, an antibiotic is to be available for your use when you contract a life-threatening infection. Computers offer no real help in dealing with the kind of information problem to which I’m trying to direct your attention. The required knowledge isn’t the kind that can be stored in a computer, and it changes faster than computer programmers could ever hope to record it, because we simply have no timely way of gathering and keeping up-to-date all the detailed bits of information that must be precisely and correctly known if an economy like ours is not to break down in chaos.
This dispersed knowledge becomes available to decision makers, in an appropriately distilled form, primarily through the relative money prices that are generated by the ongoing processes of supply and demand. What people want encounters what people are willing and able to do, and the resulting possibilities are summarized in a vast menu with specific price tags attached to each option.
If that all sounds terribly abstract and even unrealistic, it’s because I’m trying to describe everyday occurrences with which we are all familiar, but whose nature and significance we rarely appreciate. We tend to think of prices as costs, which they are, of course, to potential users of a good. But prices are also potential income to suppliers of a good. And in both cases they are signals. Rising prices are signals to users that a good is becoming more scarce and ought therefore to be employed more sparingly. At the same time they indicate to suppliers that more ought to be produced, if possible. Falling prices emit the opposite signals. Moreover, information about changing scarcities is linked in this system with incentives to act appropriately, to alter one’s behavior so as to accommodate the new social situation. Rising prices not only tell users they ought to be more economical and suppliers that they ought to make more available; rising prices at the same time provide financial incentives to do what ought to be done.
That is why, as Adam Smith maintained, people in business who pursue their own advantage thereby promote the public interest. Business decision-makers—let me use the term executive, which captures the function in which I’m interested and is also non-sexist—business executives who aim at the maximization of profits are responding to their society’s instructions for the allocation of scarce resources. The information is not perfect, whatever “perfect” might mean in this context. But it is far and away the best information available to an executive who wants to be socially responsible. To ignore it or set it aside in the name of social responsibility almost always amounts to rejecting the most reliable information available on what social responsibility entails, in favor of a subjective and usually quite arbitrary conception of the public good.
Whatever the motives of business executives, the consequences of aiming at maximum profit are the maximization of output measured in terms of monetary value. I certainly do not want to claim that a larger dollar value of output is the highest good, or even that it is in all cases better than some particular alternative. But I do want to insist that alternative goals for business executives must bear the burden of proof. Critics of profit-maximization do not seem to realize what a heavy burden that is.
Most of the productive resources in the U.S. economy, apart from human resources, are owned by corporations, and are consequently managed by business executives on behalf of others. The officers of publicly-owned corporations have legal and moral obligations to shareholders that prohibit them from using these resources capriciously. It is the first obligation of corporation officers to do as well as possible for the owners they represent: to be good stewards, in short, of the resources entrusted to their care. It is much harder than we commonly suppose to find circumstances under which “social responsibility” would call for decisions aimed at any other objective than the maximization of profit.
A number of misunderstandings regularly confuse the discussion of this issue. To begin with, in arguing that business executives should aim at profit-maximization, I am actually saying that they should attempt to maximize the present discounted value of the expected stream of net earnings from ownership of the resources under their control. That wordy amplification underlines the point that we are not recommending any kind of shortsighted behavior.
Neither logic nor experience supports the commonly-heard charge that business executives sacrifice long-term results for short-run profits. Where shortsighted behavior is not to anyone’s advantage, we shouldn’t expect to observe it. The Wall Street Journal recently published an article on fire hazards in skyscrapers and laws designed to make such buildings safer. In the course of the article the claim was made that the savings on insurance premiums over a 30-year period would pay for the installation of sprinkler systems, but that such systems were nonetheless only rarely installed because most large office buildings are constructed by speculators who sell them within a few years. The argument is absurd. Developers construct buildings with an eye to their long-run value, regardless of how quickly they intend to sell, because the selling price they can obtain will be the present discounted value of all future net income expected from ownership of the building.
Contrary to a widespread belief, corporate managers do not aim at high quarterly profits, to keep shareholders satisfied, at the expense of long-run profitability. Management in this manner would depress current stock prices, which is not the way to please shareholders. Moreover, it would invite and facilitate a hostile takeover, which would clearly not be in management’s own best interest.
Whenever we see short-run benefits being pursued in disregard of long-run costs, we may assume with a high degree of confidence that the mis-managed resources cannot be sold. The right to sell a resource is the power to appropriate its long-run value. The right to sell consequently promotes conservation. If you want to examine a social system in which short-run benefits are persistently chosen despite the fact that their long-run costs will be excessive, look at the operation of democratic legislatures. “After me the deluge” is not the slogan of business executives in a market economy; it much more closely describes the behavior of legislators who must stand for re-election every two years. It is ironic that so many people believe government intervention in economic life is necessary to secure the interests of future generations, when the preponderance of the evidence suggests so strongly that the effective time horizons of government officials are shorter than the time horizons of private persons managing marketable resources.
We must also not be misled into supposing that profit-maximization is an alternative to such objectives as obeying the law or pursuing humane personnel policies. Business executives will usually find that profit-maximization requires law-abiding behavior and diligent attention to the interests of employees. Those who attack the profit-maximization criterion by assuming that its acceptance entails disregard for legality or for people are attacking a straw man.
This is not to say that business firms will always obey the law or that they will never treat their employees inconsiderately. I am in no way attempting to argue that business executives do all things wisely and well. My argument is a quite different one: Business executives ought to use maximum anticipated net revenue, properly discounted, as their decision criterion. When this produces unsatisfactory results, as it sometimes surely will, we should not ask or expect executives to use some other criterion in allocating resources, because we should neither ask nor expect them to behave like benevolent despots.
Isn’t that what it finally comes down to? We notice that the economic system turns out a lot of schlock, and so we urge business executives to pay more attention to good taste and high quality. We do not notice that business responds to a wide range of differing tastes and to a market that calls for goods of highly variant quality, and that in asking business executives to ignore the market we are in effect urging them to substitute their own preferences for the preferences of consumers. Is that social responsibility or elitism?
Or we notice that particular corporations are doing business in South Africa, and we urge them to pull out of that racist country even if this entails the loss of some profits. We too seldom ask about the probable consequences of such a pullout. (Who will subsequently take over the abandoned capital resources, for example, and how will this affect the evolving balance of power in South Africa?) But we almost never notice that by pushing such demands we are asking business executives to make foreign policy and to interfere in the domestic affairs of another country. It is true, of course, that doing business in South Africa has effects in that country just as much as not doing business has effects. But doing or not doing business for the sake of profits is a very different matter from doing or not doing business with the primary intention of affecting another nation’s domestic policies. Against those who would call this an exercise of corporate responsibility I maintain that it is a dangerous and even arrogant assumption of powers that do not belong to business executives and cannot safely be entrusted to them.
We are frequently misled in our consideration of such issues by the erroneous assumption that the choice for business executives is a simple choice between good and evil. This will almost never be the case, however. The choices that confront business executives are most appropriately seen as choices between alternative benefits and alternative costs accruing to or falling upon different people. When we pay attention to the costs as well as to the benefits of the policies commonly advocated in the name of social responsibility, those policies tend quickly to lose the moral sheen that makes them so attractive to critics of profit-maximization. Consider, for example, a U.S. corporation that operates a factory in Malaysia and subjects employees to workplace hazards that would be illegal in this country. Is that an irresponsible pursuit of profit? Is it an exploitation of Malaysian workers? Or is it the provision of valuable income-earning opportunities to people who would be much worse off if the corporation had to adhere to U.S. safety standards in Malaysia and consequently chose not to operate a factory there? The truth is that people whose life expectancy is low because of desperate poverty do not assign as high a value to occupational safety as do people in the United States, and that employers who adopt the standards of an affluent society in a poor society could easily end up reducing the well-being of people to whom they think they are being “socially responsible.”
The good intentions of business executives who would substitute their own notions of social responsibility for the criterion of profitability do not necessarily produce good results. Would it be churlish of me to suggest that the intentions themselves might not always be as good and pure as we are inclined to suppose? Corporate executives who adopt policies being urged upon them by church groups or other self-proclaimed advocates of the public interest, despite the fact that these policies will reduce net revenue for the corporation, will often be applauded for their business statesmanship. What is the value to them of such acclaim? And is it benevolence when people take actions that bring gratifying public approval to themselves at other people’s cost? I will applaud the generosity of corporate executives who contribute a portion of their personal incomes and their own time to charitable endeavors; I see no reason to applaud when they contribute the time and money of the shareholders whose resources they’re managing.
I would in fact be alarmed by this pseudo-benevolence, this “unbenevolent despotism,” if I did not see evidence that it is much more rare in practice than it is in rhetoric. Corporate executives are flattered by the request that they serve as philosopher-kings, and they are eager to proclaim their willingness to serve. I believe we can take comfort from the overwhelming evidence that, in practice, these executives equate socially responsible business decisions with decisions that maximize the market value of their corporation’s stock. Departures from this rule are by and large insignificant; corporate charity, which seems to be a contradiction of the profit-maximization criterion, is generally of such modest proportions that it can be justified in terms of public relations.
I want to make one more point before shifting to my second text from Adam Smith. The widespread but confused belief that profit-maximization is a wholly inadequate criterion for socially-responsible business behavior gains much of its appeal from the mistaken assumption that profit-maximizing behavior is selfish behavior.
We are much too quick to impugn people’s motives, including even our own motives under certain circumstances. Business executives are human beings, with all the variety of motivation and intention that this entails. People don’t do very many things for simple reasons, and they do even less for reasons that are simply selfish. Business executives who focus their attention on the relative costs and benefits of available options are paying attention to the task at hand, not acting selfishly. Their motives at any moment will be infinitely varied, complex, and I dare say unfathomable; but they are no more likely to be selfish or otherwise morally objectionable than are the motives of college professors preparing a lecture, United Way officials planning their campaign, or an architect designing a building. Economy in the use of means for the achievement of worthwhile goals is an important criterion for all the people just mentioned, and it is economy of just this sort that is being practiced by business executives who continuously consult the criterion of profitability. It is a serious mistake to equate concentrated and focused attention on the task at hand with selfishness. That would lead us to call surgeons “selfish” because they totally neglect the personality or family situation of patients while removing their gall bladders.
This confusion is compounded in the case of business executives by the fact that their success is monitored primarily through the comparison of values expressed in monetary terms. We apparently have enormous difficulty in breaking free from the notion that there is something inherently immoral, or at least morally inferior, about making decisions on the basis of relative monetary magnitudes. And we are not deterred by the absurd conclusions to which this prejudice sometimes leads us. If the members of a downtown church in a large city, for example, decide to sell their old building to someone who wants to erect an office tower on the land, they are not necessarily being selfish or greedy or putting monetary values ahead of religious values. Everything depends on what they do with the profit that they make from converting an old building they can no longer afford to maintain into the money that represents its value in alternative uses. A Manhattan pastor who obviously doesn’t want to see old church buildings torn down was recently quoted by the Wall Street Journal in just such a case: “I don’t give a damn what others think,” he said. “It’s a perversion that property is more important than beauty.”
That’s an extraordinary statement. Property cannot be more important than beauty for the same reason that beauty can’t be more important than property: the categories aren’t comparable. What the indignant pastor presumably meant was that the aesthetic values to be realized from preserving old churches are more important than whatever alternative values are promoted through the sale of such property. Whether that’s true in any given case surely depends on what must be sacrificed to preserve the old building. The monetary profit to be realized from the sale is not itself that sacrifice. The monetary profit represents command over other resources, resources that could be used in dozens of different ways: to build new churches, support missionaries, feed the hungry, or endow scholarships for promising young church architects.
Profit maximizing, whether by church officers or business executives, is a procedure for behaving economically, for being a good steward. The Greek word for steward, used in the New Testament, is in fact oikonomos. If social responsibility entails good stewardship, it calls for economy in the use of available resources. Decisions on the basis of relative money magnitudes are basically good stewardship.
The title of this lecture includes a word that I have barely mentioned: democratic. What is the social responsibility of business under democratic capitalism? As soon as we begin to take that word into account, a serious gap appears in the argument I’ve been constructing. The gap was already present in The Wealth of Nations.
Adam Smith claimed that the pursuit of private interest by business executives promotes the public interest. But throughout The Wealth of Nations he also complains bitterly about the power that merchants and manufacturers exercise in Parliament. He says that they have often obtained “a wretched monopoly against their countrymen” by bamboozling, pressuring, and even intimidating the legislature. Isn’t this inconsistent with the claim that the pursuit of private interest will promote the public interest?
What are merchants and manufacturers doing, after all, when they lobby the legislature, except pursuing their own advantage? If a dollar invested in lobbying promises a higher return than a dollar invested in machinery or product development, then profit-maximization calls for investment in lobbying efforts. That’s exactly what the merchants and manufacturers of Smith’s day were doing, and what business executives still do today. They carry competition into the arena of government, in an attempt to secure laws and regulations that will make their business activities more profitable. In our own time as in the time of Adam Smith, the lobbying efforts of business executives are directed primarily toward the enactment of laws that would restrict their competitors and create preferences for themselves.
Smith obviously disapproved of such efforts and found them subversive of the public good. But how then can he maintain that the pursuit of private interest promotes the public interest? The answer is that the pursuit of private interest for Smith had to be within the bounds of justice. That eleven-word qualification—“as long as he does not violate the laws of justice”—clears Smith of inconsistency, but opens a whole new dimension for our discussion.
Every claim that profit-maximization is socially responsible contains the implicit premise that the actions taken are legal. In a democracy, however, citizens participate in the making of the laws; and business executives are citizens along with everyone else. As a matter of fact, business executives have considerably more influence on legislation than do ordinary citizens. That’s not because “corporations have all the money,” as populist rhetoric would have it. It’s because of the free-rider problem that afflicts the democratic process. And it calls into question the adequacy of the contention that business executives are being socially responsible when they maximize profits within the limits of law. For they have a great deal of power to determine what those limits are going to be.
The Achilles’ heel of democratic capitalism is the tendency of the democratic part to destroy the capitalism part. In order to make clear what I mean, I must carefully define my terms. I shall call a political system “democratic” if its laws result from a competition between legislators for citizen votes. That definition isn’t as strange as it sounds. Definitions of democratic that refer to “the will of the people” or “the preferences of the majority” are misleading in that they assume what must be proved, namely, that a political system such as the one we have in the United States does in fact produce legislation consistent with what a majority of the voters prefer. The definition I am using has the advantage that it calls attention to the process that actually shapes legislation: the competition among legislators for voter approval.
The basic problem with democracy is that special interests have an enormous advantage in this competition. People know and care about their own interests. But they usually don’t pursue them successfully through the political process, because the cost to any one person of exerting influence will typically exceed by a large amount the expected benefit from acting. Each of us is just one voice and one vote. So why bother? Why bear the cost? Since my action will have an insignificant impact, while imposing considerable costs on me in time and money, it is in my interest to behave like a free rider in the political arena: to do nothing and hope that someone else will defend my interests.
The people for whom the expected benefits exceed the costs are people who form part of a relatively small group with a relatively substantial interest. The laws that emerge from operation of democratic processes are consequently laws that cater to an endless succession of narrow, special interests. We are not governed by the will of the majority but by the wills of innumerable minorities. Special preferences and restrictions multiply, and collectively make all of us ultimately worse off. Competition in the political arena subverts competition in the economic arena, and thereby subverts the invisible hand that extracts the public advantage from the pursuit of private advantages.
And what is “capitalism”? Capitalism is a social system within which individuals are free to exchange with one another on the basis of clear and stable “rules of the game.” That definition may strike you as even more idiosyncratic than my definition of “democracy.” But it directs attention to the essential features of what we actually mean when we talk about capitalist economic systems.
Capitalism is a social system, because its defining characteristics are social relationships, relationships among people, not relationships between people and things. (The term “capitalism” was invented by the enemies of the system and is thoroughly misleading.)
Secondly, the definition I have given points up the two conditions that make the system work: voluntary exchange and stable rights, more commonly described as free markets and private property. The trouble with these latter terms—frees markets and private property—is that they divert our attention from the social nature of the system. Property rights are rights with respect to other people, and are therefore inescapably social, not private. If I have a so-called “private property right,” what I have is the socially acknowledged right to exclude other members of society from making certain uses of my property. And I would rather speak of voluntary exchange than of free markets in order to point out that the freedom people possess under capitalism is again a social phenomenon, dependent upon their ability to persuade other people to cooperate with them.
I don’t want to legislate definitions or to get hung up in a purely verbal argument. What is important is that we see how thoroughly dependent a capitalist system is upon clear and stable rules. If it helps you see what I’m driving at and how important these rules are, think of them as clear and stable property rights.
The freedom that capitalism provides is created by the ability of individuals to manage and dispose of particular resources on the basis of their personal knowledge and interests. That is impossible without clearly defined and stable rights over particular resources. When such a system of rights exists, then social interaction—what the economist calls supply and demand—will establish scarcity-reflecting prices, and the vast, dispersed knowledge that the members of society possess will be effectively coordinated. The productive achievements of capitalism and the freedom that it allows individuals are both the result of clearly-defined and stable property rights, or rules of the game.
The big question is: Who decides what the rules will be? The usual answer is: The laws settle the rules. But this only pushes the question one step further back: Who decides what the laws are to be? If the best answer we can give to that question is majority rule, then capitalism is doomed. Majority rule must itself be subject to rules if capitalism is to survive. For majority rule that is not itself subject to a higher rule will inevitably produce special preferences and restraints that will prove incompatible with effective market coordination and individual freedom.
Capitalism requires clear and stable property rights. But clear and stable property rights will not exist except within a political system that is constrained by a constitution. It doesn’t have to be the constitution that was ratified in this nation two hundred years ago, although that particular constitution in its original form was a remarkably successful attempt to establish the kind of constitutional rule for which I’m now contending. The necessary condition is that the constitution constrain the pursuit of self-interest within the political arena: that it set rules for changing the rules under which voluntary exchange is going to occur.
But even a constitution isn’t enough. Formal constitutions must be interpreted, not only in order to apply them to changing circumstances, but also because no constitution interprets itself. Every formal statement presupposes background statements that fill out its meaning and intent. So every political constitution presupposes antecedent notions of justice out of which it arose and which put flesh on its skeleton. The rules of justice are the ultimate rules that shape the constitutional rules that constrain the legislated rules that finally control the rules of the game within which “capitalist activities” (and all other activities) occur.
In other words, there is finally no substitute for morality. But what morality? Don’t moralities differ? Who is to decide when moral judgments conflict? I can’t answer those questions in a single lecture. But do we have to answer them before we can agree on the issues before us? Personal moralities certainly differ. But what about impersonal moralities, or the morality appropriate to impersonal social systems? Can I induce you to give sympathetic consideration to the proposition that the morality appropriate to large, many-person societies is extraordinarily simple and rarely disputed once we agree what it is that we’re talking about?
We’re talking about justice in large, impersonal societies. And the only conception of justice that makes any sense in societies larger than a handful of people is the negative conception of justice: Avoid injustice. Injustice occurs when people are treated unfairly. Unfair treatment in large societies is treatment that is not in accord with the rules: the clear rules that everyone knows in advance and that apply equally to all.
A large society, such as the economic system of the United States, cannot be a just society unless its duties and benefits are allocated in accord with clear and stable rules. Perhaps the force of this claim will be clearer if I apply it not to the economic system but to a large college class. A college professor teaching a class of 500 students (a large society) must, if she wants to be fair, clarify the rules in advance and then apply them impartially. If a student confronts her with circumstances that the rules had not contemplated and so do not cover, she must search for a response that can be generalized. She must not allow some students to take advantage of other students by securing unique advantages. Each of the 500 students, if pressed, could probably find an explanation (unrelated to what the student actually knew) for missing one or more items on the last test. But it is fundamentally unfair to give extra credit to those students whose obsession with grades or personal belligerence prompts them to ask for it. If the same privilege were extended to every student in the class through a general announcement, it might seem at first that justice would be salvaged. But in fact it would not. The problem is that no teacher could adequately hear and evaluate the explanations of 500 students. Justice in large societies requires not only that general rules binding on all be promulgated, but also that they be applied in a non-arbitrary manner. The consequence of any attempt to apply personal criteria in a large-society situation will be capricious and arbitrary decisions. In short, injustice. Justice demands that we use impersonal criteria to allocate burdens and benefits in a large society, where inescapable limitations on our knowledge make it impossible to take personal considerations into account in any consistent way. And fairness requires consistency. That is why justice is pictured as blindfolded.
It is therefore the social responsibility of business executives under democratic capitalism to play by the rules, and to participate in the making of those rules in accord with the basic underlying rule of justice: Ask for no special preferences for yourself, and impose no special restraints on others. Legislate for others as you would have them legislate for you. Adam Smith tells us what justice requires when he says that all systems either of preference or restraint are to be completely taken away.
Let me remind you at this point how I defined capitalism. It is a social system in which individuals are free to choose what they will supply and demand, offer and bid, subject only to general rules known in advance. These rules will be both legal rules, externally enforced, and moral rules that are internally enforced. Capitalism, in short, is a system of individual freedom under law, where law does not mean just “legislation” but rather the whole body of established rules, agreements, and conventions by which the members of a society acknowledge themselves to be bound.
Capitalism is thus by definition an impersonal system. It is not altogether an impersonal system, because the individuals within it do participate in families and small, face-to-face associations, where they can know other persons well enough to be concerned with and to care for their unique qualities. But the distinguishing characteristic of capitalism is the impersonal nature of the social interactions that make it up. It can be described paradoxically as a social system in which people do not care about most of those for whom they care. The farmer who feeds me does not even know I exist, and while he wishes me no ill, he does not and cannot care about me in any subjective sense. Nonetheless, he cares for me, and very effectively, in an objective sense.
We are all dependent, throughout our lives, for our actual survival as well as our many comforts, upon the assistance and cooperation of millions of people whom we will never know and who do not know us. They help us to fulfill our aims in life not because they know or care what happens to us, but because this enables them to fulfill their own aims most effectively. They are motivated by their own interests, whatever these may be. They are guided by the rules of the society and their perception of the expected net advantages from alternative decisions. These net advantages, or structures of expected costs and benefits, are created by the similarly motivated and guided efforts of everyone else in the society.
Marx was thus correct. He saw more clearly than most of his pro-capitalist contemporaries that capitalism was a system based on commodity production. It had replaced (by supplementing more than by displacing) a system based on relations of personal dependence. Thereby, as Marx and Engels observed in the first part of The Communist Manifesto, capitalism had achieved productive wonders. Their mistake, and the mistake of so many who followed them, was in supposing that capitalism could be replaced in turn by a system of production based on “socialist relations,” a system retaining the productive powers of capitalism while assigning tasks and rewards on the basis of personal criteria, such as criteria of personal need and merit.
I suspect that the deepest root of this belief, a belief remarkably immune to either theory or evidence, is the conviction that an impersonal social system is morally unacceptable. This is a tragically mistaken prejudice. Impersonal does not mean inhumane, as we sometimes carelessly assume. Nonetheless, our only model for the good society seems to be the family, where production is from each according to ability and distribution is to each according to need and merit.
Perhaps our basic mistake is the belief that we must choose between personal, face-to-face societies and impersonal societies. If we accept as fully legitimate the impersonal, rule-coordinated societies in which we participate we are not repudiating or depreciating in any way marriage, the family, intimacy, I-thou relationships, the unique value of the individual, or the power and significance of personal caring and sacrifice. If we were in fact compelled to repudiate all of this in order to enjoy the benefits that only large and hence impersonal societies can provide, we would be foolish to opt for those benefits. In the long run that choice would deprive us of the advantages of both worlds because the moral values essential to the successful operation of a rule-coordinated society can only be nurtured in personal societies.
But we are not forced to choose. We are tempted to choose, it is true, and from both directions. The expanding wealth of opportunities that the impersonal society lays before us makes us progressively less dependent (or so we believe) on particular other persons. As we enlarge our individual freedom and power, we simultaneously declare our continual independence. We view commitments as entanglements and we work toward fuller emancipation. That kind of freedom is really perpetual mobility, and I doubt that it is ultimately compatible with the institutions and virtues of personal community.
But we cannot deal effectively with these problems by turning the economic system into a nuclear family. I am not saying it ought not be done. It cannot be done. Economic decisions, the day-by-day decisions of business executives, will produce chaos and injustice if they are not guided overwhelmingly by attention to profit maximization, under a regime of clear, stable, and essentially impersonal rules. That is a limited conception of business social responsibility, it is true. It is a thoroughly humane conception, however, because it is limited to human possibilities. If we were gods who possessed all knowledge, we might be able to pursue the good society more directly. But we are not gods. It is not irresponsible to admit that fact and to live together in a manner consistent with our common humanity.
[* ] Unpublished typescript of lecture in a series titled The Moral and Ethical Dimensions of Democratic Capitalism, conducted by the Colorado Council on Economic Education and the Graduate School of Business Administration, at the University of Colorado, Boulder, Colorado, 8 December 1982. Reprinted by permission of Mrs. Juliana Heyne.