Moral basis of free enterprise

Capitalism and socialism are loaded words. In today’s political environment, capitalism is said to be immoral. Being economically successful is somehow unethical. Lost in the arguments over capitalism vs. socialism is the moral basis for prosperity: free enterprise. Free enterprise is the moral pathway to prosperity for everyone. The moral aspects of free enterprise involve sources of personal discipline according to Adam Smith.

Although he was a moral philosopher, Adam Smith (1723-1790) is known as an economist who wrote “The Wealth of Nations,” published in 1776. Few people know about his first book, “The Theory of Moral Sentiments,” published in 1759. In this book, Smith asked the question, “How can selfish interest be turned into prosperity for all?” He answered in terms of personal discipline.

Smith first and foremost believed in economic freedom, hence the term free enterprise. In “The Theory of Moral Sentiments,” Smith claimed the natural right of humans is to be free. Consistent with the U.S. Declaration of Independence, Bill of Rights and Constitution, we are naturally free to initiate, produce, buy, sell and profit from economic enterprises. Here, profit is not greed but results from serving others in our own self-interest. Free people who profit from providing the products and services that benefit others in exchange for income are also free to be benevolent when and where they choose (charity).

Smith noted that individuals seeking prosperity had a natural interest in serving others, called enlightened self-interest. Smith also said we all have an impartial spectator (conscience), which judges our actions toward others as being good or bad. When enlightened self-interest and the impartial spectator are not working to keep an individual’s profit-seeking behavior in line with moral principles, there is greed and avarice. The role of the impartial spectator is to make sure the individual (not the government) is responsible for fairness in his or her own economic and social contracts.

Smith never used the terms capitalism or socialism to describe how economic activity should be organized. He thought a free market economy was necessary for prosperity but not sufficient to create it; personal discipline is required. He felt a free market economy must do two things: 1) enable people to provide income and subsistence for themselves, and 2) supply the government with revenue sufficient to provide necessary public works and services. He limited government to national defense, ensuring justice and building things like roads and bridges. Support for education and poverty relief was also part of prosperity in principle and consequence. In other words, he was in favor of a hand up, but not a handout regarding education and public welfare. Smith believed all humans are born free and capable of providing for themselves and that any inequalities are caused by the social environment in which they live. Classes or racial categories should be rendered irrelevant by freedom and opportunity.

Smith also recognized that government can easily become the instrument of corruption by trying to replace the impartial spectator with a bureaucrat and by allowing special interests to have unfair advantage over individuals. Smith saw government interference in free markets in the form of “crony capitalism” or “mercantilism” as a source of corruption that reduces prosperity for everyone. Fairness and justice meant equal opportunity for all free people to prosper, not favoritism for a special few.

In summary, Smith saw prosperity for all through personal discipline following the principle of enlightened self-interest governed by the impartial spectator, which leads us to serve others rather than exploit others. Prosperity is limited by government, not generated by government.

Latta is the executive director of YTMBA Research, a business consulting firm in Myrtle Beach. He is also associate dean of the E. Craig Wall Sr. College of Business at Coastal Carolina University. The views expressed here are his and his alone and do not represent the university in any way.