12/02/2011 11:54 am ET Updated Feb 01, 2012

Is Capitalism Moral? Part Three

This is the third of four posts arguing that capitalism has an intrinsic morality. The first post disputed those who think that capitalism cannot have a moral dimension. Part two establishes that there is a moral context in which business is done. Part three (this one) reckons that this context means that ethics in business are essential to capitalism in a democratic society. Part four moves to an even more basic level, pointing out that macroeconomic theory is insufficiently scientific, and proposes a new theory that can satisfy the needs of business and political leaders, as well as all the actors in the economy of a democracy.

Is Capitalism Moral? Wrong question, Part Three

In the January Harvard Business Review, Michael Porter and Mark Kramer argue that companies need to "create shared value." By this they mean "policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates." The authors insist this is not moral reasoning. However, since moral norms shape decisions, choosing these policies and practices must have a moral dimension. First, concluding that the firm must embrace "shared value" because of its impact upon its market, as well as the social and environmental context it operates in, is a choice for the common good. Porter and Kramer's pitch is that choosing this path affects positively the bottom line. Second, what policies and practices the firm chooses to institute in order to influence its profitability will also have inevitable consequences. Some of these will be unintended, of course, and are therefore not part of the calculus the firm's officers engage in.

For an action to be deemed moral or immoral requires decision. One cannot be held responsible for deciding something that ended up having bad consequences no one could have foreseen. (Not that it won't get you fired... ) If you know that embarking on a course of action will have evil consequences, and you go ahead anyway, you are morally responsible. On the other hand, you may make a decision that is immoral but if you do not have the means to put it into action, you cannot be held responsible. Of course, becoming someone who routinely makes immoral decisions will eventually end up destroying you.

The law may or may not be applicable: a lot of laws are not about moral matters. Something illegal may not be immoral or something immoral may not be illegal (this latter is more likely).

Where Porter and Kramer are right concerns the focus on profits. Neither the lone entrepreneur nor Apple, Inc., should spend the firm's capital on things that do not contribute to its business, i.e., its profit-making enterprise. There is nothing wrong with paying attention to the bottom line! Where theorists of the Milton Freidman variety go astray, however, is that they do not sufficiently appreciate that market capitalism is a human activity and therefore has an inevitable moral dimension. (Friedman himself dismissively called it "ethical customs.") For the lone entrepreneur to use time, energy and resources targeted for the growth of her business on activities that do not contribute directly or indirectly to the overall health of the enterprise, or for a large corporation to do the same, is itself immoral. Similarly, not to attend to the ripple effects of a firm's activity is not only to court illegal and immoral actions with attendant personal consequences, it is also deleterious to the firm's overall profitability, even existence, in the long run. Think Enron...

There is another side of the morality of capitalism, and that is the government's moral or immoral decision-making that affects how business gets done. Who can buy and sell, what kind of products can be manufactured and services provided, what commercial practices are allowed or not, these are imposed upon the firm. Taxes are necessary to finance the infrastructure on which commercial activity belongs. Regulations that control markets and the financing of business are crucial. From ancient times, societies have set up rules, regulations and laws that optimally should help commerce flourish. Standardized weights and measures, transportation systems, currency and banks, law courts and police forces, these have developed along with civilization itself. Indeed, they are a basic mark of it.

Therefore, underlying the interlinked activities of business and government is a moral dimension, and it cannot be dismissed as irrelevant or merely of secondary interest to the practical day-to-day work of running a business. On the other hand, whose morality are we talking about?

And therein lies the rub. There are rival schools of thought, whose approach and conclusions differ widely, so much as to be considered incommensurate. But there is also a paucity of economic and political thought on the topic as well, since these disciplines must be involved in the question of which moral course to set. Now there are plenty of voices trying to inform the businessperson, usually focusing on the bottom line. There are the pressures of business itself, for the market is a miscellany of forces resulting from millions of decisions, and the proper course of action is not usually crystal clear. Not to mention unforeseen physical events like tsunamis. In fact the right thing to do seldom is obvious -- intuition and instinct honed by experience and intelligence are the qualities boards look for in a chief executive officer.

And there are all the complications arising from public ownership. For a multinational like the firm on which I have been picking, Apple, there are also the problems arising from working across national lines. Finally, the massive volumes of data instantly accessible and instantly changing, including news and opinion, through the Internet, make doing business today compared with yesteryear seem like putting up a World War I Sopwith Camel against an F-35 warplane. Both planes fly and the pilot is human. Otherwise...

There are a few clear observations that one can make despite all this. The first is that, as I have argued, there is a moral dimension to the practice of capitalism. Furthermore, if being an effective business leader is learned first by imitating, doing, and evaluating, addressing the moral dimension of doing business is not learned in school, conferences, or from consulting experts. Moreover, it isn't a matter of following a set of rules, even those Ten Big Ones. Rules need applying and the application of moral rules is learned in the doing. This is part and parcel of being not only an effective leader, but also becoming a good person in the moral sense.

The second observation is even more basic. Moral decisions flow for better and for worse from an underlying belief in the way the world is. This is as true for the non-religious as it is for religious people. The problem facing us today is first of all an inadequate grasp of economic realities, which brings some to think that capitalism has no moral dimension at all. Worse (if possible), this leads to wrong economic decisions. An economy and the politics of the country(ies) governing it are interlinked in a way that is not yet sufficiently understood. Lobbyists and their corporations, labor unions, and NGOs that employ them are acutely aware that there is a connection between the two, of course. But neither the economic actors nor the politicians have much help in terms of macroeconomic theory that helps to understand how democracy and capitalism need each other.

The heart of the matter is, therefore, that the major macroeconomic theories do not provide enough predictive power. There is one that might, however, and that is the stuff of the fourth and final part of Is Capitalism Moral? Wrong question.