Capitalism And Adam Smith – Reprised

I had a wonderful time at a coffee meeting earlier this week. The person I was having coffee with asked me some questions about Capitalism. Since this discussion I have been thinking about it conceptually and practically. As someone who abhors economic Socialism, and is a proponent of a free market, I have decided to write about the subject again.

Initially, it seems that people equate Capitalism to the excesses of large corporations. I agree with the critiques in some cases, but I cannot support the current move to a proposed Socialism. I think people are forgetting the excesses of Socialism/Marxism/Communism as an over-reaction to current levels of inequality. People, in my opinion, are too willing to support an all-powerful centralized state in response to events that are controllable – at least according to Adam Smith the father of economics.

First, let’s answer the question – what is Capitalism? Capitalism is an economic system based upon the private ownership of property and the self-interests of both buyers and sellers. The way I describe it to my students is, people who have goods to sell meet those who want to buy those goods at the palm tree. This represents the marketplace where buyer and seller negotiate an agreed to price. The seller makes a profit and the seller gets what they want. Both parties leave the event better off. Both are operating from self-interest and both are better off as a result. This system is based on six pillars.

I have already mentioned one of those pillars, private property. This allows people to own the means of production. These include things like land, machinery, and houses. This is critical to our life in the United States. We do not have to live in government issued tenements but can own our own homes.

I have previously mentioned the second pillar, self-interest. This means we are all free to pursue our own good “without sociopolitical pressure.” If I want to be a business owner, and someone wants to buy what I am offering, then I am free to pursue this. If I want to buy a product or service I am free to choose what I want to buy. Because there are multiple offerings, I can choose which one that I want to purchase.

The above is the result of the next pillar, competition. Because the market system is free, people can enter or leave the market based upon demand. Because there are multiple people providing a particular product or service they have to work for my business. I can pay less, and have better quality, because of this thing we call competition.

The next pillar is the market mechanism. The key to this pillar is what we call the equilibrium price. The market operates collectively, and all the buyers and sellers, theoretically, set a price. If a seller tries to undersell the other market participants who are selling similar products or services, they need to give the buyers a reason. They also need to control their costs, which allows them to sell at a lower price. If a seller tries to sell at a higher price, they will fail.

A very important pillar involves the freedom to choose. All of us who participate in various markets can choose to engage the market where we want. There are different market needs that I as a business person can address, and there are different products and services I can buy based on my own need. It is our choice.

The last pillar involves the limited role of government. The government’s main role in the market system is to ensure a level playing field exists. This ensures the market behaves appropriately.

Obviously, this is a simplistic description of a very complicated process. There are many examples of how this works. China and its state-controlled Capitalism, the Oligarchic Capitalism that we see expressed in Russia, Nordic Capitalism with its strong social elements that we see in Sweden, and our more Big-firm Capitalism in the United States with its excesses. It appears that people who are troubled by Capitalism focus on the last. However, Adam Smith the father of economics and the concept of the invisible hand had a lot to say about this.
James Norman describes Adam Smith as someone who “is by general consent the most influential economist who ever lived.” Smith is “justly celebrated today for his insights into the nature of markets and for his famous analysis of how specialization creates economic value.”

Norman says the if we are to understand Smith’s concept of Economics we must combine his “Wealth of the Nations” with his other critical work “Theory of Moral Sentiments.” Norman states, “For Smith Markets exist not by divine right but because they have been shaped by human beings in ways that generate both private and public value.” This is accomplished via the pillars acting together to create positive competition, and people represented by their governments.

This market process is illustrated via the neoclassical economic model describing a circular flow. Firms supply finished products to the market. Households purchase finished goods. However, for households to have the money to purchase the finished goods they need to work for the firms. To do this they go to the factor market and are hired by the firms. The firms pay the households money, which in turn they use in the goods and services market to buy finished goods. The process works well until something goes asunder. This could be greed, market failure, or something else.

Therefore, in the middle of this, according to Adam Smith is the government, with whom I agree. Through all my research and experience, I see the need for government intervention to ensure the circular flow works correctly. I do think the Nordics do this well.

Anyway, my warning to those who are against Capitalism: be careful what you wish for. You may just get what you want, and then see just how good you had it under a Capitalist economic system.

And that is my thought for the day!

Advertisements

Seven Dangers to Human Virtue

With the initiation of my new endeavor, I am spending some time thinking about what constitutes stewardship. While I was researching the subject, I ran across Ghandi’s seven dangers to human virtue. As I pondered the list, I thought it might be worth sharing my thoughts.

These seven dangers have been called many things, but it seems evident that they are worth discussing. Ghandi published them in 1925 as a part of his newspaper, Young India. According to Ghandi, “the list represents seven ways of living that are bound to undermine your well-being and the well-being of those around you. This reminds me of Proverbs 11:10, “When it goes well with the righteous, the city rejoices.”

Amy Sherman in her book, Kingdom Calling: Vocational Stewardship for the Common Good, uses the term Tsaddiqim to illustrate what the righteous do. “The righteous act in concert with God’s will for the shalom of the community. The activity of the righteous shows they align themselves with God’s desire to create community well-being, and their activity is part of God’s creative, justice-establishing efforts.” The phrase used to describe this is social righteousness. I really like that phrase.

The first danger is wealth without work. Work is a critical part of our psyche. If we are given things, it leads to a sense of entitlement. And if we are trust-fund babies it is even worse. I am thinking about the young man who claimed that he did really horrible things because of affluenza. In other words, he was given everything and therefore knew no limits. A weak argument, but still if we have wealth without earning it, our humanity suffers.

The second danger is pleasure without conscience. When we start removing consequences to our actions there is a human cost. All around us we see people getting away with it. As Jeremiah 6:15 states, “Were they ashamed when they had committed abomination? No! They were not all ashamed; Nor did they know how to blush.”

The third danger involves knowledge without character. I have worked with some very smart people, but some of them were really horrible individuals. They lacked the character needed for people to listen to them. Knowledge without wisdom is a tragedy.

The fourth danger is commerce without morality. When it comes to stewardship all of the above is critical, but none more so than this. Profit without sharing, consumption without thought, and wealth without community leads to a loss of morality, a loss of humanity.

The fifth danger is science without humanity. I think the atom bomb is a great example of this. Another example is a medical doctor that may go into medicine to help people but loses the dream when they focus more on money then on care.

The sixth danger is worship without sacrifice. This seems particularly egregious. And if we add the words of Jesus in Matthew 9:13, “But go and learn what this means: I desire mercy, not sacrifice. For I have not come to call the righteous, but sinners,” we get the true sense of the issue.

The seventh and last, at least according to Ghandi, is politics without principle. I do think I could write a whole blog on this one principle alone. It appears that reason and compromise has been replaced with political maneuvering. Thus, nothing gets done.

These seven dangers illustrate both what could be and what shouldn’t be. There is a great scene during the new Jumanji movie where Spencer is questioning whether he could do what was needed. He states that he only has one life left. The Fridge tells him that all we ever have is one life. That was a very profound statement, even if it was made by Kevin Hart. It seems that Ghandi and Jesus are both telling us to make the most of our lives.

I end with a quote from Shakespeare’s Macbeth, Act 5 Scene 5, “This life, which had been the tomb of his virtue and of his honor, is but a walking shadow: a poor player, that struts and frets his hour upon the stage, and then is heard no more; it is the tale told by an idiot, full of sound and fury, signifying nothing.”

We can be an idiot, or we can be the righteous. We can choose to do good with our lives, or we can choose the other. What is your choice?

And that is my thought for the day!

Business Stewardship

I have just started a new business. The name and Logo is below:

Epitropos is the Greek word for stewardship. The foundational concept for my business originates in scripture:

“Moreover it is required in stewards that
one be found faithful” 1 Corinthians 4:2

I have just started a new business.The name of my business is Epitropos, which is the Greek word for stewardship. The foundational concept for my business originates in scripture:

“Moreover it is required in stewards that one be found faithful” 1 Corinthians 4:2

The Slogan: Building Sustainable Business with Heart, Trust, and Leadership

The question you might ask, how does stewardship play a role in the modern business world? I think the concept of stewardship is critical for a successful business. Often in this blog I have mentioned the fact that operational efficiency is critical for business success, this is what stewardship is all about. Let me explain.

One of the financial statements business leaders monitor is the Cash Flow statement. It has three sections: Operating Activities, Investing Activities, and Financing Activities. All three sections represent how the cash has evolved from the start of the year until the end of the year. Let me demonstrate.

Let’s say a company states that it had zero net cash for the year as a result of its operations. The company can improve its cash deficiency by selling assets. This would be reflected as a positive cash result in the Investing section of the statement. Therefore, even if operations had zero cash flow for the year, the company could show a positive cash flow simply by selling assets (Investing), or even by selling stock, which would be reflected in the financing section of the statement. Even though what the business did to make money didn’t make any it could show it had a positive cash flow by other activities.

This is not necessarily bad if it is one year, but if the management team does this year after year, then there is a problem. A management team needs to run the business well, which can only be done with a healthy operational strategy. This is where stewardship plays a role.

As a business leader your goal is to sustain the business over time. A healthy business is maintained through good practices. This is the same as living a healthy life style. It involves making positive life choices. Good stewards make positive business choices, thus keeping the business healthy.

What do I mean stewardship? I think if we explore the four pillars of stewardship, I think we will understand. The four pillars are:
1. A healthy perspective on ownership of the business
a. Good business owners/managers don’t see their business as just their own. Don’t get me wrong, I believe in private property, but ownership involves not what the business can do for me, but what can it do for everyone impacted by it? This is related to stakeholder theory.
2. Being responsible:
This means that, as a business owner/manager I will be faithful in practicing my craft. I will:
a. Pay my employees a fair wage and on time
b. Pay my bills promptly
c. Practice transparency in business
d. Practice a triple bottom-line: People, Planet, Profit
e. Provide a safe work environment
f. Provide appropriate work training
3. Holding yourself accountable
a. I will be a business owner of integrity and honest business praxis
4. Operate for a larger reward.
a. I see coins, profit, as having two sides. There is an economic side and a social impact side. I must create profit, but then I use that profit to promote good for myself and those around me.

I want to help business leaders learn how to practice stewardship. That will be my job for the next thirteen years.

And that is my thought for the day!