Tuesday, March 10, 2009

Capitalism and Temperance

Who is rich? He that rejoices in his Portion.

He that drinks fast, pays slow.

What is prudence in the conduct of every private family can scarce be folly in
that of a great kingdom

These quotes may seem as if written by the great virtue ethicists like Aristotle and Plato. In reality these three quotes, which beautifully illustrate the need for modesty, temperance, and prudence were written by two of the greatest champions of capitalism: the first two are from Benjamin Franklin, and the third is from Adam Smith.

In recent discussions, the words "greed" and "capitalism" often get confused, and the former is seen to be the inevitable outcome of the latter. I can understand this connection; it seems quite obvious that as capitalism depends on the profit motive, great progress can only be achieved by great profit motive, which means "greed."

Truthfully, greed often is a big part of capitalism. The most successful entrepreneurs and businesses are those ambitious enough to desire domination of their market. Wal-mart, Southwes Airlines, Microsoft and other "high flyers" can only get there by, in some sense, being greedy - by wanting to control their markets and make as much profit as possible.

But capitalism also rewards the temperate and prudent. As Adam Smith (3rd quote) rightly notes, prudence can "scarce be folly." While risk-takers are generally greedy (which is why they are willing to take risks), capitalism more frequently rewards those who spend within their means, grow steadily over time rather than meteorically, and have realistic ambitions.

Companies which acquire huge debt, grow too fast, or try and do too much often end up losing out just as fast as they rose (if they rise at all). Companies that focus on one or a few good products, look before they leap, and do not acquire substantial debt are often the "slow but steady" companies in the market.

As with producres, so with consumers. Those who are spendthrifts, live beyond there means, and do not overextend their finances are the ones who generally go unpenalized. Those who take too many chances, buy excessively on credit, and don't limit their expenditures to their revenue, tend not to last long. The natural consequences of capitalism for this behavior are that sooner or later, their "luck," and finances, will run out.

So, far from encouraging greed, capitalism seems more to encourage temperance and prudence. While some of the more exuberant are rewarded from time to time, any good money manager will tell you that you cannot go wrong with prudence. Rather than encouraging great spending, capitalism punishes big spenders the most and moderate to small spenders the least. And a great benefit of capitalism is that it is a system - the only system - which allows one to choose for themselves what they want to be: a glutton or a spendthrift, a big shot with a stressful and high-paying career, or a "small guy" who has a less stressful pace for a lower pay, complexity or simplicity.

As I have mentioned, my fear is that the new Obama bail-out plan will immunize those who need to learn this lesson (provided by the natural consequences of capitalism) form learning it. Overspending and overextending can only lead to trouble; moderacy and prudence seldom get penalized. What Obama is doing is ensuring the opposite: those who have been prudent will be forced to pay for those who have been extravagant.

This is not the lesson of capitalism. And I like capitalism more than Obama.

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