Capitalism, Liberty and Morality

I have taken the liberty of reproducing this speech in its entirety here and, hopefully, readers will find the time to digest it in full at some stage! The universal relevance and implications of Mario's message are particularly pertinent within the social context of a nation like Cambodia which is still deeply mired in political authoritarianism, and crippled by increasing socio-economic inequities [School of Vice].

by Mario VARGAS LLOSA 

Mario VARGAS LLOSA

“. . . Liberty is not divisible, in other words, that there is no economic liberty without political freedom, and that material progress obtained through freedom restricted to the economic sphere and excluded from the political and social arena is imperilled progress, progress with lead feet”. 

The thirtieth anniversary of this great champion of freedom, the Atlas Economic Research Foundation, coincides this year –give or take a few days– with an anniversary of key historical importance: the fall of the Berlin Wall, a symbol of the collapse of the Soviet Empire, the most serious threat the culture of freedom has had to confront in its few centuries of life. It is worth recalling, now that the financial and economic crisis shaking the Western world is sowing pessimism and dire forecasts about the future of free society are on the rise, that less than 25 years ago, communism seemed permanently rooted in almost half of the world and that, today, with the disappearance of the Soviet Union and the transformation of China into a capitalist, totalitarian regime, it is no longer a strong competitor of democracy. It survives, like an ancient archeological relic, in only two enclaves, Cuba and North Korea, where collectivism, statism and despotism seem locked in the past and in extreme poverty.

It is also worth noting that communism did not disappear as a result of a war or a decisive ideological conflict with the free world. On the contrary, the free world seemed resigned to coexist with communism and none other than Henry Kissinger believed that it was here to stay. Fortunately, this did not occur. The communist collapse did not result from a struggle with its adversary but from an internal combustion, an implosion that annihilated it because of its inability to satisfy the most basic demands for well-being, economic development and liberty of the people it subjugated.

Nevertheless, this victory over its most dangerous ideological enemy has not sufficed for the free world to continue its economic and social triumphs by developing free and competitive markets and by strengthening democracy through citizen participation in political life and the cleansing of its institutions. On the contrary, for over three years democratic societies of the West have been plagued by an economic and financial crisis that has triggered unemployment, driven thousands of businesses into bankruptcy and revealed shocking cases of corruption and unlawful practices at its core. All of this has generated a sense of alarm and distrust among the public toward banks and international financial institutions. It is not surprising, then, that the major cities of the Western world are the site of the recent Occupy Wall Street protests, where one hears, yet again, the old diatribes against capitalist exploitation and markets that foster selfishness and inequality, and drive wedges between rich and poor.  Amazingly, within the “Indignant Ones” and Occupy Wall Street movement, one can hear voices that call for old populist and socialist formulas to remedy the economic ills of the free world: nationalizations, state-controlled economies and, in general, the growth of the public sector and the reduction of the private one.

“. . . a country cannot spend more than what it is capable of producing, that is, of living beyond its means, without running the risk of acquiring debts that could eventually destroy it;”

I have had to travel a good deal this year and I have met these angry young members of the “Indignant Ones” movement in Madrid, Paris, London, Berlin and recently, even on Wall Street. If one never left this developed-country circuit –in other words, Europe and the United States– one might be tempted to think that the Mecca of capitalism is in irreversible decline and that it runs the risk of becoming a victim, due to its internal contradictions, of a fatal implosion similar to the one that ended communism.

Luckily, my trips also took me out of that territory and across the seas to Asia and South America. And there –lo and behold– I found a very different panorama from the one offered by Arthur Rimbaud’s Europe aux anciennes parapets (of the ancient parapets). Capitalism does not seem to be in decline in either Asia or Latin America. On the contrary: it exhibits a vigour and confidence it never had in the past. India, South Korea, Taiwan, the People’s Republic of China, Singapore, Indonesia, Malaysia and South Africa boast emerging economies, bold private enterprises and numerous investors from all over the world who go to these countries, creating jobs and quickly expanding their middle classes. Most of these countries are opening the political spectrum, abandoning old authoritarian practices and adopting democratic customs. They are aware that liberty is not divisible, in other words, that there is no economic liberty without political freedom, and that material progress obtained through freedom restricted to the economic sphere and excluded from the political and social arena is imperilled progress, progress with lead feet.  Even the People’s Republic of China, which is attempting the impossible task of squaring circles by maintaining a free market economy within a single-party dictatorship, is forced to make small concessions daily in response to the anxious demands for participation of the new classes, who were removed from poverty by the free economy, which has enabled them to be educated and to improve their living conditions. For classical liberals such as myself, there is no doubt that if China wants to keep prospering at its current rate, it will have to open its political system, the way it has done with the economic one.

The scenario in Latin America is no less stimulating for those who believe, as I do, along with von Mises, von Hayek, Friedman, Popper and so many philosophers of liberty, that the system of free enterprise, private property, open markets and political freedom, is the only one capable of ending poverty, hunger and exploitation, and of creating societies of genuine well-being and equal opportunity for all. While the Cuban dictatorship languishes in poverty and the populist and pseudo-democratic governments of Venezuela, Ecuador, Bolivia and Nicaragua are impoverishing their countries and suffocating them in corruption and violence, those that have resolutely opted for democracy and free economies, such as Brazil, Mexico, Colombia, Chile, Uruguay, Peru and others, are experiencing a period of exceptional, though varying, economic growth.

What an extraordinary paradox!  Countries which, until recently, were considered models for emerging from underdevelopment, are now suffering a crisis which, if not addressed, could return them to a state of underdevelopment –such as what happened in Argentina and is now occurring in Greece– while countries that not long ago seemed unable to overcome their limitations are now on the path of progress, largely unaffected by the great financial earthquake shaking Europe and the United States.

What happened, as the old Spanish saying goes, to flip the tortilla so quickly? Something very simple. The pupils have learned the lessons that their teachers preached but forgot to practice at home, sometimes doing things diametrically opposed to what they were recommending to countries committed to escaping poverty and underdevelopment. This is that a country cannot spend more than what it is capable of producing, that is, of living beyond its means, without running the risk of acquiring debts that could eventually destroy it; that fiscal discipline and control of public spending go hand in hand with a healthy economy and a stable currency; that responsible banking and financial institutions obtain their benefits by serving their clients rather than the other way around, and not by speculating with the money they were entrusted with for the benefit of directors and executives; and that, in the words of Milton Friedman, “there is no such thing as a free lunch,” since irresponsible spending and wastefulness can take their toll, driving countries, businesses or individuals to bankruptcy and ruin.

The crisis striking Western Europe and the United States is neither the first nor the last that capitalism will face. But of the many it has suffered, this is, perhaps, the one that has done the most harm to morality. It has revealed, at its core, an essential lack of ethical values and a egocentric spirit in which the fervour for profit has blinded esteemed executives and business owners, bankers and financiers, to the point to which they act with a complete lack of vision and scruples, to make decisions that hurt their clients and the very system to which they owe their power and fortunes. This is the most serious aspect of the crisis and the one that will surely take the longest to remedy. This is because, at great cost to the victims of the crisis rather than to those responsible for it as well as to taxpayers, the economies of the affected countries will undoubtedly slowly recover, loans will again bring businesses back to health and the system that creates wealth and jobs will resume and, sooner or later, capitalism will again demonstrate its creative, forward-thinking energy in the Western world. But if the origin of the moral decline in the system of free enterprise and open markets that this crisis revealed is not corrected, the damage will keep corrupting it from within, undermining its sources of support and depriving it of that favourable consensus –the trust and solidarity of the majority of citizens– without which no institution can survive in the long run.

On this point, I would like to share the ideas and example of a great businessman, entrepreneur, investor, scholar and advocate of the capitalist system, a man associated with The Atlas Economic Research Foundation: Sir John Templeton. I do not want to tell the remarkable story of how this Southerner from Winchester, Tennessee, born into a poor family, managed, thanks to his talent and hard work, to study at Yale and Harvard, or how, thanks to his keen investment sense, historical vision and the global horizon of his entrepreneurial strategy, which was always allergic to provincialism and borders, he was able to build the financial empire of which the Templeton Growth Fund was the star attraction. Legend has it that anyone who invested $10,000 when the fund was established (in 1954) would have made almost $3 million by 1992 –the year Sir John sold it. But as I said, that is not the aspect of Sir John´s extraordinary career I want to talk about now. Rather, I would like to focus on this businessman’s equally passionate concern for the spiritual and religious life. He was convinced that a society steeped in economic liberty and respect for private property but lacking in that spiritual and ethical dimension was like a being without a soul, a robot that could succumb to the slightest mechanical failure. For Sir John Templeton, like for so many champions and theoreticians of classical liberalism, from Adam Smith to Sir Karl Popper to Hayek, the most solid foundation of the culture of liberty is moral rather than material. It rests on ethical and spiritual convictions and practices more than on political and ideological ones. This is the reason John Templeton donated over a billion dollars of his personal fortune to charity and created, during his productive life, a number of foundations and institutions that promote the study of links between religion and science and finance, and that encourage academic and creative activities associated with the challenges capitalism faces in this age of globalization and the communications revolution.

Rather than the problems of accumulated debt, an excess of irresponsible credit, housing bubbles and similar issues, perhaps the deepest root of the financial crisis affecting Western Europe and the United States today has to do with the inattention to Sir John Templeton’s main concern: the ethical and spiritual foundation of capitalism, the moral values that uphold it.

It is a mistake to defend the system of free enterprise and open markets in exclusively economic terms. It is of course true that thanks to the system, wealth has spread spectacularly across the face of the earth, and with it, material progress and well-being. But this is more of a consequence than a cause. Capitalism liberated society from the slavery and servitude that in feudal times had turned the vast majority of human beings into beasts of burden, condemned to work from sunup to sundown, without rights or wages or benefits of any kind. Feudal lords frequently treated their workers with less compassion than their dogs and horses. Life became much more humane with the emergence of independent businesses and private merchants, the development of modern cities, the private property system, free trade and open, competitive markets. Without them, the sovereign individual would never have appeared, and the same can be said of the concept that individuals have inherent rights and are equal before the law. All of this progress can be summed up in the word that best represents it, liberty, a word which in all its domains –political, economic, social and cultural– created opportunities and introduced changes and values that drove human civilization toward goals of development and advances that were simply inconceivable to our ancestors.

Of course I have not forgotten that Christianity played a key role in making society more humane. Despite the church’s lack of trust and occasional hostility toward capitalism (in reality, towards great wealth), the historical truth is that this system, with its powerful capacity to create wealth and the formidable momentum it gave to scientific and technological progress, contributed more than any other to liberating humankind from what Karl Marx called the “cretinism of animal life,” in other words, to save it from idleness and hunger, plagues which periodically decimated humanity during a good part of its history. And that was an extraordinary contribution, to instil in real life the religious values of doing a good deed for another and of helping an individual overcome the obstacles that impede him from having a dignified life. This is why, in its early heyday, the capitalist system was imbued with ethical and spiritual values.

In the realm of science alone, the system of free enterprise and open markets drove and continues to drive research and discoveries that have eradicated most of the diseases that devastated and at times threatened to eliminate the human race. It has created conditions, inventions and systems that have improved the quality of life in a way our great grandparents would have found miraculous just a few decades ago. That is why, a few weeks ago, millions of people around the world –especially the new generations– mourned the death of that great visionary and entrepreneur named Steve Jobs, whose innovations in and contributions to the field of communications were revolutionary. This tribute was for a man of genius, the co-founder of Apple of course, but also for the system that shaped him and made his extraordinary destiny possible.

Democracy itself –in other words, the political system shown to provide the most benefits to society, by reducing violence, allowing the peaceful turnover of governments, the coexistence of widely diverse citizens and the best defense against the abuses of power– is inseparable from the capitalist system of respect for private property and free markets. All of this gives the system a moral and spiritual justification rather than just a materialistic and pragmatic one. The Founding Fathers of America were well aware of this, spelling out the right of citizens to pursue happiness as a core value of the Republic in their Constitution.

By referring to the right to pursue happiness rather than happiness itself, they demonstrated their understanding that happiness is something personal and private, an idea whose content varies widely depending on the individual and the culture, and as something which should not be imposed on citizens by states or governments. The only responsibility of a state is to build a framework of liberty and opportunities where individuals can pursue happiness (or rather, create it).

The altruistic, philanthropic concept of capitalism of the American forefathers does not correspond to the spectacle that this system has offered the world in recent times, after the major crisis battering the Western world. Rather, one could argue that its most prominent representatives were doing their best to resemble the caricatures that their detractors have traditionally made of them. They were not the business chiefs who created jobs and wealth, in the manner of Steve Jobs, who overcame poverty and adversity, but rather selfish speculators capable of forcing their partners and clients into financial ruin, as well their own businesses, blinded as they were by their drive for profit. This is not the image of the developer of long-term projects, guided by a desire for progress for himself as well as for his loved ones, collaborators, city, country and era. Rather, it is one of an impatient individual, ravenous for quick and easy wealth, who sacrifices the future for the sake of a fleeting present and who, in his urgency, destroys the ground beneath him, in other words, the factory, bank or company he manages, without concern that, in his failure, he will bring down everyone who trusted in him, the very society and system that allowed him to reach those dizzying heights.

This is how we arrived at an unprecedented situation that we could summarize like this: Precisely when its most dangerous adversary, communism, was fading, defeated by its internal contradictions and failings, the capitalist system, instead of garnering strength from recent historical evidence that it was the best system to guarantee the holy trinity that Hayek defined as the driver of civilization –property, law and freedom– also began to decay, the victim of a poison its immune system had allowed to flourish instead of attacking and eradicating it. It ignored that aspect of its nature which other great entrepreneurs of our time, besides Sir John Templeton –such as Bill Gates and Warren Buffet, who have invested a considerable part of their vast fortunes in humanitarian aid– have held in highest esteem: the moral and spiritual dimension of capitalism.

For those of us who believe in and defend the capitalist system, there is a truth we cannot ignore. While the system has proven to be the most efficient in allocating resources, in perceiving and satisfying the potential needs and demands that emerge in a society, in rewarding with more justice anyone whose work most benefits the most people, capitalism develops an appetite for material goods –consumerism– and for accumulating wealth which, within the confines of a respectable and respected legal system, is not necessarily a bad thing. On the contrary, as long as they do not go beyond the law, these are excellent incentives to keep the system functioning since they encourage invention and creation of new products, boost competition and create models and paradigms which the young will attempt to emulate.

However, there is a certain limit, which is hard to pinpoint, where virtue becomes vice, and the legitimate yearning for success and benefits at work turns to greed, hunger for profits, a passion so exclusive that it blinds whomever it dominates, driving them beyond the limits of decency and law, to act in a way that harms others and the system itself. It is not enough to say that the problem is solved and the system is safe if a government upholds the law and takes rapid action in these criminal cases, bringing the guilty to court for sentencing. That would only be true if these cases were rare, exceptions to the rule, but not when they are everywhere like a raging infection contaminating the very essence of the system.

Sadly, that is the impression left by the most recent crisis of banks and financial institutions, whose executives have protected themselves with outrageous privileges while businesses de-capitalized and fell into ruin, wiping out the funds of those who had trusted in them—and then, of course, seeking to be rescued by taxpayers.

Of course, for this to occur on the scale it did, there had to be negligence or complicity on the part of the entities responsible for controlling the proper functioning of the system and ensuring that it did not spill over its established boundaries. But to blame the catastrophe, which left millions of people without work and bankrupted many small and medium-sized enterprises, on a few incompetent or dishonest public servants, is a huge mistake.  It is not the guardians of the system but the system itself that failed, by allowing some distortions to appear and to undermine it from within, plunging it into a full-blown recession.

What failed was not only the system’s self-corrective mechanism, the institutions responsible for heeding the alarms and administering the necessary antidotes, but rather the ethical and spiritual foundations that allow leading entrepreneurs as well as public servants, technicians and regular employees, to distinguish between what is legal and what is not, to recognize the boundary that divides what is legitimate from a conduct that disgraces everyone who practices it and causes great harm to others.

Our culture has become tolerant of those who, driven by a wild desire for profit, break the law and, instead of being punished for it, remain immune and are sometimes even rewarded by a state that rescues businesses from financial ruin triggered by their excesses. This is not the capitalist system but rather a profound distortion of what it was and what it still needs to be if we are to avoid moving backwards from civilization to barbarity.

Throughout its history, the free enterprise system has shown an extraordinary capacity to renew and reinvent itself. This is the time to do so again, following the familiar path. First, a radical, constructive self-criticism of the roots of what went wrong. In this case, the complacency and tolerance of those who have overstepped the rules of the game that the law establishes for markets and free competition. These people should be tried and punished for it. Second, an ongoing demand and effort –no holds barred– to return to the system that ethical dimension which is its strongest justification. This means defending the idea that more than just a system of economic rules, capitalism is a culture inspired by values –since it is based on respect for liberty, justice and legality– which have led to progress in human life, in the domain of the material as well as in terms of dignity, compassion, opportunities, respect for others, solidarity and generosity. It has been said, and with some truth, that liberty and justice –the latter particularly in terms of its social dimension– repel each other. Throughout its history, the great accomplishment of the classical liberal doctrine has been to replace this discord with harmony between the categories, since what we call civilization depends on their reconciliation and coexistence.

This is a difficult but not impossible task. What must gear up for it with the knowledge that the system we defend, despite its imperfections, is better than all the ones that have tried to replace it, promising paradise on earth but instead turning the societies that fell under their spell into a living hell. Let us return to political democracy and economic liberty the moral conscience it had in the best moments of its history, when progress and culture reached their greatest heights.

New York, November 9, 2011

Atlas Liberty Forum and Freedom Dinner [atlasnetwork.org]