Capitalism is the supreme expression of human creativity and freedom, an economy of mind overcoming the constraints of material power. – George Gilder1
If you listen to what people say, you’d think that they hated business and business owners. Women converse with their friends about the products they have had to return. Liberals talk comfortably about reining in “corporate greed.” People hate paying ATM fees. Politicians rail against “price gouging” oil companies, and everyone piles on when the subject is greedy bankers.
But if you watch what people do, you read a different story. People trust their money to the bank, they save with Fidelity and Vanguard, they fill up their cars at the gas station using a debit card from the bank and have complete confidence that the oil company will not steal their money. People line up for a chance to work for big corporations and they loyally buy from their favorite brands. Our liberal friends, of course, like to look different. They put their trust in cooperatives – grocery stores, sports equipment stores, health cooperatives, and TIAA-CREF – and look the other way as their favorite cooperatives slowly reinvent themselves into modern corporations by copying everything corporate, from marketing to employee development, except the idea of stockholder ownership.
On the one hand, people love to complain about corporations; on the other hand they love what they deliver. What is the meaning of this?
Let us start with the facts, as presented by Deirdre McCloskey in Bourgeois Dignity.
In 1800 the average human consumed and expected her children and grandchildren and great-grandchildren to go on consuming a mere $3 per day, give or take a dollar or two. The figure is expressed in modern-day, American prices, corrected for the cost of living. It is appalling.
By contrast, if you live nowadays in a thoroughly bourgeois country such as Japan or France you probably spend about $100 a day. One hundred dollars as against three: such is the magnitude of modern economic growth.2
McCloskey argues that the difference between $3 a day and $100 a day is the spirit of innovation in the minds of people, that “economic development requires ‘a million mutinies’” against the customary ways of doing things.
An old class of town dwellers, formerly despised by the clergy, the aristocracy and the peasantry, began to acquire a more dignified standing, in the way people talked and thought about it, in European rhetoric about middle-class activities. And along with a new dignity the bourgeoisie began to acquire a new liberty.3
With the dignity and liberty that attaches to merchants in a mercantile republic the entrepreneurs of Venice developed a startling innovation in farming. In the 13th century they developed sugar plantations on the island of Cyprus. These plantations were worked by “a mixed labor force of local serfs and Muslim slaves.”4 They were not ancestral estates but well-capitalized businesses growing sugar cane and exporting refined sugar to Europe; entrepreneurs were responding to a new consumer demand in Europe. Traditionally the only sweetener in Europe had been honey, but the Crusaders had learned from their Muslim opponents how to drink coffee and sweeten it with sugar. They took their sweet tooth back to Europe, and pretty soon the entrepreneurs of Venice figured out how to make money off it: plantation slavery. Fortunately for the profits, it was acceptable to enslave Muslims to this backbreaking work because they were not Christians.
None of this is intended to devalue the very nice trade in slaves from the Black Sea lands — females for “households and harems” and males for the mamluk military slave system — that Venice and Genoa conducted with various Islamic dynasties in Egypt.5
As the sugar business grew the plantations gradually moved west and by the middle of the 15th century the Portuguese began to establish sugar plantations on the Canaries and the Madeiras islands off the west coast of Africa. They imported African slaves to work the plantations. That was all right because the Africans weren’t Christians either. By the end of the 16th century the industry moved west to the West Indies; the British entered the business on Barbados in the mid 17th century.6
It is important to realize that right from the start these plantations were highly articulated enterprises and were plugged into the international trading system.
The large slave plantations of the Western Hemisphere required huge capital investments, not only to cover the purchase price of the slaves but also to cover the cost of the land, buildings, work animals and other livestock, irrigation works, implements, and, in the case of sugar, machinery. Towards the end of the eighteenth century, the typical Jamaican sugar plantation operated with about 200 hands and had a capital value of about £26,400 (about... $21 million in 1985 dollars)... There were no U.S. factories of this size until the second decade of the nineteenth century.7
Sugar planters were enthusiastic innovators. They built factories to grind, filter, boil and cure the sugar; they built railroads, and exploited steam power for their grinding mills.
Another major technological innovation proved critical to the success of sugar cultivation; it was “industrial labor discipline,” the work culture that a century later appeared in the textile factories of the Industrial Revolution. In plantation slavery this invention was called the “gang system,” the organization of slaves into gangs of about ten workers “driven” by an overseer to perform specific, repetitive tasks as a team. The crux of the system was
the division of the complex activities during each phase of production—planting, cultivating, and harvesting—into a series of relatively simple tasks that could be closely monitored... “A plantation might be considered as a piece of machinery,” said Bennet H. Barrow in his Highland plantation rules. “To operate successfully, all its parts should be uniform and exact, and its impelling force regular and steady.”8
A century later British businessmen recruiting labor for their new factories complained about the “bad industrial habits of their rural recruits”, the difficulty of getting any post-pubertal human to work under modern factory discipline. This was not a problem for the slave plantation owners. The “extraordinary degree of force that planters were allowed to bring to bear on enslaved black labor” took care of bad habits.9 When industrial discipline became a scandal in England in the mid 19th century the political system responded with parliamentary inquiries and Factory Acts. But in the sugar islands, a century earlier, the sugar magnates dominated politics and they passed legislation to grant themselves the force they needed to perfect the gang system in their slave plantations.
In the end the politicians took over the problem of preparing workers for factory discipline. They passed compulsory education laws that forced every child to attend an approved school for most of its pre-pubertal years and to become habituated to a life of subordination and constant discipline. For most children this school would be a government school, what we might call a government child-custodial facility. By the end of the 19th century, the role of government schools in preparing children for disciplined work in factories and offices was not reckoned to be an injustice but a virtue.
The slave economy became big business. In the great age of navigation “slave-produced commodities dominated the channels of world trade”, amounting in the 1770s to almost 30 percent of England’s imports. “Much of England’s shipping was engaged in transporting either sugar to Europe, slaves from Africa to the New World, or manufactured goods from England to the slave colonies.”10 A proper restraint was observed in polite society about all this. When Sir Thomas Bertram left his family to visit his “Antigua estate” in the West Indies readers were not introduced to the notion of slavery until, upon his return to Mansfield Park, Jane Austen’s timid heroine Fanny Price ventured a question to her uncle about the slave trade. “[B]ut there was such a dead silence” from the others, Fanny admitted, that she hardly dared to continue her topic. The literary critics tell us we are to understand that the rigid proprieties of the Bertram world are one with Sir Thomas’s patriarchal endorsement of his elder daughter’s loveless but advantageous marriage and the unsuccessful bullying of his niece Fanny into marriage with the rich but vicious Henry Crawford: they all add up to slavery. The Bertrams were not the only fictional family in on the slave action. Charlotte Brontë’s orphaned Jane Eyre inherited her miraculous £20,000 from her uncle, a businessman on the sugar island of Madeira. When the Industrial Revolution began in the 18th century with either the invention of the steam engine in 1698 or the creation of the textile industry, it either picked up or reinvented the techniques of labor discipline developed for the slave plantations. Employees were resources to be economized and consumed.
This history permits us to appreciate the startling paradox that confronted the educated elite in the mid-19th century. On the one hand the new textile magnates had revolutionized the manufacture of textiles and transformed transportation with railroads, two inventions that improved life for everyone and improved it enormously for the lower orders. On the other hand they had extended the mechanical metaphor of Newtonian science to the very people that worked on their plantations and factories, apparently treating them with inhuman callousness as mere capital resources.
But that is not the only paradox about modern business. Businessmen, we know, ruthlessly compete in a war of all against all in the battle for market share, and yet business runs on trust.
The author recently bought at his local supermarket some Pinata apples. Even though he’d never previously heard of Pinatas he bought a couple for, as he told the checkout clerk, he trusted Safeway. The clerk looked surprised. It’s unusual to express trust in our economic system these days, and especially to express trust in big corporations. This chasm between walk and talk is telling, for the reality is that the economic sector is drenched in trust.
Three stories illustrate why this is so. The first story, from the late 19th century, features John D. Rockefeller’s daughter Bessie. On an expedition in New York City shopping with college friends for a present she found herself short of cash.
At a Manhattan store they found the perfect gift: a $100 desk. Since Bessie and her companions had only $75, they asked the merchant if he could wait a few days for the remaining $25. He agreed to do so if a New York businessman would vouch for them. “My father is in business,” Bessie offered meekly. “He will vouch for us.” Who is you father? Asked the man. “His name is Mr. Rockefeller,” she said. “John D. Rockefeller: he is in the oil business.”11
Fortunately the merchant knew who Bessie’s father was. But if Bessie’s father hadn’t been John D. Rockefeller then the merchant could have checked the business directory to determine his trustworthiness as a New York businessman.
The second story is about J.P. Morgan, American financier, the man that saved the financial system after the Crash of 1907. At the Pujo Committee hearings into the “money trust” in 1913 after the economy had safely recovered, J.P. Morgan testified before the House of Representatives. In a famous exchange, Morgan and committee counsel Samuel Untermyer tussled over the question of money and credit. It was Mr. Untermyer who had asked “Is There a Money Trust?” in a speech in New York in December 191112.
Mr. UNTERMYER. Is not commercial credit based primarily upon money or property?
Mr. MORGAN. No, sir; the first thing is character.
Mr. UNTERMYER. Before money or property?
Mr. MORGAN. Before money or anything else. Money cannot buy it.
Mr. UNTERMYER. So that a man with character, without anything at all behind it, can get all the credit he wants, and a man with the property can not get it?
Mr. MORGAN. That is very often the case.
Mr. UNTERMYER. But that is the rule of business?
Mr. MORGAN. That is the rule of business, sir.
Mr. UNTERMYER. If that is the rule of business, Mr. Morgan, why do the banks demand, the first thing they ask, a statement of what the man has got, before they extend him credit?
Mr. MORGAN. That is what they go into; but the first thing they say is, “We want to see your record.”
Mr. UNTERMYER. Yes; and if his record is a blank, the next thing is how much has he got?
Mr. MORGAN. People do not care, then.
Mr. UNTERMYER. For instance, if he has got Government bonds or railroad bonds, and goes into get credit, he gets it, and on the security of those bonds, does he not?
Mr. MORGAN. Yes.
Mr. UNTERMYER. He does not get it on his face or his character, does he?
Mr. MORGAN. Yes; he gets it on his character.
Mr. UNTERMYER. I see; then he might as well take the bonds home, had he not?
Mr. MORGAN. Because a man I do not trust could not get money from me on all the bonds in Christendom.
Mr. UNTERMYER. That is the rule all over, the world?
Mr. MORGAN. I think that is the fundamental basis of business.13
Notice the difference between the understanding of Untermeyer and Morgan. To the banker business is a question of trust and relationship. To a political lawyer it is a question of conspiracy and under-the-table deals.
William Tecumseh Sherman related in his Memoirs an incident where trust, or the lack of it, was perhaps the saving of the bank of Lucas, Turner, and Co., of which the thirtysomething Sherman was a partner and the manager of its San Francisco branch in the years leading up to the Panic of 1857. The incident, in 1854, involved H. Meiggs, City Councilman, owner of a lumber business, and prominent San Francisco citizen.
In him Nisbet [Sherman’s fellow partner] had unbounded faith, but, for some reason, I feared or mistrusted him, and remember that I cautioned Nisbet not to extend his credit but to gradually contract his loans.14
Sherman contracted Meiggs’ loan balance, secured by city warrants, from eighty thousand dollars down to twenty-five thousand dollars, but “one morning Meiggs and family were missing, and it was discovered that they had embarked in a sailing vessel for South America.” Meiggs failed for nearly a million dollars, and it turned out that some of the city warrants used to collateralize his debt had been “fraudulently issued” by the City Councilman. Later, when a run on the San Francisco banks occurred in February 1855, Sherman’s bank survived. We may speculate that it survived in part because Sherman understood the importance of trust.
A young salesman once told me the story of his first big contract. He was sitting in the client’s office after the deal had been struck, and watched as his client put the contract in his desk drawer. If he ever had to take that contract out of the drawer, his client told him, then their business relationship would have failed. He meant, of course, that in future their business dealings would be done on the basis on mutual trust and a spirit of give and take. The contract was there in case their mutual trust failed.
Business dealings are drenched in words of trust, words like bond, trust, equity, redeem, company, partner, credit, and grace.15 That’s the argument of Frederick Turner in Shakespeare’s Twenty-first-Century Economics. Here he analyzes the contract for a “pound of flesh” in The Merchant of Venice.
A contract, though it contains a necessary orientation towards an eternal and unchanging perfection of clarity and justice, and implicitly stipulates the most unambiguous construction of its words at the moment of their composition and signing, is always an ongoing relationship of persons. It can work only so long as it contains enough free play, enough lubricant of inexactness, so that it does not seize up.16
The certainties of a written contract are an illusion, for the real business relationship features contingencies never imagined in the contract. The real business relationship enacts the age-old exchange of gifts and the rough-and-ready give-and-take that renews and confirms the trust between two friends.
The importance of trust not just as a lubricant for business but as a basis for a prosperous and peaceful society is argued by Francis Fukuyama in Trust: The Social Virtues and the Creation of Prosperity.
Thus, economic activity represents a crucial part of social life and is knit together by a wide variety of norms, rules, moral obligations, and other habits that together shape the society... [O]ne of the most important lessons we can learn from an examination of economic life is that a nation’s well-being, as well as its ability to compete, is conditioned by a single, pervasive cultural characteristic: the level of trust inherent in a society.17
Fukuyama investigates the trust question on a national and regional level; he observes the difference between “high-trust” societies like the United States, United Kingdom, and Germany versus “low-trust” societies like China, Italy, and France. The difference lies mainly in the ability of people to extend trust beyond their families, their blood kin. The high-trust societies include a wealth of voluntary associations in the space between the family and government, and it is the high-trust societies that led the way from agricultural to commercial and industrial society. Trust, argues Fukuyama, is the key marker of social well-being.
Ayaan Hirsi Ali, a Somali-born human rights activist, points up the difference between tribal life and city life with the “white infidels” in a “letter” to her dead tribal grandmother, who had taught her the tribal culture of “suspicion and distrust.”
The infidel insists on honesty and trust. Everywhere you turn here, you must trust someone: to fly the airplane you travel in, to teach your child, to take care of you when you are sick and feed you food that is edible. And everywhere your trust is borne out.18
The Prisoners Dilemma shines a helpful light on the question of trust. It’s a notion developed by two analysts at the RAND Corporation in 1950 and was given its name by Albert W. Tucker. In the classic situation, two prisoners are confined in separate cells. The question is: should a prisoner inform on the other prisoner and get a light sentence, or what? Generalized, the Prisoner’s Dilemma attempts to answer the question: Why or when should people trust each other? When does it pay to be trustworthy, and when does it pay to cheat? The short answer is that it pays to be trustworthy in a long-term relationship, and it pays to cheat another person on the last transaction with them. The best way to avoid a cheating situation is to have a long-term relationship in which the termination of the relationship is unthinkable. It doesn’t take too much to understand why businesses employ strategies to encourage their customers to trust them, using an array of inducements ranging from branding to unlimited return policies.
Trust is important not just between business and consumers, but business to business as well, and the reason is that it saves money. Here is an example of trust in the shipping business from the 1960s. A shipowner gets a call from his ship captain late on a Friday. His ship, in Amsterdam for repairs, is ready for sea, but for one problem. The shipyard won’t release the ship without payment of 200,000 pounds sterling. Unless payment can be arranged immediately the ship will be stuck in the shipyard all weekend and that will cost 20,000 pounds. The shipowner calls his merchant banker in London and the banker calls a bank in Amsterdam to pay the shipyard so the ship can sail on Friday night.19 It is easy to see what is going on here. The shipyard does not trust the shipowner, for once the ship sails it is gone forever and the shipyard might have to work hard to get payment. But the merchant banker trusts the shipowner and the bank in Amsterdam trusts the merchant bankers, for each of the parties has a long-term business relationship with the other; they trust each other.
It’s all very well for rich shipowners and merchant bankers to trust each other. It’s all very well for Wall Street titan J.P. Morgan to tell a crusading Jewish lawyer that he wouldn’t do business with a man he did not trust—even for all the bonds in Christendom. But most people do not do business at such rarefied altitudes. They do not have powerful friends in high places to force back the jungle and the ravenous beasts of capitalism. What about business down in the swamp? How does business survive in the informal sector of the Third World or in the inner city of the United States where the arm of the law is wielded against you? Fortunately we know how business works in such an inhospitable climate. From Hernando De Soto Polar, a Peruvian businessman, we know about the informal economic sector of Lima, Peru, researched by his Instituto Libertad Y Democracia and described in his book The Other Path. From Sudhir Alladi Venkatesh and Off the Books we know how informal business works on the south side of Chicago. From James Tooley in The Beautiful Tree we know how illegal private schooling works in the slums of Third World cities. In Portfolios of the Poor Daryl Collins and his co-authors describe the surprisingly active informal credit transactions by which the Third World poor deal with the irregular income flows they experience as farmers and street traders. These stories tell us what capitalism looks like when it operates outside the law, when virtue loses all her loveliness. They tell us how capitalism operates without the institutional benefit of the legislation that, the ruling class insists, is essential to prevent a world of cruelty and oppression. We shall see that economic and social life without the law operates pretty much the same way that business operates within the law. It operates with relationships and trust. Unfortunately it must operate without the efficiencies of the formal economy, its access to credit, its electronic transactions, its support from the commercial code and the legal system. And that makes life in poverty a lot less secure and a lot more risky than it needs to be.
Socialists rail about exploitation. Progressives talk about corporate greed and corporate oligarchy. Conservatives rail at “crony capitalism” when business gets in bed with government. Yet, as we have seen, business is drenched in trust. What does it all mean?
The answer is similar to the one that Hollywood mogul Sam Goldwyn gave: “If you want to send a message, call Western Union.” Don’t expect business to become the fount of moral inspiration. Business is all about innovation, production, execution, exploitation, and trust between partners. It is not about morality. It combines resources to deliver goods and services efficiently to the market. It uses the instrumental reason of practice and technique to exploit and to dominate Nature and other humans to the extent of efficiency, and above all it combines the efforts of millions of producers to meet the needs of the consumers. If businessmen treat customers well it is because it pays to do so. If a corporation showers its employees with pensions and benefits it is because it looked like a good idea at the time.
Business looks to others to define the parameters of what is permitted and what is forbidden. That’s OK; we have religion for that. But for religion people would lose all shame and act like freebooters and freeloaders.
2Deirdre McCloskey, Bourgeois Dignity, University of Chicago Press, p. 1.
3Ibid, p. 10.
4Robert William Fogel, Without Consent or Contract, Norton, 1989, p. 203.
5William J. Bernstein, A Splendid Exchange: How trade shaped the world, Grove Press, 2008, p. 122.
6Ibid., p. 17-22.
7Ibid., p. 23.
8Ibid., p. 26.
9Ibid., p. 26.
10Ibid., p. 22.
11Ron Chernow, Titan: The Life of John. D. Rockefeller, Sr., p. 232.
12New York Times, “Curbing the ’Money Trust’,” December 28, 1911, Accessed 5/28/2013: http://query.nytimes.com/mem/archive-free/pdf?res=FA0F12F8395517738DDDA10A94DA415B818DF1D3
13Pujo Committee Hearings, transcript for December 19, 1912. http://c0403731.cdn.cloudfiles.rackspacecloud.com/collection/papers/1910/1912_12_19_Morgan_at_Pujo_C_t.pdf
14William T. Sherman, Memoirs, Barnes & Noble, 2005, p. 102.
15Frederick Turner, Shakespeare’s Twenty-first-Century Economics, p. 11.
16Ibid., p. 73.
17Francis Fukuyama, Trust, p. 7.
18Ayaan Hirsi Ali, Nomad: From Islam to America, Free Press, 2010, p. 89.
19Joseph Wechsberg, The Merchant Bankers, p. 16.
Government and the Technology of Power
If you scratch a social reformer, you will likely discover a plan for more government.
Business, Slavery, and Trust
Business is all about trust and relationship.
Humanity's Big Problem: Freebooters and Freeloaders
The modern welfare state encourages freeloaders.
The Bonds of Faith
No society known to anthropology or history lacked religion.
A Critique of Social Mechanics
The problem with human society reduced to system.
The Paradox of Individualism
Is individualism the gospel of selfishness or something else?
From Multitude to Civil Society
The larger the government, the smaller the society.
The Answer is Civil Society
In between the separated powers.
The Greater Separation of Powers
If you want to limit power then you must limit power.
Conservatism Three by Three
Conservatism, political, economics, and cultural.
The Culture of Involvement
Imagining lives without the welfare state
The Poor Without the Welfare State
Can the poor thrive without the welfare state?
The Middle Class Without The Welfare State
How would the middle class live without all those middle-class entitlements?
From Freeloaders to Free Givers
The path to the future lies through moral movements.
The Real Meaning of Society
Broadening the horizon of cooperation in the last best hope of man on earth.
When we began first to preach these things, the people appeared as awakened from the sleep of agesthey seemed to see for the first time that they were responsible beings, and that a refusal to use the means appointed was a damning sin.
Finke, Stark, The Churching of America, 1776-1990
In 1911... at least nine million of the 12 million covered by national insurance were already members of voluntary sick pay schemes. A similar proportion were also eligible for medical care.
Green, Reinventing Civil Society
We have met with families in which for weeks together, not an article of sustenance but potatoes had been used; yet for every child the hard-earned sum was provided to send them to school.
E. G. West, Education and the State
Law being too tenuous to rely upon in [Ulster and the Scottish borderlands], people developed patterns of settling differences by personal fighting and family feuds.
Thomas Sowell, Conquests and Cultures
The primary thing to keep in mind about German and Russian thought since
1800 is that it takes for granted that the Cartesian, Lockean or Humean scientific and
philosophical conception of man and nature... has been shown by indisputable evidence to be
F.S.C. Northrop, The Meeting of East and West
Inquiry does not start unless there is a problem... It is the problem and its
characteristics revealed by analysis which guides one first to the relevant facts and then,
once the relevant facts are known, to the relevant hypotheses.
F.S.C. Northrop, The Logic of the Sciences and the Humanities
But I saw a man yesterday who knows a fellow who had it from a chappie
that said that Urquhart had been dipping himself a bit recklessly off the deep end.
Dorothy L. Sayers, Strong Poison
I mean three systems in one: a predominantly market economy; a polity respectful of the rights of the individual to life, liberty, and the pursuit of happiness; and a system of cultural institutions moved by ideals of liberty and justice for all.
In short, three dynamic and converging systems functioning as one: a democratic polity, an economy based on markets and incentives, and a moral-cultural system which is plural and, in the largest sense, liberal.
Michael Novak, The Spirit of Democratic Capitalism
The incentive that impels a man to act is always some uneasiness...
But to make a man act [he must have]
the expectation that purposeful behavior has the power to remove
or at least to alleviate the felt uneasiness.
Ludwig von Mises, Human Action
[In the] higher Christian churches... they saunter through the liturgy like Mohawks along a string of scaffolding who have long since forgotten their danger. If God were to blast such a service to bits, the congregation would be, I believe, genuinely shocked. But in the low churches you expect it every minute.
Annie Dillard, Holy the Firm
When we received Christ, Phil added, all of a sudden we now had a rule book to go by, and when we had problems the preacher was right there to give us the answers.
James M. Ault, Jr., Spirit and Flesh
The recognition and integration of extralegal property rights [in the Homestead Act] was a key element in the United States becoming the most important market economy and producer of capital in the world.
Hernando de Soto, The Mystery of Capital