QUINN: Rational self-interest the foundation of capitalism

By John Quinn | Wednesday, September 17, 2008

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Winston Churchill once declared that “capitalism is the unequal distribution of wealth, whereas communism is the equal distribution of misery.” The essence of the two rival systems has rarely been so succinctly and accurately described.   

In 1776, two remarkable works appeared that have complemented and fortified each other  to this day.

The first was the Declaration of Independence, written primarily by Thomas Jefferson, declaring certain truths to be “self-evident,” among them “life, liberty and the pursuit of happiness.” It was a clarion call on behalf of political freedom.

That same year, Adam Smith, a professor of moral philosophy at Glasgow University, published as nearly a revolutionary tome, “The Wealth of Nations,” which laid the intellectual foundations of modern capitalism.

Smith famously articulated the rational self-interest (the profit motive) at the center of capitalism: “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

Smith was a proponent of two other concepts at the core of capitalism, the division of labor and free trade.

His observations in a pin factory exemplified the former: If one worker performed all 18 steps to make a pin, he could produce only 20 pins per day.

However, if 10 people divided up the 18 different steps to make a pin, they could make as many as 48,000 pins in one day.

Henry Ford’s automobile assembly line was a later application of that principle. It made cars affordable to everyone.

Free trade would also make mankind richer, because countries would exchange what they were most efficient at producing for those goods and services for which someone else is more efficient.

Thus, the United States is proficient at designing computer software and Honduras in growing bananas. The logical trade, reflecting the absolute advantage of each, is for the U.S. to sell software to Honduras in exchange for bananas.

Millions of times each day, we see Smith’s theories become reality, not just among the 46 million Americans employed on non-farm payrolls, and  our 305 million citizens, but billions of people overseas.

An auto mechanic needs medical care, goes to a physician and pays money for the physician’s expertise.

Later, the physician’s car needs repairs and he pays for the mechanic’s  proficiency.

When either buys a loaf of bread at a store, it represents the last stage of a lengthy supply chain along which seeds, fertilizers, farm equipment, farmers, millers, bakers, transporters and others have all been involved to get that loaf of bread to the ultimate consumer.

Nobel Prize-winning economist Milton Friedman wrote in his book, “Free to Choose”: “Adam Smith’s flash of genius was his recognition that the prices that emerged from voluntary transactions between buyers and sellers … could coordinate the activity of millions of people, each seeking his own interest in such a way as to make everyone better off.”

Smith famously called it “the invisible hand.”

The true capitalists in America are not the rogues and scoundrels of the Enrons, WorldComs, Global Crossings and dozens of other egregious frauds that became little more than giant Ponzi schemes.

Look at the 900,000 to 1.1 million new businesses (overwhelmingly single proprietorships) created in America every year.

Observe hundreds of small businesses throughout this city, along Main, St. Joe, Jackson Boulevard, Haines Avenue and a myriad of other locations (including home-based businesses).

Karl Marx (whose mother wished he had made more capital and written about it less) saw capitalism as revolutionary but believed it would inevitably fail.

Bolshevik Leon Trotsky, later assassinated on Stalin’s orders, saw it more cynically, and perhaps accurately, observing, “When the last capitalist is hanged, there will be a capitalist there selling the rope.”

John Quinn, a professional investor for 40 years, including 28 years on Wall Street and in Asia, is director and executive officer of the Rapid City campus of National American University. He may be contacted at JQDrBoom@aol.com.