If [justice] is removed, the great,

the immense fabric of human society,…

must in a moment crumble into atoms.

Adam Smith

Champions

An opponent of the laissez-faire market system coined the term “capitalism” only a few decades after entrepreneurship began to flourish. The older authoritarian ideology of socialism, based upon a very different set of moral assumptions, presented their worldview in a fresh new framework.

In practice, socialism is a form of impractical Christian heresy, which among other effects, prevents entrepreneurship and the moral and temporal blessings entrepreneurial endeavors generate. Both worldviews are worth studying to discern clearly what moral basis and environmental variables will encourage entrepreneurship and its resulting greater prosperity for most people.

We will explore the two concepts through their champions—“The Devil” and “The Father of Economics.”

The Devil

To his friends and family, he was known as “Moor” for his Moorish complexion of bronzed skin and dark eyes. To others, he was known as simply “Charley.” To those close to him, he was known, fondly, as “The Devil.”

You probably know him as Karl Marx: proponent of Marxist theory and champion of Socialism.

There are many significant flaws in Marx’s socialist theory that can impact entrepreneurs. It’s important that we understand these potential challenges and how they can affect the businesses we create.

We’ll start with what the free market enterprise system—mistakenly called capitalism—is not. Marxist theory defines “capitalism” as a system of private commodity exchanges. It is private ownership and control over the means of production, where the surplus product becomes a source of unearned income for its owners. The owner of the means of production are called both capitalists and bourgeoisie. In Marx’s theory, the capitalists and bourgeoisie derive their “surplus product” by appropriating value from their workers. In harsher terms, by stealing.

In contrast, socialism is the means of production owned by the society as a whole, with the surplus product being a source of income for the whole society. Fundamentally, this raises the virtue of equality, both of action (generation of value) and outcome (ownership) to the chief virtue of the State. That may seem to be an oversimplification, and there are nuances within Marxist theory and economics ever since.

According to Marx and his colleague Friedrich Engels, the definition of “value” is sometimes the “use-value,” (which they acknowledge is indeterminable) and sometimes the “exchange-value” (determined by its “socially necessary labor” time). In other words, when a business owner who holds title to the equipment, facilities, money, and other resources required to conduct business risks those assets to make a potential—but not guaranteed—profit, Marx values only the workers’ labor.

Thus in any exchange-value between commodities, the “value” should be calculated as the difference in the time it took to harvest or build one commodity versus another. Anything beyond that calculation is supposed to represent “profit” that Marx defines as theft by the business owner of the workers’ labor.

The fallacy in this worldview is the unproven assumption that the business owner does not risk any assets—in other words, capital—that he or she has worked hard for and saved for overtime, nor any recognition of the owner’s own labor and creative use of the mind God provided to the business owner.

Socialist theory devalues the owner’s contributions to zero, thus claiming any profit comes from exploiting others by owning the “means of production” as superior to the “means of labor.”

Briefly, there are several other significant flaws in Marx’s socialist theory that impact entrepreneurs. Effective resource allocation—let alone maximally efficient resource allocation—cannot be determined because socialist “accounting” methods have no objective way to decide what goods should be produced. Or where to send scarce resources. With no key indicators like supply and demand—how is a market to know what to produce? State planners will have to step in to determine the needs, lack of needs, and presumed lack of needs, of any given population at any given time.

This form of “accounting” totally ignores consumer or populous demand for certain products or services above others. Unlike Pacioli’s double-entry bookkeeping invention, which provides accurate measurement combined with ethical accountability, planners are not held responsible to even the simplest standardized account principles. Worse, this system does not respond to the pressure of changing conditions in the same way as a free-market enterprise system. “Account” wrongly for an unexpected drought, resulting in no harvest, and well, there is no bread. You can easily fill in the rest of this line of reasoning.

We mentioned earlier that Socialist theory represents a Christian heresy. How? It claims that “Each contributes according to his abilities and takes only according to his needs.” In reality, human nature leads individuals to care for only those assets they own, not other people’s property or property owned by the state (i.e., nobody). The tragedy of the commons, an example that used to be presented in many economics classes, demonstrates this principle most clearly.

Socialist systems found that workers tend to do the minimal amount of work they are forced to while taking all the “free” stuff they can get since there is no cost applied directly to each individual (although there is a great cost to “society” or spread among everyone). Worse, there is no possible method to determine risk and reward under this system, so nothing can be efficiently produced. Only a central planner whose guesses are implemented by force or government threat of violence against the workers they supposedly are trying to help has any impact upon the system.

Marx took this concept of common “communion” or sharing from Acts 2:44:

“And all who believed were together and had all things in common.”

Still, the vast difference between socialism and Christian charity is the early church Christians shared from their privately owned assets voluntarily in response to recognizing God’s love for them—not from watching the product of their hard work get stolen to be forcibly redistributed by a distant politician. And the greed that socialism produces in a population certainly is against the spirit of the Christian understanding of communion.

Socialism inevitably has consumed all the accumulated wealth of any society where rulers implemented it, so coercive force quickly becomes required to obtain enough work to slow down the consumption of all resources and delay the inevitable gradual collapse. Both the impractical unworkability of this system and its inherent systemic selfishness-promoting immorality thwart entrepreneurial improvements for everyone, leaving every person much poorer and enslaved.

Marx did not invent the envy-driven idea of socialism. In New Deal in Old Rome, Henry Haskell documents how socialism was tried on an epic scale during the late Roman republic. In fact, it was tried in every single one of the dictatorial empire stages of that civilization. How did it go?

Socialism led to the fall of Rome.

The Father of Economics

Now, we will explore the concept of the free-market enterprise system through the eyes of Adam Smith. This will help us understand both the concept of this system and the way it can be considered an extension of Biblical ethics.

Smith lived and developed his free-market ideas at the dawn of the industrial revolution. Born in June 1723, Adam Smith’s father died just before his birth. He would be raised by his mother, who wanted him to become a priest. At age 14, he entered the University of Glasgow in his native Scotland but did not graduate, leaving at 17. He then attended Oxford University’s Balliol College, graduating in 1746, and returned to Scotland to become a popular lecturer in English literature at the University of Glasgow.

Smith lived and developed his free markets ideas, at the dawn of the industrial revolution.

In 1750 Smith was appointed lecturer of logic, as well as signing his agreement with the Westminster Confession of Faith, reflecting his strong interest in metaphysical questions which eventually lead him to pursue the chair of Ethics in 1751, staying in that position for the next thirteen years before becoming Dean of Faculty in 1760 followed by Vice-Rector in 1762.

During the years he taught ethics, England suffered from a declining intellectual climate and morals. This decline was later challenged and partly reversed by William Wilberforce, the great Christian morals reformer and champion for outlawing slavery throughout the British Empire, himself the son of a wealthy merchant.

Other major influences on English morals came from the successful American Revolution versus the failed French Revolution. Smith taught Natural Theology for the first half of his ethics chair tenure, which included proofs of the being and attributes of God and principles of the human mind upon which religion is founded.

Contemporaries questioned whether Smith was truly an orthodox Christian because his lectures reflected too much of the Aristotle-oriented thoughts of fellow Scottish philosopher and economist scholar David Hume in his moral inquiries. However, Smith clearly believed in the Biblical message. Later on, you will understand how he saw the free-market enterprise as an extension of Biblical ethics.

Smith’s first book entitled Theory of Moral Sentiments and his other famous book—An Inquiry into the Nature and Causes of the Wealth of Nations both explained the moral, Biblically-oriented essence of the economic system we now refer to as capitalism. The first book explored the division between old and new English moralists. In brief, the older philosophers’ perceived rules were derived from self-interest. The more modern theorists observed rules developing from intuition, recognized in good/right versus evil/wrong constructs like Euclid’s axioms or by intellect (championed by the third Earl of Shaftesbury and Hutcheson), which the newer philosophers referred to as conscience.

Smith’s syncretic or dialectic answer to both of these schools of philosophy was to claim morals are derived from both prudence and benevolence equally to create the virtuous character. Such virtue is required to achieve happiness (thus merging the Greek and Biblical ideas). Happiness is tranquility and enjoyment, which has no part of indolence or apathy, nor avarice and ambition.

This first book resulted from thinking about and engaging in scholarly discussions during his years of lecturing on ethics. In particular, his lectures on justice and police became the basis for his more famous second book. Both books underwent many revisions and reprintings throughout the remainder of his life.

Smith touted the “enlightened self-interest” concept of free enterprise. When people cooperate to make something, everyone is better off than if each tried to supply every need for his or her family.

The Invisible Hand, Corn Laws, and 2,000 pins

Smith coined the example of manufacturing a pin. If one man completed every step to make all the parts required (assuming each part would be available, which under the old feudal system many components could not be acquired in most of the country at any price), it would still take a full year and cost six pounds sterling to make a single pin.

By dividing the work into eighteen steps with a different worker in a plant completing each step, they could collectively make 2,000 pins per day at a dramatically lower sale price of sixpence—a 99.8 percent reduction in the cost! The profit for the factory owner could be substantial with only a modest profit margin by selling large quantities.

While the owner could pay higher wages than the worker could earn under the old feudal system, even if he was paid no more, Smith observed the worker’s standard of living was still far higher because his wages now allowed his family to purchase many more goods of higher quality than the old feudal subsistence level approach permitted previously.

As the worker’s skills increase, the owner gladly paid the more valuable worker higher wages to retain his higher productivity because both benefit from the higher output and higher quality. Hence, the price per unit continued to drop further.

However, there is resistance to this concept. Economists today recognize a concept called “rent-seeking.” This idea, a common characteristic of socialist societies, results from a private party such as royalty, noblemen, or politically connected big corporate executives convincing politicians to pass laws protecting them from competition or granting them monopoly or another unfair advantage over competitors.

Smith noted that the cost of transactions above the “natural in Jersey City Colgate, he kept much of the business volume because of his bartered rate” (freely negotiated price)—in other words, the rent-seeking special privileges benefit—actually reduced public wealth and purchasing power for everyone.

During the 18th century, the British government enforced a system called mercantilism, which provided rent-seeking advantages to selected people at a substantial cost to the majority of others, particularly colonialists.

Smith vigorously refuted mercantilism, insisting that one should determine wealth by the abundance of resources (efficiency), including—but not limited to—the commodity of money itself. This very egalitarian theory benefited the common person the most, not those able to gain wealth through government-enforced help.

Smith likewise opposed taxes that were intrusive and expensive to collect, such as income, customs, excise, and similar taxes. He favored taxes that were easily determined, such as land taxes. After his lifetime, Smith’s ideas were proven dramatically.

The Corn Laws imposed high import duties on food and grains (called corn), guaranteeing high profits for large landowners at the expense of the commoners. Urban residents resented the high food prices, which peaked during the Irish famine of 1845-1852. Some form of import tariff on food had been in place since 1689, but the corn laws took landowner greed to an extreme.

Throughout this period, English subjects were widely known for their lawlessness, and customs officials were known for their corruption. Shortly after the repeal of this onerous law, food became plentiful, and prices dropped substantially. Since there were no longer any import duties or restrictions, there was no need to bribe customs officials, nor necessity to raid royal forests to obtain food. This led to Englishmen gaining a high reputation for being law-abiding citizens in a few short years. In turn, this stabilized the rule of law, fostering an environment that encourages entrepreneurship.

God created us in His image. So, He built into each human a desire for justice. But by rejecting the true God, socialism insists on the impractical equality of results, ignoring that we are all endowed with differing skills, physical abilities, birth situations, mental capacities, and have differing willingness to adhere to God’s commands.

Socialism leads to envy and forced redistribution away from productive people towards politically favored groups. Free enterprise emphasizes equal opportunity, recognizing that all will be better off while prospering at different amounts. While Adam Smith’s ideas were only a beginning for developing a formal theory of free enterprise, they still form the basis of the free-market approach today.

The Socialist believes in things. The Capitalist believes in people. And people are capable of the soaring intangibles of ideas and spirit.

This is an excerpt from Transforming Entrepreneurs

---

Informative, captivating, and truly motivational.

—Mark Salman, CEO
Skidril Industries LLC