Making People Act Better

Free exchange and free trade make people act more virtuous. Whether they like it or not.

Smith’s Moral Framework

Depending on one’s beliefs, the term capitalism can invoke an array of thoughts, feelings, and responses. Typically, progressives point out the negative aspects of capitalism while conservatives usually point to the benefits that capitalism has wrought for all humans. Capitalism’s focus on competition is usually cited by both sides as justification for their perspective.

Progressives are quick to say that capitalism’s focus on competition incentivizes business owners to be greedy, leading to low wages, poor working conditions, and high prices. Conservatives, on the other hand, say that competition forces businesses to pay higher wages, make the workplace an attractive place to work, and lower prices to undercut competitors.

Competition is often the focus for both progressives and conservatives, but it is only one aspect of free exchange that Adam Smith, the “father of capitalism,” discussed. In fact, before The Wealth of Nations (Smith’s seminal work on economics) was published, Smith wrote a book entitled The Theory of Moral Sentiments. In other words, competition was central to Smith’s economic work, but morality was foundational to all of his thinking. This means that Smith’s advocacy for free exchange and free trade (he never used the term capitalism) was in large part because he believed that it would promote morality.

This point can be easily overlooked because so much attention is paid to the role of competition, but this aspect of capitalism is too important to ignore. Essentially, Smith argued that a system of free exchange would be a morally reforming system. Smith wrote, “The road to virtue and that to fortune… are, happily in most cases, very nearly the same.” This was true because it required “solid professional abilities, joined to prudent, just, firm, and temperate conduct” and “the favour and good opinion of their neighbours and equals.” In other words, a system of free exchange may not have changed people’s hearts, but it forced them to act in moral ways in order to conduct business. It didn’t make them into better people, but it made them act like better people, which is just as beneficial for society.

Russia

I bring this up because the world is witnessing this principle prove to be true firsthand with the sanctions against Russia. Putting aside the various tariffs and subsidies that various countries have, our global system of trade is essentially an expansion of free exchange on a worldwide scale. Instead of individuals being forced to act virtuously, multinational corporations and countries are forced to act in morally acceptable ways in order to pursue economic prosperity.

With its invasion of Ukraine, Russia stepped outside of the bounds of acceptable behavior by threatening the sovereignty of another country. Countries across the world have responded with swift and meaningful economic sanctions that ostracize Russia from the rest of the world. These economic sanctions have done, are doing, and will continue to do immense damage to Russia’s economy as demonstrated by the crash of the Russian ruble. Countries with globally powerful and interconnected economies have made it clear that Russia can have a prosperous economy or an invasion of Ukraine, but they cannot have both.

However, it has not been governments alone that have sought to punish Russia for their actions; multinational corporations are ceasing operations in Russia en masse. While this is in large part due to government sanctions, these corporations are also wary of the public backlash to maintaining operations in Russia.

This is demonstrated by the energy sector in which there was a substantial discount, at one point over $28 cheaper per barrel, on Russian oil because so many corporations were refusing to buy it. When Royal Dutch Shell bought discounted Russian oil, the public backlash was so intense that they came out with an apology and promised to “immediately stop buying Russian crude oil on the spot market.” Shell also said, “We will commit profits from the limited, remaining amounts of Russian oil we will process to a dedicated fund.”

Shell isn’t doing this out of the kindness of their hearts. Market forces are encouraging virtuous behavior and discouraging putting economic profit over support for Ukraine. Whether Shell wants to or not, they are having to acquiesce to the market’s demand for virtue.

China

While all of this is true, I think it is important to note that Russia is the world’s 11th largest economy with less than half of the population of the United States. Those aren’t numbers to scoff at, but they pale in comparison to China. China’s economy is the second-largest in the world with the largest population. In other words, a Chinese invasion of Taiwan would really strain the resilience of this argument.

Multinational corporations and governments may be willing to withstand the consequences of punishing Russia, a smaller market opportunity. Whether they would be willing to withstand the consequences of losing a market opportunity as large as China is a little more doubtful.

This is already clear in the expansion of American corporations into China in spite of the country’s well-documented human rights abuses, including the persecution of Uyghurs. While Western countries have sanctioned the Xinjiang region where the Uyghur persecution is taking place, there has been little to no response focused on China as a whole. If a state-sponsored genocide isn’t enough to move the rest of the world to implement sanctions, why would an invasion of Taiwan? This is certainly a compelling argument, but I still believe Smith’s argument applies even to China.

It is important to remember that Russia had committed human rights violations, such as poisoning political opponents, before its invasion of Ukraine with limited response from the west. Whether this was the right decision by the west or not, there came a point when Russia’s behavior went too far out of bounds and a response was demanded. That “point of no return” for Russia was when it threatened the sovereignty of another country and committed mass violence in order to accomplish it. I believe a Chinese invasion of Taiwan would provoke a similar response.

Also, China’s economy is much more powerful than Russia’s in large part to its interconnectedness with the economies of the world. This integration of the Chinese economy with the world means that China has much more at stake if sanctions were put into place. The consequences of stepping out of line are much greater for China than they were for Russia. This may not ultimately prevent a Chinese invasion of Taiwan, but Adam Smith was right that a system of free exchange and trade is the only economic system up to the task of incentivizing virtuous behavior.

God Bless,

Hunter Burnett