CAPITALISM AND ITS DISCONTENTS: To reduce risks to their companies, boards must promote an understanding of the true nature of capitalism.

• Author: Young, Stephen B.

In their duty to owners, board members should act to defend capitalism against those who denigrate its advantages. This advocacy will optimize the ability of firms to create wealth for customers, employees, the community and owners. Society and humanity also will benefit, as has been the case since the dawn of the Industrial Revolution.

The promise of capitalism, according to Adam Smith, is its ability to "create the wealth of nations." And it has done so.

Consider the following charts:

CAPITALISM MISUNDERSTOOD

The function of capitalism was, I thought, succinctly put by Walt Rostow in his 1960 book The Stages of Economic Growth. Capitalism arrives after a national economy "takes off" and thereafter experiences self-sustaining growth.

And yet for all the wealth created by capitalism over the last 300 years, there is disappointment over and resentment of its failure to bring good things to all people. An alternative has been proposed to remedy capitalism's shortcomings: wise use of public power to provide us with happy lives. The public power alternative has taken the form of socialism in both its communist and fascist expressions and its weak version of the benevolent welfare state, with its regulation of private firms and mandatory wealth transfers from the well-off to those less fortunate.

The primary disappointments with capitalism seem to arise from:

* A categorical intellectual mistake of confusing capitalism with money, and a deeply felt objection to its reliance on self-interest and individual greed.

* Capitalism's cycles of asset booms and busts.

* The failure of capitalism to produce sufficient public goods, leading to inequality.

A discerning mind will intuit that these shortcomings of capitalism as a system of production, employment and distribution arise not from flaws inherent in the system itself but from systemic flaws in human nature. The problem is not the system; it is us, each and every one of us.

Undermining clear thinking about capitalism's achievements and shortcomings lies in rejection of our personal responsibility.

The Abrahamic religions put responsibility for life's outcomes on the individual, not on the family, the tribe, the nation or the system. Confucius and Mencius argued forcefully that we should seek to become virtuous and not live as "mean" persons. Buddha advocated personal enlightenment. The ancient Quiche Maya text, the Popul Vuh, objects to "self-magnification."

CONFLATING CAPITALISM WITH MONEY

Many wrongly confuse capitalism with money.

The Apostle Paul was convinced that the love of money is the root of all evil. Money is a pre-capitalism human invention. Traditional societies used money. Socialist, even communist, economies use money. As a consequence, those economies could not escape from the selfish abuse of money power.

When Charles Dickens created his wealth-accumulating character Ebenezer Scrooge, he made him a moneylender who heartlessly collected debts owed to his firm. In his magnum opus Das Kapital, Karl Marx stigmatized a capitalist as "Mr. Moneybags": "His person, or rather his pocket, is the point from which the money starts and to which it returns."

When love of money takes over our souls, we scheme for ways to extract "rents" (cash money) from others without allowing them much, if any, bargaining leverage. Such transactions are pretty much "take it or leave it" and lack fairness. Economists call this behavior "rent seeking" and "rent extraction." The latter happens when we have power--political power, social power and market power (monopolies, oligarchies, protective regulations, patents and copyrights). This kind of capitalism is more correctly understood as "crony capitalism," or a system of collusion between rent-seeking officials and private enterprises at the local or national level.

The love of money, as Saint Paul warned, stokes desire in our hearts and encourages our minds to scheme. The more money, the more we can be tempted.

Money gives us power when, as Lord Acton warned, "Power corrupts and absolute power corrupts absolutely."

Now, power is necessary for human flourishing. We can have no individual agency without power. Assets--intellect, skills, charm and wealth--drive life outcomes. The wealthy, no doubt since the dawn of time, have lived better than the poor in every culture.

Thus, we must accept owning money as a human good, even as a human right, perhaps. But the circulation of money can distort our judgment and warp our values.

Since capitalism produces more wealth than any other economic system, it generates money, which is both a public benefit and a private good. But money power is also a source of inequality and unfairness, as owners, workers, consumers and governments all bend their wills day in and day out to get money.

But capitalism is far more important to humanity than money. Capitalism raises living standards and thus brings hope to societies and individuals.

Briefly stated, one of the most ingenious capacities of capitalism is its superior ability to restrain excessive abuse of money power. Through competition, a prolific mechanism of checks and balances, capitalism uses self-interest to constrain self-interest. Inequality of outcomes in market economies very often comes about when competition is replaced with modes of rent extraction.

BOOMS THAT END UP IN BUSTS

In addition to wrongly objecting to capitalism because it thrives on the circulation of money, there is anger that, from time to time, capitalism does not create wealth but destroys it, or rather destroys the monetary value of assets.

People buy assets with money. They invest to make a profit and so enhance their agency capacity. But sometimes assets lose market value over time as buyers don't value them as highly as they once did. Owners then become poorer in money.

Financial crises have happened since the dawn of capitalism, including the Tulip Mania in Holland, the South Sea Bubble in England, the Mississippi Bubble in France or, closer to home in the United States, the 1929 stock market crash, the 2008...