The book has a lot to recommend it. It brings the “real Adam Smith”—the moral philosopher and economist for whom The Theory of Moral Sentiments and The Wealth of Nations were part of a unified inquiry—into the conversation on faith, economics, and business ethics. Their discussion of Ayn Rand is striking, and I agree with them that, despite her atheism, she had a profound understanding of what it means for people to be created in God’s image. They encourage readers to dig into what thinkers like Smith, Rand, and Milton Friedman actually said and wrote as opposed to what is attributed to them. The authors invite their readers into a conversation, proposing action steps at the end of each chapter and asking readers to email them if they have better ideas. Better Capitalism is a sincere search for a better world.
It is also a frustrating book, as the authors seem to misunderstand some important economic ideas and arguments. For instance, I disagree with their reading of Friedman’s classic essay, “The Social Responsibility of Business Is to Increase Its Profits.” They attribute to him a view that he repudiates explicitly, claiming that his reliance on society’s institutions and norms to serve as ethical guardrails is weak sauce. Their warning that he overlooks firms’ inclination to increase their profits by working to rig government policy in their favor ignores Friedman’s repeated excoriations of people who do most of their “business” in Washington or state capitals. I’m not familiar with anywhere in Friedman’s work where he holds up Atlas Shrugged villain Orren Boyle, who grew fat on subsidies and special privileges, as a model businessperson. As Friedman pointed out repeatedly, everyone in business believes in unrestricted free trade and competition in every industry but their own, which must be regulated, protected, and supervised as a matter of national security or whatever.
Muddled thinking / This book, and the broader discussion to which it contributes, would be better if it paid more attention to societies’ institutions and the incentives they create. I get the impression from Better Capitalism that its authors believe fools and knaves occupy government offices and corporate suites, and the way to more ethical capitalism is to replace them with non‐fools and non‐knaves. That might be true, but if economics teaches us anything, it’s that good intentions do not necessarily translate into good outcomes.
The authors refer to and dismiss “blind faith” in the market. To paraphrase Thomas Sowell, we don’t have “blind faith” in the market; we have evidence of its efficacy, mountains of it. Since Friedman is one of their subjects, it’s helpful to note that what Andrei Shleifer called “The Age of Milton Friedman” has been good for the least of us. With enemies like these, the poor may not need “friends” with blind faith in grand social visions that have failed repeatedly (but only because the wrong people were in charge).
The authors give the impression that government is oriented toward the public good and will achieve it unless sinister interests corrupt it. They write, “We don’t errantly expect corporate entities to govern themselves and broader economics in the best interests of the overall public without any public oversight, so we necessarily have to deal with public policy via government.” They do errantly expect government entities to govern themselves, corporate entities, and broader economics in the overall public’s best interests despite incentives to do the opposite. States were born in blood and conquest; a state, as Douglass C. North defined it, is an organization with a comparative advantage in violence. The problems the authors identify are features of such organizations, not bugs. When they write something like “Professionals don’t need to be leashed with price controls or wage caps,” I have to wonder if they understand that price controls and wage caps have negative unintended consequences.
Problems like these are sprinkled throughout the book. I’m not sure the authors understand what economists mean when talking about externalities. For example, they write, “To shift part of the cost of doing business to others without their agreement and even to their detriment was a valid business decision offered by economists (if and for however long you could pull it off, of course).” I don’t know any economists who have actually “offered” this as a “valid business decision.” While reading the book, I reached for a few classic (or notorious) texts on price theory, like Armen Alchian and Willam Allen’s University Economics and Deirdre McCloskey’s The Applied Theory of Price, to see how they treated externalities. McCloskey discussed how private roads would eliminate externalities, but I suspect the authors would object that roads shouldn’t be provided by the marketplace and driving shouldn’t be priced.
Smaller and more human? / They also join the left in breathless anger about the size and scope of tech giants like Google, Amazon, and Facebook. I’m not sure what they think constitutes “monopoly” or “market power.” Are we supposed to dislike Google, Amazon, and Facebook just because they’re big? If Google’s cash position is “egregious” and there are better uses for those resources, wouldn’t shareholders or profit‐obsessed investors know it? How would Amazon founder Jeff Bezos become the world’s first trillionaire without making Amazon’s service a benefit of consumers worldwide? Should we join the authors’ unspoken lament? If William Nordhaus is right and almost all the value of innovation accrues to consumers, what does Bezos owe to the world? And this doesn’t even get into Knowlton and Hedges’s conflation of “meaning well” with “doing good.” Are they prepared to accept that the best thing Bezos might be able to do for the poor is to continue investing in retail innovation and space exploration?
For a book that seeks to re‐humanize the economy, I’m a little mystified by their dehumanization of shareholders and investors. They quote Max De Pree, the late founder of furniture seller Herman Miller, seemingly approvingly when he said the firm’s employees are not “the hired guns of distant, mysterious stockholders.” The stockholders, however, are neither distant nor mysterious. They are people like you, me, and (I assume) the authors, who have money socked away for retirement in the kinds of well‐diversified mutual funds with which Vanguard’s John Bogle has blessed us. They are firefighters, police officers, and teachers, drawing from our counting on public employee pensions. True, the people at Herman Miller are not the grist of a corporate mill or hired guns, but they help many people indirectly and non‐obviously. Their shareholders are only “distant” and “mysterious” when they’re willfully cast as dehumanized abstractions.
Maybe it’s inappropriate to think of “markets as the primary means for achieving the public good.” You’re looking in the wrong place if you’re in the snack food aisle at Walmart hoping tortilla chips or Wheat Thins will give you spiritual rest or existential fulfillment. Markets make it a lot easier to achieve the public good by generating the wealth we need to feed, clothe, shelter, educate, and heal people. They provide outlets for meaningful, productive work—and tortilla chips and Wheat Thins make it a little easier, at least, to seek existential fulfillment around someone’s kitchen table while discussing the Book of Proverbs.
Self interest, mutual benefit / The authors propose replacing “plantation economics”—the economics of exploitation—with “partnership economics.” I’m not sure “partnership economics,” based on principles of “mutuality and mutual benefit,” is that different from regular economics, which is fundamentally about the institutions of exchange for mutual benefit. Admittedly, economists, for our part, have failed miserably in explaining how “the market” brings people together for mutual benefit. Indeed, I suspect many people think Smith’s emphasis on “self‐love” is another way of saying, “It’s fine if people are wretched and selfish because they’ll produce more stuff that way.” But that wasn’t Smith’s message, and it wasn’t Friedman’s.
Economics helps us see how we’re driven to “mutuality and mutual benefit” even if we’re not motivated by a desire to make our trading partners better off. “Mutuality and mutual benefit” need not be articulated. When I buy gas, I’m not doing so to help Shell shareholders and people up and down the gas supply chain. I’m buying gas to drive my car to work, where I earn the money I need to take care of my family. Even though I’m motivated by “self-love”—the desire to take care of the people and causes that are important to me—free markets bring me into a relationship of “mutuality and mutual benefit” with people I’ll never see who have their own families and causes demanding their attention.
The authors are right to emphasize frictional costs and the fact that effecting transfers from one group to another consumes resources without producing any actual benefits. I’m alarmed, though, when I read passages like this: “Simply trading around existing value not only fails to grow the pie—it shrinks the pie because of frictional costs.” They quote Bogle’s phrase “out‐trading other money movers” and write that we should “incentivize work that creates value more than ‘work’ that merely trades already‐created value.”
I’m willing to acknowledge that there’s some debate about whether some kinds of financial operations, like high‐frequency trading, improve resource allocation. However, Knowlton and Hedges’s critical assessment of trading “already‐existing value” suffers two problems: First, it seems to be a version of the Materialist Fallacy: the false belief that only making things creates value, while moving those things around does not. Second, “value” is subjective; it is not inherent to a good or service; rather, it is a measure of people’s constantly changing appraisals of those goods and services. When I taught MBA students, I used a textbook that defined the “art of business” as “identifying assets in lower‐value uses and profitably devising ways to move them into higher‐value uses.” Moving assets from lower‐value to higher‐value uses doesn’t shuffle around “already‐exiting value”; it creates value.
Conclusion / I share the authors’ moral commitments, and I think their discussion of Rand is a unique, overdue, and valuable contribution. They reconcile two seemingly disparate worldviews admirably (Christianity and objectivism). I embrace their effort to bring the “real Adam Smith” back into the conversation. They are also frank and open about how Better Capitalism is an effort to start a dialogue, not end it. At the same time, they make some very heroic assumptions about what governments do and can do. A lot of their criticisms of firms like Google and Pacific Gas & Electric imply that there are practically unlimited fortunes to be made if only the enlightened would buy stock in the poorly performing enterprises and make them perform better.
Better Capitalism has its problems, but it is worth reading. It emphasizes action steps, many of which I have glossed over here. I’ll close with one: economists need to do a better job helping people understand exactly what our beloved dismal science implies. The world is full of sincere people who mean very, very well and who genuinely want to make the world a better place. We need to do a better job explaining how that happens economically and how meaning well so rarely translates into doing good.