“It’s an election year and candidates can’t stop speaking about our country’s problems (which of course only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they do. That view is dead wrong: the babies born in America today are the luckiest crop in history.” These optimistic words come from the most recent of Warren Buffett’s long line of annual letters to the shareholders of Berkshire Hathaway. While many in this country would likely say this optimistic view is obstructed by Buffett’s incredible fortune, it is undeniably true that those born in America today are among the most prosperous in human history. Today, both rich and poor consumers have access to goods and services that the ancients could never have dreamed of. Even many of those whom today’s society would view as “lower class” enjoy an unprecedented standard of living. Yet for all of the marvelous economic achievement of the past two centuries, there is still anxiety about our economic future.
This anxiety permeates our society, from the working class to the academic and political elite. There is real economic hardship in this country, and there is increasing evidence that more is on the way. Along with this anxiety comes furious disagreement amongst economists and policymakers about how to preserve the prosperity of Americans in the middle class and increase the standard of living of those in poverty. While there are certainly many issues to be found within the structures the modern market economy that contribute to the inequality and economic hardship that many Americans face, there are also systemic problems that go much deeper. Perhaps it is not only the structure of the economy that is flawed, but also the individuals that operate within it. Greed is ubiquitous in our society, and economic solutions alone cannot successfully combat this destructive vice. To do this would require us to venture into the realm of morality and ethics. Not only must we reshape our economy, we must also shape our citizens. While making laws and regulations can be an effective means of shaping the structure of the economy, legislation alone cannot shape a person’s character; it must also be accompanied by education. A foundation of virtue-centered education cannot be neglected in today’s capitalist society.
Many believe that the American economic engine has left them behind. Others have become increasingly distrustful of multinational corporations and the wealthy elite. This dissatisfaction (and even anger) with the state of the economy has undoubtedly contributed to the rise of populist political candidates who promise to bring the country back to its heyday, or to usher in a progressive revolution. There are countless willing ears eager to listen the pandering of the candidates Buffett chastises in his letter. It is easy to write off these sentiments as the doing of worrywarts and cynics; it is, after all, a part of human nature to complain. It is also easy for those who have benefited most from a particular system to be the most reluctant to criticize it. Mr. Buffett has made himself fabulously wealthy through his optimism about the American economy. Perhaps many are dissatisfied with the state of the economy because they face real hardship. Or is this just another instance of the mob working itself into a fever?
Unfortunately, this pessimism is not confined to the feelings of the multitudes. There is increasing academic sentiment that the miraculous growth of recent decades has not benefited all members of society, as many economists once thought it would. Recent economic studies have pointed to a resurgence of diverging economic inequality, which could potentially undermine much of the economic progress of the last century. One of the most famous and outspoken economists on this issue in recent year has been Thomas Picketty of the Paris School of Economics. Picketty’s provocative book Capital in the 21st Century has sold millions of copies and has sparked countless debates, from coffee shop discussions to Internet forums. In Capital, Picketty argues that unequal distributions of wealth come from a certain fundamental inequality: the tendency for the rates of return on capital to outpace overall economic growth; expressed algebraically by the inequality r>g, where r is the rate of return on capital, and g is the rate of economic growth. R includes all forms of income from capital: interest, profits, dividends, rents, etc. g represents the percentage increase of national output or income. One might ask, “How does this fundamental inequality lead to an unequal distribution of wealth?” In a context in which r>g, the wealth of an individual grows faster than average wealth, and so individuals who already own a large amount of capital will increasingly get a larger and larger share of total national wealth. In addition, those with large stocks of wealth have access to greater financial knowledge and more sophisticated investment vehicles, and thus can increase the rate of return of their wealth relative to the growth of the economy further still.
Increasing concentration of capital destroys avenues for social mobility. In cases where wealth is owned primarily by the top decile and centile of wealth distribution, the middle class has an increasingly small share of capital. Without access to capital, the middle class also becomes increasingly reliant on both rents and debt financing, making them less financially stable and more vulnerable to recessions. The more unequal the distribution of wealth is, the weaker the middle class grows, and the wider the gap between poverty and wealth. Extreme inequality effectively destroys the avenues for social mobility that are necessary for a functional, prosperous, and capitalist society.
The prospect that we could be returning to the excessive economic inequality of the past is quite daunting, yet more and more economic evidence suggests that it may be happening. There is a reason for pessimism. The word is still out on whether Picketty is right in his critiques of capitalism, and the next century could be even more prosperous for society as a whole than the last. But the future is uncertain; no one living in the 19th century could have possibly predicted the 20th. It is necessary that we brace our society for a potentially undesirable future. Politicians and economists have been busy coming up with policy solutions to poverty and inequality. Much ink has been spilt over how tax the wealthy, how to prop up wages in the lowest income brackets, and how to effectively stimulate economic growth. But while the academic and political elite furiously debates the virtues of policy proposals, it seems they have overlooked a deeper issue that cannot be fixed by legislation alone. Perhaps it is not the structures of capitalism that are deeply flawed, but the individuals who operate within it.
There is no vice so prevalent in our economic system as greed. This should not be a surprise; no economic system has been so adept at creating wealth as capitalism. This uncanny ability to produce wealth is undoubtedly behind the unprecedented prosperity that Mr. Buffett alludes to in his letter. And while wealth is not a good in itself, it is an excellent means for securing material prosperity, not only for one’s self, but also for his neighbor. However, this perspective can easily be lost. When wealth is pursued for its own sake rather than for the advancement of the individual and the common good, greed takes over. This is certainly not a tirade against the wealthy. There are many wealthy individuals and companies, like Bill and Melinda Gates, Mark Zuckerberg, and our friend Mr. Buffett, who are using their wealth to advance the common good. And without the efforts of wealthy investors, much of the entrepreneurial activity that fuels economic growth would not be possible. But many of the individual agents within our economic system – companies large and small and the shareholders who own them – are motivated first and foremost by profit. Wealth placed in the right hands is a blessing to society, but when held by those who see it as an end rather than a means, wealth can be destructive. For these people will be unwilling to give freely for the greater good of society.
One does not need to look far back to see one of the most destructive economic events in recent history: the collapse of the housing market at the end of the last decade. A popular notion about the financial crisis is that it was malicious. It was an “inside job,” a “scheme,” a “setup.” But saying this would be giving too much credit to those involved. While there certainly was some malicious activity, not all of the bankers should have gone to jail. The greatest driving force behind the spectacular rise and fall of the housing market, and of asset bubbles in general, was greed. Along with the systemic risk in the financial industry that was so scrutinized in the years following the crisis was an even greater problem: systemic avarice. The tantalizing prospects of profiting off of seemingly endless appreciation in the housing market caused many to act against their own self-interests, let alone the interests of their fellow citizens.
Economists still vigorously debate what happened in 2008. Perhaps this is because the study of economics lacks the proper tools to understand the odd quirks of humanity. The study of economics as a whole is more focused on the market – the space in which individuals operate – rather than individuals themselves. Thus the models of mainstream neoclassical economics, with their assumptions of rationality, are quite divorced from a reality where individuals’ decisions are influenced by emotions, habits, virtues, and vices. In an attempt to reconcile this disparity, a new school of economic thought has arisen: behavioral economics. Behavioral economics attempts to account for the social, psychological, and emotional factors that go into economic decision-making in various aspects of the market, such as prices and resource allocation. This is certainly a step in the right direction, as the marketplace seems to be driven by irrationality just as much as it is by rational decision-making. But what behavioral economics does not provide insight into is the ethics of decision-making. Individuals are not just driven by psychological and emotional factors; they also exist within a moral context. If the underlying problem with our economic system is indeed greed, we must look beyond economics to morality and ethics to begin to address it.
Few thinkers have been as influential and insightful as Aristotle in their thinking about the ethics of human behavior. His Nichomachean Ethics is as relevant now is it was when it was first written. This is because Aristotle’s Ethics centers on something that captivates the contemporary mind no less than it did the ancient mind: individual human action. For Aristotle, all human action is directed towards some greater end. The highest end – that which everyone ought to strive for – he calls “the good.” But some, he says, pursue false conceptions of the good. Those who pursue these rather than true happiness are ensnared by vice, which he defines as improper excess or deficiency in something good. Virtuous action, or that which leads one towards the good, does not always come naturally. “Neither by nature, nor contrary to nature do the virtues arise in us; but rather we are adapted by nature to receive them, and they are made perfect by habit.” Vice is broken and virtue is formed by the habituation of virtuous action. If systemic vice is indeed the source of many of our economic woes, then our society needs a means by which it can foster virtue in its members in order to combat the greed that permeates our economic system. How is it that these virtuous habits are developed?
Aristotle addresses this in his Politics. In this text, he enumerates two ways in which the state fosters virtue in its citizens: legislation and education. Both are necessary; neither one alone is sufficient. For if legislation alone was required for virtue, then the state could mandate virtuous actions in its citizens. But this cannot be done, and so education is also necessary. In the opening statements of Book VIII, he declares, “No one will doubt that the legislator should direct his attention above all to the education of the youth.” Aristotle goes into great detail in Politics about how the state should educate its citizens in a manner that cultivates virtue. Whether or not his suggestions are sound is open to debate, but he gives us one key insight that should not be forgotten: education is just as important as legislation in the formation of a virtuous society.
So as society prepares for the prospects of an economic slowdown, education cannot be neglected. Education is not only for the development of technical skill, as we often think today; it is also for the formation of a person as a whole. The only way to combat the systemic greed within our current economic system is to educate our next generation of investors and business leaders to habituate virtues like generosity and moderation. If the economy is truly headed in an increasingly more unequal direction, as economists like Picketty fear, then the next generation of capitalists cannot be afflicted with the widespread avarice of today’s economy. Much ink is spilt over what policies would be most effective at combating diverging inequality, yet legislation is merely a bandage that masks the deeper problem of systemic greed. The best way to preserve avenues of social mobility is to create an economy centered around giving rather than profit. In order for true economic change to occur, a society must have a foundation of virtue-centered education.
This does not mean that there is not also a place for policies that aim to stop economic inequality and promote the common good. Even within a society that educates not only for the development of technical skill but also the development of virtue, legislation will still be necessary. No society can perfectly educate its members; there will still be many who will fall snare to vices. Even in a society permeated by virtues like generosity, there will still be many individuals who, in spite of the efforts of society to educate them, are greedy. Thus there will have to be some level of redistribution in the form of policy, as in tax reform. But any economic policy that is created with the intent of ensuring that all members of society benefit from economic growth can neither undermine nor discourage the virtuous habits developed through proper education.
So perhaps the naysayers Mr. Buffett criticizes in his letter are justified in their anxiety. There is a compelling economic argument that our economy is becoming more and more unequal. But more worrisome than the structural state of the economic system is the widespread greed within it. Wealth is seen by many as an end in itself rather than a means to greater goods. As long as this attitude is pervasive, it will be very difficult to ensure that all members of society can benefit from economic growth in the future without resorting to heavy-handed legislation. But there is hope beyond economic policy. A holistic education, which concentrates on the development of virtue, is lacking in our society. It is through education that we will shape the character of next generation. Let us strive to help the next generation of leaders and investors to develop virtuous habits.