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Don’t blame markets for income inequality and poverty

June 3, 2015, 12:31 PM UTC

I was honored to be invited to the Vatican last week to speak to more than 250 delegates from economists to fund managers to academics on free markets and the practice of business. As my remarks stressed, we need to stop blaming markets for the social injustices and income inequality of the modern age. Instead, we need to come together to focus on how we can use this powerful mechanism to address the world’s most pressing social issues.

It’s helpful to start with the observation that trade is a cornerstone of human activity – so much so, that Adam Smith argued in The Wealth of Nations that the human propensity to barter is perhaps the primary activity that distinguishes men from animals. In this sense, free markets – and the firms and people who give them life – form the very fabric of human society and life.

The core challenge in 2015, I believe, is that that too few people remember that markets (and by extension the companies that create and use them) are not the source of social inequality and injustice in the world. Human (and animal) societies have long organized around status hierarchies, well before the existence of global capital markets. Survival of the fittest is not a market-based concept, it is a nature-based concept. Even today, the simple luck of where and to whom a baby is born (human or animal) will have more impact on that being’s likelihood of surviving and thriving than just about any other measurable factor.

What markets do bring to the table is efficiency. They are the most efficient mechanism humans have found for creating, distributing and allocating resources. They are arguably the most successful social structure in human history at lifting people out of poverty, extending life expectancies and breaking down barriers – more successful than governments, civil society and religions. In the past 20 years alone, nearly 1 billion people have been taken out of extreme poverty through the practice of free enterprise as noted in this article.

I have often wondered why people also expect markets to be an equalizing or moral force – possessing seemingly supernatural powers. I wrote a paper with John Jost and Jeff Pfeffer back in 2003 exploring the tendency toward “fair market ideology.” The reality is that markets have no claim on fairness and justice, nor the lack thereof. They are not in and of themselves fair or unfair, moral or amoral. They simply are – just as human life is.

Businesses can be used to promote social good, in addition to profit, as much as their owners choose. And they can do it in powerful ways. Any business owner can choose to reduce profits in order to pay higher wages, create better working conditions, and enhance job training. They can contribute to a charitable foundation or offer goods and services on a pro bono basis to communities, religious organizations and NGOs. They can invest in community redevelopment and environmental sustainability. Indeed, stockholders can also make these choices by picking which companies they own.

The challenge is that to-date the majority of investors, and indeed the majority of people I know, have chosen to maximize profit over social good in their investment decisions. This is because most people I know want to earn more money rather than less on their investments. They want to retire sooner rather than later.

That said, I am more optimistic than I have ever been about the potential for business to address the world’s most pressing social issues – including poverty and inequality. I’m encouraged not only by the progress we’ve seen in the past 15 years, but by the fact that more and more of our young people are seeking work in for-profit companies that articulate a clear social purpose – companies like Unilever, Pearson or Ericsson. These are not small enterprises or niche players. They are multi-billion dollar global corporations, whose CEOs have publicly committed to delivering both greater social value and profit.

Through conscious choice — through our decisions as business owners, shareholders, investors, and employees — we each have the power through markets to create a better world. But to do that, we must use conversations like the one at the Vatican last week, to show people the importance of creating investment pools for companies that seek to bring social principles to the forefront, in addition to profit making.

After all, it is only through human intervention, human free will, that we give concepts of fairness, morality and equality life. We each do this by how we treat people, how we undertake our work, and in the values we strive to embody in our social group memberships, interactions and decisions each day.

Sally Blount is the Dean of Kellogg School of Management at Northwestern University.