Faith in the Free Market? Part 1

Should we have faith in the free market to deliver our common good?

This is perhaps the greatest economic debate of the past few centuries, and one of the more interesting things to talk about as an economist with non-economists, usually because they aren’t that interested in the nitty-gritty of economic discourse and instead prefer to dialogue about politics.

It is also interesting to me because there are Catholics on both sides of the fence: those who vehemently support the free market and those who vehemently attack it. I’ve already noted how CST approaches the battle between liberalism or capitalism and socialism or collectivism in this multipart series. The case they present both against and for the free market is compelling and good, but there are other ways to prove or disprove its effectiveness in achieving the good for society. This is my purpose for this multi-part series. I wish to explore the arguments used to justify or rebuke the free market and point then toward the conclusions I take from this exploration of which we can engage in a friendly debate.

Two great mistakes in this debate must be noted at the outset. The first is that many treat this as a black and white problem. Those who advocate for the free market tend to argue that any measure against it puts us on the road to serfdom, or on the road to soviet communism which clearly had disastrous consequences for humanity. Those who attack the free market are usually less black and white, but are also guilty of putting the blame on the free market as a whole. There is no gray area, there is no middle option, there are no alternatives to communism or capitalism. Pope Pius XI called these the twin rocks of shipwreck—extreme individualism and extreme collectivism. The great mistake here is failing to see alternatives to these twin wreckers of ships. Rejection of “the free market” does not necessarily mean support for total communism and vice versa. We must be able to envision degrees of free market-ness or collectivism and we must direct them always to our common good.

The other great mistake is (logically) prior to the first mistake. It is failing to recognize that there is no such thing as a truly free market. That is, no market system is completely free from government intervention. Free markets fundamentally require private property and enforceable contracts, which require an enforcer. Absent of government, ‘free’ markets are closer to black markets where the market actors provide their own governance, which is why, for example, illegal drug markets are particularly violent. Absent of government protection of property and contracts, they must enforce it themselves with power, weapons, and violence. So a truly free market system is closer to anarchy, and most free market proponents are well aware of this (some seem to forget it though). However, since the government is involved in protecting property and enforcing contracts they are necessarily involved with defining property and legality of contracts and so their ‘intervention’ into markets is more of a degree than of a kind. They DO intervene, the question is, how much? This lends itself well to the lesson learned from the first mistake—free market-ness is a degree, not a black and white situation.

The danger or trap that is so easy to fall into, is putting your faith in the free market, this institution that is supposed to bring about our overall good out of the self-interested actions of individuals. We put our faith and our trust in a direction-less institution that does not see persons and does not consider their good. If we are to rely on a higher degree of free market-ness to provide the common good, then we should do so with good reasoning, but we should not expect our selfish actions to result collectively in the common good. To me, nothing could be more anti-Christian. Christ’s teaching is all about the two commandments upon which all the rest sit: Love your God, who is love itself, and love your neighbor as you love yourself. Love is an authentic gift of self, not a devotion entirely to one’s self-interests.

(There are those who argue self-interest does not necessarily equal selfishness. This of itself requires a long response, but quickly, my reply is: why risk confusing the two? Those who do not properly understand the distinction will think it’s valid to act selfishly when you argue for self-interested action. And why put the emphasis on negative freedom? Authentic freedom does involve freedom from coercion, but must always be directed toward the good which might mean a restriction of complete negative freedom, or complete self-interested action. Christian defense of the free market should make no reference to self-interested action, but rather to Christian self-giving actions. In this case, it is quite reasonable for a Christian to argue that greater free market-ness will allow self-giving actions to collectively bring about the common good).

So the task set to us then, is to decide the appropriate degree of free market-ness for a good society, or from the Catholic Social Teaching perspective, for the common good, which necessarily includes justice, truth, and charity.

How much should the government intervene? In which situations should the government intervene more rather than less and less rather than more?

Economists of all persuasions have researched the impacts of policy on the economy and economic relationships and worked to develop models to support their case on these very questions. Some have started with the data to support their conclusions. Some have started with their conclusions and worked to find data to support them. Others have largely ignored data and have instead constructed great mathematical models based on certain assumptions about human behavior to support certain conclusions.

This last group has been the dominant group in Economics for over a century now and so most of this post addresses their arguments, but I will also present data to support certain conclusions as well. The importance of this is that many politicians and the public in general take the advice of economists on matters of ‘free market-ness’. So if you’re going to listen to us, then you should know exactly what we are saying, the strengths and weaknesses of our arguments and models, and what conclusions we can then draw from them.

Part 2 will take a closer look at the model most often used to defend the free market which also happens to be the model everyone learns in principles of economics courses.

Examining CV, Part 6

In Chapter 3 of CV, Pope Benedict XVI delves into fraternity, economic development, and civil society.

He first affirms that we, as humans, are made for gift and that we are often wrongly convinced that we are the sole authors of ourselves, our lives, and all of society. He reminds us that we have a wounded nature born out of original sin and that the economy has felt the pernicious effects of this sin.

Happiness is not material prosperity and economics is not autonomous from morality:

The conviction that man is self-sufficient and can successfully eliminate the evil present in history by his own action alone has led him to confuse happiness and salvation with immanent forms of material prosperity and social action. Then, the conviction that the economy must be autonomous, that it must be shielded from “influences” of a moral character, has led man to abuse the economic process in a thoroughly destructive way. In the long term, these convictions have led to economic, social and political systems that trample upon personal and social freedom, and are therefore unable to deliver the justice that they promise.

Charity, hope, truth...these things are greater than we are. Charity in truth builds an authentic human community that we alone cannot build by ourselves. Gratuitousness must be evident in society if economic, social and political development is to be authentically human.

The Pope then goes on to make very key statements regarding markets and justice that "free marketers" often ignore or reject:

In a climate of mutual trust, the market is the economic institution that permits encounter between persons, inasmuch as they are economic subjects who make use of contracts to regulate their relations as they exchange goods and services of equivalent value between them, in order to satisfy their needs and desires. The market is subject to the principles of so-called commutative justice, which regulates the relations of giving and receiving between parties to a transaction. But the social doctrine of the Church has unceasingly highlighted the importance of distributive justice and social justice for the market economy, not only because it belongs within a broader social and political context, but also because of the wider network of relations within which it operates. In fact, if the market is governed solely by the principle of the equivalence in value of exchanged goods, it cannot produce the social cohesion that it requires in order to function well.

Without internal forms of solidarity and mutual trust, the market cannot completely fulfil its proper economic function. And today it is this trust which has ceased to exist, and the loss of trust is a grave loss.

According to the Pope, it was not just a matter of correcting dysfunctions through assistance. The poor are not to be considered a “burden”, but a resource, even from the purely economic point of view. It is nevertheless erroneous to hold that the market economy has an inbuilt need for a quota of poverty and underdevelopment in order to function at its best.

It is in the interests of the market to promote emancipation, but in order to do so effectively, it cannot rely only on itself, because it is not able to produce by itself something that lies outside its competence. It must draw its moral energies from other subjects that are capable of generating them.

These statements are very strong because they rightly point out that markets alone do NOT bring about a just distribution of goods as many economists would have you believe. The solution lies not just in redistribution, but far more importantly in moral actors within markets. We must all act together toward the common good and not rely on selfish actions within a market to produce the result for us. Pope Benedict XVI continues:

In and of itself, the market is not, and must not become, the place where the strong subdue the weak. Society does not have to protect itself from the market, as if the development of the latter were ipso facto to entail the death of authentically human relations. Admittedly, the market can be a negative force, not because it is so by nature, but because a certain ideology can make it so. It must be remembered that the market does not exist in the pure state. It is shaped by the cultural configurations which define it and give it direction. Economy and finance, as instruments, can be used badly when those at the helm are motivated by purely selfish ends. Instruments that are good in themselves can thereby be transformed into harmful ones. But it is man's darkened reason that produces these consequences, not the instrument per se. Therefore it is not the instrument that must be called to account, but individuals, their moral conscience and their personal and social responsibility.

WE, as economic actors, make up markets and it is WE who are responsible for their goodness or their badness. In other words, Pope Benedict is criticizing the market harshly, not because it isn't efficient or that it is evil, but because our actions within the market aren't directed toward the common good. Those who hold that selfish actions within a market bring about the common good as is often claimed (starting with Adam Smith's "invisible hand") by economists and politicians are wrong! It is clear that this does not bring about the common good, instead we must act always for each other, within and outside the market, so as to bring about a community of charity and fraternity that provides for the welfare of all.

The economic sphere is neither ethically neutral, nor inherently inhuman and opposed to society. It is part and parcel of human activity and precisely because it is human, it must be structured and governed in an ethical manner.

What is needed?:

The great challenge before us, accentuated by the problems of development in this global era and made even more urgent by the economic and financial crisis, is to demonstrate, in thinking and behaviour, not only that traditional principles of social ethics like transparency, honesty and responsibility cannot be ignored or attenuated, but also that in commercial relationships the principle of gratuitousness and the logic of gift as an expression of fraternity can and must find their place within normal economic activity.

Because: "every economic decision has a moral consequence. Justice must be applied to every phase of economic activity, because this is always concerned with man and his needs."

Pope Benedict XVI writes that economic life needs contracts to regulate exchange, just laws and redistribution governed by poltiics, and most importantly works redolent of the spirit of gift. He calls especially for today's market economies to make room for institutions with motives other than profit-oriented enterprises, for civil society to push for greater solidarity and not simply rely on the State to do so, and for the State to redistribute when necessary to take care of the peoples who are not included within the benefits of the market economy.

Free Markets

A recent post from the blog "The American Catholic" entitled Government and Economic Health inspired me to put together a post on capitalism and socialism. I went back and reread some passages from the encyclicals to support my comments in defense of my argument that free markets aren't necessarily the best answer. A few individuals, including the author, challenged me on this topic with Christian charity (something I appreciate very much given the heated-nature of the topic).

So ahead of my post I am putting together on Socialism and Capitalism, I wanted to give you the chance to follow our arguments (you can follow our dialogue in the comments section of the post). I would like to reiterate my stance and what I believe the stance of Catholic Social Teaching to be:

We need both moral politicians and players in the market. (We need moral people!). Government policy doesn’t make people more moral, but outlining rules and guidelines can help them stay the course. Transferring wealth that wealthy people won’t through personal charity is also beneficial to the society and the common good if done for the right reasons. It is ideal of me to think this is possible. I hope for such a world and hope I am doing my part to evangelize and make disciples of all nations. I think part of that is educating others that free markets make some rich who don’t always use it for the common good, and by its nature encourages selfishness. I think part of that is educating others that government distorts the beneficial processes of the free market and is often controlled by “economic dictators” (as we read from CST) who use it to maintain their wealth and status.

I don’t think that free markets are the answer and I don’t think that the answer lies in more government control or spending. I think the Popes have taught the same thing. I think it’s clear that at the bottom of it all is that all of us need to act in solidarity for each other and the common good.