In his first major document Evangelii Gaudium Pope Francis had harsh words for the trickle-down theory of economics, whereby the spending of the rich creates work and therefore wealth for those further down the financial chain. The Pope said it had simply led to a widening rich-poor gap and a ‘globalisation of indifference’. Here an economist examines his critique
Pope Francis had some dismissive things to say about the market economy and globalisation in his apostolic exhortation. Disappointingly, however, there was much use of the rhetorical tactic of knocking down straw men.
In one such example, the Pope criticised those who believe in the “absolute autonomy of markets”. Nobody believes in the “absolute autonomy of markets”. Markets are forums in which economic co-operation between human persons takes place in the context of institutions. Markets can be restrained by the moral and ethical behaviour of those involved; by institutions that develop within markets themselves; by civil society; by culture; and by governments. Markets cannot be autonomous – they are the creation of human persons, and human persons are reasoning acting beings rather than automatons. To talk about the complete autonomy of a market is like talking about the complete autonomy of a brothel without reference to any of the people operating within it. It is meaningless in the context of Christian anthropology. The apostolic exhortation takes the sophisticated discussion of Caritas in veritate backwards.
Insofar as the Holy Father was referring to the independence of the market from the state, which was an issue he raised, this is a strange era in which to make such a point. Western governments spend close to record proportions of national income and the regulation of businesses in many places is rising from already high levels. Indeed, the Holy Father is rightly scandalised by the level of youth unemployment in countries such as Spain, France and Italy. He should reflect on the fact that those countries come 125th, 130th and 146th out of 148 ranked countries for their regulatory burdens on business. There is a direct link between regulation and the number of people trapped outside the labour market. Pope Francis should consider too that the much-criticised financial system is not a creation of the market but a highly regulated system underpinned by the state: a welfare state for bankers if you like.
The tone of the economic analysis was unduly pessimistic. The Pope talked about increasing poverty, inequality and exclusion. However, world poverty has fallen more rapidly since 1980 than at any time in the history of our planet: the fall is staggering, and the main cause is globalisation. The globalisation of technology was criticised. But just consider how the mobile phone – which is a technology produced by multinationals but harnessed by smallholders, fisherman and stallholders in Africa – has changed the lives of millions of previously poor people. The Pope also argued that we see the “globalisation of indifference”. Perhaps we should consider the other side of the coin – the US$139.2 billion of charitable assistance that is given to the developing world each year by US citizens alone (this excludes government aid and private investment).
Indeed, the parts of the exhortation on the economy in no way reflected the tone of the rest of the document. The document was upbeat about the healing power of God’s love, inclusive in its scope and charitable in its spirit whilst prompting the consciences of the reader. There is an optimistic story to tell on the economy too: the spirit of generosity among so many and economic development lifting people out of poverty at record rates. We are all impatient and things are not perfect – but market economies and globalisation have achieved much. Ironically, those countries which are most reluctant to embrace a market economy and globalisation are often those which the Holy Father cites when highlighting some of the economic tragedies of modern world.
Of course, we should all be reminded of the crucial need for economic activity to be cloaked in virtue and urged to ensure that markets serve the poor and not vested interests – there is room for conscience-prompting there too. How important these issues are! However, unlike most other aspects of the exhortation and, for example, Caritas in veritate, it is likely that the sections on the economy will generate more heat than light and conflict rather than synthesis.
Philip Booth is the Editorial and Programme Director at the Institute of Economic Affairs
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MIke M - your last comment is rather ironical because the purpose of the post was to suggest that, following Caritas in veritate, a conversation about injecting morality into economic life was precisely the most important thing the pope could contribute (that is why I introduced the point in the first paragraph and finished with it in the last paragraph). Indeed, I used a "!" to make the point which I almost never do in writing. It is that and the importance of justice rather than making inaccurate generalisations about systems where I think most can be added by the pope. The absurdity of the comment about "237 years since the wealth of nations" is illustrated by the fact that the book was written to compare countries which at that time followed just the sorts of policies followed by post-war India, almost all Arab countries, most of South America and sub-Saharan Africa where the rich enrich themselves at the expense of the few through mercantilism, petty regulation, rampant corruption and the absence of well-functioning institutions of governance. It is also strange that you are now blaming Smith because the main criticism made of neo-classical economists whom you seem to be confusing with Smith (and of whom I am not one) is that they ignore the institutions that Smith talked about so much (as well as what is now called social capital, empathy etc which Smith characterised as sympathy).
Anyway, time for us both to focus on other things for a while. Have a happy Christmas.
On measuring poverty, this might be of interest: http://www.iea.org.uk/publications/research/a-new-understanding-of-poverty
On reducing poverty (through the pursuit of more liberal policies in land use planning - where we have some of the most illiberal policies in the developed world; more liberal energy markets; the reductions in very high rates of regressive indirect taxes that exists in the UK; addressing the benefits system and child care regulation; and dealing with the CAP - again hardly liberal) this may be of interest. There are other ways of thinking about these problems: http://www.iea.org.uk/publications/research/redefining-the-poverty-debate-why-a-war-on-markets-is-no-substitute-for-a-war-
Something went wrong with the last comment – The last paragraph should have read
It is now 237 years since “An Inquiry into the Nature and Causes of the Wealth of Nations” was published. I think you economists & the politicians you influence have had long enough to sort out poverty & equality in the world. It is now time to inject some morality into your thinking and recognise the reality of the unnecessary poverty, the inbuilt inequality and the oppression that goes with today’s orthodox economics.
Have a good Christmas
well, we are not going to resolve this in a comment thread unfortunately, but most of what you state as fact is precisely what we dispute. Does neo-classical economics dominate policy especially in countries that are poor? Do I really propose neo-classical economics? Has neo-claasical economics dominated policy in the UK since the 1970s (there have been some reforms such as privatisation, the reduction in inflation, the removal of exchange and incomes controls but there has been much movement in the other direction too)? If the current government was really driven by the ideology you suggest would it be spending of 49% of national income and be running a welfare system where the marginal tax plus benefit withdrawal rate was over 70% for nearly all families with children - the problem of high benefit withdrawal rates is perhaps the first lesson of neo-classical economics? I never suggested that current policy was satisfactory just that poverty in the world has reduced as a result of many countries developing more satisfactory policies (but if you look at policies in poor countries they are the most closed to trade, poorest governance etc etc - Argnetina, India, Pakistan, Venezuela - havens of neo-liberal economics?!!!). There is much evidence on poverty, not just by the IEA which suggests that it fell even whilst income inequality rose. There are areas of legitimate debate and ascribing consequences to policies is a complex business as is classifying policies themselves
Philip – I also look for human flourishing & for this to happen it seems to me that both poverty & inequality must reduce. They are inextricably bound together so should not be treating separately for analytical reasons – Poverty will only decrease with more equality.
In passing you say within countries inequality has increased – which cannot be denied – and this is a direct result of the dominance of the neo-classical/neo-liberal economics since the mid-seventies and it is still on the increase.
How can the IEA maintain that poverty has decreased in the UK when we have a growing number of food banks, a phenomenon not experienced in most people’s lifetime except for providing for the absolutely destitute people living on the streets. Meanwhile in 2012 the UK banks were subsidised largely by ordinary people by £38 billion (New Economics Foundation Report December 2013). Our present Government is driven by the dominant economic ideology & the myths that go with it such as, “Greed is good”.
Internationally no one can imagine that present day economic practice is satisfactory when over 40% of the World’s population exists on less than $2 a day. Also as highlighted in the recent “IF” campaign around 870 million people never have enough to eat – they go to bed hungry & wake up hungry in a world with more than enough for everyone.
It is now 237 years since “An Inquiry into the Nature and Causes of the Wealth of Nations” was published. I think you economists & the politicians you in
just to clarify my last comment, I meant to say "since 1980" with regard to the increases in government spending etc. Also worth noting that, measured in any meaningful way, world inequality is decreasing. It is possible, of course, for inequality in every country in the world to increase whilst world inequality falls if poor countries grow much faster than rich countries (which is what is happening).
Mike M - I certainly welcome a constructive debate. I am not sure whether your focus is on inequality or poverty. If you look at inequality within countries then certainly it has increased. Poverty within most countries has not (including in the UK). If you look at the proportion of really poor in the whole world, it has fallen really dramatically and it is difficult to argue that the cause has been anything other than greater peace, better governance (legal and justice systems, property rights etc) and market-oriented reforms (especially trade). However, there has also been an increase in inequality in those countries where the poor have become more prosperous (Vietnam, for example) just as North Korea would become more unequal even if everybody became more prosperous. I am more interested in human dignity and flourishing for all than I am in inequality as such (I accept that is a value judgement - and that i have set out that value judgement in a tendentious way in that sentence!). We have to be more nuanced, I think regarding the "triumph" of neo-classsical economics in policy (even if we could agree on what neo-classical economics would imply in practical policy). The fact that the propn. of national income spent by government has increased by one third in the UK and that spent by Federal government has increased by one sixth in the US (with big shift to education, health and welfare) tells us something. Some areas of the economy are more heavily regulated, others less.
Philip, I am glad that in one very important respect we are on the same side. We agree that economics teaching needs reformation and there is a need to teach the history of economic thought. It is important to realise economics is not a science and the recent vogue to make it more mathematical only produces an imitation science. As one economist put it recently, “They prefer to be accurately wrong than inaccurately correct”. I must admit I have not read IEA documents recently. Many years ago, presumably before you were there, I read a couple of tracts which just seemed to be putting forward the obverse side of Marxism and were just as wrong and dangerous to the poor of the world. Maybe, I will look again. Having re-read the original blog and subsequent comments I was struck by your insistence that since the 1980 poverty has reduced. However all the evidence suggests the opposite. Since the mid-seventies after a long period during which inequality steadily reduced, inequality started on all fronts to rise again and continues to do so with the dominant neo-classical pseudo-religion and its influence on politicians being largely responsible (See “Injustice: Why Social Inequality Exists” by Daniel Dorling )
@John Paul - my point about the banking system is that this is one area where (indeed this was identified in the AE) people talk about the market enriching the few and the market not working and so on but it is certainly not a "market" as would be pointed out by both the opponents and supporters of a free economy. It is certainly antithetical to anything Hayek would have identified as a market. I don't think that aligning neo-liberal with Thatcher and Hayek is really all that helpful and it ignores many fundamental compatibilities between a free economy based on the human anthropology understood by Hayek and that understood within the tradition of Catholic social teaching. Indeed, many Austrians (especially Catholic scholars) draw a straight line from the late scholastics to Hayek's Austrian school predecessors regarding the English and Scottish classical schools (and certainly their neo-classical successors) as a very unhelpful diversion. It would add, in fact, an awful lot to human knowledge if people who debated the efficacy and morality of markets understood the fundamentals of the debate rather than just caricatures of it.
Most of the world understands neoliberal to mean Hayek as received by Thatcher, I'm sure it can mean many other things too but that's not advancing general knowledge. Thanks for aligning me with the Pope, but neither of us "describes" a market economy and also that's not our job. Nor did I make any statements about the banking system, how it should or should not be. My points are made from the standpoint of a social ethicist within the Catholic tradition.
Mike M - Sorry, I just could not respond to everything in 1500 characters, but I will respond to that now. There are a couple of blogs on that issue on the IEA blog. It is just a wrong way of characterising the problem really. The IEA does not promote neo-classical economics. Insofar as it supports one school (and it does not support one school specifically) it would be identified with the Austrian school. The Austrian school methodologically was the main opponent of the neo-classical school from the 1930s onwards. I wrote a blog about the error of the protetesting students at Manchester equating neo-classical economics with free markets (that is a huge error it really is - neo-classical economics is used by regulators to develop huge programmes of regulation to correct "market failure" with abstract mathematical models, for example). The students were kind enough to get in touch with me to say that, in fact, that was a misreport by the Guardian and that the students were proposing more exposure to other schools in general (including the Austrian school which they explicitly mention on their website) and were not equating neo-classical economics with free market economics. Again, this comes from difficulties of using the straw men put up by the opponents of markets rather than considering how those of us who believe in a free economy thinking about the issue.
John-Paul - You can pull me up for sloppy constructs, but you really need to define what you mean by "neo-liberal economics". I am clear about what I mean - a market at the service of the people (all the people) embedded in an appropriate institutional framework. There is no point using terms such as "neo-liberal" which are ill-defined and, if defined at all, tend to be defined by the opponents of a free economy to describe theoretical constructs sometimes used as models by some economists. One cannot deny the progress in terms of reducing poverty which a market economy (poorly functioning and barely present at times) has brought to those countries that have begun to embrace one and yet you make statements that are contentious empirically as if they are facts. But also, like the pope, what you describe as a market economy is simply not recognisable as such. How can you regard a banking system heavily regulated and underwritten by the state as being part of a free economy? Of course, it enriches rent seekers (by the way, the problem of rent seeking in economies that often look like markets economies was a discipline popularised and brought to the UK by the IEA). If you were born as a poor person and had to choose a country to be born into, you would choose Chile over Argentina or Venezuala, I am sure. It is only opponents of a free economy that characterise (ridiculously) banking sectors, the way in which property rights work in S. America and so on as markets. See de Soto.
I think Philip has missed my main point – we do not need to mitigate (control) the economic system we need to change the whole theoretical background of present practice. Neo-liberal/neo- classical economic theory, which has almost total domination in universities (see the writings of eminent Norwegian economist Erik S Reinert) has to be abandoned before we can even start to move toward a just world. Applying the tenets of the theory by the IMF & World Bank has caused misery to many millions in Sub-Saharan Africa & Central & South America and now in Europe.
Mr. Booth states: "Of course, we should all be reminded of the crucial need for economic activity to be cloaked in virtue and urged to ensure that markets serve the poor and not vested interests ..." - here he shows deep misunderstanding of the morality of virtue, which springs up within the human person and remains in that dialogue. Ethos (the heart of virtue) is causal in nature – one cannot cloak an effect (economic activity) with a cause. Mr. Booth’s argumentation is here corrupt. It is the Pope who understands and the neoliberal economists who have misunderstood their role.
I have read the discussion below and reread the blog. I cannot escape the feeling that participants are talking past one another. Alas, the faithful need to be more robust in speech: Jesus said: I am the way and the truth, and I am not throwing the bible around but describing a point of outset. Catholic social teaching (CST) sets the human person at the centre of all considerations. "Human person" is a theological terminus technicus: It means "the individual within society". The dignity of the human person is paramount: All else, and in particular instruments of her own invention, are there to serve. One of these instruments is the market, which throughout the documents of CST is a wealth generator at the disposition of all. The Pope is entirely correct in his analysis that the market is currently not working like this and that mankind has thus strayed from the way and from the truth. When he speaks of the "autonomy" of markets, he refers to their having usurped the role of the human person as controller: We are not (if we wish to follow CST) beholden to any functionality of the market and nor to economic statistics, the reverse is the case. Globally, the market is not working for the human person, it is working (very hard) for the very wealthy. (continued)
@James - the WSJ index measures different things and it would be astonishing if any tolerably free economy did not appear in the top half. All the Latin economies (europe and South America) with high rates of unemployment do very badly (relative to other similar economies) in areas such as labour market regulation. @James and Mike - I am afraid that you just fall into the same trap as Pope Francis by erecting straw men and knocking them down. It is kind of you, Mike, to tell me what my position is but a reading of what we actually produce rather than of other people's preconceptions of what we think we ought to believe might be more enlightening. To give one example, perhaps read "Does Britain Need a Financial Regulator?" in which I strongly criticise big bang for sweeping away the strong regulation that developed (and was enforced) within the market itself and replacing it with state regulation that was worse in all respects. I believe in regulation, in constraints and so on - it is a question of from where they come and the Catholic social tradition is on my side here. Read Rerum novarum perhaps. Reading what people say is better than assuming what they might say. Regarding banking, much could be said about the involvement of the state in both the Spanish and Irish crises, but perhaps the best example is Slovenia where all five major banks that failed were nationalised. On globalisation, I am afraid the Pope is dangerously wrong (compare Chile and Argentina perhaps).
Philip: Your characterisation of societies where “ the…financial system is… a highly regulated system underpinned by the state” certainly does not ring true. It is contradicted by the Big Bang in the City and by New Labour’s slavish incorporation of Thatcher-style soft touch regulation. It is also contradicted by the collapse of banks in Ireland, the UK and Spain. Ditto Euribor shenanigans. Not to mention the rocketing costs of utilities there. Or is it that high levels of regulation have been singularly badly enforced in all 3 of these jurisdictions? The only element above which rings true is the issue of “state underpinning” which has resulted in the nationalisation of debts run up by banks. Though obviously not of their benefits whether previous or subsequent. As for your assertion that a reduced regulatory burden would tackle outrageous levels of (youth) unemployment, you do not quote a source for your figures. Looking at the 2013 Wall Street Journal Index, which I presume counts here as pro-Benedict, I note that Spain which you position at 125 has risen to 46 out of 180 countries on this measure. A difference mirrored for both Italy and France, neither of which is located in the bottom half of the WSJ table. Here is the problem, the gap between cold statistics and still colder reality. A reality which Pope Francis used to pen his conclusions to the 2007 CELAM meeting when he wrote “Globalisation is causing the emergence of new faces of the poor in our people.”
As the representative of the Institute of Economic Affairs, Philip, you are bound to find Pope Francis’ wise words unacceptable. The present economic orthodoxy which you defend is actually the cause of much of the poverty in the world. That orthodoxy believes in unrestrained market s and free trade in all conditions without context. When the pope said “…trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion… has never been confirmed by the facts”, he is correctly stating that the neo-classical/neo-liberal economics espoused by the IEA in practice it has always achieved the opposite of what it is said to provide. It has made ordinary people in the poor and the rich worlds poorer while providing riches beyond the dreams of avarice for the already wealthy. This orthodoxy holds almost total control in economics university courses and in world finance institutions and appears to be unable to recognise the reality it has created. Until this changes there is no prospect of an end to poverty in the world where there is more than enough for everyone’s need but not for their greed. More than one notable economist outside today’s orthodoxy has said that change cannot come from within economics because of the vested interest so change must come from other respected institutions taking a hand and what better institution to lead than the church. Mike M
Brendan - I was, of course, talking about poverty worldwide, not in developed countries and that was the main issue on the Holy Father's mind (but, see later). I am afraid that it is simply wrong to say that the reduction in poverty has not led to real change in people's lives. There has been a huge improvement - unprecedented in human history in both its scale and rapidity - in the living standards of many of the poorest people in the world. Yes, there is much to be done; yes there are problems at home; yes we need reminding of them. To use your money changers' analogy if the Holy Father had rampaged against businesses that do not behave ethically, fair enough (indeed, he has done that and I have not commented when he has done so, despite the fact that his emphasis is, I feel sometimes wrong - for the very reasons you state). Coming back home (and the figures you state are UK figures, I think), economists like us in ivroy towers at the IEA were, in fact, the first to put this whole living standards issue onto the political agenda. Of course, we see it as an agenda for necessary liberalisation (planning and housing being the most obvious area because housing costs are a (probably the) major issue). Of course, Catholics are free to disagree about those priorities and to discuss and debate them and the pope is not just quite entitled but is quite right to tell us that the poor should be our focus; but I was not criticising those aspects of the pope's words.
@James - regarding, Mrs Thatcher, it is perhaps interesting that she left office with the government spending 40% of national income. She specifically said that you cannot buck the market in relation to the government trying to shadow the deutsche mark in the late 1980s. That was true and the disaster caused by trying to buck the market in that context (inflation, 15% interest rates, very high unemployment, negative equity) left quite a scar. Anyway, probably better to deal with my views than those of somebody with whom I am supposed to agree about everything because it is suggested by left-leaning journalists that my predecessors of 40 years earlier influenced that person. The point is whether you can or cannot buck the market, it is populated by persons capable of moral reasoning and, apart from a few anarcho capitalists, nobody believes that it should also not operate in an appropriate juridical framework. Frankly, the absence of such things is a major part of the problem in Argentina. Regarding the 1920s book you cite, perhaps it would be better to quote the work of the IEA and others about the real importance of pensions and welfare institutions as a product of a market economy and civil society.
Reading Philip Booth's icy dismissal of the lack of intellectual rigour in the economic arguments of Pope Francis, our first Latin American pope and a man who witnessed Argentina's dictatorship and economic disintegration first hand, but who is charged with using illogical concepts such as "the absolute autonomy of markets," in marked contrast to the subtle sophistication manifested in the same field by his predecessor emeritus Pope Benedict, an academic and Curial official for most of his life, caused me to reflect on Professor Booth's leading role in the Institute of Economic Affairs. This body provided the intellectual cover for Mrs. Thatcher. Yet she seemed to share our poor Pope's unsophisticated, if not deluded, acceptance of the de facto reality of the supremacy of markets. Otherwise, why exactly did she endlessly repeat her mantra "you can't buck the markets"? Moreover, reading Professor Booth's harsh strictures at the Pope’s failure to buy into the professor’s ultra-liberal economic chimera, reminded me of the 1920’s American best-seller “Main Street” where we read that “all this profit-sharing and welfare work and insurance and old age pensions is simply poppycock. Enfeebles a workingman’s independence….” I recall too how Mandy Rice-Davies once presciently remarked of analyses like Philip Booth’s "Well he would, wouldn't he?"
- but the pro-marketeers are not winning the the debate at local level, are they? We need to avoid the unhelpful populism and the simplistic nostrums of the political right but there is absolutely no sign of the big international corporations (I work for one of them) coming remotely close to understanding the depth and reach of the doctrine of gratuity developed by Benedict in the Encyclica you quote. The pitiful shekels meted out by their "foundations" (incl. that of Mr. Gates!) do not remotely convince. Advancing statistics on comparative world wealth is not the same as inviting the people in true appreciation of their dignity to the Lord's table. This is the frustration which Francis is pointing up: He is saying "I see here no dialogue of mutual esteem", so that his frustration is indeed of a piece with his pastoral approach. To sharpen up the charge: Corporate dividends belong rightly to all of us, not merely to the lucky few shareholders. That is the measure of the gulf - and I didn't even mention mass taxation avoidance or bankers' misappropriation of entrusted capital.
“It is meaningless in the context of Christian anthropology”. Why not “anthropology” without adjectives to begin with? Evolution and the evident improvement of the human condition would have been impossible without our animal human desires to emulate, outdo competitors and conquer. Military research has led to improved health technologies. And where would the Koreans and the Chinese be today without globalisation? This is straightforward anthropology that would be inhuman, and unchristian, to ignore. After all, our humanity was assumed, not rejected, in Jesus of Nazareth. Yet we are not blind to the human suffering which accompanies human development. Since the beginning God has planted in our hearts the dream of human world without wars, just, made of equals. And God’s will to make our dream come true has been revealed in the person of Jesus of Nazareth. Here lays the foundation of our “Christian anthropology”. But faith is a gift, “Christian anthropology” cannot be proved by human logic alone, and “Qui veut faire l’ange fait la bête”.