What exactly is in Benedict XVI’s new encyclical on the economy and labor issues is not yet known. Catholic leftists and progressives, though, are already trembling with excitement. Three glaring errors have already appeared in these heavily panting anticipations.
An accurate presentation of real existing capitalism requires at least three modest affirmations:
1) Markets work well only within a system of law, and only according to well-marked-out rules of the game; unregulated markets are a figment of imagination.
2) In actual capitalist practice, the love of creativity, invention, and groundbreaking enterprise are far more powerful than motives of greed.
3) The fundamental systemic motive infusing the spirit of capitalism is the imperative to liberate the world’s poor from the premodern ubiquity of grinding poverty. This motive lay at the heart of Adam Smith’s important victory over Thomas Malthus concerning the coming affluence—rather than starvation—of the poor.
Since the origins of modern capitalism around 1780, more than two-thirds of the world’s population has moved out of poverty. In China and India alone, more than 500 million have been raised out of poverty just in the last forty years. In almost every nation the average age of mortality has risen dramatically, causing populations to expand accordingly. Health in almost every dimension has been improved, and literacy has been carried to remote places it never reached before.
Whatever the motives of individuals, the system has improved the plight of the poor as none ever has before. The contemporary left systematically refuses to face these undeniable facts.
Fr. Thomas Reese, S.J., one of our most reliable leftist bellwethers, has recently opined that Benedict XVI’s new encyclical will cry out for more regulation, rather than unregulated markets. Further, the pope will denounce greed and cry out for more attention to the urgent need to aid the world’s poor.
Reese thinks these are anticapitalist positions. That is ridiculous. They lie at the heart of why capitalism has worked as well as it has to liberate the poor—first in the United States and Europe, then in one continent after another, as it is now doing in almost all areas of Asia.
Fr. Reese says that the pope will blame the greed of U.S. bankers for the current global financial crisis. While many institutions, including banks, failed in their basic duties, government action was the principal villain in the 2009 debacle. It was the federal government that forced banks to make sub-prime loans to poor families (who were known to be unable to pay their mortgages on a regular basis). It threatened banks that did not invest in poisonous packages of mortgages, vitiated by the bad ones.
The federal government even guaranteed the work of two huge quasigovernment mortgage companies—Fanny Mae and Freddy Mac—that wrote more than half of all mortgages during the fateful years. Of course, when the house of cards fell, government was not there to make good on its guarantees—or even to accept responsibility for its own heavy-handed actions.
For at least ten years before the disaster finally occurred, my colleagues at the American Enterprise Institute had been warning of the government abuses that were heading toward this calamity. Partisans of big government refused to listen.
For moralists, it is essential to see how often (not always) government itself sins grievously against the common good, out of a lust for power and domination over others. Furthermore, government often (not always) generates foolish and destructive regulations, and often dispenses justice that winks rather than justice that is blind. Government is more frequently the agent of injuring the common good than the ordinary lawful actions of free citizens. During the twentieth century, governments too often destroyed the common good of their citizens for years to come.
In the United States, the existing code of federal regulations for businesses is enormous. Title 12 covering “Banks and Banking” runs to 4,786 pages; Title 15 on “commerce and Foreign Trade” is 1,941 pages; Title 16 on “Commercial Practices,” 1,600 pages; Title 17 on the “Securities and Exchange Commission,” 2,708 pages; and Title 31 on “Money and Finance: Treasury,” 1,917 pages.
The total number of pages in this code is 12,592. Laid out end to end, the volumes of the code extend for 2.35 miles. If you count the pages in feet (30 inches per linear foot is the standard measure) the code runs for six linear miles.
An unregulated market indeed! The real world of American capitalism is more like Gulliver bound down by thousands of threads. Many of the regulations are out of date, obsolete, costly, destructive, and—in their actual effects—counter to the very intentions that gave them birth. But regulation there is, and regulation there must be. Without rules, American capitalism cannot function.
As for greed, Max Weber pointed out that greed is present in every age and every system of human history. Yet greed was rather more socially central in ancient times than today, and played a much more decisive role. And nowadays, greed flourishes most wherever government power is concentrated.
By contrast, in enterprise societies such as the United States, it is possible to become rich—even very rich—by methods that focus on innovation rather than greed. The great universities of the Middle West and Far West, were founded expressly to give spur to new inventions in mining, agriculture, and other technical fields. Texas A & M, Iowa State, Wisconsin State, Oklahoma State, and scores of others have been the hothouses of ideas in agriculture, engineering and electronics, geology, mining and drilling—ideas rendered practical by the makers of many fortunes. They have mightily served the common good of Americans and the entire human race.
As John Paul II wisely commented in Centesimus Annus, practical knowledge is the main cause of wealth today. Ideas rather than great landholdings are the main form of wealth in our time. As both Caesar and Cicero long ago observed, although it seems as though community ownership ought to serve the common good best, in practice private property does. The right to private property has long been justified by virtue of its superior service to the common good.
And in the United States, scores of entrepreneurs are ready to risk losing everything they have in order to create something new, create something that will make life better for their fellow men. Henry Ford failed repeatedly in several businesses before he finally made the Ford Motor Company the great model for business that it once was. (It was the first establishment in history to pay its laborers a handsome wage of five dollars per day. At the time, ordinary lawyers averaged about $1500 per year. Ford’s motives, of course, were not altruistic; he wanted his workers to purchase the cars they helped build.)
As Oscar Handlin once noted, almost every industrialist who built a new railroad North and South in the United States in the nineteenth century prospered. Nearly every tycoon who tried to build an East–West railroad lost money. What spurred men to keep trying had less to do with greed that with the sheer romance of conquering the deserts and the Rockies. The element of romance in business is simply not grasped by dialectical materialists.
In brief, nearly all the leftish critiques of American and other forms of capitalism are empirically false. They do not fit the actual facts. But these three—greed, unregulated markets, and the idea that capitalism makes the poor of the world worse off—are especially tiresome, and very far from reality.
Will all those good Catholic leftists who announce their own enthusiastic preference for the poor actually help to liberate the poor, even by a little? Will their anticapitalist policies help alleviate poverty? The historical record offers very little evidence for that contention.
And yet wherever a healthy, inventive capitalism goes, the poor soon rise by the millions out of poverty, come to better physical health, and advance into higher education.
You can look up the record.
Michael Novak, a member of the editorial board of First Things, holds the George Frederick Jewett Chair in Religion and Public Policy at the American Enterprise Institute. His most recent book is No One Sees God (Doubleday, 2008).
Comments:
One of signs that someone has an inordinate desire is what he is willing to do to obtain it. A typical businessman simply does not have the power over others that a classic-style landowner once had over his tennants and so there is far less opportunity to oppress. Thus it is hard to say that a modern businessman is "greedy" as he is usually making no obvious demonstration of that fact.
Saying greed means desiring money is like saying lust means desireing sex, or gluttony means desiring food. When one puts it that way one realizes that is not what is meant but that it is inordinate desire that is meant. And there is no way to tell if a successful businessman is being greedy because there is no way to read his heart and the only indication can be what he is willing to do. And opportunities are scarcer to prove oneself greedy.
Thank you for your piece. It was refreshingly straightforward, and dealt effectively with some of the critiques of your position. Unfortunately, I thought that it ignored some of the more important (and indicting) critiques, which have been leveled by more moderate folks, like Stephen Marglin (in "The Dismal Science") and William Cavanaugh (in "Being Consumed"). Specifically:
1) The issue with greed is not whether it exists or not, but whether the structure itself encourages or even glorifies what ought to be understood as a sin on par with lust and wrath. There is good evidence (and I have yet to see a satisfying critique of it) that capitalism's rise was a direct result of a move by protestant theologians to repackage greed as self-interest, in the hopes that excess in what they saw as the least deadly of the seven sins would curb excess in the others.
2) What about the fundamental premises of Capitalism: The radically self interested individual, rationally seeking his own material comfort; scarcity; unlimited desire for consumption. None of these are things that Catholics can believe in if we take seriously the church's teachings, and yet every economic model is premised on their being true as a matter of fact. I know there are attempts by economists to fit those things into traditional economic models; Marglin explains very well why every attempt to do so ends up at best problematic.
3) Finally, is our only duty to the poor to make them materially wealthier? If so, at what cost? Having traveled abroad to third world countries, generally, what the introduction of capitalism means is access to fast food chains and the destruction of the things that made them unique in terms of place, culture, the things that made them a people. Capitalism tends to homogenize peoples, to take away their distinctiveness. How do we measure this cost against the efficiencies inherent in easy access to McDonalds and Walmart?
Thanks,
Chris
Yes. Because HUD set quotas for the number and proportion of risky loans lenders were required to make. That risk could not be borne, and so had to be diluted by mixing it with less risky loans in bundles. (The rest of the world regarded US mortgage debt as one of the safest investments. Americans always paid their mortgages.) The main pushers of these mortgage bundles were Fannie and Freddie, which are quasi-governmental agencies. The CEO of one of them wound up on the campaign staff of a successful presidential candidate who, while Senator, had helped block an attempt to tighten oversight of the agency.
People forget that all business is amoral. There is morality only if the businessmen have any. But when the government gets involved in creating false demand as they did in the housing sector only bad things can happen.
They all new what was going on. They all new it would crash. Read "The Coming Crash in the Housing Market" by John Talbot, 2003. BTW, this fellow is an Obamite Economist. He knew it.
Barney Frank and Dodd protected their boyfriends at Fannie and Freddie by lying to the public. Meanwhile the banker boys who now run the White House did the predictable. They spread the risk by cooking up "Investment Vehicles" known as derivatives. After all why should they be the only ones having the "fun."
"I know let's sell this garbage to the Chinese."
It became clear just how treacherous a condition had been created by government meddling. They knew we were all in trouble five years before the collapse. They knew that 5 trillion dollars of bad debt and inflated housing could cause worldwide collapse and possibly deflation. Read Talbot's book. So the bankers did what they always do; make sure they were in position to "CYA." Just what do you think Credit Default Swaps are, anyway?
They are risk spreaders and a giant international gambling casino designed to give the entire banking industry the leverage it would need collectively to blackmail the US government when things went south.
The rest is history. They now own the government. They run the White House with their song and dance front man Obama, and they are absorbing our economy. This is not some new thing. This is standard procedure for the international banking community. All booms and busts are and have been artificially manipulated by the FED the IMF and the CFR. Thomas Jefferson has been ignored.
It is not free markets that are the problem. It is government and banker greed that will destroy the chance for regular folks to climb out of poverty.
And it is the Soft Marxist Jesuits who will assist.
Stark in a a 2005 Catholic Education Resource Center article, *How Christianity Led to Freedom, Capitalism, and the Success of the West* writes:
"Though Weber was wrong, however, he was correct to suppose that religious ideas played a vital role in the rise of capitalism in Europe. The material conditions needed for capitalism existed in many civilizations in various eras, including China, the Islamic world, India, Byzantium, and probably ancient Rome and Greece as well. But none of those societies broke through and developed capitalism, as none evolved ethical visions compatible with that dynamic economic system. Instead, leading religions outside the West called for asceticism and denounced profits, while wealth was exacted from peasants and merchants by rapacious elites dedicated to display and consumption. Why did things turn out differently in Europe? Because of the Christian commitment to rational theology, something that may have played a major role in causing the Reformation, but that surely predated Protestantism by far more than a millennium.
"Even today The Protestant Ethic enjoys an almost sacred status among sociologists, although economic historians quickly dismissed Weber's surprisingly undocumented monograph on the irrefutable grounds that the rise of capitalism in Europe preceded the Reformation by centuries.
"Even so, capitalism developed in only some locales. Why not in all? Because in some European societies, as in most of the rest of the world, it was prevented from happening by greedy despots. Freedom also was essential for the development of capitalism. That raises another matter: Why has freedom so seldom existed in most of the world, and how was it nurtured in some medieval European states? That, too, was a victory of reason. Before any medieval European state actually attempted rule by an elected council, Christian theologians had long been theorizing about the nature of equality and individual rights — indeed, the later work of such secular 18th-century political theorists as John Locke explicitly rested on egalitarian axioms derived by church scholars."
I hope that Benedict will enlarge on John Paul II's favorable views of a free economy within the context of social justice and a rule of law. The many Catholics and "liberal" Protestants who still cling to the notion that capitalism is a bad system are involved in a pious illusion.
That's still not addressing the question. Once companies saw that they could make a large profit off these risky loans, they traded more and more of them. And, furthermore, I can't recall any CEOs of companies complaining that they were being forced into a risky investment; because they were taken in by the huge, fictitious profit margins they were running. I'm not saying government had no role in creating this crisis, the failures of the companies also had a role.
"And there is no way to tell if a successful businessman is being greedy because there is no way to read his heart and the only indication can be what he is willing to do. And opportunities are scarcer to prove oneself greedy."
But there is a way to tell that a selfish landowner was being greedy? It's difficult to tell individual greed, but, be that as it may, the social structures in ancient and medieval society frowned upon greed and usury, whereas the social structures in our society revolve on the assumptions that a) greed can be harnessed for the good of all and b) usury is not only not bad, but it is a positive good and the foundation of our financial order. Which social structure is more conducive to the sin of greed, then, the ancient, which at least condemns it, or the modern, which revolves around it?
Yours, &c,
V. Maro Grammaticus
Very briefly: the vast majority of sub-prime mortgages were written by brokerages NOT subject to CRA until ~2005. After that, Banks were writing sub-primes, too. Counter your position, however, it is notable that Banks were NOT writing significant numbers of sub-primes before 2007.
We can agree that CRA was deleterious. But unqualified assertions such as yours have been empirically disproven.
I don't support gov intervention of this sort, and I am not defending it. In fact, I I would love it if this were the smoking gun, but it isn't.
We all know that it was the ALT-A loans that brought the house down, and that these loans were created outside of Fannie and Freddie, by private, third party investors who knew that Wall Street could move the paper and the risk.
Yes, Fannie and Freddie eventually got in on this market and this is an example of one of the difficulties of bubbles is that the longer they last, the more pressure there is from the investors to match the bubble-iscious returns. So investors either jump in or watch their customers leave.
I am not defending Fannie, Freddie, or the government intervention. But offering up these easy targets of usual suspects is not enough. It is easy to seek a fall guy (greedy investment bankers, intervening gov hacks, etc) but the truth is that the system failed.
I say this as a devout believer in capitalism. I do believe capitalism is the greatest foe of poverty man has ever known. And that is why I am disappointed by the analysis here. The world needs honest brokers, Mr Novack. Platitudes about capitalism combined with scapegoating Fannie and Freddie don't cut it. The loans they gave out to the poor - the 30 year fixed loans that began in the 70's - which you want to blame for this mess, have had a default rate insignificantly higher than those given out to the non-poor. To mention these loans and to ignore the role of ALT-A loans (NINJA loans, for example) is an effort to build a false case against "regulation."
I agree with everything you said about over regulation, but let us not ignore the completely unregulated CDS markets (which dwarf the traditional banking system altogether). Let's be honest here; there are problems with too much regulation, and problems with too little. Or better yet, let us not focus on how much, but rather on how EFFECTIVE the regulation is. I would argue that keeping investment bankers separated from traditional bankers (Glass Steagle) is looking like EFFECTIVE regulation.
I know it doesn't mesh with the conservative ideology of the American Enterprise Institute, but don't let us fall victim to serving principles over people. When "deregulation" causes a systemic failure, we need to be honest enough to admit it, and fix it. Doing so will not threaten capitalism, or conservatism, if they be true, for the truth can never hurt the truth.
I am 100% for regulation… regulation by PROFIT AND LOSS!
I am 100% for free enterprise… freely run charities exist alongside freely run business!
I am 100% for parents… as the primary breadwinners and educators of their children!
I am 100% for dignity… the widow deserves charity, not a hand out.
I am 100% for responsibility… the absentee father should provide for his family, not let them wallow under welfare.
Statists on the left and right- both want tyranny, both want to concentrate power.
Both want to treat us like children, like infants.
There is no dignity under the nanny state.
I wish more Catholics would realize that Obama is not "with us" in helping the poor.
He must offer you something you desire- a good, a service.
Only through the heavy hand of government can he compel you to hand over the dollar without your free consent.
Predicting the 'leftist' response to the Encyclical is a bizarre pre-emptive move. What makes it likely that there will be any response? This is an effort to replay the battle over Centesimus Annus, in which the right wing may feel they were upstaged by a leftist take on the encyclical (rather than by the leftist notes in the encyclical itself).
But, leaving these minor, albeit telling, points aside, it is important to note that Novak's reading of Catholic Social Teaching is fundamentally mistaken on two points:
1. Novak conflates Capitalism with what JPII calls a "free economy." The two are not the same and, in practice, are often opposed. One example: capitalism assumes the *priority* of capital, where JPII's "free economy" assumes the *priority* of labor. This makes JPII's vision of a free economy much closer to distibutivism--the wide-spread ownership of the means of production--rather than capitalism, in which the ownership of the means of production tends gradually to consolidate upwards.
2. The wealth-creating effects of capitalistic practice--a point that no one denies--is irrelevant to the question of the structural injustice of the system itself, as Alasdair MacIntyre points out in his remarkable essay "Three Perspectives on Marxism" (Ethics and Politics, see 146-150 especially).
I simply cannot let this statement go unchallenged, because it is completely false. Let's recap briefly on the causes of the crisis -- this is a standard story on which all economists agree.
First, we have the savings glut (se Ben Bernanke on this) -- the huge increase in global savings driven by China and the oil exporters pushed long-term interests rates to all-time lows. And these savers wanted to recycle their funds into US securities, which fed a credit boom. Now, this happens time and time again -- when you get a credit boom, underwriting standards tend to slip. This also drove the asset price boom in housing prices, and an environment where nobody believed prices would fall. This was aided and abetted by a loose monetary policy, which kept rates low at the short end, and encouraged financial institutions to take on greater amounts of risk. Leverage went through the roof.
Second, we have the lax regulatory environment. Mortgage originators could simply pass off risk in the form of securitization, thus limiting their incentive to actually monitor risk. At the same time, CDOs were created --packaging assets of various quality in one jumbo instrument -- and this gave the illusion of safety. Nobody really knew where the bodies were buried and the ratings agencies gave their seal of approval to these things. Nobody fully understood the complex interconnections among systemically-important financial firms. Market discipline simply did not work.
Were Fannie and Freddie responsible? No. The GSEs might have invented securitization, but this was a private sector affair. More than 84 percent of the subprime mortgages in 2006 (the peak year) were issued by private lending institutions. During 2004-06, the subpime years, the share of subprime loans held by the GSEs from from 48 perecent to 24 percent. A key reason is that the GSEs were subject to tougher regulation than the private sector. Also, look at where the bodies are buried-- the tallied and expected credit losses. The GSEs account for a mere drop in the water here.
The next point relates to blaming the subprime crisis on lending to the poor. Again, this is totally off. During the peak of the boom, the private sector made 83 percent of the subprime loans to low- and moderate-income borrowers. Many people on the right are blaming the Community Reinvestment Act of 1977. which required banks to lend in the communities they serve. Economists like Robert Gorden and Janet Yellen have debunked this myth completely. For a start, the timing is off -- the CRA comes from 1977, and was actually weakened by the Bush administration during the subprime boom. Also note that the CRA is restricted to banks and thrifts that are federally insured. In fact, only 20-25 percent of subprime loans came from an institution fully under the CRA. And they were well-known for their good behavior-- Janet Yellen showed that Janet Yellen (president of the San Francisco Federal Reserve) showed that independent mortgage companies made subprime loans at twice the rate of banks and thrifts.
This was a failure of the private sector, and -- as Pope Benedict said -- the result of greed.
The government did not have any role in the use of credit default swaps (CDSs) CDSs in the leveraging of the much smaller problem of sub-prime mortgages, other than by omission, for example, (1) Senator Gramm’s successful but fateful effort (in a GOP-controlled Congress at the end of a lame-duck Democratic presidency with a relatively pro-market Treasury department) to prevent regulation of derivatives, (2) the GOP-dominated SEC’s relaxation of net capital requirements, and (3) the much earlier de-regulation of interstate banking limitations and Glass-Steagall that allowed over-leveraged financial institutions to become too big to fail. Possibly the major government *action* in midwifing the financial panic was the rescue of Bear Stearns that reinforced illusory expectations of market makers – had BS been allowed to fail, it would probably have just accelerated the panic, though, as the later collapse of Lehman did.
Without CDSs, we’d be facing a relatively contained asset bubble collapse.
Another huge factor in the timing and form of the bubble burst was the speculative bubble in fuel commodities markets (oil and natural gas) in 2007-08.
Too many people in the past generation have come to read Adam Smith as more prescriptive and ideological on capitalism than he in fact was: Adam Smith is better appreciated when read as primarily descriptive – his thought describes how people will tend to act under certain conditions of freedom. The ideological use to which he has been put would likely have appalled him. Ideological capitalism, like all ideologies, is a conclusion in search of an explanation, and it's no more worthy of Catholicism than ideological socialism.
Now what we need are more Catholics who choose to spend their money to save dying children, rather than to buy a luxury vehicle or go go on a 10,000 dollar vacation. These are choices, and the ability to choose is what capitalism is all about, but we need to choose whatever has more value to us. If we value our own luxuries over the lives of others, then that is our choice to make, but we will be held accountable (Mt. 25).
Pre Vatican II textbooks on social doctrine always help up public ownership and public owned enterprieses for water, electricity, ports, rail, airports and banking.
For Catholics keen to comprehend the key role money plays in the moral hazard of capitalism, and why any perceived Christian merits have proven a little moth-eaten of late (well ever since "enlightened" Government's recognized how to bamboozle their citizen savers out of the fruits of their labor via seignorage, a 'droit de seigneur' for the modern day) read:
http://www.mises.org/story/3549
http://www.asianews.it/index.php?l=en&art=15648&geo=&theme=&size=A
The richest Americans give the least -- Benedict reminds us that with wealth comes duty. The data does not suggest our country has attended that well to the teaching.
I look forward to seeing Mr. Novak's comments now that we have a text to consider.
"While many institutions, including banks, failed in their basic duties, government action was the principal villain in the 2009 debacle. It was the federal government that forced banks to make sub-prime loans to poor families (who were known to be unable to pay their mortgages on a regular basis)."
Did the government subsequently force those banks to package risky mortgages into complicated derivatives, spin them around the world so that a mortgage from Denver, CO, ended up bound up with companies in Iceland, the UK, and South Korea? Let's not pretend that the fundamental fiction of the derivatives market played no role in this crisis, and let's not pretend that big banks weren't too eager to take those mortgages and make fictitious profits off them, in the mistaken belief that housing prices would keep on rising.
"As for greed, Max Weber pointed out that greed is present in every age and every system of human history. Yet greed was rather more socially central in ancient times than today, and played a much more decisive role. And nowadays, greed flourishes most wherever government power is concentrated. "
I agree that greed flourished in every society, but would you care to qualify the claim that greed was more socially central in ancient times than today?
Respectfully yours,
Maro