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By many accounts the rise to prominence of institutions other than the church or the state marks the transition from the medieval to the modern era. Even so, it is true that many Protestant reformers considered the right balance of the relations between church and state to be of first importance in the proper formation of Christian society. Protestant theologians like Heinrich Bullinger, Peter Martyr Vermigli, and Wolfgang Musculus considered the danger of papal tyranny so great that they were willing to grant powers to the civil magistrate that alarm our “modern” sensibilities. To this extent, a basic dialectic between the powers of church and state persisted well into the sixteenth century.

But as Max Weber’s oft-maligned account of the rise of capitalism alerts us, this transition from the late medieval to the early modern period also saw the rise of systematic reflection on economic topics by many of these same theologians. On the Protestant side¯the aspect heavily emphasized by Weber¯there was a flourishing of ethical reflection on questions of usury and charity. And among the Roman Catholics, in particular the so-called “School of Salamanca,” thinkers like Domingo de Soto, Martín de Azpilcueta, and Luis Molina put forward nuanced and intricate explorations of issues related to currency and exchange.

Thus arose in relatively short order what might be called “the market” as a rival to the traditional medieval institutions of church and state. The revolution of post-modernity has largely left us bereft of the church as an institutional social force, and thereby has the medieval dualism of church and state been replaced with today’s dichotomy between market and state.

To wit: The General Social Survey has been conducting polls on American confidence in social institutions since 1976. The results for 2008 show a remarkable deterioration in confidence in every institution except for that most conspicuous and defining feature of the government¯the military.

Nowhere has the decline in mediating institutions between the individual and the state been more evident than in the development of the global economic downturn. Just as there are now perceived to be only two real institutions of social significance (the market and the state), so also are there only two entities to blame (corporations or regulators) and two avenues of solution (deregulation or nationalization).

Advocates for government intervention abound nowadays. But apologists for the market economy do themselves and their cause no favors when they ignore the fact that there are limits to what the market can and ought to be asked to do. Indeed, much of what has been called “market failure” is actually the result of applying market-based solutions to problems for which profit considerations ought to be considered secondarily¯if at all.

Within a market framework people tend to maximize efficiency and increase material well-being. But the market is not the answer for everything. It cannot tell us, for instance, how to arrange our familial or spiritual lives.

The failure of the market to deliver a particular socially desirable result does not reflect any inherent flaw in the market economy itself, but simply attests to its limitations. These kinds of limitations come into sharp relief in situations where a specific end is deemed desirable regardless of economic limitations.

Thus it increasingly appears from the sub-prime lending disaster that the market is not the best medium for dealing with the question of homeownership among those with bad credit, no credit, or who are for whatever other reasons unable to get mortgages from commercial lenders.

There is a class of people who¯by our current social standards¯ought to be homeowners but who are not being serviced by the traditional lending market. Edmund Phelps, director of Columbia University’s Center on Capitalism and Society, said recently that, “Democrats and Republicans have been very keen to make home ownership almost a national purpose.” But President Bush’s now infamous invocation of the “ownership society” was the political reflection of a latent cultural and social reality: Homeownership is an American ideal.

This ideal vision itself has significant flaws. The promotion of large-scale homeownership can have seriously deleterious social consequences, insofar as the poor and middle classes have disproportionate amounts of their net worth tied to their homes. This exposes them to relatively greater risk of impoverishment amidst fluctuating housing markets. Homes are expensive to maintain in terms of material costs, physical labor, and mental distress.

As Phelps notes:

If you rent, that’s it. You don’t have to pay any interest to anybody. You don’t have to pay any maintenance costs to anybody. You don’t have to worry about whether the boiler is going to break down. While if you own your own home, you have a hundred aggravations.

Homeownership also decreases the ability of workers to easily move out of economically distressed areas to regions where jobs are available, thus reducing the mobility and fluidity of labor. So one assumption we must question is whether homeownership ought to be promoted beyond the standards set by the market. The market effectively sets its own limits by disqualifying those whose credit is judged too risky. Indeed, it is simply not the case that every individual or family needs to own a home, any more than it is the case that every person needs to go to college, have a driver’s license, or own a flat-screen TV.

However, without correcting our assumptions about the ideal of homeownership, there still is a group of people that by American standards ought to have the opportunity of homeownership and are not provided that opportunity in our society. The argument for the failure of the market to provide this opportunity usually proceeds along these lines: The poor are disproportionately affected by lending standards, so that mortgage rates are prohibitively high or even unavailable to those of lesser means. The poor, because their applications are deemed to be riskier, end up paying higher rates than the rich, if the poor are able to even get a mortgage loan in the first place.

In a world where the government or corporations are the only options, the social demand for a solution to this failure of the market to do what we want it to do (provide poor people with mortgages) necessarily results in a reaction from the government in any number of overt requirements or subtle incentives. We are now seeing the fruits borne out of this perspective.

If we return to the insight of an age in which the market and the government were not the only two options of resort, we might come up with an alternative framework for action. The magisterial reformers, particularly John Calvin, are often credited with innovating upon the medieval prohibitions on usury, or lending at the expectation of profit. It is true that Calvin represents a rather more permissive approach to usury, in the sense that he did not think that lending at profit was always and in every case immoral (this was the opinion of Calvin’s Bernese contemporary, the reformer Wolfgang Musculus).

But the more permissive and more restrictive perspectives on usury in the sixteenth century agreed, across confessional and political boundaries, that seeking profit from lending to the poor was condemnable. Calvin wrote that usurious lending to the poor violates a “common principle of justice,” and Musculus decried it as “plainly inhuman to pursue a profit from the sweat and calamities of the poor.”

When markets fail to achieve socially desirable results, the government is not simply the only, first, or even best, avenue of redress. Traditionally the answer to market “failure” has not been governmental intervention but the non-profit charitable model. Where avaricious compulsion or well-intentioned coercion created the problems of the “sub-prime” market, the principle of charity represents the solution. In this framework the poor are viewed not as sources of profit but rather as objects of love.

This does not mean that we ignore insights into human nature that we learn from economic or political analysis. Our charitable giving is made effective when we integrate what we know about people from every area of human knowledge. We know, for instance, that people tend to denigrate that which does not cost them. The “cheap grace” of some kinds of charity must be balanced with the “costliness” of personal investment. This is why charities like Habitat for Humanity emphasize the need for “sweat equity,” which both ennobles the person as not only a passive recipient but also as an active and responsible moral agent. A non-profit charitable model does not mean that houses need to be given away for free.

Our current political emphasis is one that threatens to undermine the independence and effectiveness of faith-based non-profits and Christian ministries. When the choice is between the profit-motive of the market and the welfare offered by the state, the resulting political logic pushes inexorably towards the marginalization of private charity.

The dichotomy of market and state places us between the Scylla of seeking profit in all of our interactions and the Charybdis of coercive force and intrusive regulation. When both the state and market are properly limited, room is made for the vital institutions of social life to flourish and for a culture of charity to be truly nurtured.

Jordan J. Ballor serves as associate editor of the Journal of Markets & Morality.

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