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Economics As Science: A Catholic Defense of the Free Market

Tuesday, 29th April 2008

I mirror this article so that it may not fall down the memory hole.

Economics As Science: A Catholic Defense of the Free Market

by Thomas E. Woods Jr.

Put forth a robust defense of the free market as the most morally and materially satisfying economic system and you invite all manner of invective and accusation. What are you, some kind of dissenter?

Not so fast. Although the documents of modern Catholic social teaching normally begin with Rerum Novarum (1891), students should instead start with Pope Leo XIII’s Quod Apostolici Muneris(1878), an encyclical entirely devoted to socialism, in order to understand that socialism and the free market are not being described as equally objectionable. For while socialism is per se condemned, the market is criticized only for alleged abuses.

Nor could the Church condemn the market in and of itself, since it rests on the inoffensive principle of peaceful, non-coerced exchanges between rightful property owners. Breathless claims to the contrary notwithstanding, that is all the free market amounts to. With Leo XIII having described the rights of property as "inviolate" in one encyclical and "sacred and inviolable" in another — phrases the Left has spent the past century trying to explain away, I might add — the Church would have to acknowledge the essential justice of a market economy at some level, even if she might for whatever reason still have complaints to register here and there.

The authority of the bishops in the Church, including the supreme pontiff himself, involves matters pertaining to faith and morals. Important as that authority is, it is mere superstition to think it confers upon them an expertise in secular disciplines. It is one thing to enumerate general principles or worthy goals, but it is quite another to propose the specific policies that are most likely to achieve those goals, or even to avoid policies that may wind up frustrating them. These latter skills necessarily involve a working knowledge of the mechanics of the discipline in question.

Several years ago, Archbishop John J. Myers of Newark, New Jersey, made something like this point himself with reference to economics:

For example, our preferential option for the poor is a fundamental aspect of this teaching. But, there are legitimate disagreements about the best way or ways truly to help the poor in our society. No Catholic can legitimately say, "I do not care about the poor." If he or she did so this person would not be objectively in communion with Christ and His Church. But, both those who propose welfare increases and those who propose tax cuts to stimulate the economy may in all sincerity believe that their way is the best method really to help the poor. This is a matter of prudential judgment made by those entrusted with the care of the common good. It is a matter of conscience in the proper sense.

In other words, there is far more room for legitimate debate on these questions than some people seem prepared to concede.

Another claim is that Catholic free-marketeers have defined the sphere of faith and morals too narrowly, and that the popes’ statements about the economy are a legitimate subset of those areas of life over which they have been given divine authority to instruct the faithful. The popes, this argument goes, have every right to speak out on economic matters since such things are not utterly distinct or removed from moral concerns.

This argument, too, misfires. No one denies that economic activity carries a moral dimension. The pope is obviously well within his rights to condemn theft or fraud, or to instruct the faithful on the need to be generous with their wealth. He may likewise condemn government policies that involve oppression and injustice, such as burdensome taxation or inflation of the money supply. Thus, no one is saying that action in the economic sphere (or, for that matter, the medical or any other sphere) is exempt from moral evaluation.

The point is that the cause-and-effect relationships that constitute the theoretical edifice of economics are not a matter of faith and morals. They do not fall within the range of subjects on which a Catholic prelate is endowed with special insight or authority. Catholic laity cannot head up petition drives against them. They are simply facts of life. Facts cannot be protested, defied, or lectured to; they can only be learned and acted upon. There is no use in shaking our fists at the fact that price controls lead to shortages. All we can do is understand the phenomenon, and be sure to bear it and other economic truths in mind if we want to make statements about the economy that are rational and useful.


The real issue at stake, which is obscured by these straw-man objections, is this. Suppose an ecclesiastical document should recommend a particular economic policy as being morally necessary, because its drafters believe it will make the poor better off. Suppose further that they consider it so obvious that this policy will improve the lot of the poor that they do not consider the possibility that it could have any other effect, that there could be any good economic reason for opposing it, or even simply that a trade-off exists between the good outcome they hope for by the policy and unfortunate, unintended side effects of that policy. And now suppose that the policy will in fact not only not improve the position of the poor, but may also make it even worse. What are economically astute members of the faithful to do? Are they forbidden to observe that no one can make reality otherwise than it is, or make A cause B if in the nature of things A inhibits B?

Various episcopal conferences have issued letters on the economy whose recommendations are, to my mind, almost uniformly unwise. That observation is not intended to insult the bishops; like anyone else, they are liable to give poor economic advice in the absence of formal training or at least substantial reading in the subject, neither of which their schedules typically allow.

And here is the problem. It is not as if such policies are introduced with the proviso that, yes, they will make us all poorer, but justice demands that we implement them anyway. They are assumed to be good for workers and the poor from a material standpoint. But what if they are not? What if they make the poor worse off than they would otherwise have been? There is no a priori reason simply to assume they will not, and there are plenty of good reasons that they will. This hole in Catholic social teaching is rarely acknowledged, much less addressed. There is nothing sinister or disobedient about simply pointing it out. Those who would shut down such discussion play into the worst Protestant caricatures of the Catholic Church.

A proposal that arises in many Catholic circles is for a "living wage," which would allow a worker sufficient income to allow his family to live in reasonable comfort. Just the other day I came across an article in a traditionalist Catholic newspaper offhandedly calling for this very thing. Not even for a moment did the author suppose that the matter could be more complicated than this, that there might be any negative consequences, or that an entire field of study exists whose purpose is to understand the various interrelationships that constitute the nexus of human exchange. Wages aren’t high enough? Why, we’ll just pass a law and force them up.

Vainly barking commands at the economy cannot make reality otherwise than it is. We may as well harangue the law of gravity for dashing our hopes of soaring through the air. All people of good will would be delighted if suddenly, for the first time in world history, everyone earned a wage we considered comfortable. But if the human will alone could make everyone prosperous, then what Bangladesh lacks is not capital and secure property rights but enough protests and vigils. In what other field do Catholics feel justified in making solemn pronouncements without knowing the first thing about the subject at hand?

I lack the space here to explain just how destructive and ill-considered living wage proposals are. (I did, however, write a chapter on the subject for Philip Booth’s collection, Catholic Social Teaching and the Market Economy, published by the Institute of Economic Affairs; the whole book is available for free download here.) What I can explain is why a market economy tends to make real wages rise — and show that the process has nothing to do with, and succeeds very much in spite of, the countless interventions into the economy that are supported out of a combination of ignorance and envy.

In a free-market economy, businesses invest most of their profits in capital goods designed to make labor more productive. My own father was a forklift operator in a food warehouse for 15 years. The forklift made it possible to move and stack far more pallets than a worker could have done in the past, and to reach heights that would have been impossible with his bare hands. Likewise, a steam shovel can do the work of many men with regular shovels. The combined result of all this is that the economy can now produce far more than before. That is how wealth is created: We can produce more with the same (or a lesser) amount of labor. And no, that doesn’t mean we will run out of jobs; unless we are in the Garden of Eden, there are always unsatisfied wants and thus more to do. It means labor can now be released to produce other things for which the requisite labor had not previously been available.{mospagebreak}

Thanks to this capital investment, firms can now produce in much greater quantities than before, and at lower cost. Under competitive pressures, firms pass on these cost cuts to consumers in the form of lower prices, better quality merchandise, or a combination of both. (We don’t see these price cuts so clearly in our economy, thanks to a Federal Reserve System whose inflationary policy makes nearly all nominal prices and wages rise over time. But the process we are describing is at work when wages rise faster than prices.)

Our standard of living increases, therefore, not because government takes from the rich and gives to others; the number of rich people is relatively low compared to what people think, and moreover the rich eventually catch on and stop working or hide their income if they know the envious are going to keep taking it from them. And it isn’t because labor unions "struggle" with employers to win concessions. Our standard of living increases because business firms can invest in machinery that makes it possible for more and more goods to be produced with fewer and fewer hands, thereby increasing the overall amount of material goods available and rendering them less and less expensive.

This wonderful process can be seen at work in our everyday lives. Americans need to work fewer hours to earn the purchasing power necessary to buy the goods they need than they had to in the past. In 1950, for example, Americans had to work six minutes to earn the money that would buy them a loaf of bread; by 1999 that was down to just three and a half minutes. To be able to buy a dozen oranges in 1950 took 21 minutes of labor. It was only nine minutes by 1999. Paying for 100 kilowatts of electricity required two hours of labor in 1950, but only 14 minutes in 1999. Someone in 1900 would have had to work nine hours, as compared with four hours in 1950 and three hours in 1999, to earn the money to buy a pair of jeans. For a three-pound chicken, it was 160 minutes in 1900, 71 in 1950, and 24 in 1999. I could go on.

Anything that interferes with capital accumulation — in other words, just about everything you hear advocated on TV and, sad to say, in your diocesan paper — retards this salutary process and thus keeps the average person’s standard of living from rising.

This analysis also helps us to understand the fallacy in the argument I sometimes hear in Catholic (and other) circles that labor deserves special privileges at the expense of capital because of how indispensable it is to production. This claim dubiously extrapolates from an isolated remark in Rerum Novarum to the effect that it is only by the exertion of human labor that states grow rich. (Leo XIII spoke better than these critics when he said that labor and capital were naturally complementary, and that each needed the other.) But how much could laborers produce with their bare hands alone, absent the machinery that their employers’ investment of saved funds made possible?

The facile reply that capital equipment also requires labor for its production, and that this demonstrates the primacy of labor yet again, is answered simply: Brawn alone will never produce a Pentium processor or even a steam shovel. Only when informed by the knowledge of inventors and supplied with the capital saved by capitalists can the average laborer produce even the tiniest fraction of what he now produces. If anything, it is capital that deserves special consideration: Perhaps laborers should hand over a portion of their paychecks to their employers to compensate them for the abstention from consumption that made the investment in their capital equipment possible.

I say that in jest, of course. Wages should be determined according to the market, not on the basis of silly propositions and counter-propositions regarding the relative worth of labor and capital.

We sometimes hear about the "preferential option for the poor," a phrase that originated with liberation theology but that has more or less been adopted by mainstream Catholic thinkers. It means we should formulate economic policy, and design our institutional framework, with a special eye to improving the well-being of the poor in particular.

Now consider: No one protested against poverty in the year 1300. That is because everyone took for granted that poverty and squalor were facts of life that no amount of protest could efface from the story of human existence. That over the past two centuries we have seen protests against what poverty that remains is itself an indication of what an extraordinary engine of production and prosperity the market is. For the first time, it suddenly seemed possible that grinding poverty could actually be conquered, that enough wealth could be created to make at least the worst human misery a thing of the past. Thus, the market is the "preferential option for the poor."

The extension of the market economy to more and more areas of the world has made possible the greatest population explosion of all time — good news, one would think — and has reduced the incidence of extreme poverty more than any other mechanism in history. The market economy helps the poor in yet another way: by catering to a mass market rather than focusing mainly on luxuries for the few, the market makes the average person’s well-being into its primary goal. The poor also happen to suffer the least deprivation and enjoy the greatest material comforts (again, material comforts aren’t everything, but they are something) in countries whose economies come closest to a free market.

Supporters of the market are invariably accused of materialism, focusing on material goods at the expense of higher things, when they make such points. The correct reply to this strange objection, it seems to me, is twofold.

First, it is because the economy is more productive and can yield more goods with less effort that people can enjoy more leisure time with their families and spend more time cultivating piety and pursuing what we might call the higher things. That is an unimpeachable and non-materialistic reason to favor free, unhampered capital accumulation. The spread of market economies has made possible a dramatically lower infant mortality rate; only a fool would accuse people of "materialism" for cheering developments like this. One traditional Catholic newspaper, though, carried an article several years ago by an opponent of the market economy who actually discounted the market’s extraordinary reduction in infant mortality rates on the grounds that parents who grieved too much for a dead child were too attached to this world. I doubt I need to compose a reply to that.

Moreover, the corpus of Catholic social teaching, from papal encyclicals to the statements of bishops’ conferences, takes for granted that various kinds of interventions or central planning will make people materially better off. Msgr. John A. Ryan, for example, the American priest who perhaps more than any other attempted to reckon with the question of labor and wages, argued that men are "more susceptible to religious influence [and] can know and serve God better when they are contented and comfortable than when they are impoverished and miserable." As he said again and again, his belief that the material well-being of workers would be increased by government intervention into the labor market motivated his efforts on their behalf. So if the economists are "materialistic," then so is Catholic social teaching itself — and I rather doubt our accusers wish to back into that corner.

All kinds of aggression against private property have been proposed on the grounds that, after all, the Church does not teach that the right to property is "absolute." But whether property rights are absolute or not (and a minority tradition extending from Henry of Ghent through Pope John XXII and then to Leo XIII suggests that they are), it does not follow that it is the state rather than the individual conscience that must do the curtailing.

St. Thomas Aquinas, for example, argued that even a sin like prostitution could be tolerated if suppressing it would lead to still greater evils. But if prostitution can be tolerated, then certainly a positive good like private property can, if curtailing the rights to property would likewise lead to greater evils. Entire books have been written detailing those evils, plenty of which I describe in The Church and the Market.

All in all, state power to aggress against property owners inevitably encourages man’s most predatory instincts, giving him an incentive to devote less time to satisfying the needs of his fellow men and more time to using the state’s machinery of coercion to loot them for his own selfish benefit. Since the release of such instincts will seriously undermine the common good, I see no reason that someone could not cite St. Thomas’s principle and thereby be perfectly at liberty to oppose expansions of state power over the economy on these grounds.

Pope John Paul II was fond of the maxim that people should be treated as ends in themselves, rather than as mere means to ends. Only the market respects this principle, since transactions are allowed to occur only when both parties give their consent. No one may employ the state’s machinery of violence against another to make the latter bow to his will, hand over his money, or otherwise act against his normal inclination.

According to John Paul II, "The moral causes of prosperity . . . reside in a constellation of virtues: industriousness, competence, order, honesty, initiative, frugality, thrift, spirit of service, keeping one’s word, daring — in short, love for work well done. No system or social structure can resolve, as if by magic, the problem of poverty outside of these virtues." These are precisely the virtues that the market economy fosters.

These ideas are not foreign to Catholic tradition: The Late Scholastics of the 16th and 17th centuries favored an economy very largely free of government controls, and John Paul II’s Centesimus Annus(1991) reflected an increasing appreciation for the moral and material benefits of non-coerced economic exchange. The less heed we pay to slogans and propaganda, and the more we study the question on its merits, the more attractive does the market become.

Thomas E. Woods Jr. (view website), a senior fellow at the Ludwig von Mises Institute, won first place in the 2006 Templeton Enterprise Awards for his book The Church and the Market: A Catholic Defense of the Free Economy, which has been translated into Italian, Polish, and Spanish. His other books include How the Catholic Church Built Western Civilization and, most recently, Sacred Then and Sacred Now: The Return of the Old Latin Mass. This article is based on remarks delivered during the author’s December lecture tour of Poland.

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