Pope Benedict XVIThe encyclical Caritas in Veritate or "Love in Truth," was published on July 7th, 2009. In it, Pope Benedict XVI describes how the social doctrine of the Church is to be framed by love in truth: "The Church does not have technical solutions to offer" to the grave socioeconomic problems we face, but "she does have a mission to truth to accomplish" (Caritas in Veritate paragraph #9). Only with truth, is man capable of grasping the values that are necessary to ensure that political systems do not trample on freedom and do deliver the justice they promise.
At an interpersonal and small group level, "to love someone is to desire another person's good" (#7). At a larger societal level, the Pope points to a love that desires the "common good," that is, the good of the community of people. Every Christian, he asserts, is called to practice this love of the common good according to his vocation and level of influence, just as he is called to practice the love of neighbor directly and outside the mediation of institutions (#7). This love for the common good must take place within an environment of ethics and freedom in order to produce integral human development. Economic structures and institutions are by their nature instruments of human freedom: "Only when it is free, can development be integrally human" (#17). The economy, therefore, is not autonomous and cannot be divorced from ethics. When such a separation is attempted, economic, social, and political systems trample on freedom and fail to deliver the justice they promise (#34).
40 years ago, Pope Paul VI's Populorum Progressio included, among other goals, rescuing people from hunger, deprivation, diseases, and illiteracy. It also advocated promoting their active participation in the economic process, their evolution into educated societies, and the consolidation of democratic regimes capable of freedom and peace. In Caritas in Veritate, Pope Benedict asks to what extent these expectations have been met by the model of development adopted in the past decades, particularly in the light of successive economic crises. Since these expectations have not been met under the current model, Benedict calls for a redefinition of the meaning and the goals of economics (#32).
From a classical-liberal, Austrian, and free-market perspective, many will agree with the general framework that the Pope has outlined above, particularly those who accept an Aristotelian, Thomistic, and Rothbardian approach to the ethical foundations of voluntary exchange. However, when Benedict transitions from a philosophical framework to specific economic analysis and policy recommendations, particularly as he tries to carefully maintain a "middle of the road" approach to the logic of the market and economic crises, many will take exception.
Perhaps one policy recommendation encapsulates the problem: Benedict calls for
a reform of the United Nations so that the concept of the family of nations can acquire real teeth.… To arrive at a political, juridical, and economic order which can increase and give direction to international cooperation for the development of all peoples in solidarity. To manage the global economy; to revive economies hit by the crisis; to avoid any deterioration of the present crisis and the greater imbalances that would result … for all this, there is urgent need of a true world political authority. (#67)
Benedict's logical support for this policy stems from the following faulty arguments:
The market is the institution that permits the exchange of goods of equivalent value between two individuals in order to satisfy their needs (commutative justice) (#35).
Since the market cannot solve all social problems, since it creates problems of its own, and since economic action is merely an engine of wealth creation, it must be complemented by the political action of the state to intervene for the purposes of redistribution of wealth (distributive justice) (#36).
Profit is a means for the allocation of scarce resources, but profit risks destroying wealth and creating poverty if it does not recognize the common good as its ultimate goal (#21).
The market cannot produce by itself the social cohesion that it requires to function well (#35).
In a world economy, redistribution of wealth and regulation of financial institutions cannot be carried out by the current territorial constraints of states; therefore, a world political authority is needed.
Since Benedict makes a call for truth, the reader should expect the encyclical to go through a step-by-step logical deduction, via cause and effect relationships, to connect voluntary exchanges between individuals in a free market to the deficiencies observed in the current model of economic development. Benedict does not take this approach. Instead, he simply assumes that this correlation is obvious and true.
But Benedict's definitions of the market and of commutative justice are mistaken. In a free market, individuals do not exchange goods of equivalent value. They exchange goods of unequal value. If the values were equivalent, market participants would be indifferent and there would be no reason to make the exchange. It is precisely because a buyer values an apple more than 25 cents and because a seller values 25 cents more than an apple, that the buy/sell transaction takes place. This error originated in Aristotle's treatment of exchange in his Nichomachean Ethics (Book V, p. 5), it was restated in Aquinas's treatment of commutative justice in his Summa Theologica (q. 61 a. 2) and is repeated by Pope Benedict.
As Ludwig von Mises argues, "it is precisely the disparity in the value attached to the objects exchanged that results in their being exchanged." This insight means, Mises continues, that "just as there is no standard and no measurement of sexual love, of friendship and sympathy, and of aesthetic enjoyment, so there is no measurement of the value of commodities."[1] We cannot measure value, we can only prefer one good to another. In other words, I can say "I prefer this apple to 25 cents; therefore I will make the exchange," or "I prefer Susan to Beth; therefore I will ask Susan to dinner," but I cannot say "this apple is worth 10% more than 25 cents" or "I like Susan three times as much as Beth." Since we cannot measure value, we cannot define the market as the place where actors establish equivalency of value between goods.
Now why is this such a critical insight? If central planners and their supporters believe they can objectively measure the value of goods, then they will believe that equivalence can be established. It follows that belief in redistribution of income and wealth — based on an arbitrary standard — can be justified. Once a policy of redistribution is pursued, it is a very small step for the state and its apologists to justify intervention in matters of commutative justice itself, such as wages, prices, costs, and interest rates. Examples of these errors in theory and practice abound, but the most notorious one is Marx's labor theory, which erroneously states that capitalists rob workers of the surplus value of their work and maintain them at subsistence income levels. According to the socialists who follow Marx, then, the state is justified not only in expropriating the means of production to correct this distributive injustice, but also in managing the factors of production and the economy as a whole by central planning, statistics, and other mathematical tools.
Even if we were to accept Benedict's definition of commutative justice, it does not follow from the inner logic of his argument that he can justify state intervention in the regulation of wages, prices, and income, precisely because each of these is a commutation matter between individuals and not a distributive justice matter pertaining to common goods. And moreover, even if we were to accept the Pope's policy recommendation encouraging the political action of the state to intervene in commutative justice for the purposes of wealth redistribution, it does not logically follow that the redistribution itself should be aimed at achieving a certain desired level of equality between the haves and the have-nots. Indeed, Aquinas states very clearly that redistribution of common goods under distributive justice does not use the principle of equality but the principle of proportion between things and persons (Summa Theologica, q. 61 a. 2); therefore, in distributive justice, the more prominent a person's position in the community, the more of the common goods he should receive.
Benedict's call to temper the pursuit of profits with the pursuit of the common good misunderstands the function of the entrepreneur in creating wealth and ameliorating poverty.[2] It is impossible to conceive of the common good apart from its connection to entrepreneurial action. The French word 'entrepreneur' comes from the Latin "prehendo," to lay hold of, seize, grasp, catch, detain, or arrest.[3] It is an individual's entrepreneurial action in the pursuit of the goals he values most, using scarce factors of production, taking into consideration his costs, and guided by expected future prices in an unhampered market economy that creates wealth and diminishes poverty for society. Motivated by profit, the entrepreneur plans and then acts to satisfy the needs of other individuals. The common good is the unintended, but logically necessary byproduct of the entrepreneurial process. There exists no other rational mechanism to achieve the common good.
Pope John Paul II recognized the contribution of the entrepreneur when he stated that
organizing such a productive effort, planning its duration in time, making sure that it corresponds in a positive way to the demands which it must satisfy, and taking the necessary risks — all this too is a source of wealth in today's society. In this way, the role of disciplined and creative human work and, as an essential part of that work, initiative and entrepreneurial ability, becomes increasingly evident and decisive.[4]
It is precisely distributive justice mechanisms controlled by the state which interfere with entrepreneurial activity, destroy wealth, and create poverty. The common good is the result of an integral dynamic process of human action in an environment of freedom. The process is dynamic because it changes every second by the trillions of individual interactions in the economy. If this process is manipulated or controlled partially or totally by political action through central planning, taxation, fiat money, etc., with the noble intent of improving social cohesion, the process is no longer dynamic. It becomes static, predetermined, and dead, because it is no longer a reflection of the trillions of individual subjective valuations of the marketplace. A static conception of the economy destroys wealth and capital, and creates the very malfunctions of the current model of development that Benedict deplores.
The social cohesion, solidarity, mutual trust, emancipation, friendship, reciprocity, and the pursuit of the common good of which Benedict speaks (#35 & #36) are the result of individual human actions. Society is the outcome of human action in an environment of the division of labor. Humans perceive that it is more efficient and effective to specialize in a particular function and then trade in the marketplace. It is because humans intuitively know this truth that friendship, belonging, solidarity, and even charity can and do arise in society; but the cause and effect relationship between human action and feelings of cohesion flow from the first to the second and not the other way around. Cohesion is the result of individual human action and not its precondition.[5]
Unhampered entrepreneurial action in free markets is not merely the most efficient and best way to achieve the common good, it is the only way. There is no "middle of the road." As Mises puts it, "The market economy … and the socialist economy preclude one another. There is no mixture of the two systems possible or thinkable. Production is either directed by the market or by the decrees of a production tsar."[6]
Profits, the benefit and incentive that the entrepreneur obtains from his actions, are critical not only in guiding him to most efficiently allocate scarce resources, but in guiding the selfish interests of all economic actors to work towards the common good. Contrary to Benedict's assertions that the market becomes a negative force if it is guided by selfish ends (#36), actors in a free market — and the entrepreneur in particular — do not have to be angels, saints, or unselfish to act to the benefit of the common good. Individuals simply need to employ means with the aim of attaining the goals they value and entrepreneurs simply need to comply with the wishes of the consumers who patronize them.
Caritas in Veritate represents a lost opportunity to continue to develop the classical-liberal ideas contained in Pope Benedict's first encyclical, Deus Carita Est, in his previous writings on Christianity as a philosophy of creative freedom, and in John Paul II's treatment of Catholic Social Doctrine in Centesimus Annus.
John Paul II placed the state in its proper role, that of guaranteeing individual freedom and private property; he placed individuals, groups and associations (and not the state) in the primary role of overseeing human rights in the economy; he reinterpreted the principle of subsidiarity, asserting that it limits the role of the state even when it has to intervene in cases of emergency or market failures; he criticized the role of the welfare state and placed responsibility for welfare in the hands of "neighbors," individuals, and associations; he recognized the universal social dimension of labor markets, individual initiative, and entrepreneurship; he recognized the primacy of the free market as the most efficient and effective economy; he acknowledged the proper role of profit and pointed out how critical human capital is to the firm; he recognized the importance of religious values in capitalism and the necessary role of freedom in all dimensions, not just the economic; and, finally, he derived private-property rights in the same fashion that John Locke and other classical liberals do.[7]
Benedict had already moved in the direction of John Paul II's breakthrough by stating in Deus Carita Est that
we do not need a State which regulates and controls everything, but a State which, in accordance with the principle of subsidiarity, generously acknowledges and supports initiatives arising from the different social forces and combines spontaneity with closeness to those in need.… In the end, the claim that just social structures would make works of charity superfluous masks a materialist conception of man.[8]
I speculate that, in his deep concern to respond to the current worldwide economic depression, Benedict surrounded himself with advisers who believe in using political power to redistribute income and resources. As a result of his misunderstanding of economic theory, he failed to see the connection between every depression we have experienced in modern times and governments' intervening in the free market — the very system that, if left free of distributive-justice actions on the part of governments, would guarantee the attainment of the common good.[9]
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Notes
[1] Human Action pp. 204–205
[2] For Rothbard's account of "false organismic analogies" such as the common good, see "The Mantle of Science." For Frederick Hayek's critique of the concept of the common good, see Road to Serfdom p. 60
[3] For a discussion on the etymology of the word "empresario" ("entrepreneur" in Spanish), see Jesus Huerta de Soto, "Socialismo, Calculo Economico y Funcion Empresarial" pp. 42–43
[4] Centesimus Annus #32
[5] For a discussion of how society arises from the division of labor, see Human Action p. 144
[6] Human Action p. 259
[7] For more on this theme, see "Part 1 Benedict's 2nd Encyclical: Bigger Government?"
[8] Deus Caritas Est #28 b)
[9] For one account of the Austrian theory of the business cycle, see Murray Rothbard's "Economic Depressions: Their Cause and Cure"
