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By Toby Baxendale, on 1 August 10
We are told in this weekend’s Sunday Telegraph that:
Listening to David Cameron’s first speech on the steps of Downing Street, Archbishop Vincent Nichols says he nearly fell off his chair at the Prime Minister’s pledge to work for “the common good’.
His surprise was down to the fact that only a few weeks earlier, Catholic bishops had published a document offering election advice to churchgoers called “Choosing the Common Good”. Archbishop Nichols is “encouraged at the echoes of Catholic teaching emerging in the language of the new Coalition Government.” The article goes on to say “the Archbishop appears filled with an infectious optimism that the country could be on the cusp of returning to a more cohesive, united society.”
Nichols said,
If we can generate that sense of volunteering and the sense of fulfilment that comes from it in our society, then we would be better for it. The Big Society is a step in that direction.
It should come as no surprise to our Catholic leader in the UK that a Conservative Prime Minister should be in tune with large parts of Catholic Social Teaching. One of the greatest influences on Thatcher for example was F A Hayek, who was born a Catholic Christian, although he later became agnostic. The final sentence of his last book, The Fatal Conceit does seem to offer up a legitimate view that re reverted to his Catholic Faith.
In 1993 the Hayek Memorial Lecture “Two moral ideas of business” run by the Institute of Economic Affairs, Michael Novak in his book of the same year “The Catholic Ethic and the Spirit of Capitalism” revealed to us that Hayek had been having extensive conversations with Pope John Paul II who wrote the encyclical “Centesimus Annus.” Chapters 31 and 32 are very Hayekian.
As Karol Wojtyla, the old Pope’s doctoral Thesis, “The Acting Person,” is replete with observation that it is the creative and dynamic interaction of free citizens that causes social co-operation. This idea of course underscores Hayek’s conception of the spontaneous order of social co-operation.
Could this be David Cameron or F A Hayek writing? Is this the same as the spontaneous order of human co-operation or the mutual co-operation of The Big Society? Are they the same?
By intervening directly and depriving society of its responsibility, the Social Assistance State leads to a loss of human energies and an inordinate increase of public agencies, which are dominated more by bureaucratic thinking than by concern for serving their clients, and which are accompanied by an enormous increase in spending, In fact, it would appear that needs are best understood and satisfied by people who are closest to them who act as neighbours to those in need. It should be added that certain kinds of demands often call for a response which is not simply material but which is capable of perceiving the deeper human need.
Well it is from Centesimus Annus, by Pope John Paul II No 48 1991.
Archbishop Nichols should be aware that the Cameron modernised Conservative Party, which (whether it knows it or not) sits on a great body of thought that is deeply rooted in Catholic Social Thought.
I have written here about the Thatcherite view of society contrasted with the Cameronian one here. It is worth highlighting some of these points again.
Thatcher’s Infamous Quote
From an interview given by Prime Minister Margret Thatcher to Women’s Own magazine, October 31, 1987:
I think we have gone through a period when too many children and people have been given to understand “I have a problem, it is the Government’s job to cope with it!” or “I have a problem, I will go and get a grant to cope with it!” “I am homeless, the Government must house me!” and so they are casting their problems on society and who is society? There is no such thing! There are individual men and women and there are families and no government can do anything except through people and people look to themselves first. It is our duty to look after ourselves and then also to help look after our neighbour and life is a reciprocal business and people have got the entitlements too much in mind without the obligations, because there is no such thing as an entitlement unless someone has first met an obligation [...]
I wrote,
It would be ignorant to say that there is no such thing as society. Society is the purposeful actions of all the individuals who participate in it. As such it is simply the sum of all its parts. Delve a little bit deeper and you will see that is in fact the most liberating and fulfilling invention of mankind discovered by the use of reason. The ability for man to cooperate and pursue his ends is society. Working within the societal structure of mutual co-operation to facilitate exchange of goods and services, you get the additional benefits of friendship and a sense of belonging or togetherness. This is often hailed as one of the greatest benefits of living and cooperating together.
The principle of the division of labour that allows us to avoid providing individually for all our goods and services, shelter and warmth, with the necessary impoverishment this would mean for the majority (and probably death), make us what we are as human beings. We are lifted out of the survival of the fittest war of all against all.
The Darwinian nightmare is not writ large in the human species as it seems to be for most other life forms.
Mrs Thatcher was taken out of context, as can be seen when you read the full text of the talk. However I suspect she, or her speech writers, displayed little understanding of the true benefits of the discovery of mutual human co-operation. I think they were also of the school of thought that would quite rightly argue for less government, as is Cameron, one of her successors. However she did not have much of an idea of what to put in its place. The transition from a government-run, welfare-providing, rule-making, centralised decision-making society to individual responsibility, local-community-led society is quite a painful process. To be smoothly transitioned to a society more compatible with liberty, I fear warrants only a constructivist approach to getting top-down government out of our lives and to rebalancing responsibility away from government and to the individual and the family. Cameron is spot on the money with regard to this.
Consider these extracts from “The Big Society” (delivered on the 10th Nov 2009) speech by David Cameron our aspiring PM.
I believe that in general, a simplistic retrenchment of the state which assumes that better alternatives to state action will just spring to life unbidden is wrong. Instead we need a thoughtful re-imagination of the role, as well as the size, of the state.
And:
The size, scope and role of government in Britain has reached a point where it is now inhibiting, not advancing the progressive aims of reducing poverty, fighting inequality, and increasing general well-being. Indeed there is a worrying paradox that because of its effect on personal and social responsibility, the recent growth of the state has promoted not social solidarity, but selfishness and individualism.
This is an extremely important point. Absent personal responsibility and the mutual bonds that bind us together through the universal division of labour fall away. The selfish, those who do not take individual responsibility, the person who says he has a “right” to a job, a house, an income etc, these people believe others must provide for them. This is selfishness in its extreme, if they are fit and ready to work. We all suspect that with 2.7 million people on Incapacity Benefit, there is extreme selfishness and little societal / individual responsibility at play. In war, enemies have tried their best to bomb the hell out of us and incapacitate as many of us as possible, but I suspect in 1945 there were not 2.7m people incapacitated in the UK!
Cameron goes on to say
And here lies the rub.
The paradox at the heart of big government is that by taking power and responsibility away from the individual, it has only served to individuate them. What is seen in principle as an act of social solidarity, has in practice led to the greatest atomisation of our society. The once natural bonds that existed between people – of duty and responsibility – have been replaced with the synthetic bonds of the state – regulation and bureaucracy.
Our alternative to big government is the big society.
But we understand that the big society is not just going to spring to life on its own: we need strong and concerted government action to make it happen.
Archbishop Nichols should be not surprised the modern Conservative Party has moved on and improved from the raw Thatcherite approach in its positioning of the free society with that of the Modern Catholic Social Teaching that it has so much in common with. When the Pope visits the UK this September, we trust that his advisors and Cameron’s celebrate the great vision of the last Pope, Hayek and Cameron himself on these matters.
Some related articles that go deeper into some of these issues mentioned above are listed here
Afterthought
It is a great shame that the Pope will not be visiting Northern Ireland as there is a large Catholic minority that has little in common with its political representatives who are largely statist, interventionist top down socialist meddlers who have little in common with Catholic teaching. Those Catholics actually have more in Common with The Big Society vision of Cameron and no political representation.
By Toby Baxendale, on 14 April 10
March 19th 2010, Blackfriars, Oxford University.
When I first started dipping my toe into writing and researching Catholic social teaching, I did not see a particular good picture. The economic thinking which seemed to inform Catholic comment on social issues seemed to be weak. Much Christian comment on economic matters has tended to ignore not just empirical evidence but also, more or less, incontrovertible economic laws as well as ignoring much in the tradition of Catholic social teaching itself.
But, before I move on, I would like to pay tribute to the recent English and Welsh Catholic Bishops’ letter. It demonstrates both a considerable effort in absorbing and articulating some of the best of the tradition of Catholic social teaching as well as considerable humility in terms of the authors recognising the limits to their competence on the technical detail of economic matters. And this humility is very important when talking about these issues. Unintended consequences, about which the French nineteenth-century Catholic economist Frederic Bastiat wrote so well, are so ubiquitous in economics that, if you google the three words together, you get 1,240,000 responses. It should be a sobering thought for clergy who comment on economic matters that this is actually more than the total worldwide google responses for the words Catholic social teaching!
Many Christians grudgingly accept a free economy because of the material benefits it brings. But, today, I want to go further than this. A free economy should be seen as something that is intrinsically good of itself. Similarly, we should be aware of the problems of government intervention not just because of the damage governments can cause to material welfare, but because it can undermine certain basic precepts of a great, virtuous society. It is notable, in fact, that there is growing acceptance of some of what I will say from those on the left. Last year, I gave one of the four public lectures at Westminster Cathedral and John Battle, the Labour MP, gave another. He may have disagreed with my lecture profoundly but, I agreed with much of his. What was interesting about his lecture is that when he talked about “socialism” he was referring to organisations such as cooperatives and so on which I would regard as part of and parcel of a free economy. There was almost nothing in his lecture I disagreed with except his use of terminology.
My thesis about the importance of a free economy, the primacy of voluntary action and the subservience of government to the individual and the family is firmly rooted in the great history of Catholic social teaching. It is of interest to note that both the free market Nobel Laureate F. A. Hayek and Pope John Paul II, in their last significant books on the subject, traced the evils of the world – though for different reasons – to Descartes. That should make us pause for thought. Indeed, it is also interesting that both Francis’ centre and those who argue from my perspective, get their inspiration from the late scholastics of Salamanca as do modern followers of F. A. Hayek.
The case I want to make is that Christians should be very content with a market economy. They should not be trying to undermine a market economy but trying to strengthen it and populate it with virtuous people. This is a position, in my view, which is certainly compatible with the late scholastics and which was most clearly revived in John Paul’s encyclical Centesimus annus. But let me begin with some quotations from encyclicals about socialism. We can often understand a concept such as the market economy better by discussing its opposite.
Socialism gets a rough ride in papal writings. It starts with Pius IX, (slide) the Tablet’s bete noire. Pius IX had a certain way with words. In the 1840s he argued that socialists misapply the terms ‘liberty’ and ‘equality’ and are preparing people for “plundering, stealing, and usurping first the Church’s and then everyone’s property.” He then described socialism as a pestilence. Having said that, though Pius IX was against socialism, he was against most things, so let’s move on.
A little later, in 1891, this is Leo XIII describing the effects of socialism, (slide) “The door would be thrown open to envy, to mutual invective, and to discord; the sources of wealth themselves would run dry, for no one would have any interest in exerting his talents or his industry; and that ideal equality about which they entertain pleasant dreams would be in reality the levelling down of all to a like condition of misery and degradation.” He then talks about how socialism offends the natural rights of mankind and that its main tenet, the community of goods, must be utterly rejected.
A century later, John Paul II’s critique of socialism strikes a similar chord. He examines socialism in the context of the God-given nature of man. And this is important because, it moves us away from the tired justification of the market economy that it simply provides the best basis for material prosperity. John Paul says, in Centesimus annus: (slide) “the fundamental error of socialism is anthropological in nature. Socialism considers the individual person simply as an element, a molecule within the social organism…Socialism likewise maintains that the good of the individual can be realized without reference to his free choice, to the unique and exclusive responsibility which he exercises in the face of good or evil.”
This critique is not just relevant to extreme forms of socialism but to all forms where families are subjected to illegitimate control by the state. Indeed, John Paul goes on to deal with the specific issue of the welfare state about which he said: (slide) “In recent years the range of such intervention has vastly expanded, to the point of creating a new type of State, the so-called “Welfare State”…[E]xcesses and abuses, especially in recent years, have provoked very harsh criticisms of the Welfare State, dubbed the “Social Assistance State”. Malfunctions and defects in the Social Assistance State are the result of an inadequate understanding of the tasks proper to the State.”
So there is little in formal Catholic teaching to give much comfort to those who believe in principle that the state should play the primary role in economic life and in the provision of welfare. If the Church rejects socialism does that mean she embraces the opposite? Of course, the answer is: “not necessarily”. The opposite economic system may be flawed too. As the old Polish joke goes, “socialism is the exploitation of man by man; capitalism is the opposite.”
Catholic social teaching has criticised capitalism at various times – sometimes in very strong language. Often, though not always, those criticisms relate to the culture of consumerism – consumption for its own sake – which the Popes have perceived is rooted in western societies. The production and consumption of addictive drugs (other than alcohol and cigarettes of which many Catholics approve wholeheartedly), pornography, and so on are undoubtedly disordered uses of economic resources. And the accumulation of material goods for their own sake, must be condemned. But the enemy here should be the sin of materialism and not the market economy.
State intervention in the economic sphere does not save us from materialism as socialism is intrinsically materialistic. It seeks to raise the human condition through increased production and the redistribution of material wealth, though, as Pope Leo noted, it does not succeed. So a debate about materialism does not really get us very far in a debate about socialism versus capitalism. Whether you live in a socialist economy or a market economy or something that combines the two, the love of money will still be the root of much evil – it just manifests itself in different ways in a socialist society.
Before moving on, there is an interesting issue of semantics it is worth bringing out. The term capitalism is often used to describe what I like to call a free economy. This was a term coined by its enemies. The phrase capitalism promotes a focus on structures (labour and capital) and outputs (goods and services) rather than promoting a focus on the human person and human flourishing – or the common good.
John Paul II makes this point. He asks whether capitalism should be the model sought by failed socialist countries and what he says is this: (slide) “If by ‘capitalism’ is meant an economic system which recognizes the fundamental and positive role of business, the market, private property and the resulting responsibility for the means of production, as well as free human creativity in the economic sector, then the answer is certainly in the affirmative, even though it would perhaps be more appropriate to speak of a ‘business economy’, ‘market economy’ or simply ‘free economy’.”
Personally, I prefer the term “free economy” because, as we shall see later, a free economy should be about much more than the production and consumption of goods and services that are bought and sold in the market, but let us look at the market sector of a free economy for a moment.
When we limit ourselves to praising the market economy for its role promoting the common good by providing for material needs we tend to find a grudging acceptance of the market economy by Christians – at best. Even this limited virtue is not unimportant but it is not the whole story. In the Pope’s 2009 Peace Day message, he noted that the eradication of the scandal of serious material poverty needs a thriving economy. Recognition of this should, in turn, lead us to change the way we approach policy in certain areas in which Christians are especially interested. For example, when asking how to approach the problem of poverty in the under-developed world, we should ask first – though development campaigners rarely do – “What causes prosperity?” The answer to that question is “business and enterprise”. We should then ask “what is the institutional framework that nurtures business and enterprise?” If we ask these two questions, we might put less emphasis on government-to-government aid to deal with the problem of under-development and more emphasis on the institutional structures that are necessary to nurture enterprise and that are generally missing in under-developed countries.
But, a free economy should not just be valued for the prosperity it brings. A free economy, being the opposite of the socialist economy that was criticised for anthropological, economic and political reasons by the popes, actually has inherent virtues that a government-directed economy lacks.
Firstly, in a free economy, economic resources are allocated by agreement, peacefully. I buy a pound of sausages from the butcher, he sells them to me. We both benefit from the transaction but we are not in competition and conflict. This is not to say that conflict and competition of a destructive kind do not occur, due to fallen human nature, in a market economy, but the process of mutual contracting substantially limits the damage caused by the pursuit of unrestrained selfishness. It is an extraordinary thing that a business can only prosper by co-operation with others and by serving others. It really should be a cause of some reflection.
A socialist system, on the other hand, involves allocating a fixed set of resources in a system that is necessarily beset by conflict. Whether it is the fight for the fixed number of places at state schools or the inter-generational conflicts that are being acted out on the streets of Greece, bargaining and political positioning are the very mechanisms by which governments come to resource allocation decisions.
Allocation of resources by government planning may be tolerably peaceful in a society with a very high degree of consensus. But we no longer live, if we ever did, in a society which has Christian values that are sufficiently widely shared for the democratic system to be effective in allocating economic resources without conflict.
Markets generally harness self interest – a motive that is completely different from that of selfishness with which the term is often conflated – in a way which genuinely promotes the common good. In diligently pursuing my own objectives, I can only generally succeed if I help others achieve theirs. The brewer earns nothing from producing beer unless people want to consume it. We should therefore welcome the free economy and empathise with it because, with business at its heart, it allows human beings to meet their own needs whilst, at the same time, serving the needs of others. As Pope John Paul II put it, (slide) “The social order will be all the more stable, the more it takes this fact into account and does not place in opposition personal interest and the interests of society as a whole, but rather seeks ways to bring them into fruitful harmony.” In other words the common good – the conditions for human flourishing for all – are quite compatible with the pursuit of benign self interest within a market economy. This is another insight from the late scholastics of Salamanca.
Now, it is, of course, possible for self interest to become disordered – or bent – and turned into selfishness. In the business economy the pursuit of self can do much damage. But the damage is more limited than if the selfish take their place in government and use powers of coercion to achieve their objectives in a centrally planned economy. I would rather a selfish, greedy person worked in a manufacturing or service business than as Finance Minister of an under-developed country or as chief of the secret police. Ultimately, a business must be mindful of the “other” it seeks to serve or it will go out of business.
Now, there is a temptation to think that the market economy needs to be tamed, regulated and controlled for the sake of the common good. It is dangerous, though, to assume that a modern state should through discretionary powers of taxation and regulation – and we should remember that, for example, the state will spend more than the citizen in most EU states next year – direct the market economy towards politicians’ own interpretation of the common good. The market has many self-regulating institutions mechanisms which government intervention has frequently undermined. Once a general regulatory role is given to government, restraining it becomes very difficult – governments like to regulate the market, but who regulates the government? A government is disciplined only by a quinquennial election. My baker is disciplined three times a week by my visits – or otherwise – to his shop.
Government intervention is simply the wrong tool to deal with a problem of a lack of virtue: remoralisation and evangelisation is the correct tool. I have always been genuinely puzzled why so many clergy put so much trust in government and so little trust in evangelisation to make society a better place. If we see a lack of virtue in markets, we cannot assume that this will be tamed by government and that those in government and regulatory bureaus will exhibit the virtues the rest of society lacks.
There is a branch of economics here that is very important called public choice economics. Those – including Christians – like to criticise the concept of self interest at work in markets. But, public choice economics suggests that we cannot assume that people switch off the self-interest switch when they are bureaucrats or political representatives. For this reason, regulatory bureaus tend to expand and acquire more powers. Those who enjoy exercising such powers are attracted to work in such institutions. The middle way is, then, inherently unstable. This is not a pessimistic view of human nature. It is just pointing out that we criticise the concept of self interest in markets then we cannot assume the concept away when government is responsible for the allocation of economic resources. Just look at the budget situation of the US, Japan and almost every EU country. They are all, through the democratic process, piling burdens on future generations in order to finance today’s consumption encouraged by the self interest of voters and politicians.
Interestingly, also, economists increasingly understand the implications of the limitations of human knowledge for political and economic policymaking, and for institutional design. The argument is really quite straightforward. Humans lack the knowledge to centrally plan the economy and achieve outcomes that ensure that goods and services are produced that meet needs and demands. The collapse of the communist economies was, of course, the great manifestation of that but it applies on a smaller scale too. This particular critique should resonate with Christians who should surely be aware of the limitations of the human mind and human planning to try to improve and perfect society. And this is where the problem of unintended consequences that I mentioned at the beginning comes in. Frank Field could address you for hours about the unintended consequences of the welfare system in the UK in terms of destroying families and work incentives. In short, an imperfect human institution – the state – cannot bring to perfection another imperfect human institution – the market.
But, a free economy goes beyond a free market. Indeed, some research suggests that our societies look materialistic not because we have transferred economic power from the government to the market – something which has not, in fact, happened – but because we have transferred economic activity from within the family and civil society (where we provide a service out of love and reciprocity) and into government, and to some extent, the market, where everything has to be paid for.
Furthermore, the free economy has been made to look more like a crude process of materialistic getting and spending as the state has taken primary responsibility for less conspicuous and more wholesome goods and services such as health, education, arts and culture, social insurance, pensions and the regulation of financial markets – all of which were mainly provided, a couple of generations ago, by a mixture of profit-seeking companies, mutual associations, foundations, charities, professions and community associations. The free economy can be a richer and deeper institution than it is currently, and the opportunities for mutuality and solidarity could be much more profound, enriching and effective.
Exploring this further, there are several potential areas where I believe that a renewal of understanding of Catholic social teaching, and its intrinsic compatibility with an economic and social order in which families are at the centre of decision making can make a valuable contribution to political debate. This contribution is based, unsurprisingly on the application of the principles of solidarity and subsidiarity. That renewal, I should add, has begun.
The Church, and certainly many commentators, often talk as if these two concepts are held in tension. Solidarity, it is argued, demands government action to help the poor, the homeless, the sick and so on, whereas the idea of subsidiarity provides a warning to politicians to use the lowest possible layer of government to implement policy and to leave decisions with the family if possible. This is an extreme over-simplification.
When the popes have talked about solidarity and the “preferential option for the poor” they have generally been referring to it in the context of charity – love and service in providing for one’s neighbour without expecting anything in return. This is true from the early uses of the phrase by Pope Paul VI to Pope Benedict’s 2009 World Peace Day Message in which he said (slide) “it is timely to recall in particular the ‘preferential love for the poor’ in the light of the primacy of charity, which is attested throughout Christian tradition, beginning with that of the early Church”.
Indeed, it is a fundamental error to conflate the role of the political system in seeking to help the poor through coercive redistribution with that of people acting spontaneously out of charity. The state should create a just order which promotes the common good. The state may intervene, as a last resort, to try to assist the poor. But, the virtue of solidarity, represented by love and works of charity, arises in the first place from the individual, the family and spontaneously from the community. The political order should not be the main vehicle for the practice of solidarity as it has become in the West. The state, is the last resort because it can only achieve its objectives using coercion and because it is so remote from the needs it is trying to meet – one of the messages of Deus Caritas Est.
As Christians, we need to put the state back in its place. We should make clear the need to give families, voluntary institutions and civil society room to breathe and fulfil their legitimate functions. After all, the first and biggest provider of welfare is the family. The working wife provides for the unemployed husband. Husband and wife provide for the needs of their children. Children will look after their parents and so on. Yet, over a 20 year period at least, the state has acted decisively to undermine the family as a provider of welfare.
Why does the state need putting back in its place? The reason is because of our understanding of the term subsidiarity. The state exists to help individuals, families, the community and civil associations achieve their legitimate objectives. If it does more than this our dignity and freedom in the economic sphere, which natural law demands we are allowed to exercise, is undermined. Indeed, on occasions (perhaps on increasing occasions in the UK) the government can compel us to do things that we, as Catholics, believe to be against God’s will: especially in the fields of healthcare and education.
Subsidiarity means “to help” and from a proper understanding of subsidiarity many direct policy implications follow. I will mention just one – education – where finally the penny is dropping in the Catholic Church in England and Wales. We could have interesting discussions about the environment too, as another issue where similar considerations apply.
With regard to education, we need to clearly articulate the fact that the state exists to provide the framework within which parents, including Catholic parents, can obtain education for their children of the sort that parents desire. The state exists to help families obtain an education for their children. No more. That is what the principle of susidiarity demands. We are increasingly finding that this relationship is being reversed – though the rot set in with the immediate post-war settlement. Catholic schools are becoming agents of the government providing a service of educating children on behalf of the government – albeit in a more or less Catholic context. Indeed, it is interesting that the implicit – and sometimes explicit – message of papal Catholic social teaching in this field is that the state should provide the same support to parents to have their children educated in a private school as is provided in state schools. In others words, the parent and the family should be at the centre of decision making and the state merely provides financial assistance to those families who need it. Such a system – financing parents to obtain education and not controlling and financing schools – would set Catholic parents and schools free: again as is demanded by natural law. It would also, I suspect, lead to the creation of many more Catholic schools that would provide more alternatives for parents that better suited the varied needs, character and aptitude of their children.
In concluding, let me stress that, as the Catechism makes clear, quoting from Centesimus annus, the market economy must be circumscribed in a framework of law so that the market is the servant of human freedom. Where that framework should begin and end is not something determined directly by Catholic social teaching. But, it must protect property – something which is demanded by natural law and which is the basis of a free economy. Throughout the last 200 years, Catholic social teaching has responded positively to the claims for workers rights and condemned certain manifestations of the market economy. Precisely where the relative roles of the state, the market, moral restraint and civil society begin and end is certainly a matter for prudential judgement and is historically contingent. For some Christian economists, the current financial crisis is a failure of the market economy. For others, it is a failure of over-regulated financial institutions, government monetary policy and the inevitable result of governments – especially in the US – underwriting the building up of risks in the financial system. Each view will probably solicit a different policy response consistent with Catholic social teaching.
In summary, my message is this. We need, at least, to empathise with the free economy. All too often as Christians we see certain social objectives that we would like to see fulfilled: the elimination of poverty, education and housing for all, good health services and so on. As a result we call upon the one institution (government) that we know can pass laws that we believe can help us achieve these objectives directly. We should resist the temptation to think in this way because when the state acts it undermines the autonomy of individuals, families, businesses, charities, cooperatives, mutuals and professional and civil associations to act separately and in solidarity to meet the varied needs of families and the joint needs of the community in their own ways. We also frequently find that the result of government action is often precisely the opposite of that intended. If we do not like what we see in a market economy then our response should be to promote virtue, not big government.
We should empathise with the market economy not just because the alternative has proven so disappointing but, because its inherent virtues chime with God-given human nature. The fact that a market economy involves allocating economic resources peacefully, by agreement, is a tremendous thing; the fact that it allows people to use their creativity in the economic sphere for the own benefit but also requires them to serve others in the process is something to be celebrated. The institutional variety in terms of the different types of business and employment relationships – and the variety of goods and services – that we see in a market economy in a small way mirror the uniqueness of each individual whilst the charitable and reciprocal relationships we develop in the non-market part of the free economy reflect the social obligations that we have as a result of being unique members of the same human family.
It is with good reason that the Compendium of Catholic social doctrine states that government intervention in the economic sphere must be a last resort and only continue as long as the special circumstances that require it continue. That is a strong statement and we should take note.
Now it is time to argue. It has been said about Bartalome de Las Casas that in his writing “there was a clear excess of superlatives owing to the fact that [he] thinks in extremes, even in his grammar; he rarely uses one noun when two or three will serve the same task.” He would have pulled no punches so let us now engage in dispute.
By Toby Baxendale, on 22 March 10
Do you think it is very worrying that not one government policy encourages the entrepreneurs of the world to create wealth?
Without wealth creation we are doomed to a long slow decline in the productive capacity of the economy. We are doomed to the stagnating to slow growth economy that all the policies of our Great Leader, Gordon Brown, is inflicting upon us. It is all because he does not understand how wealth is created and the role of entrepreneurship in society. Most politicians are the same, I am afraid to say, with a few shining lights and notable exceptions. This is desperately worrying for all of us.
How is Wealth Created?
I have said here on this site before http://www.cobdencentre.org/2009/09/can-the-manipulation-of-interest-rates-create-wealth/ “I would like you to absent the concept of money and consider a situation of barter. As a butcher, when I kill an animal, I may get for the sake of argument, 10 cuts of meat: this is my production. I only need 2 for my immediate consumption, so with the remaining 8 cuts, I trade with Andrew, a garment manufacturer, for some garments to keep me warm. I consume 2 cuts and I save 8 cuts in order to trade for other goods and services. I need to produce to consume: I need to save/invest to consume.
“If I wish to consume more of Andrew’s garments as I have a family to dress and keep warm, 8 cuts of meat may well not be enough to purchase these new needs and requirements of mine. At this point in time, I am faced with a choice, either my production has to increase so I can generate more cuts to exchange for other goods, or I accept my fate and stay where I am. I decide that I can invent a method of cutting up the parts quicker by using a sharper knife, thus I seek to invent the “steel” or knife sharpener that improves my productivity from generating 10 cuts in a day to 15. With these 5 extra cuts, I can get more garments.
“The problem is, that in order to get the steel built, I need to spend some of my time that would be making the 10 cuts. Thus, I have to save and forgo some consumption while I have the steel built. I also have to rely on my savings — those stored cuts of meat — that I have not consumed to keep me afloat. This is what an economist may mean when he says adding capital to an economy lengthens the structure of production. The steel in this example adds a stage to the capital structure of society, to make me more productive, so I can consume more things.
“To be clear, saving is the only thing that allows this to happen. In this example, my personal capital structure has gone from me with a knife in my hand consuming two cuts a day and exchanging 8 saved portions, to me and a knife and a steel to produce 15 cuts of which I consume 2 and exchange 13 saved cuts. Now Andrew will be doing the same, i.e. lengthening his structure of production to meet my new found desires for more goods. He will also have to save — i.e. forgo consumption — to invest with the sustenance that savings gives him, to become more “capitalistic” or capital intensive in his production structure, to meet my demand.”
In summary, during the passage of time, only an act of saving to invest in a longer capitalistic method of production can lead to more goods and services being produced and consumed. No amount of creating money out of thin air creates more goods and services.
The Austrian School Role of the Entrepreneur in Economics
Humans Act
One of the great contributions of Ludwig von Mises to our understanding of the world, in his book ‘Human Action’ is that humans act and they act purposefully to satisfy their most urgent needs and requirements. Absent action and you would not have a moving human society, but a static world with no existence at all. We rank our most immediate preferences first and our most remote preferences last, thus we always have a downward sloping demand curve for things.
Sub Categories of Action: the Entrepreneur
All men act, they are in economic theory either an entrepreneur, a capitalist, a landowner, a worker or a consumer. These are ideal types, ideal styles. The reality is that we are all a combination of more than one of the above.
In the real world everybody is an entrepreneur except the children and elderly we look after, and wards of state that we pay in various forms to do nothing, such as the unemployed and those on incapacity benefit.
Israel Kirzner shows us in his books ‘Competition and Entrepreneurship’ and also in ‘Perception, Opportunity, and Profit’, how the spontaneous discovery of new opportunities by alert individuals is a defining characteristic of entrepreneurship. For example, a man who is more alert than another to satisfying the most urgent needs and requirements of other men, such as Bill Gates in inventing Microsoft and its worldwide and world changing software is rewarded by his fellow consumer entrepreneurs more so than the man who comes and fixes the boiler as he is providing a more valuable and needed service. Gates’s unique ability over the years to be alert to the potential opportunity, to think, to create to make happen, makes him the richest man in the world.
The Economy as Dynamic Creative Process
De Soto, in his books ‘The Theory of Dynamic Efficiency’ and ‘The Austrian School, Market Order and Entrepreneurial Creativity’ shows us that as the economy is predicated by acting man seeking ways to satisfy his most urgent needs and requirements first, and with limited resources, everything in politics should be geared to letting the full creative talents of the most humble entrepreneur to the giants on entrepreneurship flourish. Past Popes such as John Paul the II and Leo XIII, in ‘Centesimus Annus’ and ‘Rerun Novarum’ have been wonderful in expressing the moral ethic of human being s able to express our own creativity unhindered so long as we hinder no one else.
To our current political class, astonishingly, it is never about creating, but about distributing: X, the group of more deserving persons, is going to get Y taken from them, and it will be promptly redistributed to the less deserving class. In most cases the less deserving class is the successful entrepreneur who has satisfied the most urgent needs of consumers the most and been rewarded for doing so by his consumers!
How the Political Class Understands Economics: the Neo-classical Way
Lord Lionel Robbins, a great early Austrian School economist from the LSE, sadly left us with a very negative legacy concerning entrepreneurship in his otherwise exceptional book, ‘An Essay on The Nature and Significance of Economic Science’. My copy is online here, http://mises.org/books/robbinsessay2.pdf This would be the starting point marking when economics is described as the science which studies the utilisation of scare resources which may be put to alternative uses in order to satisfy human needs. So the economic problem is a technical one of allocation.
This contrasts with the real world creative dynamic actors who are constantly alert to creating new means to satisfy new ends by using all their creative talents and those of others they can muster in order to satisfy the largest number of ends. This is entrepreneurship as a discovery process. No economics is about choosing between competing uses to satisfy set ends.
In the Neoclassical world – and we must remember the School of Keynes and Friedman, the Keynesians and the Monetarist are but subsections of the Neoclassical School – it is impossible for there to be pure entrepreneurial profit or genuine discovery, as they are enclosed in a world where there is call for intervention in the distribution of scarce resources. Technical allocation is the height of the Neoclassical Mission. The man who ‘discovers’ the wheel, the internal combustion engine, the computer etc are all acts of great creativity and are examples of where pure entrepreneurial profit is generated. To the technician/administrator/bureaucrat/resource allocator of the Neoclassical School, there is no role for this, but when it does happen, lo and behold there is a role of how to technically allocate its benefits!
The Role of Knowledge and Information
I was fortunate to study under Dr Robert Orr at the LSE who was a protégé of the outstanding political philosopher, Michael Oakeshott. I will never forget my first introduction to his 1962 classic book, ‘Rationalism in Politics’, where Oakeshott cleverly distinguished between “practical knowledge” and “scientific knowledge.” The former he describes as the dispersed know-how that we all have that allows us to do things that cannot be formalised, like the tacit knowledge a cook has when he/she cooks a fantastic dinner. Putting the food together in various combinations and heating for various times are, after all, simple acts that could be described in a very formulaic fashion. But how many of us have that practical, unquantifiable knowledge to cook an outstanding dinner? The former, formulaic knowledge, is the scientific knowledge or technical knowledge that we can formalise such as the knowledge of science itself. The study of entrepreneurship or economics in general is about the study of which entrepreneurs use this practical knowledge to bring about co- ordination and more goods and services by doing more things to satisfy more people. Scientific knowledge may boost this process as entrepreneurs exploit the information that the scientific knowledge produces. The danger is when the people who study economics and the application of entrepreneurship or the use of this dispersed practical knowledge or know how think they can scientifically manage it.
Harmony / Coordination and not the Creative Destruction of Schumpeter
Technical direction by the ‘enlightened’ entrenched administrators who dominate large parts of our lives is no match for the co-ordinating forces of entrepreneurship. The price mechanism throws up information that suggests opportunities to alert entrepreneurs to supply goods and services or solutions to satisfy peoples’ most urgent needs. This co-ordination can never be facilitated by administrators. Each time a profit opportunity is found and then satisfied, a creative and co-ordinating act has happened. Entrepreneurship is coordination. Each act of entrepreneurship in fact smoothes out dis-co-ordination in society. It is the most civilising act. This is very different to the creative destruction of Joseph Schumpeter who, in ‘Capitalism , Socialism and Democracy’ says that entrepreneurs enter established industries that start to exercise some monopoly power, thus allowing a smaller, nimbler competitor to enter and value-destruct and then value re-create something new and better. Schumpeter, unlike his Austrian contemporary, Mises, viewed booms and busts to be caused by innovation and not by excessive credit creation.
The Austrian Approach
So for the Austrian, we all act to satisfy our ends. Some do it better than others, some do it to many others, and these latter entrepreneurs are, in truth, the dynamic, creative, co-ordinating and above all harmonious drivers of the economy and facilitators of a peaceful society. This is in direct contrast with the homo oeconomicus of Robbins and the Neoclassical School, whose modern members are Keynesians and Monetarists. Resource allocation between competing needs is the name of their game.
They conflate scientific knowledge with the practical. This allows them to advocate constant spending by a thing they describe as a third party: Government. Government is meant to inject new money into the economy to get us all moving again. There is a horrible inevitability here: like a Greek tragedy, it is played out on epic proportions. There is no such thing as a government standing above and separate from us that can stimulate us. The government can only take from one section of the population and give to other sections of the population. When they spend money, they are spending the money you would have spent. The positive government spending multiplier is exactly negated by the negative spending multiplier from where the government has extracted the money in the first place. The net effect is zero extra spending. However. It does not stop there. For a great dis-co-ordination in the practical knowledge of people will take place when a government spends as the entrepreneurs will now be confused as to which activity in the economy will produce a sustainable outcome. Which bits of price information are driven by the most urgent needs of consumers that needs satisfying? Which are driven by the technical director of some government department directing who he thinks – or his political master thinks – the given set of resources should be allocated?
We are told we should print more money. I tell no lie, I witnessed one economist, Roger Bootle, see here http://www.cobdencentre.org/2010/02/policy-exchange-and-the-near-consensus-on-the-merits-of-qe/ say we should, if need be, print money indefinitely until people knew we were so serious that we would not allow a deflation! He equates a growing money supply with more wealth. But a growing money supply without more goods and services means a lowering of each money unit’s purchasing power! This has nothing whatsoever to do with the creation of wealth, as I have demonstrated above. Both endless spending and endless printing of money are the policies of the mystic and witch doctor!
In conclusion,the correct and urgent policy for the political class must be to remove all restrictions on the ability of each person to use their best entrepreneurial endeavours. Each person can then take advantage of the practical knowledge that is out there and create, ex novo, new combinations of the factors of production to produce new things. Abolish all laws that prevent and hamper business unnecessarily; pro-union legislation; employment law excesses; presumption of guilt by you, the employer, for anything your staff does, thus absenting you from any individual responsibility. Stop paying the people who abuse the benefit system, who form the massive, larger than the army size workforce we have idle on unemployment and or incapacity benefit. Stop wasting resources going to war. Stop printing money and creating confusion as it is harder for an entrepreneur now more than ever to distinguish between what is or is not a bubble supported activity that is never going to be sustainable. This latter disruption in the co-ordinating ability of entrepreneurs to bring about economic harmony is the worst part of the legacy that this current government will gift the next.
Until they understand the nature of entrepreneurship, we are in for a prolonged and rough recession.
By Toby Baxendale, on 8 March 10
The current debate about bankers’ bonuses is often seen as one of fairness pitted against the greed of those nasty capitalists,.
To me, bankers are lawfully working within the system – one that is rotten to the core. The banking system is the greatest of all examples of State corporate capitalism. We have a central bank that is State owned, we have a legal tender law that prevents competition in the provision of the production of money, and we have private sectors banks which are licensed by the State to be its agent when it wants to monetise its very own debts and create inflation at the expense of its citizens: people who have been prudent and thrifty as well as those on fixed income.
The State has one important central intention: to hide its prolific over spending. We have private sector banks that have legal privilege granted to them so they can use their depositors’ money to lend out many times over to entrepreneurs. They are the only type of business in the whole country permitted do this. All other commercial enterprises at all points in time need to keep their current creditors whole, otherwise they are insolvent. There is no requirement at all in this country for any bank to keep even one penny in reserves against their depositors’ funds. In fact, it has been a stated fact of law since 1811 in Carr V Carr that “his” deposited funds are not his, but are in fact the banks’.
This fractional reserve banking system we have can only work with a lender of last resort i.e. the State owned central bank with legal tender laws. This means that in partnership with the State, the State can monetise its debts (at the expense of you and me) and the banks can keep as little reserves as they can get away with to make a return on capital that you and I in the real capitalist private sector could never do. This encourages risk. Indeed with the banks now able to borrow at the taxpayers’ expense via the discount window (heavily subsidised short term central bank funding) and know there is a guarantee of a bail out should their gambles go wrong makes the state and the bankers two equal partners in a very unjust process.
The resulting situation is what I call ‘corporate capitalism’ (thoroughly amoral) as opposed to ‘capitalism’, which is totally moral. This needs some explaining, as I suspect worthy people are shooting arrows at the wrong target.
We know that the free market capitalist system is without doubt the most efficient creator and allocator of resources. Adam Smith taught us that “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest” in his Wealth of Nations. Self interest or the profit motive drives man to create and to provide all the multiplicity of goods and services we have enjoyed and will enjoy.
Mises in his famous book Socialism, showed us that if Society was run by planners, the price system which allows resources to flow to their most desired uses would not function. Indeed it would impoverish anyone nation that tried it. If, say. the planner could not correctly witness all the competing bids and resource allocations for metals that were capable of being used in the construction of railroad tracks (that involves many companies competing for scarce resources) he would never know which metal would be the most cost effective to build his railroad. No one planner would be able to economically calculate, or indeed, no army of planners would be able to calculate and allocate all the resources of Society in the socialist economy better than the many millions of participants in the economy allocating resources via the price mechanism. The experiment in the Soviet bloc with socialism impoverished at least three generations and lead to wide scale death and a general shortage of life, and misery.
Hayek, in his very famous essay “The Use of Knowledge in Society” added to the critique of Mises by pointing out that absenting the price system would mean that the central planning officials would need to absorb the entire knowledge of all the people in society to effectively plan their needs. This was absurd and impossible.
All State planned schemes, from the provision of money to the provision of health and education – even in our cosy mixed economy – could be done better by an unhampered market. We are thus weary of all bloated government departments and officials who say they can do something better for us – they can’t.
The efficiency case for an unhampered market, or free market capitalism is clear and unchallengeable. The subjective actions of freely consenting adults in a capitalist system produce the most amount of goods in the most efficient way. But is there an objectively moral case for the capitalist system? I attempt to answer it in the remaining part of this Insight article.
First Principles: Secular Argument
I Argue
One thing that distinguishes human beings from all other life forms is our ability to communicate with each other via talking. Only human beings can make a proposition. The question of what is just or unjust only arises because I can debate or argue this point with another person. To be able to argue my position I must be in control of my physical and mental self. I must own myself in order to be to be a human being. I have the total right to use all my physical and mental faculties to participate in life, otherwise I cannot even exist as a human being expressing an opinion. I do not know many people who would argue with this. If I did not own my own faculties I could not participate in life except under the command of who owned me. This also implies that just so much as I own myself, I do not own anyone else. It also follows that if I do something that violates another human being without their consent I violate their right to express their very humanness.
Thus, I deduce that by my very being , I own myself , I own my own property as me, I have a right not to be interfered with so long as I do not interfere with anyone else. It clearly follows that if I were to interfere with someone else’s property, they would not own it. This would deprive them of their own humanity, I suggest. This is a deduction from the axiom that to exist I need to argue. I come to this conclusion via the Haberrmasian axiom of interpersonal argument that has been so cleverly adapted by Hans Herman Hoppe in his book The Economics and Ethics of Private Property.
To argue against this you explicitly acknowledge control of your faculties, at the very least. Following Kant’s Golden Rule that a norm should be universal in its applicability should it be objectively valid, this proposition surely fulfils this requirement to be a totally objective axiomatic principle.
All ethical propositions, such as socialism, that say that you owe a duty to the State to provide for others, are violations of the very distinguishing thing that makes you a human being and not a rock or a colony of ants. To advocate any form or socialism, be it of the democratic variety, the communist variety, or indeed the mixed economy is to violate your very essence of being a human.
John Locke in his “Two Treatises of Government” spells out that property or, if you like all resources exist prior to any government. Man mixes his labour with what he finds and it is by right his. Government cannot ‘dispose of the estates of the subjects arbitrarily’. Locke left us with a conundrum called “Locke’s proviso.” This is where if a man mixes his labour to own something that was not owned before; he must always leave a “sufficient” amount for other human beings.
Jesus Huerta de Soto, one of the greatest living polymath Austrian School teachers in his essay “The Ethics of Capitalism” , shows us how possibly the other living giant of the Austrian School, Israel Kirzner in “Discovery, Capitalism, and Distributive Justice” has solved this proviso of Locke. And allows us to build the objective moral ethic of capitalism.
Socialist, social democrats and a large body of modern day liberals and conservatives have a distributive conception of justice that is about a top down approach of redistribution of scarce resources from those who do have to those who that have less, or nothing, or whose lobby groups has succeeded in extracting something from those that have. Kirzner shows us how as all human being are creative actor: they are always engaging in entrepreneurial activity to generate new goods and services. All human beings are alert to opportunity, some to a greater degree than others. The fruits of this alertness arises via their actions. This is universally so. To not act would not create these things. So he proposes an axiom that all human beings have a natural right to the fruits of their own entrepreneurial creativity. As these things are created out of nothing, it implies that the acting person has an undoubted right to the quiet and peaceful enjoyment of the fruits of his or her labour. If it did not exist before, it cannot be a negative to anyone else. So Locke’s proviso is overcome by the understanding of society as dynamic and spontaneous constantly evolving process with alert actors constantly creating new goods and services that they must have an unquestionable right to own.
De Soto coins the term ‘Dynamic Efficiency’ to describe this process. He also points out that the free market capitalist system – that we know is the most efficient system – is also the most just and in fact, these two concepts are indeed two sides of the same one coin. Any form of intervention is immoral as it impedes the creative capacity of individuals to express their creativity and create all the wide range of goods and services we have. It should be pointed out that top down provision of health, education, transport, industry etc is inefficient and hence unjust as it suppresses the creative activity of human beings. Absent the profit motive and you will get sub optimal results.
Do Soto points out that the last Pope, Pope John Paul II in his Centesimus Annus, which built on the earlier work of the Rerum Novarum of Pope Leo XIII, established the universal moral capitalist ethic by acknowledging the natural right (God given) to express your very creativity unhindered so long and you hinder no one else.
First Principle: Theological – God Endowed Rights
I Exist
Writing about the morality of capitalism in glowing positive terms as I have done above and setting it in the backdrop of universally applicable objective axioms is not as unfashionable as talking to any thinking person about God, but only just! Such is the secular society we live in; you are considered to be an ill informed mystic should you engage in “god bothering.” The See of Peter would naturally see this differently and I am very grateful for De Soto to direct me to the pro capitalist teachings of the Catholic Church.
Are the above self evident axioms that are universally applicable in all times and in all places to everybody there because we are human or are they there because they are God endowed?
I can ague both, but I favour self evident God endowed over self evident secular, although the latter can stand on its own legs. Why?
I wrote an article about the proof God three years ago for LewRockwell.com. In short, I take the Aristotelian inspired position that as I exist I know that other physical things exist. I know that each and every one of these physical things must have been caused by another physical thing. I know that nothing is infinite. If it was, I would not exist as for it to be infinite, it would occupy all time and space and I would not exist. As I exist, I know this cannot be the case. I know there is a beginning to the universe and that there are physical boundaries to the universe, therefore I know there cannot be an infinite series of physical causes and effects as there would be no boundary and no beginning. Therefore what caused the first physical thing must indeed be immaterial if it cannot be a physical cause. This immaterial thing is what I label as ‘God’. So I conclude God does exist and the only act I can attribute to God by a priori reasoning is that God created everything. As I like to exist I am very grateful for this and can only conclude that God has good intentions. If I do not like to exist, I can choose not to and commit suicide. God is therefore good for me and objectively good for all human beings. As God has created everything, he has endowed us with the ability to reason and engage in the formation of reasoned propositions, the latter which is undoubtedly a unique attribute to mankind the former quite possible unique to mankind, sets the foundation for the derivation of the rights of man and the very ethics of capitalism.
Further reading
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