Well, here’s food for thought (and, I suspect, just a spot of controversy) from the Hoover Institution’s Richard Epstein:
The terrible economic news from both Europe and the United States has led to much soul-searching on both sides of the Atlantic. How did we get here, and how can we get out of this jam? In my past columns for Hoover’s Defining Ideas, I have insisted that both economies will be able to extricate themselves from their deep slumps only by promptly reversing those policies that have brought them to the brink. A successful and sustainable political order requires stable legal and economic policies that reward innovation, spur growth, and maximize the ability of rich and poor alike to enter into voluntary arrangements. Limited government, low rates of taxation, and strong property rights are the guiding principles.
Unfortunately, many spiritual and economic leaders are working overtime to push social policy in the exact opposite direction. At the top of the list are two prominent figures: Pope Benedict XVI and financier Warren Buffett.
One can only agree. The self-serving, sanctimonious drivel that has long been the stuff of Buffett’s preaching has come under fire around here before, but it’s certainly also worth spending some time looking at what the Pope has been saying. So that’s what Epstein does:
The Pope was on his way to recession-torn Spain—to lead the Roman Catholic Church’s weeklong celebration of World Youth Day—when he denounced those nameless persons who put “profits before people.” He told journalists, “The economy cannot be measured by the maximum profit but by the common good. The economy cannot function only with mercantile self-regulation but needs an ethical reason in order to work for man.” Standing alone, these words mirror the refrains of countless Spanish socialists, whose relations with the Pope have soured in recent years. Their shared premises help explain why Spain finds itself in such a sorry state.
Denouncing those who put ‘profits before people’ may stir the masses, but it is a wickedly deformed foundation for social policy. Profits, like losses, do not exist in the abstract. Corporations, as such, do not experience gains or losses. Those gains and losses are passed on to real people, like shareholders, consumers, workers, and suppliers. It is possible to imagine a world without profits. Yet the disappearance of profits means that investors will be unable to realize a return on either their capital or labor. Structure a system that puts people before profits, and both capital and labor will dry up. The scarcity of private investment capital will force the public sector to first raise and allocate capital and labor, though it has no idea how these resources should be deployed to help the people, writ large. A set of ill-conceived public investments will not provide useful goods and services for consumers (who are, after all, people), nor will it provide sustainable wages for workers (who are also people). Poor investment decisions will lead to a massive constriction in social output that harms all people equally.
The proper response to these difficulties is to treat profits as an accurate measure of the cost of capital, rewarded to those individuals and firms who supply some desirable mix of goods, services, and jobs that people, acting individually and not collectively, want for themselves. The genius of Adam Smith, whose musings on the invisible hand are too often derided, was to realize that private markets (supported, to be sure, by suitable public infrastructure) will do better than a command and control system in satisfying the individual’s wants and needs. The Pope offers no serious answer to Smith’s point when he talks about “the ethical need to work for man” and the “common good.” In both of these cases, he treats a collection of diverse individuals as though they form part of some harmonious whole. “Man” in the Pope’s formulation is a grammatical singular but a social collective. The “common good” speaks of some aggregate benefit to a community that is not securely tethered to the successes and failures of the particular individuals within the collectivity.
As a technical matter, it becomes critical to have some reductionist argument that transforms statements about these groups into statements about the individuals who compose them. Ordinary business people understand this intuitively when they speak of win/win transactions. These are transactions that generate gains to all parties involved in the bargain.That common expression, “win/win,” is the distillation of sound economic theory, for the more win/win transactions a society can generate for its people, the greater its economic prosperity.
The great advantage of competition in markets is that it exhausts all gains from trade, which thus allows individuals to attain higher levels of welfare. These win/win propositions may not reach the perfect endpoint, but they will avoid the woes that are now consuming once prosperous economies. Understanding the win/win concept would have taken the Pope away from his false condemnation of markets. It might have led him to examine more closely Spain’s profligate policies, where high guaranteed public benefits and extensive workplace regulation have led to an unholy mix of soaring public debt and an unemployment rate of 20 percent. It is a tragic irony that papal economics mimic those of the Church’s socialist opponents. The Pope’s powerful but misdirected words will only complicate the task of meaningful fiscal and regulatory reform in Spain and the rest of Europe. False claims for social justice come at a very high price.
Amen (so to speak).
And what Epstein has to say about Buffett is well worth checking out too.
Update
In reply to some points made by Ramesh Ponnuru on the Corner in response to the above, I added this later post:
Ramesh, viewed in isolation, the Pope’s remarks can be seen as a reflection of the fairly traditional Roman Catholic corporatism that lies, I’d guess, at the base of his economic thinking. That’s a doctrine that is in many respects profoundly antagonistic to classical free -market liberalism, but coming from a pontiff, and, not only that, a pontiff who has spent most of his adult life in a country run on the “Rhineland” social market model, it’s far from a surprise.
The trouble is that you cannot view those remarks in isolation. The Spanish economy is in a mess, thanks primarily to the distortions introduced by the euro and, of course, deep structural problems of the type identified by Richard Epstein. Resolving those problems will be difficult. That’s why a good number of Spain’s indignados (if not — yet — the wider electorate) have found it far easier to scapegoat a wicked, if ill-defined “capitalism.” By saying what he did, where he did, and when he did, Benedict XVI, maybe inadvertently, maybe not, has risked giving that scapegoating a credibility in a constituency that it might not have otherwise reached. That’s a pity.
“Saint” Warren the Buffett personally benefits (because he owns so much stock in Hathaway) every time a sleazy door-to-door sales person foists an over-priced Kirby vacuum cleaner on some lower middle class sucker.
ABC did an expose years ago but never mentioned that Kirby is in the saints portfolio.
“The economy cannot be measured by the maximum profit but by the common good. The economy cannot function only with mercantile self-regulation but needs an ethical reason in order to work for man.” Standing alone, these words mirror the refrains of countless Spanish socialists, whose relations with the Pope have soured in recent years.
Actually, “standing alone” those words will probably mirror the refrains of almost any political philosophy with the sole exception of that form of political autism we call libertarianism. The problem with the pope’s words here isn’t what they say, but what they don’t say. Either side of the political divide could cite them in their favor.
This kind of brings up a question I have… this is an honest question, not an argument disguised as a question.
Can anyone direct me to an essay, column, or similar, about what kinds of state-provided benefits a conservative supports. Personally, I think the interstate highway system and National Weather Service are great ideas because the private economy wouldn’t be likely to scale them adequately. I even support food stamps, because there’s plenty of food around, and it wouldn’t benefit anyone to have people starving on our streets.
Can anyone direct me to a “conservative case for benefits” webpage?
It’s not just the Pope, either. From the bishops, all the way down, socialism holds huge sway. Whenever Pope John Paul II talked about the US versus Soviet economic systems, it was a lot of “one one hand…on the other hand”, which probably put him to the right of the majority of the church hierarchy, who seemed to spend a lot more time criticising America than our enemies, the communists.
Excellent point, Polichinello!
@RandyB: There are plenty of economists who are more conservative than libertarian, so you’d think it would be easy to find what you’re looking for. When you do find it, I hope you’ll let us know.
Randy,
Off the top of my head, it’s rather difficult to find such an essay, because the basic idea of a safety net is taken for granted. Pat Buchanan is probably the most interventionist American conservative I can think of, but even more conventional conservatives, like Ann Coulter (her verbal fireworks notwithstanding) support a basic safety net.
I even support food stamps, because there’s plenty of food around, and it wouldn’t benefit anyone to have people starving on our streets.
The problem isn’t a desire or an indifference to seeing people “starving on our streets.” It’s that this system can be abused and will pervert normal incentives to lead an industrious life. If the basic needs of life are met, a lot of people will be tempted to just stay home and watch TV. If you get more money per kid, guess what? The underclass will pump out more kids. The welfare reform bill of the 90s addressed these issues. I read Mickey Kaus complain that Obama’s stimulus undid that reform, but I haven’t really followed up on that.
Speaking of social justice and reform, may I recommend Michael Lind’s excellent piece in Salon on the incompatibility of (liberal) secular humanism and darwinian science:
http://www.salon.com/news/religion/index.html?story=%2Fpolitics%2Fwar_room%2F2011%2F08%2F23%2Flind_humanism
I’d like to see Epstein quit making this a moral issue and answer some practical questions:
–How much debt can the government take on without bringing us into depression through excessive interest payments.
–If it is necessary to balance the budget through cuts, how would you do this? How much from defense, how much from social security, how much from medicare, and how much from everything else?
–If higher taxes are so inimical to economic growth, how do you explain the prosperity of the ’50’s with a 94% marginal rate, versus the stagnation of our times, with a 35% maximum.
If higher taxes are so inimical to economic growth, how do you explain the prosperity of the ’50′s with a 94% marginal rate, versus the stagnation of our times, with a 35% maximum.
The ultimate broken windows scenario: World War II.
“quit making this a moral issue and answer some practical questions”
“how would you do this? How much from defense, how much from social security, how much from medicare, and how much from everything else?”
This is a moral question, not a practical one. Which is more practical, cutting social security or the EPA? It all depends on how you define practical. I think the question of which is more moral is much more interesting and pertinent.
John – Morals tell us (in short) to avoid causing suffering. The question you cited is essentially asking, “Who must suffer for the good of society?” How can anyone possibly answer such a question on purely moral grounds? Just because something is a lesser of two evils doesn’t make it right.
“ultimate broken windows scenario.”
I didn’t think conservatives believed in the broken windows theory. The Austrian school definitely does not. The postwar prosperity started to unravel during Vietnam, another big broken windows event.
Abolishing the EPA ($9 billion) would reduce the deficit by 0.9%, and reduce federal expenditures by 0.25%. I was surprised that the EPA spends this much, but only a small fraction is for enforcement. A lot of it is grants to help state and local governments clean up their air and water.
Social security expenditures are $1.2 trillion per year. Maybe it is a moral issue, but it is also a practical issue. If you want to cut federal spending, you have to go where the money is.
Actually, the only tax increases that have a reasonable chance to go into effect would be to let the Bush tax cuts finally expire. This would affect both upper and middle class taxpayers. That could be Obama’s parting gift to President-elect Romney. I don’t think Romney would be stupid enough to turn it down.
I don’t have any problem with the part of Epstein’s commentary about the Pope.