"President Roosevelt is magnificently right," John Maynard Keynes wrote of
president Franklin Delano Roosevelt's decision to devalue the American dollar
in 1933. If any economic policy stance deserves such praise today, it is that
of Pope Benedict XVI, whose views on ethics and economics occasioned a flurry
of comment last month. Italy's Finance Minister Giulio Tremonti observed, "The
prediction that an undisciplined economy would collapse by its own rules can be
found" in a 1985 paper (see
Market Economy and Ethics, Acton Institute) by then Cardinal Joseph
Ratzinger, which Tremonti called "prophetic". I don't know whether it was
prophetic, but the future pope was right, and magnificently so.
An unethical economy, he argued, will destroy itself, and
economics cannot determine whether any activity is ethical or not. Internet
stock valuations, the market delusion of a decade ago, presumed that
pornography, gaming, music downloads and shopping would be the driving forces
of the future economy. It is easy to ridicule this Alice-in-Wonderland
accounting after the fact, just as it is easy to laugh at television
advertisements that even today urge Americans to buy homes because their prices
double every 10 years (for example this
commercial by the National Association of Realtors posted on YouTube).
But what should we say of an economy based on consuming as much as one can
without troubling to bring children into the world?
Here is what then Cardinal Ratzinger said about it more than 20 years ago:
is becoming an increasingly obvious fact of economic history that the
development of economic systems which concentrate on the common good depends on
a determinate ethical system, which in turn can be born and sustained only by
strong religious convictions. Conversely, it has also become obvious that the
decline of such discipline can actually cause the laws of the market to
collapse. An economic policy that is ordered not only to the good of the group
- indeed, not only to the common good of a determinate state - but to the
common good of the family of man demands a maximum of ethical discipline and
thus a maximum of religious strength.
What caused the laws of
the market to collapse in 2008? In another location (see
The monster and the sausages, Asia Times Online, May 20, 2008), I
argued that the bulge of workers in the US and Europe approaching retirement
age is the ultimate cause of the financial crisis. Too much capital chased too
few investment opportunities, and the financial industry met the demand by
selling sow's ears with the credit rating of silk purses.
Underlying the crisis is the Western world's repudiation of life, through a
hedonism that puts consumption or "self-realization" ahead of child-rearing.
The developed world is shifting from a demographic profile in which the very
young (children four years and under) outnumbered the elderly (65 and older),
to a profile with 10 times as many retirees as children aged four or younger.
Economics simply never has had to confront a situation in which the next
generation simply failed turn up.
Percentage of developed nations' population younger
than four years and older than 65 years
It is not just the professionals who were ethically challenged. Bankers who
insisted on dancing until the music stopped, as Citigroup's former chairman
Chuck Prince wisecracked just before his 2007 dismissal, deserve the rage of
the public. So do the analysts working for Moody's Investor Services who
acknowledged in messages made public by Congressional investigators that "we
sold our soul to the devil for revenue". The moral rot reaches into most of the
families in the developed world.
In the cited paper, Cardinal Ratzinger picked a bone with the determinism of
the "free market" economic model:
Following the tradition inaugurated
by Adam Smith, this position holds that the market is incompatible with ethics
because voluntary "moral" actions contradict market rules and drive the
moralizing entrepreneur out of the game. For a long time, then, business ethics
rang like hollow metal because the economy was held to work on efficiency and
not on morality. The market's inner logic should free us precisely from the
necessity of having to depend on the morality of its participants. The true
play of market laws best guarantees progress and even distributive justice ...
This determinism, in which man is completely controlled by the binding laws of
the market while believing he acts in freedom from them, includes yet another
and perhaps even more astounding presupposition, namely, that the natural laws
of the market are in essence good (if I may be permitted so to speak) and
necessarily work for the good, whatever may be true of the morality of
There is something profoundly disingenuous about
the pure free-market model, to which an even stronger objection might be
raised, namely that it cannot possibly exist. The market does not spring into
being like warriors from the dragon's teeth sown by Cadmus. Markets are part of
society, and if society passes the demographic point of no return, the market
will die along with all other social institutions.
There is an obvious, glaring flaw in the deterministic model: even if we assume
that no one ever cheated, lied, or stole, the market can't determine who enters
it and who leaves it. First of all, these depend on birth and death, and
secondly on law and custom. For example: who is allowed to take deposits from
the public, and make loans? In the pure free-market model, every deposit-taking
bank would make loans in its own currency, and the public would value a JP
Morgan dollar differently from a Bank of America dollar or a Citigroup dollar,
not to mention a dollar from the late and unlamented Washington Mutual.
Until 1863, that is how American banks operated. The late Milton Friedman, a
consistent if sometimes quixotic advocate of free markets, proposed a return to
this chaos. If the public treasury guarantees bank deposits, he observed, the
market no longer is free.
In Congressional testimony this autumn, former Federal Reserve chairman Alan
Greenspan notoriously admitted that his free-market philosophy was inadequate.
Yet nothing that occurred under Greenspan's tenure had to do with freedom.
Banks that enjoyed a monopoly due to their federal charters were permitted to
transfer assets away from their balance sheets to other entities, allowing them
to use much less capital to support assets than in the past. Even worse, the
Federal Reserve allowed larger and more sophisticated banks to put less capital
against assets that bore a high rating from Moody's and Standard & Poor's -
the agencies that later owned up to having sold their souls to the devil for
Greenspan, it turns out, presided over a bubble manufactured by the
most-regulated private companies in the world, the large commercial banks, who
operate with the implicit guarantee of the US Treasury. When the banks got into
a hole, the Treasury guarantee became explicit, and floated the banks out of
the whole with several trillions of dollars of actual and prospective taxpayer
money. Private interests appropriate a small but noticeable fraction of
America's wealth, emulating in a very small way the behavior of private
interests in Argentina, which typically steal all the national wealth as well
as whatever they can borrow from foreigners.
The future pope made two parallel points: first, that morality cannot be
effective without competent economics, and secondly, that economics cannot
dispense with morality by trusting to the supposedly automatic workings of the
A morality that believes itself able to dispense with the
technical knowledge of economic laws is not morality but moralizing. As such it
is the antithesis of morality. A scientific approach that believes itself
capable of managing without an ethos misunderstands the reality of man.
Therefore it is not scientific. Today we need a maximum of specialized economic
understanding, but also a maximum of ethos so that specialized economic
understanding may enter the service of the right goals. Only in this way will
its knowledge be both politically practicable and socially tolerable.
A clearer way to make these distinctions, perhaps, is to observe that the
market mechanism has a negative but not a positive function. The market cannot
decide what innovations or practices are beneficial to society. It can only
punish incompetence and inefficiency. "Creative destruction", in the famous
phrase of the Austrian economist Joseph Schumpeter, refers to Goethe's
Mephistopheles, who tries to do evil but ends up doing good instead. Without
the devilish work of destruction that kills off incompetence, established
monopolies would choke off innovation.
Nothing in the market mechanism, however, can distinguish between pornography
and art, medicine and recreational drugs, development and suburban sprawl, or,
for that matter, family formation and addictive consumption. The modern
marketplace arose during the 16th and 17th centuries through demand for silk,
spices, rum and tobacco, and destroyed most of the population of South America
and perhaps a third of the population of West Africa. In the process, the West
learned to form joint-stock companies, write insurance, trade options, and
establish central banks. All of these contributed mightily to its economic
development later, despite their checkered origins. If moral rot has taken hold
of a society, the market mechanism will take it to hell faster and more
efficiently than any of the alternatives.
There is an even greater flaw in the theory of the free market, perhaps, and
that is in the assertion that the market can form adequate expectations about
the future profitability of firms and make proper judgments about allocation of
capital. How do we explain away the misallocation of capital to Internet stocks
during the late 1990s and to homes in the United States (and elsewhere) during
the ensuing years?
The world simply is too uncertain for the market to look more than a year or
two over the horizon. Technological and social change occurs in unexpected and
dramatic ways, frustrating the best guesses of the cleverest entrepreneurs, not
to mention the stodgy decisions of central planners. The market cannot form
accurate long-term expectations; at best it can imagine future outcomes. The
quality of its imagination in this case depends on cultural factors that
transcend economic judgment.
Americans spent the 1990s in a fantasy world, where technological change
supposedly would transform the human condition, taking as their intellectual
guide science-fiction writers like William Gibson. There was nothing wrong with
the market mechanism as such; what went haywire was the childish imaginings of
the American public.
The future pope's 1985 paper insists that it is mere moralizing, not morality,
to dismiss what economics has learned about the market mechanism. But economics
cannot find a remedy for the imagination of an evil heart, or a foolish one,
for that matter. Ethics founded on religion are the precondition for long-term
economic success, if for no other reason than economies depend on family
formation. If the present economic crisis helps the West to reflect on its
moral weakness, the cost well may be worth it.