For my English Speakers Friends: Pope Francis and Free Economy in the Evangelii gaudium

By Gabriel J. Zanotti

For Instituto Acton Argentina

November, 2013

(Translated into English by Silvina Floria).

1.      Introduction

Francis’ Apostolic Exhortation Evangelii Gaudium^[1] (EG) is not a text on economy: it is a fine and substantial magisterial reflection about the topic of evangelization in our days, a most extensive subject whose analysis exceeds the humble purposes of this article, and must await a later occasion.

However, Francis’ diagnosis of current circumstances holds some judgments on economic issues that have once again caused admiration and adhesion among free market critics, as well as concern or outright rejection among free market advocates. It is not, of course, the first time this happens. The same happened with Quadragesimo Anno, 1931, Mater et Magistra, 1961, Populorum Progressio, 1967, Laborem Excercens, 1981, and Solicitudo Rei Socialis, 1988. When talking about the content of those documents, I have always done the same: I have clarified semantic nuances and have drawn a distinction between the general principles of the Church’s Social Doctrine and its prudential applications.^[2] In this case, I will further add an attempt at dialogue between the horizon of the Austrian School of Economics (ASE) and the one wherefrom Francis writes.

2.      Horizon of pre-understanding in the Austrian School of Economics

In order to understand what the ASE means when it mentions “free market”, we must analyze the core of the theory of the market process, largely developed in a research program made up by authors such as Mises, Hayek, Israel Kirzner, and even Rothbard. I therefore propose to analyze the theoretical structure of Mises’ treatise on Economics, Human Action.^[3]There, Mises divides his analysis into three broad areas: the analysis of market economy, socialism, and a hampered economy. When Mises discusses market economy, he refers to what –in my own terms– is a phenomenological analysis of the market itself, as a dynamic process tending towards a balance situation yet never attaining it, under the institutional assumption of private property, that is, of free access to the market and absence of state controls. Interventionism, instead, is a market hampered precisely by those controls whose absence is assumed in a free market. In Part Six of his treatise on economy (a key work),Mises analyzes these interventions with utmost clarity: intervention through progressive income taxes, restrictions to production through customs tariffs, monetary intervention through monetary nationalization by central banks and controls on interest rates, confiscation of natural resources, infringements to the right of association through corporatist unionism, price and salary controls. The list is not restrictive, yet what is interesting is that is makes up the essence of real economy as Mises regarded it back in 1949, when his treatise was published. That is to say, in Mises’ view, a hampered economy was not the Soviet Union; it was Europe and the USA already in 1949, not to mention other regions, of course.

Added to this must be the studies by Hayek about the rejection to perfect competition as wrongly approaching the economic problem –a criticism appearing mainly in seminal articles published in 1936, 1945 y 1946.^[4] Contrary to the models assuming perfect knowledge, Hayek claims that the economic problem lies in how to coordinate supply and demand expectations under the dispersed and restricted knowledge of offering and demanding parties. And this is possible only under three conditions: one, free entry to the market –which implies equality under the law and absence of legal monopolies in a market; two, the ability to learn from one’s mistakes as a compensating factor of the dispersed knowledge; and three, free prices as synthesizers of the dispersed knowledge and, thus, as signs of the relative scarcity of goods and services in the market. This implies that the market is always a coordination process, yet never perfect coordination, and that government intervention, by affecting prices, affects the necessary signs for this coordination. Mises includes all this in his treatise on economy, already speaking of the learning ability as the entrepreneurial factor. In 1962, Rothbard further adds his unrivaled treatise on monopoly,^[5] where he emphasizes the ASE’s rejection of the perfect competition theory, while in 1973, Israel Kirzner systematized it all in his theory viewing market as a process vs. market in balance, through the entrepreneurial factor.^[6] It is no coincidence that 1974 is considered the ASE’s revival around the world.

None of the above was written by bored people, unmindful of others. Rather, they were driven by an “emancipatory” spirit, that is, an ideal concerned with eradicating poverty and attaining development for the peoples. This may be observed, above all, in the life of L. von Mises.^[7]

Still, the fundamental conclusion of this point is the following:

a)  Free market is not “the markets” or today’s “real capitalism”, which might be called crony capitalism, though I would rather call it a hampered economy.

b)    Free market has nothing to do with the perfect competition models assuming perfect knowledge, perfect efficiency “or kindness” of the intervening agents. 

c)    Free market really occurs when all three conditions formerly mentioned by Hayek are allowed to act; the greater or lesser distancing of these three conditions is the measure of a greater or lesser free market. 

  

3.      Analysis of Francis’ “free market” criticism in light of the foregoing considerations

As I have mentioned under heading 1 above, it is not the first time that we face this problem.  The Encyclical Letter Quadragesimo Anno, by Pius XI, dates from 1931 and raises strong criticism to what is labeled as liberal capitalism and “international imperialism of money”. And yet –what a coincidence–, this criticism arises right in the aftermath of the 1929 Crash, where the economic crisis is precisely the one described and forecasted by Mises in 1912^[8] as the basic effect of state intervention in the capital market, currency and interest rate.

What now occurs is similar, yet worsened. The hampered economy in the USA and Europe has grown deeper. In the light of the ASE, we are not facing a free market crisis, but rather an increasingly worse crisis of the hampered economy; all the more so after 2008.

In light of the foregoing, the main paragraphs of the Evangelii Gaudium on economic issues are worth discussing. Our comment will be in italics. 

3.1. “… Just as the commandment “Thou shalt not kill” sets a clear limit in order to safeguard the value of human life, today we also have to say “thou shalt not” to an economy of exclusion and inequality.” Such an economy kills. (He is right; such an economy kills. Human beings dying of malnutrition, hunger, subhuman life conditions are counted by the millions and millions. But this results from underdevelopment, and underdevelopment results from the lack of investment caused by all the interventionist measures analyzed by Mises. Mises says: “…Vast areas –Eastern Asia, the East Indies, Southern and Southeastern Europe, Latin America– are only superficially affected by modern capitalism. Conditions in these countries by and large do not differ from those of England on the eve of the "Industrial Revolution." There are millions of people for whom there is no secure place left in the traditional economic setting. The fate of these wretched masses can be improved only by industrialization. What they need most is entrepreneurs and capitalists. As their own foolish policies have deprived these nations of the further enjoyment of the assistance imported foreign capital hitherto gave them, they must embark upon domestic capital accumulation. They must go through all the stages through which the evolution of Western industrialism had to pass. They must start with comparatively low wage rates and long hours of work. But, deluded by the doctrines prevailing in present-day Western Europe and North America, their statesmen think that they can proceed in a different way. They encourage labor-union pressure and alleged prolabor legislation. Their interventionist radicalism nips in the bud all attempts to create domestic industries. Their stubborn dogmatism spells the doom of the Indian and Chinese coolies, the Mexican peons, and millions of other peoples, desperately struggling on the verge of starvation”^[9]). How can it be that it is not a news item when an elderly home­less person dies of exposure, but it is news when the stock market loses two points? This is a case of exclusion. (He is right. But the “exclusion” of the millions to which Mises refers is caused by underdevelopment, in turn resulting from the absence of a free market as understood by Mises). Can we continue to stand by when food is thrown away while people are starving? This is a case of inequality. (He is right. But in economy, food is thrown away when governments interfere in the agricultural market with minimum prices, thus producing leftovers in the market).  Today everything comes under the laws of competition (not competition as understood by the ASE, because today there is no free entry to the market) and the sur­vival of the fittest, where the powerful feed upon the powerless. (Yes, such is the case when more powerful lobby groups get perks from the government, as is so clearly explained by the Public Choice School.^[10] This is not the case in a free economy, that is, one where no privileges are granted by the government). As a consequence, masses of peo­ple find themselves excluded and marginalized: without work, without possibilities, without any means of escape. Human beings are themselves considered consumer goods to be used and then discarded. We have created a “throw away” culture which is now spreading. (He is right: a human being is not a consumer good. But this happens when there is endemic unemployment, produced by the minimum wages and union privileges strongly criticized by Mises in Human Action and in Socialism –1922).^[11]  It is no longer simply about exploitation and oppression, (it is worth bearing in mind that exploitation, if implying reference to Marxist added value, must be reinterpreted, because the theory of Marxist added value, being based on the theory of Smith’s working value and Ricardo’s production cost, is false)^[12] but something new. Exclusion ultimately has to do with what it means to be a part of the society in which we live; those excluded are no longer society’s underside or its fringes or its disenfranchised – they are no longer even a part of it. The excluded are not the “ex­ploited” but the outcast, the “leftovers”. (Yes, this is the result of underdevelopment for NOT having respected free market. Ultimately, it is understandable that Francis regards the current economy as a free market; of course, the USA, Europe, and Latin America are not North Korea. Unless the ASE is born in mind, such is the case. But we have already seen that today’s economy is far from being a free market, a “market process”: it is a hampered economy and much more: it is a wicked game of lobby groups revolving around the central government that distribute, at their discretion, a fixed pie that does not grow for lack of investment and the evident limit of public budget, as finely described by J. Buchanan: a “rent seeking society”^[13]).

3.2. “... In this context, some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about great­er justice and inclusiveness in the world. (Well, this is not the case of the ASE. According to their economists, free market does not produce an intrinsic enrichment of some, wherefrom wealth is randomly poured over others. The essence of the question is that saving enables investments, new capitals and new projects, essentially resulting in an increase in the demand for work, and consequently, an increase in the real salary.That is to say, general enrichment is a necessary feature, rather than a random trait or “spilled over” from the free market, except if it is hampered by confiscatory taxation, bureaucratic controls, inflation and confiscation, as is standard practice in Latin America. Moreover, in a free market, entrepreneurs do not necessarily become wealthier, unless they are protected by the state, therefore no longer being a free market. Many of their projects fail and incur in losses, thus enabling common good to benefit only from entrepreneurial projects that rightly meet the demand by consumers). This opinion, which has never been confirmed by the facts, (now, if Francis philosophy accepts my saying, I would speak of a phenomenological analysis of social reality) expresses a crude and naïve trust in the goodness (yes, such is the trust of those who deny the original sin, but not of the ASE economists –who have always conceived a free market operating for normal people under normal incentives: free market is not for saints, it is for everybody) of those wielding economic power (well, in a free market, “power” is vested in the consumer, while in a hampered economy, “power” is wielded by the state) and in the sacralized workings (rather than workings, free market is a human process) of the prevailing economic system (I would say that the ASE economists have never sacralized anything, nor have I, having expressly criticized “market clericalism”^[14]).

3.3. “...One cause of this situation is found in our relationship with money, since we calmly accept its dominion over ourselves and our societies. The current financial crisis can make us overlook the fact that it originated in a profound human crisis: the denial of the primacy of the human person! We have created new idols. The worship of the ancient golden calf (cf. Ex 32:1-35) has returned in a new and ruthless guise in the idol­atry of money and the dictatorship of an imper­sonal economy lacking a truly human purpose. The worldwide crisis affecting finance and the economy lays bare their imbalances and, above all, their lack of real concern for human beings; man is reduced to one of his needs alone: con­sumption.(This is one of the central points of a misunderstanding that affects us all. The 2008 international financial crisis illustrated what for the ASE is the theory of the economic cycle. It was mainly outlined by Mises in 1912 ^[15]–enabling to predict, to some extent, the 1929 crisis–; Hayek added significant observations on capital in 1931,^[16]and it is a central part of the present works on the current situation by the ASE economists in the United States. The theory’s central axis is that if the government expands the currency to the capital market through monetary expansion, the interest rate tends downwards, fostering unsubstantiated investment projects which, when the expansion ceases, fall, producing bankruptcies and widespread unemployment. This is the product of state intervention, not of free market. There has always been greed, fondness for money and worship of wealth, incompatible with Christianity; yet it is not human flaws that have caused financial crises, but state intervention in the capital market).

While the earnings of a minority are grow­ing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few (As we have seen, this is produced by underdevelopment, itself caused by state intervention).

This imbalance is the result of ide­ologies which defend the absolute autonomy of the marketplace and financial speculation. (As we have seen, if by “absolute autonomy” we mean free market as understood by the ASE, then such autonomy simply means that the state does not expand the monetary offer, thus artificially lowering interest rates. I do not see why it must be labeled “absolute”, since all the banking system is governed by the basic rules of respect for contracts). Con­sequently, they reject the right of states, charged with vigilance for the common good. (The ASE does not deny that the government is the agent in charge of guarding the Rule of Law; it does deny, though, that the increase of monetary offer is beneficial. In other words, I do not see why, in order to be a Catholic, one must necessarily subscribe to Keynes). A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules. (Yes, such is the tyranny of the governments that affect the monetary offer and produce poverty and underdevelopment, the economy that kills). Debt and the accumulation of interest also make it difficult for countries to realize the potential of their own economies and keep citizens from en­joying their real purchasing power. (The indebtedness of the poor countries is due to government-to-government loans, not to free market. In a free market, there can be no public debt, because governments do not have entrepreneurial ventures. Already in 1949, Mises criticized the Monetary Fund,^[17] and P. Bauer^[18] has clearly explained the statist origin of international debt, which must obviously be condoned, yet on the other hand, never restarted). To all this we can add widespread corruption and self-serving tax evasion, which have taken on worldwide di­mensions. (Yes, corruption is outrageous, but it stems from –as we have seen- the mafias of lobby groups dependent on the government –which has nothing to do with free market–; from a myriad of government regulations –which have fostered bribery to evade them–; and from the replication of state agencies where lobby groups deposit their bribes). The thirst for power and possessions knows no limits. (Yes, so was described by Adam Smith in The Wealth of Nations). In this system, which tends to devour everything which stands in the way of in­creased profits, whatever is fragile, like the envi­ronment, is defenseless before the interests of a deified market, which become the only rule. (Again, rather than a deified market, it is the state turned into God what causes this situation).

3.4.“...Today in many places we hear a call for greater security. But until exclusion and inequal­ity in society and between peoples are reversed, it will be impossible to eliminate violence. The poor and the poorer peoples are accused of vio­lence, yet without equal opportunities the differ­ent forms of aggression and conflict will find a fertile terrain for growth and eventually explode. When a society – whether local, national or glob­al – is willing to leave a part of itself on the fring­es, no political programmes or resources spent on law enforcement or surveillance systems can indefinitely guarantee tranquility. This is not the case simply because inequality provokes a violent reaction from those excluded from the system, but because the socioeconomic system is unjust at its root. (Francis is absolutely right. There is no in-depth solution for insecurity in prisons filled with people without the slightest chance, who since their early childhood have been abused, undernourished, drugged, deprived from schooling and more, and who will surely continue filling marginalized echelons of society while underdevelopment lasts. Then again, this underdevelopment, this murderous underdevelopment stems from government statism, particularly in the case of Latin American governments. A stable constitutional democracy, a respected Rule of Law, a market economy, upholding equal conditions under the law and absence of privileges, are the key to exit poverty). Just as goodness tends to spread, the toleration of evil, which is injustice, tends to ex­pand its baneful influence and to under­mine quietly any political and social system, no matter how solid it may appear. If every action has its consequences, an evil embedded in the structures of a society has a constant potential for disinte­gration and death. It is evil crystallized in unjust social structures, which cannot be the basis of hope for a better future. We are far from the so-called “end of history”, since the conditions for a sustainable and peaceful development have not yet been adequately articulated and realized. Today’s economic mechanisms promote inordinate consumption, yet it is evident that unbridled consumerism combined with inequal­ity proves doubly damaging to the social fabric. (Again, definitely right; let us merely add that promotion of consumption may only occur on account of inflationary policies which, by expanding the monetary basis, unnecessarily foster demand for goods and services whose offer fails to increase due to controls that halt investment and produce capital flight).

3.5. “...Solidarity is a spontaneous reaction by those who recognize that the social function of property and the universal destination of goods are realities which come before private property. (Perfect; we have repeatedly mentioned that private property in a free market enables it to fulfill its social role.^[19] If the offerer DOES NOT receive protections by the state, either they earn a profit before their competitors on account of their better services, or they go bankrupt. The possibility of natural monopolies is almost impossible if tariffs are zero and the producer has all the international competition ahead of them). The private ownership of goods is justified by the need to protect and increase them, so that they can better serve the common good; (this is what we meant: Mises himself tells that such is the social role of ownership)^[20] for this reason, solidarity must be lived as the decision to restore to the poor what belongs to them. (Yes, when the government stops swindling with inflation, when it ceases to levy confiscatory taxes, the poor are restored of what the statist policy took from them). These convictions and habits of solidarity, when they are put into practice, open the way to other structural transformations and make them possi­ble. (Yes; only a developed market economy will leave margins of available resources for non-profit foundations and all kinds of charitable associations having nothing to do with profitability). Changing structures without generating new convictions and attitudes will only ensure that those same structures will become, sooner or lat­er, corrupt, oppressive and ineffectual. (This is a significant assertion. Market economies have resulted from the practice and thinking of Western Judeo-Christian societies. They may expand into other cultures, yet the origin of their main virtues –industriousness, contract fulfillment, saving, frugality, respect for the Rule of Law– are Judeo-Christian).

3.6. “…The need to resolve the structural causes of poverty cannot be delayed, not only for the pragmatic reason of its urgency for the good order of society, but because society needs to be cured of a sickness which is weakening and frustrating it, and which can only lead to new crises. Welfare projects, which meet cer­tain urgent needs, should be considered merely temporary responses. (Absolutely right). As long as the problems of the poor are not radically resolved by rejecting the absolute autonomy of markets and financial speculation (here lies the central axis of this dialogue: as we have said, Francis regards a hampered economy as “the absolute autonomy of the marketplace”. Instead, I propose him to interpret social and economic reality from another viewpoint, specifically, to consider that the financial market is a problem when the government expands the monetary basis and affects the interest rates –such being the case in the USA as well as in Argentina) and by attacking the structural causes of inequality, no solution will be found for the world’s problems or, for that matter, to any prob­lems. Inequality is the root of social ills. (Inequality is lack of distribution. Surely, it is a duty that budgets be distributed in justice. But in a society pierced by scarcity, where, after the original sin, bread must be earned by the sweat of our face, the crucial problem lies in knowledge dispersion and lack of coordination to minimize such scarcity. That is to say, the main issue is to produce. Of course, God has created everything for every human being, but after the original sin, goods must be produced through hard labor and sweat. A work and production ethics is, therefore, as significant as an ethics of distribution). 

 3.7. “…We can no longer trust in the unseen forc­es and the invisible hand of the market (In my understanding, the “invisible hand” analogy is, indeed, invisible. It is a question of interpreting the market in the light of what have been expressed by Hayek. It is not an automatic mechanism, nor is it to assume that people will be magically good. It has to do with the government’s “visible hand”, intervening the prices as a synthesis of disperse information, erasing the signs of the market, as are the prices. This certainly turns “invisible” what is scarce or not in terms of consumer demand, as explained by Hayek in The Use of Knowledge in Society.^[21] Therefore, what the “invisible hand” analogy means is that when the government does not intervene, the offer comes closer to the demand, “learning” to read the prices. If anyone fails to learn, they melt down into bankruptcy, this being vital to preserve the common good. Hence, a market economy can be trusted; there is nothing “invisible”, except that people usually fail to see the direct consequences of their actions: Francis “does not see” that when he praises San Lorenzo, producers of San Lorenzo football shirts receive a higher demand; still, so happens, and there is nothing wrong in it, unless the football shirt producer would have made an arrangement with the Argentine government at the expense of all). Growth in justice requires more than economic growth, while presupposing such growth: it requires de­cisions, programmes, mechanisms and process­es specifically geared to a better distribution of income, the creation of sources of employment and an integral promotion of the poor which goes beyond a simple welfare mentality. (Francis is right: mere assistencialism does not suffice. A reform of the existing structures must be carried out, and I am therefore proposing, with all respect and affection for Francis, the reflection that what he calls market are indeed statist structures that curb development. Apart from that, as I have explained on other occasions,^[22] Hayek does not deny income redistribution at a municipal level, provided it is not inflationary, confiscatory or monopolistic. What ASE advocates reject is the monopoly of national governments, the welfare state –in crisis both in USA and in Europe, not merely on grounds of its inefficiency and inverted population pyramid, but also of a radical injustice: it places the principle of subsidiarity at risk. The redistribution admitted by Hayek is otherwise fully compatible with the research program where the municipal government role becomes one of a club good). I am far from proposing an irresponsible populism, but the economy can no longer turn to remedies that are a new poison, such as attempting to increase profits by reducing the work force and thereby adding to the ranks of the excluded. (Now, as we have seen, this happens when there are no clear rules in a market economy. When profit is pursued, new investments are promoted, therefore implying an increase in labor demand –because capital goods result from work, intelligence and creativity applied to natural resources, in turn entailing demand for labor and decrease in unemployment).

4.      Conclusion

I hope this dialogue be fruitful. A dialogue always implies disposition towards empathy in order to close horizon gaps. Why is it that those who have been trained after Scannone or Dussel, on the one hand, cannot sit in dialogue with those of us who have been trained after Mises and Hayek? Is it that the lack of communicability of paradigms must be so insurmountable? I think not. All the more so, when intentions are the same: to put an end to poverty, underdevelopment, hunger, malnutrition, and any subhuman life conditions of the peoples. And these expressions are made by a lay person who shares Francis’ calls to live the Gospel in a more authentic spirit, to decentralize the Church’s government, to reach the peripheries, to look with mercy, to hear with the heart. I hope Francis, a Pope open to dialogue, may open himself up to this dialogue ––so unusual, yet so significant.

^[1] http://www.vatican.va/holy_father/francesco/apost_exhortations/documents/papa-francesco_esortazione-ap_20131124_evangelii-gaudium_sp.html [English version: http://www.vatican.va/holy_father/francesco/apost_exhortations/documents/papa-francesco_esortazione-ap_20131124_evangelii-gaudium_en.html]

^[2] Zanotti, G.J: Economía de Mercado y Doctrina Social de la Iglesia (Ed. de Belgrano, Buenos Aires, 1985). Second Edition: EdicionesCooperativas, Buenos Aires, 2005.

^[3] Sopec. Madrid, 1968.

^[4] “Economics and Knowledge”; “The Use of Knowledge in Society”; “The Meaning of Competition”, respectively, all in Individualism and Economic Order, Chicago University Press, Midway Reprint 1980.

^[5] Man, Economy, and State, Nash Publishing 1970, chapter 10.

^[6] Competencia y empresarialidad (1973) Unión Editorial, Madrid, 1998, and The Meaning of Market Process, Routledge, 1992.

^[7] Zanotti, G.J.: “La filosofía política de Ludwig von Mises”, in Procesos de Mercado, Vol. VII, Nro. 2,Fall 2010.

^[8] The Theory of Money and Credit, Liberty Fund, 1981.

^[9] Op cit., pg. 624,in http://mises.org/humanaction/chap21sec7.asp.

^[10] Cfr Buchanan, J,:  “Miperegrinajeintelectual”, Tópicos de actualidad, CEES, March 2001;  El cálculo del consenso, Espasa-Calpe, Madrid, 1980; The Limits of Liberty, University of Chicaco Press, 1975;  The Logical Foundations of Constitutional Liberty, Liberty Fund, 1999, Vol. I.

^[11] Socialismo, Instituto de Publicaciones Navales, Buenos Aires, 1968.

^[12] Refutation to added value by Marx, in Live of Marx, in chapter 8, Book I of the monumental work by E. von BohmBawerk, Capital and Interest (Liberty Press, 1959), dated 1884. This work is as significant and extensive as Marx’s Capital, and is its counter-face; yet it is absolutely ignored by Marxists, and also by those who claim to be non-Marxist. 

^[13] Op.cit., The Logical Foundations of Constitutional Liberty.

^[14] Zanotti, G.J.: “Economy and Culture in the Thought of John Paul II”, in Logos, A Journal of Catholic Thought and Culture; 1:2 1997.

^[15] The Theory of Money and Credit, op.cit.

^[16] Precios y Producción, Unión Editorial, 1996.

^[17] La Acción Humana, op.cit. pg. 591

 ^[18] Crítica de la teoría del desarrollo, Orbis, 1983.

 ^[19] Economía de mercado y Doctrina Social de la Iglesia, op.cit., chapter III.

 ^[20] La Acción Humana, op.cit, pg. 823.

 ^[21] Op.cit.

 ^[22] In “Igualdad y desigualdad según desiguales paradigmas”, in Empresa y Humanismo (2004), Vol. VII Nro. 2, pp. 259-254.