Published in 1986 as part of its “Taking Thought for the
Poor” series by the London-based think tank, The Social Affairs Unit.
James A. Sadowsky, S.J.
If Christians are to embrace the “option for the poor,” they
must first, in a whole range of policies to do with housing, mini-mum wages and
unemployment, find out what that option is, they must identify it. If a
physician would alleviate a disease, he must begin by discovering what it is
that causes the disease. I am sure that all they that profess and call
themselves Christians want to do what is right by the poor—in this they are united.
They agree about the end and disagree about the means. There is nothing
surprising about this kind of disagreement. There is nothing in the
deposit of faith, nothing in the content of revelation that answers this
question. There is no revealed solution to the problem of poverty any more than
there is a revealed cure for cancer. Just as there is no revealed medicine, so
there is no revealed economics.
On the other hand positive economics is a value-free
science: it does not tell us what is good or what is bad; it does not tell us
what to do or what not to do. There are those who say that economics is
value-laden to the extent to which it affirms its own value. In fact, it
does no such thing. It is theeconomist that judges that his subject matter
is worth knowing. But that subject matter would be “out there,” its
content the same even if no one thought it worth being known, even if no
economist had ever existed.
Consider the following statement: “Rent control tends to
decrease the supply of housing.” Surely this statement is not evaluative:
it does not say that rent control is a good thing; it does not say it is a bad
thing. Supposing the statement to be true, ought we to be against rent
control? It all depends on what you want. If your goal is to
decrease the supply of housing, then you have a reason for favouring rent
control. If you are trying to expand the supply, you will think twice before
advocating it. Perhaps the way to stop the drug traffic would be to put a
maximum price on illicit drugs?
Should we decrease the supply of housing? If you say
we ought or ought not to do so, then you are making a value judgement. Of
course, economists do and, indeed, ought to make such judgments. But then
they are no longer acting as economists. They are now wearing a different
hat. They are now making a political judgement, perhaps even an ethical
judgement. At least this would be true provided that the reason given
were not itself a statement of economics. If one were to say that we
should decrease the supply of housing because doing so would free the factors
of production for the making of other commodities perceived as being more
desirable, one would simply be raising the question: why more desirable?
Only by leaving the realm of economics can we avoid an infinite regress of answers.
If an ethician or a theologian says that rent control is a
moral imperative, there is nothing the economist can say against his value
judgements as such. What he can urge upon him is the necessity of knowing
exactly what it is he is evaluating. It ought to be remembered that we
evaluate reality only insofar as it is present to our minds. If one
person thinks that rent control does not tend to decrease the supply of housing
and another thinks it does, then they are really evaluating two different
things. And if they are evaluating two different things, we cannot say
that a negative evaluation of one thing and a positive evaluation of the other
thing constitute an ethical disagreement. While rejecting the rent
control that decreases the stock of housing one might conceivably embrace the
rent control that does not do so (if only such a thing existed!). What we
have to ask our ethician is whether he is in favour of decreasing the supply of
housing. If the answer is yes, we know at last what it is he favours, and
those that do not want to see the housing supply de-crease are at last in a
position to disagree with his evaluation. But if he takes this position,
there is very little left for the economist to say to him. It is time for the
moralist or the theologian to take over the task.
But how often in the real world is it a question of opposing
values? How many moralists or theologians would advocate rent control or
other interventions in the market while believing that these would serve only
further to impoverish the poor?Of course, none of them would do that sort of thing.
It is a matter for concern, however, that so many advocates of government
intervention will rush in where economists fear to tread. One detects at
times a certain impatience with economics. Talk is heard about “so called
laws of economics.” I read recently of a clergyman’s saying that we ought
not to treat the laws of economics as if they were the laws of God.
But the laws of economics are the laws of
God. They are in the same way that the laws of physics are the laws of
God. They are laws, however—not legislation. They are the laws of
God because He it is that decrees the existence of the entities whose
nature it is to obey those laws: had He wanted other laws He would have had to
create other things. He can create beings that observe other
laws, but He cannot legislate alternative laws for the same kind of
being. This shows how nonsensical it is to ask why God did not make the
laws of nature different from what they are. To ask for a different set
of laws is to ask for a different universe!
Like physical laws they are necessary but only
hypothetically necessary. They work positis ponendis. In
other words, these laws are formulated in terms of “if then” statements.
Economic laws do not tell us what human beings will or will not do, how they
will behave. They tell us rather what will happen if human beings behave in
certain ways. And here again, they reveal to us only tendencies: what
will happen if all things are equal. Will, for example, minimum wage laws
actually cause unemployment? Not necessarily—and certainly not if set
below the market-clearing level. They tend to do so when set above the market
level. There may well be forces in the economy that will overrule the effect of
the higher wages. What we can say, however, is that there will generally
be less employment than would otherwise have been the case: it is likely that,
absent the increase in wages, even more people would have been employed than
was the case before the countervailing force began to be felt.
The mere fact that a minimum wage law was not followed by an
increase in unemployment does nothing to falsify the economic law. Any
number of factors could have maintained the level of employment in the face of
the increased wage. The increase in wages could, for example, have
coincided with an increase in consumer demand for the worker’ product.
Alternatively, the government may have increased the money supply: thereby seeming
to validate the increase in monetary wages while increasing the money supply
sufficiently to cancel out any increase in real wages. What we must bear
in mind is that frequently several economic laws are operating at once.
The same holds true with respect to physical laws. When water stops
boiling at 212 degrees, we do not say the physical law has been
falsified. We seek for another factor: we ask whether, for example, the
pressure has not been altered. Both economic laws and physical laws are
subject to caeteris paribusconsiderations.
The necessity of economics laws no more implies an absence
of free will than does the necessity of physical laws. The freedom of the
will becomes relevant only when we are simultaneously solicited by two opposing
temptations. A typical case occurs when we desire both to go to the theatre and
to a football game (it being impossible to go to both simultaneously). If
the only thing that attracted us were the football game, we should have no
alternative but to go to the game: the will has no other direction in which to
go. I may be able to choose freely whether or not to put the kettle on
the stove; but if I do choose to put it on the stove, the physical law will
take over with inexorable necessity. Don’t we see that this necessity in
no way diminishes the freedom to decide whether the kettle shall be put on the
fire? For the laws to take effect the necessary conditions, including
where relevant human choice, must be present. When it comes to economic
relationships the same considerations apply. What people decide to do
determines which economic law becomes operative, but the law unpacks with ineluctable
necessity the consequences of that choice.
Persons less intelligent than my readers have disparaged the
idea of economic laws on the grounds that they are nothing but a defense of
bourgeois interests, the interests of the ruling class. But surely, for
the lover of truth the ultimate question whether even so the defense
is a successful one. Who would dismiss the laws of mathematics
for the reason that they serve the vested interest of mathematicians? All
this reminds of those who would reject certain narratives in the New Testament
on the grounds that they were put there to serve apologetic interests.
But does the fact that I adduce arguments in behalf of my conclusion show that
my conclusion is false?
Some have claimed that the laws of economics presuppose that
men are motivated exclusively by financial self-interest. The fact is that
these laws suppose only that we try to satisfy our wants. Human beings try
always to maximize their psychic income. Only when all other things are equal
do they try to maximize their financial income. By psychic income we refer
to wants of whatever description. They need not be self-regarding wants. The
Red Cross, for example, tries to gain income in order to take care of the needs
of other persons, not its own needs. Huge investments are held by
financial institutions in order to assure the pensions of retired workers.
Nor do these economic laws presuppose the reality of perfect
competition: an imaginary situation in which an entire industry had a sloping
demand curve while the demand curve for each firm was perfectly horizontal and
with the possession of full information by all economic agents. The idea
was that no one firm produced enough to have a perceptive effect on the price
of the collection of firms. If one reduced its production to zero, the price of
the good would not be affected. When this happened, would it still have
been true that if one of the remaining firms reduced its production to zero,
the price would be unaffected? One might wonder how in a world of perfect
knowledge there could be an imperceptible effect on the price of a commodity.
The fact is that most of the important economic laws were discovered before anyone
ever heard of perfect competition. It was not heard of until several
decades after Adam Smith. What Smith meant by “free market” was simply the
market unhampered by government interference. For him the number of firms was
irrelevant. He seems to have been willing to let the chips fall where they
might. The only monopoly he seems to have worried about was the
government-created monopoly—presumably because the market forces would not have
permitted its creation. To pretend that the market unhampered by
government is not free because it is not perfectly competitive is to give
“free” a different meaning that the one it had for Smith. In fact, one
sees the term “so-called free market” so often that one is led to wonder when
they would be willing to drop the scare-quotes.
But don’t economists disagree? Not as much as one
might think. The disagreements are not so much about the economic laws
themselves as they are about questions of policy. The again, there is one
problem with economists. There would not be much of a market for economists
were it not for government intervention in the economy. The government
needs economists in order to carry out its fiscal, industrial, regional, energy
and monetary policies: certainly it requires their approval. And
businesses require them either to fight intervention or else to secure
interventions that are favourable to themselves. Tax lawyers may be
engaged in reducing their clients’ taxes, but their existence and jobs are
dependent on the necessity for securing tax reductions. Qua economists, they
would have precious little to do in a totally free market. Where would
doctors be without disease and morticians without death? Besides, does
the fact of disagreement justify one who is innocent of economic knowledge in
taking sides or—worse yet—ignoring economics altogether? Do we act this
way when physicists or doctors dis-agree?
The point is not to tell clergy and others to be silent on
economics questions but rather to follow in the path of Bishop Fleetwood, the
philosopher and Bishop Berkely, Archdeacon Paley, Malthus, and above all the
great Wicksteed––all of them clergymen. Among Catholics we have Cajetan,
the famous commentator on Aquinas according to whom the just price was “the one
that at a given time can be got from the buyers, assuming common knowledge and
the absence of all fraud and coercion.” It was a Spaniard Azpilcueta who
in the sixteenth century pointed out that price controls were unnecessary in
times of plenty and positively harmful in times of famine. If the clergy
and other are willing to get their hands dirty, they can truly bring to bear on
matters temporal that higher wisdom that comes from theory and ethics. One is
tempted to transpose to our area the famous Kantian dictum that percepts
without concept are blind and concept without percepts are empty.
What are some of things that in economics can contribute
towards an under-standing of the causes of poverty? What determines a
person’s earning power? Briefly, it is that person’s contribution to
productivity at the margin. It is the difference he makes to the value of
the product. The greater one’s contribution to productivity at the margin
the larger the share of wealth that one earns. A person’s skills, the
difficulty involved in performing the job, the number of years spent in
acquiring the skills affect the earning power of the individual only to the
extent that it impacts upon his contribution to productivity at the
margin. And normally they do affect that contribution. They do so by
affecting the supply of workers. We all see that the impact we make depends
on the number of individuals producing the same good. Given a large number of
producers, the withdrawal of an individual’s contribution will make only a
small difference. It is clear, then, that consumers through the agency of
employers will have to bid much less for this individual’s services than they
would if he were one of only a few. We cannot emphasize too strongly that
it is the consumer that pays these wages. In fact, all the costs
of doing business are taken care of by the consumer. Over the long haul
sellers will not remain in business unless consumers cover their costs. It is
the consumer, not the employer that is responsible for the fact that an
individual’s wages are not higher than they are. Essentially the employer
is a middleman. By buying the product elsewhere or by not buying it at all the
consumer vetoes the choice of the over-generous or extravagant employer.
Many have suggested that the market unjustly distributes
wealth: that it makes the rich richer and the poor poorer. They look
to the government to correct this maldistribution. But does not this
claim presuppose that there is a distinct operation in the market
that could be labeled “distributing”? Does it not also suppose that there
are certain individuals on the market who function as “distributors”? But
there is not such a distinct operation on the market. Wealth is produced and
wealth is exchanged. Period. So there are no distributors. If there
is no distribution process on the market, how can there be an unjust process of
distribution or—for that matter—a just process? Again, if there are no
distributors, there can be no unjust distributors. The different holdings
that result from the process of production and exchange will depend entirely on
the justice of those processes.
Injustice can have crept in only because the holdings that
were acquired before ex-change ever took place were unjust or else because
there was injustice in the exchange process. This certainly bears
investigation but if there have been violations of justice in these cases it
was commutative justice rather than distributive justice that was violated.
But does the market make the poor poorer? Where is the
argument to show that the absolute quantity of goods possessed by the poor is
less because there has been a relatively free market? Where is the
argument to show that over the long haul the quantity possessed by the poor
would be greater if only the rich possessed less? This is what has to be
shown. A very good case can be made to the effect that the market has
made both the rich and the poor richer.
This is not to say the rich do not have obligations towards
the poor. They do, of course. But this obligation is based on the
need of the poor, not on the fact that the distribution of wealth is
unequal. Or are we to opt for the equal distribution of wealth even if
those who are now poor end up with having even less than before?
Moreover, if people are to be able to distribute their wealth, they must first
be able to earn it.
We have to beware of the “I am poor because you are rich”
syndrome. If my earnings are low, it is because there are so many others engaged
in my line of production. They, too, will have low incomes for the same
reason. Now in a free market the wealthy cannot be blamed for the fact
that I am not engaged in their line of production. (If they could, then
to that extent the market is not free.) If anyone is to blame it is those
who are engaging in my line of work. But by the same token I am to blame
for their poverty. Given the differences in skills and in work preferences,
you are bound to have more working in some occupations than in others.
Only in a world where everyone had the same skills and same tastes would earnings
be equal. Leo XIII makes this point forcefully in his encyclical Rerum
Novarum:
“It is impossible to reduce human society to a level.
The Socialists may do their utmost, but all striving against nature is vain.
There naturally exists among mankind differences of the most important kind;
people differ in capability, in diligence, in health, and in strength; and
unequal fortune is a necessary result of equality of condition. Such inequality
is far from being disadvantageous either to individuals or to the community;
social and public life can only go on by the help of various kinds of capacity
and the playing of many parts, and each man, as a rule, chooses the part which
peculiarly fits his case.”
Here we have a clear case of the recognition that inequality
has a function in the production of the wealth on which all of us––rich and
poor alike––depend.
One might imagine that all the employers have to do when
they give their workers a raise is to pass on the cost to the customers. But if
you assume that the employer had been charging what the traffic bore in the
first place, there is no way in which he can charge more for the same supply of
goods. Not unless he can increase the demand for them. But if he can
increase the demand after giving the rise, why could he not have done so without
having given the raise. No, if a raise increases the cost of employment,
less of the good in question is going to be produced than would otherwise be
the case. Fewer workers will now be employed. Those disemployed
will be forced will be forced into less desirable lines of work (or, if there
is a wage “floor” in the economy, into unemployment) and, upon entry into that
industry, will lower the pay there. It may even drive the least efficient firms
out of business.
The only way in which one can increase one’s share of wealth
on the market is by increasing one’s marginal productivity. There are
several ways in which this can happen. The easiest way is to have other
individuals exist from your occupation. This happened in the servant industry
as a result of the war. Many servants left to work in the factories. In
particular, it became respectable for women to take factory jobs. Many of
them did not return to domestic work after the war. It now became
necessary to pay higher salaries if one wanted to have domestic help. The
marginal productivity of servants had improved. This does not mean that
servants had become better or more hard-working. They had just become
fewer. You now had the same demand chasing after a much smaller supply. Through
no fault of any one of them each servant had become worth more than he was
before the war.
Sometimes government intervention artificially increases
marginal productivity in some areas at the expense of lowering it in others.
A very effective way of producing this effect is by passing anti-immi-gration
legislation. There is a law that states that the same good tends to sell
at the same price throughout the whole world (allowance being made for transportation
costs). This will hold good for labor services. If salaries are
higher in one area than in another, workers will tend to move to the areas
where the salaries are higher. This will tend to lower the salaries in the
area to which they move while raising them in the area they are leaving until
they are brought into rough equality. One would expect Haitians to move
from their heavily populated island into areas where workers were relatively
few in number. This has not happened. It has not happened because of
anti-immigration laws in countries such as the United States. Thus
American workers enjoy an unfair, man-made, legislated advantage to the
detriment of Haitian workers. Why is it that so many who profess such love for
the third world have so little to say about this state of affairs?
Another way, obviously, is to move from a job that is more
crowded to one that is less crowded. The reason some are less crowded than
others is due either to the fact that fewer people have the requisite skills or
that the job is relatively more unpleasant. (If all jobs demanded the
same degree of skill, and were equally [un]pleasant, the wages of all workers
would be identical––an application of the law just mentioned.) The sad
fact is that not everyone can increase his marginal productivity; not everyone
can increase his share of the wealth. The impossibility here is logical
impossibility. A particular application is the fact that however much trade
unions may benefit some of the workers, they do so only at the expense of
ununionized industries whose workers find their salaries depressed because of
those who exited from the unionized sector. (This is not, in and of
itself, a criticism of trade unionism. If unions can bring this about by
legitimate means, I see no moral problem. The problem is: can
they?) Of course, many are poor simply because they are unable to get
jobs. But we cannot increase the possibility of employment without
allowing real wages to fall to a level that will make the absorption of new
workers possible. This is true whether the real wages are lowered by
adjustments in the monetary wages or by overall in-creases in the money supply
while money wages remain constant. What is deplorable is that so many who
talk about the problem of unemployment do so without addressing the problem of
wage inflexibility.
The only way to make everyone richer is by increasing
production. Then everyone can be better off without anyone’s being worse
off. But this is possible only if governments bring about a climate that is
more favorable to productive investment in both plant and human skills. It
is no accident that those areas are most prosperous where the government does
not interfere with the profitability of investment. We have now had
sufficient comparative empirical evidence to bring this truth home.
Economics cannot tell the ethician or the theologian what to
do and what not to do. All it can do is to set forth the limits of the
possibility of human action. If good intentions are to bear good fruit,
they must take account of these limitations.