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.

In a recent statement to the world's diplomats, Pope Francis called for an end to the free market. He said that  free-market capitalism had created a “tyranny,” and that countries should impose more control over their economies and not allow “absolute autonomy”, in order to provide “for the common good.”In his opinion economic inequality is caused by "ideologies which uphold the absolute autonomy of markets and financial speculation, and thus deny the right of control to states, which are themselves charged with providing for the common good."
Pope Francis is one of my favorite Popes of all time. He knows how to love and lead the Church well, but his infallibility extends only to matters of “faith and morals,” as does the rest of the magisterium. No one would argue that Pope Francis and the rest of the bishops’ infallible teaching power extends into the realms of biology, so why do we accept that the Church’s teaching power extends to political philosophy and the economy? 

Yes, the current financial system is terribly screwed up. Yes, we are dominated by the tyranny of money. However, we are not living in a free-market economy. What we have are centrally planned economies that pretend to be free markets. Pope Francis’ diagnosis is wrong, and therefore his prescription must be called into question. Should countries impose more control over their economies than they already do? Well, what is the common good? I would say general prosperity (the leisurely kind) is a good. Poverty, though a spiritual virtue, is not something that we want people to live in. God’s heart for his people is that the poor be cared for, which means that he doesn’t enjoy watching his kids live in poverty. A high standard of living across the board is the best scenario for the common good, economically speaking. I’ll prove that by asking the following question: “would you rather be poor in Richmond, America or poor in Bangalore, India?” No one would pick Bangalore. Why? The standard of living is higher in Richmond. 

So what sort of factors cause growth in an economy, which then leads to a raise in the standard of living? Does more government control lead to the general welfare, or does more free market capitalism lead to the general welfare? First, let’s talk about the difference between a free market economy and a centrally planned economy. In a free market economy, banks set their own interest rates according to supply and demand of money. The currency has inherent value (Gold/silver) and is therefore stable and not easily manipulated. When an institution fails, its capital is redistributed to new entrepreneurs at cheap prices. This creates opportunity for the little guy. On the other hand, in a centrally planned economy, interest rates are set arbitrarily by a central bank. The currency is a fiat currency (paper, printed money) that is manipulated for the states benefit. Big business is bailed out when it fails and generally propped up by the state. 

Clearly, our economy is centrally planned. But let’s just take this one at a time, shall we? 

Interest rates: 
In a free market society, interest rates work the following way. A bank opens up. They don’t have money to lend out, so they raise their interest rates. That makes you want to save your money in a bank as opposed to take out loans. Once the bank has enough resources to lend out to entrepreneurs, they lower the interest rates. This makes you want to save less and borrow more. This sort of system rewards you, the small guy, for SAVING YOUR MONEY. 
In an economy with a central bank, however, ( 90% of the developed nations in the world), the interest rates are set arbitrarily, and they are generally set LOW. (The Federal Reserve has them fluctuating between 0 and 2 through 2014). This does not encourage you to save, but rather to take out loans. Here’s a thought, one of the greatest struggles of our economic lives is getting out of debt. Not enough people save right? According to people like Dave Ramsey, we are all just being stupid consumers, not saving our money or thinking long term. It’s not because we’re stupid. It’s because our current financial system doesn’t reward us for saving. There are so many repercussions to this practice that it would take hundreds of pages and lots of big economics terms. The point is that centrally planned interest rates make us much more debt laden. This true of us as individuals, and of the country as a whole. The debt crisis in the west is not caused by the free market running unhampered. It is caused by central banks. 

Currency:
The second thing that central banks do is they inflate the currency. The Fed calls it “quantitative easing.” They basically print money. In a free market, a currency has inherent value and cannot be inflated. Gold and silver have inherent value. It’s scarce, it’s shiny, and it’s easily divisible. A government cannot simply print more gold to finance its bloated welfare system and adventurist foreign policy. When the fed prints money to finance these things, it makes our money worth less. It is a hidden form of taxation. This removes money from the middle class and puts it in the pockets of defense budget lobbyists, insurance company lobbyists, and all the rest of the wall street big wigs. 

Big Business
Moreover, when these institutions fail, like in the 2008 crisis, the Fed bails them out with printed money. This sucks value from the middle class’s dollar, and gives it the wealthy. That is called wealth redistribution. It is NOT good for the poor, it is NOT good for the middle class. It LOWERS our standard of living. The state also likes to prop big business up by hurting their competitors. Big companies love to lobby to government for more and more regulation. They don’t care about regulation. They have armies of lawyers and accountant divisions specifically for the purpose of handling government regulation. They eat the cost. On the other hand, small business gets slaughtered. If you want an example of how this works, watch Senator Ted Cruiz talk about the new internet sales tax. Big business lobbied for it. Small business doesn’t lobby. Big business crush’s small business. 




In conclusion, central planning makes for a hostile environment for growth and innovation. Pope Francis’s attempts to correct what is clearly a terrible issue, tyranny, but he does it by encouraging more of the same. The Church, indeed the entire world, needs to start taking the economic sciences seriously. We cannot afford, as a church, to be encouraging practices that entrench poverty and keep the worlds resources clutched in the hands of the 1%. The free market is the answer, not the enemy.