Before Thanksgiving, my friend Tim Peach set forth a heavily ironic statement of what he apparently takes to be the free-market ideology that informs the anti-bailout view. At first, I hesitated to respond for a variety of reasons, not least my reluctance to admit any resemblance between my own conception of free-market economics and the one Tim attributes to Ayn Rand. But then Tim called me out by name on the point. And besides, he is not the first of my Catholic friends to invoke religion in support of pro-bailout, interventionist economics. These friends have either argued or implied that free-market capitalism is in some way inconsistent with God’s idea of human flourishing. That is well worth discussing, and Tim’s comment presents a perfect opportunity because of its considerable rhetorical force. So although I am no expert, I will hazard a conception of economics that I believe acknowledges its limits and distinguishes it from anything that could be considered religious or even moral.
Is money “real”?
Tim’s satire — I’m not sure that’s the right rhetorical term, but it’ll have to do until someone, probably Jim Walsh, tells me the right term — begins with the assertion that money is sacred and “the most real thing there is because it is made by God.” I believe (as Tim does, beneath the sarcasm) that money is neither sacred nor “the most real thing there is.” I also agree with Tim that sorting out the “real” from the culturally or historically conditioned is an excellent way to begin thinking about what “laissez-faire economics” really comes to.
To begin with, regardless of whether money is real, I believe we are real in this “made by God” sense, and we are made with equally real needs for food, shelter, and clothing. If we are right to regard these things and the desire for them as real, then we should also regard the problem of how to generate an abundance of these things as one of the most basic elements of any theory of human flourishing.
Work is real, too, and I take the desire for moderate amounts of work, rest, and play to be as real as anything else about the human person. Scarcity is also real; we cannot all have the same job or fish in the same pond or marry the same person. Diversity (the fact that our talents and desires are not all the same) and interdependence (the fact that each person’s choices affect the options available to others) are equally real. Scarcity, diversity, and interdependence keep us from aping each other and choosing the same path through life. Instead, they prod us along on paths that are tailored to our particular talents and desires. So our problem is not just how to generate material goods, but how to generate the right level of material satisfaction in light of our competing preferences.
Over time, we have found that people can generally have more of everything if they cooperate, specialize, and trade. It turns out that if one guy just builds houses and his neighbor just grows food, both families end up warmer and better fed. Most of us are much better off buying hamburger from a butcher than raising our own steer.
Money is essential for mediating all of these real and conflicting interdependent needs and desires. It allows fishermen to buy wheat from farmers who hate fish, and it allows the wheat farmer to sell wheat to fishermen and blacksmiths alike without calculating separate rates of barter with each. It also carries messages to individuals about what society really needs from them, guiding them out of a particular pursuit when profits are small or non-existent, and enticing them back in when business is booming.
No matter how essential, however, money is not “real.” It is true that almost all societies until ours used commodities as money — not just gold or silver, but everything from salt to tobacco to pelts to cattle. But although these commodities are themselves perfectly real when used for their own properties, their value as a medium of exchange is contingent on social acceptance. It is that sense in which money is not at all real; in which doubling the amount of money in everyone’s pockets is a totally pointless gesture because it does not affect the actual rate at which people will trade fish for wheat, or horseshoes for housing.
This observation about the nature of money is not new, by the way. Writing in 1776, Adam Smith advised landlords to specify rents in quantities of commodities rather than in coin of the realm because of what he regarded as the universal tendency of all governments to debase their coin over time by reducing the quantity or quality of precious metals used. A bushel of wheat, by contrast, may become cheaper or dearer in a given year depending on weather conditions, but decades hence it will still be worth what it takes to grow a bushel of wheat.
Thus, while Tim seems to be criticizing free-market economists for taking money too seriously, I think that’s exactly backwards. It’s the pro-bailout side that errs by treating money as real; it is they who wrongly think that an infusion of money into the economy (unaccompanied by real value) actually accomplishes anything of real consequence.
Is economics real?
I have sometimes disparaged economics as “the study of how to apply jargon to common sense.” But the problem studied by economics — how to allocate scarce resources toward the satisfaction of competing ends — is as real as the competing ends themselves — as real as we are. And although our will is free and we can generally each choose different ways to allocate our efforts and resources, experience permits certain generalizations from our aggregate behavior. For example: People who can buy something at either of two prices typically choose the lower price (all other things being equal). People who can sell something at either of two prices typically choose the higher price. The more one has of a good, the less it is worth. When demand grows faster than supply, prices go up. And so on. These generalizations — or more precisely, the countless individual decisions that conform (in the aggregate) to these generalizations — are what determine the number of people who become builders, the number who become farmers, and what they get paid.
Are these principles “real” in the sense Tim uses that word? I think the historical evidence, from all kinds of societies, is that these basic behavioral patterns are a product of the practical reason that is hard-wired into us. Indeed, I think we should take at least the most fundamental of these generalizations to be as true and as real as the law of gravity or the principles of mathematics, as long as we are talking about aggregations of individual decisions.
Of course, the aggregate picture comprises trillions of moving parts. Incomes go up (and down); consumer preferences change; technological change creates new industries and dooms established ones; weather patterns create surpluses and shortages. The permanent and ubiquitous dynamism may make it seem as if the outcomes are entirely subject to our manipulation. But there are two problems with this.
First, it’s impossible to do well. The fact that a glacier moves does not mean you can push it wherever you want it. No one, and certainly no deliberative body, is remotely capable of directing the activities of so many people on so many levels. Indeed, until the last century or so, no one would even have considered it possible even to do it badly, so self-direction flourished by default. Perhaps the ease with which we currently satisfy our material wants misleads us into thinking government direction of the economy is not very hard, but if so then our mistake is a luxury afforded to us by the very abundance we are about to destroy.
Second, when the manipulations work at all, they tend to work only for a while and only up to a point. In particular, we have developed a number of nifty fiscal and monetary tricks that induce people to act in ways they would not otherwise choose (e.g., taxing things we want to discourage and subsidizing things we want to encourage), but sooner or later people see through the money and focus on the ratio of fish to wheat, or horseshoes to housing. Housing prices eventually revert to some sort of relationship to income, because in real life and in the aggregate people will tend to limit the portion of their labor they devote to housing so that they can reserve some for food, clothing, and even frivolity.
If it is these real exchange ratios that ultimately govern, then our fancy fiscal and monetary interventions are like the Round-Up at the county fair. That’s the one that spins you around fast enough for the centrifugal force to keep you from falling even when the ride lifts off the ground and tilts 90 degrees. It is as if gravity were suspended. But gravity is not suspended; the ride will end. If, at the end of the ride, Smith is up and gravity wants him down, then Smith will fall.
Is Smith’s fall inevitable? Reasonable minds differ, but if Smith has been kept aloft by “easy credit” (also known as “exorbitant amounts of debt”), I say yes. That makes me a believer in something called the Minsky moment. This concept was elegantly explained recently by a writer at The Motley Fool, as follows:
A Minsky moment is a phenomenon named after economist Hyman Minsky, which describes what happens when an economy simply can’t afford its debt anymore. Think of it in Wile E. Coyote terms: We reach the Minsky moment when, suspended in midair, we realize we’ve outrun our road, look down, and panic.
The ground beneath Wile E. Coyote’s feet, to extend the metaphor, is the point at which everyone once again knows what wheat is worth in relation to fish, and what horseshoes are worth in relation to housing. This is a particularly frightening prospect for the chronically overpaid, and for people whose main contribution to society consists of producing large stacks of paper, which is what makes it so frightening to us as a nation right now. But it’s the only solid ground I see from the Round-Up. That, and not the money, is what’s real.
Is the free market sacred?
If anything like the view I have sketched above is right — that is, if we are real, and we have real needs and desires, and we satisfy those needs and desires by cooperating with each other in ways that are so intrinsic to human nature as to take on the character of natural laws — then interference with the functioning of the market is wrong in the sense that it is self-defeating. We need not consider it wrong in any other sense. In particular, opposition to market interventions need not be based on any notion that the poor deserve to be poor or that the rich deserve to be rich, or that anyone in society deserves the talents and opportunities and lucky or unlucky bounces that he has received. It is simply a matter of practical rationality. If you want labor and capital to be employed to satisfy human needs for food, shelter, clothing, and all the rest, then you would be well advised to let prices fall or rise according to market principles. This is because market principles reflect the underlying reality of our very real human needs — and they reflect them much more effectively than any other system we have found.
This does not make market principles sacred or moral, any more than the principles of aerodynamics are sacred or moral. But they are just as important to follow if one wants the benefits they offer: specifically, the most effective way to satisfy human needs and desires known to any human civilization ever. We would not call it a “sin” to build an airplane without paying attention to the science of aerodynamics, and there may even be some useful purposes to which such an airplane can be put — as a toy for children to climb into at a museum, for example. But if one wants it to fly, then it is self-defeating to ignore aerodynamics in the true but irrelevant opinion that there is nothing sacred about aerodynamics.
Our economic actions, including our government policies, do have consequences of moral significance (just as there are consequences of moral significance to building faulty planes). Sometimes a laissez-faire response will allow people to lose their jobs. But such a response will also achieve positive consequences from time to time, and it is no mere coincidence that these two types of events are linked. When we let an industrial concern go bankrupt, it is myopic to look only at the jobs lost in a failing industry without noticing the entrepreneur who buys up the shuttered factory and puts people back to work in a pursuit that society evidently finds more useful.
But economics is not a theory of morality (let alone a “religion“), and it is important to keep the moral considerations distinct from the economic ones. We may well ask, as a matter of religion or of moral or political philosophy, whether those who benefit the most from economic arrangements — the beneficiaries of all the natural gifts and lucky bounces to which Tim rightly calls attention — have an obligation to help their less fortunate brothers and sisters. My answer is an unequivocal yes. Long experience shows that free-market economics is the best system for society because it mediates our conflicting needs and desires and manages the constant need for disruptive change. At the same time, both experience and economic theory show that this best-of-all-known-systems imposes heavy costs on certain individuals for reasons that often have nothing to do with individual desert or even merit. That’s a pretty solid case for an overall social responsibility to the poor, in my opinion. But that’s a moral argument informed by economic realities; it is not an economic argument and it is certainly not an economic argument against the free market; on the contrary, it assumes that free-market economics is correct.
Similarly, in moments of widespread economic dislocation like the present, we may well ask, as a matter of religion or of moral or political philosophy, whether the government should monkey around with the economy in very big ways, so as to make things awful but tolerable for everyone instead of letting the system keep humming along fine for 85% of us while the other 15% suffer total collapse and everything that goes with that. My answer to that one is no; I would rather see government do something to help the 15% directly but keep its hands off the day-to-day functioning of the economy. And again, the reason is not because the 85% deserve to be left alone, or because the 15% don’t deserve any help. The reason is rather that in the long run (and it doesn’t really have to be all that long a run), all of us are worse off if we break the machine. I’d rather share the output of a machine that works well.