The Real and the Sacred in Economics

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.

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4 Responses to “The Real and the Sacred in Economics”

  1. Michael Bitler Says:

    Mark, you make great points about the importance of market forces, and the dangers of more government intervention. I am afraid we are now on a slippery slope, where both Democrats and Republicans both are taking us on a rapidly increasing journey towards socialism. It seems all most congressmen can talk about is “rewarding the taxpayer” for risks taken, acknowledging that these rewards should go back to the taxpayer from the most successful ventures they bailed out, to pay for all the ventures they through money at that ultimately failed.

    The risk as an investor of all this is watching the government continually and methodically become further involved in which company they bail out, and which one they let fail. For instance, why bail out Bear Stearns, but let Lehman Brothers fail? Why give Citibank $25 billion, and AIG $135 billion, but let the nations fourth largest bank, Washington Mutual, collapse and give the assets to Chase Manhattan, leaving the shareholders holding the bag? The losses to shareholders and employees in the corporations that are saved, or destroyed are already devastating, yet we have an emperor type government that determines the fate of these companies with a thumbs up or thumbs down. Why would any private capital invest money in a system where the government wants to step in and take the lions share of the profit as a “Preferred Stockholder” for the companies that survive and thrive, with the justification being that they have to make up for all the bad investments that were made in failed institutions? This interventionism government is putting capitalism at severe risk that it may not recover from for decades, if ever.

    Ah, how I long for the days when recommending Nokia at its all time high was the biggest worry I had.

  2. jim walsh Says:

    Historico-etymological note:

    That in days of yore cattle constituted the primary commodity used in economic transactions — or at least the prime analogate for such commodity — is reflected in the Latin word *pecunia*. We translate it as “money” but right below the surface of the word is *pecus* “herd, cattle.”

    An Indo-European cognate of Latin *pecus* is German *Vieh*, “cattle.” Pronounced “fee.” As in, say, “bride fee.”

  3. [Name Withheld by Request] Says:

    I know, Mark, that you were hoping that your posting of “The Real and The Sacred in Economics” might have closed what had become a somewhat contentious exchange (as the subject of money, wealth distribution, etc. can often be). While I’ve been thinking about your piece since reading it when posted, I wasn’t going to submit a comment–until, that is, I returned home to Connecticut with the girls for Christmas and observed some of what is happening on the “money” front (more on that below.)

    I’m going to take up the points in reverse order, though–economics and the “free market” first and then money.

    Economics

    I too have often heard the lament that free-market, laissez-faire capitalism/Austrian economics is somehow inconsistent with Christianity–and even more to the point, Catholicism. I believe, however, exactly the opposite to be true. An economic system is, as I noted in my last entry, most definitely NOT a religion, but an important branch of the quasi-science, sociology. It deals with the production, distribution, and consumption of goods and services, or the material welfare of humankind.

    While economics is most definitely not a religion, however, I believe if God was to come down to interfere with that pesky free-will nonsense and “give us” an economic system to work with, it would undoubtedly be unadulterated, free market capitalism. Even in the very unpure form in which it has been practiced on Earth to date, it has done more to advance mankind than any other economic system–or any known system ever could. It is a system which has allowed God’s greatest creation to “go forth and multiply” like no other.

    Interestingly–and very tellingly–no one who has ever made the anti-capitalist argument to me has ever proposed their “better” system. This is, I think, wholly understandable, as it would require an admission that some people are more important than others and must be allowed to control the rest in choosing what is best for them–that each of God’s greatest creations—individual human beings—is in fact NOT allowed to exercise that greatest gift of free will. They must be forced to do the “right thing” (as determined by the proposer/controller, of course…). They must be forced to have or do what some “lesser god” chooses to give them or make them do.

    Now does that make the free market/Austrian economics perfect? Far from it. Unfortunately, there is NO perfect system when human beings and God-given human nature are involved. The free market can result in arguably silly redistributions of wealth (a la “pet rocks”, cabbage patch dolls or mobile homes on the California coast). It can reward or punish risk in what appears to be wholly inappropriate ways. But in all cases, it does so as a result of now billions of human beings making individual choices every minute of every day. There is no person or group dictating to others what to do. All are free to participate or not—they are free, as God intended, to choose. Fraud can occur (and is rightly punished as an act of aggression) but certainly no more so than in any government-controlled system. (In fact, I would argue that in a truly free market, without any actual or perceived safety nets, most participants would be far more careful with their hard-earned resources. They’d be more concerned about putting all their eggs in the Enron or Madoff baskets, since there’d be no SEC or other silly regulatory body to provide them with some false sense of security—let alone steal their money to provide that false sense of security…)

    But I make the challenge again–show me an economic system, old or new, tried or yet-to-be-tried, that better fits the human beings that God has created–one that will better allocate the scarce resources of this world to God’s children. To the contrary, show me the most consistent poverty, the most constant misery and I’ll bet you show me an economic system imposed on others by government (i.e., some group of persons somehow endowed with God-like powers).

    As you know or might guess, unlike other writers in this string, I do not run away from the branding of being Randian. Rather, I consider it a compliment. But one, I think, must take Ayn’s writings in context. A Russian emigre who saw first hand the human devastation that a government-controlled economy could cause, she wrote her best material to counter-act the rapid road to socialism she found us on following the American-capitalism-maiming administration of FDR. Rand better than most had learned to worship the idea of America, where people could come from anywhere to freely succeed OR fail. And while an atheist (not too surprising growing up in a Godless Soviet system); she espoused the freedom of religion no less than any other freedom. So long as a human being did not interfere with another’s right to follow his or her best interest, it certainly didn’t matter to Rand if that human being chose to be religious. And Atlas Shrugged (interestingly voted the 2nd most influential book in America, after the Bible) was incredibly prescient to where we find ourselves today–and, more disturbingly I fear, where we find ourselves heading.

    The other argument in the past exchanges on this subject is that serendipity must somehow be accounted for. That we must consider who is or is not “deserving” of their place and/or condition. Let us for a moment put aside the issue as to whether we have a God-mandated obligation to help our fellow man (I believe we do). And let us also table for now the idea that God created–or at least allowed for that serendipity.

    But putting those points aside, one of the major “pros” to capitalism is that you cannot legitimately do well without serving your fellow man. As Adam Smith noted in 1776 (and others before and since), by each of us successfully pursuing our own self-interests, all of mankind benefits. Rewards come from delivering the best products and services to others. Failure comes from not doing so–OR at least not doing so as well as the next person does. And despite all the man-made obstacles that have been thrown in the way of the capitalist system to-date, again, it has managed to do so in such a way as to increase the living human population to a record 6.7 billion, and counting–(alas, much to the chagrin of the Malthusians).

    So, if we ourselves are indeed real (and I believe we are), then economics, as a system by which we can distribute scarce resources, must indeed also be real. Without it, we would surely perish–OR–at the very least, our numbers would be minimized and our general condition one of comparatively destitute poverty. And with economics real, I believe the best system to date–from both a practical AND moral standpoint–has shown itself to be capitalism. Hopefully, someday, we will know a purer form.

    And anyone who denies the supremacy of capitalism as an economic system for God-created human beings MUST do more than castigate. He or she must put forward a better system and show how/explain why it is better.

    Money

    Money is often defined as a medium of exchange for goods and services. And while such a definition is correct, it also misses, I believe, a crucial point—that is that goods and services only come into being as a result of human effort. At its essence, I believe this is a purposeful obfuscation. It is much better for those in control of money to equate it to things or actions than to the creation of those things and the providing of those actions. In that way, for example, income taxation is much more palatable. The government is only taking “things”—not actually the lives of its citizens. While maybe only a pschological difference, it would be far less acceptable if our federal, state and local government officials forced us at gunpoint to perform some manual labor for 6 months of every year. Yet take the THING we earn through those labors and it’s wholly acceptable (and let a “majority” vote for it and the acceptable transforms into the right of the majority to require it—but I digress… :-)

    But what makes good money? To be and remain a good medium of exchange, money must generally have seven main attributes. These are:
    (1) Value as a material;
    (2) Stability of value
    (3) Indestructibility;
    (4) Portability;
    (5) Homogeneity;
    (6) Divisibility; and
    (7) Cognisability.

    While it’s been pointed out that man has used many things in history as money, including seashells, rocks and (yes, Jim) cattle, very few things have met all the seven attributes of real money. Those things that have met them have been used the most and survived the longest as money—and none have done so longer than those “archaic” metals, gold and silver.

    But what do we have now? Fiat money. Paper—with an
    intrinsic value of virtually zero. And a perceived value based solely on the full faith and credit of our government. And while this fiat money meets attributes (4) through (7), it does not meet the first three—which are far more important as we have seen time and time again in human history, and, more importantly for us, are seeing again now.

    If you wish to control a people, first control their currency. When government replaces specie with paper, it can, as we’ve seen, “do” anything it pleases. We can allocate $8+TRillion to various financial rescue plans. We can have $60 to $100 TRillion in unfunded liabilities—spending the “money” (remember, ultimately the human effort) of generations yet to come. There is, in essence, no limit to what can be done with the NOT REAL money. That is, until there is. When fiat currencies have collapsed (and there are literally hundreds of examples), they have often collapsed incredibly fast and incredibly hard (e.g., Weimar Republic in the 1920s and Zimbabwe in 2008).

    What, finally, does my trip to Connecticut have to do with all this? It is in watching the impact of the current monetary policies on the typical middle class American. And the impact is exactly as one would expect by combining human nature and common sense. There is a tremendous, insidious disincentive to value our money. For many years, there has been little to no value in saving. Interest rates have been exceptionally low and have become even lower as of late. On the spending side, we are led to believe that inflation is not a major concern, but talk with the typical person and they have little to no belief in the government-supplied CPI. Rather, they see the prices they actually pay for what they need going up at a much greater level. As a result, the goal is to spend money now (even money that is acquired through debt), avoiding the net loss that will definitely occur by retaining it (the net interest earned is greatly exceeded by the devaluation of the currency—and debt is paid back in “cheaper” dollars). Thus, more people than ever, I believe, are living “paycheck to paycheck”. It is a very sad truism that inflation of fiat currency is the greatest robber of wealth—the greatest tax—that a citizenry experiences. Worse, it is extemely regressive—hurting the poorest members of society far more than the wealthier.

    So is our money real? A most emphatic “NO”, I’d argue. And our government can only throw TRillions of dollars around precisely because it is NOT real. Unfortunately, I fear it’s playing on borrowed time, as well as money. And I’ll bet dollars to doughnuts (the latter one day maybe making a better medium of exchange :-) that the lack of reality of our money will soon lead to troubles that most cannot now imagine. And who shall, by default and, I’d argue, by design, be our collective savior but our government. They have, acting as a surrogate god, created false money. Then, when that money ultimately leads to the pain and suffering of the citizenry, they shall be there, god-like to save us…

    When the free market has been allowed to develop a “money”, over the long term, it has always chosen specie. But today we live in a period where all official money in the world is fiat. While one should always, I believe, be optimistic and hope for the best, it is imprudent not to prepare for the worst. Just as with fire and life insurance, I believe everyone should have adequate “money” insurance. Several thousand years of human experience has shown that at least a portion of that insurance should be in gold and/or silver. There are many reasons to believe that the current period of credit-scarcity-driven deflation will be short-lived and replaced by a new period of rapidly rising, high inflation, as the massively growing amount of non-real U.S. dollars competes for the still-limited resources to be allocated to the 6.7+ billion folks we share this God-given planet with. While the price of gold continues to reflect what’s being done with our fake money, I believe we ain’t seen nothing yet.

    Reasonable minds should, I believe, act accordingly…

  4. Fernando Says:

    Interesting exchange. I don’t know that God cares what economic system we choose (or use). What I believe God cares about is our relationships – with God and with each other. “Economics” describes part of our relationship with others, but only part. The Bible tells me that generosity to the poor and the disadvantaged and the socially undesirable is not only “good” but necessary for a right relationship with God (indeed, I believe, necessary for salvation). A “market” economy allocates scarce goods and resources better than other systems of allocation we know of, but it does not absolve us of our role (or responsibility) in establishing the right relationships God seeks. I recognize the problems in doing “something” about the economic crisis we are in; but the problems in doing “nothing” seem to me equally real and potentially more damaging. Reasonable minds can disagree, of course.


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