Economic Errors of the Left

What exactly is in Benedict XVI’s new encyclical on the economy and labor issues is not yet known. Catholic leftists and progressives, though, are already trembling with excitement. Three glaring errors have already appeared in these heavily panting anticipations. An accurate presentation of real existing capitalism requires at least three modest affirmations:

1) Markets work well only within a system of law, and only according to well-marked-out rules of the game; unregulated markets are a figment of imagination.

2) In actual capitalist practice, the love of creativity, invention, and groundbreaking enterprise are far more powerful than motives of greed.

3) The fundamental systemic motive infusing the spirit of capitalism is the imperative to liberate the world’s poor from the premodern ubiquity of grinding poverty. This motive lay at the heart of Adam Smith’s important victory over Thomas Malthus concerning the coming affluence—rather than starvation—of the poor.

Since the origins of modern capitalism around 1780, more than two-thirds of the world’s population has moved out of poverty. In China and India alone, more than 500 million have been raised out of poverty just in the last forty years. In almost every nation the average age of mortality has risen dramatically, causing populations to expand accordingly. Health in almost every dimension has been improved, and literacy has been carried to remote places it never reached before.

Whatever the motives of individuals, the system has improved the plight of the poor as none ever has before. The contemporary left systematically refuses to face these undeniable facts.

Fr. Thomas Reese, S.J., one of our most reliable leftist bellwethers, has recently opined that Benedict XVI’s new encyclical will cry out for more regulation, rather than unregulated markets. Further, the pope will denounce greed and cry out for more attention to the urgent need to aid the world’s poor.

Reese thinks these are anticapitalist positions. That is ridiculous. They lie at the heart of why capitalism has worked as well as it has to liberate the poor—first in the United States and Europe, then in one continent after another, as it is now doing in almost all areas of Asia.

Fr. Reese says that the pope will blame the greed of U.S. bankers for the current global financial crisis. While many institutions, including banks, failed in their basic duties, government action was the principal villain in the 2009 debacle. It was the federal government that forced banks to make sub-prime loans to poor families (who were known to be unable to pay their mortgages on a regular basis). It threatened banks that did not invest in poisonous packages of mortgages, vitiated by the bad ones.

The federal government even guaranteed the work of two huge quasigovernment mortgage companies—Fanny Mae and Freddy Mac—that wrote more than half of all mortgages during the fateful years. Of course, when the house of cards fell, government was not there to make good on its guarantees—or even to accept responsibility for its own heavy-handed actions.

For at least ten years before the disaster finally occurred, my colleagues at the American Enterprise Institute had been warning of the government abuses that were heading toward this calamity. Partisans of big government refused to listen.

For moralists, it is essential to see how often (not always) government itself sins grievously against the common good, out of a lust for power and domination over others. Furthermore, government often (not always) generates foolish and destructive regulations, and often dispenses justice that winks rather than justice that is blind. Government is more frequently the agent of injuring the common good than the ordinary lawful actions of free citizens. During the twentieth century, governments too often destroyed the common good of their citizens for years to come.

In the United States, the existing code of federal regulations for businesses is enormous. Title 12 covering “Banks and Banking” runs to 4,786 pages; Title 15 on “commerce and Foreign Trade” is 1,941 pages; Title 16 on “Commercial Practices,” 1,600 pages; Title 17 on the “Securities and Exchange Commission,” 2,708 pages; and Title 31 on “Money and Finance: Treasury,” 1,917 pages.

The total number of pages in this code is 12,592. Laid out end to end, the volumes of the code extend for 2.35 miles. If you count the pages in feet (30 inches per linear foot is the standard measure) the code runs for six linear miles.

An unregulated market indeed! The real world of American capitalism is more like Gulliver bound down by thousands of threads. Many of the regulations are out of date, obsolete, costly, destructive, and—in their actual effects—counter to the very intentions that gave them birth. But regulation there is, and regulation there must be. Without rules, American capitalism cannot function.

As for greed, Max Weber pointed out that greed is present in every age and every system of human history. Yet greed was rather more socially central in ancient times than today, and played a much more decisive role. And nowadays, greed flourishes most wherever government power is concentrated.

By contrast, in enterprise societies such as the United States, it is possible to become rich—even very rich—by methods that focus on innovation rather than greed. The great universities of the Middle West and Far West, were founded expressly to give spur to new inventions in mining, agriculture, and other technical fields. Texas A & M, Iowa State, Wisconsin State, Oklahoma State, and scores of others have been the hothouses of ideas in agriculture, engineering and electronics, geology, mining and drilling—ideas rendered practical by the makers of many fortunes. They have mightily served the common good of Americans and the entire human race.

As John Paul II wisely commented in Centesimus Annus, practical knowledge is the main cause of wealth today. Ideas rather than great landholdings are the main form of wealth in our time. As both Caesar and Cicero long ago observed, although it seems as though community ownership ought to serve the common good best, in practice private property does. The right to private property has long been justified by virtue of its superior service to the common good.

And in the United States, scores of entrepreneurs are ready to risk losing everything they have in order to create something new, create something that will make life better for their fellow men. Henry Ford failed repeatedly in several businesses before he finally made the Ford Motor Company the great model for business that it once was. (It was the first establishment in history to pay its laborers a handsome wage of five dollars per day. At the time, ordinary lawyers averaged about $1500 per year. Ford’s motives, of course, were not altruistic; he wanted his workers to purchase the cars they helped build.)

As Oscar Handlin once noted, almost every industrialist who built a new railroad North and South in the United States in the nineteenth century prospered. Nearly every tycoon who tried to build an East–West railroad lost money. What spurred men to keep trying had less to do with greed that with the sheer romance of conquering the deserts and the Rockies. The element of romance in business is simply not grasped by dialectical materialists.

In brief, nearly all the leftish critiques of American and other forms of capitalism are empirically false. They do not fit the actual facts. But these three—greed, unregulated markets, and the idea that capitalism makes the poor of the world worse off—are especially tiresome, and very far from reality.

Will all those good Catholic leftists who announce their own enthusiastic preference for the poor actually help to liberate the poor, even by a little? Will their anticapitalist policies help alleviate poverty? The historical record offers very little evidence for that contention.

And yet wherever a healthy, inventive capitalism goes, the poor soon rise by the millions out of poverty, come to better physical health, and advance into higher education.

You can look up the record.

Michael Novak, a member of the editorial board of First Things, holds the George Frederick Jewett Chair in Religion and Public Policy at the American Enterprise Institute. His most recent book is No One Sees God (Doubleday, 2008).

Published in First Things Online June 29, 2009