Pope Francis should praise speculators, not spurn them
He began well enough, praising the intentions of impact investors to improve the lot of the impoverished. ‘A sense of solidarity with the poor and with the marginalized has led you to reflect on impact investing as one emerging form of responsible investment,’ he said, approving their ‘days of study aimed at assessing innovative forms of investment which can benefit local communities and the environment, as well as providing a reasonable return.’
With Francis’s well-known concern for the world’s outcasts, there was no doubt that this conference would appeal to his sense of justice. ‘Impact investors are those who are conscious of the existence of serious unjust situations, instances of profound social inequality and unacceptable conditions of poverty affecting communities and entire peoples.’ In the spirit of being ‘my brother’s keeper’, Catholic social teaching calls for each individual to care for those in need, advocating two approaches toward alleviating poverty.
Charity is the direct method, in which the principle of solidarity calls us to care for one another – ‘there, but for the grace of God, go I’ – with especial concern for the economically or materially disadvantaged, known as ‘the preferential option for the poor’ (Compendium of the Social Doctrine of the Church, §182).
There is also an indirect approach to aiding the poor, in the guise of opportunity for them and their benefactors. Adam Smith was among the first to write about the unintended consequences of capitalist enterprise. When an individual endeavours to employ his capital to where it may have greatest effect, he ‘neither intends to promote the publick interest, nor knows how much he is promoting it.’ Indeed,
‘he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.’ (Wealth of Nations, IV.ii.9)
John Paul II echoed Smith in his great social encyclical, Centesimus annus. ‘It is precisely the ability to foresee both the needs of others and the combinations of productive factors most adapted to satisfying those needs that constitutes another important source of wealth in modern society,’ he wrote. ‘Besides, many goods cannot be adequately produced through the work of an isolated individual; they require the cooperation of many people in working towards a common goal’ (§32). For both men, any investment is impact investment.
Meanwhile, Pope Francis himself acknowledges the co-operative spirit at work behind the capitalist enterprise:
These investors turn to financial institutes which will use their resources to promote the economic and social development of these groups through investment funds aimed at satisfying basic needs associated with agriculture, access to water, adequate housing and reasonable prices, as well as with primary health care and educational services.
And he is aware of the charitable nature that lies behind impact investments, which ‘are meant to have positive social repercussions on local communities, such as the creation of jobs, access to energy, training and increased agricultural productivity’, while at the same time the financial gain ‘tends to be more moderate than in other types of investment.’
But the Pope strays into bad economics when he implies that investing for the public welfare is more honoured in the breach than in the observance, being instead more often an irredeemable tool for avarice than an instrument of good. It would seem he believes that a legitimate free economy is amoral – ‘It is important that ethics once again play its due part in the world of finance and that markets serve the interests of peoples and the common good of humanity’ – requiring an infusion of morality into its barren soul. ‘It is increasingly intolerable that financial markets are shaping the destiny of peoples rather than serving their needs, or that the few derive immense wealth from financial speculation while the many are deeply burdened by the consequences.’ For Francis, wealth investment is bad, impact investment good.
Yet such description bears no relation to a genuine free-market economy, and can only be forgiven as an apt characterisation of its nemesis, crony capitalism, where the state colludes with business interests for mutual gain at the expense of all others. It would have been better if Pope Francis shared John Paul’s assessment of the capitalist process: ‘an economic system which recognizes the fundamental and positive role of business, the market, private property and the resulting responsibility for the means of production, as well as free human creativity in the economic sector’ (Centesimus annus, §42). As Anthony Percy demonstrates in ‘The entrepreneur in the life of the Church and society’, the truth is that Catholicism has long espoused the virtues of the marketplace in promoting the public good.
Pope Francis continued by excoriating ‘advances in technology’ which have contributed to the ‘scandal’ of the ‘speculation on food prices … which seriously compromises access to food on the part of the poorest members of our human family.’ But it is free-market speculation which ensures that the marketplace provides the necessities of life. Speculators will increase prices when scarcity is imminent, signalling consumers to ration their use and producers to increase their output – resulting in increased production and lower prices. Were the speculative activity to cease, the market would be devoid of price signals, leading to shortages and calls for government intervention that Ludwig von Mises correctly identified as initiating a ‘middle-of-the-road policy’ towards the socialisation of production.
Through the example of food provisioning, Walter Block captures perfectly the speculator’s worth to society:
‘He buys and stores food against the day when it might be scarce, enabling him to sell at a higher price. The consequences of his activity are far-reaching. They act as a signal to other people in the society, who are encouraged by the speculator’s activity to do likewise. Consumers are encouraged to eat less and save more, importers to import more, farmers to improve their crop yields, builders to erect more storage facilities, and merchants to store more food. Thus, fulfilling the doctrine of the ‘invisible hand,’ the speculator, by his profit-seeking activity, causes more food to be stored during years of plenty than otherwise would have been the case, thereby lessening the effects of the lean years to come.’
‘Yet instead of honoring the speculator, demagogues and their followers revile him. But prohibiting food speculation has the same effect on society as preventing squirrels from storing up nuts for winter – it leads to starvation.’
Naïvely, Pope Francis favours that first step toward state intervention, telling conference participants in words suggestive of ‘picking winners and losers’, that ‘It is urgent that governments throughout the world commit themselves to developing an international framework capable of promoting a market of high impact investments, and thus to combating an economy which excludes and discards.’ John Paul II understood that the proper role of the state in society was realised through subsidiarity, ‘by creating favourable conditions for the free exercise of economic activity, which will lead to abundant opportunities for employment and sources of wealth’ (Centesimus annus, §15). Thus the state is placed in its proper pis-aller role in relation to society, to ‘support it in case of need and help to coordinate its activity with the activities of the rest of society, always with a view to the common good’ (Centesimus annus, §48). His successor was even more emphatic, while emphasising at the same time the legitimate social function played by civil participants (such as entrepreneurs):
‘We do not need a State which regulates and controls everything, but a State which, in accordance with the principle of subsidiarity, generously acknowledges and supports initiatives arising from the different social forces and combines spontaneity with closeness to those in need’ (Benedict XVI, Deus caritas est, §28b).
Francis’s recent papal pronouncements on political economy may lead one to despair, but there is room for optimism. Michael Novak, sometime economic adviser to John Paul, related in a recent interview how the Pope’s early economic understanding had been framed by growing up in occupied Poland – first by the Nazis and then by the Soviets – where the benefits of free markets were nowhere to be seen. His views began to modify upon his accession to the papacy, an evolution evident from Laborem exercens (1981) to Centesimus annus (1991). Living in authoritarian Argentina, Pope Francis would have encountered similar disparaging propaganda against the market economy. Perhaps a copy of Catholic Social Teaching and the Market Economy, in the right hands, would set his economic worldview down the right path, too.