Pope Francis should praise speculators, not spurn them
30 June 2014
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Pope Francis is at it again – speaking out on behalf of the poor, while casting aspersions on the free market, perhaps the poor’s greatest friend. In an address to a conference meeting in Rome on the topic of ‘Impact Investing for the Poor’, the Pope took up once more his anti-market cudgel, with particular opprobrium for speculators.
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.
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.
8 thoughts on “Pope Francis should praise speculators, not spurn them”
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I am sorry you omitted the very next sentence from Adam Smith’s ‘invisible hand’ comment, namely:”I have never known much good done by those who affected to trade for the public good.” One of the greatest virtues of the market process, as Smith explained (in slightly different words) is that traders often ‘do good without meaning well’. We don’t need saints for the market to work its wonders.
Point taken; concerns about length required some culling and I hoped that Smith’s passive formulation would suffice. Your addition of his more active assertion against intentionality is appreciated.
Let me add, though, another well-known quotation from Wealth of Nations that again emphasises the beneficial, yet unintended, consequences of the free market:
‘It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages (I.ii.2).’
It is very noticeable that it is always the rich and the speculators who argue that free-market capitalism is good for the poor and dispossessed of the world.The poor are rarely asked! It is also noticeable that wages for the workers are kept low as austerity measures, whilst top wages, bonuses and capital returns are allowed to flourish. There is truly one rule for the wealthy and one for the poor, very obvious when it comes to economic migration.
You lost me at sentence #1:
“Pope Francis is at it again – speaking out on behalf of the poor, while casting aspersions on the free market, perhaps the poor’s greatest friend.”
The greatest friend is Christ. To elevate a human invention, a mere system that itself often shows moral indifference on the part of its practitioners, is a form of idolatry. It might suggest that free market practitioners are not quite balanced in their approach to life.
At best the free market is a tool, a means to an end. If the tool is faulty, or wrong for the job, or being misused by its handlers, then it must be altered, adjusted, or even set aside.
A market is people exchanging stuff for their mutual advantage. In a freely functioning market, even the mightiest corporation has to satisfy customers, employees, suppliers.
A free market is an absolute pre-condition of a free society. We should do all we can to break the assumption that ‘socialism’ has anything to do with compassion.
“In a freely functioning market, even the mightiest corporation has to satisfy customers, employees, suppliers.”
This is true, but satisfaction depends on the qualifier “freely functioning.” Many people don’t believe the mightiest corporations function in fairness. This is what Pope Francis argues against. Do these corporations operate as dictatorships? Do they run roughshod over employees and consumers? Are they subject to a different set of rules?
The problem is not economics, but lawlessness and a lack of accountability.
Every society in the past was regulated by laws made for the benefit of the people. The Old Testament had many laws governing economic realities. Thus, it makes perfect sense for the Pope to add his voice to the chorus of thoughtful people that realize that there is something terribly wrong with the way capitalism is working. Marxism has shown itself to be a failure, but this does not mean that capitalism is in no need of adjustments. Our anti-monopoly rules in the US were just one very old manifestation of the kind of adjustments that are needed from time to time.
Gabriel – something may be wrong with the way capitalism is working but it is not for the want of laws or regulations. I am afraid that Pope Francis is not a thoughtful voice in this area. From his argument that the income of the majority is crumbling (stated at the end of a 25-year period when world poverty has fallen at its fastest rate in history) to his observations about poverty in poor countries or unemployment in Italy, his assertions fall well short of sensible comment on reality. Take the financial sector. Never before has it been more highly regulated than it is in the UK or the US. You can certainly argue that structural changes would make it better (and we might argue for different structural changes – in my case for an end to the 40-year increase in moral hazard in the system which simply subsidies those who take large bets at the expense of people in general, and you might argue for different structural changes). But the Pope’s statements in this area do not even begin to chime with reality and they are certainly not a sophisticated voice. Pope John Paul and Pope Benedict showed a real understanding of these issues and a real appreciation of what they did not understand. That is certainly not clear from Pope Francis. If the Pope is to object to food speculation, he really does have to show that it harms the poor. In two ways, the prior assumption would normally be that it doesn’t. The first is that the poor tend to be net sellers of food (and the evidence suggests that the poor in general – not all of them of course – gained from the rise in food prices around 2009). The second is that speculation is most likely (not always, of course) to smooth prices and bring forward the increases in supply that we would like to see in response to increases in demand. Now, it may be that the academic work here is wrong and the Pope is right but he has not shown (and the J&P has not shown) any interest in presenting the evidence (or, indeed, any curiosity about the subject at all). The statements simply seem like rhetoric.