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Markets and Morality

The best Vatican document on economics for some time

Philip Booth
25 May 2018
Markets and Morality | Society and Culture

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The Vatican recently issued a letter on economic and financial matters. Quite unlike many recent communications on those issues, it was elegantly written – almost a joy to read. It is a serious and constructive contribution to the debate and, in its earlier sections, it is, if not quite original, a vital contribution to the teaching of the Church.

A feature of other recent documents on finance and the economy is that they have tended to exaggerate or, quite often, say things which are simply not true about the factual picture and this has taken the focus away from the essential moral and social teaching message. This letter makes no such mistake.

So, what does it say?

In the first half the document, the authors, from the Congregation of the Doctrine of the Faith and the Dicastery for Promoting Integral Human Development, discuss at some length, though concisely, the essential nature of economic behaviour. Economics is about human action in the economic sphere and so it cannot be separated from the need for ethics. Keynesian economics and neo-classical economics have separated economics from ethics in order to focus more clearly on particular aspects of economic problems. This works to an extent, but, just as when we focus on part of a painting in an art gallery, we have to adjust our eyes and step back to see the full picture in all its glory.

Economics and finance is about human interaction and co-operation. It is ultimately inseparable from a consideration of normative ethics. In recent documents, such discussion has got mixed up with sideswipes at those who believe in free markets (ironic, given that it is Austrian economics’ followers of Hayek and Mises who are quickest to understand the human element) or grandstanding about the failure of globalisation and markets to promote welfare for the most needy.

This time is different. Some of the great advances in economic wellbeing are recognised. It is not noted that the growth of globalisation and financialisation has coincided with the first era in over 200 years that income inequality on the planet has fallen. Slightly more oddly is that the letter, quite rightly, mentions that there is much more to economic life than can be measured by GDP, but it does not note the collapse in infant mortality and child labour and the fall in deaths from pollution or huge increases in literacy that have taken place since globalisation took off in the early 1980s.

But, I don’t want to end this part of the discussion with a quibble. There is a wonderful message for universities which, in fact, would be an excellent summary of a number of discussions we have had at St Mary’s University about the design of our curricula in business studies and Catholic social teaching:

“In this regard, it is particularly desirable that institutions such as universities and business schools both foresee and provide, as a fundamental and not merely supplementary element of their curricula of studies, a formational dimension that educates the students to understand economics and finance in the light of a vision of the totality of the human person and avoids a reductionism that sees only some dimensions of the person. An ethics is needed to design such formation. The social doctrine of the Church would be a considerable help in this connection.”

I hope that this is a message that will resonate and be applied.

There is then a discussion of regulation and financial instruments. Here, I disagree with the tenor of the discussion, but there is no doubt that the hand behind this broadly understands the financial system and the world we live in despite some somewhat strange conflations and definitions at times.

Speculation is criticised and seems to be held responsible for the financial crisis. It is suggested that different activities of banks should be compartmentalised. These are arguable, but perfectly respectable positions.

As ever, very much in the mould of Quadregesimo Anno, the case is made for state regulation (and global regulation). But it is not overstated, and the difficulties are recognised. It would have been sensible for the authors to note that the crisis occurred in an era when we had international regulation of the banking system which encouraged the behaviours that caused the crisis and also that the crisis may not have happened at all were it not for the huge regulated and state-underwritten securitisation warehouses in the US. Imperfectability is all around the place – it is part of the human condition. It is not clear that the serious reflection that is necessary to understand where the role of the regulator begins and ends has been undertaken. But, the document is written in a tone which can feed into that reflection.

I will end by making two points. It must be recognised that, if we have international regulation of finance, it will encourage the adoption of similar business models by those involved in finance and to larger financial institutions. The document calls for more bio-diversity in finance. Amen to that! However, international regulation is unlikely to create that and can also lead to a system that is more fragile.

Secondly, the paper argues: “Moreover, where massive deregulation is practiced, the evident result is a regulatory and institutional vacuum…” This is demonstrably not true. Whether it be the stock exchanges of Holland or the UK over the centuries (the latter having had its wings clipped in the big bang of 1986, which was an act of government prohibition of private regulation not of deregulation) or the development of the International Swaps and Derivative Association or the development of independent professions, we know that regulatory institutions can develop within markets and from civil society. Why do they develop? Because markets involve interaction and deliberate human action and are not autonomous and so institutions develop to solve problems. Indeed, the document recognises this in its conclusion in which it notes:

“In front of the massiveness and pervasiveness of today’s economic-financial systems, we could be tempted to abandon ourselves to cynicism, and to think that with our poor forces we can do very little. In reality, every one of us can do so much, especially if one does not remain alone. Numerous associations emerging from civil society represent in this sense a reservoir of consciousness, and social responsibility, of which we cannot do without.”

Absolutely: and shades of Quadragesimo Anno again. Let’s hope that this is a sign that the Vatican has itself abandoned such cynicism and that the ideas behind this letter will be discussed, critiqued and developed.

 

This article was first published in the Catholic Herald.

Philip Booth
Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.


1 thought on “The best Vatican document on economics for some time”

  1. David Harold Chester
    Posted 27/05/2018 at 09:31 | Permalink

    There seems to be confusion here between individual behavior and the nature of our society at large. Even if a significant proportion of our neighbors improved their behavior, the chances are that this will have very little effect on the overall situation. So the subject we should be considering is macroeconomics and not the accumulated effects of microeconomics interactions. To properly influence the aggregate of the whole population one needs better laws not individual examples of righteousness!

    So little seems to be commonly known and shared about the latter subject and this is because religion and moral matters are made into such an individual topic rather than a more public one. So it seems to me its up to a good government rather than a true minister of religious morals, to make the state become a properly behaving place, and it should do this after a) recognizing of what it really comprises and b) getting sufficient political support to introduce the particular necessary change.

    So that wicked word “politics” is unavoidable for getting things changed! This means that without having the right movement for change we have little hope for social justice. Good ideas for economic affairs being sorted and improved must be backed by large-scale revolt and demonstrations of good faith. So next time you decry a “demonstration” remember that it is the only way for getting things done for a better world.

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