Economics and Ethics

Had a discussion with a friend who is a staunch libertarian that caused a few things to click for me that have been rattling around for a while.

I studied economic and political philosophy for a bit before I began studying theology. Something that interested me about both economic and political philosophy is that they have at least at some level an underlying question that is about ethics. Both are, in some foundational sense, concerned with the question "how can society best provide for all its members?" We can see this historically in political philosophy in the development of feudalism in the middle ages: a society that was falling apart and facing great danger developed a system designed around the idea of protection for its members.

In economic terms, this question is explicitly in the mind of many of the founders of modern economic thought. Adam Smith, for instance, when he wrote The Wealth of Nations was certainly trying to answer this question. And he believed that answer lay in human self-interest. He believed that self-interested humans will always make economic decisions that are "in their best interest" and that allowing this process to freely play out would result in the most efficient economy, which to him meant the one that best provided for the needs of society's members. In other words, he felt that a free market was the most ethical system not because of concerns about property rights or about the authority of the government but because he felt that the end result of a free market was the best provision of peoples' needs.

So in my discussion with my libertarian friend, he argued that the free market was the best system. So far, we are in agreement. He then argued that government action like "The New Deal" were bad and were messing up the marketplace. This is where I begin to disagree. I think that a free market is ideal not as an ends but as a means to an outcome that is best for society. But because the free market is a means and not an ends in itself, I do not believe that when the market fails we are required to sit and wait on the market to fix itself (in the name of preserving a free market). Lets take the historical example of the Great Depression. Initially, preserving a free market was the policy of choice. However, three years later when unemployment was at a record 35% with no sign of getting any better, it seems fairly apparent that the preservation of a free market is no longer in societies best interest. Letting people starve for the sake of preserving the free market is of dubious morality, I think. So I think that the government was obligated at that point (and maybe should have reached this conclusion earlier) to step in and act in a way that relieved the strain on the country to provide for its own peoples' needs. In that case, the New Deal was economically and ethically an advisable strategy.

In a nutshell, this is what I'm arguing. Economic philosophy is not about making efficient markets or making the most profit. Sure, those things are products of good economic philosophy. However, the real motivation behind economic philosophy is an ethical one- the greatest good for society as a whole, the greatest provision of the needs and wants of societies' members. As such, I would argue with the general consensus of economists in the western tradition that free markets are usually the best way to accomplish this goal. However, I would strongly differ from libertarians in that I think the market is only a tool, a means to an ends. So when the tool doesn't work, you fix it or scrap it for a new one. Likewise, when the market fails, I believe it is acceptable for the government to intervene and attempt a solution that better provides for society.

Is Socialism the Natural Economic System of Christianity?

In a conversation with a friend about my previous post "The De-Humanizing Effects of Mega-Corporations" this question was posed to me. I said I would think on it and write some thoughts later.

My initial reaction is to say yes. But on further consideration, that is far too simple.

If we just took the Old Testament law, the answer would be a resounding yes. There are some very definite socialist prescriptions in the law. There are provisions for keeping the gap between rich and poor to a minimum such as the cancellation of debts every seven years or the returning of all land to its original owners every fifty years (the year of jubilee). There are commands that effectively establish a welfare state, even going so far as having an effective welfare tax in the form of requiring farmers to leave parts of their fields un-gleaned each harvest so the poor could gather food for themselves. The Torah without a doubt makes a significant point of making sure everyone in the society is provided for and makes this not just an ethical obligation for charity but a legal obligation that the state was supposed to enforce, which certainly seems socialist in its basic underpinnings (though maybe less "sophisticated" in its structure than modern socialist states). I think its important to make a distinction here- these prescriptions could be considered socialist, but I would say this is different from a "communist" state- individual land ownership still existed in ancient Israel, there was not collective ownership of property.

While these laws existed in the Torah, it doesn't seem that this part of the Torah was given much attention in ancient Israel's history. We have no recorded instances of the Year of Jubilee being enacted, for instance. And the prophetic writings condemn Israel repeatedly for failing to care for the poor. In fact, social and economic justice are apparently so neglected that in several places the prophets record God as declaring to Israel in essence (my paraphrase here) "I have stopped up my ears to your prayers and the smell of your sacrifices makes me want to vomit." We can take a couple things from this. First, it seems that while the Torah was socialist, it would appear in practice Israel was not. Second, social/economic concerns seem to be extremely important to the God of Judaism and Christianity. So far, that seems to add up to a socialist norm for Christianity.

The New Testament makes this a little more complicated, however. There is still a strong concern for providing for the lower rungs of society, and even a civil rights movement like note the New Testament declarations that all are equal in Christ- slave, free, Greek, Jew, men, women and every other potentially opposing category are nullified in the Church community. However, there is a striking difference. Whereas in the Old Testament the ethical concern for the poor was a legal obligation written in the nation's "constitution" in the New Testament the church is not a political entity of the same nature. There are certainly political implications to the Christian message, don't get me wrong. Rome in large part persecuted Christianity because Christians refused to worship Caesar and instead acknowledged Jesus as "Lord"- the same term Romans used to pay homage to Caesar. However, unlike in ancient Israel where the Torah was the governing law of the nation, Christianity is an underground group from its conception. So while Christians do things to care for the poor, I think it would be better to consider them a charity group than a socialist government, at least in their early years.

However, Christianity does not stay an underground group. Eventually, it rises to become a very dominant political force in Europe. Over the course of this history, two basic "philosophies" of looking at the world develop in Christianity. One comes from Augustine, the other from Thomas Aquinas. Augustine's philosophy is essentially libertarian. He sees the state as there to protect its people, but his view of human depravity is such that he does not think it can accomplish any "good" (which would include providing people's material needs), and so it’s the role of the church to provide for the poor as a charity. Aquinas has a very different take. He things that the state can do material good, and that society as a whole has a responsibility to take care of the poor and oppressed and neglected who form its lower tiers, a much more socialist (or at least welfare state-ish) position. Part of the difference between these views may have to do with the time periods they wrote. Augustine wrote during the Roman Empire when Christianity was still not a key political power and "paganism" still abounded in Europe (some would say not much has changed…). Aquinas wrote much later, after the fall of the Roman Empire and during the golden age of Church "domination" of Europe. Their different historical situations may have contributed to the differences in their philosophical views on the question of societies obligation to the poor. However, there are other underlying philosophical differences. For metaphysical reasons, I am more inclined to agree with Thomas Aquinas, and because I think his system is logically coherent, to also adopt his view that society can and should take care of its people. I'm not sure I would say I am a complete socialist- I think the markets should be as free as they can be. But I also think that society should be able to provide basic "needs" for everyone in the society- food, shelter, clothing, education, etc. I think the earliest Capitalist thinkers felt the same way, but they believed a free market could provide all these things for all the members of a society (and would therefore be the best way to do that). History and experience I think shows us that this is a bit too optimistic, and so I think some government intervention is required to fill in the gaps.

The De-Humanizing Effect of Mega-Corporations

Lately I have been working on a crew that installs above ground pools. It’s a great summer job for college kids! The other day as we were driving between job sites, a thought occurred to me. There are a great many jobs that exist that are not things anyone would aspire to be.

Think about kids dreaming of what they want to be when they grow up: either something glamorous, like an astronaut or a movie star, or something "noble," like a doctor or a teacher. We can think of lots of other vocations that fit under those categories, and as we get older, we often expand our definitions of these categories and add new ones of "aspired-to" vocations.

Yet there are a number of careers that we would never aspire to. We might end up working in such a career, but never because we set out to do that. We simply fell into it and never got out. Careers like working on an assembly line or as a greeter at Walmart. But why do we consider these to be careers that are undesirable, things we would never set out to do? What makes other careers more honorable, things we would aspire to?

This may be one of the great ironies of capitalism from a philosophical viewpoint. Capitalism begins with the idea of ownership- if we own our own means of production, we are going to work in "creative" ways to promote our livelihood. The idea is that we have a vested interest in our own success, and so we are willing to put forth effort to achieve that success, especially when driven by competition. The theory of capitalism is that individuals driven to succeed will develop new ideas, new means of production, and the most efficient use of resources and thus create the most robust economy. But this theory developed in a day when markets where much smaller and more localized, when the internet and mega-corporations were not even on the horizon. I think in a twist of irony, the progression of capitalist economics, built on the idea of ownership, has in effect destroyed that idea.

Lets say I own a local shoe store. Or that I work for a locally owned shoe store, either will work. I have a vested interest in the success of that store, I have "ownership" by which I mean a stake in its success. So I work to make the store succeed (per capitalist philosophy). But lets paint a different scenario. I work in the shoe department at Walmart. I find it hard to argue that I actually have any stake in the success of this store. The store is simply too big for me to make an impact anymore. If I do poorly, I loose my job and the store moves on, not even feeling a bump in its progress from my failure. Even if the particular store I work for does fail and close, the corporation is so large it will hardly notice. Likewise, if it does well I cannot claim any sort of responsibility for that really. My contribution is simply insignificant. So the concept of ownership is completely meaningless in this scenario. I don't have a stake here, I am just a meaningless "tool" in the eyes of the corporation.

In both scenarios, we might argue that I have a concern for my own personal success, but I think in each case this means something completely different. In the first, my personal success and the success of my business go hand in hand. So things like efficiency and competitiveness and ingenuity will mark both. In the second scenario, however, my personal success is something completely different from the success of the company I work for. My personal success becomes a matter of mere survival- do I still have a means of sustenance?

This is not meant to be a rant against Walmart, by the way. I will admit I am not particularly fond of the place, but I'm not a Walmart-hater.

Here is what I am really getting at- the reason the concept of ownership is so important to capitalist economics is philosophical. Capitalism developed out of enlightenment philosophy, which is particularly humanist. Self-determination is at the heart of the capitalist system. We are more likely to take the initiative in our own lives if we feel we have self-determination, and for capitalism this is derived from the concept of ownership. If we own (or in the case of the worker in the local shop who doesn't actually own it, have a significant stake in) the means of our own success, we will work to bring that success about.

So the loss of the concept of ownership in the wake of corporations too big for the individuals who are part of them to matter is ironic on two levels. First, on a purely economic level it undermines the very foundation of the system that brought these corporations about. But secondly, on a philosophical level, it attacks the self-determinism and humanism of the very philosophy that brought that system about. It in essence erodes the role of individuals as real "humans" in the sense of having control of the shape of their own lives. They are instead merely pawns swept along in the wake of a much larger creature.

Economic Irony?

Let me say at the outset of this that I am not a communist. Keep that in mind, it will be important in a minute.

I spent a good amount of time studying economics before I moved to Birmingham to study theology. I was a pretty strong advocate of the modified classical/monetarist economics employed by the Federal Reserve under Chairman Greenspan and now Bernake. However, the more I have seen about the current economic crisis the more I am questioning the traditional models and ways of viewing economics.

In the classical system, the economy manages itself by money-flow. This is supply and demand at work- if more people demand a good, then more money flows to that market and the supply increases to match the demand. So the greatest way to encourage economic growth is to expand the amount of spending that is going on. This has to be carefully monitored though- we can't just dump money into the system, all that will do is create inflation with little or no growth. To keep this balance, the Fed plays a back and forth game with the money supply by buying and selling bonds to the major banks, thus controlling how much money they have on hand to loan out.

And there lies where the irony begins. Our managing of the economy has been based very largely on the credit industry. We depend on banks to give out loans that stimulate growth. If inflation is getting out of hand, we try and cut back on the amount of loans banks make. If the economy is slowing down, we try to encourage them to make more loans. So our growth is sustained by credit!

What we seem to be realizing now is that this pattern isn't sustainable in the long-run. What has happened in our economy is that we have had a huge "credit bubble" that has collapsed. The bubble was sustained not just by lots of housing loans, but by loans from bank to bank and credit agency to credit agency. Then, to make things really complicated, we turned those loans into "securities" and sold them to other agencies, who bought them using more loans. Now the bubble bursts. My company fails because others can't pay back their loans, which means I can't pay back my loans, which means another company can't pay back theirs, and the cycle goes on. Since all this growth was based on money that no one actually had, the current collapse creates a massive domino effect in the order of a few hundred billion dollars!

So why is this ironic? The very thing that we have been relying on to sustain our economic growth is now the very thing that is causing a massive economic fall-out.

Now, in a sense, that's how a bubble usually works. An industry booms for a while, and then something goes awry and that industry collapses. What makes this especially interesting, though, is that its not a single industry. Its our whole economic system that is being shaken.

Now is where what I said at the beginning is going to be important again. I see basically two options on the "capitalist" system: The first is the classical option- do nothing and let the economy fix itself. The Great Depression is the main counter-example to this method. And, if we did opt for this method, my prediction is the economic collapse would become very wide-spread (remember, this started in the finance sector, which is what the rest of the economy depends on. If it goes, it will take down every other major industry with it), with the end result being a revolution that will probably transform the west into a communist society. In other words, if we do nothing, we will see exactly what Marx predicted come about.

The second option is to try and salvage the economy through a "bail-out" (what we have been doing)- following the New Deal model, in other words. The problem is, in the long run this just perpetuates the problem. This problem exists because our economy is built on credit, which means it can't absorb the shock of a market failure. Dumping more money into the system to try and stimulate more growth is only adding to that problem. So in the long-run, we haven't gotten anywhere. We may temporarily avoid catastrophe, but then we still have the same root problem- an economy built on credit with no shock-absorbers and no way to sustain growth without more credit.

I'm not sure if this second option eventually leads us back into the first. I think that is the worst case-scenario: we get to the point where we literally cannot do anymore, so we have to do nothing. I don't foresee that happening in the major Western powers anytime soon, but there are concerns it might happen (or already be happening) in developing nations that are taking a hit from all of this.

The ultimate solution is going to require some sort of radical change to the underlying economic structure of our system, I think. I'm not sure how we get there (at least without it being a very painful transition). But we have to move away from a dependence on credit and adapt to a more long-term sustainable system. I am not saying we do away with all credit. Credit is important in a lot of ways. People generally buy a house or a car via credit. I (along with most other students I know) am at least partially financing my education through credit. However, what this economic crisis is showing is that we cannot depend on credit, so we have to adapt our system in some way to not be dependent on it (which may mean a fundamental change in the way we manage the economy). What that probably looks like is a much smaller economy on a whole and maybe much more simple life-styles. And for a lot of industries that simply cannot be sustained without credit (for instance, in a lot of ways, the medical industry), there may be a need for socialization.