The Free Market

THE SOCIAL DOCTRINE OF THE CATHOLIC CHURCH undeniably puts great emphasis on the free market as a valuable, indeed "irreplaceable" economic and social institution. (Compendium, No. 349) Drawing largely from John Paul II's encyclical Centesimus annus, the Compendium of the Social Doctrine of the Church is bullish on the free market and supports it as the best general means to assure proper allocation of scarce economic resources, of achieving economic efficiency, and of benefiting the common good.

The free market is an institution of social importance because of its capacity to guarantee effective results in the production of goods and services. Historically, it has shown itself able to initiate and sustain economic development over long periods. There are good reasons to hold that, in many circumstances, "the free market is the most efficient instrument for utilizing resources and effectively responding to needs. The Church's social doctrine appreciates the secure advantages that the mechanisms of the free market offer, making it possible as they do to utilize resources better and facilitating the exchange of products. These mechanisms "above all . . . give central place to the person's desires and preferences, which, in a contract, meet the desires and preferences of another person."

(Compendium, No. 347) (quoting Centesimus annus, 34, 40). The Compendium continues:

A truly competitive market is an effective instrument for attaining important objectives of justice: moderating the excessive profits of individual businesses, responding to consumers' demands, bringing about a more efficient use and conservation of resources,rewarding enterpreneurship and innovation, making information available so that it is really possible to compare and purchase products in an atmosphere of healthy competition.

(Compendium, No. 347)

The free market, then, is generally the best means to achieve a number of desirable economic and social ends, and is justified as an institution to be promoted precisely because of these ends it achieves so efficiently. When the free market carries out these functions "it becomes a service to the common good and to integral human development." The free market, in fact, is precisely valued and judged because of the ends it achieves," and it is the market's social utility--and not the market itself independent of its ends since it is but an instrumental good--that justify it. The free market is an instrumental good, and so it is not as an end, but as a means to an end, in particular, the means to the promotion of the common good, where it finds its value and justification.* (Compendium, No. 348)

For the same reason, therefore, the free market is only justified to the extent that it achieves these ends, as the "free market cannot be judged apart from the ends that it seeks to accomplish and from the values that it transmits on a societal level." (Compendium, No. 348)

For all its value, the free market ought not to be confused with a lawless or moral-less market. Nor should the free market be thought as all encompassing, so that all human goods are thought as commodities. We shall review briefly these two limits on the free market.

The free market must operated within certain moral, institutional, and legal norms, or else it becomes something other than a free market. The free market is not an autonomous, free-for-all area exempt from moral law or from the hand of positive law. The market must always be protected and kept free, and it must be safeguarded from those who would seek to use it wrongly, whether by fraud, manipulation, abuse of economic power, or monopolization.

To "safeguard 'the prerequisites of a free economy" and the benefits of a free market, the State has the "fundamental task" of "determining an appropriate" legal and juridical framework "for regulating economic affairs." This includes assuring "individual freedom and private property, as well as a stable currency and efficient public services." (Compendium, No. 352) At the same time, the State's role in assuring freedom of markets must not be one where it tries to "direct economic and social policies" and "become abusively involved in the various market activities," and become "authoritarian--or worse, totalitarian" in its supervisory and regulatory role. Wherever State power becomes involved, however, such actions "must be consistent with the principle of subsidiarity." (Compendium, No. 351)

In some extraordinary cases, where the market has clearly failed or does not obtain for whatever reason (e.g., a natural disaster, an economic depression, or some other aberration), the State--again consistent with the principle of subsidiarity--may have a role in "stimulating those [business] activities where they are lacking," by "supporting them in moments of crisis," or by intervention when "monopolies create delays or obstacles to development." In "exceptional circumstances," and for limited time, even "exercise a substitute function." (Compendium, No. 351)

Though there are times government intervention is required, there is a great danger to economic freedom that is posed by an overly-interventionist State, since invariably the prescriptions of the State end up being guided by "bureaucratic logic" and governed by burgeoning "public agencies." Therefore, any State or public intervention "must be carried out with equity, rationality, and effectiveness, and without replacing the action of individuals, which would be contrary to their right to the free exercise of economic initiative." (Compendium, No. 354)

In general, the free market and the governing bodies of the State ought not to be viewed as competitors seeking to occupy the same realm, but as cooperators in the same aim:

It is necessary for the market and the State to act in concert, one with the other, and to compliment each other mutually. In fact, the free market can have a beneficial influence on the general public only when the State is organized in such a manner that it defines and gives direction to economic development, promoting the observation of fair and transparent rules, and making direct interventions--only for the length of time strictly necessary--when the market is not able to obtain the desired efficiency and when it is a question of putting the principle of redistribution into effect.** There exist certain sectors in which the market, making use of the mechanisms at its disposal, is not able to guarantee an equitable distribution of the goods and services that are essential for the human growth of its citizens. In such cases the complementarities of State and market are needed more than ever.

(Compendium, No. 353)

Finally, there are some human goods that simply are not commodities to be traded as if they were pork bellies. Well does the Church state that there are goods that "'by their nature are not and cannot be mere commodities,' goods that cannot be bought and sold according to the rule of the 'exchange of equivalents' and the logic of contracts which are typical of the market." (Compendium, No. 349) (quoting Centesimus annus, 40) These include "collective goods and goods meant for common utilization." (Compendium, No. 356) Marriage contracts, orphans, human corpses or organs, the freedom of religion or free speech ought not to be traded as if they were consumer goods.
______________________________________
*Indeed, as the Compendium makes clear, the "inversion of the relationship between means and ends . . . can make [the market] degenerate into an inhuman and alienating institution, with uncontrollable repercussions." (Compendium, No. 348) It points to a "risk of an 'idolatry' of the market." (Compendium, No. 349) This occurs when one forgets that it is the market that is made for man, and not man for the market.
**It is perhaps unfortunate that the Compendium speaks of the "principle of redistribution," but never defines or provides any clear guidance about this principle in this context. It is not defined as a "permanent principle" in Section 161 of the Compendium. In the context of a free market, it is undefined. Perhaps its most complete statement is found in the context of the rights of workers and fair remuneration, and not with particular reference to the free market in general. See Compendium, No. 303. Its use in section 303 does not appear to fit the context of the free market in general. It seems that the "redistribution" referred to in Section 353 is the natural redistribution that occurs in the voluntary exchange in an efficient market, the result of which is always a redistribution of resources wherein both parties believe themselves better off than before. (Intervention is justified when the "market is not able to obtain the desired efficiency," in other words when the market is for some reason not acting like a free market should.) It is when the market fails to be efficient--in other words, where the exchange is not knowing or voluntary for some reason (e.g., fraud, manipulation, monopoly)--that the State must intervene by law or regulation or as a prosecutor of the public good. The reason behind such intervention is that, in such an exchange, both parties are not better off, and the desirable redistribution of wealth intrinsic in the voluntary exchange, because of a market for some reason unfree, is one-sided and inequitable. Unfairly, the one who lied or the one who is protected from competition becomes richer, while the one who is the victim of the lie or the one who is forced to bargain with a monopoly becomes poorer.

Morality and the Economy

THERE HAS BEEN A MODERN TENDENCY to put a rift between economics and morality. This was not always the case, as moral sentiments had traditionally been seen as a foundational part of the economic science and an increase in the wealth of nations. Economics was viewed as a moral science.

Beginning with the 19th century, starting with such thinkers as David Ricardo (1772-1823) and John Stuart Mill (1806-1873) and in earnest in William Stanley Jevons (1835-1882)and Alfred Marshall (1842-1924), however, the science of economics was progressively divided from morality and came to be viewed as a stand-alone natural or physical science that was empirically based, so as to be something akin to physics or chemistry with their natural laws which have no regard for morality. There is no right or wrong in the laws of thermodynamics. Nor was there right or wrong in the laws of economics. The market was governed by rational self-interest, and not morals. Political economy became economics. Some have called this process the "scientification" of economics.*

In her social doctrine, the Church insists that this separation of economics and morals is wrong and unwise. She insists on the classical and traditional link between morals and economics not be forgotten. "The Church's social doctrine insists on the moral connotations of the economy." (Compendium, No. 330). While the Church recognizes that economics has "its own principles in its own sphere" which is separate from moral science, she also insists that it is "an error to say that the economic and moral orders are so distinct from and alien to each other that the former depends in no way on the latter." (Compendium, No. 330) (quoting Pius XI, Quadragesimo Anno, 23). "The necessary distinction between morality and the economy does not entail the separation of these two spheres, but, on the contrary, an important reciprocity." (Compendium, No. 331)

As the Compendium puts it: "Just as in the area of morality one must take the reasons and requirements of economy into account, so too in the area of the economy one must be open to the demands of morality." (Compendium, No. 331) Economics must obtain values elsewhere than from economics. "[T]he purpose of the economy is not found in the economy itself, but rather in its being destined to humanity and society" since "man is the source, the center, and the purpose of all economic and social life." (Compendium, No. 331) (quoting Vatican II, Gaudium et spes, 63)

The Church insists that there is something greater than economics. A "meta-economic order" exists. Man does not live by bread alone. (Matt. 4:4, Luke 4:4) This seems to be just plain common sense. It is remarkable how this common sense eludes so many modernly.

"The relation between morality an economics is necessary, indeed intrinsic," continues the Compendium of the Social Doctrine of the Church, "economic activity and moral behavior are intimately joined one to the other." (Compendium, No. 331)

The fact that morality and the economy are intertwined does not mean that economic efficiency is not important. "The moral dimension of the economy shows that economy efficiency and the promotion of human development in solidarity are not two separate or alternative aims but one indivisible goal." (Compendium, No. 332). The term "economic efficiency" means a situation where it is impossible to increase general welfare from the available resources. In other words, any effort to make others better off will make others worse-off to the extent that the gains of one are offset by the losses of the other.

In fact, the Church recognizes that there is a moral duty to assuring "economic efficiency," as the "production of goods is a duty to be undertaken in an efficient manner, otherwise resources are wasted." The words "economic efficiency" quite clearly are a reference to the market economy or free economy. And yet "economic efficiency" has its limits. Economic efficiency cannot be sought in an immoral manner, "at the expense of human beings, entire populations or social groups, condemning them to indigence." (Compendium, No. 332) There is a moral limit to the cost/benefit analysis beyond which efficiency must not go.

So the Church gives its guarded approval of a market economy or free economy and even "capitalism" properly understood. Capitalism is a vague term, and so before approving of "capitalism," the Church defines what it understands as "capitalism."** "In the perspective of an integral and solidary development, it is possible to arrive at a proper appreciation of the moral evaluation that the Church's social doctrine offers in regard to the market economy or, more simply, of the free economy." "If by 'capitalism' is meant 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," then Church approves of capitalism. This form of capitalism the Church calls a "business economy," a "market economy," or simply a "free economy." (Compendium, No. 335)

While the Church does not begrudge self-interest insofar as it promotes the common good and is undertaken with justice and solidarity in mind, it does seek to distinguish that act from selfishness which seeks private benefit unjustly or in disregard of others. "The growth of wealth, seen in the availability of goods and services, and the moral demands of an equitable distribution of these must inspire man and society as a whole to practice the essential virtue of solidarity, in order to combat, in a spirit of justice and charity, those 'structures of sin' wherever they may be found and which generate and perpetuate poverty, underdevelopment, and degradation." (Compendium, No. 333) Simply put, we may not get rich at another person's expense.

"The economy has as its object the development of wealth and its progressive increase," and so the Church is not adverse--rather she encourages--economic activity. However, she rightly points out that wealth and its increase is something that is measured "not only in quantity, but also in quality." Wealth and progress are not reducible to "a mere process of accumulating goods and services." To be rich and vicious is not qualitatively wealthier or more conducive to happiness than to be poor and virtuous. There is wealth measurable in the specie of virtue.

To suggest that the measure of wealth is quantitative only, and not qualitative also, is an error, in fact is a "treachery" that can enslave us. It leads to a "civilization of consumption" or a "civilization of consumerism." We thus become "slaves of possession" and "slaves of immediate gratification." (Compendium, No. 334) (quoting John Paul II, Sollicitudo rei socialis, 28) This is a life of vice, not virtue. It is a life of fools, as we should remember that possessions and gratification of the world's goods does not protect us from the fact that there will be one night where our soul shall be required of us. (Cf. Luke 12:20)

_______________________________________
*A short synopsis may be found in James E. Alvey, "A Short History of Economics as a Moral Science," Journal of Markets & Morality 2, no. 1 (Spring 1999), 53-73.
**The Church does not approve of capitalism if it is understood to be "a system in which freedom in the economic sector is not circumscribed within a strong juridical framework which places it at the service of human freedom in its totality, and which sees it as a particular aspect of that freedom, the core of which is ethical and religious." (Compendium, No. 335)