Sunday, August 2, 2015

A populist Pope critiques capitalism

The Pope is in the news recently for his critique of capitalism.
Just as the commandment “Thou shalt not kill” sets a clear limit in order to safeguard the value of human life, today we also have to say “thou shalt not” to an economy of exclusion and inequality. Such an economy kills.
It is hard to take this criticism seriously, especially when we consider the alternative:  the Pope grew up a Peronist from his early days of Argentina, a populist movement responsible for the wreckage of millions of lives in the name of “inclusion.” Here is an historical perspective:
How did a Christian country, with a European population, a negligible racial problem, and enormous natural and agricultural wealth screw up? How did a country with a liberal constitution cycle in and out of dictatorship? How did a country that was the fourth-richest per capita on the planet in 1929 fall so hard? How is it that Argentina regularly cycles between enormous first-world wealth and third-world economic collapse? 
The answer, in a word, is government. Argentina is a frightening example to prove that bad government can destroy even a potential heaven on earth.

And here is a more recent critique:
It boils down to the basic concept of spending more money than you can make, and cutting off long-term sources of potential financing in order to make short term ends meet. Businesses have been fleeing Argentina since 2010 due to impossibly high taxes, the inability to repatriate gains, and the inability to acquire imported inputs. Agriculture exporters hoard their products rather than fork over ungodly sums to the government. Foreign investors sit on the sidelines waiting for something to break, and Argentina has to pay extremely high interest rates to lenders.

The interesting aspect of this kind of populist critique linkage it creates between politics and economics:  Argentina seems caught in a cycle between populism==>economic collapse==>dictatorship, ... .


  1. In this post, "A populist Pope critiques capitalism," the pope is quoted as saying "thou shalt not" to an economy of exclusion and inequality. Such an economy kills." The blog post goes on to point out that the Pope comes from Argentina and describes Argentina as a country that has failed from an economic standpoint, cycling between great wealth and the brink of collapse, with ungodly taxes and regulations that have driven out business and foreign investment. It appears to be assumed that the Pope agrees with Argentina's economic policies.

    In chapter two of Managerial Economics: A Problem Solving Approach by Froeb, McCann, Shor and Ward, the authors point out that wealth is created when assets move from lower to higher value uses. They also share that some individuals argue that when a person or organization makes money, someone else loses it (the zero sum fallacy). In contradicting the fallacy, the authors say trade is voluntary in nature and ensures both parties gain.

    I am struggling with these concepts as it relates to the Pope's comment above, so I researched his philosophy a bit more. In a July 9, 2015 article on by Phillip Pullella and Sara Marsh titled, "Pope calls for new economic order," they quote the Pope as calling for the poor to have "sacred rights" of labor, lodging and land and denouncing wealthy countries that rely on poor countries as cheap providers of labor and raw materials.

    This is where I'm struggling. Let's forget about Argentina for a moment and consider a hypothetical example. Let's say an American company is creating a high-value product and essentially taking money and materials, moving them overseas, and utilizing cheap foreign labor to move its resources from a low-value to a high-value use with the greatest possible margin of profit. Wealth is created and what is traded, is money for labor. However, isn't the country that provides the cheap labor actually moving their human resource from a high to a low value? They are providing a resource cheaply for the purposes of survival, so wealth is created in one country while wealth is destroyed somewhere else, because that human resource is not being valued appropriately. I think this might be what the pope is getting at. How do we value a life? Is it moral to value labor by one human life significantly lower than another life in one's own country for greater profits? If we carry this illustration through, the pope might be asking, is it moral to pay someone just enough to survive, in the name of free trade and higher profits. The principle of free trade would argue that both parties are gaining, even if one party is gaining significantly less. However, a moral question remains.

    I don't know the answer. The book's authors say wealthy countries enforce property rights and contracts, thus facilitating voluntary transactions; and that the absence of these rights stunt development. So one could argue that in poor countries, absence of a living wage set by government to protect its people allows free trade to pay labor whatever they will accept and that's okay. Perhaps the Pope is arguing that what is good for business does not always benefit the people, or benefits them inappropriately. However, if those poor countries regulated wages higher, foreign investors would stop utilizing their labor. It's a vicious cycle. So what is the answer?

    It seems to me the answer is that countries need to create wealth from within, organically, starting with good policy and enforcement that allows its own people to own property, create business, and trade freely with one another and the outside world. Until then, those countries will not be in the position to create significant and impactful wealth. Instead, they will be in survival mode. Capitalism is not the destroyer of their wealth, their own policies an systems are. However, it appears that capitalistic systems do, in some ways, set value on human labor inconsistently.

  2. In Froeb's Managerial Economics, Chapter 2, the author states his proposition that taxes, subsidies and price controls destroy wealth. He also proposes that the role of government is to enforce property rights, contracts, and the rule of law. I would also add, to provide for the common defense. If government is necessary to maintain the economic environment; doesn't that cost money? Aren't taxes therefore a necessity? Doesn't the ideal tax level fluctuate with the current situation? Froeb's statement that taxes destroy wealth therefore strikes me as a political view. Housing subsidies providing a social support system may raise the future value of our stock in human capital. Do subsidies for public education, or the nations transportation system destroy wealth? I would say that inefficient taxes, subsidies, and price controls can destroy wealth. Efficient taxes, subsidies, and price controls must be viewed long term as investments in infrastructure that have wealth creating potential. A blanket ban on new taxes, and investments in public infrastructure is artificially inflexible, creating inefficient economic policy.