Must a Catholic Love the State?
The Church and the Market: A Catholic Defense of the Free Economy
Thomas E. Woods, Jr.
Lexington Books, 2005
x + 239 pgs.
Thomas Woods here addresses a question that many of his readers will find of vital personal concern, but even those who need not confront this question directly have much to gain from his analysis of it. Woods is a Roman Catholic and also supports free enterprise capitalism. He rejects the need for any government intervention to correct the supposed excesses of the free market. In support of this view, Woods relies principally upon Austrian economics, of which he shows himself in this book a gifted expositor.
May a Catholic accept the free market in the unreserved fashion of our author? Some have claimed not, and several exponents of Catholic social thought, as they conceive it, have taxed Woods with inconsistency. Austrian economics, critics such as John Sharpe allege, ruthlessly subordinates the common good to economic efficiency. Catholic personalism rejects such "economism," and papal social encyclicals, beginning with Leo XIII’s Rerum Novarum (1891), support restraints on the market that Woods rejects. Though Leo and his successors endorse the right of private property and denounce socialism, they also support the "living" or "family" wage and, to that end, regard with favor the economic effects of labor unions. If Woods does not find these papal pronouncements to his liking, has he not cast aside the magisterium of his Church? Roma locuta, causa finita est.
Further, what of the distributist economic system defended by such great Catholic apologists as Hilaire Belloc and G.K. Chesterton? Is not this system a faithful and creative attempt to fulfill the papal mandates? The advocates of this system maintain that a regime of widespread ownership of land and small-scale craft production obeys natural law and Catholic tradition. By contrast, does not modern finance capitalism flout the Church’s condemnation of usury?
Woods mounts a magnificent attack on Catholic critics of the free market. Austrian economics, contrary to its detractors, does not at all assume that people pursue, or should pursue, their financial gain to the exclusion of all else. Woods has here been greatly influenced by Murray Rothbard, and he notes that "[m]uch of his [Rothbard’s] career was dedicated to exposing the injustice of socialism and making the moral case for private property and in fact he explicitly rejected the utilitarian case for the free market" (p. 25).
It is the Chicago School, not the Austrians, that preaches the gospel of efficiency; and Woods in this connection makes an insightful criticism of a prize ornament of Chicago theory. According to the Coase Theorem, actors in the free market will deal with externalities through negotiation to a mutually advantageous settlement. Absent transactions costs, the final settlement will be the same regardless of the initial distribution of assets. The welfare economics of A.C. Pigou, which called for massive government intervention to "correct" the market, has been struck a fatal blow. Do we not have here a triumph of free market economics?
Austrians are not convinced. What happens if the property disputes reach the courts? Then, supporters of the Theorem such as Richard Posner claim, judges should endeavor to settle matters to maximize wealth. Such disregard for rights exemplifies just the "economism" that arouses the Catholic critics, and Woods fully brings out that the Chicago approach rests on assumptions about ethics. It is not the pure product of scientific analysis. Woods also notes that Coase himself entirely shares the efficiency perspective: it is not just his disciples such as Posner who are here at fault.
But does not Woods’s defense of the Austrians against economism land him in a new problem? He says that Austrians rely on ethics, not efficiency, to vindicate capitalism; but if he rests his case on ethics, is he not as a Catholic subject to papal authority? How then can he defend the strict laissez-faire policy that the popes on ethical grounds reject?
Woods has an ingenious response. The papacy does indeed have final authority on questions of faith and morals, but this jurisdiction does not extend to economic theory and history. When Leo tells us, e.g., that employers ought to pay a "living wage" that enables a man fully to support a family, he implicitly rejects a conclusion of Austrian economics. The Pope assumes that wage rates are set at the discretion of the employer. If the employer pays less than a living wage, he stands subject to ethical judgment.
The assumption is false. In a free market, workers earn the value of what they contribute to the product—in technical language, their "marginal value product," discounted for time. Employers who pay less than this will lose their workers to firms that find it profitable to offer better rates. An employer will not pay more than the discounted marginal product because this is all the employee’s labor is worth to him.
What then happens when the law or labor union coercion compels employers to raise wages higher than the market rate? Unemployment results: workers whose marginal value products fall below the higher rates will be discharged, or not hired in the first place.
Obviously, Woods maintains, the Pope cannot have been aware of these ill effects when he recommended the living wage: he relied in his encyclical on faulty economic theory. To differ with the Pope, then, does not require the Catholic defender of the free market to question the Pope’s moral authority: he need only deny that the Pope’s judgments about economic theory have binding force. In like fashion, believers stand free to make their own evaluations of secular history. The Industrial Revolution, however the Vatican may view it, was a blessing rather than a curse to the European masses.
Woods appeals to Pope Leo himself to justify his contention about the limits of papal authority: "If I [Leo XIII] were to pronounce on any single matter of a prevailing economic problem, I should be interfering with the freedom of men to work out their own affairs. Certain cases must be solved in the domain of facts" (p. 4).
But is not Woods here caught in a contradiction? He says that Rothbard’s defense of capitalism rests on ethics but also insists that the judgments of Austrian economics escape papal authority. If this is so, must not Austrian economics entail no ethical judgments? How, then, can the claim about Rothbard be maintained, given that Rothbard relied on Austrian economics?
The response to this difficulty raises a fundamental issue. Austrian economics makes no judgments about ethics. If an economist argues, in the fashion just explained, that minimum wage laws cause unemployment, he has made a purely factual assertion: "Father James Sadowsky, S.J., . . . expressed it well when he said that ethics is prescriptive while economics is descriptive. ‘Economics,’ he says, ‘indicates the probable effects of certain policies, while ethics determines what one should do.’ These are two very different things" (p. 31). But given certain truths of economics, ethical judgments at once suggest themselves to the normal mind. Someone, e.g., who accepts the Austrian view of the effects of mandatory minimum wages will be unlikely to be a committed advocate of this measure.
Our author goes further. Not only may Catholics licitly reject papal teachings that contravene sound economics: they should also embrace with enthusiasm Austrian theory. "I [Woods] am convinced that a profound philosophical commonality exists between Catholicism and the brilliant edifice of truth to be found within the Austrian school of economics. . . . Carl Menger, but above all Mises and his followers, sought to ground economic principles on the basis of absolute truth, apprehensible by means of reflection on the nature of reality. What in the social sciences could be more congenial to the Catholic mind than this?" (p. 216). The connection between the Austrian school and Catholicism, further, is more than theoretical: the Spanish scholastics of the sixteenth century were important precursors of Austrianism.
To throw into question views of the popes demands from a Catholic great circumspection, but no such restraint is needed when one’s targets lack ecclesiastical authority. Woods displays his formidable polemical skills to full effect in his demolition of distributism. Hilaire Belloc in The Servile State, a book that won Friedrich Hayek’s praise, warned against statism’s assault on liberty, but unfortunately, as Woods abundantly shows, his remedy partook of the disease it pretended to cure.
Belloc and his fellow distributists supported the family farm, through which people could free themselves from the sudden swings of the market. If a family could produce its basic needs for itself, it need not fear changing economic conditions. If this is right, Woods asks, why have so few people abandoned the market for subsistence farming? Are the backbreaking labor and low standard of living of European peasants really the ideal form of life to which we must all aspire? Most people have the sense not to abandon so readily the immense advantages of the division of labor.
But those who find distributism plausible are in a market society free to follow their wishes. In like fashion, those who do not like what Mises called "mass production for the masses" are at liberty to confine their purchases to handmade goods. Distributists find this insufficient, and demand that people be restricted by law from engaging in large-scale production. Only a state with total power over people’s lives could enforce the stringent restrictions that distributism demands. Belloc, I fear, despite his many services to liberty and his penetrating gifts as a historian, had an affinity for the Jacobins. Those inclined to doubt that a staunch Catholic could hold such a view should examine Belloc’s The French Revolution.
Distributists assail capitalism as based on usury, but Woods shows with little difficulty that Belloc’s views on this subject were confused. Belloc thought that taking any interest on "unproductive" loans was usurious; but Woods, relying on the monumental work of John T. Noonan, The Scholastic Analysis of Usury, points out that Belloc’s "chief distinction, between consumption and production loans, is totally unfounded" in Catholic moral teaching (p. 121, quoting Noonan).
In his excellent account of usury, Woods places great stress on the influence of an argument advanced by Aquinas. He maintained that interest on a loan unfairly requires the lender to pay twice for the same thing. For some goods, like a house, we can distinguish between use and ownership. I can rent your house without owning it. But for others, no such distinction is possible: I cannot use wine, e.g., without owning what I then consume. Money belongs to the latter class: St. Thomas says that the "proper and principal use of money is its consumption or alienation whereby it is sunk in exchange" (p. 110, quoting Aquinas). If so, "it is not legitimate to charge rent on money. . . for this would be charging both for the use of the money and for the money itself" (p. 111).
Woods rightly finds this argument "peculiar" and wonders what is wrong with selling the same thing twice, if this results from a voluntary agreement. But is there a fallacy in the argument itself? I suggest that Aquinas has relied on an implicit mistaken assumption. He thinks that if the lender were charged only once, he would have to repay no more than the amount of money he loaned. If he has to pay more than this, then, the creditor has charged him twice over. But as Woods aptly notes, "the phenomenon of time preference means that a good in the present will be valued more than the same quantity of that good in the future" (p. 116). Time preference of course applies to money; and, given this fact, we can identify precisely what is wrong with Aquinas’s argument. The cost of obtaining money now is a greater sum of money in the future. If so, the borrower who has to pay interest is not being charged twice for the same good. He is only charged once.
Woods, one of the best classical liberal scholars of his generation, has once more placed us in his debt with this lucid and tightly argued book.
At one point I think that Woods goes too far. He notes John Stuart Mill’s odd view that "we might find some place in the universe where two and two did not make four" (p. 216) and thinks that this is grounded in the belief that the world is not an orderly creation. But Mill did not deny that there are laws that are without exception true. He thought that these laws are empirical generalizations, not necessary truths. This view does not deny that the world is orderly.
See my review of his The Politically Incorrect Guide to American History in The Mises Review, Winter 2004.