So far in his pontificate, Pope Benedict XVI has delighted conservatives and annoyed the Catholic church’s trendy liberals in equal measure with his doctrinal orthodoxy and symbolic restoration of the old Tridentine Latin mass. But will the boot be on the other foot when the pope unveils a new encyclical (a letter sent by the pope to all bishops) on capitalism later this year? Will Benedict add his voice to the chorus of European criticism of capitalism at this moment of financial crisis? Will he proclaim anathema on hedge funds and private equity firms and denounce them as “locusts”?
The omens don’t look good. At a recent conference in the Vatican to discuss the substance of the encyclical, the Observer’s Will Hutton was sufficiently bowled over to put aside his evident distaste for the Catholic church—too much fine art and love of the good life, apparently—to declare that “we believers in stakeholder capitalism must make common cause where we can”. Hutton is a man whose ideas on the modern economy proved too left-wing for UK’s Tony Blair and Gordon Brown. Yet Benedict, he felt, shared his desire to reshape “turbo-capitalism”, whatever that might be, and to support greater redistribution to end the scourge of inequality.
If this is the limit of Benedict’s agenda, that would be a shame—and a missed opportunity. Not because anyone seriously argues, right now, for uncontrolled free markets and rampant inequality, but because, by focusing on such a negative view of modern capitalism, the pope would be missing out on an important truth about the boom, and overlooking one of the key reasons for capitalism’s current crisis.
For all the attention on capitalism’s failings, it is important to remember the recent boom helped lift more than a billion people out of poverty. And for all the hand-wringing over rising inequality within countries, we should be celebrating the huge strides over the last two decades to lower inequality between countries. Average living standards across much of the developing world have risen so fast that in many recently poor countries they now match those in the West. That is an astonishing testimony to the power of free markets. No other system of economic organization—and certainly not the socialism from which many of these countries so recently escaped—could have delivered this outcome.
There is nothing inherently un-Christian or immoral about free markets. Indeed, the papacy has been admirably robust in its defence of capitalism and scathing in its condemnation of communism. Pope Leo XIII, whose landmark 1891 encyclical Rerum Novarum (literally, “of new things”) was the first attempt by the Vatican to address the relationship between capital and labour, was broadly supportive of free markets and respectful of private property, but emphasized the dignity of human beings, the right to collective action and the responsibilities of employers. That is an approach Leo’s successors have more or less followed in subsequent encyclicals, and there is no need for Benedict to deviate. True, the current crisis has revealed flaws in modern capitalism. It is just that these are not those of Hutton’s excitable imagination. Looking for the seeds of the current crisis in ownership structures, for example, is a red herring—the financial equivalent of arguing over how many angels can dance on a pinhead. Capitalism is endlessly evolving, trying out new models. Models that prove economically advantageous survive; those that do not quickly disappear.
Instead, Benedict should focus on modern society’s attitude to risk, and to the perverse incentive structures that attempts to eliminate risk have created—and not just in finance. The market’s claim to economic superiority is based on its ability to provide finely calibrated pricing signals that guide behaviour. But during the boom, these signals became hopelessly skewed, leading to the mispricing of risk and the inflation of a vast credit bubble. Benedict should ask himself why.
Economists will tell him it was due to technical factors such as the glut of global savings, or the impact of globalization, or the introduction of new technology. But just as important was the perception, built up over several decades, that modern democratic governments will always ride to the rescue of markets and financial institutions, absolving the reckless from the consequences of their behaviour. The result has been to encourage ever greater risk-taking—the phenomenon that economists call “moral hazard”.
The modern world is awash with moral hazard. In the social sphere, high levels of welfare have encouraged socially risky behaviour, as can be seen in the soaring incidence of drug and alcohol abuse, teenage pregnancies and family breakdown. It’s the same in the economic sphere: financial welfare—exemplified by former US Federal Reserve chairman Alan Greenspan’s willingness to slash interest rates at the first sign of trouble, and readiness to rescue troubled financial institutions—has helped fuel extreme risk-taking. Viewed through this prism, the current crisis does not prove that capitalism has failed, but that welfare has failed.
If Benedict wants to be radical, he could point out there is nothing morally superior about a form of capitalism that bails out the rich and foolish and leaves future generations to foot the bill. No one is better placed to reaffirm the virtue of stigma as a tool to encourage moral behaviour. And if that sounds harsh, he can remind critics that the Church holds out a powerful alternative incentive structure to encourage compassion and help for those who suffer: the prospect of salvation in the next world. Last month’s Absolute Return for Kids dinner, which raised £25 million (Rs216 crore) for charity from London’s hedge funds in one evening, is a reminder that even in this era of turbo-capitalism, that incentive is still very strong.
More free markets, much more charity and fewer bailouts: now there’s a prescription for capitalism to delight conservatives and infuriate lefties. Go for it, your Holiness.