Free Markets and Morality—PART I

A primary “progressives’”[i] pastime appears to be seeking, finding, and pointing out ways in which free markets and the participants therein, especially those who succeed, are immoral. I was reminded of this fact last week when Freakonomics served up a rebroadcast of a 2013 podcast [ii] that followed Pope Francis’s apostolic exhortation “EVANGELII GAUDIUM.” That rebroadcast was timely because this controversial Pope[iii] created yet another controversy last month by implying that atheists could go to heaven.[iv] In the Evangelii Gaudium, the Pope said, among other things, “. . .  today we also have to say “thou shalt not” to an economy of exclusion[v] and inequality. Such an economy kills. . .. Today everything comes under the laws of competition and the survival of the fittest, where the powerful feed upon the powerless. . ..” Because capitalism cannot achieve paradise, truthful factoids of capitalism’s shortcomings abound. The Pope’s language, however, is nothing more than a typical inaccurate and hyperbolic promotion of collectivism via a denunciation of capitalism. However, to highlight and exaggerate capitalism’s weaknesses and ignore its strengths is both a distortion of its worth and uncharitable.[vi] This line of thinking also reflects a profound lack of understanding of the human condition, human nature, and economics;[vii] ignores counter-evidence, and is founded on myths.[viii] (Whether the Pope is falling for myths about inequality or exploiting his flock’s belief in these myths for political ends is something I will leave for the Pope and God to sort out among themselves.)

The Pope purports to understand economics. For example, he says,

“. . . some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.” I’ve addressed what is wrong with his statement about “trickle down” before.[ix]

That the Pope fails to see the vastly greater amount of “greater justice and inclusiveness in the world” that relatively free-market countries have caused around the globe compared to any other economic system reveals blindness of the light of capitalism. Unlike the Pope is doing here, Jesus urged his followers to count their blessings rather than their tribulations.

The Pope also appears to believe any system that results in significantly unequal incomes is unjust. According to that logic, it would be unjust not to award As to everyone regardless of how much the student studied for the exam or the student chose not to answer any of the test questions. More than being faulty logic, it ignores the greater unjustness of the inequality of power among the participants in more collectivist economic systems he would substitute for the capitalist systems he decries. By wanting to redistribute wealth, the Pope makes clear that he believes wealth is good for people to have. He makes a positive passing reference to the vastly improved standards of living of those who live in the improved world that is brought about by free markets, “We can only praise the steps being taken to improve people’s welfare in areas such as health care, education and communications.” [x] However, he assigns little significance to it. (Talk about ungratefulness!)

Finally, he is wrong to say that advocates of free markets “expresses a crude and naïve trust in the goodness of those wielding economic power. . . .” Advocates of free markets fully understand that people who “wield power” (a misnomer)[xi] in free markets are often bad people. Because the case for free markets does not depend on the benevolence or goodness of anyone,[xii] the naivete or sophistication of free-market advocates concerning the goodness of market participants is irrelevant in deciding what economic system best serves humans.

With the Pope’s premises about free markets being false, the Pope’s message concerning economic policy based on those premises leads to his wrong judgments about the morality of free-market capitalism. Let’s sort out some of how the Pope’s judgments concerning the morality of free markets reveal that the Pope is especially fallible concerning economics.

Let’s start with a fundamental proposition. The essence of free market capitalism[xiii] (a pure form of which has never existed countrywide and likely never will[xiv]) is one party simultaneously, voluntarily, and freely trading something it owns for something another party owns. Such a trade only occurs when each party prefers what it will receive by the trade over what it must giving up to make the trade. Trading makes each party better off (“wealthier”). Consider a simple example: Party A has ten apples, and Party B has ten oranges. For most people, a diet of all apples or all oranges is less enjoyable than a diet of some apples and some oranges. Free markets best facilitate mutually beneficial exchanges for the benefit of all involved.[xv] Hence, free markets facilitate wealth creation.

In no way is the above described fundamental feature of free markets immoral or “dog eat dog.” Exchanges can, of course, produce ancillary negative effects. It is not, however, the free market that creates the evil acts the pontiff laid at the feet of free markets. It is the sins of participants in free markets that create the ancillary evils. Such sins include greed,[xvi] misrepresentation, breaches of promises, the insufficient respect for or enforcement of the law, individual or governmental incompetence, government favoritism (corruption) that advantages one party over others,[xvii] and activities that create more negative than positive effects on third parties (“externalities”), e.g., pollution. Those things are immoral.[xviii] But those things are human fallibilities that are present in all economic/political systems. To blame the system for the sins of the participants is illogical, unjust, and misguides the flock. To create false hope that sins would be less prevalent under some other system without solid proof for that proposition is itself sinful.

However, it’s worse than even that. The economic/political system the Pope proposes is a more collectivist than free market capitalism. Collectivist systems have consistently produced far more immorality and far worse earthly results for the unfortunate average income and poor people who find themselves in those systems. (Venezuela is a dramatic recent example.)[xix] During the 20th century, Communist/Socialist/collectivist governments intentionally killed a minimum of 85-100 million non-combatants. Communist/Socialist/collectivist governments unintentionally killed or enslaved countless more. The deaths of combatants in wars between and against collectivist countries adds mightily to the totals. Free market systems have produced nothing close to comparable. On the contrary.[xx]

The Pope is doing God’s work when he focuses on how poorly humans behave in free market economic/political systems, and to shine a light on sinners and how they should mend their ways. The Pope is doing the work of the devil when he speaks without regard to the facts that compared to any other system known to man free markets restrain human fallibilities and sins and reward human morality. Conversely, other systems, especially the one the Pope promotes, consistently become tyrannical, which results in far more human suffering. To condemn something because it falls short of his standards (paradise?) when his proposed alternative will cause humans to fall even farther from paradise is damnable.

The Pope speaks of the immorality of income inequality, but his focus has less to do with the excess of wealth of some than the lack of wealth of the poor. Of course, there would be less income inequality if everyone were poor, but the Pope’s homily ignores how much less wealth humans will produce as incomes are forced to be more equal. It appears that he incorrectly assumes that it is possible for humans to have their cake (have a system that improves the standards of living of everyone, especially the poor) and eat it too (eliminate the engine that creates motivation to create the desired improvements and the wealth to develop and deliver those improvements).[xxi] He appears oblivious to the fact that the primary source of wealth is free market exchanges (which inevitably create income inequality).[xxii] As I explained in “Wealth,” “Wealth cannot solve all human problems—not by a long shot. It would be hard, however, to find a cause or a pursuit of knowledge that would not benefit from more money behind it.”

The Pope will slow the amazing recent worldwide drop in extreme poverty by[xxiii] throttling the creation of wealth. As Joseph Kaboski put it in the Freakonomics podcast cited above, “. . . we’ve never seen an example of any country that has escaped extreme poverty because of foreign aid or NGOs [wealth redistribution]. . . . More people have escaped extreme poverty in the past 25 years in part through the growth of China and India than in any period of human history. And all of these miracle countries — “miracle” in the economic sense, China, South Korea, Taiwan, Hong Kong, Singapore, Chile down in Latin America — they’ve all grown through, high levels of trade, market economies. And that’s important.”[xxiv]

Income inequality can and often does create societal problems. Reasonable cases can be made for some wealth redistribution to mitigate some of those problems. The Pope’s attempt at such a case, however, was thin on substance and sound economics and heavy on guilting the rich and fomenting disgruntlement by the poor without offering a realistic and beneficial alternative to free market capitalism. The Pope led his flock astray by omitting any clue as to how to prevent redistribution from inflicting infernal harm on the poor and slow wealth creation for the benefit of all humans.[xxv] Instead of showing a way to the truth, the way, and the light, the Pope clears a path for the tyrannical wolves who inevitably control collectivist economic/political governments.

Also absent from the Pope’s homily is an acknowledgment of the power of free markets to elicit moral behavior. Diedre McCloskey’s 600+ page tomb, “The Bourgeois Virtues: Ethics for an Age of Commerce,” explains how in free markets the virtues of Faith, Hope, Love, Justice, Courage, Temperance, and Prudence are advantageous to entrepreneurs. Because they are advantageous, free markets incentivize entrepreneurs to hold and exhibit those virtues to attract and keep customers and employees. Entrepreneurs primarily focus on her fellow man’s needs and desires, and to produce the things that will fulfill those needs and desires at a lower price than their competitors. To succeed in such endeavors requires faith, hope, and treating customers, suppliers, partners, and employees fairly (so those people will want to continue working with the business person in the future) and it takes courage, temperance, and prudence succeed in serving one’s fellow man.

Unlike dogs who might eat each other, successful business people understand that they cannot become exclusively focused on gaining the most advantage out of every transaction. Winning individual games is far less advantageous to a business person than winning what Jordan Peterson calls “the game of games”[xxvi] or “The Game of Life.”[xxvii] The gist is of this idea is that science has discovered that if a mammal wins every game, no one will want to play with that mammal for very long and word spreads about bad sports. Consequently, the optimal strategy for an individual is to play games in a way that causes other individuals to want to play with him. Consequently, to be successful business people (the people who the Pope alleges have too much power) cannot overplay their so-called “power.” They must play the game of business so that customers will want to continue to “play” with them over time.

Of course, there are businesspeople in free markets who succeed despite being unfair or cutting corners, but they are not the norm and are less likely to succeed. Those people, however, are the norm and are more likely to succeed in many other systems—especailly the one the Pope advocates. Free markets are far from perfect solutions, [xxviii] but they are far better at fostering virtues (morality) than any other known economic/political system.[xxix]

They know that having a good reputation as to honesty, trustworthiness, fairness, and caring about customers is essential to success. The best way to gain and retain that reputation is to be honest, trustworthy, fair and care about customer’s wants and needs and to serve those wants and needs better and/or at a price lower than their competitors. If that is not pure morality, it is probably as close to it as a vast number of humans are likely to get. Free market systems reward that. Because collectivist systems do not reward those virtues nearly as well, the people are far less likely to be virtuous. Absent a virtuous cycle, all but the very powerful remain poor and do fewer good works.

 


[i] I put “progressives” in quotes to register my quarrel with people whose policies cause our political system to progress toward to something akin to the divine right of kings (tyrants). See “The Road to Serfdom.”

[ii] See “Pontiff-icating on the Free-Market System: A New Freakonomics Radio Podcast.”

[iii] See “5 times Holy Father caused major controversies with his comments.”

[iv] See “POPE FRANCIS HUGS, COMFORTS LITTLE BOY WHO ASKED IF HIS ATHEIST DAD WAS IN HEAVEN

[v] The word “exclusion” as the Pope is using it suggests that the economic system bars people from participating in it. An explanation as to why that is in no way is that true will have to await a future blog.

[vi] There has never been or ever will be an economy in which people do not get killed. So to say capitalist economies kill is shallow pontification. Even if one felt compelled to point out that people get killed by capitalist economies, to be fair and charitable, one should also account for the lives save, improved, and extended by capitalist societies. Compare the lifesaving and life-improving drugs and medical procedures that have been invented, developed, produced, and delivered to people around the world by more capitalist economies to those of less capitalist economies, and more capitalist societies come out a runaway winner. The vastly larger number of people intentionally or incompetently killed in collectivist political/economic systems compared to capitalist political/economic systems and the Pope’s pontification becomes ludicrous when it comes to morality.

The idea that people are excluded or are “marginalized” by capitalist economies is ludicrous as well, but a discussion of that must await a future blog post.

The phrase “dog eat dog” gratuitously maligns free market capitalism, but if misleads. (Do you feel eaten when you go to the grocery store and trade your dollars for your daily bread?) The Pope, however, appears oblivious to the fact that the alternative to “dog eat dog” capitalism is not the garden of Eden. History teaches us that collectivist economies are “monster eats citizens” or “citizens eat zoo animals” by comparison.

[vii] See Jordan Peterson: Warren Buffett and Wealth” and “Income Inequality Is More Than It’s Cracked Up To Be.”

[viii] See “5 Inequality Myths” and “Is Capitalism Moral?

[ix] See “Trickle Down.”

[x] Pope Francis, EVANGELII GAUDIUM” at 52.

[xi] Unless a business gains special favors from government (e.g., get the government to force people to buy their products), businesses can only offer to sell their goods or services, they are powerless to force anyone to buy anything. The “power” to which people like the Pope refer comes from the desire of the buyer to obtain what she wants. It is not the seller’s fault that the value of the item on offer is higher than she can afford or prefers to pay.

Consequently, businesspeople do not have the power to force anyone to do anything unless the customer does not live up to her end of the deal or the government says the businessperson can force something. That is government power at work—not business power. Government power is even more pervasive in more collectivist economies.

[xii]It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Adam Smith.

[xiii] See “Milton Friedman: The Essence of Capitalism.”

[xiv] A genuinely free market would not be regulated by a government other than with respect to the enforcement of contracts, and private companies would issue money.

[xv] Note that less free markets diminish the benefits of trade. For example, consider what would happen if party A would rather have ten oranges than ten apples, and party B would prefer ten apples to ten oranges, and a government proposes a 10% exchange tax. After an exchange between the parties, each party would wind up with only nine pieces of fruit. Consequently, the probability the wealth-creating trade will happen diminishes, i.e., the likelihood of wealth being created diminishes. (That loss associated with taxes is mitigated to the extent the tax is efficiently deployed to serve a public good. Sadly, however, in this process government inefficiency, waste, and corruption ensures a net loss of wealth in total.)

[xvi] Which may or may not be what you think it is. See “Greed.”

[xvii] For example, tariffs. See “Tariffs Transfer Wealth From the Poor To The Rich.”

[xviii] This overstates the case with respect to some circumstances. For example, almost all trades create wealth for the parties involved. The creation of wealth is a good thing that in theory helps every human in the world to a small degree individually, but potentially to a large degree collectively. In other words, essentially all trades create positive extermalies. Some trades create negative externalities. In many cases people who incure negative externalities can obtain compensation from the parties to the deal, in other cases they cannot. Moreover, positive externalities generally inure to the benefit of everyone, while negative externatities are often more localized. So even in cases where sume of the positive externalities are much greater than the sum of the negative externalities, some people can suffer net losses while other enjoy net gains. In short, while the statement I made is useful to understanding, it is not universally accurate.

[xix] See “Venezuela’s Starving People Are Now Eating The Zoo Animals – The Parisians Had The German Excuse.”

[xx] See “If Goods Don’t Cross Borders…

[xxi] See “More On Two Paths for America.”

[xxii] See “Why a Very Few Have SOO Much – Prof. Jordan Peterson Explains Pareto Distribution.”

sup>[xxiii] See “‘How To End Poverty in 15 years’ Hans Rosling – BBC News,” “Hans Rosling’s 200 Countries, 200 Years, 4 Minutes – The Joy of Stats – BBC Four” and “Dead Wrong® with Johan Norberg – Causes of Poverty Reduction.”

[xxiv] See “Pontiff-icating on the Free-Market System: A New Freakonomics Radio Podcast.”

[xxv See “Welfare programs that do more harm than good.”

[xxvi] See “Jordan Peterson Rats and Morality.”

[xxvii] See “The Game of Life.”

[xxviii]  As if there were such a thing as solutions. See “Solutions.”

[xxix] For a summary of these thoughts see “Bourgeois Virtues?,” also by Diedre McCloskey.

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