Economic and financial prudence

Pop quiz time: who wrote the following quotes:

"Profit should be pursued"

"Economic activity cannot be sustained in the long run where freedom of initiative cannot thrive."

"The financial dimension of the business world, focusing business on the access of money through the gateway of the world of stock exchange, is as such something positive"

"Money in itself is a good instrument, as are many other things at the disposal of the human person, as a means to order one's freedom and to expand one's possibilities."

Was it:

a.  Friedrich Hayek
b.  Ludwig von Mises
c.  Milton Friedman
d.  Alan Greenspan

The answer is actually "e.  None of the above."  Rather, these pro-free-market quotes were cherry-picked from a Vatican document released a few days ago with the rather complicated title, "“‘Oeconomicae et pecuniariae quaestiones’. Considerations for an ethical discernment regarding some aspects of the present economic-financial system” of the Congregation for the Doctrine of the Faith and the Dicastery for Promoting Integral Human Development, 17.05.2018"

The document is of interest in several respects.  A few commentators have noted that this is the first time that the Congregation for the Doctrine of the Faith (CDF), best known for shutting down errant theologians and, in an earlier incarnation, burning heretics at the stake, has issued a document on the financial markets.

As indicated in the title, the CDF's partner in this endeavor is the Dicastery for Promoting Integral Human Development.  That's a pretty new Vatican department: Francis created it in 2016 by combining four Pontifical Councils: Justice and Peace, Pastoral Care of Migrants and Itinerant Peoples, Pastoral Assistance to Health Care Workers, and Cor Unum - in other words, offices of the Vatican that deliver pastoral services and have a social-justice focus.  So the title of the document, announcing this joint set of considerations, sets our expectations that it is a synthesis of doctrinal and social-justice considerations.

The document also piques interest because Francis has not been shy in offering critiques of the depredations of unbridled capitalism and its effects on the developing world and the poor.  The document notes that Francis has personally approved the contents of the document.  So one may be forgiven for anticipating some sharp criticisms, and perhaps even some harsh attacks, on the free market.

Several commentators have been quick to point out that Francis's interest in the economy and its effects is not a novelty: his two immediate predecessors also wrote extensively about economic concerns, and those writings in turn are simply among the more recent entrants in an entire documentary tradition that goes back at least as far as Leo XIII in 1891 with Rerum Novarum.  But somehow, Francis's criticisms seem to have more bite.  In part that may be because, as a native of the Global South, he stands in solidarity with those who are victimized by an increasingly globalized financial system that also exploits and corrupts where it is able.  Whatever the reasons, Francis is perceived as being no friend of capitalism.

Another interesting aspect of the document is its chosen topic: it is a considered response to the worldwide financial crisis that began at the end of the George W Bush presidency in 2007-2008 and continued through most of President Obama's two terms, and whose effects reverberated far beyond the borders and shores of the US.  In addition to a focus on marketplace ethics and failures therein, the document spends considerable time discussing specific items that were primary aspects of the crisis, such as credit default swaps and mortgage backed securities.

But its most valuable sections, in my opinion, are in the top half of the document.  In the first 13 paragraphs, it articulates what might be thought of as an ethical theory of the marketplace.  The foundational insights which are laid out in those first sections and provide a framework for discussing the financial topics throughout the remainder of the document would seem to be the following:

• Economic activity should contribute to the full and integral development of the human person; a single-minded focus on profits impoverishes this contribution
• Economic activity should contribute to the common good
• Economic activity, including the financial markets, must be integrated with an ethics which experience has shown the market is incapable of developing on its own
• Financial markets do not self-regulate.  They require government regulation as a means to the end of the common good

If my description to this point has set your expectations that this document strongly repudiates the free market economy and delivers blistering attacks on the financial markets, then ... if that approach strikes you as good and necessary, you probably will find this document to be disappointing, because that doesn't seem to be its authors' basic outlook.  This is not a call to blow up the financial system and start over (although, interestingly, it does lament that the world missed the opportunity, at the time of the financial crisis, to institute fundamental ethical and regulatory changes in the operation of the financial markets).   As a matter of fact, and as indicated by the free-market-supportive quotes at the top of this post, the authors take some pains throughout to point out that there is much that is positive about the financial markets.  At the same time, they don't hesitate to express concern about the many excesses, risks, dishonest acts and injustices that continue to beset financial markets today.

The document seems to strive to strike a balance: call out what is good; also call out what is bad.  And call us to do better.  At the bottom of the post, I've pasted a table which juxtaposes each of the market-positive quotes I pasted at the top of the post (plus some others) with  offsetting cautionary notes.

 I suspect that both the left and right activist wings of American politics will be dissatisfied with the document.  To the consternation of libertarians, it stands as a vigorous rebuke of an unfettered marketplace and the many unregulated financial instruments and offshore practices that have become prominent in recent decades - which preferences, instruments and practices it identifies, rightly, as a primary cause of the financial crisis.

But neither does it call for the radical redistribution of wealth and the restructuring of the financial sector that some members of the progressive wing may wish for.  It recognizes that money, the stock market, the credit market, corporations and other economic entities have much that is good and necessary about them.  It also recognizes that there is much that is problematic about those things today, and that a decade ago we very nearly had a global financial meltdown because of those problems.

Oeconomicae et pecuniariae quaestiones calls for keeping what is good while bringing to bear ethical constraints and government regulation to mitigate the many powerful forces in today's financial system that seem to work contrary to the common good.  The goal the Holy See seems to be advocating for here is not a brand new replacement system, but a cleaned-out, purified existing system.

One other note: it is not by accident that economics is known as "the dismal science".  Most of us find the topic pretty unenjoyable.  And unfortunately, this document doesn't lighten the load for those who are interested in reading what the Holy See thinks about these important financial topics.  Of  the various reactions to the document's publication that I have read, among the most interesting is Thomas Reese's, who judges it to be "horribly written".  I can't say he's wrong.  Its translation is not very felicitous, and some of it is pretty awkward and, in a few spots, amateurish.  It's not always clear at first what is being discussed in certain sections.  As a read, it's a slog.  But if you're interested in the church's take on the economy and especially on the financial markets, it's worth the effort.

Here are the quotes from which I chose those that are in the "quiz" at the top of this post.  To the right of each one is an offsetting or qualifying quote.

Economic activity cannot be sustained in the long run where freedom of initiative cannot thrive (12)	It is also obvious today that the freedom enjoyed by the economic stakeholders, if it is understood as absolute in itself, and removed from its intrinsic reference to the true and the good, creates centers of power that incline towards forms of oligarchy and in the end undermine the very efficiency of the economic system. (12)
Money in itself is a good instrument, as are many other things at the disposal of the human person, and is a means to order one’s freedom and to expand one’s possibilities. (15)	Nevertheless, the means can easily turn against the person. (15)
the financial dimension of the business world, focusing business on the access of money through the gateway of the world of stock exchange, is as such something positive. (15)	Such a phenomenon, however, today risks accentuating bad financial practices concentrated primarily on speculative transactions of virtual wealth, as well as negotiations of high frequency trading, where the parties accumulate for themselves an excessive quantity of capital and remove the capital from circulation within the real economy. (15)
Every business creates an important network of relations and in its unique way represents a true intermediate social body with a proper culture and practices. (23)	the Church recalls the importance of the social responsibility of each venture,[44] wherein the ad extra is congruent with the ad intra. (23)
the natural circularity that exists between profit, a factor intrinsically necessary for every economic system, and social responsibility, an essential element for the survival of any form of civil coexistence, reveals its full fruitfulness and exposes the indissoluble connection, that sin tends to hide, between the ethics respectful of persons and the common good, and the actual functionality of every economic financial system. Such virtuous circularity is favoured, for example, by the pursuit of the reduction of the risk of conflict with the stakeholders in order to nurture greater inner motivation of the employees of a company.  (23)	The creation of added value here, the primary objective of the economic financial system, must demonstrate, with all of its implications, its practicality inside a solidified ethical system founded on a sincere search for the common good. Only from the recognition, and from the realization, of the intrinsic connection that exists between economic reasoning and ethical reasoning, can a good indeed spring forth, that may benefit all of humanity.[45] Therefore, in order to function well, the market needs anthropological and ethical prerequisites that it is neither capable of giving for itself, nor producing on its own. (23)
Profit should to be pursued (11)	…but not “at any cost”, nor as a totalizing objective for economic action. (11)
In a fully human perspective, there is actualized an interchange between profit and solidarity that, thanks to the freedom of the human person, unleashes a great potential for the markets. (11)	Well-being must therefore be measured by criteria far more comprehensive than the Gross Domestic Product of a nation (GDP), and must take into account instead other standards, for example, safety and security, the growth of “human capital”, the quality of human relationships and of work. (11)
Every human reality and activity is something positive, if it is lived within the horizon of an adequate ethics that respects human dignity and is directed to the common good. This is valid for all institutions, for it is within them that human social life is born, and thus it is also true for markets at every level, including financial markets. (8)	What is needed, on the one hand, is an appropriate regulation of the dynamics of the markets and, on the other hand, a clear ethical foundation that assures a well-being realized through the quality of human relationships rather than merely through economic mechanisms that by themselves cannot attain it. (1)
In principle, all the endowments and means that the markets employ in order to strengthen their distributive capacity are morally permissible (13)	At the same time, it is clear that markets, as powerful propellers of the economy, are not capable of governing themselves.[28] In fact, the markets know neither how to make the assumptions that allow their smooth running (social coexistence, honesty, trust, safety and security, laws, and so on) nor how to correct those effects and forces that are harmful to human society (inequality, asymmetries, environmental damage, social insecurity, and fraud). (13)
Thanks to globalization and digitalization, the markets can be compared to a giant organism through whose veins, like life giving sap, flow huge amounts of money. This analogy allows us to speak of the “health” of such an organism when its means and structures are functioning well, and the growth and diffusion of wealth go hand in hand. The health of a system depends on the health of every single action performed. In a healthy market system, it is easier to respect and promote the dignity of the human person and the common good. (19)	Correspondingly, every time unreliable economic-financial instruments are introduced and diffused, they put the growth and the diffusion of the wealth into serious danger creating systemic problems and risks that amount to the “intoxication” of the organism. (19)