Sunday, December 28, 2014

Devil in the detail of Pope's attack on capitalism

December 27, 2014

Allister Heath

Pope Francis is wrong about how best to fight global inequality.

Pope Francis' view, inequality is the root of social evil. Photo: AFP

There can be no doubt that Pope Francis is a devoted and selfless man who has dedicated his life to serving others. A phenomenal theologian, he abhors war and poverty and is an inspiration to hundreds of millions of believers; he has gained widespread respect even among those who disagree with the Catholic church's teachings.

So it is with great sadness that I must take exception to the Pope's views on economics and business. His hostility to capitalism is tragically misplaced. He has repeatedly savaged free markets and aligned himself with the views of Thomas Piketty, the far-left intellectual who obsesses about inequality and advocates crippling taxes on income and wealth.

In one key intervention, the Pope said that the "absolute autonomy of markets" was a "new tyranny". It was a strangely inaccurate vignette of the modern economic system, which is characterised by not-so-free markets that are routinely bailed out, subsidised, taxed, capped, fettered, regulated and distorted by activist governments and their monetary and fiscal policies. North Korea is a genuine tyranny; free trade and genuine free markets are anything but.

It gets worse, unfortunately. At the height of Pikettymania, and before many leading economists punched holes in the French economist's thesis, the Pope took to his Twitter account to state, without any caveats or context, that "inequality is the root of social evil". He was clearly referring to differences in financial outcomes and wealth, and, crucially, not to poverty or to inequalities of opportunity, both very different concepts.

In any free society characterised by private property rights and individuals endowed with differing tastes, ambitions, talents and aspirations, there will inevitably be a divergence in earnings and wealth. The Pope's wholesale condemnation of inequality is, thus, tantamount to a complete rejection of contemporary economic systems. It is not a call for reform, or for moderation, but a radical denunciation.

The logical conclusion of the Pope's tweets is that it is "evil" for the likes of Sir Richard Branson to have been allowed to keep the money he earned by providing the public with goods and services, and that we need immediate equalisation through punitive taxes. Such an extreme approach would have catastrophic consequences, annihilate incentives to work, save and invest, and halt the progress of human civilisation.

A more recent critique from the Pope was equally unfounded, blaming speculators for high food prices. "The few derive immense wealth from financial speculation while the many are deeply burdened by the consequences," he said, asserting that "speculation on food prices is a scandal which seriously compromises access to food on the part of the poorest members of our human family".

The Pope's predecessor, Benedict XVI, made similar comments, as have many pressure groups; ironically, food prices have been falling recently. But the truth is this: speculators are not to blame for high (or low) prices over any meaningful period of time; there is no genuine, robust statistical evidence to back up the Pope's claims, and any profits traders make do not come at the expense of the poor.

Those who buy and sell and seek to predict the future perform a crucial and legitimate social function; without them, the economy would lurch from oversupply to undersupply. Markets would be horrendously opaque and illiquid, with some consumers paying far more than others for identical products. When the price of food goes up, it means experts collectively feel demand will rise or supply will fall; thanks to such speculation, market prices are the best possible early warning signal. They allow farmers to plant more of the right kinds of crops, and futures markets allow them to insure themselves against price changes. Speculators who keep getting it wrong go bust.

Food is relatively expensive because it is relatively scarce. Many countries are becoming richer and, thus, consuming more of it – which is wonderful – and more agricultural land is being used to produce biofuels and ethanol. Yet we have coped: technological progress, fuelled by entrepreneurial innovation, has made agriculture immensely more productive; and improved policies have meant that more countries operate productive agricultural sectors.

Over time, it is these trends which determine the cost of our lunch and dinner, not traders; it is a shame that so many people find it easier to shoot the messenger than try to understand the underlying causes of scarcity and plenty.

Of course, the system can break down. Bubbles can appear: quantitative easing and ultra-low interest rates have pushed up a variety of asset prices over the past few years; too much money is chasing too few commodities. Markets can be manipulated, as we saw with Libor; fortunately, such illegal activity doesn't tend to have much of a long-run affect on prices but it should, nevertheless, be penalised severely. Cracking down on such abuse is one thing; seeking to stop speculation is another entirely.

The Pope has also slammed "trickle-down" economics – in fact, a caricature of free-market arguments – in scathing but equally incorrect terms. "There was the promise that once the glass had become full it would overflow and the poor would benefit. But what happens is that when it's full to the brim, the glass magically grows, and thus nothing ever comes out for the poor," he said.

It is hard to reconcile such a baffling statement with recent economic history. Even the poorest among us today have access to medical technologies which the richest of the rich couldn't even have dreamed of a century ago. The number of people living in extreme poverty in emerging markets has collapsed from half the population in 1981 to 21 per cent in 2010. A giant new global middle class has emerged in China, India, Africa and Latin America.

Yet no real free marketeer believes that growth alone is enough to solve all problems. In the West, wages are under pressure and youth unemployment elevated, among myriad other urgent issues. The solutions are complex; they include boosting entrepreneurship, improving education and more flexible labour markets. They certainly do not involve wholesale, ill-informed attacks on the market economy.

Religious groups have a central role to play in improving society: they can promote self-control, civility, respect and ethical behaviour, and help to reduce fraud, manipulation and other illegal activity in all spheres of human action. They can remind their followers that there is more to life than merely accumulating goods, and that reading, learning and thinking are wonderful things. They can convince the rich to finance poverty alleviation programs, medical research, and educational scholarships. They ought to emphasise the oneness of humanity, and, thus, help remove protectionist barriers which prevent people from poor countries from selling their wares to richer countries. The task is immense.

But unthinkingly to fight capitalism – the greatest alleviator of poverty and liberator of people ever discovered – makes no sense. The sooner the world's great religions learn to love the wealth-creating properties of the market economy, the sooner they will be able to harness them to make the world a better place.

Allister Heath is a columnist with The Daily Telegraph, London.


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