The German ordo-liberals may offer a path for reforming today's central banks.
Many of the world’s religious leaders decry the evils of income inequality stemming from a globalized economy. My first post, based on economic reports from such institutions as the World Bank, showed that recent pronouncements by the Pope, the Ecumenical Patriarch, and the Dalai Lama have followed a conventional wisdom that does not capture what has actually gone on in recent economic history: namely, that even as inequality has widened, extreme poverty has simultaneously decreased. I brought in the economic analyst Nassim Nicholas Taleb and his insights about wealth production in modern societies and the wrong assumptions people make about it.
Taleb’s point in his The Black Swan (2007)—that wealth and income are not distributed according to a “normal distribution” bell curve model, with extremes being unlikely, but are instead scalable, with no clear limit to the possible extent of expansion—helps to account for the ostensibly surprising fact that greater inequality today has coincided with a diminution of, rather than a rise in, global poverty. But Taleb stops short of saying why this is, other than luck. To get inside this seemingly puzzling correlation, we can turn to the Austrian economist Friedrich Hayek.
Hayek argued for a stronger connection between inequality and economic progress in his 1960 work The Constitution of Liberty. “New knowledge and its benefits,” writes Hayek, “can spread only gradually, and the ambitions of the many will always be determined by what is as yet accessible only to the few . . . This means that there will always be people who already benefit from new achievements that have not yet reached others.”
Hayek’s basic point is simple: Before many social advancements become common, they first exist as luxuries. “The new things,” writes Hayek, “will often become available to the greater part of the people only because for some time they have been the luxuries of the few.” This applies to much of what the average person in a developed society today takes for granted: automobiles, air-conditioning, refrigeration, tablet computers, smart phones, and so on. Go back far enough, and we might even add clean water and basic sanitation to the list.
Thus, according to Hayek, “The rapid economic advance that we have come to expect seems in large measure to be the result of this inequality and to be impossible without it. Progress at such a fast rate cannot proceed on a uniform front but must take place in echelon fashion, with some far ahead of the rest.” [Emphasis added.] As societies learn to use their resources “more effectively and for new purposes,” the cost of manufacturing luxury goods decreases, making them affordable to new markets of the middle class and, eventually, even for the poor.
Look again at the list of former luxury goods above. One can find most of these goods among the poor in developed societies today; not only that, many of them are not uncommon even in less advanced societies. Pace the Dalai Lama, this sort of inequality is not “the greatest source of suffering on this planet”—quite the opposite. Such inequality not only accompanies the very economic progress that lifts the poor out of poverty, it is one essential factor that makes that progress possible.
While Taleb and Hayek paint a different picture of inequality than that drawn by many spiritual leaders earnestly seeking to stand up for the poor and disadvantaged of this world—different, and also more in line with the actual data collected by economic researchers—neither of them offers a strong moral framework. Many of the Church fathers, who do, of course, set forth a moral framework, give the impression that a necessary part of that framework is denunciation of all inequality as categorically unjust.
However, if one digs beneath the surface, an alternative metric of fairness and morality emerges that just might bridge the Hayekian and religious sensibilities. Not only could it reshape religious rhetoric with regard to wealth and inequality, it could also prove fruitful in terms of providing effective help to the world’s poor.
In his Conferences, St. John Cassian records the following from one Abba Theodore: “Altogether there are three kinds of things in the world; viz., good, bad, and indifferent. And so we ought to know what is properly good [righteousness], and what is bad [sin], and what is indifferent.” He continues:
Those things are indifferent which can be appropriated to either side according to the fancy or wish of their owner, as for instance riches, power, honour, bodily strength, good health, beauty, life itself, and death, poverty, bodily infirmities, injuries, and other things of the same sort, which can contribute either to good or to evil as the character and fancy of their owner directs. For riches are often serviceable for our good. . . .
Virtue and vice are pretty clear-cut. Indifferents, on the other hand, require a great amount of prudence to assess. In the cases of wealth and poverty, St. John Chrysostom expresses the same sentiment, saying that “neither is wealth an evil, but the having made a bad use of wealth; nor is poverty a virtue, but the having made a virtuous use of poverty.”
Thus, we might say that economic inequalities are only as good as their use. However, it might be better to add that they are also only as good as their cause. The inequalities that Taleb described (which are natural even if they defy the “bell curve” expectations that people have–their assumption that extremes are so unlikely as to be impossible) include benefits to all classes, including the poor, that come about through relatively free economies where people enjoy private property rights, the rule of law, and freedom of exchange. As then Vice President for the Africa Region of the World Bank Obiageli Ezekwesili said in 2011,
It has taken the past decade’s embrace of market principles as well as sound macroeconomic policies for us to see Africa’s economic growth trajectory turn entirely positive—so positive that at the height of the economic crisis, most of the countries on the continent sustained their economic reforms, and that enabled Africa to be one of the fastest to rebound from the  collapse. . . .
Furthermore, free economies are fragile and require a basic culture of trust and virtue—as well as realistic expectations, Taleb would add—to sustain them. In this, religious leaders have an integral role to play, teaching the basic principles of moral living and the practices of self-discipline conducive to those ends. Yet there are other sources of inequality; not all inequalities are, as it were, created equal.
The German economist Walter Eucken noted in 1952 that pure laissez-faire in practice historically favors freedom of contract at the expense of freedom of competition, ultimately tending toward a corruption of economic freedom in general. He writes in This Unsuccessful Age that “the problem of economic power cannot be solved by further concentrations of power, whether in the form of a corporative system … or of centralized economic control, or of nationalization. Power remains power whoever may exercise it.” Thus, when generally free economies tend toward consolidation and cronyism, it is because economic and political actors misuse their wealth and power for the sake of inequalities that have been caused, not by the production of wealth that benefits all, but by exclusion.
In this light, Pope Francis is right to condemn “an economy of exclusion and inequality” as unjust and self-destructive. As the proverb warns, “He who oppresses the poor to increase his riches, and he who gives to the rich, will surely come to poverty” (Proverbs 22:16). Whether this, however, is what Pope Francis had in mind is unclear since he goes on to say: “In this context, 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.” The analysis I have presented so far seems to disprove His Holiness’ assertion that these theories have “never been confirmed by the facts.”
One prince of the Roman Catholic Church has more clearly grounded his moral pronouncements in the facts of the matter than has the Pope—though be it noted that he argues that the Pope would agree with him. “The spread of the free market,” writes Cardinal Timothy Dolan in a recent editorial in the Wall Street Journal, “has undoubtedly led to a tremendous increase in overall wealth and well-being around the world.” Dolan, importantly, does not blindly laud the market but underscores the necessity of moral habits to sustain free markets. He writes: “One does not have to subscribe uncritically to the notion that ‘a rising tide lifts all boats’ to acknowledge that all people, including the poor, benefit from a general increase in the overall wealth of society.” Of course he does not, nor would I, advocate pure laissez faire. “When properly regulated, a free market can certainly foster greater productivity and prosperity. But, as the pope continually emphasizes, the essential element is genuine human virtue.”
Far from condemning what are in fact ethically indifferent inequalities, and the conditions that make them possible, Dolan warns against the dangers of government structures that, in the name of correcting inequalities, would restrict basic freedoms and rights. To assume that inequalities are ipso facto the product of injustice is to misjudge what world we live in. And to seek to prevent the production of such inequalities would impede economic progress that would otherwise help the poor.
That said, Friedrich Hayek is not unaware that even where inequalities do not stem from illicit concentrations of economic power, the process can be painful: “Poverty . . . has become a relative, rather an absolute, concept,” he writes, yet “this does not make it less bitter.” We may add to this Joseph Schumpeter’s observation in his 1947 work Capitalism, Socialism, and Democracy that the process by which “the contents of the laborer’s budget, say from 1760 to 1940, did not simply grow on unchanging lines but . . . underwent a process of qualitative change” is a process of “creative destruction.”
Innovations create great economic gains, but not with zero losses. The automotive industry displaced the blacksmith, for example. Some people lose jobs and never recover. Systems are vulnerable to what Taleb called “Black Swan” events—as highly consequential as they are unpredictable. The improvement of the many can be a disastrous “Black Swan” to the few.
We ought to acknowledge the need to care for those who suffer loss in the midst of economic growth, as well as those excluded from it altogether. This should not, though, entail imprudently condemning that growth in itself. As Cardinal Dolan put it, “free economic activity should indeed be pursued, but the human dignity of our needy brothers and sisters must always be at the center of our attention.”
This would be a much more balanced and constructive line of rhetoric for religious leaders who feel they must weigh in on economic matters. Indeed, since “riches are often serviceable to our good,” religious leaders ought to remind people of their moral duty to freely use their riches for what is truly good—namely, virtue. Dolan highlights the need for those with wealth to wisely employ it to support the common good—a consistent tenet of Roman Catholic, as well as patristic social teaching. Beyond mere stop-gap measures of economic aid, this would include supporting those conditions of society that foster upward mobility, dignified work, and effective alleviation of the plight of the poor, whatever inequalities may come with them.