Rubio is Channeling Wilhelm Röpke, Not Elizabeth Warren

In a November 5 speech at Catholic University, and in an August web essay at First Things, U.S. Senator Marco Rubio (R-FL) publicly aligned himself with Catholic social teaching on the market. Quoting Pope Leo XIII, Pope Benedict XVI, and Pope Francis, Rubio calls his view “Common-Good Capitalism.” He has been criticized on all sides, both for throwing capitalism under the bus (here and here) as well as for not throwing capitalism under the bus (here).

The principles are attractive, not just for Catholics, but for Christians and people of good will in general. It is high time they were expressly articulated by U.S. politicians. In both the speech and the essay, however, Rubio’s main application of the principles misses the boat. Minimally, any application of Catholic social thought to the market needs to meet two conditions: The first is recognition that the market is made for man and not man for the market. The second is “do no harm” when trying to achieve the first condition. It is easy, even when unintended, to make market outcomes worse even with—or especially with—good intentions that reflect only the first condition but not the second.

Rubio’s project deserves attention, both praise for some aspects and criticism for others.

First, initially, Rubio’s express invocation of Catholic social thought is remarkable. US politicians of his stature rarely seem aware of the long tradition of Catholic social thought. Few serious candidates or politicians have ever publicly aligned themselves with it. While there surely is plenty of woolly headedness in the way partisans sometimes interpret and apply Catholic social thought, its core centers around the necessity of both freedom and solidarity for human flourishing. Its central concept of human dignity recognizes the need for human freedom against statist overreach while also understanding that formalistic overemphasis on freedom can result in outcomes that approach the state of nature rather than promote human flourishing.

Secondly, Rubio’s public embrace of Catholic social teaching represents a significant political gamble. This move provides him with a non-Trumpian means of speaking to core concerns of Trump’s constituency, yet also allows him to speak to a broader constituency. It provides him with an accessible yet principled and non-populist vocabulary that nonetheless speaks to populist concerns.

If he can pull it off, and if he sticks with it, it also provides Rubio with a principled synthesis allowing him to address concerns of post-liberal conservatism without rejecting the liberty commitment at the center of the last 60 years of conservative fusionism. In Catholic social thought, political freedom is fundamental to achieving human dignity. But freedom is not the sole dimension along which human dignity is achieved.

More substantively, despite the criticism he has received, Rubio really hasn’t said anything that early fusionists did not say. Writing in the late 1950s in A Humane Economy, for example, Wilhelm Röpke circles his broad argument around the Biblical maxim that “man shall not live by bread alone,” which he quotes repeatedly. So, too, in a line Rubio could have written without changing, Röpke writes

The highest interests of the community and the indispensable things of life have no exchange value and are neglected if supply and demand are allowed to dominate the field.

Similarly, on the limits of competition, Röpke writes

It cannot be said often enough that in the last resort competition has to be circumscribed and mitigated by the moral forces within the market parties.

Röpke articulates a version of the “partnership” between labor and capital that Rubio articulates. Röpke argues the need for what he terms a “moral aristocracy” of people with “close ties to the market”:

We need businessmen, farmers, and bankers who view the great questions of economic policy unprejudiced by their own immediate and short-run economic interests; trade union leaders who realize that they share with the president of the national bank the responsibility for the nation’s currency; journalists who resist the temptation to flatter mass tastes or to succumb to political passions and court cheap success . . .

To be sure, in asserting a desire for this type of partnership, Rubio faces the same problem that Röpke dodges even while calling for these partnerships: How does one create and sustain economic leaders who defer to diffuse, long-run outcomes instead of opting for immediate and palpable outcomes? Röpke argues that the alternative to doing so is a capitalist system that would not survive populist reaction. Current events seem to be validating Röpke’s hypothesis.

Rubio’s indictment of the current economy, however, focuses much of its criticism on what he terms “our financialized economy.” He quotes Pope Francis on the indictment. Patrick Deneen makes much of financialization, as do John Milbank and Adrian Pabst (as do left-wing postliberals). In doing so, however, Rubio follows Pope Francis and notable conservative postliberals down a wrong turn.

The mode of Rubio’s indictment is common enough. He recites numbers showing the increased magnitude of the activity and profitability of the financial side of the economy in recent decades. He decries that many corporations are “buying back their own shares” of stock rather than making new investments. The financial flows, he writes, are “detached from real production.”

Well yes, and no. First, the problem with mortgage-based financial instruments prompting the 2008 recession gives cover to the broad indictments of finance among post liberals. The problem with these mortgaged-based securities, however, was essentially fraudulent estimates of the value of the underlying properties and mortgages. That was a serious problem. But that’s a problem the market itself can deal with (at least if the possibility of government bailouts in the future do not create incentives for financial firms again negligently to monitor the underlying value of the real assets).

The postliberal indictment goes more broadly than this. Its criticism of “financialization” focuses on the outsized proportion of financial sales exchanging existing securities relative to those securities raising capital for new production. The vast proportion of financial activity that simply rearranges ownership of existing financial instruments, the argument goes, represents only social waste relative to activity deploying capital into new production. After all, the sales support no new productive investments.

The criticism, however, is myopic in the extreme.

That financial markets trade existing securities far more than raising capital for new projects is certainly true. But much of the demand for new securities derives from the ability to sell those securities to someone else when one needs money. What criticisms of “financialization” miss is the connection between willingness to fund new investments and the subsequent ability to trade those investments later on the secondary market.

Consider an analogy using a less abstract investment.

According to the National Association of Realtors, approximately 6 million homes were sold in 2018. Of those homes, 89 percent were existing homes, eleven percent were newly-built homes. Basically, nine out of ten housing transactions were sales of existing homes in 2018.

A criticism analogous to the “trading-existing-securities-is-nothing-but-social-waste” argument applied to the housing market would say, “Look,http://bit.ly/2rfUeBF almost 90 percent of the activity in the housing market in 2018 was movement of ‘nonproductive’ residential property. It represents only the rearrangement of existing housing stock, and does not add one square foot of new housing stock.” Noting the disproportion of the sale of existing housing stock to new stock, our critics then lament the social and economic waste represented in the housing market. The critics declaim, “What society needs to do is to adopt policies that induce families to make real additions to their current houses or to buy new houses rather than simply to buy existing houses.” Calls issue forth to tax or regulate housing sales to encourage the building of new housing stock or building new additions to existing houses, and to discourage the mere transfer of existing housing stock.

But, of course, the willingness of many families to buy a brand new home depends in part on what a family can do with it if they want to sell it. Limiting the secondary market for housing works its way back to the market for new houses. Restricting or penalizing the sales of existing homes would reduce the addition of new houses to existing housing stock, not increase it. Secondly, existing housing stock actually provides value—a family can live there even if the house was first owned by someone else. So, too, while more abstract, financial instruments are part of the assets people use to support all sorts of choices. Their decisions about work, retirement, paying for their children’s education, consumption, other investments they make, all depend in part on the value of these existing financial instruments. All of these other factors go into demand for new economic production. Even with corporate buybacks, the capital does not disappear, it simply goes to individual investors who sell their shares back to the corporation. These investors now have additional funds to invest, save, or spend productively elsewhere.

There are any number of reasons to regulate different aspects of financial instruments to insure that people don’t get ripped off and that the instruments serve their intended purposes. But the notion that “financialization” represents intrinsic social waste is fundamentally shortsighted, and misguided.

Rubio links “financialization” to a host of social ills in the U.S., including declining church attendance and a decline in life expectancy caused by an increase in “deaths of despair.” There are numerous theories floating about to account for these phenomena; it is implausible that “financialization” by itself is a critical cause of these ills. Simply consider that church attendance in the U.S. began a slow but consistent decline around 1960, long before the current economic travails.

Rubio needs to think more broadly about these problems. For example, both conservative and left postliberals commonly cite Karl Polanyi’s book The Great Transformation as their touchstone for how the “autonomous market” shreds personal lives and the social fabric.

What these same postliberals usually ignore, however, is Polanyi’s solution. Polanyi does not advocate stopping the economic changes he chronicles. He recognizes the immense productivity of the market system even as he criticizes the human effects of the autonomous market. Rather, Polanyi’s solution to the problem he identifies is to slow down the rate of change to a level commensurate with the ability of humans to adapt to those changes, or at least to buffer people from rapid chages. That’s it. Just slow down the pace of change to a human dimension, or provide buffers so that those affected have time to adjust. The speed of economic changes has only increased since Polanyi wrote, with the ability of capital to cross national borders with the stroke of a computer key, and with the ability of people to traverse thousands of miles in a few hours. Policies that would slow down or buffer against the pace of change are not as easy to derive as it may sound. That second condition has bite. Unintended consequences can easily make matters worse than without intervention. And “temporary” measures to ease transitions can too easily become permanent measures with vested constituencies.

Nonetheless, focusing on easing the pace and impact of these transitions is more in line with Catholic social thought than populist denunciations of “financialization.”

To be sure, the devil is in the details. Nonetheless, Rubio’s embrace of Catholic social theory, with its central recognition that human flourishing requires both freedom and solidarity, offers a sensible way forward for the ills that bedevil the U.S., at least if Rubio and others apply these central principles with prudential understanding and judgment.

Reader Discussion

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.

on November 22, 2019 at 09:10:39 am

The Roman Catholic Church adopted a critique of markets in the late 19th century when its leaders realized they were losing working class members (and their money) to secular socialism.

read full comment
Image of John Smith
John Smith
on November 22, 2019 at 10:23:02 am

Both Austrian economica and various documents of catholic social teaching talk about the market, the government and civil society. The church being part of civil society. The market and the government are both very poor at establishing moral standards for behavior . The problems that Senator Rubio and others identify seems to stem from the breakdown of civil society. The government cannot effectively take the place of civil society with respect to encouraging moral behavior I the market place and previous actions of government have weakened civil society where it cannot sufficiently encourage moral behavior. It seems to me that the beginning of the solution is for government to look at how to allow civil society to strengthen itself (i.e. when government should not compete with civil society) and allow civil society to constrain the moral behavior of the market.

read full comment
Image of Chris
on November 22, 2019 at 11:09:22 am

The analogy to home sales here accidentally brings the reader to the edge of a shadowed lacuna (an abyss) in this argument. Home sales involve a wide spectrum of people (hopefully to their benefit), whereas Wall Street financial transactions involve a small band of people (primarily, sometimes only, to their benefit). Merely mentioning in passing that “financial instruments are part of the assets people use” tries to get us to believe the aptness of the analogy and thus to avert our perception of the ever-deepening abyss of economic inequality we are facing in our current manifestation of capitalism. The future of U. S. capitalism depends on some smart adjustments.

read full comment
Image of Bill78749
on November 22, 2019 at 11:10:35 am

The market is FAR more moral than given credit for. Indeed, giving credit in the financial sense is the ultimate test of faith in one's fellow man. How the recipient of credit responds is a testament to his morality. When default rates are low, when fraud cases are rare, when employers are bidding for employees, morality in the market place is quite high

read full comment
Image of OH Anarcho-Capitalist
OH Anarcho-Capitalist
on November 22, 2019 at 11:11:23 am

We tend to anthropomorphize the market as if it were a being that had some independent and coordinate will of its own. When we ask the question, "What's the market doing?" what we really mean is, "What are billions of people and trillions of individual decisions doing?" The only answer to this question is, "I got no idea" not because we lack the will to find out but because it is impossible know. All we know for certain is that a relatively unfettered market system tends, by the process of specialization, to raise living standards broadly over time. Prudence and circumspection are called for.

I'm not so sure I would agree that "slowing" the pace of change to a more human pace meets the prudence and circumspection test, although I'm open to hearing more about how that could be done without extending the poverty horizon for those trying to reach escape velocity. I am in favor of supports that are aides to individuals grappling with the chaos of market-driven transitions: wage insurance to facilitate transition to new but lower paying jobs; training insurance programs funded jointly by workers, employers and government to help workers find their way to new and better employment; and therapeutic communities that acknowledge, validate and treat the psychological trauma of job loss as the means of avoiding becoming ensnared in addiction. These efforts are achievable and humane and validate the dignity of the person and the priority we place on sustaining families and communities caught in the whirlwind of a dynamic and growing economy.

read full comment
Image of Brent Orrell
Brent Orrell
on November 22, 2019 at 11:18:50 am

Expecting politicians to champion morality in or out of the market place is tilting at windmills. Government is the institutionalized use of coercive force on society. It is immoral and unjust to its roots. Making peace with it is error; living in spite of it is the Christ's teaching. Render unto Caesar is the Christ's mockery of the state's power.

Catholicism errs when it sees government as a means to fulfill the Christ's teaching. Markets are voluntary social constructs; no one is compelled to engage in them but everyone does (even those who seek to live off the land do so with at least a few market produced implements/supplies) because he sees the benefit to himself from doing so.

As Adam Smith pointed out, it is not the baker's altruism that makes us better off but his own self-concern. This is the great blind spot of market critics - the failure to see the Hand of God present in peaceful, voluntary exchange...

read full comment
Image of OH Anarcho-Capitalist
OH Anarcho-Capitalist
on November 22, 2019 at 11:24:12 am

Wage insurance is personal savings. Until the size and reach of government is dramatically reduced, the individual through having his property routinely mulcted will be buffeted far harder by the vagaries of life.

Subsidizing unemployment reduces the pain of unemployment, reducing the incentives to move to where the jobs are. This is a conscious policy decision of government - to create a permanent underclass dependent upon the state for its sustenance.

Statists seek to get the people to break the 7th Commandment by first getting them to ignore the 10th...

read full comment
Image of OH Anarcho-Capitalist
OH Anarcho-Capitalist
on November 22, 2019 at 11:28:02 am

"...whereas Wall Street financial transactions involve a small band of people (primarily, sometimes only, to their benefit...".

What about the 100s of millions of ordinary citizens who own stocks & bonds directly or via the use of 401k/403b/IRAs?

Granted, fraud occurs when the connected can create deals that fleece the public by using the power of the state to privatize profits and socialize losses & risk, but that's a problem of government, not financial markets.

In an unhampered market, losses and risk stay with the owners of capital and lenders, not innocent 3rd parties...

read full comment
Image of OH Anarcho-Capitalist
OH Anarcho-Capitalist
on November 24, 2019 at 17:07:27 pm

I think that OH Anarcho-Capitalist has the better argument here, but I should like to add the following thoughts:

I agree with Professor Rogers that the assertion "After all, the sales support no new productive investments" is false, but would illustrate it with a different example.

Consider two investors, A and B, and two companies, X and Y, and for the sake of argument assume that X and Y are biotechnology companies developing new treatments for disease. Company X is much further along in development of its product than is Company Y. Investor A is a long -time investor in company X, because he understands that the great risks associated with investing in early stage biotech companies can be rewarded with large returns; his investing strategy is to take large risks, and if they pay off, reap his profits and find another candidate company and repeat the process. Investor B is more cautious. he will only invest in companies that are well on their way to becoming profitable. He will not invest in either Company X or Company Y until they have approved products with significant market potential.

Eventually Company X's development processes pay off. They have an approved drug that is being rapidly adopted for use in the healthcare market. Its price skyrockets, and Investor A realizes a huge profit. He now looks for other investment opportunities and is interested in Company Y. Meanwhile, Investor B is now interested in Company X, since significant risks having been eliminated, and he is satisfied with the more modest, but less risky potential returns of that stock. So Investor A sells his shares in X to investor B, and uses the proceeds to invest in the potential innovations of Company Y. The transaction leaves Investors A and B, as well as Company Y better off. The sale by Investor A of Company X stock, with the proceeds invested in Company Y, do in fact "support new product investment." This would not be true if there were no market in which A and B could exchange shares.

This scenario illustrates a key point of markets: it is not merely capital that is exchanged. Capital flow is a surrogate for other factors that are necessary to progress and economic health, such as risk/benefit assessment and risk tolerance (the differences in which explain why B is willing to buy shares from A, and A is willing to sell them), the perceived potential for innovation, and the relative value that different people attach to different things. Markets are an optimizing mechanism that maintains balance among these factors. The fact that markets involve the allocation of capital is not surprising nor dubious. All economic systems require capital. The difference between socialist or communist or capitalist systems is who controls it. It should be noted that while markets, especially free markets, optimize certain types of transactions, they are not universally beneficial. There are certain circumstances (e.g. providing capital for development of antibiotics) where they may not be the best option for optimizing technological progress.

As to the concept of morality in markets, OH Anarcho-Capitalist is correct that markets are associated with morality, but the point is worth emphasizing that a degree of morality is a prerequisite to a functioning market. I believe it was Chesterton who noted that the ability to keep one's word, or to fulfill a promise was one of the two essential pillars of civil society. It is a specific instance of the broader concept of obligation, which R. Richard Schweitzer asserts is a foundation of justice. The notion of keeping promises and performing obligations is essential to the operation of markets, but this is not a weakness of markets, since it essential to civil society in the first place.

Regarding the role of Catholic social teaching in all of this, that is a post for another day.

read full comment
Image of z9z99

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.