The Chief Question in Economics

The most fundamental question in economics, whether we are speaking of economic policy or of the subject called economics, the human or social science which studies man's economic activity, is this: Do we look at an economy on the model of a machine which works by self-regulating laws or principles or as a system which, even though it operates according to certain tendencies that are generally present in human nature and have received the name of economic laws, nevertheless also functions according to varying legal systems, customs and institutions, and is able to be manipulated by human will, especially by the wills of those who hold economic or political power? The former view, the view that considers an economy on the analogy of a machine, always has a tendency to favor market solutions, since at bottom it considers market outcomes as somehow guaranteed—in the long run anyway—to produce economic prosperity and the best outcome possible for most people. Likewise this point of view will usually analyze economies and economic activity by means of impersonal demand curves and largely ignore the varying factors of human traditions and human power as these embodied in institutions such as the legal system. The second way of looking at economics, the way which understands an economy to be subject to more than what are called the laws of economics, is the approach of many of the alternative schools of economics, such as the original institutionalist school, and is also the approach which underlies the social teaching of the popes. Pope Pius XI wrote the following in his encyclical Quadragesimo Anno (1931):

Just as the unity of human society cannot be built upon 'class' conflict, so the proper ordering of economic affairs cannot be left to the free play of rugged competition [permitti libero virium certamini]. From this source, as from a polluted spring, have proceeded all the errors of the 'individualistic' school. This school, forgetful or ignorant of the social and moral aspects of economic activities, regarded these as completely free and immune from any intervention by public authority, for they would have in the market place and in unregulated competition [in mercado see libber competitors certain] a principle of self-direction more suitable for guiding them than any created intellect which might intervene.[note]QA, no. 88.[/note]

We can see here the rejection by Pope Pius of the notion that it is better to allow economic activity to be regulated by market forces and "unregulated competition," rather than by man's purposeful and deliberate intervention, his "created intellect." Of course this does not mean that every aspect of economic activity should be regulated according to a blueprint formulated by a central planner, but it does mean that in principle such intervention in the economy is necessary, and that we ought not to conceive the economy after the model of a self-regulating machine that works better the less we intervene.The schools of economic thought that look upon economic activity as wholly or largely self-regulating believe that they can formulate and express the principles of this self-regulation by means of economic laws, which are held to be generalizations of constant and omnipresent tendencies in human nature. But these economists err in at least three ways. In the first place, they formulated these laws looking at a small portion of mankind, small in both time and place, chiefly Englishmen from about 1750 to 1830, who were already thinking in terms of purely economic motives divorced from the social milieu. It is true that economists have continued to reflect on and refine these original propositions, but nevertheless they retain the indelible mark of their origins. However, there is a mass of data which shows that the institutions of market economy, conceived as isolated from their social context, are not natural to mankind and do not represent the universal tendencies of human nature. As the economic historian Karl Polanyi wrote in his very significant book, The Great Transformation,

[P]reviously to our time no economy has ever existed that, even in principle, was controlled by markets. In spite of the chorus of academic incantations so persistent in the nineteenth century, gain and profit made on exchange never before played an important part in human economy. Though the institution of the market was fairly common since the later Stone Age, its role was no more than incidental to economic life.

Secondly, and closely related to their first error, even when these economists had correctly identified some constant in human nature, they failed to see that the way in which this constant is expressed in our behavior depends upon institutions, using that word in the widest sense to include the legal system, the state of technology and customs. For example, the legal fiction of corporate personality and even more the limited liability guarantee allow corporations to engage in reckless and illegal behavior with little fear that any single individual will have to suffer much inconvenience because of this. But if the law were altered to make directors and stockholders criminally liable for corporate misbehavior, consider how fast corporations would change their ways. Yet the limited liability laws in their current form are products only of the later nineteenth century and could be reformed by simple legislative action. In this case, human nature reacts differently depending on what legal regime is in place.Thirdly, the economists who hold to the self-regulating character of the economy neglect the fact that laws and institutions can be manipulated by those with power, and that they usually are. The drop or stagnation in wages in the United States since about 1980 and the concomitant immense rise in the incomes of the rich have not come about primarily because of impersonal economic forces, but because of concerted action on the part of corporations and employers to undermine unions, weaken government regulation and otherwise skew economic and political policy in favor of the rich. This has included use of the media both to influence opinion in favor of business and to divert the population from thinking about important matters by concentrating attention on the frivolous doings of movie stars, sports figures and other celebrities.What of those economists, historians and philosophers who recognize that the idea of the self-regulating market is a vicious myth? They differ considerably among themselves on the crucial point of exactly who is to regulate the powerful economic appetites and strivings of mankind. Some of the solutions proposed are clearly wrong, such as pervasive central planning by the central government or the nationalization of all property or at least of all productive property. Fortunately, both the teaching of the Church and the testimony of Christian history points to the correct answer, Distributism. The European urban economy was Distributist throughout the Middle Ages, and this Distributist order broke down only gradually, in different countries and regions at different paces. In every place, however, this Distributist economy broke down not because impersonal economic laws asserted themselves, but because of deliberate state action on behalf, first of merchantilism, then of capitalism and the free market.On the crucial question of who is to carry out the responsibility for economic regulation, Distributism places the primary responsibility in the guild or occupational group, backed up as necessary by state authority. But Distributism does not see the state as the omnicompetent actor in human affairs. Such a doctrine is characteristic of communism and of many types of socialism, but not of Distributism.If once we recognize that the notion of the self-regulating market is a myth, then we logically have to face the question of who is to regulate. Distributism, basing itself firmly on the teaching of the Church, looks to a revived guild system to do this, with the government acting only when necessary to secure the common good. This is the system most congruent to man's nature, one which places regulation in the smallest and lowest feasible group according to the principle of subsidiarity.Distributists do indeed desire a revolution, but a revolution in men's minds, in our way of thinking, so that eventually our way of acting and conducting our economic affairs can be changed. This is surely one of the greatest tasks which could be proposed to us, a gigantic task in fact. In 1931 Pope Pius XI, in the encyclical Quadragesimo Anno, called for such a "reconstruction of the social order." He wrote,

And in truth, the world has nowadays sore need of valiant soldiers of Christ, who strain every thew and sinew to preserve the human family from the dire havoc which would befall it were the teachings of the Gospel to be flouted, and a social order permitted to prevail, which spurns no less the laws of nature than those of God.[note]Ibid., no. 144.[/note]

The difficulties of doing this are immense. But if we begin with changing our thinking to make it conform to both "the laws of nature [and] those of God" we will have made a good start. What it might be possible to do after that we must leave to the mercy and providence of God.