In the first part of this article I spoke of economic behavior as understood by mainstream neoclassical economics and provided a critique of that, pointing out in particular its failure to recognize the crucial role played by power and by human institutions in determining economic outcomes. Now how does this relate to Catholic social teaching? Does it recognize these factors? In fact, the popes have always recognized the place of human power and institutions in the workings of the economy. For example, in Rerum Novarum itself, Pope Leo wrote that "Working Men have been given over, isolated and defenseless, to the callousness of employers and the greed of unrestrained competition".[note]RN, no. 2.[/note] And later in this encyclical, when discussing just wages, he states that a worker who accepts less than a living wage "because an employer or contractor will give him no better," is "the victim of force and injustice".[note]Ibid., no. 34.[/note] In other words, he does not see an impersonal and quasi-mechanical law of supply and demand at work in the relations between employer and employee, but acknowledges that greed and force can have a major role in these relations. Similarly, Pope Pius XI, in his encyclical Quadragesimo Anno (1931), wrote:

Capital, however, was long able to appropriate to itself excessive advantages. It claimed all the products and profits and left to the laborer the barest minimum necessary to repair his strength and to ensure the continuation of his class. For by an inexorable economic law, it was held, all accumulation of riches must fall to the share of the wealthy, while the workingman must remain perpetually in indigence or reduced to the minimum needed for existence.[note]QA, no. 54.[/note]

And later in the encyclical, he speaks of the "immense power and despotic economic domination ... concentrated in the hands of a few",[note]Ibid., no. 105.[/note] and of the "accumulation of power [which] is a natural result of unrestrained free competition which permits the survival of those only who are the strongest".[note]Ibid., no. 107.[/note] And John Paul II, in Centesimus Annus (1991), implicitly censures the neoclassical approach when he criticizes "a radical capitalist ideology ... which blindly entrusts [the solution of poverty and economic exploitation] to the free development of market forces".[note]CA, no. 42.[/note]With regard to institutions, this quotation from Pius XI's Quadragesimo Anno shows that popes have been aware of the mutability of human institutions and their effects upon economic behavior. Discussing the ownership of property, Pope Pius noted,

History proves that the right of ownership, like other elements of social life, is not absolutely rigid, and this doctrine We Ourselves have given utterance to on a previous occasion in the following terms: "How varied are the forms which the right of property has assumed! First, a primitive form in use among untutored and backward peoples, which still exists in certain localities even in our own day; then, that of the patriarchal age; later came various tyrannical types (We use the word in its classical meaning); finally, the feudal and monarchic systems down to the varieties of more recent times."[note]QA, no. 49.[/note]

Following on this, Pope Pius stated that "the public authority, in view of the common good, may specify accurately what is licit and what is illicit for property owners in the use of their possessions".[note]Ibid.[/note] In other words, property ownership as a social institution is subject to different legal and social norms at different times. It is not a fixed concept and it is no injustice to make legal changes with respect to property rights as long as the natural law is not violated.Although the papal comments on economic power that I have given have been critical of the use of that power, the popes recognize that since economic power is omnipresent, it can be used for good also.It becomes wrong when what is sought is unjust, whether this is done by capital or by labor. Leo XIII in Rerum Novarum spoke of the positive role which power could have in protecting the victims of injustice.

The richer population have many ways of protecting themselves, and stand less in need of help from the State; those who are badly off have no resources of their own to fall back upon, and must chiefly rely upon the assistance of the State.  And it is for this reason that wage-earners, who are, undoubtedly, among the weak and necessitous, should be specially cared for and protected by the commonwealth.[note]RN, no. 29.[/note]

None of this, however, means that the popes have ever set forth an economic theory as such. They have pronounced on certain moral aspects of economic activity, and have insisted on their right to do so. The fullest statement on this point is found in Pius XI's Quadragesimo Anno, 41 and 42.

We lay down the principle long since clearly established by Leo XIII that it is Our right and Our duty to deal authoritatively with social and economic problems. It is not of course for the Church to lead men to transient and perishable happiness only, but to that which is eternal. Indeed "the Church believes that it would be wrong for her to interfere without just cause in such earthly concerns"; but she never can relinquish her God-given task of interposing her authority, not indeed in technical matters, for which she has neither the equipment nor the mission, but in all those that have a bearing on moral conduct. For the deposit of truth entrusted to Us by God, and Our weighty office of propagating, interpreting and urging in season and out of season the entire moral law, demand that both social and economic questions be brought within Our supreme jurisdiction, in so far as they refer to moral issues.

For, though economic activity and moral discipline are guided each by its own principles in its own sphere, it is false that the two orders are so distinct and alien that the former in no way depends on the latter.

But while restricting themselves to the moral aspects or implications of economic activity, they could hardly perform this task without some attention to the manner in which economies actually work. For it would be vain to exhort people to do what they could not do or to encourage behavior which violated laws of nature. The popes are realists in their social thinking. They cannot rely upon the idealized picture of economic behavior presented by mainstream economists, nor by the equally or more absurd portrayal by the so-called Austrian economists. Although intending to teach morals, the popes must necessarily assume some economic facts. This in itself should be sufficient to make Catholics who take an interest in economics suspicious of neoclassical or Austrian teachings, and cause us to look elsewhere. And in fact, there are other approaches, alternatives to the mainstream, alternatives which offer promising lines of thought for the creation of an economics which is consistent with observed human behavior and with the Church's social doctrine.One of the most interesting of these alternative schools is the original Institutionalism, an economic school that flourished especially in the United States from the late nineteenth century until the middle of the last century. Economist Clarence Ayres explains its basic approach in this way:

...the object of dissent is the conception of the market as the guiding mechanism of the economy or, more broadly, the conception of the economy as organized and guided by the market. It simply is not true that scarce resources are allocated among alternative uses by the market. The real determinant of whatever allocation occurs in any society is the organizational structure of that society - in short, its institutions. At most, the market only gives effect to prevailing institutions. By focusing attention on the market mechanism, economists have ignored the real allocation mechanism.[note] Clarence Ayres, Discussion of Kenneth Boulding, "A New Look at Institutionalism" American Economic Review, Vol. 47 (May 1957): 26.[/note]

Market forces always function within the "the important roles of history and culture" which determine "economic actors' operative goals, values, and views...."[note]Saeed Parto, "Economic Activity and Institutions: Taking Stock," Journal of Economics Issues, Vol. 39, no. 1 (March 2005): 24.[/note] Such ideas about how economies actually function seem very close to the kind of economic ideas and analysis implicit in papal social teaching.In any case, a Catholic who takes seriously the social doctrine of the Church can hardly embrace uncritically the conclusions of neoclassical or Austrian economics. And if such a Catholic desires to help construct an economics that is fundamentally in harmony with the Church's teaching, he ought at least to look at economic schools such as Institutionalism to see what useful concepts and methods he might borrow or make use of. Any other approach, any attempt to proclaim the absolute autonomy of economics from ethics or from the Church's magisterium will constitute a fatal separation of faith from reason. But a Catholic approach will understand that reason and faith work together and that the genuine conclusions of reason will never contradict the teachings of the Church. In this way man's reason and the teaching of the Church of God will be in harmony, allowing us to see more clearly the truth about economics, as about all other matters.