Freeman

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The Vatican and the Free Market

Economic Science and Spiritual Concerns Point in the Same Direction

OCTOBER 01, 1996 by JOHN C. GOODMAN

Dr. Goodman is president of the National Center for Policy Analysis, a research institute founded in 1983 and internationally known for its studies on public policy issues. The NCPA is headquartered in Dallas, Texas.

An unusual event took place in Rome earlier this year. A group of pro-free enterprise intellectuals assembled at the Vatican to analyze the crisis of the family and the role of government in creating it.

Participants included Nobel Prize-winning economist Gary Becker (University of Chicago) and America’s foremost writer on theology and capitalism, Michael Novak (American Enterprise Institute). They came from such diverse countries as Chile, Poland, and Hong Kong. The attendees were united in a common belief that big government is more likely to be a cause of problems than a solution.

So what do free-market economists and liberty-loving scholars, many of whom are nonreligious, have in common with the Catholic Church? More than you might think.

The church, of course, has had an uneasy relationship with scholars since the days of Galileo. And economists have fared not much better than astronomers. To the extent that outside intellectuals have made an impact on Catholic social thought, the influence has come mainly from those who advocate the welfare state and are hostile to the market. The classical liberal tradition, which among economists runs from Adam Smith to Ludwig von Mises to Milton Friedman, has largely been ignored by the clergy.

Yet times are changing. In his most recent encyclical on economics, Centesimus Annus, Pope John Paul II noted that the modern welfare state is often costly, bureaucratic, and counterproductive; further, he averred that it often substitutes for private sector charity that does a better job. Although contending that it can be a mixed blessing, the Pope called capitalism the most efficient instrument for utilizing resources and effectively responding to needs.

Families Matter

One area of common concern is the family. Becker stated that economists are discovering solid evidence that families are far more essential than government in creating human capital—the knowledge, skills, beliefs, and values that make people productive. Further, traditional two-parent families are far better at creating human capital than are families headed by single mothers.

One way of thinking about human capital is to see it as what is inside our heads that helps us succeed, as distinct from physical capital like machines and computers. Both kinds of capital are important. But 80 percent of the total U.S. capital stock is human capital and only 20 percent is physical capital.

Evidence shows that mothers matter a great deal in the formation of human capital. They are a major determinant of their children’s health and educational attainment, especially for their daughters. Fathers also matter. Patrick Fagan of the Heritage Foundation presented an impressive array of data showing that children born to and reared by single mothers have lower educational achievement, higher crime rates, and more psychological problems.

Becker says that there is a human capital problem among those in the bottom 20 percent of the income distribution in the United States. Too many children born in this stratum are not learning the skills and adopting the habits and values that other children acquire. One result is increasing inequality. For example, prior to 1950 college graduates earned about 40 percent more than high school graduates, on the average. Today they earn 80 percent more.

Can government solve the problem by providing education and skills that traditionally have been provided by parents? Becker says there is no evidence that that will work. Patterns set by age five are difficult to reverse, and studies show that job-training programs for 16-year-olds do not succeed because they cannot overcome the failure to learn skills in the first 16 years. What about replacing real mothers with professional day care personnel? Sweden tried this on a grand scale (a literal nationalization of the family) at great social cost, but produced no evidence of positive effects on children.

Clint Bolick (Institute for Justice) noted that scholarly research on school choice is consistent with the preference of Catholic parents for parochial schools. Despite efforts by the teachers unions to muddy the water, carefully researched studies find that private (mainly Catholic) schools outperform public schools by every measure. They are more cost effective, and their students perform better on standardized tests, go to college more often, and earn more lifetime income.

Although these ideas were well received, the conferees did not agree on everything. Cardinal O’Connor of New York argued that abortion was the single greatest threat to civilization. Many of the academics politely avoided the topic. Surprisingly, however, the group reached common ground on the issue of population growth.

The Positive Aspects of Population Growth

Outside the church, economists are one of the few groups who view people as a resource, rather than as a pollutant. William McGurn of the Far Eastern Economic Review recalls that 30 years ago dire warnings were issued about population growth in Asia and the threat it posed to living standards. Since then, the Asian population has more than doubled and per capita income has more than quadrupled in what has been one of the most amazing economic expansions in the history of the world. Moreover, those Asian countries with the greatest population densities are the ones with the highest growth rates—Hong Kong, Singapore, Taiwan, South Korea, and Japan.

The world population has increased sixfold since Thomas Malthus thought it had reached its capacity. Even today, no evidence exists that economic growth is imperiled by too many people. Grain production in the undeveloped world is growing at twice the rate of populations, and food prices—like most international commodity prices—have fallen over the past decade, indicating abundance, not scarcity.

Moreover, McGurn said that population control rhetoric is often covertly racist. For example, no one ever complains that there are too many Dutch. Yet the Netherlands is three times more crowded than China, which has a controversial “one child” policy.

Among developed countries the problem is a birth dearth. The rate at which women are having children is below the population replacement rate—implying that without immigration the populations of these countries will begin shrinking in the next century. Ironically, the Catholic countries of Italy and Spain have two of the lowest birth rates in the world.

Without passing moral judgment on the result, economists explain the decision to have children as a response to economic incentives. One hundred years ago, children were viewed as an economic investment. By the age of 12, they produced more than they consumed, and they could be counted on to support their parents in case of disability or old age.

Today, children are a financial liability, and social insurance programs have largely replaced the family as a source of income for widows, the disabled, and the retired. Technological advances have reduced the time needed to cook, clean, and otherwise care for a home, even as the market lures women with higher and higher wages.

What are the implications of these developments for government policy? Clearly, pay-as-you-go social security systems, which depend on a large influx of new workers to pay benefits for the elderly, cannot survive. So a popular idea among the conferees was to move to a private system in which individuals contribute to a personal retirement account and make their own investment choices. Moreover, since families have more economic power and are more prosperous in free markets, privatization and deregulation also were popular ideas.

The conference document, published in Osservatore Romano, the unofficial newspaper of the church, places much of the blame for the breakdown of the family on government. It says “the welfare state, and its social welfare systems, which began with the best intentions, accelerate this family breakdown by weakening parental responsibilities and choices”. Although some recommendations can be interpreted as expanding the role of government in some areas, the overall theme is that power should be transferred from government to families. In addition, the document states that deregulation of the labor market would free employers “to give jobs to young people and with the elimination of rent controls young families would gain adequate housing”.

Above all, the conferees agreed we should end government programs that discourage marriage and encourage dependency on the state—the prime example being the U.S. welfare system. According to the document, the institution of the family often does better than large institutions try to do. The family should not hand over its inalienable rights and responsibilities to the State.

This conclusion contrasts sharply with the position of Catholic Charities USA, which ardently defends the welfare state, arguing that it is the foundation of private charity. (Since Catholic Charities gets 62 percent of its funds from government, however, the organization now functions more as an arm of the welfare state than as a private charity.)

Will free-market ideas further penetrate the thinking at the Vatican? When the Pope spoke to the group, he disappointed some by referring to a just wage, an idea rejected by economists since the days of Adam Smith. But they believed he was on sound footing when he condemned tax systems [that] penalize families or aggravate their economic condition.

In summarizing the results of the conference, Becker, who is not a Catholic, said, I am struck by the similarity between the church’s view of the relationship between the family and the economy and the view of economists—arrived at by totally independent means. Economic science and spiritual concerns appear to point in the same direction.

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October 1996

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