On the Bishops and the Market

Dr. Baird is Professor of Economics st California State University at Hayward.
      The author wishes to thank Professor David Henderson, the Reverend James Sadowsky, and the Reverend Ferdinand D. Saunders for their comments and suggestions on an earlier draft of this essay.

The second draft of the controversial pastoral letter of the National Conference of Catholic Bishops on the American economy (hereinafter, the Pastoral) was recently released. While it acknowledges some of the successes of the American free enterprise system, it is seriously flawed by fundamental confusions concerning the nature of the voluntary exchange economic system.

The bishops have adopted an outmoded view of the relationship between the government and the market. On the basis of that economic and political analysis, the bishops offer “solutions” based on a government-directed command economy. These solutions have failed in the past, are failing now, and will fail wherever they are tried. The only feasible solution to the problems with which the bishops are concerned is to eliminate the government enactments that cause those problems.

A second fault of the Pastoral is its repeated instances of the fallacy of composition. The bishops discuss at length the implications of the Gospel for the choices that individual Christians ought to make. They then, without giving any logical justification for doing so, immediately leap to conclusions about what government ought to do. God created man with free will. The bishops seem to want to replace free will with governmental coercion.

The Outmoded View

In the 1950s and 60s most mainstream economists taught that a free market economy works well only under very unrealistic conditions called “perfect competition.” The three most important of those conditions are that (1) each buyer and each seller must have only tiny market shares, (2) all buyers and sellers always know all relevant information, and (3) there are no unpaid-for spill-over effects of exchanges between individuals. Since those conditions obviously do not hold, economists taught, the real world is beset with “market failure.” Market failure provides the rationale for government to go beyond its traditional role of referee or night watchman enforcing the rules of voluntary exchange. It justifies government intervention in the exchange process to make things come out more nearly as they would if the conditions of perfect competition actually existed.

The Modern View

In fact, the conditions of perfect competition are completely irrelevant to the assessment of the merits of the free market. Those conditions were the creation of economists who wanted to express their theories in mathematical terms. In so doing, those economists practiced what F. A. Hayek, the 1974 Nobel Prize winner, calls “scientism”—the adoption of the methodology of the natural sciences in a field of inquiry where it is totally inappropriate, and, in the case of economics, destructive of clear thought.[1]

The chief advantage of a voluntary exchange economy over a command economy is that the market process provides a way systematically to discover and correct economic error.[2] For reasons I explain below no government can possibly duplicate or improve upon that discovery and correction mechanism.

If we make the value judgment that each person is as significant as every other person, a successful economy must be defined as one in which the pattern (quantities and qualities) of production is constantly adjusted to keep up with the pattern of what the people in the economy want to be produced. Moreover, it is one in which all the people in the economy are free to participate on the basis of their own preferences, and their own knowledge, alertness, and abilities, subject only to the condition that they do not initiate any involuntary exchange (e.g., theft, fraud, coercion).

When the pattern of production is inconsistent with what people want, resources can be profitably redeployed by directing them away from where they are valued less toward where they are valued more. Legally enforced private property rights to profits earned through voluntary exchange switches on entrepreneurial alertness to profit-making opportunities.[3]

Interventionism Does Not Work

There are two reasons why government intervention, regulation, or control cannot improve upon, or even duplicate, the performance of an economy based upon voluntary exchange: the knowledge problem and the political problem.[4]

First, the knowledge that is relevant to the successful performance of an economy exists nowhere in its entirety. The relevant knowledge—of individual tastes and preferences, individual productive capacities, resource availabilities, and potential for technological innovation—exists in small bits and pieces in the minds of the millions of individuals to whom the knowledge pertains. There is simply too much of it for any government agency to assemble and keep up to date. Moreover, much of the relevant knowledge (e.g., tastes and preferences) is inherently subjective and therefore nonquantifiable.[5]

Second, the political facts of life are such that no government agency will be run on the basis of a dispassionate weighing of social costs and benefits. Even if there were no knowledge problem, no government agency would use the relevant knowledge in an objective and efficient way. We are all painfully aware of the disproportionate influence of special interest groups on political decision-making. What counts is political advantage, not the generalized public interest. And this must always be so, no matter who is involved in the process.

The modern theory of public choice begins by noting that the typical person in government is just like the typical person in the private sector—he or she acts purposefully to achieve his or her own goals.[6] We all attempt to do the best we can for ourselves as we see it within the constraints that confront us. The chief goal of the typical politician is to get re-elected. The chief goal of the typical bureaucrat is to secure larger and larger budgets for his agency. The chief goal of the typical special interest group is to secure more and more benefits. So an “iron triangle” is formed. Politicians, recognizing the value of a highly organized, politically active, special interest group at election time, attempt to buy favor with such groups by voting for programs that confer focused benefits on the groups at the expense of the general taxpayer.

A single taxpayer’s share of the tax burden that comes from any one program is tiny, but a single beneficiary’s share of the benefit is large. Thus taxpayers will not oppose a specific program as intensively as its beneficiaries will support it. Taxpayers overlook a politician’s support of programs that focus benefits on others as long as the politician also supports the program that focuses benefits on them. Government inexorably grows, even though very few programs enjoy genuine informed majority support.

People in the private sector also attempt to do the best they can for themselves subject to the constraints they confront. But private sector constraints are different from government sector constraints. In the private sector there is constant pressure to be efficient. Employees and suppliers are constantly monitored by management whose eyes are fixed on the bottom line. Monitor-managers are forced to care about efficiency, even when they are not the owners of their enterprises, by the market for corporate control—hostile takeovers of poorly-run firms.[7] Thus in the private sector people find, perhaps to their discomfort, that the only way successfully to pursue their own goals is constantly to strive for efficiency in all their economic activities. They will make mistakes, but there is a strong incentive to discover and correct the mistakes, and there is a reliable market process enabling that discovery and correction.

Humans are a fallen race. Ever since we were expelled from the Garden we have been confronted with scarcity—i.e., there are insufficient resources to provide us all with all that we would like to have. Both as individuals and collectively we confront tradeoffs. In order to get more of one thing, we must be willing to forgo some of something else. Every decision carries a cost. There is no such thing as a free lunch.

That is true for individuals, and it is also true for government. When taxes (open or disguised) are imposed, taxpayers forgo the use of some of their means which are transferred to others by government force. Nothing is free. Government cannot re-enact the miracle of the fishes and loaves.

Since every individual and collective choice involves a cost, the only way that we can get the most out of the scarce resources with which God has endowed us is constantly to strive to minimize the cost of all our actions—i.e., constantly to strive for efficiency. We are commanded to be good stewards of our endowments. The private property, voluntary exchange economic system is the only system that automatically provides the means and the incentives to do so.

Economic Rights

In the Pastoral the bishops advocate the enactment of what they call “economic rights.” By this they mean that the government should pass laws which give each person in the country a legally enforceable entitlement to housing, food, employment, education, and so forth. They recommend that when a person or a group cannot secure these things for themselves through voluntary exchange, government should provide them. But government cannot create out of nothing the means to pay for these things. Thus the bishops are saying that taxpayers in general ought to be bound under secular law to pay for them. The “rights” prescribed by the bishops for some impose legally enforceable (by secular government) duties-to-provide upon others.

Rights Must Be Universal

As long as we are discussing secular law and the actions of secular government we ought to be more careful about what is meant by “rights.” A “right,” in the sense that the authors of the U. S. Constitution understood that word, is an entitlement which all people can hold and exercise simultaneously without contradiction.[8] For example, suppose we say that person A has a right to food in the sense that food must be made available to A no matter what A does. We must also be saying that there is at least one other person, B, who has the obligation to make the food available to A. But then A and B do not have the same food-related right. The alleged right requires government to take from one person and give to another person.

The only food-related right which all humans can hold identically and simultaneously, and therefore the only one that is a legitimate human right, is the right to make offers to engage in voluntary exchange with each other concerning food (i.e., offers to give, receive, buy, or sell). A person has a right to make any offer on any terms he or she wishes, but no person has the right to compel any other person to accept the offered terms. The legitimate role of secular government is limited to the enforcement of the rules of voluntary exchange. That includes the punishment of those who engage in involuntary exchange.

The same is true regarding jobs, housing, education, or anything else.[9] Logically, one person’s legitimate human right cannot impose a duty upon another person to perform any positive act. To be legitimate, a right must be universal. The only duty that a legitimate human right can impose is the duty to refrain from a particular kind of positive act—viz, involuntary exchange. This is a negative duty. Rather than specifying what a person must do, it specifies what he or she must not do. To engage another person in involuntary exchange is to trespass against the legitimate human rights of that person.

In sum, the bishops’ call for economic rights is a call for a set of secularly enforced obligations to perform positive acts (surrender of means) on some people for the benefit of some other people. It is not a call for legitimate rights at all. It is a call for privileges for some at the expense of others.

A Revised Parable: Good and Better Samaritans

I think the bishops have taken the wrong lesson from the parable of the Good Samaritan. In that parable the Lord taught that Christians have a God-imposed duty to choose to engage in charity. There is nothing in the parable that even suggests that there is any moral merit whatsoever in being charitable because the government forces you to be. Indeed, there is much throughout the Gospel narratives that”suggests that such acquiescence does not qualify as charity at all. We are creatures with free will, and we are answerable to God only for the choices we make as we exercise that free will.

It almost seems that the bishops would have preferred a different version of the parable: the parable of the “Better Samaritan.” In this version when the Samaritan discovers the victim of the robbery and assault he does not use his own means to help out. Instead, he rushes back to Jerusalem to urge the passage of a law that forces all travelers on the road between Jericho and Jerusalem to pay a traveler’s tax to build a fund which can be used to ameliorate the suffering of all such victims. Having thus fulfilled his moral obligation to be his brother’s keeper, he resumes his journey to Jericho confident that he now, just as the Levite and the priest, need not suffer any more interruptions.

Free to Choose

As a Christian I am bound to choose to be charitable to friends, acquaintances, strangers, and even enemies. In fact, millions of people do choose to be charitable each year. God established His Church and endowed the Apostles and their descendents with authority and responsibility to instruct the faithful in the choices that they must make if they are to attain salvation. He authorized no one to force people to make correct choices. The bishops’ authority to bind and loose does not imply the authority to take away God’s gift of the freedom to choose.

The choices humans have made have given rise to hunger, homeless-ness, famine, disease, war, and other tragedies too numerous to mention. Moreover, the disastrous consequences of our choices have always been greatest when those choices are enforced by secular government. Wicked choices of a private citizen who cannot wield the coercive authority of government never affect as many people as are affected by the wicked choices of those who can impose their choices through the actions of the state. The most egregious recent examples of wicked choices, enforced by government, wreaking havoc on millions of innocents are the choices of Hitler and Stalin. The problem with them was not that they were fascist or communist. The problem was that they had the power to impose their choices on others.

A major point in favor of the voluntary exchange economic order is that it limits the scope and consequences of the choices that humans make. The United States is not a purely voluntary exchange economy. We have strayed far away from the political and economic philosophy of the authors of our Constitution, and it is precisely for that reason that we suffer from the economic problems the bishops so fervently lament.

Many of the proposals of the bishops would further diminish the scope of voluntarism and choice. For example, in #103 of the Pastoral the bishops endorse the so-called labor-law reform bill of 1978. Under that proposed legislation, which was defeated, unions would have been granted increased power to coerce unwilling workers into accepting union representation “services” and into paying for the privilege. The bishops justify their endorsement by, believe it or not, appeal to the freedom of association implied by the First Amendment.[10]

Similarly, in Chapter IV the bishops go on to endorse the concept of “industrial policy” whereby a tripartite authority made up of representatives of unions (not workers in general), corporations, and government would replace the market system with economic planning. The choices of consumers and producers in the marketplace would be overridden by this authority. The bishops presume that planners know better than consumers and producers what is good for the country. This particular form of economic organization is not new. It was exactly how Mussolini organized the Italian economy. Mussolini called it fascism, but it is more commonly called syndicalism or the corporate state. No matter what it is called, it is fraught with peril because it replaces the freedom to choose with naked economic force driven by the choices of a power elite.

Harnessing Self-Interest

In several places in the Pastoral the bishops seem to endorse that old Marxist canard: production for profit ought to be replaced with production for use. But production for profit is production for use.

Christ, of course, warned us against becoming captives of self-interest. He admonishes us as individuals to get our priorities in order, putting our development as members of His Body at the top of the list. He does not say that attention to self-interest is bad in and of itself, especially when looking after self-interest forces us to act in the interest of others.

In a voluntary exchange economy the natural desire of all people to pursue their individual ends is channeled into actions that benefit others. Apart from gifts, the only way that you can obtain income and wealth in a voluntary exchange economic system is to do things that other people value highly enough to be willing to pay you to do them. To repeat, production for profit is production for use. One can make profit only by producing what others find so useful that they are willing to pay a price for it that exceeds the cost of production. Each person is forced by the rules of voluntary exchange to be very “other directed.” Each person must care very much about what other people want him or her to do.

By contrast, in a command economy a person who wants, for exam-pie, to spend his or her time painting abstract pictures doesn’t have to worry about pleasing enough people to make a living at it. Rather, the natural attention of the would-be artist to his or her self-interest is channeled into attempts to secure tax subsidies. Taxpayers don’t have to like that for which their taxes are spent.

The bishops endorse the principle of tax subsidy over consumer choice in their recommendations regarding bailouts for failing smokestack industries. As consumers, citizens have rejected the economic choices of producers in many smokestack industries. As a remedy the bishops would force those consumers, through the imposition of taxes, to act as if they approved those choices. The bishops thereby encourage producers, such as Lee Iaccoca of Chrysler, to ignore the interests of consumers and cater to the interests of politicians.

The Mirage of Social Justice

In the beginning of the Pastoral, the bishops assert that every perspective on economic life must be shaped by three questions: “What does the economy do for people? What does it do to people? And how do people participate in it?” A careful survey of history reveals at least one important truth: Societies that give a large scope to the voluntary choices of their members are more prosperous, just, and free than societies that override those choices with governmental coercion. It may be true, as the bishops assert, that the richest 20 per cent of Americans receive more income than the bottom 70 per cent combined. It is also true that the typical American living in what the federal government defines as poverty is immeasurably better off than the vast majority of human beings on earth. The American economy, based on much less involuntary exchange than the bishops wish to impose, has generated more wealth, and has distributed that wealth more widely, than any other economy that exists today or has ever existed. By their own criterion—the effect on the poor—the bishops ought to forswear their support of the command economy and promote the principles of voluntary exchange.

But a more fundamental point needs to be made about how the word “justice” is used.[11] “Justice” refers to the choices and actions of people. A tree, for example, is neither just nor unjust. Only people choose and act, and it is only those choices and actions that are just or unjust. A society is merely a group of people. It has no existential significance beyond the individuals that make it up. The choices and actions of society are merely the choices and actions of its individual members.

Sometimes individuals choose to act collectively through the adoption of such decision procedures as majority-rule voting, but it is still individuals who are acting. And it is still the choices and actions of individuals which are just or unjust. Nowhere in Holy Scripture are we told that anything other than individuals will be judged according to God’s rules of just conduct. Since society, apart from its individual members, does not choose or act there cannot be any such thing as social justice or social injustice.

True Justice

It is what people, as individuals, do on the basis of the choices they make that is just or unjust. The justice or injustice of the end result of human actions can be determined only by examining those actions themselves. If just steps are undertaken each step along the way, the result has to be just. In philosophy this is called a process, rather than an end-state, theory of justice.[12] Applied to the question of distributive justice it implies that whether a given income distribution is just or unjust depends only on how that distribution came about, not on the pattern of the distribution itself. If it is the result of voluntary exchange, and only voluntary exchange, it is just. If it is the result of involuntary exchange (e.g., theft, fraud, or assault) it is not just.

The end-state theory of distributive justice adopted by the bishops implies that a person is not justly entitled, under secular law, to the portion of his voluntary exchange income that exceeds the average income received by other individuals. One is tempted to accuse the bishops of subscribing to a view of distributive justice forbidden by the Tenth Commandment.

Within a voluntary exchange economic order individuals are free to choose to live in communities organized on the principle of “from each according to his ability, to each according to his need.” But they are not free to force others to do so. The Christian community described in Acts was such a freely-chosen community. The bishops may think that all people ought to choose to live in such communities, but they go beyond the authority of Scripture when they advocate forcing people to do so through the coercive power of the state. Caesar, after all, is due only that which is legitimately his.

In Conclusion

The bishops are disturbed by the suffering and injustice that they see in the United States, and they wish to recommend remedies. That certainly is their right—and their duty. They fail, however, to understand the principles of a voluntary exchange economic order. And because of that, they fail to see that their proposed remedies can only make matters worse. They apparently believe that the problems they so abhor arise because there is too little government action. They seem to consider the free market system as the source of all the problems. So they advocate less freedom and more coercion as the remedy. By proposing to move the American economy further away from the principles of voluntary exchange they guarantee that the same, or even worse, problems will still be around when it comes time for them to write another Pastoral.

A more promising solution to the economic problems that rightly con-cern the bishops and many other Americans would be to repeal all the legislated barriers to economic prosperity that have been enacted since the beginning of the New Deal and firmly to resolve not to make the same mistakes again.

1.   F. A. Hayek, The Counter-Revolution of Science (Glencoe, IL: The Free Press, 1952), Part I.

2.   F. A. Hayek, “The Meaning of Competition,” in Individualism and Economic Order (Chicago: University of Chicago Press, 1948), Chapter V.

3.   Israel M. Kirzner, Competition and Entrepreneurship (Chicago: University of Chicago Press, 1973).

4.   Don Lavoie, “Two Varieties of Industrial Policy: A Critique,” Cato Journal, Fall 1984.

5.   F. A. Hayek, “The Use of Knowledge in Society,” in Individualism and Economic Order, op. cit., Chapter IV.

6.   James M. Buchanan and Robert D. Tollison, eds., Theory of Public Choice: Political Appli cations of Economics (Ann Arbor: University of Michigan Press, 1972).

7.   Henry G. Manne, “Mergers and the Market for Corporate Control,” Journal of Political Economy, April 1965.

8.   Roger Pilon, “Ordering Rights Consistently: Or What We Do and Do Not Have Rights To,” Georgia Law Review, Summer 1979.

9.   Charles W. Baird, Opportunity or Privilege: Labor Legislation in America (Bowling Green, OH: Social Philosophy and Policy Center, 1984).

10.   Charles W. Baird, “Labor Law and the First Amendment,” Cato Journal, Spring/Summer 1985.

11.   F. A. Hayek, Law, Legislation, and Liberty, Vol. 2, The Mirage of Social Justice (Chicago: University of Chicago Press, 1976).

12.   Robert Nozick, Anarchy, State, and Utopia (New York: Basic Books, 1974).

Further Reading