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One part of Pope Francis’s first apostolic exhortation, Evangelii Gaudium, condemned “trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world … which has never been confirmed by the facts, [and] expresses a crude and naïve trust in the goodness of those wielding economic power.” Those on the political left immediately celebrated this as an endorsement of “progressive” government, and every story I saw about the Pope’s selection as Time’s man of the year mentioned it.
Unfortunately, Pope Francis’s evident compassion for the poor is overwhelmed by his confusion about freedom expressed in markets. Economic liberty has done more to elevate the living standards of the general population than any other form of social organization in history. At the same time, it improves justice and expands inclusiveness. In addition, it is the only system which does not trust in the goodness of those with power. Conclusions drawn from such mistaken premises demonstrate why good intentions are not enough, if we are to judge from results.
The fact that the Pope picked “trickle-down” economic theories to attack was revealing, because no economist ever promoted such a thing. It was a term, like “tax cuts for the rich,” invented by big government opponents of market freedom to deliberately misrepresent it.
Trickle-down is a defamatory characterization of “supply side” economics which misdirects attention away from the primary means by which all gain from market freedom. Its core confusion is in assuming that reducing the disincentives faced by heavily-taxed high earners, leaving them more take-home pay, only benefits them, except for what trickles down to others when they spend it.
The reality is that when people, however rich or poor, advance their interests through voluntary arrangements, they benefit those they deal with. This is done by providing opportunities others find better than their alternatives, and those improved opportunities increase others’ real wealth. As George Reisman succinctly put it:
Under capitalism, not only is one man’s gain not another man’s loss, insofar as it comes out of an increase in overall, total production … one man’s gain is positively other men’s gain … Indeed, under capitalism, competition proceeds to raise the standard of living of the average wage earner above that of even the very wealthiest people in the world a few generations earlier.
Or, as Arthur Seldon put it, “capitalism is the instrument which people in all societies … use to escape from want and enrich one another by exchange.”
As a consequence, worsening the incentives of producers induces them to do less for others. And while it hurts such producers, it provides benefits only to the envious or covetous. It hurts those they deal with, by wiping out arrangements that would have been mutually beneficial. In other words, increased tax rates (and regulatory burdens, which act like taxes) destroy wealth that would have been created for the non-rich.
When the rich get richer by rigging the political process, that is objectionable, but it is not amarket failure. It is a government failure, imposed by undermining the benefits competitive markets provide for all participants. And the solution is to get the government out of the theft business (as capitalism would require), not to first enable favorites to garner ill-gotten gains from restricting competition, then use government’s abuses as an excuse to more heavily tax (and thus discourage) those who actually benefit others.
It is true that the crony capitalism we see all around us, which is far closer to fascism than capitalism, is unjust. Pope Francis is right to criticize such injustice. But private property, the basis of capitalism, prevents rather than enables the “dog eat dog” “survival of the fittest” competition that capitalism’s attackers accuse it of.
In contrast, private property prevents the physical invasion of a person’s life, their liberty, or their property without their consent. By preventing such invasions, private property is an irreplaceable defense against aggression by the strong against the weak. No one is allowed to be a predator by violating others’ rights. Property rights negate the rule of “might makes right,” which prevails in the absence of such rights. In Herbert Spencer’s words, “far from being, as some have alleged, an advocacy of the claims of the strong against the weak, [it] is much more an insistence that the weak shall be guarded against the strong.”
Pope Francis’s implication that freer markets need not expand inclusiveness also reflects confusion about crony capitalism versus capitalism. Capitalism is a system which places no legal barriers in the way of participants offering products and terms that others may deem better. All are free to discover and offer ways to benefit others. And no current market share (sometimes misleadingly called a firm’s “market power”) can persist in the face of superior options. However, the essence of crony capitalism is the use of laws, regulations, mandates, taxes, price controls, tariff and trade barriers, and administrative discretion to stymie such offers, extracting some of the gains from the “friends” created with such favoritism to maintain their stranglehold on political power.
That is also why the Pope’s assertion that capitalism puts “naïve trust in the goodness of those wielding economic power” is misguided. Voluntary arrangements based on private property protect everyone from abuses of economic power. As Adam Smith’s Wealth of Nations demonstrated: as long as all relationships are voluntary, even people who do not care at all about those they deal with seek for ways to benefit them as the indirect way to advancing their own self- interest (and hisTheory of Moral Sentiments discussed how people go beyond just narrow self-interest in their relationships).
There is nothing naïve about trusting people to advance their own self-interest. On the other hand, it is faith in political “solutions,” where government’s coercive power violates individual rights and their power to choose for themselves, that is naïve.
Pope Francis is clearly compassionate, illustrated by his pastoral attempts to lead the Catholic Church to be holier. As a Catholic, I sincerely applaud his efforts. He is right to object to much that he sees in the world around him. But what he objects to is not, in fact, caused by capitalism. It is caused by its crony capitalist caricature, which is a form of government control, not the individual self-determination enabled by capitalism. The confusion in Evangelii Gaudium is highly problematic. Spurred by this document, politicians may, in trying to “fix” capitalism, which is a massive economic blessing rather than the problem, turn to the transfer of even more individual choice to government diktat, resulting in even more crony capitalism. It would eviscerate the widespread benefits of capitalism, and in turn, harm the very people Francis wishes to protect.
- Chris Becker’s Austrian Perspective on South Africa, Gold and the Ludwig von Mises Institute (rvnewstoday.com)
- Good Austrian News (tomwoods.com)
- We Were Middle-Class Once, And Young – Paul Krugman – NYT (dralfoldman.com)
- Nathan Tankus: Krugman von Hayek (nakedcapitalism.com)
- Krugman warns Canada vulnerable to a ‘big deleveraging shock’ (business.financialpost.com)