Lateran University Conference - Catholic Business

I will be presenting a paper at the Pontifical Lateran University in Rome on Wednesday, November 21.? Here is a draft of the paper:

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We used to joke that the Social Doctrine is the Church?s ?best kept secret??a valuable treasure that was too well hidden, because no one knew anything about it. This was always more true in the United States than in Italy, and fortunately it is less true today, since through the efforts of many, including people in this room, it is now more widely and better understood. However, there are two parts of this teaching that are still not sufficiently appreciated, it seems to me, and yet which have great significance for development and self-reliance. The two parts I want to focus on are subsidiarity and private property.?

The general point I wish to make is that concentration of wealth and power?which is opposed by the principles of subsidiarity and private property?is harmful to the growth of self-reliance.?

I will begin with an argument made by the Austrian economist Friedrich Hayek in his 1944 work The Road to Serfdom, which he attributes to the English historian Hillaire Belloc, who made the argument in a book called The Servile State, published exactly 100 years ago in 1912. Beyond the obvious questions of justice, Hayek, and Belloc, make the case that concentration of wealth is not politically sustainable in a society that is based on principles of freedom and equality, because when wealth, and therefore power, are concentrated into a few hands, the majority of the population do not feel so free or so equal, and this leads to social unrest. It is remarkable how well this explains the unrest we have seen with the global Occupy movements and their concerns about the ?one percent? who own the majority of the capital.?

Because of the instability of a society based on concentration of wealth, Hayek and Belloc argue that unless more widely held property ownership can be achieved, the system will predictably move in the other direction, towards further concentration of property ownership, leading ultimately to totalitarian government.?

Unfortunately for us, once we reach a point of highly concentrated ownership?as we have done?then moving in the opposite direction towards more widespread property ownership is very difficult.? It works against the grain, because people no longer expect to rely for their security upon their own property. They have exchanged self-reliance for ?other-reliance.? What is it we ask of our politicians, and what do they offer us, from all different political parties?? ?Jobs!?? Not the freedom and opportunity to make our own way, but a wage in someone else?s establishment.? And therefore it is almost impossible to achieve a more just distribution without a renewed understanding of the importance of self-reliance and therefore of the essential role of private property and subsidiarity.?

Today there exists a serious misconception about what is private property is. It is commonly understood to be a source of pleasure and comfort, or a conspicuous display of one?s wealth.? The original idea of private property, as the foundation for self-reliance, needs to be recovered.?

The Social Doctrine of the Church offers one of the strongest and most consistent defenses of private property. The Second Vatican Council affirmed that private property is ?wholly necessary for the autonomy of the person and the family.? The wording is interesting: the Council did not say that because we are free, we have the right to private property; instead the reverse: private property itself is necessary for the exercise of that freedom. Humans are material beings, and we need material goods to live.? But interestingly, the Social Doctrine does not place the justification of private property primarily in that it helps us provide for our daily material needs. Ahead of such needs, the Catechism of the Catholic Church places the role of private property as ?guaranteeing the freedom and dignity of persons.? Because as a property owner, you are free in practice, not just in theory.? For example, if you find yourself in an unacceptable situation at work?say you?re being pressured to do something you think is wrong?if you have no property, no savings, then your ?freedom? to walk away and find some other work is much more limited (especially in a weak economy) than if you had some property to live off while you look for another position.?

In earlier days, a family?s security was largely based on the property that it was able to accumulate and put to work. In the past century, however, we have moved from relying upon private property for our security, to relying in large part upon government transfer payments. When times are tough, or when I retire, I am dependent less on my property, and more upon unemployment support, welfare, or social security.

There is a fundamental assumption underlying this shift: that property and income are equivalent. I would like to argue that this assumption is false. They appear to be equivalent: property can be invested to generate income; income can be saved to accumulate property. But this assumption only holds if the purpose of private property is solely to help meet your needs and those of your family, which it isn?t. Unlike private property, income from government transfer payments does not do much to allow you to exercise your freedom and self-reliance. With private property, you have the freedom to decide how much to save, how and where to invest, and when to draw from your savings. You also have the responsibility to make those decisions carefully and correctly?to exercise self-reliance.? Your Social Security ?contributions,? on the other hand, are compulsory, you have no say in how they are ?invested,? and the amounts and timing of both contributions and withdrawals are determined for you.? A government transfer payment doesn?t foster much responsibility: it arrives monthly, and all you have to do is cash the check.? But private property requires you to invest it, care for it, make decisions about it and reinvest it as necessary?to work with it in order to ensure that you are getting a good return out of it, and in doing so to exercise and grow in self-reliance. Nobel economist Amartya Sen is famous in part for his work on how unemployment benefits are an acutely inadequate substitute for real work, because of the loss of dignity, personal development, and responsibility associated with unemployment. Private property enables freedom and encourages self-reliance; government transfer payments do neither.?

And here?s how the misunderstanding of private property arises.? When we give up much of our reliance on private property for our economic security, and place it instead upon government transfer payments, we relinquish responsibility, but we still keep our natural desire for property. Helped with the force of mass marketing, this desire is redirected in part towards luxury or status goods. But luxury or status goods are not very effective at providing either of the benefits of private property: they don?t give us much opportunity to exercise our freedom and responsibility, nor do they support our material needs very efficiently.? Mostly, they just provide pleasure: a home that I own and rent to others is a source of income and independence, while a vacation home is a source of pleasure; a fishing boat gives me security and food, while a yacht gives me pleasure.

The purchase of luxury goods is indeed an exercise of ones freedom, and so it is not my suggestion here that we should be prohibiting luxury goods. What is important to recognize is that certain kinds of purchases encourage freedom and self-reliance, while others do not. Yachts and vacation homes are not evil things. Each in their own way can help spread joy among families and friends: an evening cruise on the Tyrrhenian Sea or a weekend in the mountains, for example, can be very good things. The point is simply that when we think about private property today, we tend to think about these kinds of luxury goods or status goods.

We need to restore the idea of private property as productive property, which is so essential for self-reliance because it enables us to provide for our own security. Goods such as rental housing, shares in a business, tools and equipment?these are true private property: productive property. But when the majority of people come to depend on government instead for their security, then the natural desire for productive property is perverted towards luxury goods. At this point, the institution of private property itself becomes very difficult to defend.? If private property is just yachts and vacation homes, a luxury of the rich, rather than the foundation of the security of the majority, then we should not be surprised at all to see more and more attacks on the right to private property and on ?greedy capitalists?.?

Hayek and Belloc warn about the dangers of concentration of wealth and power, of what we now call crony capitalism. Supporters of the market are deeply suspicious of, and generally hostile to, concentration of power in government.? But according to Hayek and Belloc, the problem starts with concentration of power in both business and government. It seems to me that advocates of the market have had a big blind spot with regard to this issue for the past several decades: well aware of the dangers of concentration of power in government, but apparently unaware, or unconcerned, about the perils arising from concentration of power in business.

This is perhaps because of a certain discomfort among champions of the market with any criticism of big business?isn?t a big business, after all, nothing other than a very successful small business?? Isn?t criticism of big business therefore a criticism of the market? Not necessarily.? After they reach a certain size, some companies choose to move outside the market to apply political power to defend and grow their businesses. Economies of scale and scope take you so far; beyond that, the temptation to grow or protect profits in ways that are anti-competitive proves to be too great to resist in many cases.?

Perhaps the clearest example of this is the phenomenon of ?regulatory capture,? a concept described by Nobel economist George Stigler.? Regulatory capture is where government regulation is turned, over time, to favor those it is intended to regulate. Regulatory capture happens because the interest of regulated companies in how they are regulated is very, very great, given its potential to impact their bottom line.? They are also very small in number, so it is easy for them to organize to influence that regulation. And they are usually successful in their efforts, because consumers are vastly more numerous and too busy with the details of their daily lives to provide much effective countervailing efforts.? How much time did you spend in the last year thinking about the price of electricity, for example, or, still less, organizing your neighbors to lobby the government about it? How much time and effort do you think the electrical utilities spend on the same question??

In opposition to the concentration of power in both government and business, the Social Doctrine of the Church proposes the principle of subsidiarity. If there is some confusion about the meaning of private property, there is even more scope for confusion about the meaning of subsidiarity. In a recent article in the Journal of Markets & Morality, Prof. Donati noted that secular interpretation of the term ?subsidiarity? has wavered between bringing assistance on the one hand, and preserving autonomy on the other (Donati, 2009, p. 212). As a result, plenty of misunderstandings arise (ibid. p. 214). He clarified the different meanings or types of subsidiarity, in particular vertical, horizontal, and lateral subsidiarity (p. 229) and then offered a generalized definition of subsidiarity to mean ?helping the other to do what he or she should? (Donati, p. 229).

What I want to focus on here is what kind of help?what aspect of subsidiarity?can serve as a check against the concentration of power.? Because when we think of what we are doing as helping people, it is sometimes easy to slip, without realizing it, into harming their self-reliance. There is a phenomenon that psychiatrists have identified called ?learned helplessness??where a human being (or an animal) learns, through various ways, that it is unable to rely on itself to improve its situation (Seligman). We can see this most clearly with children.? My wife and I have six young children, and I have seen this time and again?if you try to do too much for children, it impedes their development.? (This is in fact one of the central insights of Dr. Maria Montessori?s approach to child education).? And it is relevant to adults also: doing too much for someone can create learned helplessness, and so sometimes the best ?help? you can give someone is to leave them alone.? Of course, when people do not have the bare necessities of life, this is not the time to be ?helping? them by leaving them alone. But we must be vigilant to ensure that our attempts at help are not in fact harming the development of self-reliance.?

And thus I believe that it is not accidental that Pius XI formulated his definition of subsidiarity in the negative, and with such strong language: ??that most weighty principle, which cannot be set aside or changed, remains fixed and unshaken in social philosophy: Just as it is gravely wrong to take from individuals what they can accomplish by their own initiative and industry and give it to the community, so also it is an injustice and at the same time a grave evil and disturbance of right order to assign to a greater and higher association what lesser and subordinate organizations can do.? (Quadragesimo Anno, #79 [#80 in Italian edition]; emphasis added). It is this aspect of subsidiarity, as defined in the Social Doctrine, which opposes concentration of power, and is relevant for the creation of self-reliance.?

This is evident in the moral justification for subsidiarity, which is not one of efficiency?i.e. societies function more efficiently when decision-making is widely decentralized.? It is indeed true that subsidiarity can promote efficiency, but this is not the primary moral rationale for it.? The primary rationale for the principle of subsidiarity is liberty.? The Catechism of the Catholic Church, echoing St. Thomas Aquinas, explains it as follows: ?The way God acts in governing the world, which bears witness to such great regard for human freedom, should inspire the wisdom of those who govern human communities??in other words, if God rules us with such profound respect for our freedom, then our human rulers should do likewise. It seems to me that this strong, negative formulation is a response to the recognition that in mass society?with the power of the mass media to influence society so strongly?the lust for power is among the greatest and most dangerous personal disorders we face, especially when hidden in the guise of the desire to serve the public good.

Let me provide just one example.? The debate about Keynesianism is a large and ongoing one, and it is not my intention to enter into it in any way here. But I think it is fair to say that one result of Keynes? General Theory of Employment, Interest, and Money is that it gave generations of politicians an excuse to give in to the temptation to exercise more personal power, though deficit spending. Instead of being restrained by natural limits on the ability tax, they now had apparently unlimited spending ability?a sort of political consumerism, if you will, with the same negative consequences that consumer debt has on consumerism, i.e. the ability to magnify it greatly.

The dangers of the violation of subsidiarity are displayed very well in an extensive study by the late professor of development economics John Powelson. His book, Centuries of Economic Endeavor, tries to explain why sustained economic development?across a long period of time (centuries)?has only occurred in Europe, North America, Australia and Japan.? The same policies, tried elsewhere, seem invariably to have failed.? Powelson?s explanation is that in the successful regions, power was diffused, widely held, whereas everywhere else it was concentrated. Concentration of power seems to lead, inexorably, to economic stagnation and decline.?

The long-term economic dangers of concentration of power are so great, that it even makes sense to oppose concentration when such opposition itself might seem economically inefficient. An example of this is what Prof. Luigi Zingales of the Chicago Booth School of Business has identified in the US as a ?populist anti-finance bias,? which ?led to many political decisions throughout American history that were inefficient from an economic point of view, but helped preserve the long-term health of America's democratic capitalism.? In the past, Americans valued freedom more than the supposed efficiency that would arise from consolidation of banks, because they feared the power that such large banking entities would wield.? Zingales points to President Andrew Jackson?s opposition to renewing the charter of the Second Bank of the United States in the 1830s, to numerous state-level banking restrictions, and to the Glass-Steagall Act of 1932, as examples of this populism. He admits that from a purely economic point of view, such restrictions are ?crazy,? but also recognizes that positive side effects arouse.? The fragmentation of the banking industry that resulted from such regulation led to the rise of a thriving securities industry and prevented for a long time the massive political power that banks now wield.

Deregulation of the US finance industry over the past few decades has overturned these restrictions.? Attempts at re-regulation of the finance industry, and specifically the 2010 Dodd-Frank act, are of a very different kind. We can divide regulation into two types, those that foster subsidiarity and those that hinder it. Glass-Steagall was largely of the former type; Dodd-Frank is of the latter.

Regulation that hinders subsidiarity tends to focus on activity and outcomes: you may or may not do this, that, or the other; if you do, you should do it in this way; and you should get these kinds of results, and not others.? Environmental protection regulation is largely of this type. Anti-trust regulation is too: it focuses not on the absolute or even relative sizes of firms, but on whether their market power is expected to affect consumers negatively. ?By its nature, regulation of activity or outcome requires a large bureaucracy to implement it, because one needs to monitor almost everything that firms do, and well as the results they achieve. Regulation that fosters subsidiarity tends to focus instead on size and scope restrictions?you may not be bigger than x, you may not do business in an area wider than y, etc.? It is therefore much easier and therefore cheaper to monitor: you don?t have to watch everything firms do, you just have to keep an eye on their size.

Because our current regulation is predominantly hostile to subsidiarity, we experience the perverse result that smaller enterprises, who typically violate regulations least, pay a disproportionate cost of regulation.? In the US, despite some attempts at regulatory relief over the years, in general, small business is still far more heavily penalized by most regulation. For example, businesses with fewer than 20 employees incur 44% more in per employee costs of regulation in total; for environmental regulation, they pay over 300% more. And yet ironically, even though regulation costs them more, in many cases they need it less, usually because it is easier for small businesses to regulate themselves and to be scrutinized by the local community; one recent study showed that manufacturing facilities owned by small companies tend to have significantly lower employee injury rates, for example.

Let me bring this to a close.? I have argued that two principles of the Social Doctrine of the Church, subsidiarity and private property, are vitally important for the creation of self-reliance. When these principles are violated, development policy tends towards concentration of power, and a weakening of self-reliance, and ultimately a weakening of economic prosperity itself.?

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Andrew V. Abela, Ph.D.

Chairman, Department of Business & Economics

The Catholic University of America, Washington, DC

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Source: http://www.catholicbusinessethics.org/2012/11/lateran-university-conference.html

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