DRI-146 for week of 12-29-13: Catholic Doctrine and Economics: History and Evidence

An Access Advertising EconBrief:

Catholic Doctrine and Economics: History and Evidence

Pope Francis’s recent apostolic exhortation denouncing capitalism earned plaudits from mainstream media and the political Left. Last week’s EconBrief exposed the Pope’s rhetoric as emotive, superficial and devoid of intellectual content. Two questions follow: First, what impelled the Pope to comment at all? Second, what accounts for his assurance that the case for capitalism “has never been confirmed by the facts?”

Catholic Socio-economic Doctrine

Hostility to money, trade and finance by organized religion and the Catholic Church in particular dates back centuries. Religion developed in opposition to political absolutism. Prior to the rise of specialization and markets, economic stasis was the rule. Wealth was attained by military conquest and plunder rather than economic growth or, on a small scale, by banditry rather than business. Thus, wealth itself was suspect, as was its expression via money. Life expectancy was short and investment possibilities were scant, so the need for finance was correspondingly limited. Thus, financiers were viewed askance.

This view found expression within the Catholic Church in the prohibition of usury, defined as loaning money at interest. Since there was no economic theory to speak of, there was no recognition of principles such as time preference. Consequently, when medieval nobles purchased indulgences from the Catholic Church, the Vatican had no compunctions about insisting on paying less than the nominal value of a noble’s right to receive annual rents on his land. That is, the noble might own land on which he contractually received the equivalent of $30 per year in annual rent from the lessee, and the Church would pay less than $30 to gain title to that contractual payment. The Church was charging rent to the noble; i.e., was itself guilty of the usury it forbade its flock to commit.

This historic example tells us several things – that interest is an ineradicable, inevitable category of human action even outside of a monetary context; that the Church was slow to appreciate the economic logic governing human action; and that church doctrine tended to inhibit rather than accommodate change and progress.

By the 19th century, the Industrial Revolution had dramatically widened the scope of human possibility. Productivity was now increasing rapidly. Economic growth was a reality. War was more destructive and less beneficial to the victor. But all this was gained at a price – the time-honored ways of society were changing. Rather than embrace change, the Catholic Church lined up against it. After witnessing a century of political upheaval and the birth of socialism and communism, the Vatican issued its first formal statement on social policy in 1891 – the Rerum Novarum. Fourteen subsequent papal encyclicals followed, refining the doctrine and developing several fundamental principles.

Man is made in the image of God and thus inherits the quality of human dignity. This is expressed in various ways, one of which is through work. The principle of subsidiarity allows individuals to attain self-expression in their work and thus contribute to the communal welfare. While the principle of private property is recognized, however, it is subordinated to enjoyment of “the goods of the whole Creation,” which are “meant for everyone.” The principle of distributism governs the allocation of goods in a fashion consistent with “social justice.”

Which political system – capitalism, socialism or communism – is optimal for achievement of social justice? None of them, according to explicit Catholic doctrine. Communism not only violates private property but also renounces religion – so much for that. “Unfettered capitalism” is not acceptable either – here we can see the roots of Pope Francis’s call for subordination to government authority, which apparently acts as surrogate for the Church in enforcing social justice. As for socialism – well, the longtime affinity between Catholicism and the political Left suggests that this is the de facto preference of a sizable fraction of the flock.

If the above summary seems vague by the standards of political economy, there are good reasons for that. The Vatican had to somehow reconcile the rapidly evolving standards of science and technology and the brute facts of modern economic life with the basic teachings of the Church – without alienating the flock and causing an exodus of believers. Obviously, it took refuge in comforting generalities and uplifting rhetoric at the expense of logic. If there are no hard edges or bright lines drawn, then the faith can dodge its contradictions and practical shortcomings just well enough to survive.

It was this doctrinal tradition of emotive uplift and vague generalization that Pope Francis called upon in his latest apostolic exhortation. For over a century, the Church had relied upon government as its deus ex machina in social policy, and Pope Francis was certainly not about to deviate from that playbook now.

Economic History and the Church

Pope Francis’s quaint ideas about capitalism were not generated spontaneously within his brain. They were the outgrowth of a long history of antipathy expressed toward capitalism and free markets by historians and commentators, some of them affiliated with the Church. This attitude began at the time of the Industrial Revolution. We can simplify it by breaking it down into two key propositions: first, that the industrial factories worsened the lot of the working population and the poor by substituting an inferior lifestyle for a preferable one spent working on farms; and second, that factories were especially harmful to children, who were shamefully exploited and maimed by the factory system.

One of the leading historians of the Industrial Revolution and child labor, Clark Nardinelli, characterized the opponents of industrialization as the “Romantic movement.” During the “golden age” (e.g., prior to the Industrial Revolution), “England was populated with sturdy yeoman farmers who…produced enough for a comfortable subsistence for their families.” And shortfall in material goods was “more than compensated for [by] the serenity and beauty of rural life.” The Industrial Revolution “tore workers away from the land and forced children to enter the labor market” rather than enjoy a joyous, pastoral existence as carefree as it was healthful. Although the best-known Romantics today are writers such as Coleridge and Wordsworth, the Catholic Church provided a great deal of moral support and front-line activism to this movement. It also drew upon the Romantic literature for much of its later doctrinal expression.

The reality of industrial life and child labor, both pre- and post-Revolution, had little to do with Romanticism. It was driven by economics.

Prior to the Industrial Revolution, economies were predominantly agricultural. At the time of the American Revolution, for example, over 90% of U.S. output was produced on farms. Beginning in the mid-1700s, economic productivity began a long upward climb that is still underway today. It started with the birth of factories housing production processes for raw materials and finished goods. This affected agriculture at first by drawing away labor and other resources from farms to cities. Eventually the Revolution spread to agriculture itself; many machines and processes for producing and harvesting farm goods were invented. The increase in agricultural productivity led to huge increases in supply and lowered prices. Since increases in demand were less-than-commensurate with these supply increases, the result was a net exodus of resources away from agriculture and toward industry. This transformation occurred around the world and continues to accentuate the trend toward urbanization today.

British economist N.F.R. Crafts estimated that British per-capita income rose from $333 in 1700 to $399 in 1760 to $427 in 1800 to $498 in 1830 to $804 in 1860 (all figures expressed in 1970 U.S. dollars). As Nardinelli infers, this implies that economic growth occurred very slowly prior to 1760, slowly from 1760 to around 1820 and much faster between 1820 and 1860. According to detractors of free markets (to whom Nardinelli attaches the non-partisan label of Industrial Revolution “pessimists”), workers drawn into the factories were actually made worse off by the transformation.

Nardinelli estimates that the lowest 65% on the British income totem-pole received about 29% of all income in 1760. By 1860, this share had declined – but only to about 25%. (This relatively glacial pace of change is consistent with rates of change in the 20th century, too, despite loud protestations about the rapid pace of inequality.) On average, this would justify only a modest downward adjustment in the per-capita near-doubling of real income in Crafts’ figures, to about a 70% increase.

Within the historical profession, debate over the effects of the Industrial Revolution has raged for well over a century. “Optimists” like T.S. Ashton and R. M. Hartwell assembled data on real wages to overcome the anecdotal impression left by “pessimists” that life was a living hell for factory workers and children. Pessimists were left to argue that countervailing factors like urban crowding, unemployment and pollution overcame the material wealth created by capitalism to make workers worse off after all. But the best that pessimists have been able to manage is a case that the rate of growth was slow prior to 1840 and only began to accelerate thereafter.

Among many factors complicating the evaluation is the fact that the Romantics overlooked all the drawbacks of pre-Industrial life. While the factor system may have worsened air pollution, for example, the relative decline in air quality was not as great as it might seem. The widespread use of horses for transportation, for example, was a substantial source of air pollution. Agriculture caused water pollution and reduction in land quality, both of which were ameliorated by the outflow of resources from agriculture to cities. The fact that life expectancy in Great Britain rose 15% from 1781 to 1851 does not tell in the pessimists’ favor. The strong population growth between 1760 and 1830 is the only thing that kept per-capita growth in real income from being even larger, but this cuts both ways – it holds down per-capita income but suggests that dis-amenities of industrial life were not life-threatening in magnitude.

The Truth About Child Labor

History books throughout the 19th and early 20th centuries were replete with gruesome tales of children mangled and crushed by machinery or driven to early graves by the unhealthy hours and working conditions inside factory walls. Beginning in the 1940s, however, what the late Paul Harvey would have called “the rest of the story” started to emerge. Even before the Industrial Revolution, children normally worked on farms, either from age 12 onwards as outdoor farmhands or as younger hirelings of cottage industries. Outdoor farm labor was hardly less arduous and dangerous than factory labor. And it was certainly less remunerative. Today, child labor survives not in Western factories but rather in the subsistence agricultural economies of Africa and India.

There is no systematic evidence of child abuse and mistreatment of child labor by factor owners – which is what we would expect of factory owners who were dependent on child labor for substantial productivity. That productivity earned substantial wage income – this was what lured the children into work in the first place. Thus, the Industrial Revolution did not result in the exploitation of child labor, regardless of how the term “exploitation” is defined. Factories and other industrial employments were not a magnet for child labor; rather, large-scale child labor was a localized phenomenon confined mostly to portions of Great Britain and the American South where cotton mills were numerous. Children were ideally suited for textile production, which explains their sudden rise to prominence at the strategic moment in the Industrial Revolution. Employment of roughly 122,000 children in the textile mills of Lancashire, Yorkshire and Cheshire constituted the bulk of child labor – about 203,333 – in England and Wales. Since the total population of children was over 2,400,000, child labor accounted for only a little over 8% of the population of children. As the Revolution went on, the need for more technologically sophisticated labor militated against the use of child labor.

Free Markets and the Poor: Evidence from Around the Globe

Not surprisingly, the Pope’s proclamation and its ecstatic reception triggered indignant reaction from knowledgeable sources. One of America’s leading experts on economic policy, John Goodman of the NationalCenter for Policy Analysis, recalled his participation in an economic conference called by Pope John Paul II in 1996. Contrary to longstanding Church policy, then-Pope Karol Wotyla sought counsel from free-market economists before issuing his encyclical Centesimus Annus. This time, Pope Francis pointedly ignored economic logic and principles in adhering to traditional Church doctrine.

In an op-ed entitled “Papal Economics,” Goodman noted that for some 100,000 years, most of mankind subsisted on a real income equivalent to $1 per day, rarely reaching $3 per day. Then, about 200 years ago [actually, closer to 250], capitalism began to blossom throughout the world with the spread of free markets. Today, even the poor in the wealthiest countries are better off by thousands-fold.

Economists Benjamin Powell and Darren Hudson, writing on “Pope Francis’s Erroneous Economic Pontifications” for the Independent Institute, take on the Pope’s assertions directly. After excoriating “trickle-down” economics, the Pope further maintained that “when the glass [of economic growth] is full, nothing ever comes out for the poor.” Citing the specific case of China, the world’s most populous nation and formerly home to its largest quotient of poor residents, the authors remind the Pope that since 1980, 500 million people have been lifted out of poverty under the new, market-friendly economic policies pursued within China. This could hardly have been the work of the Catholic Church, since Christianity was condemned by the Communist regime of Mao Zedong and barely tolerated subsequently.

The Pope’s confident assertion that faith in free markets and economic growth as a tonic for the poor has “never been confirmed by the facts” was next to fall to the authors’ analytical scythe. They calculate that the average annual per-capita income of the poorest 10% of the population in the world’s freest countries exceeds $10,000 annually. In the world’s least-free countries, that same average annual per-capita income is less than $1,000.

But surely the Pope’s headline-grabbing point about capitalist inequality is ironclad? After all, today even defenders of capitalism and free markets fall over themselves apologizing for the widening gap between rich and poor. But Powell and Hudson utilize the most popular tool of left-wing student economists, the quintile tables, in comparing income distribution in most-free and least-free countries. The share of total income going to the poorest 10% of the population in the freest countries in the world is 2.76%. In the least-free countries, that same share of total income is less – 2.57%.

The quintile method (in this case, actually a decile method) is an analytically inferior method of parsing the mysteries of income distribution because it aggregates huge numbers of individuals inside each quintile (or decile) and hides the results of changes felt by them. Only the overall averages are visible. Just as bad is the fact that the individual components of the quintile do not stay the same over time. People are born and die. Even more pertinent to the analysis, their incomes change so much that they leave one quintile and move to another one. Historically, Americans have been quite mobile between quintiles; that is, they are likely to spend time at both the low end and the high end at different points in their lives.

Left-wing students of income distribution tend to act as though the makeup of the quintiles did not change – as if the poor remained in the poorest 20% (or 10%) all their lives. The evidence suggests that some do, but most don’t. This radically changes the implications of inequality between quintiles, since it is completely different to spend your whole life poor than (let’s say) to spend a few years poor, a few years well off, a few years very well off and a few years rich. It is no accident that the Left prefers the quintile method. Socialism began as a movement proposed by French philosopher Saint Simon, who longed to operate an entire national economy as if it were one big factory; in short, to pretend that a nation was a single collective entity.

Messrs. Powell and Hudson graciously agreed to play the comparative income-distribution game in the left-wing ballpark by employing the quintile method, a technique containing inherent bias against free-market outcomes. Yet the free-market side still won, which makes the victory all the more telling.

The immediate reaction to this analysis is to wonder what Pope Francis would respond when confronted with the refutation of his arguments. In fact, he has already responded. He told an interviewer that “I was not speaking from a technical point of view but according to the Church’s social doctrine.”

Exactly. Since 1891, the Catholic Church’s social policy has served the vital function of allowing Popes to speak out of both sides of their mouth on social policy. To the public, they can appear to address real-world problems and public-policy issues directly by using terms and phrases that seem to have real-world referents. To the cognoscenti, though, they can de-fang their comments by translating them into the vague mush of Catholic doctrine, chock-full of good intentions and nobility but unrelated to any logical or practical program. That is the way to understand Pope Francis’s latest apostolic exhortation, as just another in the long line of these duplicitous exercises.

The only exception in this deplorable line of double-talk was provided by John Paul II. John Goodman noted that, in Centesimus Annus, John Paul actually came out and said that capitalism was the most efficient instrument for utilizing resources and effectively responding to needs. It can hardly have been coincidental that John Paul was also the courageous Pope who joined with Ronald Reagan and Margaret Thatcher to topple Communism in the Soviet Union and Eastern Europe. He recognized the role played by capitalism in overcoming Communism and restoring religious freedom to his home country and a substantial chunk of his flock worldwide. He knew that capitalism created prosperity and that material security and leisure time enhance the quality of religious observance.

Summing Up

The Pope’s latest apostolic exhortation earned headlines and fawning press coverage for the Papacy but broke no new ground in theology or public policy. Pope Francis was simply plowing inside the same furrow cultivated by his predecessors for over a century. The Catholic Church’s exhortations can be traced back to the Church doctrine first codified in 1891. With only one exception, this policy has followed a consistently vague and unproductive line since its inception.

The Pope’s confident assertion that free-market economics has no provenance is the outgrowth of over a century’s worth of mistaken history. Accurate revisions in estimates of real wages and a more realistic comparison of life prior to the Industrial Revolution have put the effects on workers and children in proper perspective. Poor workers gained from the Industrial Revolution; children were not exploited but rather benefitted from relatively high wages and favorable working conditions within factories.

The world’s freest countries and economies not only enable their poorest citizens to have much higher real incomes than poor people in the least-free countries, those poorest people also enjoy larger shares of total income than the poorest people in the least-free countries. In short, Pope Francis was wrong about nearly everything he said.