The Pope and an economist walk into the bar - Matt Nolan looks at how economists have reacted to The Pope's Evangelii Gaudium; Dilbert and more

Today's Top 10 is a guest post from Matt Nolan, his second. His first one is here.

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See all previous Top 10s here.

The Pope and an economist walk into the bar

Economics is a descriptive discipline, which focuses on trade-offs that exist given scarcity.

While this is extremely useful, in order to decide what policy is “right”, “fair”, or “just” people need to add subjective judgments about these matters. These subjective choices allow us to choose a trade-off.

Given this, Pope Francis’s speech about the Catholic Church and society – where he spent some time discussing the economy and the distribution of income – caused a bit of a stir among some economists online.

Some were annoyed with his comments, while some were supportive. I found this difference in views fascinating, and thought it might be fun to look through all these different arguments.

Note: This is a complicated debate, which requires many views and democratic input to come up with a conclusion. I am just listing interesting views that I’ve heard, not trying to tell anyone what is right or wrong.

1. The speech
Via the Washington Post comes the speech from the Pope. (Or the full official version from the Vatican.)

Although bits and pieces around social justice, poverty, and inequality are all over the document, there are two main sections touching these issues – pages 44-51, and pages 147-168.  To summarise the key points which come up:

• Violence and inequality (namely income inequality) are on the rise – in part this is attributed to a self-centred view of individualism.

• We fail to consider the poor.

- eg: food is thrown away in one place while people starve in another

- eg: the plight of someone dying from lack of care is less likely to make the news than a small movement in the stock market

• Society/economic mechanisms promote “excessive” consumption.

• Inequality of opportunity – and the plight of those without a say in society matters.

The way I have written these statements they may seem relatively uncontentious. I have done this deliberately – in this way there are clear empirical questions (is it true these factors are rising or falling) and there are clear value judgments (relative to some benchmarks, for some reason, we are consuming too much).

However, the Pope did not state these ideas in such neutral tones. And this led to a number of economists becoming frustrated.

2. Mankiw on the Pope’s rhetoric
We all use rhetoric in some shape or form.  However, Harvard Professor Greg Mankiw felt that the way the Pope framed these issues is inappropriate – and in some ways wrong.  Looking specifically at where the Pope implied that society has become less moral, and stated that a belief in the current economic ‘system’ is naïve, Mankiw replied:

First, throughout history, free-market capitalism has been a great driver of economic growth, and as my colleague Ben Friedman has written, economic growth has been a great driver of a more moral society.

Second, "trickle-down" is not a theory but a pejorative used by those on the left to describe a viewpoint they oppose.  It is equivalent to those on the right referring to the "soak-the-rich" theories of the left.  It is sad to see the pope using a pejorative, rather than encouraging an open-minded discussion of opposing perspectives.

Third, as far as I know, the pope did not address the tax-exempt status of the church. I would be eager to hear his views on that issue. Maybe he thinks the tax benefits the church receives do some good when they trickle down.

3. The Economist’s economics blog thinks Mankiw missed the point
While Mankiw was frustrated with the Pope’s rhetoric, Ryan Avert at the Economist was equally annoyed with Mankiw’s.

Economic growth is indeed a wonderful thing. Enormous increases in real output per person over the past two centuries have allowed humanity to escape the grinding poverty that was the normal human condition for thousands of years.

But the Pope does not appear to be attacking growth. Rather, he is attacking the view that "economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world".  

Mankiw may feel that "trickle-down" ideas have been wronged, but he certainly seems to be displaying precisely the viewpoint that the Pope is warning about: don't worry about the outcomes of growth (and for heaven's sake don't do anything about them), because growth is pretty rad.

4. While the Economist’s religion and policy blog thinks the Pope missed the point
The Economist’s religion and policy blog fears that, when it comes to discussing global economics, the Pope is relying on a strawman version of what is going on.

The whole point about a properly functioning market is that no specific outcome is inevitable, and no winners are pre-determined. Markets should create possibilities, within which moral choices can be made, not iron certainties. Nor do "those wielding economic power" enjoy any permanency of tenure, if the market is operating well. They are perpetually challenged to prove their competence.

And the author fears that this type of broad-based attack simply leads to poorly thought out solutions.

Yes, sacralising any system is bad, precisely because it can render meaningless the values which religious and ethical systems proclaim. But excessively demonising a system can be pretty bad too, especially if it tempts you to sacralise an even worse alternative.

5. Scott Sumner just doesn’t think the Pope is making consistent statements
Scott Sumner, famous among economics blogs for his strong push for central banks to target nominal GDP, also weighed in.  He shares the concerns of Mankiw and the Economist’s religion and policy blog about whether the description was well thought out.

I could go on and on, as every single paragraph is full of disturbing claims and assertions.  But I’ve gone on long enough. So let me instead recommend that you read the first 50 pages or so of Deirdre McCloskey’s “Bourgeois Virtues.” McCloskey is just as opposed to those who “deify” the market as the Pope.  But McCloskey also understands that free market economic regimes do lead to greater “justice.”  The Pope does not.  Either he supports a statist economic system, or (like McCloskey) he supports free markets plus social insurance, in which case his entire economic statement is a complete mess.

6. A Catholic economist gives the statements some context
A given set of terms and statements about the world can mean very different things, depending on the way you read them.  As mentioned, a number of economists were uncomfortable with the ‘rhetoric’ used by the Pope.  However, he is the head of the Catholic Church – you would expect the things he says to be consistent with the beliefs of that religion, not the beliefs of economists as a group!

In that way, I found this post by Carola Binder fascinating – here is someone who understands economics very well, but also knows about Catholicism.  She essentially points out that the message of the Church has been little changed through time – contrary to the reporting.  Discussing a 1992 document (the Catechism) she then states:

These passages from the Catechism are based on a long history of Catholic teaching on economic justice, including Encyclicals from the Popes. Quadragesimo Anno, for example, written by Pope Pius XI in 1931, responded to economic conditions and inequality following the Great Depression. More recently, Pope Benedict in Caritas in Veritate stated that "Profit is useful if it serves as a means towards an end that provides a sense both of how to produce it and how to make good use of it. Once profit becomes the exclusive goal, if it is produced by improper means and without the common good as its ultimate end, it risks destroying wealth and creating poverty."

7. Mario Rizzo asks, what about the facts?
Mario Rizzo accurately points out
that social issues are complicated, far more complicated than the description given by the Pope appears to point out.  Given that, a proper scientific treatment of these issues – in order to determine what trade-offs exist, and even what is going on, is required:

But where social policy is concerned, fundamentally scientific issues are crucially involved and the Church has no greater teaching authority than the rest of us. To confuse matters by combining superficial scientific analysis with strictly moral teaching does neither the Church nor the world much good.

This begs the question, what does the evidence suggest about the two “facts” regarding violence and income inequality that the Pope alluded to?

8. Has global inequality really been rising?
When talking about the global economy and inequality, we must be considering measures of global income inequality.  So has this really been worsening as the Pope has indicated?  Well no.

The author points out that if we exclude Asia overall global income inequality has been falling over the past decade, but only after a sizable increase in the prior two decades.  If we include Asia, income inequality is falling sharply, and is well down on its peaks in the 1970s!

Furthermore this research shows that the sharp drop in the inequality “between” countries that has occurred has been partially cancelled out by greater inequality “within” countries. 

Recent analysis suggests that global income inequality has been falling at the same time as inequality within individual nations has risen – this is because poorer nations are now “catching up”.

9. Broadening opportunity
In this way, economists from JP Morgan made an interesting point about equality of opportunity – after all if inequality between countries is falling, but it is rising within countries, doesn’t this imply that the poorest in the world are gaining income and opportunities?

The widening distribution of income in the US and other developed economies is attracting considerable attention. It would be unsettling, and destabilising, if the global “economic pie” were static and one group were benefiting at the expense of others.

Instead, what likely is driving the distribution of income is the wealth of opportunity that is associated with an expanding global “economic pie” and that because it is occurring at an eye-popping pace has uneven benefits. The global community has much to be thankful for and modern market-oriented economies deserve considerable credit for the battle against global poverty.

10. What about violence?
Back in 2011, Harvard psychologist Steven Pinker had a crack at asking what has been happening to violence globally. He found that violence has been in decline. The Huffington post has a nice piece about his research.

Pinker and other experts say the reality is not painted in bloody anecdotes, but demonstrated in the black and white of spreadsheets and historical documents. They tell a story of a world moving away from violence.

I will conclude with my reading of all of this.

There appears to be three broad things I’m willing to say about the speech, without saying I agree or disagree with anything, or making too many assumptions.

1) Some of the Pope’s facts about how the world has changed were false – he admits that in many ways the world has improved, however in many of the ways he believes it has gotten worse it has actually improved !

2) However, relative to the beliefs of the Catholic Church, poverty, the inequality of wealth, the focus on consumption, and the way we treat each other is still off.  The Pope in this way is merely saying he views a world with less material wealth, but a more egalitarian nature, preferable – given what he believes the trade-off is.

3) To answer these questions, we need to think more deeply about these questions, and ask society what it believes is just or right. We need an idea of the trade-offs, and hopefully social scientists will tell us when there are costs and benefits we are inadvertently ignoring.

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* Matt Nolan is an economist at Infometrics, and an author at the blog TVHE. He specialises in looking at the household sector, and household economic data, but will offer an opinion on pretty much anything related to business and the social sciences.

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22 Comments

I also saw an article (in the wake of various American commentators going "the Pope's a Marxist) linking the Pope's views with the work of Polanyi.
http://www.theatlantic.com/business/archive/2013/11/pope-franciss-theory...
I think #2's comments about the church's tax exempt status are a bit of a straw man arguement, given the Pope has expressly been calling on the Catholic church becoming a church "of the poor for the poor". But then, I don't think all the bishops agree with this philosophy (and news like the Pope sneaking out at night dressed as a priest to minister to the homeless). There may be a bit of infighting in the Catholic church on this over the next while.

Polanyi is a very moderate and reasoned advocate of political economy. Old school like the great thinkers before economics was turned into a pseudo science with faulty mathematics.
 
Even Adam Smith thought capitalism would provide a great increase in prosperity for a limited time - he thought 200 years - before needing to level off into a "static state" because there would not be enough natural resources to maintain perpetual growth and the effects of environmental destruction. Funny how libertarian free marketers reduce him to just one metaphor - "the invisible hand"
Likewise John Stuart Mill. Spent his later life trying to ameliorate his early libertarian writings because life taught him that often the dark side of human nature and self interest would trump  a nice theory.

Without being cynical towards Christians , I am one myself , one cannot but smile wryly about the Popes remarks.
 
He is the CEO of the worlds largest and most efficient Multinational Corporation.

  • Its Corporate structure should be a case study for MBA students 
  • It has a Branch of the business in every town in almost every country 
  • It owns all the  branches / outlets / properties ( churches) that it occupies
  • All Mortgage free
  • In addition it has a huge worldwide property investment portfolio  . 
  • It pays absolutley no tax whatsoever
  • It pays no  rates or land taxes on the branches
  • It has the flattest Corporate structure possible , just 3 tiers the  priests and Nuns  (workers) , the Bishops ( General Management level) and the Cardinals ( the Board of Directors) . No other multinational Corporation has such a flat uncomplicated structure
  • Staff cannot get married , so there are no issues around having to pay more for wives and kids , is no paid maternity leave issues , etc
  • It has massive investments , including the worlds biggest art collection
  • It has a banking licence.
  • Its exempt from being Audited
  • Its able to legally not disclose its income or wealth
  • Its annual income  , while undisclosed,  is rumoured  to be bigger than the GDP of most of the worlds countries.

You missed the most important differentiating feature to corporations which is the focus on charity work, support for those in need and support for people and communities. That is a completely different focus to corporations whose focus is to make as much money as possible for themselves.

You forget the bit where corporations often sponsor sports and activities in the community, and where church leaders are in it to make a buck too (Brian Tamaki anyone?). It's not nearly as black and white as you paint it.

The tiny proportion of capital corporations use to sponsor community events (as advertising to make more money) is not in the same league as the church that makes it a primary focus.  An occasional corrupt corporation or pastor does not change that picture, it is exactly that black and white.  

The Pope is just talking his religion...which is waht he is suppose to do.
 
In highlighting the Humanity of Humans, which is the way we should behave instead of the inhumanity of humans which is the way we are behaving right now....Is he wrong ??
 
If trickle down economics is a good thing, why is the wealth gap increasing instead of decreasing ?? Does trickle down means the "crumbs that trickle down" or benefit by the most of the opportunities available?? Or are are we saying that a wide wealth gap is actually a good thing and should be the ultimate objective of economic policies ??
 
Mankiw is just trying to justify the current "neo-liberal" economic thinking, despite all the flaws we have experience and is experiencing.....using the tax exempt status of the church as a foil is just childish. That's the best a so called respected economist can do gives all economist a bad name

Kin, what is the source for your statement that the wealth gap is increasing?  It seems to contradict the material above about how global income inequality is reducing as poorer countries catch up.
 
 

Maybe he is referring to the recent disparity in capital's share of GDP versus that of labour. An example?

Cherry picking, in-equality within countries is increasing....
regards

1. Please check CIA website.
 
2. Wealth inequality is getting wider by countries especially between developed Economies and Underdeveloped economies.
 
3. wealth inequality within each country is also getting wider as measured by Gini index.
 
Just google and it's all there ....

The wealth gap can't grow indefinately - there is a point where consumer's can't afford the goods and services of the business owners and these businesses either stagnate or collapse. In the past deflation would have taken care of it but we have minimum wages etc. that prevent it from happening.

Even if we do manage to create a society of equal opportunities that does not remove our responsibility to those suffering, disabled or poor. 

Some will win the lottery of genetics, health, circumstances, good parents/role models, town/city/country of birth and some will lose.  These are not things we should give ourselves credit for and feel justifies us having more while others have not enough.

The whole "I worked hard for it so don't touch my money" mentality completely ignores the huge luck and lottery aspect of life which is far more significant than what we achieve on our own will.

Fascinating - clever Pope - the office has become relevant again. Gotta be a good thing. 

Did I miss his change re: birth control?
regards

#1 I see the pope points at some issues yet misses the biggest, over-population, but then that would clash with his dogma/vested interests.
fail
regards

The Pope is well aware we're overpopulated. He's smart, and (unlike economists who have had much opportunity hereabouts) he doesn't have to indulge in denial, and he can obviously capable of walking forwards without looking backwards.
 
The bigger problem about the 'wealth', though, is the lack of planet left to underwrite it. The Pope gets that. There is indeed a lot that is parallel between religion and economics - belief, denial, addiction and fear - were the quotation marks round the 'excessive' yours, Matt?
 
I find it interesting that almost no macro political leaders will acknowledge the limits to growth (or the ramifications of striving in that direction) and almost no business leaders either (Branson/planb, Huffington, Ellen Macarthur's trust and who else?). Interesting that popey was the first macro leader to raise the overdue issue.

I vote the cartoon between #3 and #4 as the new masthead for interest.co.nz

Yes, it would be a good fit!

One of the best consistently themed 10's I've read.  Congrats, Matt.
 
A riff you may care to explore somewheres, now that His Popeness has brought it front and centre, is the interaction between value systems and economic theory.
 
Many of the more history-aware readers of the early capitalists (Smith, Ricardo etc) have pointed to the societal value systems that originally surrounded the practice of capitalism itself.  As they were to an amazing extent Scots (a useful text here is Herman:  How the Scots invented the Modern World ) this world-view incorporated Calvinism and the rather severe religious affiliations that arose out of this. 
 
Those Christian ethics informed business for a good chunk of the first century of the Industrial Revolution, a point made by such recent commentators as P J O'Rourke.  Smith's earlier work, for example, was 'The Theory of Moral Sentiments'.  Along with the 'Wealth of Nations' and a never-published third tome, Smith had intended the three to be read as a triptych of sermons.  Yes, sermons.  That's why the damned books are so wordy.
 
That intimate association between a stern but ultimately sympathetic value system, and the practice of industry and trade, was somewhat broken by the late 19th century (vide Engels and Marx), and finished off comprehensively by the mid-20th, as competing religions which were essentially (as David P Goldman argues) tribal/nationalistic, brought different value systems to great swathes of the globe. 
 
We are still reeling from the turbulence this competition generated, and the virtual disappearance of organised religion and its value systems, from any association with trade and commerce, has led to two observable aspects of the zeitgeist:
 
1 - A Chestertonian plethora of quasi-religions (from AGW to enviromentalism in general, not to say Marixism, Leninism, Pan-Africanism, Third caliphate Pan-Muslimism) which all demand faith, have ways of dealing to apostates, and none of which have anything like the spread or ritual attractiveness of the old ones.
2 - a value-free trade and commerce, which tends to an explicit disavowal of any larger pretensions:  societal good included. 
 
The first thing is, given that we have dug ourselves this hole, gotten into it, and burnt the ladder, how do we get out?  And the second thing is, do we have to hit some sort of wall (sorry about the mixed metaphor, we are down a hole, must have walls down there too) to wake us up enough to build a new ladder, and climb out?
 
And just being nice to Gaia, alone,  won't cut it.  That's another faith-based initiative.  But just like the new Pope may have been trying to warn us, we may have to be much, much nicer to each other first. 
 
Or, possibly, much, much nastier.  Because a whole lotta people will want to jump on that ladder to a Better Life, however defined.  And the laws of Ladder Physics still apply.

Interesting comments Waymad.
There is some interesting research now being done on the wealth of a nation being linked to historic value systems - which still have an ongoing residual effect.
Yes, countries dominated by Catholicism seem to not thrive well economically - but then would they have been worse without?
The rise of the USA economically is linked to historic strong protestantism and a pervasive set of underlying values. Perhaps no more. Same with the UK.
Of course this is heresy in our Universities and national discussion of economics  - it's all sterile, divorced from people & values. But which are the countries that most immigrants wish to head for?   
E.g. India, Africa, etc  - there is no shortage of food, resources & wealth overall. The problem is value systems that don't work economically, project management, castes, social limitations, let alone socially.
We are now in a post-Christian era, where the emphasis is on the wealthy, businesses in luxury products are doing very very well.  Economic distribution to the poor is blocked by faulty value systems.