This afternoon, Pope Francis will touch down in New York City. As the pontiff heads for the capital of capitalism, he has been getting attention for his exhortations against the modern market economy. But the pope isn’t so much opposed to free-market capitalism as he is confused about what exactly it is. And that’s the West’s fault — for violating free-market capitalism in letter and in spirit.
So what is free-market capitalism? The classic definition is this: Individuals and companies compete with one another to provide goods and services of the best possible quality at the best possible price. Potential customers use those prices to make decisions: If something costs too much, whether it’s a sweater or a house, they won’t buy it; if enough people refrain from buying it, often the price will come down. But free-market capitalism is not anarchy. The government plays a role in establishing the rule of law and making sure that those who participate in the markets follow it.
Now, looking at the pope’s complaints, one sees that they’re not really about free-market capitalism at all.
Take, for example, his comments about consumerism. “The culture of consumerism . . . ,” he wrote in May, in his encyclical Laudato Si’, “prioritizes short-term gain and private interest. . . . The market tends to promote extreme consumerism in an effort to sell its products, [and] people can easily get caught up in a whirlwind of needless buying and spending.” The pope warned that “A constant flood of new consumer goods can baffle the heart and prevent us from cherishing each thing and each moment.”
What we desire one day, we can’t give away the next: Charity shops are overwhelmed by yesterday’s clothes. But we still owe money on those past purchases: $3.3 trillion in consumer debt, not including mortgages, or more than $10,000 for every American man, woman, and child.
But consumerism isn’t the fault of free-market capitalism. It is largely the result of decisions by Western governments to favor the financial industry above all other industries. Since the 1980s, America has made it clear that it will protect large financial institutions from bankruptcy. The rest of the West has followed.
The West got addicted to finance because its citizens and leaders won’t admit to themselves that they are living beyond their means — and have been doing so ever since the West started losing manufacturing dominance to China and the rest of the “emerging” world three decades ago. Rather than confront the challenge, we have borrowed our way into oblivion.
“Financial speculation cannot enjoy absolute autonomy,” the pope said in an interview in January. Well, it doesn’t. It enjoys the support of Western governments. Since American bailouts of financial institutions started in the Eighties, the financial industry has exploded in size. Its borrowing, adjusted for inflation, has quintupled in that time. It has lent much of that money right back to Americans so that they could buy houses, cars, educations, and, well, lots of stuff.
For three decades, the government, with the apparent consent of the people, has thwarted free markets by protecting finance. Free-market capitalism could have helped fix this problem. To be sure, if it had done so, we would have smaller houses, smaller cars, and less consumer spending — but we would also have less debt.
The pope is right to say, in Laudato Si’, that the West’s decisions since the 2008 financial crisis have made inequality worse.
The pope is right, too, to say, in Laudato Si’, that the West’s decisions since the 2008 financial crisis have made inequality worse. “Saving banks at any cost” and “making the public pay the price . . . only reaffirms the absolute power of a financial system, a power which has no future and will only give rise to new crises after a slow [and] costly . . . recovery,” he wrote.
But he’s not speaking out here against free-market capitalism. Any true free-market capitalist would agree with him.
Since 2008, “the wrong people got the capital,” John Burbank, a top hedge-fund manager, noted this week. When Europe forces Greece into years of depression so that banks that lent unwisely to Greece can minimize their losses, that is not free-market capitalism. It is the opposite. Similarly, when China builds entire cities that it doesn’t need in order to avoid an economic crash, that, too, is the opposite of free-market capitalism.
How about the environment, another of the pope’s causes? Well, when the British government guarantees the debt of a state-backed Chinese company to build a nuclear-power plant in the U.K. to keep power prices low, as it did this week, that isn’t free-market capitalism either. It is the perversion of a market price signal that the public needs to absorb: Higher prices for power mean less energy consumption, a good thing for the planet.
As humans are imperfect in most things, we are imperfect in governing free markets so that they can help to govern us. Free-market capitalists should thank the pope for not shrinking from pointing out real problems in the global economy.
But if the pope seems unable to identify the actual cause of these problems, we must do so. Rather than knocking free-market capitalism, we should take aim at those forces that give it a bad name — that is, government activity that thwarts free markets and encourages poor behavior.
— Nicole Gelinas, a Chartered Financial Analyst (CFA) charterholder, is a senior fellow at the Manhattan Institute. Twitter: @nicolegelinas