Monday, November 14, 2016

Solidarism and the Just Third Way, III: Free and Open Markets


Last Thursday we looked at the role of the State in solidarism as understood by the “redeemer” of solidarism, Father Heinrich Pesch, S.J.  We discovered that a limited economic role for the social tool of the State is a pillar of both solidarism and the Just Third Way.  Yes, we think Father Pesch could have been a little more explicit, but by and large CESJ and Father Pesch come to the same conclusion: the economic role of the State should be limited as much as possible.

Not quite what we meant. . . .
Why?  Because the dignity and sovereignty of the human person under God is the starting point for both CESJ and Father Pesch.  Forcing people into a condition of dependency, or maintaining them in that condition permanently even with their own consent (circumstances that prevent someone from truly becoming independent can only be judged on a case by case basis), is an offense against human dignity.
Thus, both CESJ and Father Pesch recognize the importance of a limited role for the State — and thus the equally important necessity for free and open markets.
It is key to realize that “free and open market” (as opposed to laissez faire capitalism) does not mean a market in which “anything goes,” but a market to which everyone has free and open access as well as the means to participate. (Michael D. Greaney, Social Justice Betrayed, the Misinterpretation of Catholic Social Teaching.  St. Louis, Missouri:  Catholic Central Union of America, 2001, 14.) Market behavior is regulated not by arbitrary fiat, but by adherence to moral norms (especially keeping agreements/contracts) and by government policing of abuses.
"Socialism? Been there, done that.  I'm free market."
Understood this way, a free market is the best means for determining just wages, just prices, and just profits.  Responding to the question, “can it perhaps be said that, after the failure of Communism, capitalism is the victorious social system, and that capitalism should be the goal of the countries now making efforts to rebuild their economy and society? Is this the model which ought to be proposed to the countries of the Third World which are searching for the path to true economic and civil progress?” Pope John Paul II explained,
If by “capitalism” is meant an economic system which recognizes the fundamental and positive role of business, the market, private property and the resulting responsibility for the means of production, as well as free human creativity in the economic sector, then the answer is certainly in the affirmative, even though it would perhaps be more appropriate to speak of a “business economy”, “market economy” or simply “free economy”. But if by “capitalism” is meant a system in which freedom in the economic sector is not circumscribed within a strong juridical framework which places it at the service of human freedom in its totality, and which sees it as a particular aspect of that freedom, the core of which is ethical and religious, then the reply is certainly negative. (Centesimus Annus, § 42.)
A true level playing field optimizes fair competition.
Clearly, Catholic social teaching, the Just Third Way, and Father Pesch’s solidarism are in agreement on the necessity of free and open markets — as is Saint Thomas Aquinas (which we won’t get into today, though).  As explained by Father Richard E. Mulcahy, S.J.,
Pesch is not opposed to competition in itself; in fact, he wishes to preserve it.  In unhesitating terms he explicitly acknowledges the benefits due to competition: “We owe to free competitive enterprise the great benefits of the last century in the field of knowledge and ‘know-how’; in it dwells a never-failing, animated, creative force; it is able to harness forces for the highest production, always creating new goods for the welfare of the people.” (Heinrich Pesch, S.J., Lehrbuch der Nationalöconomie (Freiburg i. Br., Herder, 1924)4, 220 – 21) (Richard E. Mulcahy, S.J., “Economic Freedom in Pesch” Social Order, April, 1951, 163.)
This, of course, raises the issue of how best to preserve fair and reasonable competition.  Coincidentally, we find it in one of Hilaire Belloc’s most popular works, An Essay on the Restoration of Property (1936).  According to Belloc (and the Just Third Way), access to money and credit determines whether a market is truly free and competition is fair.
"Old Thunder" knew credit is important.
Unfortunately, Father Pesch simply implied that a free market is good, and Belloc didn’t understand money, banking, credit, and finance.  As a result, some of their latter day followers took “the slavery of past savings” for granted, and didn’t realize that the best way to finance widespread capital ownership is with future savings. That is, the future can be financed using private sector contracts (bills of exchange) turned into money by commercial and central banks, repaid and cancelled (fulfilled) with the future profits of the capital being financed.  The capital is “self-liquidating.”
The real problem is collateral.  Most businesses don’t finance growth using savings directly.  Instead, they use the value of the business itself (remember: savings equals investment) to secure a commercial bank loan, using the loan proceeds to finance new capital.  In short, it is not absolutely essential to save first and then invest.  You can invest first, and then save: the “secret” of the “Banking Principle.”
Instead of using existing savings/investment for collateral, the loan itself can be insured.  Thus (in a sense) someone who doesn’t own collateral can “rent” (sort of) collateral in the form of an insurance pool to repay a loan based on future savings in the event of default . . . which is better than hard assets for a bank, because the bank wants its money back, not an asset it would have to turn around and sell to get its money back.
Once every participant in a market has an adequate ownership stake, they all have equal status, and Belloc’s worries about the “large man” who can borrow existing money on better terms than the “small man” evaporate.  The only thing that matters is whether the capital itself is financially feasible, not the current economic status of the borrower.
That is how a market can be truly free and open.
#30#

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