CNA Columns: Indispensable Economics

The epistemological problems in modern and recent politics and economics

Wed, 03 Oct 2012 00:00:00 -0500

By Dr. William Luckey

There are many reasons for the general population, and the politicians who cater to their wishes, not to accept what the scholars tell it to be true in economics and politics.

There is ignorance, like the case of the woman who said that Obama was going to pay her rent, electric bill, etc. When asked where he was going to get the money, she replied, “From his stash.” There is the classic problem that you can never successfully oppose a principle to an interest. Even if I know what is right, it is very hard to think of the common good if that will stop my check from coming in. But what I would like to discuss in this entry is the problem of knowledge, the validity of it, and the method by which we attain it; and the problem of knowledge in our society.

This subject is called epistemology, from the Greek word, epist?m?, meaning true knowledge as opposed to opinion. Opinion is a statement made with fear that the opposite may be true. Note that the fear does not have to reside in the know-it-all making the statement, but in the hearers, who would not bet money on the truth of the statement. Seeking the truth is a process designed to replace opinion with knowledge. In order to achieve knowledge one must be assured that the human being can accurately know the world outside of itself. This not only applies to physical things, but things such as the order contained within things on which the senses focus. Take the example of the little child who is given a new pink rubber ball. Such balls were common when I was a kid. Unless he has never seen one before, the child knows that that is a ball, that it is rubber and that it bounces. The child immediately begins to bounce the ball until his mother tells him “Not in the house, dear.” The child then goes outside to continue to bounce it. That child did not spend any serious time thinking about the ball; he got it in his hand, bounced it, his expectations were correct.
The great political philosopher, Leo Strauss, calls the fact that that we can accurately know what we sense pre-philosophical common sense. While there are cases when your senses can be deceived, those are out of the ordinary. I remember smelling what I thought was the smell of rotten eggs coming out of the chemistry lab, when it was really burning sulfur. Once I knew of the place from which the smell originated, and since I know there is no reason for eggs to be in the chemistry lab, I immediately drew the correct conclusion. I replaced opinion about the smell with knowledge about the smell. We could not live without this ability. Also, this does not apply to purely sensible objects, but to more and more complex things. Think of the name Mary. It may remind you of our Blessed Mother, or a nice relative with that name. Suppose I add the word “typhoid” to Mary, so that it becomes “Typhoid Mary.” Typhoid Mary was the nickname of a woman in New York, who, beginning in 1901, contracted Typhoid fever as a carrier without symptoms and infected numerous people because she was a cook and unknowingly infected her customers. It was very difficult to find this carrier, so she became a household name.

Notice how your mind changed its orientation when the word “typhoid” was added to “Mary.” You needed no prompting from anybody to go from a joyful attitude toward “Mary” to a fearful attitude to “Typhoid Mary.” How did this happen? Typhoid Mary was a real person of which we received an intelligible species impressed upon our mind, such that “Typhoid Mary” became in some sense a part of you. The concept, coming from the reality and being impressed upon the intellect, can be analyzed by the intellect, and conclusions can be drawn. Hence flows the negative attitude. This is how human beings exist in the world. Their senses pick up something intelligible, the species impresses itself on the mind, the intellect analyzes it and logical conclusions are draw, frequently, but not always, followed by action.
But now a days, the matter has become complicated. Beginning with the thought of René Descartes (1596-1650), who was a Catholic and a canon and civil lawyer, there arose the idea that we really cannot know what is outside our own head. For Descartes, the disagreements among philosophers were proof that we could not know reality outside of our mind, but we could only know our own ideas about reality. Thus he thought geometry was the true philosophy—because all of it was a mental construct. John Locke picked up on this in his epistemology by holding that our knowledge is only conversant regarding our own ideas, not external reality. Bishop Berkeley, who was a devout Anglican, felt that original creation could easily have been only mind and ideas, not real things. He held that anything that was not perceived, did not exist, meaning that we only know what things are perceived by our own senses, and known by our own mind only. Any thinking not linked to these subjective things of sensing and perceiving have no existence. The things we think exist are, if you will, products of our senses and our mind, and we cannot posit their objective existence. Berkeley wrote: “their esse (existence) is percepti (perceptible), nor is it possible they should have any existence outside of the minds or thinking things that perceive them.”

David Hume (1711-1776) continues this line of thought by holding that man has no distinct intellectual capacity for abstracting the intelligible from what his senses perceive. The things that the senses perceive are faint copies of the original, hence any intelligibility is a figment of the perceiver’s mind. Immanuel Kant took Hume seriously, and held that there was the world as it is and the world as we know it, and they were not the same. What humans do, supposed Kant, is to impose categories on perceptions as though the perceptions were of real things. The categories are subjective. The person projects these categories or ideas outward on to the perceptions.

With all of this as background, we see in today’s society that these ideas are rampant, not just in intellectual circles, but in the very populace itself.

We have all had conversations where our interlocutors have said, “Well, that’s true for you; not for me.” (As I recall that there is a line in West Side Story that says that very thing.) But today this subjective approach to reality even encompasses public policy. People in public life say things that are factually not true. More to the point, politicians, and even some economists, say things that the study of economics for centuries show are not true, yet they continue to mouth the same ideas. Even the economic practices of government have shown that they are not true, yet the persons uttering these same ideas continue to do so. Let’s take the economic stimuli. As a freshman in college, I could have told you that these injections of government funds (taxes) will not stimulate the economy. At best, they will lead to a temporary boom, which will end in a bust. At worst, like today, it will have no effect. The only outcome is inflation. Ben Bernanke, former economics professor at Princeton, should know better, but he now says he will continue injecting money into the economy by the billions every month to stimulate growth, despite the fact that economic theory tells us otherwise and practice over the past few years has verified the theory, as it did, by the way, in the 1970s. Nevertheless, Bernanke and politicians, the media and many citizens think it will work. Why? Because the only reality is in their minds. If they think that it will “jump-start” the economy (as if the economy was a motorcycle) it will.

All of this is a type of Gnostic thinking. Gnosticism is a kind of infused, private knowledge given from “above” that only the elite have, such Obama, Bernanke and Geithner. Their followers are either in the Gnostic elite’s second tier, slavishly following the “enlightened,” or in the group which hangs on because of what they can gain from the elites being in power.

How do we remedy this situation? How do we change the minds of those who think that what they think is true, despite the objective truth? First we must ask the cause of the problem. I believe it falls directly on the government educational system and on the colleges and universities. Where would people pick up such outrageous epistemology except in the college classroom, taught by professors who cling to the Cartesian-Kantian fad? They inject the idea that we cannot know reality directly into the minds of students, who then go out and teach in the government schools. The poor teachers may never have heard of another epistemology. Oddly enough on the other hand, those who major in business administration do not pick up these false philosophies because, if they thought like this, their business would fail and they might even wind up in jail. They cannot say that “they believe” that the company has a certain amount of funds, if the funds are not really there; but a liberal arts graduate can say that the stimulus will work, even though there is not a scintilla of evidence to back that up. Hence, prior to reforming the society, we have to reform education. When hiring teachers and professors, it is not where their degrees come from that matters, it is what they teach. If this is not done, the society will continue its downward slide.

The HHS mandate and economics

Thu, 15 Mar 2012 00:00:00 -0500

By Dr. William Luckey

Anyone who is living has heard of the dispute between the Obama administration and the Catholic Church regarding the Obamacare’s ruling that religious organizations, such as schools and hospitals, must provide contraceptive services, including sterilization and abortifacient pills.

Due to the tremendous outcry, the administration rescinded part of the mandate and said that the religious organizations did not have to provide the services, but their insurers did, and for free, womens’ “health care” being considered a right under the Obamacare plan.

The major problem here is that the Catholic people and institutions will be paying for these “health” services, to which Catholics must have nothing to do, and many of the insurers are the Catholic organizations themselves. For example, in my diocese, the diocese is the insurer, and the Catholic Charities is its insurer.

Why would a politician who wants to be re-elected in November, go charging into a large crowd of Christians, Jews and religious liberty-loving Americans in general with only one horse and lance? Is he politically suicidal? Does he not know that he will be overwhelmed?

There are standard answers to this question such as, Obama is appealing to his base. Even if he loses the fight, no one can say that he did not try to take on the evil, out-of-date, Catholic Church. This will shore up his base, just as the stupid decision to stop the Keystone pipeline will solidify his radical environmental supporters. All this might be true. But an economist sees things from a little more complex view.

I have in the past explained what public choice economics is (see, my article, “The Economics of Politics”). Let us apply Public Choice to the HHS mandate. What explains this action of the President and his Catholic henchwoman, Kathleen Sibelius, which seems to be political suicide.

Remember, all people act in their own interest. That is not generally a bad thing, especially in the private forum because 99% of what we do for ourselves helps the common good. Self-interest is not necessarily selfishness. But in public life it is another story. When a politician acts it also for his own interest in public life, this interest usually contradicts the common good. Politicians protest that they are “public servants” and suddenly receive a halo when working for the government that they did not have in private life. Does that make sense to you? When politicians act (generally speaking) they act because they want something. Threatening to regulate an industry brings forth that something. Threatening to place expensive regulations on, say, the hat industry, brings about a flurry of meetings among the hat industry executives about how to stop the regulations.

The scenario usually ends up where the industry raises money and offers it to the politician’s election campaign funds or PACS, getting a promise to back down on the regulations. It also works in the other direction. A government cartel can be threatened by a politician to have the regulations which protect the cartel from competition removed. This forces the cartel to do the same thing—cough up money for the politician’s war chest to keep the regulations in place. This is well established economic doctrine.

Now let us take the case at bar. We all know that Obama has a Catholic strategy. His idea is to rope in Catholics to his team trying to show that despite the fact that he is a fanatical supporter of birth control and abortion, that there are many prominent Catholics that follow him: Professor Kmiec, Kathleen Sebelius, Notre Dame, Joe Biden, etc. But his problem is that the American Bishops are beginning to develop a backbone and are a bit more outspoken regarding the incompatibility of Catholicism with Obamaism.

Since the original strategy meant to gain Catholic support is floundering, a new strategy to release the Catholic pressure against him is necessary. He now threatens to “regulate” Catholic institutions by making them pay for birth control, sterilization and abortifaciants. The Church has properly dug in its heels about the regulations; there are lawsuits pending, especially about the First Amendment rights of religions; and there even a lot of good videos about the problem from the Catholic viewpoint.

If the Church wins in court, the problem is solved. If it doesn’t, what is the next step: “Mr. President, what will it take for this to go away?” Will the Church be willing to pay the enormous fines? If Obama does not get re-elected in the Fall, again, problem solved, since he has put off implementation of the mandate for a year. If he gets re-elected, then what? According to Public Choice, someone will have to come up with some benefit to him to make him relent.

'That's not fair!'

Thu, 09 Feb 2012 00:00:00 -0500

By Dr. William Luckey

The above expression brings me back to my childhood on the streets of New York City where we were always playing some kind of ball game.

So many times during a stickball game in the street there would be a great hitter, like my friend Dennis, who would cream the ball every time he got up to bat. And usually after a few runs, one person on the other team would shout out, “That’s not fair!” In fact, it always seemed to be the same guy. He could not stand it that there was someone way better than he was, if that guy was on the other team. A few times this complainer would go off in a snit into his house until his temper would abate and he would come out and apologize for his behavior in the face of yet another enemy home run.

In this case, my complaining friend was angry that someone was better, not only than he was, but even better than the rest of us—and we were no slouches. But Dennis was headed to the pros one day, which he almost made as a pitcher when he permanently injured his arm and that was the end of that.

What is fairness? Interestingly, it is not a philosophical concept. Neither the Dictionary of the History of Ideas, nor the Encyclopedia of Philosophy has an entry for the word or any variation of it. The on-line dictionary, on the other hand, hits the nail on the head: “Gained or earned without cheating or stealing … free from favoritism or self-interest or bias or deception … ” But is this what my companion meant by his protests—that we have violated the rules; that we cheated or were out to get him? Of course not. But there is a serious problem in our society.

More and more we hear the word “fair” and “fairness” in public discourse about the economy. There are calls by politicians and other interested parties that we need more fairness. The implication is clearly that if some people are doing better than others, financially, educationally, or skill-wise, that there is something “unfair” about it; that these people have gotten where they are by “cheating or stealing” or with “bias or deception.”

Take the example of Robert’s Rules of Order or the rules of criminal or civil procedure of a state. These rules are meant to produce a fair process, not to affect a “fair” outcome. The rules protect both sides of an argument to make sure they get a “fair” hearing. If the chairman of the meeting or in court the judge, who is the trier of law (the jury is the trier of fact), deviates from the rules, someone can object. But in a meeting when a vote is taken after the rules are followed, one sides loses; in a court once the jury decides, the rules being properly enforced by the court, the outcome is final. If you are convicted of bank robbery by said jury, that’s fair, because the rules are followed. You cannot argue that it is not fair that you have to spend 10 years in jail, while everybody else walks around free.

Now if your side loses and there is a reason of substance, not procedure, why you are upset, you might claim that the outcome was not just, even though the procedures were fair. Suppose the members of the organization at the meeting merely did not listen to your arguments, or the jury ignored evidence in your favor, then you can argue on substantive grounds that justice was lacking. In business, suppose I contract to work for a company for a gross amount of $10 per hour, and when I get paid, I get only $ 8 per hour gross. This might very well be unjust, but assuming it is not a mistake. If it is a mistake, it is merely unfair. If it is intentional, it is unjust.

So why the constant talk about fairness? Some have less resources than others. This is a fact of life, but there are reasons for it. If I have a skill that is in demand and you have no skills or a skill that no one demands, it is just that I get more income than you. A brain surgeon makes way more than I do, even though I have much more education than almost all brain surgeons.

Why? If you have a brain tumor, who would you go to? Me? Even I would not go to me.

Even though the world needs good political philosophers, economists and theologians, the need is not as acute as the need for surgeons. Hence, surgeons are in demand more that political philosophers, economists and theologians. Hence, the surgeons make more money.

But so many people resent this.

So many are supporters of politicians who will take the surgeons’ income away and give it to the political philosophers, economists and theologians, or, more likely, give it to the skill-less. But the surgeons, and for that matter, the political philosophers, economists and theologians are more in demand by society than the skill-less.

It seems that the root cause of all this fairness “jibba-jabba” (to quote Mr. T.) is egalitarianism; or the desire for equal outcomes, enforced, of course, by the government. And where does this idea come from? There a couple of sources; intellectual, laziness, greed and envy.

Here I want to address the laziness, greed and envy aspects. I want to do this because there are personal flaws surfacing and now widespread in many American people today. Laziness produces a desire for a reward despite the fact that one does not do anything to earn the reward.

Greed is the desire lurking in all of us for more and more. Greed does not apply to the rich only, contrary to popular opinion. Since greed is a capital sin, as is laziness and it applies to all, if we let that cat out of the bag.

Envy may be the worst of the three. In envy we are sad and jealous at the success of another and we begin to go from mere envy to a violation of the 10th Commandment—desiring our neighbor’s goods, which then leads to violation of the 7th Commandment—Thou shalt not steal.

But most people do not want to risk walking over to their neighbor’s house and kicking the family out of their mansion. This might bring dire consequences, like the possibility that the owner might kill the perpetrator, or that the perpetrator will be arrested and spend time in prison. What is the next best thing?

Get the government to do it!

Almost all government programs are wealth transfers in order to buy votes. The lower classes, who are more numerous than the more productive classes, use the votes or threat of votes to get politicians to take money from the latter and give it to the former.

This now has become legalized theft. Those who voted for it will not go to jail and the politicians will not go to jail. The productive classes are the only losers here because they just do not have the numbers. Today a report came out that the average person on governmental assistance gets more net money than the average net income of the whole USA.

Gee, I wonder why?

Next, I want to write an article about the HHS mandate, but then I will return to the root causes of this problem.

Some economic laws of spirituality

Tue, 25 Oct 2011 00:00:00 -0500

By Dr. William Luckey

I cannot take any credit for this, and I am sorry that I did not think of it first. The other day I was reading a book on spirituality and the author brought up an interesting point. She said that Christianity conformed to economic laws such as Gresham’s law. This law says, in its short form, that bad money drives out good. We can understand this by looking at an economic system that has two types of currency in circulation, both legal tender. One is a precious metal, such as gold, and the other, paper money, supposedly representing gold. The two currencies are interchangeable, meaning that one can turn in paper certificates for the real thing, or for, say, convenience, turn in the gold for certificates representing the gold. But when governments start printing more certificates than there is gold, like a counterfeiter, the value of those certificates begins to decline. People then notice that the paper certificate that says 10 oz. of gold buys less than the 10 oz. of actual gold. Noticing this, people obtain as much gold as they can and hoard it, and use the paper certificates. Gold, because it is now more valuable, becomes an inflation hedge and people keep it against the time when the paper currency becomes valueless, then they can bring out their real gold and still be able to survive.

The author to whom I referred said that there is a Gresham’s law of Christianity: non-challenging Christianity drives out challenging Christianity. We could say that non-challenging Christianity is “watered-down” Christianity, just like the paper currency in the above example is “watered-down” currency. In this case, however, the reason for the driving out of the challenging Christianity is different than the reason for the driving out of the gold in favor of the paper money. That reason is that people tend, because of the scars of original sin, to gravitate to the easy, the short cut, to that which confirms their own private preferences. A friend of mine once characterized the typical sermon of the 1970s in New York City as, “It’s go to be good to be good.” This is an example of the “watered-down” religion that crept into so many parishes and dioceses since Vatican II was hijacked by Modernist rebels. Priests no longer gave sermons on serious moral questions such as abortion or, God forbid, the evils of artificial birth control, in favor of sermons having very little content; sermons that made you feel good, rather than telling you what you must actually do. This kind of Christianity spread like wildfire, because now people could make up their own minds about moral questions, simply because there was no priestly guidance.

The catechetical instruction in the 1970s was horrible as well. When my kids began to become school age, we were directed to a private Catholic school run by nuns because people told us that it was more orthodox than the local parish school. Well that was not true at all, and after my wife had a talk with the principal, and we both examined the catechetical materials my children were to have in their classes, we decided to homeschool. So who were left to go to the school? People who were not at all distressed by the no-content doctrine that was to be taught, and paid a lot of money for it. The rest of us went into “hiding” in a sense.

One economic law that my help to understand this phenomenon is the economic “law of demand.” This very simple law, which is one of the first things one learns in an introductory economics class, is that when price goes up, people demand less of a product or service; when the price declines, they want more. The extent of the change of quantity demanded to the change of price is called by the unfortunate term of “elasticity.” Simply stated, if people are really committed to something, like heroin, a rise in price will make hardly a difference in demand. If people are not really committed, and there are some substitutes available, such as tea for coffee, the demand for the item with the rising price will fall and the demand for the item with the unchanged price will rise.

Applied to the religious situation at hand, when the Church begins to fail in its duties to the faithful to offer the unvarnished truth and substitutes a namby-pamby version of itself, two markets are created. One is the market for namby-pamby Catholicism, and the other for the real thing. They are no longer the same product. The new-fangled version of the Catholicism has a low price (no real penitential practices, pick and choose morality and no-real presence in the Eucharist) as opposed to the higher priced Catholicism, the true version, which calls for real commitment and sacrifice, etc. Just like a high quality product which is sold in upscale stores, most people go for “knock-offs.” Liberal Catholicism is a “knock-off” religion. One gets to call oneself a Catholic like a woman who shows off her “Gucci” purse, but neither of them have the real thing.

Why are there two markets for Christianity? The answer is the level of the society. In a society that prized the traditional values of Christianity, the watered-down version would not be tolerated. For the last 40 years it not only has been tolerated, but embraced, by a society which has become “fat, dumb and happy.” All we have to do is read the Old Testament to see the same scenario that God himself predicted in Deuteronomy. The chosen people would become prosperous and eventually offer human sacrifices to Baal in the very Temple itself. God sent his prophets to warn the people, as he has in the past hundred years of so; St. Therése of Lisieux, St. Josemaria Escriva, Archbishop Fulton Sheen, etc., great Popes, but like the Israelites of old, we did not listen.

The other market, that does not tolerate the cheesy Catholicism, pays an even higher price for the “product” because it comes with persecution, not only from the society at large and the agnostic media, but from members of the Church itself. My own sons, because they have a large number of children, are criticized by their fellow parishioners: “Didn’t you ever hear of birth control?” or “What are you, some sort of Super-Catholics?” There are even advertisers for this diluted form of Catholicism—liberal professors at so-called Catholic universities. Most college-aged Catholic students, ignorant of the true faith and whose parents are just as ignorant, send them to these colleges thinking that they will get a Catholic education. They come out as agnostics, or as surface believers. It is the same as the advertisers of Gucci knock off purses, who, while not admitting that the purse is not a real Gucci, tell them that it is but just cheaper. That is to say, this is the real Catholicism, but it costs less in actual requirements than the original.

Because economics is not a business science, but a science of human action, I think that this author I was reading has stumbled on something useful to our understanding of the spiritual world, and I intend to follow the path it leads from time to time.

Introduction to economics II

Mon, 19 Sep 2011 00:00:00 -0500

By Dr. William Luckey

In our last article, we covered the fact that people make choices based on their values. The values are subjective to them. We stressed that this is not a denial of objective values, but it is a recognition that one must accept something as his own before he chooses it. Even green vegetables fall into this category. They are good for you, and you need their nutrients, but how many kids, turn their nose up at them? In fact, even some adults reject them despite the fact that they know that they are part of a healthful diet. So, the truth is that people make choices based on what is in their heart, and it is not the job of the economist qua economist to comment on that.

Next, we have to realize that people’s values are ordinal not cardinal. This means that they are not able to be ranked as 1, 2, 3, etc., but at 1st, 2nd, 3rd, and so forth, that this ranking changes over time, either long or short. Just before lunch, you may be hungry, and therefore, eating is ranked high in your value list. After lunch, eating has fallen to the bottom of the list, but will rise in rank as the day goes on. There are long and short term values. One might say that the most important thing I want to do in my life is to become a lawyer, but right now I have a paper due tomorrow and I have to get it done. Both of these values are ranked first, but in different time schemes. There are related in that the immediate problem, doing the paper, is a means to accomplish the long term value.

When people act they not only act for an end, but they always act to improve their condition. rom shifting you position in a chair so that you will feel more comfortable, to changing jobs because you see more room for advancement, no one acts if there is not chance for betterment. Acting, however, is based on the idea that the act is likely to improve one’s condition, so that a person must see an end and means to accomplish that end. If you are in prison and you would like to escape to regain your freedom, but the prison is so well sealed that you cannot figure out a way out, you will not try to escape. Not to see any way to improve your lot in life, whether this perception is accurate or not, leads to despair. Persons who have a victim personality think that the whole world is against them and so they do not see any connection between their actions and their betterment. The result is that they stop trying. Those people who live in poverty stricken countries, where there has been no economic improvement for a long time, despair of ever bettering their future. But these cases are usually caused by either dictatorship, where the ruler drains any wealth from his people, or by constant civil war. Political stability is necessary for economic improvement, because no one will try to fulfill their goals in the midst of serious uncertainty or danger.

What we usually call cost is called “opportunity cost” by economists. The cost of something is not the price one paid for it; it is the loss of the next best alternative, now made impossible by the choice of the first option. Years ago there was an ad on television of a guy drinking something, perhaps a soda. After finishing the drink, he his himself on the forehead and said: “I could have had a V-8,” referring to vegetable juice. Since he bought and drank the soda, he cannot have the V-8, and the way the ad was set up, the opportunity cost of not having the vegetable juice was higher than the benefit of having the soda.

Notice that the idea of money was not brought up so far. Since economics is a science of human action, it is necessary to see the patterns of human action, prior to introducing money into the situation. This leads us to consider things that go into benefit. True, money or income might be the motivation for someone to do something, but part of considering the cost of the action might be what are called “psychic benefits.” Blessed Mother Theresa, knowing that she was pleasing God by showing his love to the least in his kingdom, did not make money taking care of the poorest of the poor, but received a psychic benefit greater than the very high cost to her in doing what she did. She started by herself, in the very poorest part of Calcutta, living with the squalor in which these unfortunates lived, taking care of those who were dying, smelled badly, had diseases, could not feed themselves, were incontinent, and in the midst of all this she was persecuted by Hindu authorities and citizens who accused her of not allowing these people to find their Karma.

This example aside, we are not disembodied souls, and the provisions for the body and those of the family are a necessary part of life. In addition, there is nothing in our faith that prohibits us from having labor saving devices, nor conveniences, such as air conditioners, which no one I knew had when I was a kid, or cars and such. (We are not all capable of becoming Mother Theresa.) The moral problem with this is not in the things themselves, being inanimate, but in the heart of the person. As Blessed Pope John Paul II said, the problem is in a person’s defining himself by “having” not “being.”

Having said this, it is now time to go on to more of what makes a free market work; our next installment.

Introduction to economics

Thu, 25 Aug 2011 00:00:00 -0500

By Dr. William Luckey

This is going to be a series of articles to help Catholics to understand economics. Because of the serious deficit in the comprehension of economics by Catholics, this will be a daunting task, but the author will do his best.

In order to understand this subject, there is a need to distinguish between the actions of human beings and the way those actions are perceived by those who study them. The value of any writer’s thought is whether it jives with actual human experience. Note, it is not your personal experience, but the general experience of humanity that counts. This means that the economic system of a country and the writings of those who study it may or may not jive, depending upon how schooled in technique and objective the observer is. It is a commonplace that witnesses to a crime, even if it is staged crime in a law school class, will differ widely in their descriptions of what occurred. This means that no evaluation of how an economy works is valid when done by observers not trained in what to look for, not trained to analyze what they have observed, not to mention the fact that their experience may be limited to their own neighborhood or their personal experience, or one event. Sadly, most people see themselves as experts on economics and political science, without having read or studied any serious work on these subjects. Happily, this is not true of surgery. Very few people try to instruct physicians on how to take out a gall bladder, but everyone “knows” about politics and economics, such that the layman considers his view of these subjects as good, or better than, those who have studied for years.

Everyone must remember that the economic system is a given, and it is extremely complex. There are billions of transactions of every kind (not just business transactions) that occur continually each and every day. No human being or group of human beings or computer can ever monitor even some of those transactions. This is because a transaction is not a transaction until someone acts and another responds. One would have to be there to know the transaction; and who could ever do that? What we get is statistics which are nothing more than past history, a digest of what occurred a week or a month or two ago, by the time they are gathered. While analyzing statistics can be helpful in telling one what happened, it is useless in informing us as to why it happened. But a true science is not based on what, but on why, on cause and effect. And the best way to understand economics as a science is to understand man, not data.

Economics begins with the “action axiom,” i. e., man acts. There is no question that this is true, because even to argue with this you are required to act. It is true that man also thinks, but we cannot know what he is thinking unless he acts. So if a person says to himself that he going skiing tomorrow, it means nothing if he does not actually do it. If I come up with a great theory of the nature of the universe, it is useless unless I act, in this case, tell someone either verbally or on paper. We only know about Einstein’s fruitful “thought experiments” because he wrote about them. Blessed Pope John Paul II tells us in the Acting Person that those who only have ideas live in a dream world. Thinking about doing good does not make one good. Thinking about going to France, does not get you there. Dreaming about a machine that you would like to invent that would be a great boon to mankind, does not help mankind at all.

But admitting that man acts does not explain how man acts. Economics does not delve into the psychological tangles of the mind to explain why each man acts, but it does explain his actions to a great degree. Aristotle correctly informs us that all men act for an end or goal. In other words, people do not act for nothing. Your mother may have asked you at one time, “What are you doing?” You may have responded, “nothing.” But was that really true? Chances are that you were playing, chilling, thinking about what to do on Saturday, or brooding, or stalling so that you have to do your homework or chores, etc. Even an act as innocuous as going to bed has a purpose to the person who does it. He knows that if he does not get sleep he will be miserable the next day, if not dysfunctional.

So, all men act for an end. In addition, all men act for the good. Your may object to this, pointing out correctly that the prisons are full of people who did not act for the good. But as Aristotle says, men act for either a real good or a perceived good. In other words, whether the action aimed at an objective good or not, even the bad acts seemed good to the perception of the actor at the time of the action.

Think of the bank robber. No one goes through all that trouble because he was bored, but because it is seen as a solution to the robber’s money problems. Later on, when he sees his picture on television and he has to go on the run, he might come to the realization that it was not really a good choice, and turn himself in. But in this case, “good” again does not mean objectively good, but that the trouble he is in, and the inconvenience he caused himself, was not worth the money, which is slowly dwindling.

Here is presented to us another basic element of human action—all human acts are based on “subjective valuation.” If an economist had a nickel for every time some well-meaning Catholic misunderstood or intentionally misinterpreted that term, he could retire. Subjective valuation means that a person’s actions are based on things that HE thinks are of value. This in no way denies the existence of objective values. It just means that if a person has not subjectivised those values, he will not act on them. If a guy think ballet is for sissies, he will never go to one. If I fail to see the value of Catholicism, I will never become a Catholic. So everyone acts on his values. Examine your self. Ask yourself why you do not do certain things, even things that are perfectly moral and objectively good. It is because YOU do not value them, while still insisting that they are objectively good.

The parable of the new car

Thu, 11 Aug 2011 00:00:00 -0500

By Dr. William Luckey

Once upon a time, there was a man, let us say for the sake of the story it is me (it isn’t but if I did these things, I would be in the same state as the man in the story). One day my 11-year-old Buick died. So, I needed another car. But, instead of getting a nice used car for cheap, like the Buick I had which lasted six years, I went out and treated myself to a Ferrari. The price of this new car was over $225,000. Now I am a man of modest salary, and I already have a mortgage on my house and am trying to pay off credit cards, which means that I do not have that much discretionary cash. But the payment on this car (I looked this up in the amortization tables) at five percent for five years, (the most they usually allow in a new car) is $4,700 per month. Since, up to this time I had a good credit record, they actually loaned me the money.

So I came home with the new Ferrari, and, after my wife stopped hitting me on the head with her rolling pin, she yelled at me for spending too much money and for putting us in so much debt. I felt very badly that she was so upset, so I decided, as soon as the headache went away, that I would do something nice for her. Since my wife does not have her own car (again, for the sake of the story), I went out and bought her a car. But since she was mad that I spent so much on the Ferrari, I decided to get her a cheaper car, so as not to spend as much. The car I bought, a Mercedes-Benz, cost $42,000 and the payments, at five percent for five years would be about $800 per month, surely a bargain compared to a Ferrari. This means that I just boosted by monthly liability payments by $4,700 + $800 which equals $5,500 per month.

For a man of modest salary and only a small amount of discretionary cash, this payment is way too much. Suppose, for the sake of the story, I am not allowed to give the cars back. Even if I did, they would be considered used cars and I would still owe a chunk on them, though nothing like I am currently paying if I keep them. How do I make the payments? I borrow the money. After all, I made these purchases in only two days, maybe they have not gotten into the credit system yet. Suppose I got some credit cards with high credit levels? I would not have to borrow the whole payment from the cards every month, because I could make some part of the payment with my discretionary cash. I would, however, have to borrow a large portion to make the full payment. Maybe I could make my wife go to work, if she is not already working (in real life, she is). Maybe, I can suddenly get hired as a vice-president of a big company so that my salary will take a big jump. But is that likely to happen anytime soon? No. Basically, I am in serious financial trouble.

Now, what is the meaning of this parable? If the reader did not already see it coming, we can compare the man in the parable to the Federal government. The man got attached to material goods, and not just any goods, but fancy, expensive cars, probably due to the mid-life crisis syndrome. The populace gets attached to transfer payments made to them, called entitlements, and the government gets attached to the power that comes to it in return for promising these entitlements to the people attached to them.

But the government and the populace, who pay for these things, cannot really afford it, and, like the wife in the example, will shout and scream about the cost. So the government (husband) goes and gets loans to pay for the entitlements, and to appease those who complain about the spending, gets them some goodies, like bail outs for profligate banks and companies, the executives of which get to keep their jobs. Of course, to do that, the government has to borrow more, and in a pinch, the Federal Reserve Bank can counterfeit some cash, which the man in the parable would go to jail for a long time if he got caught doing that.

Meanwhile, the people (like the wife) are furious and are worried that the whole edifice will collapse. Just like the family will have to declare bankruptcy, the government will have to default on its debt. So the government (husband) finds a way to keep borrowing, though a lower amount, to enable everyone to keep their programs (and their cars), the protesters (wife) having gotten used to the bailouts (the Mercedes-Benz), etc.

This is the recent debt deal worked between Democrats and Republicans.

Spending was not cut; just the rate of new spending is less than the old rate. We can still borrow more money, which we will also have to pay back, but since the economy has been malfunctioning for some time (no gigantic pay increases for the husband) where will the money come from?

This parable is not far-fetched in any sense of the word. The laws of economics, which are not laid down by anybody but come from the actions of humans, are the same for all. Milton Friedman famously said that there is not such thing as a free lunch. For those too young to know the reference of this wise statement, my grandfather, who was born in New York in 1880, told me that bars in those days advertised a free lunch. Of course, most people going in to get a free lunch, got some alcoholic beverage. The cost of the beverage was high enough to pay for the food, so the lunch was not free.

Everything has to be paid for, and the debts incurred are not incurred by the “government” but by the individuals in government whose actions try to defy the laws of human action—the laws of economics. Just as the husband in the story would be a fool to buy a Ferrari with the income he has, and then buy a less costing but costing nevertheless Mercedes-Benz right after that, so the people in government are crazy to think that they can keep promising and giving benefits to voters without considering how to pay for them. Thus endeth the lesson!

The game is up

Wed, 20 Jul 2011 00:00:00 -0500

By Dr. William Luckey

Did you ever wonder why tuition at most Catholic universities has skyrocketed since you went there decades ago? Did you ever why the tuition at these schools climbed way higher than the inflation rate?

Well, the game is up; and here is the story.

Somewhere in the mid-1960s when I was and undergraduate in a non-Jesuit Catholic college, the Jesuits had a meeting, the report of which I have read, where they were trying, for good reason, to increase the prestige of their universities. Since the schools were still Catholic at the time of this conference, they were interested in getting more people to go to Jesuit universities to increase the influence of Catholicism.

Prior to this time, many, if not most Jesuit scholars, after their long period of philosophical and theological training, got their doctorates at the Gregorian University, in Rome. The Gregorianum, as it is called, was founded by St. Ignatius Loyola himself, and originally called the Roman College. Those getting their doctorates there have gone to an excellent school. The problem with it is that is, in the mind of these Jesuits, it is Catholic. There is a prejudice against Catholic education in snooty circles, so the decision was made to send their budding academics to secular universities for the Ph.D. The thinking was that even though these people were Jesuit priests, the fact that they had a Harvard, Yale, University of Chicago, etc., degree, would give them, and their universities, recognition in the secular world, yet they would still be Catholic.

But this view was very naïve. Since doctorates from Catholic universities in the United States as well as in Europe are generally just as good (if not better—don’t get me started), in my opinion as the ivy league’s doctorates, this tells you that the problem is actually that the educational establishment just hates Catholic anything. So starting in the late 1960s you saw more and more priests with doctorates, even sometimes in theology, from big-name secular schools. This was not only true of Jesuits now but of other orders as well.

This, however, is only the beginning of the story.

The next chapter of the tale occurred in 1967 when a number of Catholic university officials met and issued the “Land-o-Lakes Statement.” Signers included authorities from many Jesuit universities, Seton Hall University and Catholic University of America. Thankfully, my undergraduate institution was NOT one of the signers, but my Jesuit doctoral university was, and by the priest-president, who, one year later, left the priesthood. (See, http://consortium.villanova.edu/excorde/landlake.htm) This statement basically relegated Catholicism to the “campus ministry” department, and theology to a study of the “depths of the Christian tradition” and “the total religious heritage of the world.” In other words, Catholicism will no longer be the center of the Catholic university, but will treat religion similarly as it is treated in secular universities.

But what about the tuition, our original subject? Well, at the same time as all this was going on, priestly vocations were going down. Since the universities had decided that only big-name doctorates were to be hired, they had to hire lay people with these degrees. In order to do so, the Catholic schools had to compete with the non-Catholic universities, so that the pay had to be comparable. But how do they pay for this? And how do they pay for an increase in the number of fields available to study, not to mentions labs, etc., staffed by these faculty members now getting greater pay? Here is where the government stepped in. The government, beginning mostly in the Johnson administration in the mid to late 1960s, began a process of increasing the federal government’s contribution to student financial aid in terms of scholarships, loans and grants. At first glance, one automatically says, “Isn’t that great, now poorer folks can afford college.” But this had many effects, including one interesting economic one. The big boost in federal student financial aid became an enabler for these now liberalized Catholic universities to get more money for themselves. The key was this, and it took a while to actually realize it. What the schools did was raise tuition to great heights. The rich people can pay it anyway with just a check; the poorer ones can just get financial aid. Everybody wins. Now those interested in attending one of the now more secularly prestigious Catholic-named institutions can go even if they could not afford it in the past. One proof of this is the sudden building of a Taj Mahal-like student center at a university at which I used to do research in the 1980s and 1990s. This student center has marbled floors and a hotel attached to it. The reason for this is obvious—competition for students. Students will be attracted by the spectacular.

The last stage of the process is the changing of the Board of Trustees. This occurred early in the game, and the argument was made that since Vatican II gave the laity more responsibilities in the Church, so it should be on college boards. But there were always lay people on the boards of Catholic universities. So, where is the problem? Now on most, if not all, colleges run by religious orders, the lay people are in the majority, usually the vast majority. The order no longer controls its own school. Oh, there is usually a provision that the president has to be a member of the founding order, but he is now a functionary of the board.

But, you might object, there are plenty of layman out there who would have the heart of the institution in mind, so they would make good board members. That is true, but is that why these laypeople are chosen? I argue that it is not. The real reason is their ability to raise money—purely and simply. After all, if the schools are going to hire laymen with big-name university degrees, and build fancy student centers and labs, etc, they have to raise more and more money, since tuition, even with government funding, does not cover probably even half of the expenses. The universities will generally not ask those who are hostile to the university in question to join the board, but the rationale of these board members is not quite the same as that of the original founding order when it was founded.

The ultimate outcome of this whole thing is that many, not all thank God, Catholic schools have abandoned the faith in reality, while maintaining a veneer of it, to become a business. While there is nothing wrong with business in itself, there is something wrong with this particular business, the Catholic university, built with the money of devout Catholics and the sacrifices of religious since, in some cases, the late 1700s, abandoning their raison d’etre. This explains an awful lot of incidents, such as Cardinal Arinze being treated like he was the bearer of the plague by a large group of Georgetown University faculty, or Georgetown’s covering up of the Jesuit "IHS" part of the school’s emblem when President Obama spoke there, the showing of obscene plays on the campus’ with the authorities powerless to stop it, and lastly, President Obama receiving an honorary degree at the University of Notre Dame.

Oh, by the way, both of these schools signed the Land-o-Lakes Statement.

Raising the capital gains tax

Wed, 22 Jun 2011 00:00:00 -0500

By Dr. William Luckey

As everyone knows, the government has painted itself into a corner. More and more spending on more programs, more bureaucracies, more entitlements, and more buying of votes with these programs has gotten the federal (and some state) government into the unenviable position of reaching the end of the tolerable income tax level, beyond which the populace will revolt, and at the end of the indebtedness limit, beyond which we cannot repay all the money it borrowed in order to fund these things beyond the tolerable tax level. Calls are being made for a hike in taxes “on the rich,” and a hike on capital gains taxes.

So let us examine what a capital gain is, and then examine the effect on the economy of higher capital gains taxes. A capital gain is the proceeds less cost from the sale of a capital asset, such as property, stocks or bonds, a car, etc. These proceeds are taxed at a lower rate than income, because if income tax rates were applied, most of the proceeds would be given to the government. Supposed you win a million dollar lottery. This is not a capital gain, and it taxed as income, which means that about one-half of the million dollars goes to the government. A capital gain, however, is taxed according to different rates. According to the Tax Foundation, the current capital gains tax rate goes from 20 percent to 39.6 percent, depending on how long you have owned the asset. The higher rates are for shorter time spans. So if you held a piece of property for a year, you would pay virtually a 40 percent tax on the proceeds. If you held it for five years or more, you would pay 20 percent.

What is behind the capital gain tax? Those who propose a capital gains tax, or those who propose raising it to higher levels are motivated by a number of things. Firstly, there are the government officials whose spending is so profligate, by which they “buy” votes by rewarding their supporters and harvesting more followers, that they need to tax everything that they can, and Americans are habituated to the thinking that everyone has to pay their “fair share” so that the racket can continue. Then there are people motivated by false thinking. Neither of these parties cares about you selling a seven year old car, or an old outhouse. Both of these are interested in people who sell, say, the Empire State Building. These types of capital gains are the targeted both by government officials, and by the people of the second type of thinking, who have in their heads the image of rich people with yachts, with large living quarters on the most desirable locations in the world. To this second group, it is a question of pure class warfare and envy. In their minds, the wealthy sold this big asset so that they could live “high on the hog,” while the rest of the country toils away for a modest living. There was an anecdote I heard when I was a kid, although the story pre-dated my birth, of rich people sitting around having cocktails and one of them says: “I wonder what the poor people are doing today.”

This story is like the cartoon version of the truth, so let us examine what people do when they sell a major capital asset. Firstly, why would a person or a company for that matter, sell a major capital asset? Unless the person just wants cash to retire with, which is not that common, he or she wants to do something more profitable with the money. Take our Empire State Building for instance. That building is income property. Companies rent the offices and the owner, after expenses, is the residual claimant, which means he or she, or their company, get what’s left. It is this money that allows the owners to live a comfortable life, assuming that they can keep the building rented. The owners do a great service to companies in providing such a building for companies to use. But if the economy tanks, they might find companies who rent space in the building going out of business, and getting others to rent might be difficult, requiring the lowering of rents, so then the residuals will get smaller.

Now let us posit the scenario of a Mid-western city which is going to get a major league baseball and football franchise, and now needs a stadium. The owners of the Empire State Building notice that even though the economy is not doing so well generally, and in New York, the Mid-west is doing better, and throughout the Mid-west receipts for sporting events are actually increasing. The rule here is that money goes where it is most productive, because that is where it is most needed. So the owners of the Empire State Building will find a buyer for the building, even if they sell it for less than they think it is really worth, to raise the cash to build a stadium. (Of course, we are leaving out many technical details here, such having to bid for the contract, etc., but these are not relevant to the story) But, and here is the key to the article, if the capital gains tax take too much of the proceeds, the owners of the building will not sell it because the sale will not render enough cash to build the stadium. So, the result of high capital gains taxes is to keep capital frozen in current projects and forestall new, more profitable projects. Notice that the owners of the Empire State Building did not want to sell the building so that they could buy another mansion, but to enter a venture that will increase their own cash flow or income. If they succeed, money will flow from where it is not really needed, New York, where things are in decline, to the Mid-west, where people are begging for investment funds.

The result of all of this is that whatever the reason for wanting to foist higher and higher capital gains taxes on business folks, either to fund government profligacy or to soak the rich, the result is the same—economic stagnation.

Crony capitalism and its remedy

Tue, 24 May 2011 00:00:00 -0500

By Dr. William Luckey

If you read my last article, “What Is a Humane Economy?,” you will notice that in there I brought up the subject of whether large corporations seek money or power. I said that if they seek power, it is only because they seek money, which is their raison d’être. Well, this article was a paper I gave at a conference of an academic society. The format of the panel I was on was that each of four participants gave their papers, then responded to questions from the panel, and then responded to questions from the attendees. Mine was the last of the four papers. The first was by a very radical distributist who, I found out later, has no graduate credentials in anything, and said he teaches theology at a good Catholic university down south. I looked at the website of this university and his name does not appear there. Be that as it may, the only “question” anyone asked from the panel was this guy asking something about my paper. I put the word question in quotation marks because he did something I have never seen at any academic conference since I have been either attending or actually giving papers in over 40 years.

He shouted his question at the top of his lungs, saying: “How can you say that corporations don’t seek power?” I felt like replying in an Inspector Clouseau fashion: “Well, I just opened my mouth and the words came out.” But I didn’t. I tried to answer the question, but he kept shouting his question, phrasing it in various ways. I had to shout over his shouting. Finally, in desperation, I said that we would have to agree to disagree and get on with it. No one else on the panel had any question for anyone else. Incidentally, his paper was a hodgepodge of non-scholarship and ranting, such that if I wanted to question or critique his paper, I would not even know where to start.

There are two lessons from this episode. The first one is that distributism is merely an ideology. And distributists are unhappy folks, because this is not the first incident of this type I have witnessed, just not at academic conferences. If distributists had good arguments, why do they not discuss them in a mature way? But they either use trickery, like asking the speaker trivial questions they know the speaker can’t answer, or merely shout their way through. The reason is that an ideology has, by definition, no convincing reasons. It is merely taking an idea, usually unproven, and building a logical system around it. This is why they do not like probing questions. For example, in a meeting of distributists a student of mine asked how this distributist society is going to come about since there is absolutely no real movement in society toward it. Would it have to be imposed by the government? Everyone in the room got furious with this student for even asking the question—a proof that we are dealing with an ideology. (For a good discussion of probing questions and ideology see, Eric Voegelin, “Science, Politics and Gnosticism” [n.p.: Regnery-Gateway, 1968].)

Now for the heart of the question. I do not agree with Milton Friedman that the whole purpose of a company is to make a profit. The purpose of a company is to produce something that the founder of the company believes is beneficial to the public. Studies of entrepreneurs have borne this out. But the desire to do this cannot be fulfilled unless the company brings in more money than it spends. The difference between the money it spends and that which it brings in is called profit. As Pope John Paul II said in “Centesimus Annus,” profit is the sign of the health of the company. In addition, profits are returned to stockholders, who ponied up the money for the company to begin with. They would not have done this without some expectation of a return on their money, which they would have put into a different enterprise. Profits are also plowed back into the company for research and product development so that the company can produce better products.

Why, then, do large companies seek favors from government? They do so because the government will give them privileges which make it easier to make more profit. One way to do this, believe it or not, is to insist that government regulate the industry, because regulation costs companies money, and smaller competitors cannot afford dealing with the regulations, and go out of business, thus limiting competition for the original firm. The same is true of tariffs. Why do corporations not want power? Because power is not money, and they are judged on the basis of money, not power. When the CEO goes to a stockholders meeting, bragging about how often he has been in the White House, it does him no good if the company is failing. But if the CEO has been to the White House and has persuaded the President of the United States to suppress the competition in some way, and that has resulted in an increase in revenue, the stockholders are happy.

The reason that distributists and others do not understand this is because, repeating myself, their views are pure ideology. The value of any writer’s or speaker’s thought comes not from whether you like it or not, but from whether it jives with human experience. Distributism does not. Capitalism does.

But how do we solve this tendency to get government favors for some businesses so that they prosper over those who did not get favors? The remedy is to prevent government from getting involved in the economy. If government were strictly prevented from any interaction with companies for any reason, and this could be monitored, crony capitalism would end. A company would have to survive on its own effort and newcomers to the industry would have a better chance to compete, as well as foreign suppliers. Prices would go down, and the people of the U.S. would not be paying for massive bailouts in exchange for votes for politicians.