CNA Columns: Indispensable Economics

Where is Pope Benedict coming from?

Sat, 07 Nov 2009 00:00:00 -0500

By Dr. William Luckey

It is interesting that we have been presented with a gift of sorts. This writer stated in another place that Popes do not reveal their sources. In the case of Pope Benedict XVI, we have an indication from what intellectual tradition he approaches economic problems. In 1985, in a symposium in Rome entitled, �Church and Economy in Dialogue,� Cardinal Ratzinger (at the time) gave a talk, �Market Economy and Ethics.[1] Looking at this document gives many insights into the approach he takes in Caritas et Veritatis.

Ratzinger begins his talk by describing the economic state of the world in the same way as Pope Pius XI described the world in Quadragesimo Anno. To Ratzinger, the world is in terrible economic shape, especially when you consider the differences between the northern and southern hemispheres. He says that this situation poses such a threat �no less real than that �proceeding from the weapons arsenals with which the East and West oppose one another.� He states that all methods used to remedy the situation have been ineffective. In fact, according to the Cardinal, �the misery in the world has increased in shocking measure over the last thirty years.�[2] This is much too general a statement to make much of, but some checking of data leads us to question this assertion. Speaking of the southern hemisphere, in Latin America for the period to which he refers, the trend has generally been upward economically, despite some dips in some countries, and stalling in Haiti.[3] Africa,on the other hand, is illustrative. Northern Africa is developing well,but sub-Saharan Africa does poorly. But this is no mystery, and many economists have the solutions for this state of affairs, but hardly anyone listens.[4] The main point here is that the world was not doing as bad as Cardinal Ratzinger supposes. Some keys to his point of view come from the rest of the article and his admitted source.

Ratzinger says that following Vatican II, it was held that the separate disciplines had their own autonomy and should be allowed to operate according to their own laws. He seems to be saying that this idea was not developed by the official Church, but came from outside official channels. The problem with this notion is that Vatican II actually states this in a number of places.[5]And it is also true. Etienne Gilson once said that if you want to use chemistry for God�s sake, you must learn if for its own sake. But the Cardinal criticizes this. He takes the case of Adam Smith who, he says,believed that the market operates on its own and �moral considerations imposed on it from without.� The Cardinal says that according to Smith,�this position holds that the market is incompatible with ethics because voluntary �moral� actions contradict market rules and drive the moralizing entrepreneur out of the game.� But Smith holds no such thing. Adam Smith was a professor of moral philosophy, and prior to writing The Causes and Consequences of the Wealth of Nations, he wrote The Theory of Moral Sentiments. In the latter book, we see Smith on the cutting edge of a phenomenological idea of morality based on empathy.[6] Empathy can only take place between human beings because we share a common nature. In addition, Smith obviously assumes moral behavior on the part of the actors. The whole free market economy is based on trust, and it very short-sighted to ignore this obvious fact. Moral actions do not contradict market rules, they are the foundation of successful market functioning. When people are immoral in their actions, the market gets skewed. No one in their right mind, economists included, thinks that Bernie Madoff is the ideal market participant. Law itself, going payback to English common law, has prohibitions against fraud, outright deception and coercion. It is said by business experts that on average a customer who does not get treated well in a store will tell over 40people about the experience. Those folks will tell others, and on and on. Why? Top of the list is moral outrage in not being treated according to the dignity that one deserves. After this comes the desire of the offended person to warn others about the offending place of business. In both these cases, both morality and the laws of economics operate as a check on the entrepreneur, who is punished but shrinking sales. It is very likely, unless the merchant in question was just having a bad day, he has treated others like this, or presented them with faulty merchandise or bad service and the like. This means that the reputation of the place of business will be blackened. (Read more)

Some Suggestions for an Austrian Theory of Organizational Behavior

Fri, 16 Oct 2009 00:00:00 -0500

By Dr. William Luckey

Introduction

The purpose of this paper is to suggest ways in which the insights of the Austrian school of economics can be applied to the understanding of exactly how institutions behave. While this question has been probed somewhat by political scientists and scholars in the field of management, the results are far from adequate. Firstly, the political scientists have been afflicted with the same positivistic plague that has infected economics. This �physics envy� has them reducing everything to statistics and graphs that are just as vague and generic as those of the neo-classical economists. Just as the economic models assume full knowledge and a single product, the political scientist presumes that all governmental officials and persons working in organizations want power. All attempts to discuss the behaviors of actors by using a version of the Austrian �mind construct� methodology are termed �journalistic,� and not taken seriously. This prevents any methodological breakthroughs. Even so, this method of analysis is still fraught with the presumption that power is almost the only value of persons in their organizational roles, and it seems to pan out in the form of a revealed preferences theory.^[1]

By contrast, management scholars have made more headway in examining the behavior of individuals in organizations.^[2]The reason for this is that the management scholars deal in real case studies, and have more empirical evidence at their disposal. Nevertheless, their studies are hampered by the fact that they have no interest in developing an overall theory of behavior in organizations, if, in fact, this is possible. (Read more)

John Paul II: On the Cutting Edge of Catholic Social Teaching on Economics

Fri, 09 Oct 2009 00:00:00 -0500

By Dr. William Luckey

Some people treat Catholic Social Teachings in the same way that the Church treats revealed dogma�as mostly unchanging, but that there can be some expansion to our understanding of those revealed dogmas, but no change in Social Teaching. But Catholic Social Teaching has three aspects:

The first is eternal principles. Catholic teaching of any kind has to be founded on eternal principles, or else there would be no solid foundation at all. In point of fact, beyond those eternal principles, especially justice, prudence and charity, the Church applies those eternal principles to changing circumstances, which means that the teaching changes. There is no such thing, for example, as pure justice. Justice must be applied to an actual circumstance. In addition, the Church, as Church, has no particular expertise or divine commission in the particular, non-theological sciences. This means that it accepts the opinions of scholars of the sciences prevalent at the time of the writing of an encyclical. Of interest to us is economics. As I have shown in many papers, for many years the Church accepted the conclusions of the German Historical School of Economics as its paradigm for understanding economic reality. That School is totally discredited, and slowly, but surely, Popes have backed away from its worldview, despite the fact that many Catholics tend to quote past encyclicals like Protestants quoting �proof-texts� from the Bible to prove their anti-Catholic views.

There is no space here to go into the teachings of the German Historical School but here I would just like to demonstrate briefly the case for development with a few quotations. (Read more)

Back to Nature

Fri, 25 Sep 2009 00:00:00 -0500

By Dr. William Luckey

There are a number of Catholics, thankfully not too many, who believe that it would be more pleasing to God if we all gave up our highly technical lives, or money, vacations, etc., and lived on a subsistence level. These same folks are always championing "Western Civilization." They never ask what made Western civilization possible. The existence of great writers and thinkers does not make a civilization. A civilization is made up of all those people who have learned and accepted the values of the great thinkers of that civilization, and in the West, the teaching and contribution of the Catholic Church, not all of which is doctrinal, but intellectual as well. Notice that it is not just the teachings of the Church that made up Western civilization, but the accumulated wisdom of that whole civilization. Even the Church in its theological debates uses philosophical language and concepts developed by the great, and frequently pagan, thinkers.

But how did this wisdom get around? It got around because some folks had excess wealth to finance the development of schools to educate thinkers. The early Church Fathers were very educated men. The money of dedicated people sponsored schools which they attended. Think about it: one cannot spend time getting the required learning if one has to put food on the table. Learning requires leisure. Leisure is purchased for the student by someone else. That someone else gives that money to the student or the school, or both, so that the student and teachers do not have to spend their time putting food on the table by farming, or working in an asphalt plant (as yours truly once did) and the like. This means that someone in the society has to have discretionary funds. If we all lived in a subsistence mode, there would be no discretionary funds, and there would be no learning, no churches, no artists.

Nor is that all. The reader might notice that the life expectancy of people in the West has taken tremendous leaps since the 1800s. Why? Because in the West the free market system has discovered ways to create wealth. Much of that created wealth goes into the paychecks of households and is spent on medical care. But where did the medical care come from ("Take out two pints!"�Theodoric of York, Medieval Barber)? It comes from the fact that some people and the "evil" corporations take their discretionary income and save it. This money is then used to develop diagnostic medical equipment, medicines, and surgical equipment, and support medical schools which train practitioners who are able to use these great things for the health of every patient. The households pay these practitioners to keep them healthy. It is nice for the healthy 20-year-old to talk about living on a subsistence farm or owning a small shop, like you see in the movies�until he contracts cancer, or gets hit by a car. He does not run (or crawl) to old Theodoric (above), but he goes to the oncology department of a good hospital, or the trauma center of the same hospital, none of which would exist if these "back to nature" folks had their way. (Read more)

Martyrdom...What?

Fri, 11 Sep 2009 00:00:00 -0500

By Dr. William Luckey

To many Catholics a martyr is one who dies for the Faith, usually by open persecution. We think of the Apostles, St. Stephen, St. Peter of Verona, and St. Teresa Benedicta of the Cross, among so many others. Few, however, know the origin and nature of the term "martyr," and hence, the multifaceted aspects of martyrdom.

The word "martyr" means witness (martus) who gives testimony about something he witnesses (martyrian). The apostles were witnesses to Christ�s life, suffering, and resurrection. They died because they gave witness before the enemies of Christ. It is not the dying that made them martyrs, but the witnesses. It was only later in the history of the Church that the term was applied exclusively to those who died for this witness. When you read the Fathers of the Church, you see that anyone who suffered for his witness of the Truth is a martyr, even if they were not put to death because of it.

Wait, you say, because I am relatively safe in the more civilized West, the chances of my dying for the Faith are relatively low. While that might be true, all of us are called to be witnesses to the truth, and, as St. Thomas says, all truth, no matter who says it, comes from God. When we stand up for the truth, even in non-religious matters, we are being witnesses�and the world does not like the truth. In Plato�s Republic, Socrates asked his interlocutors what justice is. One of them replied that justice is always in the interest of the stronger. This meant that there was no objective measure of justice. The one who pays the piper calls the tune, as the old expression goes. Socrates tries to show that there is an objective nature of justice, no matter who has the power. It is the same with truth. Truth exists and can be discerned by reason and revelation no matter who has the power. But the people in power hate the objective truth and objective justice, especially because it threatens a concrete interest of theirs. (Refer to my article "What a Character" in the blog.) This is why we must be witnesses to the truth, and in doing so, we bring suffering on ourselves. We should say the truth with prudence, realizing that a baby cannot have solid food, and we should witness with love and kindness. But witness we must. (Read more)

Population-Control Weirdos

Fri, 04 Sep 2009 00:00:00 -0500

By Dr. William Luckey

The population-control weirdos believe that people are a blight on the planet. (I am not being harsh calling them weirdos�wait until you see my argument). They think that all people do is use up resources, and eventually the planet will be void. In fact, as the late, great economist Julian Simon pointed out, national income accounting counts the birth of a calf as an increase in capital, but the birth of a baby as a decrease in capital. Those economists who worship mathematical methods divide amount of capital by population. So, if you have $1,000,000 in capital and you have 1,000,000 people, you have one dollar of capital for every person. But if you have $1,000,000 of capital and then give birth to 10 babies, you get $1,000,000/1,000,010, or .9999 cents of capital per person, clearly a decline. One thing that these folks never seemed to learn in Economics 101 is that everybody, except the most handicapped or the most lazy people, produce more than they consume. This is true even in less-developed countries.

These characters also believe that the amount of natural resources in the earth has already reached its limits due to population growth. For example, Paul Ehrlich, a professor of biology specializing in butterflies, wrote the book The Population Bomb in 1968, in the middle of the hippie revolution. In that book, he predicted that in the 1970s there would be worldwide famines and resources would run out despite any emergency programs that would be put into place. To show the nonsense of this, in 1970, Dr. Julian Simon, late economics professor at University of Maryland, bet Ehrlich that the prices of any ten natural resources Ehrlich chose would be lower in 1980. The bet was for $10,000. Simon won; the prices were lower. Why? The resources were more abundant, not less. Ehrlich�s theory of worldwide shortages was an Armageddon fantasy. Simon offered the bet again in 1980 to anyone, but no one took him up on it. Why was that? They knew they would lose, which meant Simon was right, but also they had too much invested in this fantasy. One needs character to admit that one is incompetent, didn�t do his homework, and sold a profitable book on a fraud.

But today the racket continues. It is said that we must cut down on population, especially in developing countries, so they do not have so many mouths to feed. But economists know better, and the studies are there to prove it. (Read more)

There�s a Bridge�

Fri, 28 Aug 2009 00:00:00 -0500

By Dr. William Luckey

"Cash For Clunkers." This, as everybody knows, was the administration�s plan to get environmentally unsound cars off the road. The idea was that if somebody had a car that had been around too long, the piston rings were probably so worn down that you could drive a car through them, burning oil was spewing through the atmosphere, they were gas hogs, and were bought before the current environmental regulations on autos were imposed. If you turned your clunker in, you got $4500 in cash from the government which could be used to purchased a NEW car, which would be less harmful to the environment. The car you traded in would be destroyed so that it could not be resold and put back on the road.

Now, let me get this straight, and maybe put it in more truthful terms. If you were driving a real clunker, could it be that you could not afford a new car to begin with? Now you are to bring the ol� jalopy in, and for $4500 in cash, go into debt for a new car costing, say, $25,000? While it is true that a clunker would not bring in much exchange value, so that this program would up the return, would you bring in your old car in for $4500 if you were not already going to sell it and buy a new one anyway? Just take my own experience. I drive a 2000 Buick. I bought it used, and it is a great car. I have no intention to sell it, but even IF I wanted to trade it in for a new one, and IF I could have gotten $4500 dollars for it, I still could not afford a new car. Would the promise of $4500 make me go into debt to buy a car I could not afford to make the payments on? Absolutely not. Forget the fact that I am a trained economist. My dog would not do that either.

Take another aspect. In my experience, real clunkers are driven by poorer people anyway. They can�t afford a new car either�hence they drive the clunker until it can drive no more. What do they do then? Buy another clunker from the used car market. (Read more)

What a Character!

Fri, 21 Aug 2009 00:00:00 -0500

By Dr. William Luckey

A thorough reading of the Old Testament will show that the worst, and the most persistent, sin that the Chosen People committed was that of idolatry. They did it time and time again. This, and God�s punishments that followed, were actually predicted in Deuteronomy 29, 30, and 32. The people of the Northern Kingdom, Israel, were captured by the Assyrians, never to return, and the Assyrians populated their land with other pagan peoples. The Southern Kingdom, Judah and Benjamin, were captured by the Babylonians and taken to Babylon for about 45 years. When the Persians defeated the Babylonians, the Judeans and Benjaminites were allowed to return to Jerusalem and rebuild the city wall and the Temple, which the Babylonians had destroyed.

What does this have to do with anything? Plenty. We are all sinners. But when we commit a sin, we need to go to confession, if it is a serious sin, and "fess up" before God in the person of the priest. If not a serious sin, we still need to admit our sin to God. Now many, if not most, have skeletons in their closet. If you opened my closet, the skeletons would hit you on the head. These skeletons are generally between you and God, and anyone else who took part in the skeleton formation process. They are no one else�s business�unless they are publicly discovered. But if it is made public, we need publicly to own up to the fault, as painful as it is. Lying is a sin, too. Assuming that this horrendous act is actually true and someone finds out about it, we need admit it and not try to lie our way around it. This applies especially to public figures, upon whom the public trust reposes.

The case I wish to bring up is former Senator John Edwards. In the last campaign leading up to the nominations for president, Edwards tried to take the high road, coming across as the defender of the poor, pushing his point to the verge of, I believe, class warfare. Despite the fact that he was loaded with cash (which he seemed not to wish to share with the poor), had a gigantic house, and made his money as an ambulance chaser, he still came across as the candidate who really cared. Then, a newspaper caught him with his hand in the "cookie jar." Not only did he have a long-time mistress, but he even fathered a child through her. What was his first and continuing reaction? Denial. Only recently did he announce he would have a press conference and own up to his skeleton. (Read more)

My Money Lies over the Ocean�

Fri, 14 Aug 2009 00:00:00 -0500

By Dr. William Luckey

In our last entry we discussed the necessity of savings for economic growth. It is savings which buys capital goods so that we can have consumer goods in the future. It was also pointed out that there needed to be enough savings to repair and replace current capital equipment just to consume at current levels, and that in order to grow economically, we must save more than that.

Having said that, it was shown that the United States does not save. We have a negative savings rate. But that does not seem to affect us very much. Sure, there is an economic downturn, but even before this recent recession we did not save, yet our lifestyles did not seem to suffer. Why is that if savings is so important?

The answer is that the savings had to some from somewhere. And if it did not come from the United States� citizens, where did it come from? (Read more)

Savings, Schmavings!

Sat, 01 Aug 2009 00:00:00 -0500

By Dr. William Luckey

Dear Dr. Luckey, I realize that savings is good for the individual�for contingencies, vacations, retirement�but why is it good for the nation as a whole?

This is an excellent question, and one which very few people ask themselves, or know anything about. John Maynard Keynes, an economist whom I have roundly criticized in these pages, believed that there was a �paradox of thrift,� that is to say, that savings pulled money out of the economy, so that the things which companies planned to make would not be sold, people having saved money that should be spent on consumption. This would cause continued economic recession as companies would have unsold goods, would have to lower prices, and would lay off employees. This process would continue year after year, unless the government would, by deficit spending, put extra money in the hands of the consumers to offset the savings. This is utter nonsense, but has suddenly become popular again since Obama was elected to the presidency. Look at the media coverage of Christmas time�retail sales, this; retail sails, that. It is as if the whole country depended on retail sales.

Let us go back in time in the production process and ask ourselves where the consumer goods came from in the first place. St. Thomas Aquinas pointed out that what is first in intention is last in execution. In economics, this means that the desire to have and provide a consumer good is the last stage of a process that brings into existence resources that were not necessarily related before. These �higher level� goods include things like taking iron ore out of the ground, which no one would do just because they were bored, but they would do if they were paid for doing it, because the ultimate goal of the ore is the frame of an automobile, or some such consumer good. It includes transportation, factories, machinery engineers, machinists, and on and on. (Read more)