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August 24th 2016 print

Peter Smith

Distributive Justice

Those who wear compassion on their sleeves have no monopoly on concern for the poor. The only contention is about how best they can be helped. And whatever help is provided must be detached from any illusion that society can be rid of poverty

A little enquiry shows that though a great many people are dissatisfied with the existing pattern of distribution, none of them has really any clear idea of what pattern he would regard as just. —Friedrich Hayek, “The Atavism of Social Justice”

Prosperity and poverty do not sit well together. The contrast is confronting. Take this comment for example:

Everywhere in the world there are gross inequities of income and wealth. They offend most of us. Few can fail to be moved by the contrast between the luxury enjoyed by some and the grinding poverty suffered by others.

You are probably wrong about its provenance. It is neither from a papal encyclical nor an utterance of Justin Welby, Thomas Piketty, Bernie Sanders or Jeremy Corbyn. It is from Free to Choose (1980) by Milton and Rose Friedman.

Those who wear compassion on their sleeves have no monopoly on concern for the poor. The only contention is about how best they can be helped. And whatever help is provided must be detached from any illusion of ever ridding society of poverty. It will always be around, confirmed for those biblically minded by Deuteronomy 15:11 and Matthew 26:11. Moreover, there will always be wide disparities between the rich and the poor. Anything approaching equality of income or wealth is unachievable. Even those on the fringe of the distant Left who might extol its desirability will admit of that. As explicitly does the Catholic Church: “unequal distribution [‘in physical and mental abilities, wealth, etc.’] is part of God’s plan, so that man can share his blessings with those in need” (from the “Simplified” version of the Catechism of the Catholic Church, paragraphs 1936 and 1937).

There is no question. Inequality is an inherent characteristic of all complex human societies. This means that claims of there being excessive inequality is a judgment call. It is based, presumably, on the prevailing economic system, whatever it is, being flawed or broken in one way or another. This has to be the argument.

Unsurprisingly, as the system underlying all successful economies, capitalism is in the firing line. Inequality in, say, socialist Venezuela is not a headline issue. Inequality is just one of many problems in a typical socialist society and not the major one when the lights go out. But I’m getting ahead of myself. The question I intend addressing is how the values inherent in capitalism bear on “distributive justice” compared with Christian values and, as a subsidiary reference point, with those inherent in socialism. I am squarely in the First World. At root, the Third World’s problems have nothing to do with economics. They have everything to do with dysfunctional cultures and can only be solved though political and social reform by the societies concerned.

John O’Sullivan, in The President, the Pope and the Prime Minister (2006), points out that papal encyclicals “rightly warn against greed and materialism as dangerous sins”. The latest encyclical, issued on May 24, 2015, Laudato Si’ (On Care for Our Common Home) carries on the theme. Capitalism is again the culprit, as it must be. No other system, whether it was feudal or mercantilist before the rise of capitalism at the beginning of the nineteenth century, or the experiments with socialism-cum-communism in the twentieth and twenty-first centuries, has produced enough material goods to sustain widespread materialism.

Greed and materialism, to which can be added “individualism” (interpreted as meaning a lack of solidarity with others), underscore the Catholic Church’s discomfort with capitalism. Other Christian denominations undoubtedly share this discomfort. And, certainly, it is difficult to see how greed, materialism and individualism, which undoubtedly at times characterise capitalism in practice, are reconcilable with Christian values.

But here is the rub. Christian values cannot be lived up to in this world, whatever economic system is in play. As the theologian and philosopher Michael Novak eloquently puts it in his defining work The Spirit of Democratic Capitalism (1982, 1991): “Prematurely, before the endtime, to attempt to treat any society of this world as a ‘Christian Society’ is to confound precious hope with sad reality.” So ends my brief reference to the afterlife. I will stay right here on Planet Earth in assessing how the values (principles of behaviour) of capitalism in distributing worldly goods, despite falling short, stack up against applicable Christian values, and against those of the socialist alternative to capitalism—both in theory and in effect.

As my guide to Christian (economically-related) values I will use the Catechism of the Catholic Church (CCC) which I referred to above; mainly its social justice provisions. The values inherent in capitalism and socialism are not extractable from a comparably authoritative source. However, for the most part, I believe they fall fairly straightforwardly out of the structure of capitalism and socialism.

Capitalism is commonly defined as an economic system in which the means of production—labour, capital, land and intellectual property—are privately owned. This is fine so far as it goes but it doesn’t go far enough. Michael Novak uses the term “democratic capitalism” to describe:

three systems in one: a predominantly market economy; a polity respectful of the rights of the individual to life, liberty and the pursuit of happiness; and a system of cultural institutions moved by ideals of liberty and justice for all.

More prosaically, capitalism is a system within which individual rights to property and to the free exchange of such property on mutually agreed terms are recognised by society at large and protected by laws without favour. What does this mean in practical terms?

It means that people are protected from enslavement and that their property, held individually or collectively, is protected from arbitrary confiscation by others or by the state and from being diminished in value by corrupt behaviour. To the extent that enslavement, confiscation and corruption are immoral imposts, capitalism is a presumptive model of morality. At this level there appears to be no obvious conflict between the values embedded in capitalism and spiritual values. Nuanced though it is, the Catholic Church (CCC, 2403) supports private property rights:

Even with the right to private property (acquired by work or by a gift), the original gift of earth belongs to everyone. This universal destination of goods remains primary, even though the common good demands the right to private property.

One or other incarnation of socialism is the alternative to capitalism. Now it is possible to get tied up in knots defining socialism. The term “democratic socialism” wouldn’t work, as did the term “democratic capitalism” for Novak. People would think of Sweden. In the annals of economics Joseph Schumpeter is a giant figure. His definition of socialism in Capitalism, Socialism and Democracy (1942) will do, it seems to me. He defines socialism as:

an institutional pattern in which the control over the means of production and over production itself is vested with a central authority—or, as we may say, in which, as a matter of principle, the economic affairs of society belong to the public and not to the private sphere.

The only thing I would add to Schumpeter’s definition, for the sake of clarity and completeness, is that controlling production allows for the control of the distribution of the end product. And this, theoretically, means that socialism can produce a more even income distribution than can capitalism. I will leave this thought hanging for the moment.

The Catholic Church begins its catechismal provisions on social justice by affirming, under a heading of “Ensuring Human Rights”, that “Society must ensure social justice, the conditions that allow individuals and associations to gain what is their due” (CCC, 1928). Friedrich Hayek delivered a lecture at Sydney University in 1976 titled “The Atavism of Social Justice”. The title is instructive. There is a sense in which those who look to social justice, by which they mean some ill-defined and unquantified, and perhaps unquantifiable, redistribution of worldly goods, are stuck in a static world. Or, what comes to the same thing, in a world which existed before capitalism started growing and enriching the pie. In this latter form it is a species of arrested development.

It would be a leap and somewhat uncivil to suggest that the Catholic Church suffers from arrested development. Yet, in a sense, that is what Novak suggests:

Catholic thought was fashioned to deal with a static world … [it] did not understand the creativity and productivity of wisely invested capital … [it] so identified with the ancien regime that it came to resist the social revolutions in modernity [and it has accordingly] misread the liberal democratic capitalist revolution.

Novak’s assessment is consistent with conservative criticisms of Laudato Si’, which are largely based on its neglect of the benefits that capitalism has brought to humanity; including to some of the most disadvantaged. I argued in the December 2105 issue of Quadrant (“Spiritual Economics”) that these criticisms took too little account of the purpose of encyclicals in encouraging beneficial change rather than in being exercises in well-rounded pedagogy. At the same time, it is clear that the Church is troubled by what it sees as adverse outcomes of capitalism; of which, among others, inequality bulks large.

At one level, the Church accepts the inevitability of inequality. While it regards unequal distribution as part of God’s plan, its weight of view is quite evident: “there are ‘sinful inequalities’ which affect millions and are open to contradictions with Jesus’ Gospel”. And in the same paragraph: “We must strive for fairer conditions because social disparity is a human scandal” (CCC, 1938).

Is the current extent of inequality a scandal? According to a recent report by Oxfam the richest sixty-two people own as much as the poorest half of the world’s population. Separately, I read that Bill Gates has $77 billion, Warren Buffett $61 billion, with Mark Zuckerberg lagging third with “only” $46 billion. I can’t vouch for the accuracy of these figures but presumably the orders of magnitude are close enough to the mark. I saw Gates being asked about the Oxfam report while he was attending the World Economic Forum in Davos. He rambled something about giving away his wealth through his charitable foundation but you could see that he didn’t quite know how to give a politically correct response.

An economic morality tale is instructive. Assume the average wealth of the top sixty-two is $10 billion. It is probably no more and probably less than that. In total that is $620 billion. The world’s population is 7.4 billion. The poorest half therefore numbers 3.7 billion. Imagine through some feat of financial wizardry that the $620 billion was distributed evenly among the poorest half of the world’s population. They would each receive $168. No doubt such a sum would be a rich prize in many parts of the less-developed world. What would the poorest of the poor do with $168? What would you do? Maybe buy a bike or some such. This would be a boon for those selling and making bicycles. What would be lost? Savings would be lost, as would its counterpart: capital investment in industry and in new technology and, in turn, the growing prosperity this activity brings about.

Let me guess the epilogue to this imaginary exercise in redistribution. After years of turmoil, slower growth and patchy inflation, as factories frantically switched from high-tech investment into making bicycles, everything settled down and returned to normalcy. Oxfam produced another report which showed, lo and behold, that once again sixty-two billionaires (or thereabouts) owned as much as the poorest half of humanity. Deep in the report was a comment about the problem of “mountains” of rusting bicycles in West Africa. The moral of this story is that a free bike will only take you so far; or a dollar redistributed is a dollar which might otherwise have contributed to wealth creation.

Of course, there is room for philanthropy and growing prosperity; nevertheless, on balance, it is unarguable that on average a dollar invested by Gates benefits humanity more than a dollar he gives away. The world is not rich enough to afford equality and never will be. A society approaching anything remotely close to absolute equality would save little or nothing and therefore would invest little or nothing and be mired in poverty. All of our progress has depended on there being very rich people who save and invest. Rich people are essential and would have to be invented if they didn’t exist. But can the degree of inequality be scandalous? I think it can, but not quite in the way some people think.

There is no settled opinion on the trend of inequality. The weight of view is that it is increasing; but it is unclear by how much. For example, Chris Giles, the economics editor of the Financial Times, cast doubt on Thomas Piketty’s data. He suggested (on May 23, 2014) that the steep upward trend in wealth inequality since the 1970s, as identified by Piketty in Capital in the Twenty-First Century (2014), is largely a product of the process he used to adjust the raw data.

It is very difficult to get accurate numbers on the changing magnitude of inequality through time. However, I am persuaded by other researchers, notably Edward Wolff (for example, “Recent Trends in Household Wealth in the United States”, Levy Institute, March 2010), that inequality has most likely increased in recent decades. But, the facts, whatever they are, don’t matter. What is important is not the extent of inequality but its cause, as I will explain.

First, I will go back to the Catholic Church: “Solidarity [‘friendship’] requires a just distribution of goods, remuneration for work, a just social order, and tensions resolved by negotiation” (CCC, 1940). Leaving aside the ambiguity about the meaning of “a just distribution of goods”, the balance of the provision is not at odds with Novak’s concept of democratic capitalism. The comparison becomes more compelling when the Church makes clear its condemnatory views about collectivism:

Socialisation presents the danger of excessive intervention by the state. States must practise subsidiarity, not interfering in a community’s inner life, but supporting its activities … This principle of subsidiarity opposes all forms of collectivism, limits state interventions, [and] aims at harmonious relationships between persons …
(CCC, 1883–1885)

It is, therefore, not surprising to find Novak saying that he has “slowly become convinced that the actual practice of democratic capitalism is more consistent with the high aims of Judaism and Christianity than the practice of any other system”.

The problem is that the Catholic Church is not as convinced. The primary source of this problem is unlikely to be instances of market excesses, such as trading in threatened species or in foetal body parts, or the egregious despoiling of the environment. These represent examples of universal human failings; not the failings of any system. It is hard to believe that this is not understood by the Church and by other critics of Western capitalism. No, the source of the problem, in my view, is a different deficit of understanding. It is a deficit of understanding about how capitalism works, and can only work if it is to produce growing prosperity. And, it is a companion failure to distinguish between real and monetary wealth. Both lead to a misguided concern about inequality.

Market price signals ensure that all resources, including people, move to where they get best rewarded; which corresponds to where they are most productive and add most value. Those who talk about redistributive justice appear to think of production and distribution as separate and distinct processes. Under socialism, such thinking makes sense and reaches its extreme in Karl Marx’s well-known dictum: from each according to his ability, to each according to his needs. Under capitalism, production and distribution are inextricably linked as part of the same process. Detaching production from distribution means there is nothing to channel resources to where they can be best used.

Of course, under socialism, resources can be channelled by a central authority in accordance with an economic plan. However, inevitably, this results in misallocations of resources. In turn, this ultimately brings about relative impoverishment, as it must, as many historical and contemporaneous examples amply demonstrate. Admittedly it is possible under a socialist system to engineer a more equal distribution of income and wealth. But surely Christian values are not served by equality of immiseration. Yet criticisms of capitalism seem oblivious to the conundrum that you can’t have its benefits without marked disparities of income and wealth. These are not “scandalous” disparities. They are an integral part of an economic system which alone in history has created widespread prosperity and lifted untold millions out of grinding poverty.

There are scandalous disparities. These disparities are those produced by corruption, where people gain more than “their due” by nefarious means. Transparency International (TI) monitors and scores public-sector corruption around the world. It is evident that neither capitalist nor socialist societies are free from corruption. However, the evidence is that societies which have less freedom have more corruption. And, perforce, socialist societies have less freedom. Hayek sets this out persuasively in The Road to Serfdom. Centralised economic planning, because it forces people, as it must, to relegate their own interests to the interests of the state, inevitably morphs into despotism. It is not surprising, therefore, that North Korea, socialist and despotic, is at the bottom of the latest TI scoring.

To go back to the rich sixty-two and to those somewhat less rich who, together, make up the top one per cent. Their wealth is overwhelmingly represented by pieces of paper—by titles to property. Sure, they might own a few mansions, fancy cars, maybe a plane or two, and take expensive holidays. None of that amounts to a hill of beans in the scheme of things. The predominant things that they own, or part-own, are businesses, factories, mines and commercial property. Divvied up none of it will feed the poor.

There is a sad lack of understanding, even among many of those who supposedly are economically literate, never mind the Church, about the difference between real wealth—things with utility or beauty that can be touched and felt—and monetary wealth—bits of paper (or, these days, electronic records). Monetary wealth represents past savings which have a substantial counterpart in productive physical capital; which often embodies advanced and advancing technology. The vastly increased prosperity of a large part of the world since 1800 has wholly depended on physical capital accumulation. The future prosperity of the world will equally depend on new capital accumulation. Capital accumulation is fed by savings and, the fact is, only the rich save very much. The one-percenters are a boon for humanity because their wealth is fuelling future prosperity for the rich and poor alike.

It seems to me that Novak is right. Capitalism is in tune with the spiritual aims of Christianity. It sets out to justly reward people for their contribution. It generates the wherewithal to ameliorate poverty and has succeeded to a degree unimaginable at the time of its inception; which arguably was around the year 1800, when “a mostly torpid world” came to an end. Novak reports that real wages in Great Britain doubled between 1800 and 1850 and doubled again over the next fifty years, despite the population quadrupling over the century. This represents a sixteen-fold increase in the total of real wages. During the same period, the available data from Piketty and others show that wealth became even more concentrated than it is now; the rich got much richer. Exactly why should that be of concern? It shouldn’t. The two trends of rising real wages and rising wealth among a relative few are interdependent. Over such a secular period of time, neither one would have happened without the other.

Capitalism is a two-way street. The particular implications of this can be characterised, if you like, as a fundamental law. Capitalists don’t get rich unless workers have the wherewithal to buy the goods they produce. Workers don’t get well-paid jobs unless capitalists get rich. It is true that the strength of this interdependency is variable. It is less evident when real wages are depressed by the effect of prolonged recessions or by the effect of strong and continuous immigration. But this is something that has to be understood and ridden through or, in the case of immigration, countered at source; rather than be the cause of a fretful malaise which besets many Christians and all those on the Left.

The wealth that capitalism has generated has not only directly lifted people out of poverty; it has also provided enormous scope for private philanthropy and for governments to assist those in need through the tax and transfer system. Of course, capitalism has no pretence of being guided by spiritual values. It works its wonders profanely, led by freely moving market prices; by what Adam Smith famously called its “invisible hand”. Nevertheless, wonders it does perform. And these wonders should be celebrated by Christianity. This would not at all take away the right and duty of religious leaders to rail against abuses which capitalism throws up; or to ask for more to be done for the poor. But it would strike a more realistic and balanced perspective.

Peter Smith is the author of Bad Economics: Pestilent Economists, Profligate Governments, Debt, Dependency & Despair (Connor Court).


Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics