Capitalism is Good for the Poor – and for the Environment

Capitalism and the market economy have solved what is probably humanity’s biggest problem: the problem of mass poverty. But what is capitalism? “Capitalism” means: the productive use of private wealth for the purpose of entrepreneurial profit-seeking, free market-based exchange and competition, as well as international trade – all on the foundation of state protection of property rights, generally applicable legal rules, and legal certainty. This should be good news for the Church, which has always paid special attention to the well-being of the poor and is today also concerned about the environment, nature and, the climate. But misunderstandings and defensive reflexes predominate. Capitalism, profit-seeking and the market economy do not have a good reputation in church circles. Instead, they are blamed for today’s problems and turmoil.

However, the fact is that since the Industrial Revolution the combination of this form of economy—which is entirely directed toward the needs and preferences of consumers—with the process of technological innovation has led to a historically unprecedented rise in the standard of living for the general masses, increasing education, and steadily growing opportunities for a self-directed life. This all despite the enormous population growth that this has brought about, which in earlier centuries had always led to mass impoverishment.

The present text is a slightly extended keynote address by Austrian Institute President Martin Rhonheimer at a public debate with Prof. Bernhard Emunds, Director of the Oswald von Nell-Breuning-Institute for Economic and Social Ethics at the Philosophisch-Theologische Hochschule Sankt Georgen. The debate, presented under the title “Capitalism and the Church: Critique or Approval?”, took place on October 29, 2019 at the Karl Rahner Academy in Cologne.

The creation of mass prosperity – but with negative side effects

However, this process of the capitalist creation of mass wealth has always produced losers in the short term. Even today, with its accelerated, sometimes disruptive dynamics of innovation, it leads to insecurity, social upheaval, psychological problems such as the feeling of being left behind or disadvantaged, as well as loss of identity, at least in the short term and among certain groups. However, many of the negative side effects of capitalism were – and still are – demonstrably the result of harmful policies: often well-intentioned, at least socially well-intentioned, state interventions. The impoverishment of the so-called “rust belt” in the United States, for example, is largely due to the state protection of jobs brought about for social-political reasons and due to the influence of powerful trade unions, which throughout the decades has led to a reduction in the competitiveness of these industries, and to the massive migration of jobs not only to China but also to other states in the U.S. (cf. the analysis The Decline of the U.S. Rust Belt by Simeon Alder, David Lagakos and Lee Ohanian from 2013). Such policies indirectly play into the hands of populist politicians.

It is not social policy but capitalism that has created today’s prosperity.

What is important is that what made today’s mass prosperity possible – a phenomenon unprecedented in history – was not social policy or social legislation, organised trade union pressure, or corrective interventions in the capitalist economy, but rather market capitalism itself, due to its enormous potential for innovation and the ever-increasing productivity of human labour that resulted from it.

Increasing prosperity and quality of life are always the result of increasing labour productivity. Only increased productivity enabled higher social standards, better working conditions, the overcoming of child labour, a higher level of education, and the emergence of human capital. This process of increasing triumph over poverty and the constantly rising living standards of the general masses is taking place on a global scale – but only where the market economy and capitalist entrepreneurship are able to spread.

From industrial overexploitation of nature to ecological awareness

The first phase of industrialisation and capitalism was characterised by an enormous consumption of resources and frequent overexploitation of nature, which soon gave the impression that this process could not be sustainable. Since the end of the 19th century, disaster and doom scenarios have repeatedly been put forward, but in retrospect they have proved to be wrong: The combination of technological innovation, market competition, and entrepreneurial profit-seeking (with the compulsion to constantly minimise costs) have meant that these scenarios never occurred. The ever-increasing population has been increasingly better supplied thanks to innovative technologies, ever-increasing output with lower consumption of resources less harmful to the environment – e.g. less arable land in agriculture, or oil and electricity instead of coal for rapidly increasing mobility. More recent disaster scenarios, such as those spread by reputable scientists since the late 1960s and in the 1970s, have also proved to be inaccurate.

The reason things developed differently was the always underestimated innovative dynamism of the capitalist market economy, a growing ecological awareness and, as a result, legislative intervention that took advantage of the logic of market capitalism: As a result of the ecological movement that had come out of the United States since 1970, wise legislation began to use the price mechanism to apply market incentives to internalize negative externalities. Environmental pollution was given a price-tag.

This led to an enormous decrease in air pollution and other ecological consequences of growth, which is only possible in free, market-based societies, because the production process here is characterized by competition and constant pressure to reduce costs, i.e. to the most profitable use of resources. On the other hand, all forms of socialism, i.e. a state-controlled economy, have proved to be ecological disasters and have left behind destruction of gigantic proportions, without providing the population with anything that is near comparable in prosperity, often even by destroying existing prosperity, such as happened in Venezuela.

Capitalist profit motive combined with digitalization as a solution: Increasing decoupling of growth and resource consumption

Moreover, technological innovations combined with capitalist profit-seeking and market competition have led to a new and surprising phenomenon over the past decades, which is still hardly noticed in the public debate: the decoupling of growth and resource consumption (“dematerialization”). In a wide variety of industrial sectors, the developed countries, above all the U.S., are now achieving ever greater productive output with increasingly fewer resources. This has a lot to do with technology, especially the digitalization of the economy and of our entire lives.

As the well-known MIT professor Andrew McAfee shows in his book More from Less, published in October 2019, this process also follows the logic of capitalist profit maximization. To get it going, we do not need politics, even though wise, properly incentivizing legislation can be helpful and sometimes necessary. Above all, however, it is the combination of technological innovation, capitalist profit-seeking, and market-based entrepreneurial competition that will also solve the problem of man-made global warming.

In addition, property rights and their protection are decisive for the careful use of natural resources. And where this is not possible, legal support for collective self-governing structures, in accordance with the principle of subsidiarity, are important—as is analysed by Nobel Economic Prize winner Elinor Ostrom. By contrast, the growing ideologically motivated anti-capitalist eco-activism, and the policies influenced by it, are leading in the wrong direction, distracting precisely from what would be best for the climate and the environment—and distracting us from what could help protect us against the inevitable consequences of global warming.

When is inequality unfair?

Other contemporary accusations against capitalism are directed at the social inequality it causes – which is allegedly unjust and harmful. But inequality is a complex phenomenon. On the one hand, inequality – as a result of the accumulation of capital – is a socially positive phenomenon: for the accumulation of large productive monetary and physical assets – capital – is the prerequisite for technological and entrepreneurial innovation, for mass production, and mass prosperity. However, inequality can also be the result of injustice, especially legal inequality (discrimination on racial, religious and other grounds).

The decisive equality is therefore equality of equal treatment before the law, not social or material equality or equality of opportunities, which cannot and never will exist in the full sense in a free and humane society. In any case, even as regards material inequality, as the leading inequality researcher Branko Milanovic points out, precisely for social reasons one should not look at inequalities of wealth but rather inequalities of income.

The decisive point, however, is not social inequality as such, but the question of whether the fruits of growth, across generations, will benefit everyone, or whether some will be left behind unjustly, i.e. trapped in poverty and disadvantage. That is the feeling many people have today. Populists on both the right and the left make their living from this while offering misleading analyses and responses, and thus they endanger the functioning of our democracies through toxic polarisation.

The real existing capitalism is in a state of imbalance – why?

Yet capitalism is on trial today. If I say that this is unjustified, I am not unconditionally defending “real existing capitalism,” because politics and legislation have always hindered the effectiveness of capitalism and the market economy, and have distorted its results in a way that clearly contradicts its inner logic: such distortions are with good reason criticized as unjust.

In my opinion, the following factors lead in our time to an imbalance of capitalism and to growing social inequality, rightly experienced as unjust and unfair:

• At least since the decoupling of the dollar from gold in 1971, all central banks have pursued an inflationary monetary policy. This abuse of the state monetary monopoly has led to an enormous expansion of the financial economy, its partial decoupling from the real economy, and to harmful bubbles that, together with other political interventions, triggered the last financial crisis.
• The current monetary policy, which is designed to deal with the consequences of this recent financial crisis, and to save the ailing Euro system – the euro was from the outset an economically mistaken project and was only implemented for political reasons – enables politicians to continue making promises, to save banks that should have disappeared from the scene long ago, and which, by concealing problems, keep states afloat that would have had to declare bankruptcy without the low interest rates. Moreover, the market-based allocation mechanism of interest rates is being suspended, leading to enormous distortions and bad investments, with negative consequences for growth and prosperity.
• One consequence of the policy of cheap money is, in particular, the “zombification” of the economy, because the low refinancing costs artificially keep tens of thousands of unproductive businesses alive throughout Europe: at very least it removes the necessity for them to become more innovative and thus more productive. This leads to a massive misallocation of resources in the double-digit range of GDP, to stagnation of productivity, and thus also stagnation of the real wages of average earners (with simultaneous high-income growth in the financial and highly productive IT sectors). Young people today must enter the labour market in much less favourable conditions than their parents’ generation.
• Zombie banks that live on cheap loans to zombie companies are also kept afloat. Urgently needed structural reforms, especially in the countries of southern Europe, are thus being postponed due to a lack of pressure.
• Low interest rates have caused an inflation of asset prices (shares, real estate). As a result, those who can invest in assets, namely those who are already wealthy, are becoming richer and richer and inequality is growing. But other investors, pension funds, and insurance companies that depend on returns are also driving asset prices up. Savers are deprived of their savings as a result of financial repression; they cannot accumulate wealth through saving, and even lose wealth in the long run.
• The states are overindebted and can only survive thanks to low interest rates, and in this way they protect themselves from bankruptcy. Nevertheless, their bonds are accepted as collateral in the banking sector and are kept on their balance sheets by the central banks. This over-indebtedness is necessary to save the over-inflated welfare states, especially the pension systems. These, in turn, are overburdened by the low interest rate policy, the ageing of society, and by a rising life expectancy without a consequent raising of the retirement age. People live at the expense of future generations and turn a blind eye. To save the system, market-economy mechanisms are increasingly being obstructed and made ineffective.
• The welfare state creates false incentives: in combination with the policy of cheap money, it leads to a lack of willingness to save, to consumerism, and to the corrosion of personal responsibility towards the future. The guilty conscience of the elites towards future generations is compensated by the often almost hysterical encouragement of climate activism.
• Cronyism (“Crony Capitalism”): Too many laws and overregulation lead to a collusion between “big government” and “big business.” Powerful and financially strong corporations succeed in gaining competitive advantages by influencing legislation and regulatory authorities, which is unfair, and contradicts the principles of a market capitalism, ultimately leading to inefficiency and loss of prosperity. Even if a certain degree of regulation is indispensable, the more regulation is introduced, the more the influence of powerful lobbyists grows at the expense of small and medium-sized enterprises, which must face a strong competitive disadvantage or even be crushed by a high degree of regulation.

Real existing capitalism is therefore by no means a pure capitalism, but – often demanded in the name of social justice – is very strongly mixed with dirigiste and interventionist elements, which lead to undesirable and socially unjust results. The market economy and its price mechanism also exist only to a very limited extent, with many distortions and corresponding losses in allocative and innovative efficiency.

It is regrettable that the harmful and unjust consequences of a policy that is detrimental to the market economy, and even contradicts it, are generally blamed on capitalism itself, and that these consequences trigger populist reactions, and endanger democracy through unhealthy polarisation. As a rule, politicians and the public react by calling for even more state activism and interventionism, i.e. a constantly increasing undermining of the market economy.

Church demonization of capitalist profit-seeking – the wrong path

For the Catholic Church’s social doctrine, the extremely worrying developments mentioned above have so far hardly been an issue. The Church does not seem to have a sense for these things. Instead, it criticises capitalism and entrepreneurial profit-seeking, meets the market economy and technological innovation with increasing mistrust, and sees private property above all as a problem and not as the solution to a problem. Thus, it has almost completely detached itself from an older tradition of Christian social ethics, which thought in a much more nuanced and economically enlightened way (as did the Franciscan and other theologians from the 13th century on, and as did those in the School of Salamanca of the 16th and 17th century). Moreover, in the face of an increasing power of the state, the Catholic Church had in the past uncompromisingly defended private property as the basis of individual freedom and justice (as happened in the 19th century with Bishop Emmanuel von Ketteler of Mainz and Pope Leo XIII, in his encyclical “Rerum novarum” of 1891).

After the definitive failure of the Church’s social doctrine as a “Third Way” between capitalism and socialism – in the tradition of Heinrich Pesch, S.J.’s “Solidarism” – current official Church doctrinal statements for the solution of social and ecological questions instead insist on more government and politics, ignore the importance of securing property rights for economic and social progress, and overlook the importance of market instruments for the solution to ecological problems. Often, they even advocate the idea that poverty can only be overcome if the rich are deprived of their wealth. The economy is seen as a zero-sum game consisting of the distribution of fixed resources. And it is not understood that the aim of companies is not to create jobs – although capitalist entrepreneurship of course has exactly that as a result – but to serve consumers, and that means everyone. It is also overlooked that capitalism generates mass wealth through its propensity for profitable mass production. As Ludwig von Mises remarked, capitalism has turned yesterday’s luxury consumption into today’s mass consumption.

Still many in the Church seem to misjudge the wealth-creating and ultimately inclusive—i.e., especially advantageous for the very poor—dynamics of capitalism and its typical pursuit of profit. It would be important for them to understand that, even if this is not the intention, it is precisely profit-oriented entrepreneurship, based on private ownership of the means of production, which has the greatest share in contributing to the common good, and that capitalism and the market economy, despite all imperfections, fulfil a socially beneficial function and are, thus, systemically useful, particularly for the poor and the disadvantaged. Therefore, market capitalism should hold a central place in Church social teaching for specifically moral reasons as well.

Translation from the German original by Thomas and Kira Howes.