Edward M. Welch

The Catholic Church has taught for over a century that the use of money, capital and markets must be subservient to the good of humankind. It has said that free competition though justified and quite useful within certain limits, cannot be an adequate controlling principle in economic affairs, and has demanded that the market be appropriately controlled by the forces of society and by the state, so as to guarantee that the basic needs of the whole of society are satisfied. The church continues to adhere to this teaching in the Catechism of the Catholic Church (1992), pointing out that regulating the economy solely by the law of the marketplace fails social justice (No. 2425).

I have always wondered what all this meant. Of course there was historical significance to some of the older statements, but they seemed to be truisms. Who would argue that there was not some role for government in controlling economic life? Who would doubt that a completely unrestrained market would lead to excesses for some and deprivation for others? Surely the church was silly to worry that a responsible society would go to these extremes.

The Extreme Has Arrived

But consider what has happened in this country in the last 20 years. Deregulation and privatization have become the top priorities of government. We have deregulated trucking, airlines, phone service and energyto mention just a few industries. We have turned over to for-profit companies everything from prisons to public schools. Much of the work once done for state and local governments by civil servants is now contracted out to private business. On a single day this summer the media reported that the U.S. Food and Drug Administration was loosening its regulations for health claims on food, Congress was voting to relax overtime rules applied to employers, and the House of Representatives was limiting the ability of states to police investment firms.

Even the sciences have been privatized. It used to be that most basic scientific research was done at universities and was funded by grants from the government. Today, however, much of it has moved from universities to private organizations. This is partly because of political factors and partly because of the potential profits that can result from such work. This has been especially true in genetic research, where some form of control might be particularly important.

It has become the accepted wisdom that government regulation is in itself bad and must be reduced in every possible way, that as many functions as possible should be taken away from government and turned over to for-profit businesses, and that the control of our society should be turned over to the forces of the marketplace. Fifty years ago Charles Wilson was laughed out of office for saying that what’s good for General Motors is good for the country. Today we just assume that what is good for business will somehow result in good things for people. The situation about which the church warned us has come to pass.

Disastrous Results

Consider just a few examples of the results of this unlimited reliance on the marketplace. The most striking recent example is the blackout in the Northeast, which should have been avoided by better regulation of the energy business. In a way, though, the blackouts in California a couple of years ago are a more serious example. They occurred because deregulation allowed companies like Enron to manipulate the energy market for their own profit. To do this they created artificial shortages, which led to the blackouts.

The securities market seems to have been completely discredited. Researchers for Wall Street firms give advice to their clients, often small investors, on how to invest their money. Other parts of these same firms are paid by big companies to help sell their shares. It now turns out that the researchers were often giving glowing descriptions of the companies the firms are paid to represent, even when they were bad investments. In fact, these researchers were advising small clients to invest in some companies while sending e-mail messages to friends joking about what terrible investments these companies actually were. After a settlement in which 10 firms paid $1.4 billion, one of the firms had trouble admitting it did anything wrong. It was, it claimed, only doing what its customers wanted. The same firm is also being investigated for giving its brokers improper incentives to sell its own mutual funds.

Xerox officials paid $22 million to settle claims that they falsely inflated the value of the company’s stock. This spring American Airlines was asking its flight attendants and other employees to take pay cuts in order to save it from hard times, while at the same time it was secretly giving supplemental pensions and bonuses to its top executives.

Guidant, a supplier of medical equipment, has pleaded guilty to allowing marketers to influence scientific decisions. It kept marketing heart grafts even after becoming aware of significant dangers involved in their implantation. AstraZeneca pleaded guilty to giving illegal financial incentives to doctors to persuade them to prescribe its drug Zoladex. A California court has handed down a $12.5 million false-advertising judgment against the maker of an ephedra-based dietary supplement. Visa and MasterCard have agreed to a $3 billion settlement of a claim that they violated antitrust laws and forced merchants to accept their cards. Even Coca-Cola has paid $21 million because of a rigged test of one of its products.

The Bottom Line

Perhaps the most important result is just what we should expect. The people with capital are doing very well at the expense of the rest of us. The disparity between the wealthy few and others in society gets bigger and bigger in terms of both income and wealth. This is sometimes described by saying that the rich get richer and the poor get poorer. This is true, but it is not the best way to describe what is happening. One does not get rich by taking money from the poor. They do not have much money to take. You get wealthy by taking from the middle class. Perhaps taking from the poor is more of a sin, but the problem will never be dealt with until the majority in the middle realize that they too are being victimized.

It could be argued that the examples cited above do not represent failures, because they have all been found and corrected. While they have all been pointed out, however, hardly any have really been corrected. Energy regulators imposed a largely symbolic sanction on the now bankrupt Enron, but did not invalidate the oppressive contracts that were entered into during the manipulations. The manufacturers of health products were fined, but the drive continues to limit the liability for medical malpractice. Courts have thrown out cases by investors who followed bad advice from Wall Street. The settlement by Visa and MasterCard was paid to merchants, not to cardholders, and Coke paid Burger King, not consumers. Moreover, one could just as well say that these are only the abuses that have been found. It is quite likely that there are just as many, perhaps many more, problems that have not come to light.

The Church Was Right

The church was right, but its rightness was not so much in saying that unrestricted capitalism would be bad. That is indeed a truism. It should also not be surprising that, given free rein, capitalism would go to extremesa circumstance predictable from its very nature. What is surprising is that the church was right in predicting that we would go as far as we have in tearing down any and all limits to the control of our system by capitalism and markets.

Have we learned anything? Will we do better in the future? There are hopeful signs. Even The Wall Street Journal is writing that we may need to reinstate some regulations. It began a recent article saying, The blackout of 2003 offers a simple but powerful lesson: Markets are a great way to organize economic activity, but they need adult supervision. (Maybe the encyclicals just needed a little more style.)

But I still worry. Are ordinary citizens, much less business leaders and politicians, ready to reject the idea that we can always rely on the marketplace to produce the right result? Are they willing to ask first, How will this help people? before they ask, How will this help businesses? Are pastors and teachers ready to tell them that this is the morally correct way to look at things? We will see. In the meantime, we all might do well to pay more attention to the church’s social teachings.

Edward M. Welch is a professor in the School of Labor and Industrial Relations at Michigan State University, East Lansing, Mich.

Comments

Joan E. Burke | 12/8/2003 - 4:53pm
I found this article to be very incisive. The author might have included that the great growth of the American middle class took place after WW II, largely due to the benefits of the GI Bill and the labor movement.

Working-class people had an opportunity to go to college and buy their own home. Union workers had more of a collaborative relationship with business, as well as a chance at true profit-sharing. For about the last 25 years they have rapidly been cut out of the equation, so that only top level management and stockholders share the largest parts of the "pie".

Rick Cabral | 11/25/2003 - 8:14am
I believe the Church is right about Capitalism, but the author is not. When you allow the government to get involved in owning and managing economic resources, you invariably end up with a much more destructive situation where the people of a country become dependent on the State, rather than on God.

The Catechism teaches that "Regulating the economy solely by centralized planning perverts the basis of social bonds." Because of its (human) nature, a government seeks to always increase its own power and authority over the people, rather than allow the people to follow God. You don't have to look far to see the result of Socialism and Communism in our world. The Godless states of Eastern Europe during the second half of the twentieth century demonstrated how regulation and power in the hands of government lead to the denial of the reality of our dependence on God.

Capitalism, even with its faults, encourages hard work and an effecient use of resources. It allows people the freedom to be challenged which encourages them to rely on God and family more than on the State.

The Catechism also teaches that a "Reasonable regulation of the marketplace and economic initiatives, in keeping with a just hierarchy of values and a view to the common good, is to be commended" Although some limits on capitalism may be required to minimize its negative side, one must be careful not to "throw the baby out with the bath water." The key is to keep the regulation reasonable, and more importantly, to keep in mind the just hierarchy of values when imposing regulation. Too often in America, the goverment is more concerned about the well being of plants and animals than of human beings. Clearly, such choices are not in keeping with the teachings of the church.

Jack Morris, S.J. | 2/7/2007 - 4:40pm
I very much appreciated Edward M. Welch’s article, “The Church Was Right About Capitalism” (12/1). The marvelous themes of our Advent liturgies point in the same direction: the call to stand with the marginalized, the dispossessed and the rejected. Unyoked capitalism sets loose the dogs of greed and brutal competition, while legitimizing untruth and deceit as the coin of the realm. When unregulated capitalism becomes the central liturgy of a national economy, national sovereignty quietly becomes a supreme and ruthless god. One courts the other.

Mr. Welch’s article clearly, but all too gently, delineates the schizophrenic self-destructive activity in American society today in the top reaches of government and corporate business, all in the name of deregulation and private and “free” enterprise.

Straight paths are being made crooked, and the smooth is getting rough for the handicapped, the elderly, the poor and, above all perhaps, for the middle class. John the Baptist is an appropriate patron saint for these unraveling times.

Joan E. Burke | 12/8/2003 - 4:53pm
I found this article to be very incisive. The author might have included that the great growth of the American middle class took place after WW II, largely due to the benefits of the GI Bill and the labor movement.

Working-class people had an opportunity to go to college and buy their own home. Union workers had more of a collaborative relationship with business, as well as a chance at true profit-sharing. For about the last 25 years they have rapidly been cut out of the equation, so that only top level management and stockholders share the largest parts of the "pie".

Rick Cabral | 11/25/2003 - 8:14am
I believe the Church is right about Capitalism, but the author is not. When you allow the government to get involved in owning and managing economic resources, you invariably end up with a much more destructive situation where the people of a country become dependent on the State, rather than on God.

The Catechism teaches that "Regulating the economy solely by centralized planning perverts the basis of social bonds." Because of its (human) nature, a government seeks to always increase its own power and authority over the people, rather than allow the people to follow God. You don't have to look far to see the result of Socialism and Communism in our world. The Godless states of Eastern Europe during the second half of the twentieth century demonstrated how regulation and power in the hands of government lead to the denial of the reality of our dependence on God.

Capitalism, even with its faults, encourages hard work and an effecient use of resources. It allows people the freedom to be challenged which encourages them to rely on God and family more than on the State.

The Catechism also teaches that a "Reasonable regulation of the marketplace and economic initiatives, in keeping with a just hierarchy of values and a view to the common good, is to be commended" Although some limits on capitalism may be required to minimize its negative side, one must be careful not to "throw the baby out with the bath water." The key is to keep the regulation reasonable, and more importantly, to keep in mind the just hierarchy of values when imposing regulation. Too often in America, the goverment is more concerned about the well being of plants and animals than of human beings. Clearly, such choices are not in keeping with the teachings of the church.