"Power tends to corrupt, and absolute power corrupts absolutely." Lord Acton

The Inevitability of Finance And The Call of the Entrepreneur

“The Deal Professor,” Steven M. Davidoff, has a good piece at The New York Times website about the indispensability of finance to our economy. It briefly rebuts the view popularized in the Oliver Stone movie Wall Street, in which financiers are portrayed as greedy parasites. I left a comment at the web page, noting that our documentary The Call of the Entrepreneur makes a similar case. I include the comment below, since it may not pass muster with the page’s comment moderator:

A documentary that explores the wealth-creating role both of the entrepreneur simpliciter and the finance entrepreneur in particular: The Call of the Entrepreneur. The film appeared on more than 80 PBS affiliates nationwide, including repeated airings in several major markets. And in what may be a first, it appeared both on PBS and Fox Business. I mention this by way of reassuring readers that the documentary isn’t screechy.

The one-hour film is a combination of narrative and expert commentary that many have found useful for explaining what entrepreneurs and merchant bankers bring to the economy, a particularly useful explanation for friends and family who wouldn’t read a lengthy article or book on the subject but will watch a documentary with high production values. It doesn’t pretend that there isn’t corruption or greed on Wall Street, but it does insist that these elements do not provide a full picture.

Full disclosure: I wrote the script for the documentary and am a fellow of the institute that created the film, The Acton Institute. The film is available at calloftheentrepreneur.com/. Also, the film doesn’t address the market distortions generated by Alan Greenspan and others, distortions that encouraged excesses in the financing world leading up to the economic crisis. Those issues are tackled at our web page on the economic crisis: acton.org/issues/economy.php/.

— Jonathan Witt

Government-Managed Capitalism: A Love Story

Memo to documentary filmmaker Michael Moore: Free markets didn’t cause the financial crisis. The biggest culprits were government planners meddling with the market. That’s the message of Acton’s newest video short.

So why on earth is Michael Moore (Capitalism: A Love Story, Sicko) so eager to route even more power and money through Washington? Centralized planning is economic poison. Doubling down isn’t the cure.

(Also, Acton’s resource page on the economic crisis is here.)

Money, Greed and God at NRO

“We talk about what caused the financial crisis, whether ‘greed is good,’ and if ‘it is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God.’ It’s John J. Miller describing his podcast interview with Jay Richards here at NRO. They discuss Jay’s excellent new book, Money, Greed and God: Why Capitalism is the Solution and not the Problem.

Caritas in Veritate: Why Truth Matters

Relativists beware. Whether you like it or not, truth matters – even in the economy. That’s the core message of Pope Benedict XVI’s new social encyclical Caritas in Veritate.

For 2000 years, the Catholic Church has hammered home a trio of presently-unpopular ideas into the humus of human civilization: that there is truth; that it is not simply of the scientific variety; that it is knowable through faith and reason; and that it is not whatever you want or “feel” it to be. Throughout his entire life, Benedict XVI has underscored these themes, precisely because much of the world, including many Christians, has lost sight of their importance.

Perhaps Caritas in Veritate’s most important truth-claim about economic life is that the market economy cannot be based on just any value-system. Against all relativists on the left and the right, Benedict maintains that market economies must be underpinned by commitments to particular basic moral goods and a certain vision of the human person if it is to serve rather than undermine humanity’s common good: “The economy needs ethics in order to function correctly — not any ethics whatsoever, but an ethics which is people-centred” (CV no.45)

“Without internal forms of solidarity and mutual trust,” the Pope writes, “the market cannot completely fulfill its proper economic function” (CV no. 35). This surely has been amply confirmed by the recent financial crisis. America’s subprime-mortgage market collapse was at least partly attributable to the fact that literally thousands of people lied on their mortgage application forms. Should we be surprised that mass violation of the moral prohibition against lying has devastating economic consequences? “The economic sphere”, the pope reminds us, “is neither ethically neutral, nor inherently inhuman and opposed to society. It is part and parcel of human activity and precisely because it is human, it must be structured and governed in an ethical manner” (CV no.36).

Contrary to the pre-encyclical hype of certain American commentators and the ever-unreliable British press, predictions of papal anathemas against “global capitalism” have – as usual – been found wanting. In economic terms, the pope describes as “erroneous” the tired notion that the developed countries’ wealth is predicated on poor nations’ poverty (CV no.35) that one hears customarily from the likes of Hugo Chavez and whatever’s left of the dwindling band of aging liberation theologians. That’s a pontifical body-blow to a central working assumption of many professional social justice “activists”.

Nor will they be happy with the pope’s concerns about the ways in which foreign aid can produce situations of dependency (CV no.58), not to mention Benedict’s strictures against protectionism (CV no.42) as well as his stress that no amount of structural change can possibly compensate for people freely choosing the good: “Integral human development presupposes the responsible freedom of the individual and of peoples: no structure can guarantee this development over and above human responsibility” (CV no.17).

Nor does Benedict regard the market as morally problematic in itself. “In and of itself,” the Pope states, “the market is not . . . the place where the strong subdue the weak. Society does not have to protect itself from the market, as if the development of the latter were ipso facto to entail the death of authentically human relations” (CV no.36). What matters, Benedict claims, is the moral culture in which markets exists.

At the heart of the economy are human persons. People whose minds are dominated by crassly hedonistic cultures will make crassly hedonistic economic choices. “Therefore”, Benedict comments, “it is not the instrument that must be called to account, but individuals” (CV no.36).

The implications of truth for economic life do not, however, stop here. For Benedict, it is a lens through which to assess ideas such as “business ethics”, “ethical investing” and “corporate social responsibility.” The notion that investment and business choices have a moral dimension is hardly new. What matters for Benedict is the understanding of morality underlying these schemes. Merely labeling an investment scheme as “ethical”, Benedict notes, hardly tells us whether it is moral (CV no.45).

A second major truth underscored by Benedict is the indispensability of a strong civil society for both undergirding and limiting the market and the state. By this, he does not mean a plethora of government-funded NGOs, many of whom Benedict identifies as intent upon imposing some of the very worst aspects of Western lifestyle-libertarianism upon developing nations (CV no.28). Certainly, Benedict believes, there is a need to re-evaluate (CV no.24) how the state regulates different parts of the economy. Ultimately, however, Benedict stresses that the virtue of solidarity, he argues, is about people concretely loving their neighbour; it “cannot therefore be merely delegated to the State” (CV no.38). This is reminiscent of Alexis de Tocqueville’s attention to the manner in which the habit of free association both limits the size of government while also discouraging people from retreating into their own little bubbles.

The economist John Maynard Keynes is famous for many things, including the saying that “in the long run, we’re all dead.” The horizon of Benedict XVI’s perspective on economic life is rather different. The pope asks people to live their economic lives in the short, medium, and long-term as if living in the truth is eternally important, not to mention eternally relevant to their soul’s salvation.

That’s change we can all believe in.

Pope Benedict’s Encyclical and a New World Economic Order

In the midst of the release of his expected encyclical, Pope Benedict is calling for a new world economic order; a model that is “more attentive to the demands of solidarity and more respectful of human dignity.” Professor Philip Booth, editorial and program director of the Institute for Economic Affairs, and speaker at Acton University, was interviewed by The Catholic Herald, a UK paper, about the Pope’s upcoming encyclical:

…it would be dangerous to follow a path of greater socialization and greater regulation of the economy and financial sector.  This is a model that has been tried and which is failing.

But what is essential is ethical renewal in all aspects of life-including in the financial sector.  Trying to deal with problems such as the lack of ethics in economic life with more regulation is like trying to deal with promiscuity through sex education lessons – it is the wrong instrument.

Kishore Jayabalan, director of Istituto Acton in Rome and an AU lecturer, was also interviewed by The Herald.

The Pope’s challenge to all of us is that we make the best possible use of our freedom and gifts, which will require a bit more intellectual and spiritual fortitude than we’ve seen from most of our political and business leaders recently.

To read the article and more comments by Professor Booth and Jayabalan please click here.

Pope Benedict’s encyclical is expected to be released on June 29.  The Acton Institute will be commenting on the encyclical once it is released and we encourage everybody to return to the PowerBlog and our website for more commentary.

GM Bankruptcy A ‘Hammer Blow’ To Michigan

The Detroit News says the General Motors bankruptcy filing “is a hammer blow for a state that was already on its knees.” In an editorial, the paper calls for an “emergency response” from government and an entirely new orientation to attracting businesses and jobs to the state:

Longer term, Michigan’s entire focus must be on creating a business climate that makes the state attractive for job creators in a wide range of industries. It can’t afford to focus on any one segment in hopes of finding the next Big Three. Its future will depend on making itself irresistible to investors across the spectrum.

This echoes Sam Gregg’s Detroit News commentary “Entrepreneurs Require More Room to Thrive” published on May 12:

Michigan must create an entrepreneur-friendly economy by lowering the cost of doing business for all firms, not just the favored few darlings of the moment. The state’s policymakers have spent decades trying to pick the winners (automation, biotech, green energy) that would rescue the state from its dependency on automotive manufacturing. But policy makers and elected officials do not “create jobs” or industrial sectors — businesses and entrepreneurs do.

Also in today’s News, Oskari Juurikkala writes about the push for greater regulation in financial markets:

Is lighter regulation the solution to economic crises? It depends. Some over-the-counter financial derivatives are practically unregulated, so there is nowhere to cut regulation. It might be more appropriate to cover such clear gaps in existing rules in a principled manner so as not to lead people to the temptation of recklessness.

But a few clear-and-fast rules are often better than numerous rules that are hard to understand — especially if they are poorly enforced, which seems to be the case in financial market regulation.

When designing rules for a game, one must take into account the moral character of the players. But there needs to be adequate variation: General laws designed for crooks will not produce any saints.

New report: Verdict on the Crash

Much of the blame for the current financial crisis has been aimed at Wall Street and the bankers who, the story goes, created toxic debt instruments and then lined their own pockets with the proceeds. In “Verdict on the Crash: Causes and Policy Implications,” a new analysis from economists and scholars — including Acton Institute Research Director Samuel Gregg — the London-based Institute of Economic Affairs comes to the opposite conclusion: It was governments and regulators who erred. Moreover, the IEA report says, the people most often berated for their part in the crisis – the hedge fund managers and those who run tax havens – are among the least guilty. The report also spells out the need for a “radical overhaul” of the financial system to guard against a repeat of the errors that led to the crisis.

The authors of “Verdict on the Crash” assert that “a revolution in financial regulation is needed. The proposals of the G20 governments and the EU are wholly misconceived. Specific and targeted laws and regulations could restore market discipline.”

Read a letter to London’s Daily Telegraph from the economists and scholars who wrote the “Verdict on the Crash” report for IEA. Read highlights and download the full report from the IEA blog. Acton’s Samuel Gregg authored the chapter titled, “Moral Failure: Borrowing, Lending and the Financial Crisis.”

‘The Morality of Mortgage Relief’

The National Catholic Register’s Tom McFeely interviewed Sam Gregg, director of research at Acton, about President Barack Obama’s $75-billion plan to help mortgage holders at risk of default.

McFeely: What is your overall assessment of President Obama’s mortgage relief plan? Is it likely to work?

Sam Gregg: Without question, thousands are suffering as mortgage defaults rise across America. Their plight should not be trivialized. That said, I am deeply skeptical of the mortgage relief plan. I believe that it will be counterproductive and only harm those that it is intended to help.

First, we know that something like 55% of people who have defaulted on their mortgage and received a temporary reprieve typically re-default within six months. In short, this plan is likely to encourage people to stay in painful situations instead of moving on with their lives, rebuilding their credit, and investing their talent, time and energy in more productive activities.

Secondly, the plan will encourage some to stay attached to mortgages that are worth far more than the real value of the actual properties. Frankly, foreclosure or individuals renegotiating their mortgages with their banks would be better, and allow for a faster recovery of the housing market, which is truly in the interests of the common good.

Read “The Morality of Mortgage Relief” on the NCR site.

Risky Business: Keynes, Moral Hazard, and the Economic Crisis

Acton’s Sam Gregg on Public Discourse:

At the level of government policy, a prominent instance of moral hazard was what some call the “Greenspan doctrine” of 2002. This involved the U.S. Federal Reserve stating that, while it was powerless to prevent the emergence of asset bubbles (such as the dot-com and housing booms), the Federal Reserve would do everything that it could to soften the effects of an imploding bubble. This included providing investors with the option of selling their depreciated assets to the Federal Reserve at a time of crisis. Not surprisingly, the result was a surge in excessive risk-taking by investors confident that, if everything did not proceed as planned, they could recoup their losses at someone else’s expense. In his recent book, Fixing Global Finance (2008), the financial journalist Martin Wolf underlines “the distortions introduced by government guarantees to risk-taking.” These, he writes, “create an overwhelming incentive to privatize gains and socialize losses.”

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Economic Justice for All Revisited

Catching up on “Revisiting the 1986 economic pastoral”, an article from October in the National Catholic Reporter:

The bishops’ point “that Catholics’ moral life cannot be separated entirely from their economic life has relevance for what we’re going through now,” said Kevin Schmiesing, research fellow for the Acton Institute, a proponent of free markets. “Unless you believe there is no moral component to this, that there’s no failure of responsibility, that there’s no greed at work, that those kinds of moral issues have no impact. … If you’re willing to concede that they do, then I think you can also concede that the bishops have a point.”

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