Acton Research Director Samuel Gregg contributed this piece to today’s Acton News & Commentary. Sign up here for the free, weekly email newsletter.

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Humility in a Time of Recession

By Samuel Gregg

Read more on Humility in a Time of Recession…

The famous Austrian economist, Joseph Schumpeter, despaired for the future of the free market system. The reason for this despair was that the excess wealth of the system would create educated folks who would turn on the very system that created them. Their education would make them into anti-capitalist ideologues, who would then kill the goose that laid the golden egg. He did not think that those who participated in the creation of such enormous wealth would be in any position to fight back, and this for two reasons: firstly, business people do not tend to be men of letters, so they are unable to mount arguments defending the system; secondly, the job of the business executive is the survival of the company, and thus, he will concentrate on those things required to weather the storm, not be controversial.

The man who is probably the most famous Austrian economist, Ludwig von Mises, despaired for the future of the free market system due to envy. Various sectors of society, academic, non-productive, uneducated, etc., would envy the wealth of the producers in society, and end up by finding means to take away that wealth and give it to the lesser productive people, despite the fact that they did not earn it, and therefore, are not entitled to it.

Our present political situation has a combination of both of these views. Both presidential candidates are in favor of redistribution of wealth, albeit one is more open about it. And very few business people are saying “no!” to any of it with a few exceptions, such as the president of BB&T Bank, who wrote an open letter to Congress asking why his totally solvent bank should be punished for the stupidity of the others.

But there is another culprit in this maelstrom. This culprit is the business person. Why? With tongue-in-cheek apologies to neo-classical (mathematical) economic theory, the purpose of a company is not to make a profit. As John Paul II said in Centesimus Annus, a profit is a sign of the health of a company, and therefore is good and necessary. But anyone who has taken a management course knows that the purpose of the company, aside from producing what the customers want, is to increase the wealth of the stockholders. This is different than making a profit, although profit is an integral part of it. Wealth is different than profit. Profit is a short run measurement of the short run health of the company. Wealth, by its very nature is long run. Profit appears on the financial statements of a company in mere money terms, and the accountants who produce those statements do not even take inflation into account. So a company could have an increase in profit, but not an increase in items sold, merely because they had to raise prices to accommodate the fall in the value of the dollar. But executives today are a slave to the profit line in the financial statements. They have a need to impress their boards and stockholders now by sacrificing the long term growth of the enterprise. Read more on Saving the Free Market…

What is the root cause of the sub-prime crisis shaking the global economy? We need to know so we don’t allow it to screw up our economy even worse.

Many point to dishonesty and poor judgment on Wall Street. There was plenty of that leading up to the near-trillion dollar bailout, and even now the stock market is busily disciplining stupid, dishonest companies.

Others point to the many people who falsified loan applications to get mortgages beyond their means. That too played a role.

But dishonesty and poor judgment are as old as Adam and Eve. Something more was at work in the present crisis, a crisis of unprecedented scope. Why didn’t profit-minded loan companies run thorough credit checks? Why did they keep pumping out low interest loans to high risk borrowers, ignoring the risks?

It’s as if somebody spiked the financial system’s punch bowl with stupid juice, driving normally prudent financiers to dash, en masse, over the cliff.

It seems that way because it is that way. The brewers of the stupid juice were largely (if not exclusively) politicians in Washington who sought to redistribute wealth from the rich and middle class to poor people with bad credit. These politicians fostered various laws and institutions that directed, cajoled and legally bullied mortgage companies to extend big loans to people with little credit.

A case in point is a group called ACORN—Association of Community Organizations for Reform Now. Stanley Kurtz explains in an Oct. 7 essay at National Review Online:

“You’ve got only a couple thousand bucks in the bank. Your job pays you dog-food wages. Your credit history has been bent, stapled, and mutilated. You declared bankruptcy in 1989. Don’t despair: You can still buy a house.” So began an April 1995 article in the Chicago Sun-Times that went on to direct prospective home-buyers fitting this profile to a group of far-left “community organizers” called ACORN, for assistance. In retrospect, of course, encouraging customers like this to buy homes seems little short of madness.

… At the time, however, that 1995 Chicago newspaper article represented something of a triumph for Barack Obama. That same year, as a director at Chicago’s Woods Fund, Obama was successfully pushing for a major expansion of assistance to ACORN, and sending still more money ACORN’s way from his post as board chair of the Chicago Annenberg Challenge. Through both funding and personal-leadership training, Obama supported ACORN. And ACORN, far more than we’ve recognized up to now, had a major role in precipitating the subprime crisis.

Read more on The Credit Crisis: Who Brewed the Stupid Juice?…