Today, the Vatican issued a letter on economic and financial matters. Quite unlike many recent communications on those issues, it was elegantly written – almost a joy to read. It is a serious and constructive contribution to the debate and, in its earlier sections, it is, if not quite original, a vital contribution to the teaching of the Church. The document has a beginning a middle and an end and is written in such a way that you don’t have to keep re-reading it to work out what the over-riding theme is. Sadly, modern Church teaching documents on economic matters have not had such elegance: this letter is more like Quadragesimo Anno or Rerum Novarum. Indeed, its content could have been written by Oswald von Nell-Breuning, the author of the former encyclical.
A feature of other recent documents on finance and the economy is that they have tended to exaggerate or, quite often, say things which are simply not true about the factual picture and this has taken the focus away from the essential moral and social teaching message. This letter makes no such mistake.
So, what does it say?
In the first half the document, the authors, from the Congregation of the Doctrine of the Faith and the Dicastry for Promoting Integral Human Development, discuss at some length, though concisely, the essential nature of economic behaviour. Economics is about human action in the economic sphere and so it cannot be separated from the need for ethics. Keynesian economics and neo-classical economics have separated economics from ethics in order to focus more clearly on particular aspects of economic problems. This works to an extent, but, just as when we focus on part of a painting in an art gallery, we have to adjust our eyes and step back to see the full picture in all its glory.
Economics and finance is about human interaction and co-operation. It is ultimately inseparable from a consideration of normative ethics. In recent documents, such discussion has got mixed up with sideswipes at those who believe in free markets (ironic, given that it is Austrian economics’ followers of Hayek and Mises who are quickest to understand the human element) or grandstanding about the failure of globalisation and markets to promote welfare for the most needy.
This time is different. Some of the great advances in economic wellbeing are recognised. It is not noted that the growth of globalisation and financialisation has coincided with the first era in over 200 years that income inequality on the planet has fallen. Slightly more oddly is that the letter, quite rightly, mentions that there is much more to economic life than can be measured by GDP, but it does not note the collapse in infant mortality and child labour and the fall in deaths from pollution or huge increases in literacy that have taken place since globalisation took off in the early 1980s.
But, I don’t want to end this part of the discussion with a quibble. There is a wonderful message for universities which, in fact, would be an excellent summary of a number of discussions we have had at St Mary’s University about the design of our curricula in business studies and Catholic social teaching:
In this regard, it is particularly desirable that institutions such as universities and business schools both foresee and provide, as a fundamental and not merely supplementary element of their curricula of studies, a formational dimension that educates the students to understand economics and finance in the light of a vision of the totality of the human person and avoids a reductionism that sees only some dimensions of the person. An ethics is needed to design such formation. The social doctrine of the Church would be a considerable help in this connection.
I hope that this is a message that will resonate and be applied.
There is then a discussion of regulation and financial instruments. Here, I disagree with the tenor of the discussion, but there is no doubt that the hand behind this broadly understands the financial system and the world we live in despite some somewhat strange conflations and definitions at times.
Speculation is criticised and seems to be held responsible for the financial crisis. It is suggested that different activities of banks should be compartmentalised. These are arguable, but perfectly respectable positions.
As ever, very much in the mould of Quadregesimo Anno, the case is made for state regulation (and global regulation). But, it is not over-stated and the difficulties are recognised. It would have been sensible for the authors to note that the crisis occurred in an era when we had international regulation of the banking system which encouraged the behaviours that caused the crisis and also that the crisis may not have happened at all were it not for the huge regulated and state-underwritten securitisation warehouses in the US. Imperfectibility is all around the place – it is part of the human condition. It is not clear that the serious reflection that is necessary to understand where the role of the regulator begins and ends has been undertaken. But, the document is written in a tone which can feed into that reflection rather than a tone that will promote destructive debate.
I will end by making two points. It must be recognised that, if we have international regulation of finance, it will encourage the adoption of similar business models by those involved in finance and to larger financial institutions. The document calls for more bio-diversity in finance. Amen to that! However, international regulation is unlikely to create that and can also lead to a system that is more fragile.
Secondly, the paper argues: “Moreover, where massive deregulation is practiced, the evident result is a regulatory and institutional vacuum…” This is demonstrably not true. Whether it be the stock exchanges of Holland or the UK over the centuries (the latter having had its wings clipped in the big bang of 1986, which was an act of government prohibition of private regulation not of deregulation) or the development of the International Swaps and Derivative Association or the development of independent professions, we know that regulatory institutions can develop within markets and from civil society. Why do they develop? Because markets involve interaction and deliberate human action and are not autonomous and so institutions develop to solve problems. Indeed, the document recognises this in its conclusion in which it notes:
In front of the massiveness and pervasiveness of today’s economic-financial systems, we could be tempted to abandon ourselves to cynicism, and to think that with our poor forces we can do very little. In reality, every one of us can do so much, especially if one does not remain alone. Numerous associations emerging from civil society represent in this sense a reservoir of consciousness, and social responsibility, of which we cannot do without.
Absolutely: and shades of Quadragesimo Anno again. Let’s hope that this is a sign that the Vatican has itself abandoned such cynicism and that the ideas behind this letter will be discussed, critiqued and developed.