The pope takes on economics’ pro-rich bias
The leading theories of economics and finance are usually produced for the rich. Pope Francis deserves praise for suggesting an economics for the poor.
The typical criteria of economic success – such as efficient pricing, fully competitive markets and rapid GDP growth – sound uncaring. And they often are. One problem is that most of the leading theories have an implicit pro-rich bias. For example, the Capital Asset Pricing Model, a basic tool in finance, assumes that the rich investors who can afford to take big bets deserve extra-large rewards when things go well. Or consider how most governments’ economic policy aims first and foremost at GDP growth, basically ignoring the uncomfortable truth that the already rich typically take a disproportionate share of additional production.
By contrast, pro-poor concepts receive almost no attention. Mainstream thinkers rarely say that the rich people who have gained from the economy have an obligation of solidarity with the poor who have lost out. Most of them have never heard of the idea (common in Catholic circles) that private property comes with a “social mortgage”, a debt to the society which makes that property valuable.
I am not accusing the academics, or Wall Street for that matter, of intentional callousness. There are no plots to defend the ruling classes or to ignore suffering. Many economists have used the theories to justify anti-poverty programs. Still, standard economics has a pro-rich bias. I felt it acutely last month at a financial firm’s presentation of its latest investment thinking. A speaker explained that many of the firm’s billionaire clients thought emerging markets would underperform, so they were shifting funds out of them.
In other words, these very rich people were trying to become a little bit richer by taking money away from poor people.
There was no concern for the economic effects of these portfolio adjustments, and no sense that billionaires should have something better to do with their wealth. No one seemed to think twice about the ethical incongruity of it all.
Francis wasn’t there. Had he been in the audience, he could have read aloud from his recent essay: “The Pope loves everyone, rich and poor alike, but he is obliged in the name of Christ to remind all that the rich must help, respect and promote the poor. I exhort you to generous solidarity…”
The pope’s pro-poor bias leads him to some exaggerations in that document. It is not fair to say that the entirety of economic activity is governed by “the laws of competition and the survival of the fittest”. Governments and charities follow other laws in both rich and poor countries. And the gap separating the majority from “the prosperity enjoyed by those happy few” is not actually “growing exponentially”. On the contrary, measured by the provision of basic economic goods, the gap has narrowed substantially.
But Francis is a preacher, not a statistician. The former archbishop of Buenos Aires was well known for spending time in the slums. The billionaires, the richest of the rich, can fact-check; the poor should be allowed poetic truths. And alongside the noble words – I particularly like the “globalization of indifference” – Francis offers some fairly specific recommendations of how to reorient real world economic activity to be pro-poor.
Finance is an obvious target. He argues against the toleration of speculation, the merciless pursuit of debt repayment and the unhealthy hunger for profits. He is basically right: money and credit should unify society and promote the common economic good. Too often these days they divide and diminish.
Now to business people, and their purpose. In tackling strategy, chief executives often start by asking: why does this company exist? Francis has a wise answer. He says executives should “see themselves challenged by a greater meaning in life”, a calling which comes with a material purpose, “to increase the goods of this world and to make them more accessible to all.” That ultimate stakeholder approach is quite a contrast with the rather pro-rich current tenets of management theory, for example that businesses should maximize shareholder value.
Then there are politicians. “I beg the Lord to grant us more politicians who are genuinely disturbed by the state of society, the people, the lives of the poor!” It is perhaps significant that Francis asks for divine help with this cause. He may think mere human action will just produce more leaders whose main concern about the poor is how they vote.
Economists can lead the way, even without fully following the papal injunction to end their blind trust in the invisible hand of the market. Francis provides a quite realistic agenda: policies geared to a better distribution of income, the creation of sources of employment and an “integral promotion” of the poor. A good start would be to root out any old ideas which amount to an integral promotion of the rich.