Morality and the meltdown

Who would have imagined 20 years ago with the fall of the Berlin Wall and the end of socialism — or in the 1990s when so many made their fortunes in the new economy — that now in 2009 capitalism would be under heavy fire. The Cardinal of Westminster, Cormack Murphy O’Connor, reportedly went as far as to say that as 1989 marked the end of communism, 2008 is the year when capitalism came to an end.

What are we to make of capitalism in light of all these crises, fraud and government bailouts when even some traditional advocates of markets are supporting bailouts and seem to have lost faith in the market order? Is capitalism really to blame for all of the financial woes we now face?

Before we try to answer that question, it’s important to point out that the word “capitalism” is actually a Marxist term. While we use it interchangeably with “market economy,” the Marxist view of capitalism surprisingly still shapes the way we understand economics. The word “capitalism” gives the impression that the market is something out there — a nebulous force which can create great wealth but can also turn and harm us.

This impersonal understanding can lead us to blame markets when things go wrong instead of looking for reasons that are harder to diagnose and often reveal deeper cultural and spiritual issues. In his 1991 encyclical Centesimus Annus, Pope John Paul II specifically rejected the term “capitalism,” preferring instead “market economy,” “business economy” or “free economy.” He did this not to be pedantic but to illustrate the important truth that markets are fundamentally networks of human relationships. Understanding markets this way sheds light not only on many economic problems, but also on the underlying moral nature of markets.

Markets are the combined activities of millions of individuals, not just some guys on Wall Street. But like all human institutions, markets are not perfect and can fail. If people become overly speculative and are convinced that prices can only go up, they will violate all norms of prudence and keep buying at outlandish prices. It happened in the tulip bubble in 1637, the dot.com bubble in 2000 and the housing bubble last year. Sooner or later, reality sets in and the bubble bursts.

Markets can teach us important, though often painful, lessons about life, and we cannot separate markets from human action and human responsibility. Despite their failures, however, free markets have lifted more people out of poverty and helped create prosperity and peace than any system ever devised — so much so that even in today’s financial downturn, very few people who live in mature market economies are desolate and on the brink of starvation. Notice that markets are often blamed for the downturns, yet we tend to forget the cause of the upturn.

In these days of financial turmoil, we often hear critics speaking about de-regulation or “unbridled capitalism.” Yet both of these are straw men. Unbridled capitalism is a myth. Try to think of one country where there are no regulations on the economy or business. In fact, for free markets to succeed and be sustainable, they require a framework with rule of law, contracts, secure property rights and so on. The real question is what regulations and what level of intervention we should choose.

It’s important to remember that many of the primary reasons for this crisis are precisely an overly invasive government that created regulations requiring banks to provide mortgages to customers who could not pay back the loans, the Federal Reserve which manipulated the money supply and thus exacerbated the housing boom, and the promise of bailouts which incentivized irresponsible behavior. These are prime examples of what Friedrich Hayek labeled “the fatal conceit,” the notion that bureaucrats and politicians have enough knowledge to plan an economy better than the individuals and businesses.

Sustainable markets also require a specific moral culture. This includes trust, diligence, collaboration, honesty, perseverance and prudence. If this crisis has taught us anything, it’s the importance of morality for a market economy. Wall Street bankers took imprudent risks with clients’ money and bought financial instruments they hardly understood.

Yet instead of learning the lessons of the past, we again hear calls for increased regulation and government involvement. Some regulation is necessary, but we must not look to regulation to solve our moral problems. Here is where the realization that markets are networks of human relationships is important. If we regulate too much, we concentrate the power of markets in fewer and fewer hands. This has led to all sorts of corruption. Socialist economies, cartels, oligarchies and union-controlled industries where the price mechanism cannot function lead to stagnation and create incentives for corruption.

It is a false hope to believe that regulation will make everything right, a utopian dream that ignores human failing and is the same promise that has been peddled by the socialists. It is likewise delusional to believe that markets alone are enough. Markets require more than just efficiency, they require virtue. Our Founders taught us that political liberty could not long be sustained without virtue. The same holds true for economic liberty. Yet without economic liberty there can be no political liberty. Like liberty, the market must be moral or it cannot be.

Michael Miller is the Director of Programs at the Acton Institute for the Study of Religion and Liberty in Grand Rapids, Mich.