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Michael Meeropol: The Magic Of The Market Needs A Guiding Hand

Just three months ago, I commended the Papal Encyclical Laudato Si which focused on the need for humanity to unite in an effort to drastically cut back carbon emissions to mitigate climate change.  In this commentary, I want to focus on one of the Pope’s economic arguments.

But first, I want to note that the Pope’s recent visit to the United States shows how far we have come as a nation.   Back in the 1920s, the Ku Klux Klan used anti-Catholic rhetoric to gain influence in a number of Midwestern states.  When, in 1928, the Democrats nominated Al Smith, a Catholic, for President, anti-Catholic bigotry was used to turn even staunchly Democratic voters against him.  Some argued that if Smith were elected it would be the Pope who would sit in the White House.  The mostly white-only southern electorate had voted solidly Democratic since the end of Reconstruction, but in 1928, four Southern states voted Republican.   We all know that when John F. Kennedy ran in 1960, he had to confront anti-Catholic sentiment head on.   Can anyone imagine an invitation in 1960 to a Pope to address a joint session of Congress?

Yet now in 2015, the entire nation has just celebrated the Pope’s visit – which included an address to Congress.  Catholic and non-Catholic alike listened intently to his speeches and treated him with great respect.    Who says a nation cannot make significant progress in combatting bigotry?

As I listened Pope Francis address Congress, I heard a man asserting moral leadership.  To my mind, his basic message is that organizing society based on market principles where the pursuit of self-interest is supposed to result in the best of all possible worlds ignores the moral dimension of life.  Public policy must impose a moral order on the marketplace.  

Many economists reject the Pope’s view.  They argue that market-based societies such as the United States --- organized under the principles of free enterprise capitalism -- have been the engine that has lifted hundreds of millions of the world’s people out of poverty.   The implications are – it ain’t broke, don’t try to fix it.

I do not deny that economic developments since the rise of capitalism have lifted many millions out of poverty.  However, it is ludicrous to imply that nothing is broken.  The recent economic meltdowns in the US and Europe and the outrageous increase in inequality that has been the trend in the United States for the past 35 years both give the lie to complacency.  We should judge the United States and the rest of the capitalist world not by how much better off we are than, say, 50 years ago but by how we are doing compared to how much better we could be doing.  If we utilized all our resources (our unemployed workers, our uneducated poor, our green technologies) and curbed the financial speculation and looting of our economy and environment by quick profit millionaires and billionaires the vast majority of our fellow citizens would be much better off than they are now.

What Pope Francis said, in many different ways and in many different contexts, is that the political will of the people acting through their elected representatives must craft good rules in which the market will function.  In that way, the pursuit of self-interest in the marketplace will actually result in the greatest good for the greatest number.  The recent concentration of wealth and power in the hands of fewer and fewer people is the result of the current set of rules in which the market functions.  Those rules can be changed – and changed for the better.   Those who argue that we have too much government intervention destroying the freedoms of the job creators are either ignorant or dishonest.  IN fact, we have too little government control and the results have been clear to anyone willing to accept reality.

Pope Francis has appealed to our better nature to make the economy work for all.  This task cannot be left to the “magic of the market.”  What is “the market” anyway?  It is a system whereby the costs to society of producing goods are services are accurately communicated via the market price at which they are sold.  Meanwhile, the benefits derived from the production of those goods and services are supposedly accurately reflected in the willingness of people to pay for those goods and services.  But that is not how the world actually works.  Prices often do not accurately communicate real costs to society.  The costs of generating electricity with fossil fuels does not include the air pollution, health effects and global warming effects.  Those costs are borne by others who are not party to the decisions of both the electric company to generate power and the people and businesses who pay for that power.   That is why it falls to government to regulate what comes out of the companies’ smokestacks.  Similarly, benefits are not always accurately communicated by the willingness of individuals to pay.   My willingness to pay for, say, a trip on a commuter rail line does not reflect the benefits to everyone else because I didn’t drive my car to work.  That is why mass transit needs to be subsidized – something our spending-phobic Congress refuses to do.   (The refusal of New Jersey Governor Chris Christie to permit the construction of a new rail tunnel under the Hudson River back in 2010 is costing commuters every day and those costs could become astronomical if an accident closed one of the remaining tunnels permanently.)

Thus, it is essential that the incentives of the market be changed.   There are four ways to alter what the market would do if left alone.  All involve government action.  Activities that impose costs of society not reflected in price need to be taxed.   (Gasoline consumption, all extraction of fossil fuel raw materials from the ground.)   Activities whose benefits exceed the willingness of individuals to pay need to be subsidized (education, mass transit).   Some activities for which there is no viable market alternative (national defense, law enforcement, a Central Bank) need to be directly provided by the government.   Other market activities like the provision of credit and the production of food and pharmaceuticals need to be regulated.   Freeing billionaires to get even richer and saying the “magic of the market” will solve all our problems has been a disaster for the vast majority us and for the planet as a whole.

[I refer back to THE COLLAPSE OF WESTERN CIVILIZATION and LAUDATO SI which were the focus of my July 5 commentary.  For a discussion of how the magic of the market failed when it was first tried under Reagan, see my SURRENDER, HOW THE CLINTON ADMINISTRATION COMPLETED THE REAGAN REVOLUTION – U. Michigan, 2000, paperback edition.]

We need to take the Pope’s messages to heart.

Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author (with Howard Sherman) of Principles of Macroeconomics: Activist vs. Austerity Policies.

 
The views expressed by commentators are solely those of the authors. They do not necessarily reflect the views of this station or its management.

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