Pope Francis is Wrong About Capitalism

01/06/2014 05:13 EST | Updated 03/08/2014 05:59 EST

Any time of year is a good time to discuss poverty but the subject has obvious resonance at Christmas. Thus, unsurprisingly, Pope Francis recently wrote about the necessity of compassion for those on the margins.

In Evangelii Gaudium, the Pontiff covers much ground. He urges deliberate, thoughtful action for the world's poor and warns against the folly of loving money and worshipping consumer goods. These are calls with which no thinking, compassionate person should disagree.

However, the Pope's letter also took capitalism in general to task -- troubling because the relationship between wealth creation and the alleviation of (some) poverty is often misunderstood. The Pontiff's critique will not necessarily correct this confusion.

In his letter, Pope Francis makes a number of assertions, including that a "dictatorship of an impersonal economy," exists and which he equates to a "tyranny." The Pontiff also claims so-called "trickle-down" economics reveal a "crude and naïve trust in the goodness of those wielding economic power."

The Pope's letter is a broad-brush critique but thoughtful readers should pause, ponder and then object. Markets have not exactly been left alone by governments. Relative to the economy, the size of government in many developed countries is nearly as large as at any point in the last 50 years.

On regulation, there is much of it and probably too much. For instance, if the U.S. Securities and Exchange Commission had fewer financial regulations to enforce, they might have paid earlier attention to an obvious crook like Bernie Madoff. Instead, busy with enforcing a plethora of regulations and missing critical ones, they overlooked Ponzi schemers like Madoff. They did so despite outside submissions that dated back to 1999 about Madoff's unrealistic and faked investment returns.

Pope Francis does not make this next distinction but his critique applies better to crony capitalism than to competitive capitalism. The former is more prevalent than the latter in his home country of Argentina; it also helps explain his present concern.

In Argentina, politics, corruption, privilege and bureaucracy often combine with monopolistic or oligarchic economic interests. That harms the possibility for small and newer businesses to arise, to create new jobs, more wealth, less poverty and to challenge the privileged status quo.

But crony capitalism wherever it occurs (and every country has some), is not capitalism properly understood, where people are free to bargain and choose goods and services -- trade, in other words, an activity human beings have engaged in for much of history.

Far from enhancing those who already possess wealth, competitive capitalism -- and within the rule of law, property rights (including for the poor), other civil rights and sound currencies -- allows entrepreneurs to compete in existing markets or edge out old goods with new, innovative products. That competition challenges existing concentrations of wealth and power. (Just ask American automakers about the rise of Japan and then Korean competitors.)

On poverty in specific, some history is helpful. The late Angus Maddison, a British economist who famously surveyed the world economy, concluded that the growth of international trade and capital was one major reason for the reduction in absolute poverty over the centuries.

A 2009 paper by Columbia University economists Maxim Pinkovsky and Xaier Sala-i-Martin backs up Maddison. The authors found that between 1970 and 2006, poverty rates around the world fell by 80 per cent. Capitalism does help reduce poverty, providing it is more the competitive type than the "crony" type.

None of this means that some people will not attempt to combine money and power to abuse others, or that "capitalism" will solve every social ill. The claim is only that poverty rates would be vastly higher absent open markets and competitive entrepreneurs, as indeed such rates were when protectionism, mercantilism, and socialism were more influential around the world.

Which, as it happens, explains Argentina's relative decline: In 1900, Argentina's per-capita GDP at $2,756 was almost as high as Canada's at $2,911 (this from Maddison's statistics and in 1990 dollars). By 2008, the latest year for which these statistics were available, per-capita GDP in Argentina was just $10,995 while Canada's raced ahead to $25,267 per person.

Argentina today has much poverty and that reality has informed the real-world experience of the current pope. But the blame for that cannot be attributed to freely functioning and competitive markets. Successive politicians have mostly and busily crimped those since the 1940s, when Juan Perón and his wife Eva became fixtures of Argentinean political life and began to destroy that country with populist but damaging policies.

Pope Francis's capitalism critique is too general but there is indeed a problem with crony capitalism. That, and his deeply concern for the world's poor, justifiably requires a withering but more focused critique.

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