James A. Sadowsky "Capitalism, Ethics, and Classic Catholic Social Doctrine"

What I call the classical social doctrine is that which prevailed among Roman Catholic thinkers from the time of Rerum Novarum (1891) until the middle of the twentieth century. Rerum Novarum is the title of what is called an “encyclical,” a papal letter addressed to the bishops, which articulates a pope’s position on some matter of importance to the Catholic Church. Though what is set forth in encyclicals possesses great authority, encyclicals do not, in and of themselves, possess the force of doctrine. In other words, positions can and do change with the passage of time. Yet more than any other single document, Rerum Novarum guided the thinking of Roman Catholics on socio-economic questions during the first half of our century.

The encyclical was written in 1891. Marx had died in 1883, and Engels was to die in 1895. The important treatises on classical economics had already been completed, and the age of Austrian economics had begun with the publication of Menger’s Principles in 1871. Yet Rerum Novarum betrays no significant amount of attention to any of the writings of the great economists––though if one wishes to understand the workings of the market, that is exactly what one has to do.

Leo XIII was striving to improve the living conditions of the worker, and quite properly so. Here is Pope Leo’s summary of the problem that he thought needed his attention:

After the trade guilds had been destroyed in the last century, and no protection was substituted in their place, and when public institutions and legislation had cast off traditional religious teaching, it gradually came about that the present age handed over the workers, each alone and defenseless, to the inhumanity of employers and the unbridled greed of competitors . . . and in addition the whole process of production as well as trade in every kind of goods has been brought almost entirely under the power of a few, so that a very few exceedingly rich men have laid a yoke almost of slavery on the unnumbered masses on non-owning workers.

No socialist, no liberation theologian could have brought forth a stronger indictment. But if one is expecting the pope to propose the socialist remedy as his own, one is heading for a severe disappointment:

To cure this evil, the Socialists, exciting the envy of the poor toward the rich, contend that it is necessary to do away with private possession of goods and in its place to make the goods of individuals common to all, and that the men who preside over a municipality or who direct the entire State should act as administrators of these goods. They hold that, by such a transfer of private goods from private individuals to the community, they can cure the present evil through dividing wealth and benefits equally among the citizens.

But their program is so unsuited for terminating the conflict that it actually injures the workers themselves. Moreover, it is highly unjust, because it violates the rights of lawful owners, perverts the functions of the State, and throws governments into utter confusion.

If the worker cannot use his wages to buy property, which under socialism he could not do, his right to dispose of his wage as he sees fit is taken from him. His holdings are “nothing but his wages under a different form.” In other words, socialism dooms the worker to remaining forever under the very wage system it deplores, “. . . inasmuch as the Socialists seek to transfer the goods of private persons to the community at large, they make the lot of all wage earners worse, because in abolishing the freedom to dispose of wages they take away from them by this very act the hope and the opportunity of increasing their property and of securing advantages for themselves.”

Private Property and Human Nature

Even more important, a regime of private property is demanded by human nature itself. Unlike the animals, man must plan for the future. He can do so only if he is able to possess the fruit of his labors in a permanent and stable fashion. It is in the power of man, wrote Leo,

to choose the things which he considers best adapted to benefit him not only in the present but also in the future. Whence it follows that dominion not only over the fruits of the earth but also over the earth itself ought to rest in man, since he sees that things necessary for the future are furnished him out of the produce of the earth. The needs of every man are subject, as it were, to constant recurrences, so that, satisfied today, they make new demands tomorrow. Therefore nature necessarily gave man something stable and perpetually lasting on which he can count for continuous support. But nothing can give continuous support of this kind save the earth with its great abundance.

The ownership of the earth by man in general means only that God did not assign any particular part of the earth to any one person, but left the limits of private possessions to be fixed by the industry of man and the institutions of peoples. To use the technical phrase, ownership in the original state was negatively rather than positively common: owned by no one but capable of being converted into property by anyone.

How does one convert the unowned into property? By laboring on what till that moment has been unowned. By so doing “he appropriates that part of physical nature to himself which he has cultivated.” He stamps his own image on the work of his hands in such wise that “no one in any way should be permitted to violate this right.” Moreover, those who would deny to the individual the ownership of the soil he cultivates, while conceding to him the produce that results from that activity, forget that the modifications man introduces into the soil are inseparable from it. A man cannot own one without owning the other.

In sum, here is Leo’s indictment of socialism:

From all these conversations, it is perceived that the fundamental principle of Socialism which would make all possessions public property is to be utterly rejected because it injures the very ones it seeks to help, contravenes the natural rights of individuals persons, and throw the functions of the State and public peace into confusion. Let it be regarded, therefore, as established that in seeking help for the masses this principle before all is to be considered as basic, namely, that private ownership must be preserved inviolate.

Running through the encyclical is the theme that man’s natural right of possessing and transmitting property by inheritance must remain intact and cannot be taken away by the State, “for man precedes the State,” and, “the domestic household is antecedent as well in idea as in fact, to the g athering of men into a community.”

At most, the State could modify the use of private property, but it could never rightly take away the basic right to its ownership and ordinary exercise.

Forty years after Rerum Novarum, Pope Pius XI indicated his agreement with this teaching in another encyclical, Quadragesimo Anno:

Hence the prudent Pontiff had already declared it unlawful for the state to exhaust the means of individuals by crushing taxes and tributes. “The right to possess private property is derived from nature, not from man; and the state has by no means the right to abolish it, but only to control its use and bring it into harmony with the interest of the public good.” However, when the civil authority adjusts ownership to meet the needs of the public good it acts not as the enemy, but as the friend of private owners; fur thus it effectively prevents the possessions of private property by Nature’s Author in His Wisdom for the sustaining of human life, from creating intolerable burdens and so rushing to its own destruction. It does not therefore abolish, but protects private ownership; and, far from weakening the right of private property, it gives new strength.

So it would seem that both for Leo XIII and Pius XI socialism in the sense of the generalized ownership of the means of production is out of the question. They do allow for state intervention, however. The question is, how much?

Leo XIII did not discuss the extent of legitimate nationalization of property, but Michael Cronin––a highly regarded interpreter of Catholic ethics––laid down the limits of State ownership in a way I think would have won the agreement of both Leo XIII and Pius XI:

If State nationalization should reach a point where the pressure of State restriction begins to be felt by private persons, so that it can no longer be said that these persons have ample and full opportunity for private enterprise and investment, or if such a point has even been definitely approached so that there is danger to the private person’s right of free enterprise and investment, then the State has already passed the limits of lawful monopoly. Also, if there be anything which is of such fundamental importance to the economic life of the community that to nationalize it would give the State a kind of modified ownership over all wealth, gravely hamper the freedom of private owners in every department of commerce, and so introduce conditions almost equivalent to those of socialism, then nationalization in such a case would seem to be forbidden as imperiling the liberty and welfare of the community.

Cronin would allow the state to set up a monopoly only for very grave reasons, and only after full compensation has been made to existing owners. He says that:

There is all the difference in the world between monopolies owned by private individuals and monopolies set up by the State. The private individual or company which establishes a monopoly succeeds in doing so, not by forbidding a particular line of business to others, but as a result of open competition and by utilizing the lawful expedients which competition brings into play; and supposing that only lawful expedients are utilized, a private company has quite as good a right to acquire a monopoly in open competition with others, as an individual has to win a race or to secure a prize by examination. But, on the other hand, when the State contemplates setting up a monopoly in any line of business, it forbids all others from entering that line of business, and thus effects a serious encroachment on the liberty of the subject. Such encroachment can only be justified by very grave reasons of public policy and necessity.

Monopoly’s Duties

Cronin’s thinking on the subject of monopolies represents a high degree of enlightenment. Very few have shown themselves aware of the distinction between the type of monopoly that results from the consumers refusing to deal with more than one producer of a good and the monopoly that results when the State uses force to ban all but one producer of the good. If the State’s ban brings about a result that would not otherwise have occurred, this means that those consumers who would have preferred to buy from some other firm are now prevented from doing so. Injury is done both to those firms that would have entered the market and to consumers who would have preferred an alternative. In the absence of governmental interference, consumers are able to choose between a single seller and a plurality of sellers. It is well to note that contrary to what m any think, the monopoly that Adam Smith deplored was precisely the type that was brought about and kept in being by the power of the State. In fact, the term “monopoly” was in his day never used to designate the sole producer of a commodity except when the uniqueness was due to state intervention.

One often hears that the free market envisioned by Smith and his contemporaries no longer exists. If this means that there is far more government intervention in the economy than Smith would have accepted, then of course the claim is true. But this is not what the charge generally intends. Instead, the market is said to be unfree because the size of firms is greater than Smith supposed they ought to be. According to this complaint, Smith thought that in order for the market to be free and for prices to be “competitive” the market had to consist of firms so small that the withdrawal of a single one of them from the market could have no effect upon the price of the given product.

Never mind that it is a logical impossibility for a firm to be that small. The whole thing is creative history. Nowhere does Smith attribute the success and freedom of markets to the smallness of the firms that make up a given industry. For him the freedom of the market consisted of but one thing: the absence of government interference. As to the size of the firm that would result from the freedom of the market, he was perfectly willing to let the chips fall where they might. In his mind competition existed whenever there was legal freedom to enter the market. As long as the market was free in this sense, all prices were eo ipso competitive. In any case, as long as governments permit free trade across national boundaries, one is not the single seller of a good unless one is the only seller of that good in the entire world. As long as there are two in the entire world, the price differential will hardly exceed the transportation costs. The point is this: to remain a monopoly, a company in a free market must sell its goods at a price lower than the price at which its potential competitors could afford to sell it. Once it ceases to do so, the potential competitors turn into actual competitors.

Most critics of capitalism in our own day tend to regard competition as a beneficial force. They recognize that it makes for lower prices, better quality, and increased protection for employers. If anything, their complaint is that business is not sufficiently competitive. In the light of this, it seems strange to see thinkers of another age blaming the economic evils of their day on competition. Leo XIII, for example, said that “the present age handed over the workers, each alone and defenseless, to the inhumanity of employers and the unbridled greed of competitors.” And Pius XI wrote the following:

In the first place, then, it is patent that in our days not alone is wealth accumulated, but immense power and despotic economic domination is concentrated in the hands of a few, and that those few are frequently not the owners, but only the trustees and directors of invested funds who administer them at their good pleasure.

This power becomes particularly irresistible when exercised by those who, because they hold and control money, are able to govern credit and control its allotment, for that reason supplying so to speak the life-blood to the entire economic body, and grasping, as it were, in their hands the very soul of production, so that no one dares breathe against their will.

This accumulation of power, the characteristic note of the modern economic order, is a natural result of limitless free competition, which permits the survival of those only who are the strongest, which often means those who fight most relentlessly, who pay least heed to the dictates of conscience.

Capitalism and “State Capitalism”

One of the great problems we encounter when dealing with criticisms of “capitalism” is discovering exactly what kind of arrangement is being criticized. For our purposes we can distinguish between two kinds of capitalism: laissez-faire capitalism and State capitalism. The advocates of laissez-faire capitalism want a market situation such that the activities of the State are restricted to the punishment of fraud and violence to persons and their peacefully acquired possessions. (Violence against persons and property can very well include polluting.) Thus the State, as such, is not a participant in the economy except, perhaps, as a customer. This implies no intervention either in behalf of or against any business interest. According to this creed, the only things that the State is capable of doing for business in general is to get out of the way, and follow a strict hands-off policy. What Leo XIII and Pius XI, and so many others, failed to see was that the economic concentrations they deplored oftentimes could not have existed without the benefit of State interference. To the extent that a state of affairs exists by virtue of governmental intervention, how can we properly call it a function of capitalism? Wherever there is economic misery, we always out to ask ourselves whether the misery is due to the absence of intervention in the economy or to intervention itself. In countries such as the United States, whatever obtains in the economy is thought of as capitalism, and therefore people imagine that the cure for interventionist diseases is more intervention.

Of course, there are those who think that “pro-business” intervention is itself part of the immanent logic of capitalism, that the chicken of State capitalism automatically develops from the egg of laissez-faire. Pius XI seems to have had something of this sort in mind when he wrote that:

This concentration of power has led to a threefold struggle for domination. First, there is the struggle for dictatorship in the economic sphere itself; then the fierce battle to acquire control of the State, so that its resources and authority may be abused in the economic struggles; finally the clash between the states themselves. This latter arises from two causes: because the nations apply their power and political influence, regardless of circumstances to promote the economic advantages of their citizens; and because, vice versa, economic forces and economic domination are used to decide political controversies between peoples.

There is no doubt that this describes the history of so-called capitalistic regimes. Certainly many businessmen have struggled in order to achieve domination of the State and in many instances have succeeded. Not only have they thus committed aggression against their own people, they have influenced their governments to commit aggression against others as well. The point to be made is that none of these monstrosities results from capitalism per se. Rather capitalism is the only economic system that can be conceived of as existing without a State.

On the other hand, the abuses rightly deplored by Pius XI require the existence of the State if they are to be institutionalized. One can only regret that he and so many others (understandably) blame capitalism for what results from unnoticed interventionism

Labor, Equality, and Contracts

Now we turn to what the encyclicals have to say concerning labor. First, the papal documents reject the ideal that wealth and positions should be equally distributed. On this, let us hear Leo XIII:

Therefore, let it be laid down in the first place that a condition of human existence must be borne with, namely, that in civil society the lowest cannot be made equal with the highest. Socialists, of course, agitate the contrary, but all struggling against nature is in vain. There are truly very great and many natural differences among men. Neither the talents, nor the skill, nor the health, nor the capacities of all are the same, and unequal fortune follows of itself upon necessary inequality in respect to these endowments. And clearly this condition of things is adapted to benefit both individuals and the community; for to carry on its affairs community life requires varied aptitudes and diverse services, and to perform these diverse services men are impelled most by differences in individual property holdings.

Secondly, there is the rejection of any notion of class war:

It is a capital evil with respect to the question we are discussing to take for granted that the one class of society is of itself hostile to the other, as if nature had set rich and poor against each other to fight fiercely in implacable war. This is so abhorrent to reason and truth that the exact opposite is true; for just as the human body whose different members harmonize with each other, whence arises that disposition of parts and proportion in the human figure rightly called symmetry, so likewise nature has commanded in the case of the State that the two classes mentioned should agree harmoniously and should properly form equally balanced counterparts to each other. Each needs the other completely: neither capital can do without labour, nor labour without capital. . . .

Workers are themselves required, wrote Leo XIII:

. . . to perform entirely and conscientiously whatever work has been voluntarily and equitably agreed upon; not in any way to injure the property or to harm the person of employers; in protecting their own interests, to refrain from violence and never to engage in rioting; not to associate with vicious men who craftily hold out exaggerated hopes and who make huge promises, a course usually ending in vain regrets and in the destruction of wealth.

The notion of “voluntary and equitable agreements” has traditionally caused problems for Catholic thinkers, and does so for many others in our own day. Pius XI objected the “liberal” understanding of freedom of contract (“liberal” here being understood as it was in the nineteenth century). The advocates of laissez-faire considered a contract to be free as long as no one was using physical force or threatening it in order to bring the contract about. The fact that one of the parties had an irresistible desire for what the other contracting was offering was not considered to impair the freedom of the contract as long as the other party had not brought about that need by theft, fraud, or violence. Liberals applied these principles to all contracts, even the so-called necessitous ones. Part of the problem may stem from a refusal to grasp that in a capitalist regime non-capitalists can become capitalists. To do this, what is essential is that non-capitalists reduce their present consumption and start investing. In response, it is sometimes said that workers cannot reduce their consumption. Yet we have to be careful not to define “worker” as “one who must consume all his earnings.”

The fact is that in the nineteenth century, when workers had far less disposable income than their counterparts today, a remarkable number of them became capitalists. It is all too often the unwillingness to restrict consumption, a grasshopper attitude, that prevents workers like me from becoming capitalists. In our day we sees especially among immigrants from Asia what is, for us, an amazing willingness to defer present consumption. We find these people living initially in conditions that we should judge to be absolutely impossible. Yet before we know it, they are operating successful businesses.

What was the response of the encyclicals to the liberal theory of freedom of contract and theory of wages? Leo XIII makes a distinction between the labor contract and other contracts. He makes the point that, unlike other products, labor cannot be separated from the person who performs it:

. . . in man labor has two marks, as it were, implanted by nature, so that it is truly personal, because work energy inheres in the person and belongs completely to him by whom it is expended and for whose use it is destined by nature; and secondly, that it is necessary, because man has need of the fruit of his labors to preserve his life, and nature itself, which must be most strictly obeyed, commands him to preserve it. If labor should be considered only under the aspect that it is personal, there is no doubt that it would be entirely in the worker’s power to set the amount of the agreed wage at too low a level. . . . But this matter must be judged far differently, if with the factor of personality we combine the factor of necessity, from which the former is separable in thought but not in reality. In fact, to preserve one’s life is a duty common to all individuals, and to neglect this duty is a crime. Hence arises necessarily the right of securing the things to sustain life, and only a wage earned by his labor gives a poor man the means to acquire these things.

Perhaps Cronin makes clearer what Leo XIII is getting at:

. . . The man who gives up his whole labor day to another, puts at the disposal of that other all those energies with which nature has equipped him for the supplying of his own needs. Therefore, the just wage payable in return for the use of those energies, the only wage which can justly be represented as the equivalent of those energies, is a wage capable of supplying the same needs which human energies are meant to supply. And the minimum just wage will be a wage capable of supplying the minimum essentials of those needs, the essentials of human life. It is a measure which is based on the nature of labor itself and its essential function.

This suggests the idea of what economists call “opportunity costs.” Presumably, the worker is to expect of his employer at least what he could have obtained by expending his energies on his own behalf instead of on behalf of an employer. All well and good. But isn’t that what is happening? Why is our man not self-employed in the first place? Is it not because he thinks that his employer is giving him more than he would have received by going into business himself? One gets the idea from Cronin that job offers make people poorer than they would have been in the absence of such offers.

To be sure, our worker is in dire need. And certainly from a Christian point of view we ought to help him meet his needs. Why, however, should it be precisely the employer on whom this obligation falls, if in fact the employer is not worsening but bettering the condition of his employee?

But perhaps it will be said that the necessary condition of these low wages is the inability of the worker to obtain a suitable income elsewhere. Now it is certainly true that one is not ordinarily going to take a low-paying job if the alternative income is sufficiently high. This is in fact the reason why all sort of menial jobs are not accepted today. Welfare is a mighty source of voluntary unemployment: it has provided numerous persons with an alternative income. But if the theory we are discussing were correct, the fact that these people have this alternative ought to cause employers to offer a correspondingly higher wage to induce people to take the jobs. Why are they not rushing in to outbid welfare? The answer is simple. The consumers, who in the last analysis pay the costs of doing business, will not pay the resulting higher prices so long as there is a lower cost alternative––which, in a world economy, there always is.

Few see that it is the consumer who puts the cap on wages. In this respect, the employer is a middleman. By buying elsewhere or by not buying at all the consumer vetoes the choice of the over-generous or extravagant employer. Unless the government forces the consumer to buy the good at the higher price, there is no way that employers can increase these wages and still remain in business.

Given an understanding of the market the debate about the living wage need never have occurred. The fact is that if employers are able to pay a living wage, the market itself will force them to do so. And if they cannot, they are not obliged to do so. It is, of course, impossible to stay in business for any length of time and pay a living wage unless one is making a profit. Let us now suppose that it is possible to make a profit while paying a living wage but that the existing firms are not doing so, i.e., not paying the living wage. This means that it will be profitable for other firms to enter that market and lure the workers from the recalcitrant firms by offering to pay a higher wage. This process will go on until the wage rises to the level of the living wage. The only way to keep these would-be entrants out of the market in for the firms that are already there to offer the living wage in the first place. The best ally of the worker will be the competition for workers that exists among businessmen. Of course, you can try to sabotage the market and force some firms to pay the living wage when this is not produced by market conditions. But in that case those who are receiving it are doing so at the expense of those who because of their unemployment are receiving no wages at all. It should be understood that when we are talking about the living wage, we are talking about a real wage. The only way to bring about an over-all increase in real wages is to increase productivity. No way has been found to do this other than the unhampered market. It makes the rich richer and it makes the poor richer.

What Was Wrong?

What was wrong with Catholic social thought in the nineteenth century was not so much its ethics as its lack of understanding of how the free market can work. The concern for the worker was entirely legitimate, but concern can accomplish little unless we know the causes and the cures for the disease.

Like so many others, Catholic thinkers were unaware of the amount of government intervention in their day. Though considerably less than in our own day, it was considerable. This fact kept them from asking whether the problems they saw were due to intervention or to the lack of it. The tendency, therefore, was to blame whatever went wrong on the market itself. And when this happens, the temptation is to demand more and more intervention––the very cause of the problem in the first place.

Frequently our ethical judgments of an action are based on what the effects of that action are perceived to be. Most people, for example, will be for or against government intervention depending on what they think this sort of thing will achieve. But this makes it all the more important that we should know what those effects are. I doubt that Catholic thinkers would have judged the market as they did had they known its workings better.

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