Pontiff-icating on the Free-Market System

Every once in a while, the pope issues some kind of statement reflecting the views of the Catholic Church. Usually, it’s just the hardcore faithful who pay much attention. This time was different…

Brian WILLIAMS: Pope Francis is getting a lot of attention tonight for the mission statement he issued for the Catholic Church he would like to see in the future.

Lawrence KUDLOW: I just was so surprised because that language…I understand… the pope’s job is not to proselytize about free market capitalism. Ok, I get that.

John ALLEN: The strongest language of this document called has to do with critiquing what he calls a kind of crude and naive faith in the free market. And insisting that the Church has to be a change agent on things like income inequality, spreading unemployment, the environment, war and peace.

You may be wondering: “What the pope is expecting to happen when he talks about the miseries of the free-market system?” Yeah, we were wondering that too.

ANNOUNCER: From WNYC: This is Freakonomics Radio, the podcast that explores the hidden side of everything. Here’s your host, Stephen Dubner.

Today we’re talking about Pope Francis’s recent broadside against the global economy. Our story begins with the economist Jeffrey Sachs, who remembers the very day he found out that economics, the way it’s taught and learned in academia, represents only a sliver of a shard of a smidgen of how economics actually happens in the real world. The year was 1985; the place, Bolivia:

Jeffrey SACHS: I remember from the first moment, literally of getting off the airplane actually taking a deep breath and finding no oxygen there because you’re about 13,000 feet above sea level, that my mouth was absolutely agape and amazed, and I’ve never ceased that feeling. What I had learned in the classroom was such a small part of what one needs to understand to be able to apply tools of economics effectively that I’ve regarded the next 28 years as really being an extraordinarily intensive learning curve. And I continue to feel that way. The world’s very complicated. What we can learn from theory and from models and from econometrics is very useful. But if it’s done divorced from practice I think it is almost inevitably, profoundly misleading.

Jeff Sachs has spent his career trying to keep that marriage alive – the economic theory and modeling that happens in universities, and the practice of economics, out in the world. These days, he’s known as a globetrotting, poverty-fighting, economic superhero, an adviser to the United Nations and director of the Earth Institute at Columbia University.

SACHS: I began as an academic economist, joining the faculty at Harvard University in 1980.

He was awarded tenure at just 28. When he went to Bolivia, he was asked to help tame that country’s hyperinflation. Really, it was hyper-hyper-hyper-hyperinflation: In one year, prices had risen by about 20,000 percent.

SACHS: And I worked in Latin America very extensively for several years after the work in Bolivia…

In 1989, he was contacted by an official in the Polish government, looking for some economic advice.

SACHS: And I told them that I would be interested but frankly as long as my hero, the Solidarity leader Lech Walesa, was under house arrest, I wasn’t really able to do it.

And you know what happens next, right?

SACHS: And he called me back a few weeks later and said well we’re making a deal with Solidarity, things are moving, would you come? And I became Poland’s economic advisor, and communism fellow, and I was there and played some role in helping to design the transition from a completely collapsed and defunct, centrally-planned economy back to a market economy.

Sachs’s work in Poland became a calling card for much of the former Soviet Union, including the mother ship: Russia.

SACHS: …working with Gorbachev and Yeltsin, and many leaders around the region on this transition back from the failed communist era.

With that on his resume, Sachs was called upon to work on economic reform in India and China…

SACHS: And then in 1995 another quite decisive turn for me was an invitation to Zambia and to see what this experience and these lessons might mean for Africa.

By now, the focus of his work had shifted a bit…

SACHS: I became quite engaged in the fight against AIDS and malaria and the challenge of fighting extreme poverty.

The World Health Organization asked him to help scale up the fight against disease in poor countries…

SACHS: And from that I was asked by Kofi Annan to advise him on the newly-born Millennium Development Goals.

And ever since, Jeff Sachs has been at the very center of the fight against global poverty:

SACHS: And Ban Ki-moon very kindly asked me to continue in that capacity when he became Secretary General. And so, I am, for a dozen years now, the lead adviser to the secretary general on the fight against extreme poverty.

DUBNER: OK, so you’re a special adviser to the U.N. on issues of poverty, and development, and you’ve advised many heads of state on the same and on their economies, what about popes? Have you ever sat down with popes and talked to them about these issues?

SACHS: Well, I have indeed.

First there was Pope John Paul II, the Polish pope. He was particularly interested in the economic reforms that Sachs had worked on in Poland.

SACHS: And I was very, very lucky that he wanted to make an encyclical about teachings of the economy, what’s the role of a market economy? And so this was an extraordinary experience. He gathered a group of diverse economists of different faiths, different countries. He greeted every one of us in our native languages. It was the most extraordinary day.

After offering advice for that encyclical, Sachs met the pope again, eight years later, as part of the Jubilee Year.

SACHS: I was part of the Jubilee Campaign to drop the debt for poor countries. And that was a little bit different visit, because that one was with Bono and Bob Geldof, and the pope, and Quincy Jones and then a few others, so it was a pretty interesting day in the Castel Gandolfo.

But if you are a person of Jeff Sachs’ intellect, and track record and temperament, you aren’t necessarily limited to one pope per lifetime.

SACHS: Then recently I saw and met this new, absolutely wonderful, wondrous Pope Francis at the Vatican last month and have been quite involved with the Pontifical Academy of Social Sciences in recent months discussing the challenges of poverty, because this is at the core of Pope Francis’ interests.

And so, when Pope Francis recently published a document calling the global economy a “dictatorship” in which “the powerful feed upon the powerless” – well, we thought that Jeff Sachs would be a pretty good person to ask about it:

SACHS: First let me say I am a believer in a market economy and I would imagine Pope Francis, too, is a believer in a market economy, but what the Church has taught is the idea that first, an economy needs a moral framework.

DUBNER: So we’re here today primarily to talk about this new document that Pope Francis has published — technically it’s called apostolic exhortation, it’s called “Evangelii Gaudium,” or the “Joy of the Gospel.” I guess my first question before we get into the particulars, particularly the economic particulars, is: Were you involved in any way? You describe these earlier meetings with Pope John Paul II to talk about economics as they would make their way into that encyclical. Were you involved in any way in the crafting of this particular message?

SACHS: No, not in this document. But I am an avid reader of it.

DUBNER: OK, so even if you weren’t an avid reader you would have heard about it by now. And it’s made a lot of news for a variety of reasons. There wasn’t that much in the document about economics per se, but what there was was quite trenchant, statements about the economy, calling unfettered capitalism “a new tyranny.” So my first question for you is this: Knowing a lot about economics, knowing a lot about poverty, knowing quite a bit about popes, too, and the way they try to send a message like this, first of all, who actually wrote this exhortation? Did Pope Francis, do you think, write the whole thing or most of it himself? Or does he have some economists on staff who he brings in for different parts, particularly the economic sections?

SACHS: Well, I would imagine this is his voice, because this seems very authentically his message to the world. And much of what the pope talks about in the analysis, the preferential option for the poor is a famed and justifiably so Church doctrine. The universal destination of goods is another phrase that he uses, and those who have read through Church teachings as I have over the years know these phrases and these concepts. But, of course, what Pope Francis is bringing is something extraordinarily vivid and fresh, and his message really is that he’s infusing the exhortation with the very spirit of going forth and being out in the community. That’s partly the Jesuit background and it’s partly his holding Jesus’ own teachings as the most central part of the Church’s message.

DUBNER: Let me read from you one brief passage from the exhortation about the economy. Pope Francis writes, “Today everything comes under the laws of competition and the survival of the fittest, where the powerful feed upon the powerless. As a consequence, masses of people find themselves excluded and marginalized without work, without possibilities, without any means of escape.” So Jeff, I’m curious, is the description here from Pope Francis accurate, that the laws of competition result in masses of people who are excluded and marginalized? Is that what causes the majority of poverty that you’ve seen around the world?

SACHS: Well, I resonate with this for a number of reasons. In the end, while there can be property rights and market forces, they are not sacrosanct to use an appropriate word in this context. They must serve a bigger purpose. And one of those purposes is that there should be the ability of every human being to meet basic needs, and to have basic human dignity. And I think that this is what the Church calls the preferential option for the poor. What Jesus said is, “He who feeds the least among thee, feeds me.” That the Church’s attention is to the most marginalized, the most destitute, those outside. Now I’ve taught for a number of years, on the, let’s say the more analytical side of this that there is the reality of poverty traps. And that is you can have a functioning market economy, but for some reason, pockets of that market economy in the word can be so impoverished, so destitute, so devoid of the most basic things needed, whether it’s food supply, freshwater, ability to fight malaria, ability to pave a road from the hinterland, that the economy is actually trapped. And you can even see what should be done, but our capital markets don’t work well enough, and our ability to see that there’s a way out of this doesn’t just allow for this kind of bootstrap rising out of poverty. And so when I wrote the book, The End of Poverty, in 2005, I use the metaphor of the ladder of development, and I said that it is often crucial to help the poorest of the poor get onto the ladder. After you’re on the ladder of development, then you can walk up the rungs, and market forces are very powerful, and they can carry people, help them climb the rungs, but if you’re not even on the ladder, and there are a lot of reasons why that might be that I emphasized over the years, many disagree with me, but I’ll keep fighting for what I see with my own eyes and what I’ve been able to gather, that helping those who are excluded get into a process where markets work for them and not against them is extremely important.

DUBNER: So I would argue that the view that you just expressed there is a somewhat nuanced one. Maybe even an extremely nuanced one. And I think to most people who hear it, certainly most people who listen to a program like this would say, “Well yes, absolutely, that resonates, and it makes sense, and it’s doable,” and all those things. I guess my question to you is this: Compared to what the pope has written about capitalism and how it can or can’t work, it was much heavier on the can’t work part and here’s why it doesn’t work, and yes we need to reintroduce a moral framework to capitalism. But I guess what I don’t read in it is a pragmatic means of approaching or building said framework. So can you help us kind of sort that through? In other words, what is the pope actually calling for in terms of practical steps, in terms of less or more regulation, in terms of more open or more regulated markets? Can you give us any kind of insight into what that vision might be?

SACHS: I think I can. First, he makes very clear in this document, he’s not a policy maker, policy analyst, politician. This is a spiritual text. It is not a policy framework. And I think this is very important. What he’s really talking about here is what is just in a few lines after the ones you quoted a phrase that I think is very powerful and very correct: “the globalization of indifference.” He’s talking about the fact that we have lost even a moral sensibility of the suffering that is around us of those who are battling extreme poverty, or hunger, or disease or all of them. And that what he is calling on the Church to do in going forth and entering the community and spreading the gospel as he sees it is to break that moral indifference. Now, I was at the Vatican just a few days ago for a very practical discussion about programmatic things, because the Church also has a huge network of clinics, hospitals, schools. It’s very much engaged all over the world, including throughout Africa, of course, where I come into contact a lot with Church institutions providing life-saving social services. So there are a lot of pragmatic things to say. I discussed how information technology can be mobilized to improve healthcare delivery, to improve education, very specific kinds of things and there was huge interest in that, not only high abstraction. But I think what the pope is really talking about here is breaking that indifference. And I have to say I see this very much, this indifference. It really does weigh on me very heavily. And I’ll give you an example, Stephen. Recently, the Global Fund to Fight AIDS, TB and malaria came up for its financial replenishment, a three-year replenishment. I was one of the architects of that global fund 12 years ago. And at the time, George Bush said, “Look we won’t let money stand in the way, you show that this works and the money will be there.” Well, this fund has saved millions of lives. It’s delivered. And yet, when it came to the replenishment just now, it couldn’t raise the funds for the minimum package. It was saying that it needed at a minimum to fight these three diseases $5 billion a year. Mind you, hundreds of millions of people and their lives are at stake. $5 billion we know in macroeconomics is nothing in this world, and yet they could not raise $5 billion a year. They raised $4 billion a year. And that may not sound so consequential, but when you’re in a village and the rapid diagnostic tests aren’t there, there’s a medical stock out, the antiretrovirals aren’t there, this is life and death. And since I’m living in a neighborhood where if not down the block, then a few blocks away, or a couple miles away are billionaire hedge fund owners taking home personally paychecks of a billion dollars for the year, the fact that we can’t come up with $5 billion for this institution from all worldwide sources is the globalization of indifference. And the pope says, “The culture of prosperity deadens us.” This is what he’s really talking about.

Coming up on Freakonomics Radio …  The president of CREDO – that’s the Catholic Research Economic Discussion Organization – isn’t quite so sour on the global economy:

Joseph KABOSKI: …More people have escaped extreme poverty in the past 25 years in part through the growth of China and India than in any period of human history…

And Jeff Sachs talks about what it’s like to be a moralist in economist’s clothing:

DUBNER: Do your economist peers, especially from the old days, consider you something of a heretic in taking morality so seriously?

SACHS: I think so.

ANNOUNCER: From WNYC: This is Freakonomics Radio. Here’s your host, Stephen Dubner.

Pope Francis recently published an apostolic exhortation called “Evangelii Gaudium,” describing the role of the Catholic Church in the modern world. He was particularly critical of income inequality, calling unfettered capitalism “a new tyranny.” Not everyone agreed with the pope. Rush Limbaugh, for instance …

Rush LIMBAUGH: I gotta be very careful. I have been numerous times to the Vatican. It wouldn’t exist without tons of money. But regardless, what this is, somebody has either written this for him or gotten to him. This is just pure Marxism coming out of the mouth of the pope. There’s no such— unfettered capitalism? That doesn’t exist anywhere. “Unfettered capitalism” is a liberal, socialist phrase to describe the United States.

KABOSKI: Sure, I mean, the first thing is Pope Francis is wholeheartedly not a Marxist.

That’s Joe Kaboski. He’s an economics professor at Notre Dame.

KABOSKI: Yeah. I’m a cradle Catholic. I’ve been Catholic my whole life. I’m a daily communicant, so I mean, Catholicism is central to my life.

Kaboski does research on development and growth around the world.

KABOSKI: And I’m also the president of CREDO, which is a Catholic Research Economist Discussion Organization, which is a professional society. I want to emphasize again that also for the Rush Limbaugh crowd, is that you don’t want to read this as an economic document. And in fact there’s many places in the document where the pope has said, “I’ve gone into a great level of detail because I want you to think about how these things concern the practical implications for the Church’s mission.” That’s what he’s about, he’s thinking about the practical implications for the Church’s mission. And economy is not completely separate from that. But that’s not what he’s talking about.

All right, so we all agree that the pope isn’t writing an economic prescription – but what is he saying about the economy?

KABOSKI: You know I think, so…the pope has a point on a number of fronts. And you know, markets aren’t perfect, and ethics are important. I think that’s one of the things he’s trying to say. And as just an example of that, I have an immigrant friend who went to buy a car and you know, doesn’t speak English, has no information, and the person ended up charging her twice what the car was worth. There’s an ethical thing, that’s ethically wrong for someone to take advantage of your misinformation. So ethics are important in markets. You know, finance obviously is not perfect. Globalization itself isn’t perfect. You know, I do work in Kenya. There’s a town called Malindi. If you go to Malindi, there’s a lot of people from the West, from Italy, who are working for NGOs, missionaries, doing all sorts of work to help the people of Malindi, and there’s another segment of people from the exact same countries that are coming for basically child sex trade. Child sex is a market. You know, that’s an impact of globalization that’s not entirely positive. So I think the pope has some important things, the idea that growth doesn’t cure everything. But on the other hand, we’ve never seen an example of any country that has escaped extreme poverty because of foreign aid or, you know, NGOs. And more people have escaped extreme poverty in the past 25 years, in part through the growth of China and India, than in any period of human history. And all of these miracle countries, miracle in the economic sense, China, South Korea, Taiwan, Hong Kong, Singapore, you know, Chile down in Latin America, they’ve all grown through high levels of trade, market economies. And that’s important. The importance of a market economy you can see no better than South Korea and North Korea. I mean, North Korea people are starving to death and dire poverty. And South Korea is basically a high income country at this point, and it’s because of 40 years of intense growth versus 40 years of stagnation or even going down.

As much as Joe Kaboski and Jeff Sachs insist that the pope’s “Evangelii Gaudium” is not an economic treatise – well, here we are, talking about the economics of it. So are a lot of other people. What will all those conversations produce? Many millions of people, if not billions, have become disillusioned with capitalism in recent years; will the pope’s words tilt that disillusion into something more productive? Here’s Jeff Sachs again:

SACHS: The dynamics of society are indeed extraordinarily rich and complex. And we know that material forces, the forces of the market if you will, of technology, drive a lot of change. We know that politics, which means how power is organized and used, has huge effects. And we also know that beliefs and ideas and moral principles can also have very powerful effects, but which ones work and in which ways is a very difficult thing to know and to guess. And, of course, it was Stalin who famously sniffed at the pope, “Well how many divisions does he have?” And the pope’s institution outlasted Stalin’s institution. And it turns out that ideas can matter a lot. And I do think that there is some hope, and I regard it as more than a passing need for a kind of new awareness. And I say this not only because of the problems of wealth and poverty by the way, but because I believe that at least as large, an existential crisis is unfolding with the physical environment. We also have a globalization of indifference over climate change. We have lots of deniers, we have lots of skeptics. But I believe that the science is as strong as can be to tell us that we’re, as a species, we’re moving in a reckless and largely uncharted and very dangerous direction for our planet. And one needs to break through there as well. And while this exhortation does not discuss the environment at length, it does talk about protecting God’s creation and our moral mandate and practical need to do it. So I think the stakes are quite high.

DUBNER: Jeff, let me ask you about the environment, because it’s an interesting point. He does write, “The thirst for power and possessions knows no limits in this system, which tends to devour everything which stands in the way of increased profits. Whatever is fragile, like the environment, is defenseless before the interests of a deified market, which become the only rule.” So he is talking about economic concepts here, externalities and market failures, and I’d be curious to know how you see these kind of problems, again, wearing the hat of both an economist and a humanitarian and almost a philosopher of poverty by this point. I’d love you to talk to me about the optimal balance, not just on the environmental point, but on the whole economic point. I think that’s what’s really challenging for people is how to get their head around this.

SACHS: Well let me mention just an example, it may sound like a digression, but I think it’s relevant. I worked in Poland and in Russia after the communist system collapsed. One of the things that was extremely powerful in Poland was the fact that the Catholic Church was there almost as a guardian of the society and of some decency, and standards, and while the Church was not engaged in the reforms in any way in particular, and on specifics, probably was not too enthusiastic about some of the market liberalization and so forth, the fact of the matter is it gave a context to the government and to the society that really held in check massive corruption, that helped the Polish people to hold together through a very difficult period, and helped Poland come out as a great success story, rapid economic growth, rapid improvements of living standards, and a fully functioning democracy. In Russia, I felt very strongly that, the Russian Orthodox Church had of course been suborned by the Communist Party, all civil society had been crushed. There were not organized institutions that could discipline the government and say, “Come on, hold back on that mega corruption.” And I watched the difference close up. It was very subtle, very complicated, but I believe that the moral framework that Poland found itself in, not explicitly, but as part of its history, as part of its culture, as part of the role of the Church and its institutions, played a very important role in helping Poland through the crisis. And the fact that the Communist Party in Russia and the Soviet Union and its brutality had basically slaughtered civil society and brought the Church under state control with all that that entailed, meant that you didn’t have that kind of moral framework that could help to stop what eventually became an orgy of corruption. So this is a very perhaps a general, I hope not an esoteric point, but that’s why I’m a believer in these things, that all of this matters and that reminding ourselves, and especially hearing it from a pope, that there needs to be a moral framework, that our indifference, our brazenness, our hard-heartedness, is no favor to ourselves or to the functioning of our societies, can be extremely powerful in opening eyes and making people rethink.

DUBNER: It’s so interesting, you know, if you look at the history of economics itself you see that there used to be a lot of moral sentiment, literally from Adam Smith, in thinking about what economics was, or how economics works. These days, however, economics and economists are not known for trafficking in moral statements or moral judgments, as you put it. Often the moral view is considered kind of naïve or passé. I’m curious, do your economist peers, especially from the old days, consider you something of a heretic in taking morality so seriously?

SACHS: I think so. And I do feel that this is a very, very real issue. I find it absolutely necessary for the orientation that I take as what this whole field is about and how I view my own attempts to practice it as inevitably requiring that moral framework anyway. But I think that once you have that perspective — and I must throw in quickly an Aristotelian idea that happiness means also that our institutions comport with our deep human nature, including our human nature as social animals. To my mind it brings it back full turn that we need the morality not only to know what we’re doing but for our institutions to have a chance at delivering things that humanity wants. And as the pope talks about in this exhortation, sometimes these days even the ideas of moral sentiments are viewed with derision or scorn. That is true and incredibly dangerous. He says here that, “Ethics has come to be viewed with a certain scornful derision. It seems as counterproductive, too human…” and so forth. And this I think one could say, I’ll say it both analytically and normatively and prescriptively, if we view ethics in that way as silly, a nuisance, a hindrance, we’re going to get everything wrong.

It’s easy to be skeptical, even cynical, when you hear the leader of the Catholic Church describe the global economy as exclusive and exploitive and too rich for its own good – because those are the very criticisms that could have been levied against the Church itself for quite a few centuries. Even today, the Vatican is hardly a shining example of financial rectitude. So if you wanted to, you could dismiss the pope’s message here as a pot-calling-the-kettle-black situation, or just a statement of moral platitudes. You could also accuse him of throwing out the baby with the bathwater – highlighting the obvious failures of a free-market system while failing to highlight the perhaps even more obvious victories. But those are easy outs. It’s harder – and, I would argue, much more admirable – to go for the balancing act, to figure out how to keep the baby and clean up the bathwater. It strikes me that that’s what Jeff Sachs is going for. He doesn’t sound like most of the economists we talk to on this program – really, he doesn’t sound much like anybody. What struck me most is his ability to be the ultimate non-extremist. Most conversations these days, especially in the political sphere, tend to take one side and ride it hard, wiping out all nuance, refusing to acknowledge any strength in the opponent’s argument. But Jeff Sachs argues for the power of the market and the power of morality. A voice like his probably shouldn’t be so rare – but it is. In the new year, here’s hoping for more.