The Liberating Balance

In his great book The Cultural Contradictions of Capitalism, Daniel Bell argued that capitalist systems are composed of three complementary but distinct social systems: the political, the economic, and the moral/cultural. That their values are mutually complementary makes their unity possible. That they are distinct institutions with competing interests enables them to act as checks and balances upon each other. But sometimes one system becomes too strong for the other two. When this happens, the poor are the primary victims.

We see something of the effect of this new imbalance in the current economic crisis. There seems to be virtually universal agreement that the crisis began in the U.S. housing bubble. But what caused the housing bubble? Which of the three systems overpowered the other two?

My economist colleagues at the American Enterprise Institute predicted this collapse nearly a decade before it happened. They identified one immensely destructive Congressional policy: promoting mortgage lending to people of very low income through off-budget guarantees and lax lending standards (rather than explicit, on-budget subsidies), which disguised the substantial risks to the financial system as a whole.

The two giant “GSEs” (government-sponsored enterprises) Fannie Mae and Freddie Mac supplied hundreds of billions of dollars of government-guaranteed loans for “subprime” mortgages, while the bank regulators pressured banks to relax traditional lending standards dramatically and to increase their mortgage lending. Much public praise (including, alas, from me) was lavished on “Fannie and Freddie” for making millions of poor families the owners of their own homes. What was overlooked was that the homes were really owned by the banks and other lenders—and that the families had been loaded with far more debt than they could afford when and if housing prices fell, as of course they did.

Government policy was not alone responsible for the current crisis, but it did play an originating part. And the poor were, as I said, the primary victims of the unintended consequences of government’s good intentions, good intentions that would not have had such effect if the balance between political and economic had been maintained. During the first thirty years of the new millennium, the main moral task is to reduce the numbers of the world’s poorest persons drastically. There is no reason written in the stars why this earth should have so many poor people. Poverty is directly linked to poorly designed human systems for creating new wealth, and an abysmal failure to teach all peoples how to shape their habits and daily practices to become creators of new wealth. Sound economic habits and skills of enterprise and invention are quite natural to the human species, and only need to be taught and encouraged in order to blossom, if external restrictions and impediments are removed.

If you had your way, what programs would you propose in order to end poverty such as we recently saw in Bolivia and Brazil?” Pope John Paul II asked me more than once at the dinner table in his apartment. I always made three simple yet basic recommendations. The effect of these is to restore the balance Bell described, in a way that frees the natural energy and creativity of people to create wealth and improve their lives.

First, since the most dynamic form of capital is human capital, give priority in social spending to expand and improve education. Along with that, put new emphasis on economic creativity, enterprise, wit, and invention, which in Centesimus Annus the Holy Father identifies as the chief cause of the wealth of nations today.

Second, in order to supply the millions of new jobs desperately needed among the unemployed and underemployed in many poor countries, make it easier for poor persons to form economic associations such as small businesses, under the protection of limited liability, so that they do not put at risk the whole well-being of their families in their new ventures. Most new jobs are created by new small businesses employing three to twenty-five persons, and the rate of small-business formations is the best indicator of progress against unemployment and underemployment. Without rapidly increasing employment in the private sector, a nation is unlikely to grow out of poverty.

Any nation wishing to escape poverty must help unleash the economic creativity of the poor. Human beings have a natural right to association (first vindicated by St. Thomas Aquinas in Contra Impugnantes Religionem), and it is virtually criminal to exclude the poor from the right to form business associations, and to form them quickly and cheaply.

Third, since poor people lack the personal capital to buy materials or to pay collaborators before they begin operations, governments must establish small credit bureaus in every locality. These will offer practical advice because they want their lenders to succeed, and thus to pay back in a regular stream the moneys they have borrowed. These mini-loans, once successfully paid back, can then be recycled to still other entrepreneurs.

Such progress at the bottom is the best method for bringing the fruits of new wealth to the grassroots of society, where in a relatively short time (as we learn from all the “Asia tigers”) persons of considerable economic genius will begin to emerge. For the Lord has spread economic talents abroad like the sower sowing his seed.

The usual motivation for denigrating capitalism has been to collect more power in the hands of the State. The usual rationalization has been to “regulate,” “correct,” and “direct” the market, which would otherwise malfunction, to the advantage of the rich and the continued oppression of the poor. Myths such as “global freezing” in the 1980s and “global warming” since the 1990s have stimulated new lusts for government control over economic activism and economic creativity, for motives held to be intrinsically pure and good. The lust of political elites for more and more control over economic activity is always a danger against which wise societies take strong precautions.

Up to a point, regulation is advantageous to the economy itself. Businesses often ask for regulation, in order, for example, to protect patents or ensure fair markets. But carried too far, regulation injures the economy and the people it is supposed to protect. There seem never to be lacking those who would suffocate economic activists and creators of new wealth in the name of “helping” them. But experience shows us wise ways to regulate as well as unwise ways, ways that actually liberate the poor from poverty and unemployment by liberating them to be creative economic activists.

This we have seen played out in the real world (the world of actual experience), where the policies and practices just described have quite recently worked wonders in freeing from poverty an immense proportion of the world’s population, even while the world’s population has doubled three times since the year 1800. The system sometimes denigrated as “capitalist” is a system with many serious faults. It is a poor system, until compared to all the others. It has no peer in lifting the world’s poor out of poverty.

It was only about two hundred years ago that the Christian West moved (against Malthus) to lift the cruel burden of poverty from the whole human race, when the dream of “universal affluence” was first voiced by Adam Smith in tiny and then not very wealthy Scotland. The persisting aim has been to help today’s poor to live at standards of living unattainable by even the wealthiest persons in 1776 by freeing their economic drive and creativity. His language was not Bell’s, but he would have agreed with the need to balance the political, economic, and moral/cultural for the good not of the wealthy but of the weakest and most vulnerable.

For example, in China and India alone, since 1980, more than 500 million of the world’s poorest people have now moved out of poverty. Never have so many poor people moved out of poverty in so short a time. Deliberate encouragement of economic creativity among the poor led to these sterling successes, along with new access to open markets in parts of the West. Let us hope that poor nations do at least as well in liberating their poor in the next twenty years.

Michael Novak is the George Frederick Jewett Scholar in Religion, Philosophy, and Public Policy at the American Enterprise Institute and is a member of the editorial board of First Things. “The Liberating Balance” is adapted from a talk he gave to the Pontifical Association of Social Sciences in Rome on May 1, 2010.