After years of going nowhere, economic theory in the Catholic world just got a big upgrade from none other than the head of the Vatican’s bank. Ettore Gotti Tedeschi, a one-time private banker and professor of financial ethics at the Catholic University in Milan, has headed the Institute for Religious Works since 2009. Writing in L’Osservatore Romano, he has denounced the “new statism,” as practiced by the United States, and spoken about economic issues with more specificity than we’ve seen in these circles for years.
Usually the debate over Catholic thinking on economics takes place at a ridiculous level of abstraction, and, for this reason, these debates rarely make any difference in the real world. The truth is that hardly anyone with technical knowledge of economics and economic policy pays attention to them. Theorists go on about social justice, workers’ rights, the morality of profit, the pluses and minuses of economic growth, the limits of market efficiency, and the like, but never get around to speaking about what’s actually going on in the great struggle between market forces and the interventionist state.
Tedeschi’s article was different. He pointedly names the source of the ideas that are wrecking government budgets, saddling the world with debt, leading to nationalizations and centralized control, and discouraging thrift. The source here is the body of writing by John Maynard Keynes, the British economist who came to rule the world with his ideas in the 1930s and 1940s, who has made a stunning resurgence in the last five years or so.
Keynes is like Marx in that he has been refuted again and again, and every generation of thinkers declares the body of ideas dead from the neck up. It was this way with Marx in the 1890s, when German thinkers were already dismissing his ideas as defunct. But it was all premature. So with Keynes: Economists in the late 1930s wrote him off, and again in the 1940s. By the late 1950s, economists were already apologizing in advance for refuting him yet again. And yet here we are, 75 years after the General Theory appeared, and Keynes is still the man.
It’s about time that someone with a voice in the Catholic world actually spoke about Keynesian theory, for this is indeed the source for just about every crazy scheme of governments to wreck the functioning of markets throughout the world. The naming of Keynesianism here falls in a great tradition, too. Popes from Leo XIII to Benedict XVI have condemned Marxism time and again, but it is not Marx who is the muse behind the current fiasco among developed economies on both sides of the Atlantic.
Keynes was neither Marxist nor socialist but rather a pragmatist who had an upside-down way of viewing the functioning of markets. He saw all problems of recession as reducing to a single problem: Resources were still instead of active. This was true for labor, capital, and even money, which is why he was so intent on schemes that get people off their feet and work, get consumers spending instead of saving, and get factories coughing up products rather than waiting it out.
W. H. Hutt had it right in 1939 with his book called The Theory of Idle Resources. He argued that there are rational reasons for consumers to save and not spend, rational reasons for factories to pull back rather than squander their resources, and even rational reasons for people to hold high cash balances. Even unemployment masked an underlying rationality: Businesses might not be hiring at present wage rates, and workers are either not inclined or not permitted to lower the asking price for their labor.
Keynes would have none of it. He wanted action, busyness, production, labor, spending — these were the key. If the public wouldn’t do it, his prescription for prosperity involved a vast increase in government control over economic life using fiscal and monetary planning to “stimulate demand” and discourage saving, while believing that prosperity could be generated out of a printing press if necessary. In other words, Keynes wanted a vast coercive apparatus to goad markets into doing what he believed they should be doing, and never mind the cost.
Tedeschi, as a banker with long experience, knows that these teachings are the road to disaster. They have not only been proven wrong time and again; they actually make no sense from the point of view of economic logic. The whole raison d’être of markets is to enable the most rational use of scarce resources, and there are good reasons for a pull-back in a recession, if only to wash away the errors made during an artificial boom. In making these comments, Tedeschi stands with a great tradition of anti-Keynesian including Hutt, F. A. Hayek, Wilhelm Ropke, Ludwig von Mises, Orvall Watts, Murray Rothbard, Lionel Robbins, Henry Hazlitt, and many others.
The book that Tedeschi singles out for particular praise is Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles and Busts by the American economist and philosopher Hunter Lewis. The book in turn is based on Hazlitt’s own 1958 work, The Failure of the New Economics.
Tedeschi warns of high deficits, zero interest rates, de facto nationalizations, and the hidden tax of inflation — and sure enough, he hit his target. Paul Krugman was seriously annoyed. But rather than address the arguments, he quipped: “Maybe if we stopped talking about the Keynesian cross?” — a reference to the Keynesian graph and thereby a double entendre. The point is that Tedeschi gained an audience for the Catholic view against state-managed societies by speaking with some authority and specificity rather than merely talking in abstractions.
Keynes is a great target, and an important one. He was born in 1883 and died in 1946, long after governments began citing his material as a cover for power grabs but before his theories came to dominate economics departments. His collected works are vast, but he is mostly known for his 1946 book, The General Theory of Employment, Interest, and Money. His ambition with this work was to overturn all orthodoxies that had been built up over many hundreds of years, beginning with the writings of the Spanish scholastics in the 15th and 16th centuries. (The drive to do so was probably influenced by devotion to the writings of philosopher G. E. Moore, who loathed the idea of natural law, bourgeois virtues, and conventional morals.)
The core of his argument was simple but masked by an amazing blizzard of convoluted neologisms and tangled prose. As he saw it, the price system does not work properly to coordinate resources; consumers and investors are irrational and need government management. But government cannot manage the economy properly so long as there is a gold standard, because gold limits the amount of money that governments can print. Governments need to be freed to print so that they can spend without taxing and shove around macroeconomic aggregates the way the gods move planets. Keynes even went so far as to speak about the capacity of governments to “turn stones into bread” — provided, of course, that Keynes was the one showing them how.
To be sure, all governments at all times and in all places love to spend and accumulate power unto themselves. Economists before Keynes have always been around to wag their fingers and point out the costs of such interventions. Debts must be paid eventually, through inflation or taxes, and it diverts wealth from the private sector, where it is used productively, to the public sector where it is wasted to build up bureaucracies. It is no solution to print more money, because that reduces the value of the existing currency stock and punishes the savers and investors in society while rewarding debtors and financial insiders.
Keynes turned nearly all accepted wisdom on its head, changing what were once considered to be cranky views of amateurs into respectable teachings by well-educated economists. For example, economists always taught that interest rates should be formed on the market in response to the supply and demand for credit. Keynes imagined that interest rates could and should be driven to zero, which he hoped would mean certain death for the class of people who live on interest payments, namely savers and lenders.
It was Keynes who revived the notion that all an economy needs to run well is a wild consumerist spirit. So long as people were hungry for more and spent instead of saved, the economy was supposed to have the necessary fuel to stay pushing ahead forever. Never mind the complexities of production and competition that require a vast machinery that coordinates not only through many stages of production but also many and varied time schedules of production. Keynes wrote as if such complexities in the capital-goods sector didn’t exist. It was all input and output, so far as he was concerned.
It seems obvious at this late date that Keynes isn’t going anyway, and it is long past time for Catholic thinkers to get serious about the subject. I would speculate that the influences on Tedeschi could be traced to the Acton Institute and the writings of Rev. Robert Sirico, among others at Acton, because they have long urged Catholics to take the subject of economics seriously, and speak out with greater authority on the actual issues of the day. Someone in a position to make a difference has at last done so, and for that we can only say Deo gratias.