About the incompletness of Economics
and of Economic practice
Editor of quarterly Finance & the Common Good/Bien Commun,
professor of Economics at University of Fribourg,
director of Observatoire de la Finance (www.obsfin.ch)
After half a century of almost total black-out, the discussion on the nature and purpose of “Economics” as a science has recently resumed and reached the public domain. Triggered by an apparently anodyne question that the Queen posed during her visit at the London School of Economics – one of the modern temples of the discipline – the old unanswered questions have made their come back.
Her Majesty is reported to have asked, alluding to the crisis: “why had nobody noticed that the credit crunch was on its way?” Eight months after the question was put, in a letter British Academy dated on 22 of July, summarises the epistemological and sociological reasons that prevented the profession from understanding clearly the signs of the times.
Surprisingly, the last papal encyclical, published a few days before the British Academy letter, provides a deeper critique of economics and of economic life, which is also an explanation of why economics failed.
“There is no free lunch” – this statement summarises the core teaching of any contemporary serious Economics or Management textbook. This means that there is no place for free gift and gratuity either in the practice, or in contemporary economic thought. But the (epistemological) nature of this statement is ambiguous: is it a “positive” statement meaning that there can’t be a “free lunch”, or a “normative” exhortation of a rule of behaviour: that there shouldn’t be any lunch, or a bit of both.
Both economic practice and theory are based on the same premise: nothing is free, everything has to be paid for. From this follows a political recommendation: if pockets of gift and gratuity still exist, they should be eradicated in the name of the gain in efficiency which would be brought to light by being substituted with a commercial transaction.
Thus, the economic idea that has nourished political thinking during the last decades is that of the so-called “complete” markets, i.e. a situation where a market exists for everything and its opposite.
In such a context, economic efficiency is at its peak as the individual – perfectly selfish and, therefore, perfectly isolated- communicates with the rest of the world exclusively by means of prices and quantities. Thus, the intellectual building up of a society, not to say of a market civilisation, rests on a strong anthropological vision – known by the name “homo oeconomicus”. This cornerstone of contemporary micro-economic theory has been laid down by Vilfredo Pareto in Lausanne, on the shores of Lake Geneva, where he lived at the beginning of the 20th century. Under Pareto’s pen, “homo oeconomicus” was only an exercise in style. However, in the last twenty years or so, the fundamentally selfish rationality of homo oeconomicus , totally devoid of any ethical feeling, has been used by economists as the binder in the great project (at once positive and normative) of unifying the economic theory by anchoring the foundations of macro-economics in the human nature.
The practical relevance of this intellectual construct of economics as theory has been seriously brought into question by the current crisis. A complete market world, together with homo eoconomicus, are enough to establish an entirely and exclusively economic ideal of civilisation, where the clash of selfish individuals, put into competition by the market, is sufficient to solve all problems and all conflicts through exchange transactions. An ideal of economic fundamentalism that could – if this hasn’t happened already – degenerate into an ideology.
The encyclical ‘Caritas in Veritate’, that Pope Benedict XVI released at the beginning of July, refutes point by point both the economicist ideology and the practice that could result from it. “There ought to be free lunches”, the Pope seems to say. This is so because human nature blossoms and reaches its fulfilment in generosity and in generous relations with others. Expert in humanity, the Catholic Church, authoritatively, offers a reading of human nature diametrically opposite to that of homo oeconomicus. Charity (Caritas) can’t have another foundation or justification than that of the truth (Veritas) of the human nature. If economic practice and thought tend rather, nowadays, to pose as centres of social and individual life, Benedict XVI emphasises, on the contrary, their imcompleteness and deals them a blow with a lesson in humility. Economics and finance are, at best, means while what is truly at stake concerns the ends. The economy must therefore serve human destiny rather than preside over it.
Although the encyclical recognises explicitly the importance of equivalent exchange, contract, profit and of the institutions that are governing them, i.e. the market and the businesses, it is more than anything else a call to go beyond them. They are necessary, but not sufficient, conditions to allow each human being and all people to fulfil their vocation of integral development. It is not a question of legislating or of acting through macro-political regulations, which have great difficulties, as it is, guaranteering a minimum of justice, but of reconfiguring in depth the behaviour of economic agents.
“The importance of this goal is such as to demand our openness to understand it in depth and to mobilize ourselves at the level of the “heart”, so as to ensure that current economic and social processes evolve towards fully human outcomes.” (para.20)
Announced, and expected, as a text on the economic crisis, the encyclical avoids a technical debate; if it touches on the crisis, it is more a crisis of civilisation than an economic crisis.
At the heart of the diagnosis, there is the non- or ill-development of contemporary humanity, a situation that doesn’t simply come down to the material dimension only and that isn’t confined to the so-called developing countries. The current crisis then is “an opportunity for discernment, in which to shape a new vision for the future.”. Throughout the 100 or so pages, Benedict XVI insists on a necessary double renewal in order to come out of the crisis. It is necessary to start at the beginning where there is a striking need for a “new humanist synthesis”, and with practical action, where new models and structures are to be experimented with and put into action.
This double renewal demands that human truth never be lost from sight, that such abstractions as structure, technique, progress, growth, profit or market never overcome human beings in their individuality and their uniqueness. How are we to articulate the generous aspiration to this “integral humanism” in day-to-day action? This is probably the weak point, but also the fundamental demand, of the encyclical: there are no recipes with a magic baton, there are no technical and impersonal “it’s just a question of” or “one must”. The only practicable path suggested by Benedict XVI is that we are all to act or, more realistically, that each person starts acting without waiting for others. By doing what? By putting some giving and generosity into the heart of economic practice (not aside of it), which means by going beyond the strict (and sterile) equivalence of exchange in order to write in a surplus, a dimension of giving. A surplus, that is an increase (as in a really full measure), bearing the fruitfulness necessary for the development of lived-out solidarity. But how? This still remains to be invented, experimented with, rediscovered. There are some suggested paths: a relationship open to the future and to the other party should allow all to relax the grip of the strictly equivalent exchange and to gradually substitute anonymous and instantaneous transactions; autonomy and responsibility, another path, which imply human-size organisations. “Small is beautiful” is a discreet leitmotiv of the encyclical, as is the hope that, through a virtuous circle, ‘the business as usual” will be won over by the exemplary nature of the still-marginal practices of micro-finance, of solidarity economics and of economy of communion in which giving and generosity play a central role.
The encyclical doesn’t suggest alternatives, or a third way. It assumes the heritage of the 120 years of modern Catholic social teaching, while adapting it to the current realities. It shows a certain defiance towards the possibilities of politics – taken aback for the time being by the scale of the economic globalisation – and emphasises the direct responsibility of economic and financial agents. Thus the encyclical reminds us of an ideal horizon that humanity will never be able to reach, but that it should never loose sight of at the risk of loosing its soul. Indeed, human nature is wounded and torn between ‘the good it wants’ and ‘the evil it does’ as St Paul puts it.
In short, ‘Caritas in Veritate’ is a heavy stone in the garden of economics as science and in that of economic practice. The Pope exhorts his readers to take a fresh look at their habits of thought and basic postulates and to adapt their behaviour accordingly.