Oeconomicae et pecuniariae quaestiones: The best Vatican document on economics for some time

Oeconomicae et pecuniariae quaestiones: The best Vatican document on economics for some time

‘Oeconomicae et pecuniariae quaestiones’ is a serious and constructive contribution that ranks alongside ‘Rerum Novarum’

by Philip Booth – posted 

A British economist. He is Director of Research and Public Engagement at St Mary’s University, Twickenham and Senior Academic Fellow at the Institute of Economic Affairs. His primary areas of research and writing are social insurance, financial regulation and Catholic social teaching. – Wikipedia

New Vatican document on economic, financial system: The new document was written by the Congregation for the Doctrine of the Faith and the Dicastery for Promoting Integral Human Development. Entitled “Oeconomicae et pecuniariae quaestiones: Considerations for an Ethical Discernment Regarding Some Aspects of the Present Economic-Financial System.” The 34-paragraph document offers “fundamental considerations” and “some clarifications in today’s context.” – Catholic World News.
Today, the Vatican issued a letter on economic and financial matters. Quite unlike many recent communications on those issues, it was elegantly written – almost a joy to read. It is a serious and constructive contribution to the debate and, in its earlier sections, it is, if not quite original, a vital contribution to the teaching of the Church. The document has a beginning a middle and an end and is written in such a way that you don’t have to keep re-reading it to work out what the over-riding theme is. Sadly, modern Church teaching documents on economic matters have not had such elegance: this letter is more like Quadragesimo Anno or Rerum Novarum. Indeed, its content could have been written by Oswald von Nell-Breuning, the author of the former encyclical.

A feature of other recent documents on finance and the economy is that they have tended to exaggerate or, quite often, say things which are simply not true about the factual picture and this has taken the focus away from the essential moral and social teaching message. This letter makes no such mistake.

So, what does it say?

In the first half the document, the authors, from the Congregation of the Doctrine of the Faith and the Dicastry for Promoting Integral Human Development, discuss at some length, though concisely, the essential nature of economic behaviour. Economics is about human action in the economic sphere and so it cannot be separated from the need for ethics. Keynesian economics and neo-classical economics have separated economics from ethics in order to focus more clearly on particular aspects of economic problems. This works to an extent, but, just as when we focus on part of a painting in an art gallery, we have to adjust our eyes and step back to see the full picture in all its glory.

Economics and finance is about human interaction and co-operation. It is ultimately inseparable from a consideration of normative ethics. In recent documents, such discussion has got mixed up with sideswipes at those who believe in free markets (ironic, given that it is Austrian economics’ followers of Hayek and Mises who are quickest to understand the human element) or grandstanding about the failure of globalisation and markets to promote welfare for the most needy.

This time is different. Some of the great advances in economic wellbeing are recognised. It is not noted that the growth of globalisation and financialisation has coincided with the first era in over 200 years that income inequality on the planet has fallen. Slightly more oddly is that the letter, quite rightly, mentions that there is much more to economic life than can be measured by GDP, but it does not note the collapse in infant mortality and child labour and the fall in deaths from pollution or huge increases in literacy that have taken place since globalisation took off in the early 1980s.

But, I don’t want to end this part of the discussion with a quibble. There is a wonderful message for universities which, in fact, would be an excellent summary of a number of discussions we have had at St Mary’s University about the design of our curricula in business studies and Catholic social teaching:

In this regard, it is particularly desirable that institutions such as universities and business schools both foresee and provide, as a fundamental and not merely supplementary element of their curricula of studies, a formational dimension that educates the students to understand economics and finance in the light of a vision of the totality of the human person and avoids a reductionism that sees only some dimensions of the person. An ethics is needed to design such formation. The social doctrine of the Church would be a considerable help in this connection.

I hope that this is a message that will resonate and be applied.

There is then a discussion of regulation and financial instruments. Here, I disagree with the tenor of the discussion, but there is no doubt that the hand behind this broadly understands the financial system and the world we live in despite some somewhat strange conflations and definitions at times.

Speculation is criticised and seems to be held responsible for the financial crisis. It is suggested that different activities of banks should be compartmentalised. These are arguable, but perfectly respectable positions.

As ever, very much in the mould of Quadregesimo Anno, the case is made for state regulation (and global regulation). But, it is not over-stated and the difficulties are recognised. It would have been sensible for the authors to note that the crisis occurred in an era when we had international regulation of the banking system which encouraged the behaviours that caused the crisis and also that the crisis may not have happened at all were it not for the huge regulated and state-underwritten securitisation warehouses in the US. Imperfectibility is all around the place – it is part of the human condition. It is not clear that the serious reflection that is necessary to understand where the role of the regulator begins and ends has been undertaken. But, the document is written in a tone which can feed into that reflection rather than a tone that will promote destructive debate.

I will end by making two points. It must be recognised that, if we have international regulation of finance, it will encourage the adoption of similar business models by those involved in finance and to larger financial institutions. The document calls for more bio-diversity in finance. Amen to that! However, international regulation is unlikely to create that and can also lead to a system that is more fragile.

Secondly, the paper argues: “Moreover, where massive deregulation is practiced, the evident result is a regulatory and institutional vacuum…” This is demonstrably not true. Whether it be the stock exchanges of Holland or the UK over the centuries (the latter having had its wings clipped in the big bang of 1986, which was an act of government prohibition of private regulation not of deregulation) or the development of the International Swaps and Derivative Association or the development of independent professions, we know that regulatory institutions can develop within markets and from civil society. Why do they develop? Because markets involve interaction and deliberate human action and are not autonomous and so institutions develop to solve problems. Indeed, the document recognises this in its conclusion in which it notes:

In front of the massiveness and pervasiveness of today’s economic-financial systems, we could be tempted to abandon ourselves to cynicism, and to think that with our poor forces we can do very little. In reality, every one of us can do so much, especially if one does not remain alone. Numerous associations emerging from civil society represent in this sense a reservoir of consciousness, and social responsibility, of which we cannot do without.

Absolutely: and shades of Quadragesimo Anno again. Let’s hope that this is a sign that the Vatican has itself abandoned such cynicism and that the ideas behind this letter will be discussed, critiqued and developed.

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2 comments on “Oeconomicae et pecuniariae quaestiones: The best Vatican document on economics for some time

  1. The National un-Catholic Reporter’s report: Vatican offices decry ‘profoundly amoral culture’ of global financial system
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    Did the “profoundly amoral culture of the global financial system” cause this?
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    Venezuelan Church rejects elections, warns of ‘catastrophe’
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    May 16, 2018 | By joop koopman | Aid to the Church in Need
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    ACCORDING to the latest report by Caritas Venezuela, the inflation of food prices exceeded 1,300 percent in 2017. The International Monetary Fund estimates that inflation in Venezuela will reach 13,000 percent in 2018, the highest rate in the world. On May 1, 2018 the minimum monthly wage was increased from 1.3 million bolivars to 2.5 million bolivars, the ninth increase since January 2017 and the third this year alone—and still most everyday purchases are beyond the reach of ordinary citizens. Now this economic crisis has been exacerbated by a political crisis, the government having suddenly decided to hold presidential elections on May 20, 2018, rather than in October or December as originally planned.
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    In its most recent communiqué, the Venezuelan bishops’ conference declared that these elections lack legitimacy, because, the statement said, “as conceived, and without the necessary guarantees common to every free, trustworthy and transparent electoral process, and with the innumerable disqualifications of potential candidates, such an election, far from bringing about a solution to the crisis the country is facing, may even aggravate this crisis and lead to a humanitarian catastrophe without precedent.”

  2. On finance, the Vatican can still do better
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    “Oeconomicae et pecuniariae quaestiones” outlines sound general principles, but also reflects the Church’s present struggle to comprehend modern finance.
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    May 17, 2018 – Dr. Samuel Gregg
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    Over the past decade, various Vatican offices have produced several documents addressing the vexed topic of finance and banking. Given the turmoil and scandals characterizing the world’s financial sectors over the past two decades, such interventions are to be expected, even welcomed. But while these texts often set out useful principles for approaching this topic, they’ve tended to reflect a selective and, at times, questionable grasp of the subject-matter. This pattern is, alas, replicated in the Church’s latest official statement about the financial sector, this time jointly issued by the Congregation for the Doctrine of the Faith (CDF) and the Dicastery for Promoting Integral Human Development.
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    Entitled “Oeconomicae et pecuniariae quaestiones [Economic and Monetary Questions]: Considerations for an ethical discernment on certain aspects of the current economic-financial system,” this text is divided into four parts. The first, second, and fourth sections contain what I think is a sound set of criteria for analyzing the morality of finance and financial markets. These are the parts in which the CDF’s imprint upon this document is very obvious.
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    In the third section, however, the document offers what it calls “Some Clarifications in Today’s Context.” But clarity isn’t the strong point of this section. It muddles some helpful observations with questionable claims about the present state of financial markets, incomplete analyses of particular questions, and truncated discussions of some of the financial sector’s biggest problems.
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    Money isn’t evil
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    The first substantive point to note about Oeconomicae pecuniariae et quaestiones is that it’s free of populist hyperbole like “this economy kills!” There’s no demonization of capital. Indeed, the document states that money “is a good instrument . . . a means to order one’s freedom and to expand one’s possibilities” (15).
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    The financial sector likewise is presented as “something positive” insofar as it engages in circulating capital (15). More could have been said about the ways in which financial markets realize this goal by managing risk, engaging in the formation of prices, putting capital to work in efficient ways, correcting misallocations of resources within and between economies, and, above all, establishing links between the economic present and economic futures of individuals and communities. Absent these capacities, all of us would be living materially poorer—and considerably shorter—lives.
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    This positive approach provides a basis for Oeconomicae pecuniariae et quaestiones to articulate a number of reference-points useful for anyone in finance who wants to live a morally good life. These go beyond stating that money is an instrument and not an end in itself (15). They includes recognizing that good relationships, including financial relationships, are built upon people’s good use of their freedom (8) and that while economic logic has its place, it can’t capture the full meaning of human choice and action. Put another way, without the right understanding of the human person (9), you can’t establish a sound ethics. Without sound ethics, the economy won’t be an arena for human flourishing. If you get human anthropology wrong, everything else will go wrong—including finance.
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    For many Catholics and others, this is all a given. But in a world in which many people have never had this connection explained to them, it’s a point which bears repeating.
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    The document’s positive emphasis also leads it to affirm that finance has a “primary vocation” inasmuch as “it is called to create value with morally licit means, and to favor a dispersion of capital for the purpose of producing a principled circulation of wealth” (16). That’s not the sort of language we’re used to hearing from religious leaders in economic discussions. The use of the word “vocation” is especially important. It indicates that working in finance can be a calling instead of being dismissed as a necessary but disreputable occupation.
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    Equally noteworthy is Oeconomicae pecuniariae et quaestiones’ statement that “all the endowments and means that the markets employ in order to strengthen their distributive capacity are morally permissible, provided they do not turn against the dignity of the person and are not indifferent to the common good” (13). That’s a warning against being instinctively suspicious of financial markets. Provided that a financial instrument doesn’t in itself involve some fundamental violation of the moral law (e.g., don’t steal, don’t lie etc.), it should be judged on its capacity to help financial markets grow wealth and spread capital.
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    An absence of clarity
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    These and other points contained in Oeconomicae pecuniariae et quaestiones’ first, second, and fourth sections are helpful in identifying core principles which should be central to any sound reflection upon morality and finance. The third section, however, is a different story.
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    Here we find a mishmash of, among other things, commonsense observations (“the market needs anthropological and ethical prerequisites that it is neither capable of giving for itself, nor producing on its own”), extensive use of outmoded business school jargon (“virtuous circularity”), smatterings of different theories of the firm, and some very debatable historical claims. The overall impression is one of an author or authors wandering between offering all-encompassing macro-explanations for the way things are, while regularly descending into some of the micro-weeds of very specific questions. At this point, a ruthless wielding of Occam’s razor would greatly enhanced the text’s readability and, more importantly, its coherence.
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    It’s not that the third section completely lacks merit. I’m very glad that it discusses, for instance, the problems associated with large public debt (32), though what those have to do with offshore tax-havens escapes me. That’s just one example of how the third section proceeds in fits and starts through a bewildering range of subjects in which the connections are not always clear. As a result, some very serious problems facing the financial sector aren’t given anywhere near as much attention as they need.
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    At one point, for instance, Oeconomicae pecuniariae et quaestiones mentions that “there are often economic losses created by private persons and unloaded on the shoulders of the public system” (32). That could have led to a through-going discussion of one of the biggest challenges facing the financial sector: the situation of people being insulated from the possible negative effects of their choices, which incentivizes them to take risks they wouldn’t otherwise take. This is known as “moral hazard.”
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    Moral hazard played a major role in the 2008 financial crisis insofar as some large financial institutions overleveraged themselves on the premise that, if a big investment went south, governments would have no choice but to bail them out. Instead, however, of underscoring the wrongness of expecting other people to pay for your mistakes or pointing out that allowing banks to fail would radically diminish this problem, Oeconomicae pecuniariae et quaestiones lurches into a discussion of the morality of everyday shopping-choices.
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    But what’s especially missing in the document’s third section is any consideration of the way that excessive regulation distorts the workings of the financial sector. In multiple places, Oeconomicae et pecuniariae quaestiones insists that the financial sector requires more regulations and regulators.
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    The difficulty is that the financial sector, especially in developed economies, is already heavily regulated. Even before 2008, America’s financial sector was subject to manifold levels of regulation. Thousands more pages of regulations were added to the statute-books following the 2008 financial crisis. Exhibit A is the 2,223 page Dodd-Frank Act signed into law in 2010.
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    Under-regulation just isn’t the primary problem facing today’s financial markets. In the United States, for example, there are no less than eleven federal agencies with financial regulatory responsibilities, ranging from the Federal Reserve to the Commodity Futures Trading Commission. All these agencies administer and interpret thousands of regulations. Their jurisdictions also overlap in ways that truly merit the word “Byzantine.” That doesn’t even count the hundreds of regulatory bodies which function at the level of the states. If anything, the situation in Western Europe is even worse.
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    So what are some of the negative effects of all this regulation? First, excessive regulation can encourage people to think that as long as they comply with the endless legal requirements, they are fulfilling their moral obligations. That facilitates a legalistic approach to morality, something that’s already pervasive in what sadly passes for “business ethics” in many business schools.
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    Second, excessive regulation diminishes access to capital by less well-off segments of society. The costs associated with meeting the demands of regulatory compliance can be absorbed with greater ease by, say, Goldman Sachs than your average credit union. Excessive regulation consequently makes it harder for smaller banks to compete. That puts capital out of reach for many people.
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    Excessive financial regulation also works against start-up businesses. Unlike large companies, first-time entrepreneurs usually don’t have the resources to hire armies of accountants and lawyers to help them navigate convoluted regulatory environments as they seek to acquire capital. If a start-up can’t obtain capital, the enterprise probably won’t begin in the first place. The wealth and employment which could have been created thus never sees the light of day.
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    Third, over-regulation can actually contribute to further separating the financial sector from the real economy. The bigger and more extensive the regulatory environment, the greater the incentives for banks to hire very smart people to work out how to game the regulations to their advantage. Banks subsequently get distracted from their primary purpose of creating and efficiently directing capital to the economy’s productive sectors. Regulators typically react by closing loopholes. But the same very smart people will then work out how to game the new arrangements.
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    None of this is an argument against regulation per se. Nor does it excuse banks from losing sight of their primary function. But Oeconomicae et pecuniariae quaestiones seems blissfully unware of excessive regulation’s many counterproductive effects upon the financial sector.
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    A missed opportunity
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    What, however, most struck me about this document is what it could have been, but isn’t. You wouldn’t know it from reading Oeconomicae pecuniariae et quaestiones, but the Catholic Church possesses a vast repository of knowledge on the topics of money, finance, and banking.
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    Medieval and early modern Catholic theologians wrote at length and sympathetically, for instance, about the capital-intensive economies that first emerged in medieval Catholic Europe. Their thought played a major role in sparking the Financial Revolution which helped launch Europe on the path to an economic prosperity that rapidly dwarfed other civilizations’ poverty-alleviating capacities.
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    It’s a matter of record that most of the tools and methods associated with modern finance attained their mature form in this overwhelmingly Catholic world. In her 2002 book Medieval Economic Thought, the historian Diana Wood concluded that the intellectual explorations of the nature and use of money by medieval theologians “sanctioned many of the monetary considerations that underlie modern economies.” Before he found himself embroiled in theological debates with Martin Luther as Catholicism’s leading apologist during the early Reformation, Father Johannes Eck spent most of his time penning lengthy treatises on money-lending and identified several instances in which it didn’t amount to usury.
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    Turning to more contemporary sources, mid-twentieth century Jesuits such as Bernard W. Dempsey and Thomas F. Divine extensively studied subjects ranging from the functions of interest-rates to the nature of capital, public finance, currency-exchanges, and the benefits and risks of debt. Moreover, they did so from perspectives informed by Scripture, church doctrine, and natural law reasoning but also a deep grasp of modern economic insights into—and modern economic debates about—these topics. Areas like monetary policy were no great mystery to them.
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    There is, in short, a veritable treasure of intellectual resources upon which Oeconomicae et pecuniariae quaestiones could have drawn to produce a tightly-integrated analysis of the great good produced through finance as well as its real and potential challenges and weaknesses. You won’t find these resources referenced in business schools or in the world’s financial houses. But they contain many uplifting and challenging truths about morality, economics and finance that the world’s bourses need to hear.
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    Finance is unquestionably a sphere of life in which people are subject to specific temptations—just as politics and the priesthood are callings with their own potential pitfalls. Oeconomicae pecuniariae et quaestiones goes some way towards helping people make good choices in an industry upon which every single one of us is in some way reliant for our economic well-being. Unfortunately, it’s also a reminder that the Church has much more work to do if it’s going to make constructive contributions to the reform of a segment of modern economies that, ten years after the financial crisis, is still in desperate need of substantive change.

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