Friday, June 1, 2012

"Toward a Moral Economy"

On Thursday, the Lumen Christi Institute hosted a public symposium, "Toward a Moral Economy: Policies and Values for the 21st Century." The keynote speech was given by the Archbishop of Munich, Reinhard Cardinal Marx, and responses were given by Professors Roger Myerson and Kevin Murphy (both UChicago) and Russell Hittinger (University of Tulsa).

SUMMARY:

The Archbishop's keynote framed the debate around his interpretation of current Catholic social doctrine which calls for a "global social market economy" regulated by a "global subsidiary government" based on "values and the common good." (For definitions, see below.)

In their responses, both Professors Myerson and Murphy emphasized the importance of managing "the rules of the game" versus managing "the outcome of the game." Myerson focused on how rules influence welfare and the importance of political structures and reputation in working toward a moral economy. Murphy focused on growth as the most important goal of policy. In addition, he emphasized that managing/regulating the fundamental rules of competition rather than economic outcomes of it actually better achieve the moral ends for which the Archbishop advocated. Inputs versus outputs approach.

Hittinger focused on whether a subsidiary world government is even a possibility.


DETAILS:

The Archbishop's speech was a little tough to follow because of all the references to terms with which I am unfamiliar or he defined differently (ordoliberalism (I thought he was saying autoliberalism for the majority of the speech), old and new European neoliberalism, "capitalism," etc.). This is the main problem of cross-disciplinary talks: sometimes there's a language barrier. His supporting evidence for his thesis was based heavily in German and EU history as well as references to Benedict XVI's 2009 social encyclical and other works which inform Church doctrine. It took me quite a while to decipher what is meant by "global social market economy" and "global subsidiary government," but based on the context of the speech and a little web research, this is what I think they mean:

Global Social Market Economy (henceforth SME): A European/Western German idea first developed with heavy Catholic influence after the second world war. A "compromise" between socialism and free-market laissez-faire. Markets are one tool to use to achieve certain ends. The government's main job is to regulate "fair competition" and adjust outcomes to meet social goals. These goals are sustainable development, stability, full employment, helping the poor through social insurance programs (old age pensions, health care, etc.), food security, peace, and addressing climate change.

The focus on "fair competition" stemmed from an overwhelming concern that without active government control, oligopoly and monopoly forces would overwhelm the economy. The idea is that competition is not natural. Professor Murphy argued against the idea that the outcomes we see are because of pervasive market failure and questioned our ability to use government effectively.

Global Subsidiary Government: Government that makes decisions at the most local level possible, but is directed by an overarching set of values and goals, but does not have "state" power. Marx was clearly interpreting the values and common good in the traditional Catholic sense. Professor Myerson tried to interpret this as global federalism.

In his rebuttal, Hittinger argued that without political union, this idea for a global government is impossible to achieve. In particular, he argued forcefully that it is not enough to say "not a state" since there is no example of subsidiary government the Archbishop was talking about. Worldwide government requires consent and political union because subsidiarity presupposes political union. To try to argue otherwise is pointless. He used the problems the EU is currently facing to argue: if European nations have such trouble forming a consensual political union, then it is pointless to try to argue for this worldwide. The Church's stance is really a standard "world government" proposal reworked to try to better appeal to people. 

There were a couple main lines to the speeches:

1) Are market outcomes immoral?

Marx advocated that a global economy implies the necessity of a new global order to regulate and control market outcomes to better achieve SME goals while simultaneously distancing the Church from having to understand how the economy works.

Myerson and Murphy tried to emphasize that understanding how the economy works is important in order to be able to pass judgement on the market outcomes. In addition, designing institutions is hard -- it's not a physical system, but a system of people. Murphy emphasized that unintended consequences always arise when one does not understand the incentives being institutionalized. If the incentives are bad, markets will be created that do bad things really well even if you don't want them to. 

In addition, Marx argued for redistribution of wealth and market outcomes and use of wealth for social progress (through taxation).

A basketball analogy that came up in the panel clarified the presenters' positions. Murphy and Myerson support making sure the rules of the game are designed appropriately, allow the game to play out, and then we accept the outcome. The Archbishop's position was to look at the final score to declare whether the rules were fair to the players. Murphy compared this position to some approaches in anti-trust law: winning by too much is a crime. He argued this metric has no relevance to making people better off or one's ability to pass judgement on the rules.

2) Is change/instability bad?

Archbishop Marx argued that market fluctuations are bad and stability should be a moral goal of a world economy.

Murphy pushed back hard against this line of thinking arguing that attempts to control fluctuations destroy growth, the main goal of economic policy, and hurt the chances of achieving the desired outcomes of a moral economy as laid out by the Archbishop. He pointed out that we constantly get side-tracked by "fluctuations" but the only fluctuation of any significance was the Great Depression. He wanted to have a graph of growth to emphasize his point, but the projector wasn't working. Here's something similar. He emphasized that we should not smooth out the fluctuations if it means destroying growth. As a supporting point he clarified the common misconception that economists only care about material wealth. This is false. Economic growth is important because it maximizes welfare in a much broader sense. Murphy cited one estimate that the improvement in health and life expectancy is as important to welfare as the increase in income.

Here are some more details of the responders' speeches by presenter:

Myerson:

Myerson focused on what he believes are the best hopes for achieving a moral economy:
     1) promoting democratic political systems
     2) having voters with (religious) values and a sense of what their leaders are doing.
There were a couple of caveats. He emphasized that in order to think about a moral economy, one must understand how the economy works. In addition, laws can be an instrument of social change only if people understand the law and hold leaders responsible for it. Thus, reputation is important for democratic leaders. But getting government right is hard. He supported these main points through five examples and questions:
     a) The financial crisis was caused in part because of over-leveraging in risky mortgage-backed securities and sovereign debt. This was caused by under-regulation of reserves because international standards declared the assets perfectly safe (Basel II standards) and thus banks were allowed to invest at will in these assets. However, it turned out these investments were RISKY not safe. Myerson asked: Should regulations require more capital in reserve across the board?
     b) Austerity versus stimulus is a false choice. Fiscal austerity (balanced budget) and monetary stimulus (printing money/inflation) are both still a possibility. Should Fed have an inflation target? Or a nominal growth target?
     c) Less public spending is not always better. However, better democratic oversight (more educated voters able to read financial statements) would lead to less wasteful government spending.
     d) Reputation of leaders is very important to good governance. How does successful democracy develop? One way is through robust local elections that feed leaders with good reputations into higher offices.
     e) One way to think about the "global subsidiary government" mentioned by the Archbishop is to think about global federalism. Another is to acknowledge that US superpower status can be peacefully sustained only if other countries agree. Should US accept voluntary international constraints on its power?

Murphy (sans baseball cap!):

Professor Murphy began by emphasizing the objective of a moral economy: maximize growth. Growth and globalization (not government) has helped the poor the most. Examples:
     -- Chicago bans Wal-mart: this hurts the poor
     -- globalization increases the purchasing power for low income people
     -- How do we get full employment? Not by protecting existing jobs, but focusing on moving to jobs of the future which no one has property rights over.
     -- An increase in demand for skilled workers increases their wage if the supply of skilled workers does not increase, a decrease in demand for unskilled workers decreases wage if supply does not decrease. Increase in inequality is a result of market forces telling you people need more education. It's not a result of market failure; thus, government regulation will not fix this imbalance.

What do we need to do to maximize growth? Focus on the inputs:
     1) increase human capital (create more skilled workers, more education)
     2) increase physical capital for workers to use (because labor and capital are complements)
     3) increase technology, productivity
     4) efficiently allocate resources
How do we accomplish these goals? MORE MARKETS AND MORE COMPETITION. Focus on inputs, and let people make choices.

He finished with a very strange analogy: managing an economy in the way the Archbishop laid out is like trying to heard cats. It would be much better to feed the cats appropriately and then let them run. One or two may end up stuck in a tree, but on average, they will run much farther than if we tried to control their every move. 

Panel:

A panel afterward clarified each presenter's positions.

Myerson mentioned the Church and economists are closer than it may first appear.

At the very end there was a very interesting discussion of how demographic change will influence the application of the ideas presented. The current direction of the European welfare state was cited by the economists as a the premier example of how governments can get incentives so wrong. Myerson asked: "How did living longer and healthier become a BAD thing?" Murphy used it to emphasize that renegotiating centralized contracts is hard, and problems should be solved at as local a level as possible (e.g. individual/family level versus state level).

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