This is going to be a series of articles to help Catholics understand economics. Because of the serious deficit in the comprehension of economics by Catholics, this will be a daunting task, but the author will do his best.
In order to understand this subject, there is a need to distinguish between the actions of human beings and the way those actions are perceived by those who study them. The value of any writer’s thought is whether it jibes with actual human experience. Note, it is not your personal experience, but the general experience of humanity that counts. This means that the economic system of a country and the writings of those who study it may or may not jibe, depending upon how schooled in technique and objective the observer is. It is a commonplace that witnesses to a crime, even if it is staged crime in a law school class, will differ widely in their descriptions of what occurred. This means that no evaluation of how an economy works is valid when done by observers not trained in what to look for, nor trained to analyze what they have observed, not to mention the fact that their experience may be limited to their own neighborhood or their personal experience, or one event. Sadly, most people see themselves as experts on economics and political science, without having read or studied any serious work on these subjects. Happily, this is not true of surgery. Very few people try to instruct physicians on how to take out a gall bladder, but everyone “knows” about politics and economics, such that the layman considers his view of these subjects as good as, or better than, those who have studied for years.
Everyone must remember that the economic system is a given, and it is extremely complex. There are billions of transactions of every kind (not just business transactions) that occur continually each and every day. No human being or group of human beings or computer can ever monitor even some of those transactions. This is because a transaction is not a transaction until someone acts and another responds. One would have to be there to know the transaction; and who could ever do that? What we get are statistics that are nothing more than past history, a digest of what occurred a week or a month or two ago, by the time they are gathered. While analyzing statistics can be helpful in telling one what happened, it is useless in informing us as to why it happened. But a true science is not based on what, but on why, on cause and effect. And the best way to understand economics as a science is to understand man, not data.
Economics begins with the “action axiom,” i.e., man acts. There is no question that this is true, because even to argue with this you are required to act. It is true that man also thinks, but we cannot know what he is thinking unless he acts. So if a person says to himself that he going skiing tomorrow, it means nothing if he does not actually do it. If I come up with a great theory of the nature of the universe, it is useless unless I act—in this case, tell someone either verbally or on paper. We know about Einstein’s fruitful “thought experiments” only because he wrote about them. Blessed Pope John Paul II tells us in The Acting Person that those who only have ideas live in a dream world. Thinking about doing good does not make one good. Thinking about going to France does not get you there. Dreaming about a machine that you would like to invent that would be a great boon to mankind does not help mankind at all.
But admitting that man acts does not explain how man acts. Economics does not delve into the psychological tangles of the mind to explain why each man acts, but it does explain his actions to a great degree. Aristotle correctly informs us that all men act for an end or goal. In other words, people do not act for nothing. Your mother may have asked you at one time, “What are you doing?” You may have responded, “Nothing.” But was that really true? Chances are that you were playing, chilling, thinking about what to do on Saturday, or brooding, or stalling so that you did not have to do your homework or chores, etc. Even an act as innocuous as going to bed has a purpose to the person who does it. He knows that if he does not get sleep he will be miserable the next day, if not dysfunctional.
So, all men act for an end. In addition, all men act for the good. You may object to this, pointing out correctly that the prisons are full of people who did not act for the good. But as Aristotle says, men act for either a real good or a perceived good. In other words, whether the action is aimed at an objective good or not, even the bad acts seemed good to the perception of the actor at the time of the action. Think of the bank robber. No one goes through all that trouble because he was bored (of course, the ending of boredom is a end), but because it is seen as a solution to the robber’s money problems. Later on, when he sees his picture on television and he has to go on the run, he might come to the realization that it was not really a good choice, and turn himself in. But in this case, “good” again does not mean objectively good, but that the trouble he is in, and the inconvenience he caused himself, was not worth the money, which is slowly dwindling.
Here is presented to us another basic element of human action—all human acts are based on “subjective valuation.” If an economist had a nickel for every time some well-meaning Catholic misunderstood or intentionally misinterpreted that term, he could retire. Subjective valuation means that a person’s actions are based on things that HE thinks are of value. This in no way denies the existence of objective values. It just means that if a person has not subjectivized those values, he will not act on them. If a guy thinks ballet is for sissies, he will never go to one. If I fail to see the value of Catholicism, I will never become a Catholic. So everyone acts on his values. Examine yourself. Ask yourself why you do not do certain things, even things that are perfectly moral and objectively good. It is because YOU do not value them, while still insisting that they are objectively good.
Once upon a time, there was a man, let us say for the sake of the story it is me (it isn’t, but if I did these things, I would be in the same state as the man in the story). One day my 11-year-old Buick died. So, I needed another car. But instead of getting a nice used car for cheap, like the Buick I had which lasted 6 years, I went out and treated myself to a Ferrari. The price of this new car was over $225,000. Now I am a man of modest salary, and I already have a mortgage on my house and am trying to pay off credit cards, which means that I do not have that much discretionary cash. But the payment on this car (I looked this up in the amortization tables) at 5% for five years (the most they usually allow in a new car) is $4700 per month. Since, up to this time, I had a good credit record, they actually loaned me the money.
So I came home with the new Ferrari, and, after my wife stopped hitting me on the head with her rolling pin, she yelled at me for spending too much money and for putting us in so much debt. I felt very bad that she was so upset, so I decided, as soon as the headache went away, that I would do something nice for her. Since my wife does not have her own car (again, for the sake of the story), I went out and bought her a car. But since she was mad that I spent so much on the Ferrari, I decided to get her a cheaper car, so as not to spend as much. The car I bought, a Mercedes-Benz, cost $42,000 and the payments, at 5% for 5 years, would be about $800 per month, surely a bargain compared to a Ferrari. This means that I just boosted by monthly liability payments by $4700 + $800 which equals $5500 per month.
For a man of modest salary and only a small amount of discretionary cash, this payment is way too much. Suppose, for the sake of the story, I am not allowed to give the cars back. Even if I did, they would be considered used cars and I would still owe a chunk on them, though nothing like I am currently paying if I keep them. How do I make the payments? I borrow the money. After all, I made these purchases in only two days; maybe they have not gotten into the credit system yet. Suppose I got some credit cards with high credit levels? I would not have to borrow the whole payment from the cards every month, because I could make some part of the payment with my discretionary cash. I would, however, have to borrow a large portion to make the full payment. Maybe I could make my wife go to work, if she is not already working (in real life, she is). Maybe I can suddenly get hired as a vice-president of a big company so that my salary will take a big jump. But is that likely to happen anytime soon? No. Basically, I am in serious financial trouble.
Now, what is the meaning of this parable? If the reader did not already see it coming, we can compare the man in the parable to the Federal government. The man got attached to material goods, and not just any goods, but fancy, expensive cars, probably due to the mid-life crisis syndrome. The populace gets attached to transfer payments made to them, called entitlements, and the government gets attached to the power that comes to it in return for promising these entitlements to the people attached to them. But the government and the populace, who pay for these things, cannot really afford it, and, like the wife in the example, will shout and scream about the cost. So the government (husband) goes and gets loans to pay for the entitlements, and to appease those who complain about the spending, gets them some goodies, like bailouts for profligate banks and companies, the executives of which get to keep their jobs. Of course, to do that, the government has to borrow more, and in a pinch, the Federal Reserve Bank can counterfeit some cash, for which the man in the parable would go to jail for a long time if he got caught doing that. Meanwhile, the people (like the wife) are furious and are worried that the whole edifice will collapse. Just as the family will have to declare bankruptcy, the government will have to default on its debt. So the government (husband) finds a way to keep borrowing, though a lower amount, to enable everyone to keep their programs (and their cars), the protesters (wife) having gotten used to the bailouts (the Mercedes-Benz), etc. This is the recent debt deal worked out between Democrats and Republicans. Spending was not cut; just the rate of new spending is less than the old rate. We can still borrow more money, which we will also have to pay back, but since the economy has been malfunctioning for some time (no gigantic pay increases for the husband), where will the money come from?
This parable is not far-fetched in any sense of the word. The laws of economics, which are not laid down by anybody but come from the actions of humans, are the same for all. Milton Friedman famously said that there is no such thing as a free lunch. For those too young to know the reference of this wise statement, my grandfather, who was born in New York in 1880, told me that bars in those days advertised a free lunch. Of course, most people going in to get a free lunch got some alcoholic beverage. The cost of the beverage was high enough to pay for the food, so the lunch was not free. Everything has to be paid for, and the debts incurred are not incurred by the “government” but by the individuals in government whose actions try to defy the laws of human action—the laws of economics. Just as the husband in the story would be a fool to buy a Ferrari with the income he has, and then buy a less costing but costing nevertheless Mercedes-Benz right after that, so the people in government are crazy to think that they can keep promising and giving benefits to voters without considering how to pay for them. Thus endeth the lesson!