There is no space here to go into the teachings of the German Historical School but here I would just like to demonstrate briefly the case for development with a few quotations.
Gaudiam et Spes of Vatican II:
“It is necessary that the voluntary initiatives of individuals and of free groups should be integrated with state enterprises and organized in a suitable and harmonious way.”
This reflects Pius XI’s corporatist suggestions, originally propounded by the German Historical School. Indeed, Pius saw competition as an evil:
[T]he right ordering of economic life cannot be left to a free competition of forces. From this source . . . have originated and spread all the errors of individualist economic teaching. Destroying through forgetfulness or ignorance the social or moral character of economic life, it held that economic life must be considered and treated as altogether free from and independent of public authority . . . free competition, while justified and useful provided it be kept within certain limits certainly direct economic life—a truth which the outcome of this application in practice of the tenets of this evil individualistic spirit has more than sufficiently demonstrated.” (Quadragesimo Anno)
But John Paul II shows the developing view of capitalism even during his own papacy:
In Laborem Exercens, he agrees with the Marxist and German Historical School’s understanding of Capitalism in saying that any system in which primary attention is paid to the “objective dimension of work,” where man’s status as “the effective subject of work and its true maker and creator” is not recognized, is capitalist.
In other words, any system in which the person is trivialized is capitalistic. Here, men are seen as mere means of production. Of course, this applies both to an approach to a free market and to socialism and communism as well.
But more recently, he says new forms of capitalism have developed. Workers rights have been recognized, and where more worker control over aspects of productivity and aspects of the business have been recognized.
In Solicitudo Rei Socialis, he recognizes the right of economic initiative and says that this right is not only important to individuals but for the common good. The attempt to limit this right in favor of so-called equality suppresses or destroys the spirit of initiative or “the creative subjectivity of the citizen.”
In Centesimus Annus, the Holy Father points to the complexity of the subject. Asking the reader if capitalism should be the goal of the countries recently freed from Communist domination, he writes:
If by “capitalism” is meant an economic system which recognizes the fundamental and positive role of business, the market, private property and the resulting responsibility for the means of production, as well as free human creativity in the economic sector, then the answer is certainly in the affirmative even though it would perhaps be more appropriate to speak of a “business economy,” “market economy” or simply “free economy.” But if by “capitalism” is meant a system in which freedom in the economic sector is not circumscribed within a strong juridical framework which places it at the service of human freedom and its totality and sees it as a particular aspect of that freedom, the core of which is ethical and religious, then the reply is certainly negative.
Pope John Paul II is right is expressing reservations here, but his reservations are not about the free market but the social context in which that market, or, quite frankly, anything else, operates. Everything in society functions in an environment of ethical/religious, political/juridical and economic reality. For the free market to work, there needs to be a moral society, backed up by revealed religion, and a system of just law, respected by the people and enforced justly by the courts. Economists have created a whole body of literature on the effect of institutions on economic life. If there is a problem with how the market operates, the first place to look is the society and the government. Obviously Pope John Paul II realized this. Now if only other Catholics would be as informed.