Catholic Social Teaching and the Austrian School Revisited: A Reply to Thomas Storck

0:00A lot of times the differences that I seem to have with people like Thomas Stork is that we're in some ways talking about two different things. Now the phenomena that economics touches upon, so that would include money, banking, exchange, wages, prices, monopoly theory, whatever, all these things are themselves replete with moral significance. But the point is that the positive scientific statements about these phenomena that constitute the discipline of economics are themselves value neutral. So describing how fractional reserve banking works is a positive task, not a normative one. Discussing whether such a system is desirable is a normative task, but is qualitatively separate from describing the mechanics of that system.

0:48So you can't make an intelligent comment about the former unless you grasp the latter. So likewise economic policy may possess a moral dimension, But I suggest that no propositions of economic theory do. So for instance, if Frank Knight conceives of capital as being a homogeneous unit whose individual processes occur simultaneously and therefore can be understood without introducing the element of time into capital theory, I don't see the moral dimension of that. It might be wrong, it might be right, but it's not immoral. is a theoretical proposition. So likewise the Austrian view of capital, which is very different, is a different proposition theoretically, but there's no moral dimension to it. But yet to propose this, to make this what seems to me to be an elementary point, is to invite accusations of apostasy in effect. You know, don't you believe this is a moral science?

1:49If you don't believe that, then you're some kind of a, probably some kind of a nihilist. I mean, I've had every bizarre accusation thrown at me by people who just seems to be trying not to understand the fundamental point. So there's nothing in the deposit of faith that would resolve a disputed question like this, like differences in capital theory. Likewise, it is not dissent merely to observe that the cause and effect relationships that constitute the theoretical edifice of economics are not a matter of faith and morals. They do not fall within the range of subjects on which any Catholic prelate has ever been understood to enjoy any particular insight or authority. Facts cannot be protested, defied or lectured to. They can only be learned and acted upon.

2:36There is no use in shaking our fists at the fact that price controls lead to shortages. All we can do is understand the phenomenon and be sure to bear it and other economic truths in mind if we want to make statements about the economy that are rational and useful. Now, if a bishop's conference proposes an intervention into the economy whose promised results cannot occur because it takes no heed of these restraints, we have the problem that I identified in my book The Church and the Market, but that Stork either ignores or thinks cannot arise, which is a faulty grasp of economic theory leads in turn to ill-considered economic proposals that will have the opposite of their and their intended effect. It is obviously within the realm of possibility that such a thing could occur, and in my own work I've suggested that it in fact has occurred.

3:25The advice of the American bishops on the economy has been distinctly unhelpful. But the point is it is at least a possibility and scholars need to address it. Stork does not address it. Now I realize I'm not providing you with a copy of his paper, but I will upon request if the CSSR permits me to. But by failing to address this question, Stork leaves us with a tangle of logical fallacies and gratuitous assumptions. So he has accused, as I said, Bill Lucky, of disloyalty for wondering about the effectiveness of some policies proposed by various prelates, or the unstated assumptions themselves at odds with economic theory that lie behind so much of what prelates have said about the economy. But it is nonsensical to concede on the one hand, as Stork in passing does, citing Pius XI, that the mechanics of economics lie beyond the Church's competence, but on the other hand to claim that the recommendations prelates make for the express purpose of increasing human welfare will necessarily accomplish their stated goals and are necessarily good

4:29and wise. These statements cannot both be true. If someone can make infallibly good economic policy without having to know the first thing about the discipline itself, then and economics should be abandoned as a field of study forthwith. And then, I've had many, many other things on this line of argument, but I think we get the point. Well, Stork's view is that the best school of thought and what we should seek to resurrect is the German historical school. Thank you, everybody. Good night. Now, let's suppose, though, that the German Historical School has declared the winner.

5:15This is the school of thought you've got to belong to as a Catholic, or you're going to get nasty emails written about you sent to your college president. Let's suppose that's the case. So does that mean that people who belong to any other school are now outside Catholic communion from now on? Would economists then be disciplined for continuing to debate capital theory? Long after that's been foreclosed. Now he may say, well, no, no, no, academic freedom would permit this to continue. Well, thanks for your generosity. But when economists of competing schools of thought arrive at theoretical conclusions that do not seem to imply the policy prescriptions that Stork seems to believe the Catholic faith itself demands, what would happen then? Well, no answer is provided because as usual the the question is never raised.

6:09Now we don't learn exactly what Stork's brand of economics really is. His paper is about showing how all other schools of economics are faulty. He doesn't bother addressing the Austrian School, needless to say, except in a footnote somewhere, to say that it's pretty much kind of like neoclassical economics. So, I mean, this guy's getting an article published in a scholarly journal. But anyway, Most of his general complaints about economics are, like one of them is that economics assumes that people are motivated entirely by the cunyary interests and this and that. I mean, this is obviously not true of the Austrian School, but by not mentioning the Austrian School, he avoids that little problem, a little crimp in his thesis. So instead, he just lists each defective school of thought in turn and then just throws his hands in the air at the insufferable fools he has to deal with in this world.

7:01he even goes so far as to say quote the premise behind the ubiquitous demand curve of mainstream economics is to make the maximization of income the fundamental principle not only of the economy but of society and of life itself i mean now it's it's dubious enough to claim that a tool of economic analysis was intended to describe the fundamental principle of society But of life itself? I don't know of a school of economics that taught that. So he then gives a few, and I know I have only a few minutes, but he gives a few examples of problems that he believes can't be solved by mainstream economics. Now, I never thought I'd be in a position where I would be defending neoclassical economics.

7:49There are criticisms to be made of it, but he's not finding them. The few semi-sensible things you can find, that's what he wants to attack, basically. So one of them is, he gives the example of a group of merchants who enjoy a lot of leisure, let's say a lot of leisure, more leisure than the average person does, and they're not working to maximize their monetary income. And so he says, well this defies the constraints of neoclassical economics. But even neoclassical economics understands that leisure is a consumer good. People enjoy it. And so the neoclassicals can in fact and have in fact incorporated this, so this is not You know, there, I solved your problem. Leisure is a consumer... I mean, no one ever denied that. He also tries to deny the ubiquitous emphasis among economists on scarcity.

8:37He tries to claim that, well, you know, look, according to you economists, you know, the world is full of all these scarce goods, and people always want more and more and more. Whereas, in fact, you know, a lot of people are perfectly satisfied with the goods they have, so that disproves... that disproves scarcity. And again, if you think I'm exaggerating that, I absolutely promise you that is his point. That, you know, for example, we have monastic communities. You know, we've got people who are perfectly content with the goods they have, and they're not continually working to get more and more goods. I'm sorry, I'm sort of explaining. And by the way, in attacking the idea of scarcity, he goes after Paul Samuelson, who actually the one sensible thing you can find in Paul Samuelson is the argument that, you know, if we were living in an The Eden of Affluence, he says, there would be no economic goods, because everything would be in super abundance, and he says that, you know, until we get there, you know, we're still going to want to produce more and more and more, and for Stork, this is just, I think this just shows how materialistic we economists are, but now I have to defend, is it fine? Okay, go good, wow, I have more time than I thought, now I have to defend Paul Samuelson, why is he doing this to me? Because the point Samuelson is making in effect is that, is there any family

9:52Is there a family on earth who wouldn't prefer to be able to send his child to college on the fruits of one month's labor instead of years and years and years worth of labor? Is there anyone? Well, in effect, that just shows that that's an empirical example of the existence of scarcity. But of course, from a praxeological point of view, scarcity is simply implied in the very fact of human action and the nature of the world. I can't possibly fulfill all the ends I have in mind simultaneously because of scarcity, the scarcity of my own time and my own body. I can't do everything at once. So scarcity is a necessary fact of life. It doesn't mean that we're all... All we want to do is buy, as George Reason would say, you know, a yacht and then a plane and then a yacht on which I can land my plane.

10:41All right. So then we learn that economists leave power out of the equation because, you know, some groups in society have more power than others and so that will interfere with the functioning of the free market, that you won't get all these, your cute little models won't really conform to reality. Well, a neoclassical economist will reply to this by saying that their supply and demand analysis factors this stuff in. It's meant to be an analytical conduit through which all these factors are incorporated, and so they include all the circumstances of human life. So suppose, for example, you have people who are attached to one particular town, and that town has one major industry, and that industry goes sour.

11:26Well, let's suppose the inhabitants of this town feel really sentimentally attached to it. They might not necessarily want to leave. They might be willing to take really, really low wages if it means they can nevertheless stay in that town where they're attached. Okay, so their attachment to the town is then factored into the supply and demand analysis. They're willing to accept lower wages. Again, this is not a problem for a neoclassical. There are problems for neoclassical economists. That isn't one of them. And in fact, the idea that power can influence things, well I mean this is, Carl Menger acknowledges this in his price theory, that the determination of prices, it does matter how many buyers, how many sellers and so on, and the more of each you have, the less is the range of indeterminacy along which prices will be decided only by bargaining, in which case power does play a role. And of course, needless to say, Stork then takes the view that power differentials in society, such as laborers versus capital, the terms in which

12:29he thinks, influence wage rates, so that's why we need labor unions, because the laborers don't have as much bargaining power, and that's an argument that I've answered in the church and the market and in my 33 questions. But now I'll just give one final quick example, he says this also, here's another reputation of neoclassical economics, he says, he talks about fishermen in Nova Scotia and he says is that in Nova Scotia, fishermen were getting two cents for their product, but in Boston they could get fifteen cents. So the middlemen and the local dealers were exploiting the fishermen, Stork says, and these power relations are not accounted for in the standard economic account of the market. Well the truth is exactly the opposite because by the end of his example by the way, the Nova Scotia fishermen have figured this out and have themselves worked out an arrangement where they themselves supply the product in Boston and they start to arbitrage are arbitraged away the gains that the middleman makes, and by the way, of course, it's taken for granted here that middlemen are evil,

13:28because they add no value to the product, so anything they're skimming off is just wicked. But the point is that, okay, maybe they were earning some type of, you know, excessive profit in some sense, you know, sort of unsustainably so. So, okay, that's arbitraged away by the fishermen themselves. By the end of his own example, They have themselves started to supply it to Boston and now they're getting these gains. And he says, but this just shows the market doesn't work. That's how the market works, is through the arbitrage process. So in effect, although he criticizes neoclassical economists for a million reasons and because of their unrealistic models of perfect competition, now he's on to something. Well then he criticized the market because at this particular snapshot of time, it didn't correspond to the model because there was the possibility for arbitrage.

14:17Okay, well, at any particular snapshot a lot of things are going on, but eventually you saw this gain arbitraged away. Well, now I'm pretty much, that's pretty much my time, but I have many other things to say, because I go through and explain the Austrian School to him, in effect, to show that this is a school that really doesn't have the shortcomings you're talking about. By the end, he's saying, well, maybe the one superficially plausibly attractive school for a Catholic is the Chicago School. I don't even know if I want to read what the rationale for that is, but in The Church and the Market, I explain that to the contrary, there's a lot about the Chicago School that should be appalling to a Catholic if you're looking at the practical implications of what they're saying.

15:03But anyway, that's what I have time for. The paper will be out next year, and down with Thomas Stork. Thank you very much.